For the most current version of this Note, see Background Notes A-Z.

Flag of Philippines is two equal horizontal bands of blue (top) and red with a white equilateral triangle based on the hoist side; in the center of the triangle is a yellow sun with eight primary rays (each containing three individual rays) and in each corner of the triangle is a small yellow five-pointed star.

PROFILE

OFFICIAL NAME:
Republic of the Philippines

Geography
Area: 300,000 sq. km. (117,187 sq. mi.).
Major cities (2000 census): Capital--Manila (pop. 9.9 million in metropolitan area); other cities--Davao City (1.2 million); Cebu City (0.7 million).
Terrain: Islands, 65% mountainous, with narrow coastal lowlands.
Climate: Tropical, astride typhoon belt.

People
Nationality: Noun--Filipino(s). Adjective--Philippine.
Population (2000 census): 76.5 million; estimate for 2004: 83.9 million.
Annual growth rate: 2.36%.
Ethnic groups: Malay, Chinese.
Religions: Catholic 85%, Protestant 9%, Muslim 5%, Buddhist and other 1%.
Languages: Pilipino (based on Tagalog), 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--94% in elementary grades, 64% in secondary grades. Literacy--93.4%.
Health: Infant mortality rate (2003)--29 per 1,000. Life expectancy (2003)--67.8 yrs. for males; 73.1 yrs. for females.
Work force (2004): 35.8 million. Services (including commerce and government, 2004)--47%; agriculture--20%; industry--33%.

Government
Type: Republic.
Independence: 1946.
Constitution: February 11, 1987.
Branches: Executive--president and vice president. Legislative--bicameral legislature. Judicial--independent.
Administrative subdivisions: 15 regions and Metro Manila (National Capital Region), 79 provinces, 115 cities.
Political parties: Lakas-Christian Muslim Democrats, Nationalist People's Coalition, Laban ng Demokratikong Pilipino, Liberal Party, Aksiyon Demokratiko, Partido Demokratikong Pilipino-Lakas ng Bayan, and other small parties.
Suffrage: Universal, but not compulsory, at age 18.

Economy
GDP (2004): $84.2 billion.
Annual GDP growth rate (2004): 6.1%.
GDP per capita (2004): $976.
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, food processing, electronics assembly, petroleum refining, fishing.
Trade (2004): Exports--$39.6 billion. Imports--$40.3 billion.

PEOPLE
The majority of Philippine people are of Malay stock, descendants of Indonesians and Malays who migrated to the islands long before the Christian era. The most significant ethnic minority group is the Chinese, who have played an important role in commerce since the ninth century, when they first came to the islands to trade. As a result of intermarriage, many Filipinos have some Chinese and Spanish ancestry. Americans and Spaniards constitute the next largest alien minorities in the country.

More than 90% of the people are Christian; most were converted and became Westernized to varying degrees during 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 groups of northern Luzon. Small forest tribes still live in the more remote areas of Mindanao.

About 87 native languages and dialects are spoken, all belonging to the Malay-Polynesian linguistic family. Of these, eight are the first languages of more than 85% of the population. The three principal indigenous languages are Cebuano, spoken in the Visayas; Tagalog, predominant in the area around Manila; and Ilocano, spoken in northern Luzon. Since 1939, in an effort to develop national unity, the government has promoted the use of the national language, Pilipino, which is based on Tagalog. Pilipino is taught in all schools and is gaining acceptance, particularly as a second language. Many use English, the most important nonnative language, as a second language, including nearly all professionals, academics, and government workers. 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. Only a few Filipino families use Spanish as a first language.

The Philippines has one of the highest literacy rates in the East Asian and Pacific area. About 92% 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 years since independence (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. Subsequently, people of Malay stock came from the south in successive waves, the earliest by land bridges and later in boats called barangays. The Malays settled in scattered communities, which became known as barangays, and which were ruled by chieftains known as datus. Chinese merchants and traders arrived and settled in the ninth century A.D. In the 14th century, Arabs arrived, introducing Islam in the south and extending some influence even into Luzon. The Malays, however, remained the dominant group until the Spanish arrived in the 16th century.

