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June 3, 2011Bureau of East Asian and Pacific Affairs

Background Note: Philippines

Official Name: Republic of the Philippines

PROFILE Geography Area: 300,000 sq. km. (117,187 sq. mi.). Major cities (2007 estimate): Capital--Manila (pop. 11.55 million in metropolitan area); other cities--Davao City (1.36 million); Cebu City (0.80 million). Terrain: Islands, 65% mountainous, with narrow coastal lowlands. Climate: Tropical, astride typhoon belt. People Nationality: Noun--Filipino(s). Adjective--Philippine. Population (2009 estimate): 92.2 million.

Annual population growth rate (2007 estimate): 2.04%. Ethnic groups: Malay, Chinese. Religions (based on 2000 census): Roman Catholic 80.9%, Muslim 5%, Evangelical 2.8%, Iglesia ni Kristo 2.3%, Aglipayan 2%, other Christian 4.5%, other 1.8%, unspecified 0.6%, none 0.1%. Languages: Filipino (based on Tagalog), official national language; English, language of government and instruction in education. Education: Years compulsory--6 (note: 6 years of primary education free and compulsory; 4 years of secondary education free but not compulsory). Attendance (2008 net enrollment rates)-85% in elementary grades, 61% in secondary grades. Functional literacy (2008, for ages 10-64)-86.4%. Basic literacy (2003)--93.4%. Health: Infant mortality rate (2008)--25 per 1,000. Life expectancy (2005)--67.8 yrs. for males; 72.5 yrs. for females. Work force (2009): 35.06 million. Services (including commerce and government)--51%; agriculture--34%; industry--15%. Government Type: Republic. Independence: 1946. Constitution: February 11, 1987. Branches: Executive--president and vice president. Legislative--bicameral legislature. Judicial-independent. Administrative subdivisions: 16 regions and Metro Manila (National Capital Region), 80 provinces, 122 cities. Political parties: Liberal Party, Lakas-Christian Muslim Democrats/KAMPI, Nacionalista, Nationalist People's Coalition, Laban ng Demokratikong Pilipino, Pwersa ng Masang Pilipino, Aksiyon Demokratiko, Partido Demokratikong Pilipino-Lakas ng Bayan, and other small parties. Suffrage: Universal, but not compulsory, at age 18. Economy GDP (2010): $188.7 billion. Annual GDP growth rate (2010): 7.3% at constant prices. GDP per capita (2010): $2,007. Natural resources: Copper, nickel, iron, cobalt, silver, gold. Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs. Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, paper and paper products, tobacco products, beverage manufacturing, food processing, machinery and equipment, transport equipment, electronics and semiconductor assembly, mineral products, hydrocarbon products, fishing, business process outsourcing services. Trade (2010): Exports--$50.7 billion. Imports--$61.1 billion. PEOPLE Popular belief holds that the majority of Philippine people are descendants of migrants from Indonesia and Malaysia who came to the islands in successive waves over many centuries and largely displaced the aboriginal inhabitants. Modern archeological, linguistic, and genetic

evidence, however, strongly suggests that those migrants originated in Taiwan and went on from the Philippines to settle Indonesia and Malaysia. The largest ethnic minority now is the mainland Asians (called Chinese), who have played an important role in commerce for many centuries since they first came to the islands to trade. Arabs and Indians also traveled and traded in the Philippines in the first and early second millennium. As a result of intermarriage, many Filipinos have some Asian mainland, Spanish, American, Arab, or Indian ancestry. After the mainland Asians, Americans and Spaniards constitute the next largest minorities in the country. More than 90% of the people are Christian as a result of the nearly 400 years of Spanish and American rule. The major non-Hispanicized groups are the Muslim population, concentrated in the Sulu Archipelago and in central and western Mindanao, and the mountain aboriginal groups of northern Luzon. Small forest tribes still live in the more remote areas of Mindanao. About 87 languages and dialects are spoken, most belonging to the Malay-Polynesian linguistic sub-family. Of these, eight are the first languages of more than 85% of the population. The four principal indigenous languages are Cebuano, spoken in the Visayas; Tagalog, predominant in the area around Manila; Ilocano, spoken in northern Luzon, and Maranao and related languages spoken in Mindanao. Since 1939, in an effort to develop national unity, the government has promoted the use of the national language, Filipino, which is based on Tagalog. Filipino is taught in all schools and is widely used across the archipelago. Many use English as a second language. Most professionals, academics, and government workers are conversant or fluent in English. In January 2003, President Gloria Macapagal-Arroyo ordered the Department of Education to restore English as the medium of instruction in all schools and universities. The Philippines has one of the highest literacy rates in the developing world. Approximately 93% of the population 10 years of age and older are literate. HISTORY The history of the Philippines can be divided into four distinct phases: the pre-Spanish period (before 1521); the Spanish period (1521-1898); the American period (1898-1946); and the postindependence period (1946-present). Pre-Spanish Period The first people in the Philippines, the Negritos, are believed to have come to the islands 30,000 years ago from Borneo and Sumatra, making their way across then-existing land bridges. According to popular belief, Malays subsequently came from the south in successive waves, the earliest by land bridges and later in boats by sea. In contrast, modern archeological, linguistic, and genetic evidence strongly suggests that those successive waves of migrants came from Taiwan as the Austronesian sub-group, Malayo-Polynesians. From Taiwan, the Austronesians first spread southward across the Philippines, then on to Indonesia, Malaysia, and as far away as Polynesia and Madagascar. The migrants settled in scattered communities, named barangays after the large outrigger boats in which they arrived, and ruled by chieftains known often as datus. Mainland Chinese merchants and traders arrived and settled in the ninth century, sometimes traveling on the ships of Arab traders, who introduced Islam in the south and extended some influence even into Luzon. The Malayo-Polynesians, however, remained the dominant group until the Spanish arrived in the 16th century.

