The Corruption in the Philippines Keeps Getting Worse
With Estrada's Tactics and Cronyism
Former U.S. Base, Is Hit By Cronyism and Closings
By ROBERT FRANK Staff Reporter of THE WALL STREET JOURNAL
About 9/20/00
SUBIC BAY, Philippines -- Kevin Hamdorf knew there was trouble in the
neighborhood even before his watchdog was taken hostage.
As one of the pioneers of the Subic Bay Freeport Zone in the early
1990s, he had helped turn this former U.S. military base into an
international business hub and a symbol of the New Philippines. Gone
were the gunboats, blackouts and bar girls. In came Acer, FedEx,
fiber-optic cables and business lunches at the Hollywood Steakhouse. By
1997, economic developers world-wide were trekking to Subic to study the
Philippine miracle.
"So much for the miracle," sighs Mr. Hamdorf, hunched over a plate of
cold French fries at the half-empty Hollywood Steakhouse. Mr. Hamdorf, a
photographer from Australia, used to take pictures for Subic businesses
and events. He hasn't had a corporate call in weeks. Acer Group, the
Taiwanese computer giant, is cutting jobs and moving business to China,
while France's Thomson SA just closed its phone factory. On Aim High
Avenue, a circuit-board maker, a convenience store and a pencil plant
have all moved out. The new Negritos Cyber Canteen does a brisk business
in pork rice but doesn't have a computer.
A Hundred for One Dalmatian
Brownouts, smuggling and crime have returned, residents say. Mr.
Hamdorf's house, just outside the Freeport Zone, was robbed twice,
despite the presence of Nikko, his Dalmatian watchdog. After the dog was
grabbed last month, it took $100 in ransom to get him back.
If there's a ground zero in the sudden crisis of confidence facing the
Philippines, it is here in Subic Bay, 55 miles northwest of Manila. Once
a symbol of all that could go right with Asian democracy and free
markets, the commercial and residential development is now a lesson in
cronyism, corruption and the clumsy leadership of Philippine President
Joseph "Erap" Estrada.
A former actor in local B-movies, Mr. Estrada is known for his
glistening pompadour, his Average Joe image and his vigor -- he takes
pride in his many illegitimate children. Since he came to power, the
Philippines has become the slowest-growing economy in Asia, after Japan.
Its stock market has been among the world's worst performers this year,
privatization has stalled, and foreign direct investment is down more
than 40% this year from 1999. Islamic rebels and Communist bandits are
back in action, along with the cronies of Ferdinand Marcos. The can-do
optimism of former President Fidel Ramos has been replaced by daily Erap
jokes, like:
How do you tell when Erap sends you a fax?
It has a stamp on it.
Not so long ago, the Philippines was being cheered as the comeback kid
of Southeast Asia. While its neighbors collapsed in crisis in 1998, this
country forged ahead with only minor damage. Its U.S.-built legal and
accounting systems, free press and rapid reforms were proof, many said,
that good institutions were more important to Asia's development than
individual leadership. Progress will march on, said Gen. Jose Almonte,
then national security adviser, in 1996, "even if a chimpanzee becomes
president."
The picture began to darken after Mr. Estrada took office in 1998 and
brought a different style to economic management. After intervening in a
stock-manipulation probe on behalf of a business friend, Mr. Estrada
called in to a late-night television talk show in March and told the
country's top stock regulator, "May lightning strike you down!" A $1
billion tax case against Lucio Tan, the country's wealthiest man and Mr.
Estrada's main campaign backer, was recently dropped because the
government missed the filing deadline. This comes at a time when a
tax-collection shortfall is widening the budget gap and threatening a
bailout program with the International Monetary Fund that was set up
before Asia's financial crisis.
"We thought our institutions were so strong that it no longer really
mattered who was president," says Bernardo Villegas, dean of economics
at the University of Asia and the Pacific in Manila. "Now we realize
there's a limit to that."
Nowhere have the limits been tested more than at Subic Bay. On a recent
afternoon, as a typhoon howls into the harbor, a group of local business
leaders and workers march into a meeting hall to celebrate the second
anniversary of the Subic Administration, which oversees the zone. The
anniversary used to be in November. But President Estrada changed it to
September, to honor the day he ousted the administration chairman,
Richard Gordon, who was appointed by President Ramos.
In the summer of 1998, Philippine police, armed with riot gear and
automatic rifles, surrounded the administration headquarters to remove
Mr. Gordon, who was barricaded inside. A dynamic salesman and
self-confessed autocrat, Mr. Gordon was largely responsible for Subic's
$2.6 billion in investment and global success, and was slated to remain
chairman until 2004. Mr. Estrada, angered that Mr. Gordon didn't support
his presidential campaign, appointed his own chairman. Police clashed
with more than 100 of Mr. Gordon's supporters and more than 20 people
were injured during the three-month standoff before Mr. Gordon agreed to
honor a court ruling and step down.
On the podium to celebrate his anniversary this month, Subic's new
chairman, Felicito Payumo, sets the new tone. Mr. Gordon's anniversaries
featured parades, floats, beer and evening feasts. Today Mr. Payumo -- a
former congressman -- hands out boxed lunches to a small group of
workers and gives a speech about Subic's new cargo crane and raises for
government workers. Their salaries have more than doubled, although the
Subic development is losing money for the first time.
Back in his office, Mr. Payumo stresses his achievements at Subic: more
than 30 new projects, over 20,000 new jobs, more than $1 billion in
exports in 1999 and rising tax collections. But local business
executives refute the figures, pointing to the rash of closings and
cutbacks, and add that Subic's marketing has all but vanished. Even Mr.
Payumo admits some problems. Companies have stopped paying their bills,
leaving him with more than $30 million in back rent. "The infrastructure
needs a little work," he says, just as the electricity shuts down in his
office.