Spanish Period
Ferdinand Magellan reached the Philippines and claimed it for Spain in 1521, and for the next 377 years, the islands were under Spanish rule. This period was the era of conversion to Roman Catholicism. A Spanish colonial social system was developed with a government centered on Manila and with considerable clerical influence. Spanish influence was strongest in Luzon and the Central Philippines. It was less strong 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, western-educated Filipinos or "ilustrados" such as 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 which began in 1896 under the leadership of Emilio Aguinaldo and continued until the Americans defeated the Spanish fleet in Manila Bay on May 1, 1898, during the Spanish-American War. Aguinaldo declared independence from Spain on June 12, 1898.

American Period
Following Admiral Dewey's defeat of the Spanish fleet in Manila Bay, the United States 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 war.

A war of resistance against U.S. rule, led by Revolutionary President Aguinaldo, broke out in 1899. This conflict claimed the lives of tens of thousands of Filipinos and thousands of Americans. Although Americans have historically used the term "the Philippine Insurrection," 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. The conflict ended with a Peace Proclamation on July 4, 1902. However, armed resistance continued sporadically, with heavy casualties on both sides, until 1913, especially 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 and a sound legal system.

The first legislative assembly was elected in 1907. A bicameral legislature, largely under Philippine 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. World War II intervened, 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 guerilla campaign against Japanese forces.

The full-scale war to regain the Philippines began when Gen. Douglas MacArthur landed on Leyte on October 20, 1944. Filipinos and Americans fought together until the Japanese surrender 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.

As a result of 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 Independence Day was changed from July 4 to June 12, commemorating the date independence from Spain was declared by General 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. Corruption and favoritism contributed to a serious decline in economic growth and development under Marcos.

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 Sen. Richard Lugar (R-Indiana), denounced the official results. Marcos was forced to flee the Philippines in the face of a peaceful civilian-military 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 respect for 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.

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 on corruption charges. 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, Macapagal-Arroyo was eligible for another six-year term as president, 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 Macapagal-Arroyo in June of 2005 for allegedly tampering with the results of the elections after purported tapes of her speaking with an electoral official during the vote count surfaced. The Congress rejected the charges in September 2005.

GOVERNMENT AND POLITICAL CONDITIONS
The Philippines has a representative democracy modeled on the U.S. system. The 1987 constitution, adopted during the 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 indigenous tribes still live.

The 24-member Philippine Senate is elected at large. There are currently 23 senators, however. The May 2004 national election produced 12 new senators, although, because current Senator Noli De Castro was elected Vice President, he will leave his seat empty until the next Senate elections in 2007. Of a maximum 250 members of the House of Representatives, 212 are elected from single-member districts. The remainder of the House seats are designated for sectoral party representatives elected at large, called party list representatives; currently there are 24 such representatives in the House.

When Macapagal-Arroyo assumed the Presidency, her "People Power Coalition," led by the Lakas-CMD party, became the dominant group in Congress. The 75-member Lakas party leads the "Sunshine Coalition," which also includes the 61-member Nationalist People's Coalition, the 22-member Liberal Party, and several other major and minor parties. The LDP party leads the 20-member opposition bloc. In the Senate, the pro-administration coalition controls 12 of the 22 seats. Members of the Philippine Congress tend to have weak party loyalties and change party affiliation easily.