Spanish Period Portuguese explorer Ferdinand Magellan reached the Philippines and claimed the archipelago for Spain in 1521, but was killed shortly after arriving when he intervened in a dispute between rival tribes. Christianity was established in the Philippines only after the arrival of the succeeding Spanish expeditionary forces (the first led by Legazpi in the early 16th century) and the Spanish Jesuits, and in the 17th and 18th centuries by the conquistadores. Until Mexico proclaimed independence from Spain in 1810, the islands were under the administrative control of Spanish North America, and there was significant migration between North America and the Philippines. This period was the era of conversion to Roman Catholicism. A Spanish colonial social system was developed with a local government centered in Manila and with considerable clerical influence. Spanish influence was strongest in Luzon and the central Philippines but less so in Mindanao, save for certain coastal cities. The long period of Spanish rule was marked by numerous uprisings. Towards the latter half of the 19th century, European-educated Filipinos or ilustrados (such as the Chinese Filipino national hero Jose Rizal) began to criticize the excesses of Spanish rule and instilled a new sense of national identity. This movement gave inspiration to the final revolt against Spain that began in 1896 under the leadership of Emilio Aguinaldo (another Chinese Filipino) and continued until the Americans defeated the Spanish fleet in Manila Bay on May 1, 1898, during the SpanishAmerican War. Aguinaldo declared independence from Spain on June 12, 1898. American Period Following Admiral George Dewey's defeat of the Spanish fleet in Manila Bay, the U.S. occupied the Philippines. Spain ceded the islands to the United States under the terms of the Treaty of Paris (December 10, 1898) that ended the Spanish-American war. A war of resistance against U.S. rule, led by revolutionary General Aguinaldo, broke out in 1899. During this conflict fighting and disease claimed the lives of tens of thousands of Filipinos and thousands of Americans. Filipinos and an increasing number of American historians refer to these hostilities as the Philippine-American War (1899-1902), and in 1999, the U.S. Library of Congress reclassified its references to use this term. In 1901, Aguinaldo was captured and swore allegiance to the United States, and resistance gradually died out until the conflict ended with a Peace Proclamation on July 4, 1902. Armed resistance continued sporadically until 1913, however, especially among the Muslims in Mindanao and Sulu. U.S. administration of the Philippines was always declared to be temporary and aimed to develop institutions that would permit and encourage the eventual establishment of a free and democratic government. Therefore, U.S. officials concentrated on the creation of such practical supports for democratic government as public education, public infrastructure, and a sound legal system. The legacy of the Thomasites--American teachers who came to the Philippines starting in 1901 and created the tradition of a strong public education system--continues to resonate today. The first legislative assembly was elected in 1907, and a bicameral legislature, largely under Filipino control, was established. A civil service was formed and was gradually taken over by the Filipinos, who had effectively gained control by the end of World War I. The Catholic Church