Even the bats have grown surly. Every night the sky over Subic turns
black with giant columns of fruit bats, which are forced to fly farther
away for food because of increased logging in the base's extensive
forested areas.
"It's a little eerie," says Mr. Payumo. "But a lot of things here are
better. Have you seen our new logo?"
Down the road, at the foot of a dense jungle where American soldiers
once trained for Vietnam, Kenny Wang is fighting his own air war. The
managing director for Acer Philippines, Mr. Wang oversees the biggest
factory complex in Subic, employing 2,600 workers. The computer plants
make more than one-third of Acer's personal computers and about
one-third of its notebook devices, accounting for 70% of Subic's total
exports. A recent decision by Mr. Estrada to help a businessman friend,
however, has choked off Acer's business.
Last year, Mr. Estrada suspended an air-rights pact with Taiwan, citing
accusations by Philippine Airlines that its Taiwanese rivals were
poaching passengers with cheaper fares. The decision, which ended direct
commercial flights between the two countries, largely benefited Mr. Tan,
the majority owner of Philippine Airlines. The rest of the Philippines
has suffered: Taiwanese tourists no longer flock to Philippine beaches,
electronics parts can't make it to Philippine factories, and Philippine
nurses and engineers have to take long and expensive routes to get to
their contract jobs in Taipei. Both Philippine Airlines and the Estrada
government say allegations of favoritism toward Mr. Tan are groundless.
Acer has been among the hardest hit. Most of the parts and motherboards
for its personal computers come from Taiwan. Without direct flights, the
components take twice as long to arrive, at twice the cost, making the
plant uncompetitive. Mr. Wang has moved one PC-manufacturing line to
China and two notebook lines to Taipei, cutting more than 1,000 jobs
here. While some employees have been absorbed into the notebook
division, Acer can't move ahead with its planned expansions. The factory
has so much empty space that workers have started playing soccer on the
testing floor.
"We want this solved immediately," says a frustrated Mr. Wang, who is
eyeing China for expansion. "The environment here has become very
political, and it's not good for business."
At happy hour at the Subic Bay Yacht Club, soft piano music drifts
across the lounge. Giant picture windows offer a view of the harbor that
America's Seventh Fleet once called home and where, today, a cluster of
leisure boats bobs in the rain. The $80 million club was part of a grand
plan to turn Subic into a tourist haven. Yet now, the bar is empty,
there isn't a member in sight, and the guest-services manager is asleep.
"You know what the problem is?" says Jose Mari Vargas, the club's
managing director, as he rattles around the empty Skipper's Grill.
"Buzz. We need more buzz."
And less terrorism. While President Ramos made peace with Islamic
separatists and rural bandits, Mr. Estrada has taken a tough military
stand. Last weekend, he launched an all-out war against Muslim
guerrillas on the island of Jolo in an effort to rescue 19 hostages,
including one American and two French journalists. The military strikes
are continuing, and it isn't clear whether the hostages are alive. The
rebels had been gathering strength after collecting an estimated $15
million in ransom money paid by Libya, in what was widely seen as an
effort to enhance relations with Europe.
The turmoil has battered tourism. Although Subic is flooded on weekends
with visitors from Manila, the big-spending foreigners have stayed away.
A casino at the nearby Legenda Hotel, once one of the most profitable in
Asia, is quiet, and construction ended two years ago on a new hotel down
the road.
When it opened three years ago, the yacht club expected 300,000
memberships; it has gotten about half that. The club is trying special
"food days," offering cuisine from, say, Mexico, and playing up its
policy that members don't need to own a boat. Corporate memberships used
to cost more than $30,000; an advertisement in the Subic Chamber of
Commerce newsletter offers one for $12,000.
Anna Lyn Dominguez stirs a pot of rice in her cramped, concrete home in
Olongapo, the town just outside the gates of Subic. Ms. Dominguez, 27
years old, used to snap together phone circuits at a Thomson plant for
$80 a week. The money supported her husband and two children, her
parents and her sister. Earlier this year, Thomson moved its plant to
China to become more competitive and Mrs. Dominguez lost her job.
"It's getting hard to buy food," she says. Unemployment in Olongapo,
once among the lowest in the country, has soared to more than 22%. Small
stores are closing and shop owners report a rapid rise in crime.
Political battles have made matters worse. Subic's new boss, Mr. Payumo,
hails from Bataan, a poor province on Subic's southern border where he
used to be a congressman. Olongapo remains the turf of Mr. Gordon, whose
wife is mayor. After taking office, Mr. Payumo filled the Subic jobs
center with workers from Bataan, replacing many from Olongapo. Subic
companies are forced to hire first from the job center for available
positions.
Stuart Allen, director of South Sea Resources, a treasure-hunting and
diving company at Subic, wanted to hire a talented Web-site designer
from Olongapo when he ran into trouble with Subic authorities. They
required him to first consider a long list of candidates from the jobs
center, including a Bataan bus driver. Although he eventually got
permission to make the hire, the approval took weeks.
Mr. Payumo concedes that he is trying to boost employment for Bataan,
but only "to correct the favoritism of Mr. Gordon toward Olongapo."
Gazing out his office window, Mr. Payumo points to another corrective
measure, a marble statue honoring the 12 Philippine senators who helped
drive out the U.S. military. Mr. Gordon's monument was the Volunteer's
Wall, listing the names of the more than 20,000 volunteers who helped
protect and nurture the Subic development throughout the 1990s.
The new display, called "Inang Laya -- Mother Country," features a robed
woman releasing a small bird and 12 handprints set in marble,
representing the senators. Mr. Payumo calls it a "symbol of the
Philippine spirit and persistence." Locals, however, have their own
name: "The Outstretched Palms."
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