The government continues to face threats from both Muslim separatist groups and communist insurgents, and rising crime and concerns about the security situation have had a negative impact on tourism and foreign investment. The terrorist Abu Sayyaf Group (ASG), which recently gained international notoriety with its kidnappings of foreign tourists in the southern islands, is a major problem for the government. In May 2001, the ASG kidnapped several Americans, beheading one of them in June 2001. In a June 2002 rescue attempt, another American hostage was killed. Efforts to track down and destroy the ASG have met with some success, especially on Basilan, where U.S. troops advised, assisted and trained Philippine soldiers in counterterrorism. ASG elements remain active on Jolo Island and elsewhere in the southwestern Philippines. Philippine security forces captured an Indonesian terrorist with links to Jemaah Islamiyah in 2002; he escaped from custody in July 2003, but police pursued and killed him in October.

In August 2001, the government reached a cease-fire agreement with the separatist Moro Islamic Liberation Front (MILF); negotiations on a final peace agreement continued at a very slow pace amid sporadic fighting. At President Arroyo's May 2003 State Visit to Washington, President Bush pledged diplomatic and financial support for the peace process, a move that both sides embraced. In June 2003, the MILF issued a formal renunciation of terrorism. An ensuing cessation of hostilities has held into mid-2005, and talks between the two sides continue, with the Government of Malaysia acting as principal mediator. The United States Institute of Peace has also made proposals for assisting the peace process, in cooperation with the Philippine Government and the MILF. The Department of State in August 2002 added the Communist Party of the Philippines/New People's Army (CPP/NPA) to the U.S. Foreign Terrorist Organization list. Negotiations between the government and the CPP's political arm, the National Democratic Front, were suspended in 2001 after the NPA assassinated two members of Congress, although "back-channel" and exploratory talks have continued since then.

Principal Government Officials
President--Gloria Macapagal-Arroyo
Vice President--Noli de Castro
Foreign Secretary---Alberto Romulo
Ambassador to the United States--Albert F. del Rosario
Permanent Representative to the UN--Lauro Baja

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 the Second World War, the Philippine economy has had a mixed history of growth and development. Over the years, the Philippines has gone from being one of the richest countries in Asia (following Japan) to being one of the poorest. Growth immediately after the war was rapid, but slowed over time. A severe recession in 1984-85 saw the economy shrink by more than 10%, and perceptions of political instability during the Aquino administration further dampened economic activity. During his administration, President Ramos introduced a broad range of economic reforms and initiatives designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, but the Asian financial crisis triggered in 1997 slowed economic development in the Philippines once again. President Estrada managed to continue some of the reforms begun by the Ramos administration. Important laws to strengthen regulation and supervision of the banking system (General Banking Act) and securities markets (Securities Regulation Code), to liberalize foreign participation in the retail trade sector, and to promote and regulate electronic commerce were enacted during his abbreviated term. Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Gloria Macapagal-Arroyo has made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. However, despite recent progress, fiscal problems remain one of the economy's weakest points and its biggest vulnerability.

Important sectors of the Philippine economy include agriculture and industry, particularly food processing, textiles and garments, and electronics and automobile parts. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromite, nickel, and copper. Significant natural-gas finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal energy reserves.

Today's Economy
The Philippines was less severely affected by the Asian financial crisis than its neighbors, aided in part by annual remittances from overseas Filipino workers that are expected to hit the $10 billion mark in 2005. Except for 1998--when drought and weather-related disturbances pulled down agricultural harvests, combining with the contraction in industrial sector production--real Gross Domestic Product (GDP) has recorded positive growth year-on-year. From a 0.6% decline in 1998, GDP expansion picked up in 1999 (3.4%) and 2000 (4.4%) but slowed to under 2% in 2001 in the context of a global economic slowdown, export slump, and domestic as well as global political and security concerns. Year-on-year GDP growth accelerated to 4.5% in 2002, reflecting the continued resilience of the service sector, gains in industrial sector output, and recovering exports. The economy exhibited resilience during 2003 with 4.5% GDP growth, notwithstanding serious external and domestic shocks. (including the Iraq War, SARS, uncertainties over global economic prospects, sovereign credit-rating downgrades, and resurgent law-and-order worries). GDP increased by 6% in 2004, a fifteen-year high, but is expected to expand by under 5% in 2005 on weaker export growth, drought-affected agricultural harvests, and high oil prices. Historically, the Philippines has had difficulty sustaining growth at over 5%. It will take a higher, sustained economic-growth path to make more appreciable progress in poverty alleviation given the Philippines' high annual population growth rate of 2.36%--one of the highest in Asia.