was disestablished, and a considerable amount of church land was purchased and redistributed. In 1935, under the terms of the Tydings-McDuffie Act, the Philippines became a self-governing commonwealth. Manuel Quezon was elected president of the new government, which was designed to prepare the country for independence after a 10-year transition period. Japan attacked, however, and in May 1942, Corregidor, the last American/Filipino stronghold, fell. U.S. forces in the Philippines surrendered to the Japanese, placing the islands under Japanese control. During the occupation, thousands of Filipinos fought a running guerrilla campaign against Japanese forces. The full-scale war to regain the Philippines began when General Douglas MacArthur landed on Leyte on October 20, 1944. Filipinos and Americans fought together until the Japanese surrendered in September 1945. Much of Manila was destroyed during the final months of the fighting. In total, an estimated one million Filipinos lost their lives in the war. Due to the Japanese occupation, the guerrilla warfare that followed, and the battles leading to liberation, the country suffered great damage and a complete organizational breakdown. Despite the shaken state of the country, the United States and the Philippines decided to move forward with plans for independence. On July 4, 1946, the Philippine Islands became the independent Republic of the Philippines, in accordance with the terms of the Tydings-McDuffie Act. In 1962, the official Philippine Independence Day was changed from July 4 to June 12, commemorating the date independence from Spain was declared by Emilio Aguinaldo in 1898. Post-Independence Period The early years of independence were dominated by U.S.-assisted postwar reconstruction. The communist-inspired Huk Rebellion (1945-53) complicated recovery efforts before its successful suppression under the leadership of President Ramon Magsaysay. The succeeding administrations of Presidents Carlos P. Garcia (1957-61) and Diosdado Macapagal (1961-65) sought to expand Philippine ties to its Asian neighbors, implement domestic reform programs, and develop and diversify the economy. In 1972, President Ferdinand E. Marcos (1965-86) declared martial law, citing growing lawlessness and open rebellion by the communist rebels as his justification. Marcos governed from 1973 until mid-1981 in accordance with the transitory provisions of a new constitution that replaced the commonwealth constitution of 1935. He suppressed democratic institutions and restricted civil liberties during the martial law period, ruling largely by decree and popular referenda. The government began a process of political normalization during 1978-81, culminating in the reelection of President Marcos to a 6-year term that would have ended in 1987. The Marcos government's respect for human rights remained low despite the end of martial law on January 17, 1981. His government retained its wide arrest and detention powers, and corruption and cronyism contributed to a serious decline in economic growth and development. The assassination of opposition leader Benigno (Ninoy) Aquino upon his return to the Philippines in 1983 after a long period of exile coalesced popular dissatisfaction with Marcos and set in motion a succession of events that culminated in a snap presidential election in

February 1986. The opposition united under Aquino's widow, Corazon Aquino, and Salvador Laurel, head of the United Nationalist Democratic Organization (UNIDO). The election was marred by widespread electoral fraud on the part of Marcos and his supporters. International observers, including a U.S. delegation led by Senator Richard Lugar (R-Indiana), denounced the official results. Marcos was forced to flee the Philippines in the face of a peaceful civilianmilitary uprising that ousted him and installed Corazon Aquino as president on February 25, 1986. Under Aquino's presidency, progress was made in revitalizing democratic institutions and civil liberties. However, the administration was also viewed by many as weak and fractious, and a return to full political stability and economic development was hampered by several attempted coups staged by disaffected members of the Philippine military. Fidel Ramos was elected president in 1992. Early in his administration, Ramos declared "national reconciliation" his highest priority. He legalized the Communist Party and created the National Unification Commission (NUC) to lay the groundwork for talks with communist insurgents, Muslim separatists, and military rebels. In June 1994, President Ramos signed into law a general conditional amnesty covering all rebel groups, as well as Philippine military and police personnel accused of crimes committed while fighting the insurgents. In October 1995, the government signed an agreement bringing the military insurgency to an end. A peace agreement with one major Muslim insurgent group, the Moro National Liberation Front (MNLF), was signed in 1996, using the existing Autonomous Region in Muslim Mindanao (ARMM) as a vehicle for self-government. Popular movie actor Joseph Ejercito Estrada's election as president in May 1998 marked the Philippines' third democratic succession since the ouster of Marcos. Estrada was elected with overwhelming mass support on a platform promising poverty alleviation and an anti-crime crackdown. During his first 2 years in office, President Estrada was plagued with allegations of corruption, resulting in impeachment proceedings. Estrada vacated his office in 2001. In 2007, an anti-graft court convicted Estrada of plunder charges. He received a presidential pardon soon after the conviction. Gloria Macapagal-Arroyo, elected vice president in 1998, assumed the presidency in January 2001 after widespread demonstrations that followed the breakdown of Estrada's impeachment trial. The Philippine Supreme Court subsequently endorsed unanimously the constitutionality of the transfer of power. National and local elections took place in May 2004. Under the constitution, Arroyo was eligible for another term as president for a full 6 years, and she won a hard-fought campaign against her primary challenger, movie actor Fernando Poe, Jr., in elections held May 10, 2004. Noli De Castro was elected vice president. Impeachment charges were brought against Arroyo in June 2005 for allegedly tampering with the results of the 2004 elections, but Congress rejected the charges in September 2005. Similar charges were discussed and dismissed by Congress in later years. In 2010 elections, Liberal Party Senator Benigno S. Aquino III (son of Ninoy and Corazon Aquino) ran for and won the presidency, campaigning against corruption and on a platform

including job creation, provision of health care and education, and other domestic issues. Makati City Mayor Jejomar Binay, a member of the PDP-Laban party, won the vice presidency. The election was the first in the Philippines to feature nationwide use of automated ballot-scanners, and, despite uncertainty about the technical reliability of the machines in the run-up to the election, most opinion-shapers lauded the election process as among the best in the Philippines history, quickly producing results that were widely accepted as legitimate. GOVERNMENT AND POLITICAL CONDITIONS The Philippines has a representative democracy modeled on the U.S. system. The 1987 constitution, adopted during the Corazon Aquino administration, reestablished a presidential system of government with a bicameral legislature and an independent judiciary. The president is limited to one 6-year term. Provision also was made in the constitution for autonomous regions in Muslim areas of Mindanao and in the Cordillera region of northern Luzon, where many aboriginal tribes still live. The 24-member Philippine Senate is elected at large, and all senators serve 6-year terms. Half are elected every 3 years. There are currently 278 members in the House of Representatives, 226 of whom represent single-member districts. The remaining House seats are occupied by sectoral party representatives elected at large, called party list representatives. The Supreme Court approved the introduction of 31 additional party list seats in April 2009, in time for May 2010 national elections. All representatives serve 3-year terms, with a maximum of three consecutive terms. The government continues to face threats from terrorist groups, including groups on the U.S. Government's Foreign Terrorist Organization list. The terrorist Abu Sayyaf Group (ASG), which gained international notoriety with its kidnappings of foreign tourists in the southern islands, remains a major problem for the government, along with members of the Indonesian-based Jemaah Islamiyah (JI). Efforts to track down and interdict ASG and JI members have met with some success, especially in Basilan and Jolo, where U.S. troops provide counterterrorism assistance and training to Philippine soldiers, along with conducting humanitarian activities. In August 2006, the Armed Forces of the Philippines began a major offensive against ASG and JI on the island of Jolo. This offensive was successful and resulted in the deaths of Abu Sayyaf leader Khadafy Janjalani and his deputy, Abu Solaiman. In 2010, Philippine forces killed ASG leaders Albader Parad and Dulmatin. The U.S. Government provided rewards to Philippine citizens whose information led to these deaths in the military operations, as well as to many other operations against terrorist leaders. The broad-based efforts to weaken terrorist organizations resulted in the death or capture of more than 200 terrorists since 2007. An international monitoring team continues to watch over a cease-fire agreement between the government and the separatist Moro Islamic Liberation Front (MILF). In June 2003, the MILF issued a formal renunciation of terrorism. In August 2008, during peace talks mediated by the Government of Malaysia, the Philippine Government and the MILF reached agreement in principle on a territorial agreement. Intervention by the Philippine Supreme Court, however, and its subsequent October 14, 2008 ruling that the draft agreement was unconstitutional, forced both parties to seek new ways to reach a peace agreement. Fighting flared up after the agreement was struck down in court and continued sporadically in central Mindanao until both sides agreed to a

cease-fire on July 29, 2009 and formally resumed the peace talks in December 2009. Following a hiatus in talks during the first months of the Aquino administration, the parties again pursued peace negotiations beginning in February 2011. Principal Government Officials President--Benigno S. Aquino III Vice President--Jejomar C. Binay Foreign Secretary--Albert F. Del Rosario Ambassador to the United States--Jose L. Cuisia, Jr. Permanent Representative to the UN--Libran N. Cabactulan The Republic of the Philippines maintains an embassy in the United States at 1600 Massachusetts Avenue NW, Washington, DC 20036 (tel. 202-467-9300). Consulates general are in New York, Chicago, San Francisco, Los Angeles, Honolulu, and Agana (Guam). ECONOMY Since the end of World War II, the Philippines has been on an unfortunate economic trajectory, going from one of the richest countries in Asia (following Japan) to one of the poorest. Growth after the war was rapid, but slowed as years of economic mismanagement and political volatility during the Marcos regime contributed to economic stagnation and resulted in macroeconomic instability. A severe recession from 1984 through 1985 saw the economy shrink by more than 10%, and political instability during the Corazon Aquino administration further dampened economic activity. During the 1990s, the Philippine Government introduced a broad range of economic reforms designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, although the Asian financial crisis in 1997 slowed Philippine economic development once again. Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened by inadequate infrastructure and education systems, and trade and investment barriers. International competitiveness rankings have slipped. The service sector contributes more than half of overall Philippine economic output, followed by industry (about a third), and agriculture (less than 20%). Important industries include food processing; textiles and garments; electronics and automobile parts; and business process outsourcing. Most industries are concentrated in areas around metropolitan Manila. Mining has great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper. Significant offshore hydrocarbon finds have added to the country's substantial geothermal, hydro, and coal energy reserves. Today's Economy The Philippine economy proved comparatively well-equipped to weather the recent global financial crisis, partly as a result of the efforts over the past few years to control the fiscal deficit,