Agriculture generally suffers from low productivity, low economies-of-scale, and inadequate infrastructure support. Agricultural output fell in 1997 and 1998 due to an El Ni�o-related drought but increased by 6.0% in 1999 (over 1998's low base). Growth reverted to more normal rates in 2000 (4.0%) and 2001 (3.7%). Agricultural output (affected by another, albeit milder, dry spell) expanded by 3.9% year-on-year in 2002 and 3.2% in 2003. Agricultural output increased by 4.9% in real terms during 2004 but stagnated during the first semester of 2005 due to drought and intermittent weather disturbances.

The Philippines relies heavily on electronics shipments for about two-thirds of export revenues. Although there has been some improvement, over the years, local value added of electronics exports remains relatively low at about 30%. Overall export receipts expanded by 9.6% in 2004, led by an 11.2% increase in foreign exchange receipts from electronics shipments. Year-on-year export growth slowed to 3.6% during the first half of 2005, with receipts from electronics shipments up by a lethargic 1.2%.

Although less severely affected than its neighbors, the Philippines' banking sector was not spared from high interest rates and non-performing asset (NPA) levels during the Asian financial crisis and its aftermath. Increases in minimum capitalization requirements, increasing loan-loss provisions, and generally healthy capital-adequacy ratios have helped temper systemic risk. The Special Purpose Vehicle (SPV) Act of January 2003, which provides time-bound fiscal and regulatory incentives to encourage the sale to private asset management companies, has helped to reduce banks' portfolios of non-performing assets (NPAs). As of July 2005, the ratio of the commercial banking system's NPAs to total assets had declined to under 9.5% (from 12.3% as of July 2004). Banks had until April 2005 to conclude notarized agreements to sell their NPAs to qualify for incentives under the law. A bill supported by the Philippine Central Bank and the banking sector seeks to extend the deadline towards further reducing the NPA ratio to pre-crisis levels of under 5%. Circumstances surrounding bank closures continue to highlight remaining impediments to more effective bank supervision and timely intervention--including stringent bank secrecy laws, obstacles preventing bank regulators from examining banks at will, and inadequate legal protection for Central Bank officials and examiners. The government faces another important challenge in addressing threats to the long-term viability of state-run pension funds. The monetary authority's adoption since January 2002 of an inflation-targeting framework has enhanced transparency in the conduct of monetary policy. The government--which has targeted lower fiscal deficits since 2003 toward balancing the budget before the end of President Macapagal-Arroyo's term--contained the full-year 2004 budget deficit to 3.9% of GDP (down from 2002's 5.3% record high) and is on track thus far to containing the 2005 deficit to 3.4% of GDP in 2005, reflecting spending restrain and more vigorous efforts by tax collection agencies to improve administration, enforcement, and governance. However, the current 13% tax-to-GDP ratio remains well below the 17% peak ratio achieved in 1997.

The Aquino and Ramos administrations opened up the relatively closed Philippine economy and provided a firmer base for sustainable economic growth. After a slow start, President Estrada and his cabinet continued with, and expanded, liberalization and market-based policies and reforms. Efforts to reform the constitution to encourage foreign investment, particularly foreign ownership of land, were abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had dimmed amid concerns of governmental corruption. Scandals involving the Philippine Stock Exchange, and the President's close ties to certain businessmen, shook confidence of investors and the business community and ultimately led to successful efforts to impeach and remove President Estrada.