bring down debt ratios, and adopt internationally-accepted banking sector capital adequacy standards. The Philippine banking sector--which makes up 80% of total financial system resources--had limited direct exposure to distressed financial institutions overseas, while conservative regulatory policies, including the prohibition of investments in structured products, shielded the insurance sector. After slowing to 3.8% growth during 2008, and sputtering to 1.1% during 2009, real year-onyear GDP growth rebounded to 7.3% during 2010, a 34-year high, fueled in part by electionrelated spending, optimism over the peaceful transition to a new government, and an accommodating monetary policy. Overseas workers remittances, which remained resilient during the global financial crisis, expanded by 8.2% in 2010 to $18.7 billion (nearly 10% of GDP) and helped support the balance of payments and international reserves. Annual GDP growth averaged 4.6% over the past decade, but it will take a higher, sustained economic growth path--at least 7%-8% per year by most estimates--to make progress in poverty alleviation given the Philippines' annual population growth rate of 2.04%, one of the highest in Asia. The portion of the population living below the national poverty line increased from 24.9% to 26.5% between 2003 and 2009, equivalent to an additional 3.3 million poor Filipinos. The Philippines business process outsourcing (BPO) industry currently accounts for about 15% of the global outsourcing market and has been the fastest-growing segment of the Philippine economy. Although industry revenues slowed from 40% growth during 2006 and 2007, the BPO sector exhibited resilience amid the global financial turmoil, generating more than $6 billion in revenues in 2008 (up 26%) and $7.2 billion in 2009. BPO revenues rose 26% to nearly $9 billion in 2010. The sector created about 100,000 new jobs in 2010, bringing total BPO employment as of end-2010 to about 525,000. The balance of payments surplus widened from $6.4 billion in 2009 to a record $14.4 billion in 2010. Surging foreign portfolio capital flows were a major factor and combined with an export rebound and the continued expansion in remittances and BPO revenues to more than double the Philippines balance of payments surplus. Merchandise exports--which rely heavily on electronics shipments for more than 60% of sales--grew by nearly 35% during 2010; electronics export revenues increased 38%, beating industry forecasts and recovering to pre-crisis levels. Although there has been some improvement over the years, the local value added of electronics exports remains relatively low. The Philippine stock market index--which closed 2009 up by 63% after slumping in 2008--hit new highs during 2010 and closed 38% higher year-on-year. The Philippine peso closed 2010 up 5.1% year-on-year. From $44.2 billion as of end-2009, gross international reserves rose to a new record high of nearly $62.4 billion as of end-2010, adequate for nearly 10 months of goods and services imports and equivalent to 5.5 times foreign debts maturing over the next 12 months. Although still relatively high, the debt of the national government has declined to under 56% of GDP (from a 2004 peak of 78% of GDP); and the consolidated public sector debt has declined to about 75% of GDP (from a 2003 peak of 118% of GDP). The national government worked to reduce its fiscal deficits for 5 consecutive years to 0.2% of GDP in 2007 and had hoped to balance the budget in 2008 but opted instead for measured deficit spending to help stimulate the

economy and temper the adverse impact of global external shocks on the already high number of Filipinos struggling with poverty. The national government ended 2008 and 2009 with deficits equivalent to 0.9% and 3.9% of GDP, respectively. The deficit-to-GDP ratio declined to 3.7% of GDP in 2010, consistent with the Aquino administrations medium-term goal to reduce the deficit to 2% of GDP by 2013. Further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. The national government's tax-to-GDP ratio increased from 13% in 2005 to 14.3% in 2006 after new tax measures went into effect; it declined and stagnated at 14% in 2007 and 2008, however, and declined further to 12.8% in 2009 and 2010, low relative to historical performance (i.e., 1997s 17% peak ratio) and regional standards. The recent passage of revenueeroding measures, partly to temper the impact on incomes of the global financial crisis, has exacerbated weaknesses in revenue administration. The government has used privatization receipts to reduce shortfalls in targeted tax collections, but this has not been a sustainable revenue source. The Philippine Congress enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address legal concerns posed by the Organization for Economic Cooperation and Development (OECD) Financial Action Task Force (FATF). The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The FATF Asia Pacific Group conducted a comprehensive peer review of the Philippines in September 2008. Some of the more important concerns include the exclusion of casinos from the list of covered institutions, the non-criminalization of terrorist financing as a stand-alone crime, and 2008 court rulings that inhibit and complicate investigations of fraud and corruption by prohibiting ex-parte inquiries regarding suspicious accounts. Legislation to address these deficiencies is pending in the Philippine Congress. The Philippines has taken steps to adopt Internationally Agreed Tax Standards (IATS) and has enacted a law that allows and provides a framework for the exchange of tax-related information. In September 2010, as a result, the OECD upgraded the Philippines to its tax "white list." A decade after the enactment of legislation to rationalize the electric power sector, the stateowned transmission company (Transco) has been privatized and 92% of total generating assets in Luzon and the Visayas have been sold. This has triggered the opening of access to retail competition in the electric power sector. What remains for privatization is to complete the transfer of contracts of the National Power Corporations (NPC) Independent Power Producers (IPPs) to private IPP administrators. NPC has transferred about two-thirds of these contracts to date but has postponed further action indefinitely due to concerns about the potential adverse effect on energy supply. Electricity is still relatively expensive in the Philippines, and the central and southern regions still suffer from inadequate and unreliable generating capacity. A Renewable Energy Act was passed in 2008 and provides additional incentives for investment in this sector as a means of ensuring reliable electricity supply and bringing down the cost of power. No new renewable energy investments have been implemented thus far under the act pending consultations on, and approval of, a Feed-in Tariff System (FITS), a major incentive mechanism that aims to accelerate renewable energy investments, and the results of a grid impact study. The U.S. Trade Representative retained the Philippines on its Special 301 Watch List for 2010,

citing inadequate protection of intellectual property rights. Potential foreign investors, as well as tourists, remain concerned about law and order, inadequate infrastructure, policy and regulatory instability, and governance issues. While trade liberalization presents significant opportunities, intensifying competition and the emergence of powerful regional economies also pose challenges. Competition from other economies for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, to lower costs of doing business, and to promote good public and private sector governance. Philippine anti-corruption efforts have been inadequate and inconsistent and more needs to be done to improve its international image--an effort that will require strong political will. Agriculture and Forestry Arable farmland comprises more than 40% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs about one-third of the work force but contributes less than a fifth of GDP. Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. Although the government has instituted conservation programs, deforestation remains a severe problem. With its 7,107 islands, the Philippines owns a diverse range of fishing areas. Notwithstanding good prospects for marine fisheries, the industry continues to face a difficult future due to destructive fishing methods, a lack of funds, and inadequate government support. Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. The sector barely grew in real terms during 2009, dragged down by the adverse effects of successive strong typhoons on the crops sector (which contributes over 45% of total agricultural production). Agricultural output declined by 0.5% during 2010 due to the adverse effects of drought during the first 9 months of the year. Industry Industrial production is centered on the processing and assembly operations of the following: food, beverages, tobacco, rubber and plastic products, textiles and textile products, clothing and footwear, leather products, pharmaceuticals, paints, wood and wood products, paper and paper products, printing and publishing, furniture and fixtures, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass and glass products, industrial chemicals, fertilizers, iron and steel, fabricated metal products, mineral products, machinery and equipment, transport equipment, and refined petroleum products. Newer industries, particularly production of semiconductors and other intermediate goods for incorporation into consumer electronics are important components of Philippine exports and are located in special export processing zones. The industrial sector is concentrated in urban areas, especially in the metropolitan Manila region, and has only weak linkages to the rural economy. Inadequate infrastructure, transportation, and

communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements. Mining The Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. Natural gas reserves discovered off Palawan have been brought on-line to generate electricity. Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the 10 leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure contributed to the industry's overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil, and gas. Some local government units have enacted mining bans in their territories. FOREIGN RELATIONS In its foreign policy, the Philippines cultivates constructive relations with its Asian neighbors, with whom it is linked through membership in the Association of Southeast Asian Nations (ASEAN), the ASEAN Regional Forum (ARF), and the Asia-Pacific Economic Cooperation (APEC) forum. The Philippines chaired ASEAN from 2006 to 2007, hosting the ASEAN Heads of State Summit and the ASEAN Regional Forum. The Philippines is a member of the UN and some of its specialized agencies, and served a 2-year term as a member of the UN Security Council from 2004-2005, acting as UNSC President in September 2005. Since 1992, the Philippines has been a member of the Non-Aligned Movement. The government is seeking observer status in the Organization of the Islamic Conference (OIC). The Philippines has played a key role in ASEAN in recent years, ratifying the ASEAN Charter in October 2008. The Philippines also values its relations with the countries of the Middle East, in no small part because hundreds of thousands of Filipinos are employed in that region. The welfare of the some four million to five million overseas Filipino contract workers is considered to be a pillar of Philippine foreign policy. The Philippines signed its first bilateral free trade agreement in 2006 with Japan under the Japan Philippine Economic Partnership Agreement (JPEPA). The Philippines has also begun implementing preferential rates under the ASEAN trade in goods agreement (ATIGA), ASEANChina, ASEAN-Korea, and ASEAN-Australia New Zealand Free Trade Areas. The fundamental Philippine attachment to democracy and human rights is reflected in its foreign policy. Philippine soldiers and police have participated in a number of multilateral civilian police and peacekeeping operations, and a Philippine Army general served as the first commander of the UN Peacekeeping Operation in East Timor. The Philippines presently has peacekeepers deployed in eight UN peacekeeping operations worldwide. The Philippines participated in Operation Iraqi Freedom, deploying some 50 troops to Iraq in 2003. (These troops were

subsequently withdrawn in 2004 after the kidnapping of a Filipino overseas worker.) The Philippine Government also has been active in efforts to reduce tensions among rival claimants to the territories and waters of the resource-rich South China Sea. U.S.-PHILIPPINE RELATIONS U.S.-Philippine relations are based on shared history and commitment to democratic principles, as well as on economic ties. The historical and cultural links between the Philippines and the United States remain strong. The Philippines modeled its governmental institutions on those of the United States and continues to share a commitment to democracy and human rights. At the most fundamental level of bilateral relations, human links continue to form a strong bridge between the two countries. There are an estimated four million Americans of Philippine ancestry in the United States, and more than 300,000 American citizens in the Philippines. Until November 1992, pursuant to the 1947 Military Bases Agreement, the United States maintained and operated major facilities at Clark Air Base, Subic Bay Naval Complex, and several small subsidiary installations in the Philippines. In August 1991, negotiators from the two countries reached agreement on a draft treaty providing for use of Subic Bay Naval Base by U.S. forces for 10 years. The draft treaty did not include use of Clark Air Base, which had been so heavily damaged by the 1991 eruption of Mount Pinatubo that the United States decided to abandon it. In September 1991, the Philippine Senate rejected the bases treaty, and despite further efforts to salvage the situation, the two sides could not reach an agreement. As a result, the Philippine Government informed the United States on December 6, 1991, that it would have 1 year to complete withdrawal. That withdrawal went smoothly and was completed ahead of schedule, with the last U.S. forces departing on November 24, 1992. On departure, the U.S. Government turned over assets worth more than $1.3 billion to the Philippines, including an airport and shiprepair facility. Agencies formed by the Philippine Government have converted the former military bases for civilian commercial use, with Subic Bay serving as a flagship for that effort. The post-U.S. bases era has seen U.S.-Philippine relations improved and broadened, with a prominent focus on economic and commercial ties while maintaining the importance of the security dimension. U.S. investment continues to play an important role in the Philippine economy, while a strong security relationship rests on the 1952 U.S.-Philippines Mutual Defense Treaty (MDT). In February 1998, U.S. and Philippine negotiators concluded the Visiting Forces Agreement (VFA), paving the way for increased military cooperation under the MDT. The agreement was approved by the Philippine Senate in May 1999 and entered into force on June 1, 1999. Under the VFA, the United States has conducted ship visits to Philippine ports and resumed large combined military exercises with Philippine forces. In October 2003, the United States designated the Philippines as a Major Non-NATO Ally. That same month, the Philippines joined the select group of countries to have ratified all 12 UN counterterrorism conventions. President Ramos visited the United States in April 1998, and President Estrada visited in July 2000. President Arroyo met with President George W. Bush in an official working visit in November 2001, made a state visit in Washington on May 19, 2003, and returned for additional visits on June 24, 2008, July 30, 2009, and April 12, 2010 for the Nuclear Security Summit.

President Bush made a state visit to the Philippines on October 18, 2003, during which he addressed a joint session of the Philippine Congress--the first American President to do so since Dwight D. Eisenhower. President Aquinos first overseas trip as President was to the United States, on the occasion of the 2010 UN General Assembly. There are regular U.S. cabinet-level, congressional, and military visits to the Philippines as well. The United States and Philippines held the first-ever Bilateral Strategic Dialogue on January 27-28, 2011, in Manila to advance discussion and cooperation on bilateral, regional, and global issues. Annual bilateral military exercises contribute directly to the Philippine armed forces' efforts to combat the Abu Sayyaf and Jemaah Islamiyah groups and bring development and relief to conflict- and disaster-affected areas. The exercises include not only combined military training but also civil-military affairs and humanitarian projects. The International Military Education and Training (IMET) program is the largest in the Pacific and the third-largest in the world, and a Mutual Logistics Support Agreement (MLSA) was signed in November 2002. In law enforcement, U.S. and Philippine agencies have cooperated to bring charges against numerous terrorists, to implement the countries' extradition treaty, and to train thousands of Filipino law enforcement officers. A Resident Legal Advisor also provides training to Philippine prosecutors. In FY 2010, the U.S. Government--working closely with the Philippine Government, civil society, the private sector, and other donors--provided $176.5 million in grant funds to foster inclusive economic growth and alleviate poverty; strengthen democratic institutions and governance; and counter transnational terrorism and insurgency in Mindanao. To achieve inclusive economic growth and alleviate poverty, the U.S. Government is supporting a broad range of socio-economic efforts, including activities to promote fiscal and trade policy reforms; infrastructure development; business climate improvement; enterprise development; natural resources management; improved health and education services; and increased access to clean and affordable energy, water, and sanitation services. To strengthen democratic institutions and governance, the U.S. Government is supporting judicial capacity building, fiscal management and accountability of local governments, election administration and management, civil society strengthening, alternative dispute resolution, human rights law enforcement, and activities to combat corruption and human trafficking. To counter transnational terrorism and insurgency, the U.S. Government is helping to increase the abilities of military and civilian law enforcement agencies. The United States also provides humanitarian assistance to internally displaced persons in conflict-affected areas and to victims of natural disasters. About 60% of economic assistance resources are targeted for Mindanao for programs that promote socio-economic growth and promote peace and security. In September 2010, the Millennium Challenge Corporation (MCC) signed a $434-million compact with the Philippines. The 5-year compact provides funding for three major projects: road construction and rehabilitation, community development, and revenue administration. An estimated 600,000 Americans visit the Philippines each year, while an estimated 300,000 reside in-country. Providing government services to U.S. and other citizens, therefore, constitutes an important aspect of the bilateral relationship. Those services include veterans' affairs, social security, and consular assistance. The newly completed Veterans Affairs Clinic and NOX 1 building, housing consular and other services, offer improved platforms for client service on the U.S. Embassy grounds, and the third and final building of that $120 million construction project

should be completed by 2013. Benefits to Filipinos and U.S. citizens resident in the Philippines from the U.S. Department of Veterans Affairs and the Social Security Administration totaled approximately $502 million in fiscal year 2010. Many people-to-people programs exist between the United States and the Philippines, including Fulbright, International Visitors, and Aquino Fellowship exchange programs, as well as the U.S. Peace Corps. Trade and Investment The United States competes closely as one of the Philippines top two trading partners. Two-way U.S. merchandise trade with the Philippines--which declined from $17 billion in 2008 to $12.6 billion in 2009 following declines in global trade flows--increased to $15.4 billion in 2010 (U.S. Department of Commerce data). According to Philippine Government data, about 11% of the Philippines' imports in 2010 came from the United States, and about 15% of its exports were bound for America. In 2010, the Philippines was our 30th-largest export market and our 36thlargest supplier. Key exports to the United States are semiconductor devices and computer peripherals, automobile parts, electric machinery, textiles and garments, wheat and animal feeds, and coconut oil. In addition to other goods, the Philippines imports raw and semi-processed materials for the manufacture of semiconductors, electronics and electrical machinery, transport equipment, and cereals and cereal preparations. The Philippines has ranked among the largest beneficiaries of the Generalized System of Preferences (GSP) program for developing countries, which provides preferential duty-free access to the U.S. market. In 2010, the Philippines was the eighth-largest exporter under the GSP program with nearly $913 million in duty-free exports to the United States. The United States traditionally has been the Philippines' largest foreign investor, with close to $6 billion in total foreign direct investment as of end-2009. The United States has a bilateral Trade and Investment Framework Agreement with the Philippines. Since the late 1980s, the Philippines has undertaken reforms that encourage foreign investment as a basis for economic development, subject to certain restrictions. For example, it opened the power generation sector to foreign investment, introduced competition to the telecommunications and sea and air transport sectors, ratified the Uruguay Round agreement, and became a member of the World Trade Organization. The new Aquino administration has signaled that it is pro-business, and is making efforts to open up the country to foreign investment, especially in large infrastructure projects. Business process outsourcing operations, also known as call centers, tourism, and mining likewise offer investment opportunities. Major obstacles include a prohibition on foreign ownership of land, and constitutional restrictions on majority foreign ownership of public utilities. Principal U.S. Embassy Officials Ambassador--Harry K. Thomas, Jr. Deputy Chief of Mission--Leslie A. Bassett Political Counselor--Joy O. Yamamoto Economic Counselor--Brian P. Doherty Public Affairs Counselor--Richard W. Nelson Consul General--Michael R. Schimmel

Management Counselor--Robert A. Riley Commercial Counselor--Patrick T. Wall USAID Mission Director--Gloria D. Steele Agricultural Counselor--Philip A. Shull Transportation and Safety Administration--Anthony M. Mira Department of Homeland Security--David V. Roy Department of Justice Attache--Robert E. Courtney III Defense Attache Office--Colonel Richard Matton Joint U.S. Military Assistance Group--Colonel Kevin D. Clark Regional Security Officer--Jacob M. Wohlman Legal Attache--James D. Nixon U.S. Drug Enforcement Administration--Robert M. Cash Veterans Affairs--Jonathan M. Skelly Social Security Administration--Darrin K. Morgan American Battle Monuments Commission--Larry A. Adkison U.S. Peace Corps--Sonia L. Stines Derenoncourt Millennium Challenge Corporation--Matthew L. Bohn The U.S. Embassy is located at 1201 Roxas Boulevard, Manila; tel. (63)(2) 301-2000; fax 3012399; website: http://manila.usembassy.gov; social media: http://www.facebook.com/manila.usembassy; http://www.twitter.com/usembassymanila; http://www.youtube.com/user/usembassymanila; http://www.flickr.com/photos/usembassymanila. The American Business Center is located at 25/F, Ayala Life - FGU Center, 6811 Ayala Avenue, Makati City. It houses the Foreign Commercial Service: tel. (63)(2) 888-4088; fax 888-6606; website: http://manila.usembassy.gov/us-agencies2/u.s.-foreign-commercial-services.html; and the Foreign Agricultural Service: tel. (63)(2) 887-1137; fax 887-1268; website: http://manila.usembassy.gov/us-agencies2/foreign-agricultural-services.html. TRAVEL AND BUSINESS INFORMATION Travel Alerts, Travel Warnings, Trip Registration The U.S. Department of State's Consular Information Program advises Americans traveling and residing abroad through Country Specific Information, Travel Alerts, and Travel Warnings. Country Specific Information exists for all countries and includes information on entry and exit requirements, currency regulations, health conditions, safety and security, crime, political disturbances, and the addresses of the U.S. embassies and consulates abroad. Travel Alerts are issued to disseminate information quickly about terrorist threats and other relatively short-term conditions overseas that pose significant risks to the security of American travelers. Travel Warnings are issued when the State Department recommends that Americans avoid travel to a certain country because the situation is dangerous or unstable.