The Macapagal-Arroyo Administration enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address remaining legal concerns posed by the OECD Financial Action Task Force (FATF). The Financial Action Task Force (FATF) removed the Philippines from its list of Non-Cooperating Countries and Territories in February 2005, noting the significant progress made to remedy concerns and deficiencies identified by the FATF to improve implementation. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005. The Macapagal-Arroyo government is pushing for congressional approval of an anti-terrorism law to strengthen its campaign against terrorism and terrorist financing.

Although encountering implementation hitches, the Macapagal-Arroyo administration also enacted legislation in 2001 to rationalize the electric power sector and privatize the government's debt-saddled National Power Corporation (NPC). The government has achieved some success in establishing an independent regulatory system for electricity pricing which will benefit NPC finances. In addition to the Special Purpose Vehicle law, President Macapagal-Arroyo also signed into law in 2003 a priority initiative to reform the government procurement system (the Government Procurement Reform Act). During the first quarter of 2004, she signed into law legislation to rationalize and plug leakages in the Philippines' convoluted documentary stamp tax system and encourage secondary trading of financial instruments, as well as legislation (the Securitization Act) towards establishing the necessary infrastructure and market environment for a wide range of asset-backed securities. She also signed legislation to institutionalize Alternative Dispute Resolution for civil cases to help address the problem of overburdened court dockets.

Notwithstanding a number of favorable policy developments, the Philippine economy continues to juggle extremely limited financial resources while attempting to meet the needs of a rapidly expanding population and address intensifying demands for the current administration to deliver on its anti-poverty promises. Over 80% of the government budget is gobbled up by non-discretionary expenses (i.e., debt service, government salaries and benefits, and legally-mandated revenue transfers to local government units). The current high level of government debt, the substantial share of foreign obligations, the emerging risks posed by contingent liabilities (particularly those of the government's debt-saddled NPC), and the worrisome deterioration in the tax collection performance from the 1997 peak (still low by regional standards) have increased the country's vulnerability to severe external and domestic shocks. More recent reforms include laws increasing excise taxes on tobacco and liquor products and establishing a system of rewards and penalties in revenue collection agencies. An amended Value Added Tax law (which would reduce VAT exemptions and increase the VAT rate from 10% to 12% in 2006 represents the most significant measure thus far in the Macapagal-Arroyo Administration's efforts to raise revenues from legislative measures to balance the budget two years ahead of schedule (2008 vs. 2010) while expanding investments in infrastructure and improving the delivery of essential social services. As of end-September 2005, the amended VAT law--originally scheduled for implementation in July 2005 but challenged by opposition lawmakers and other groups before the Supreme Court--was on hold pending a final ruling by the Court.

Reflecting weaknesses in intellectual property rights protection, the country remains on the U.S. Trade Representative's Special 301 Priority Watchlist. Potential foreign investors, as well as tourists, continue to be concerned about law and order, inadequate infrastructure, and governance issues. While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. Competition from other Southeast Asian countries and from China for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, lower costs of doing business, and promote good public and private sector governance. The government has been working to reinvigorate its anti-corruption drive and the Office of the Ombudsman has reported improved conviction rates. Nevertheless, the Philippines will need to do more to improve international perception of its anti-corruption campaign--an effort that will require strong political will and significantly greater financial and human resources.

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 nearly 40% of the work force but provides less than one-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. The government has instituted conservation programs, but deforestation remains a severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas. Notwithstanding good prospects for the agriculture subsector, the marine fishing industry continues to face a bleak future due to destructive fishing methods, a lack of funds, and inadequate government support.

Industry
Industrial production is centered on processing and assembly operations of the following: food, beverages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals, paints, plywood and veneer, paper and paper products, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass, industrial chemicals, fertilizers, iron and steel, and refined petroleum products.

The industrial sector is concentrated in the 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 chromite 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. The discovery of natural gas reserves off Palawan Island has 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 ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have 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.

FOREIGN RELATIONS
In its foreign policy, the Philippines cultivates constructive relations with its Asian neighbors, with whom it is linked through membership in ASEAN, the ASEAN Regional Forum (ARF), and the Asia-Pacific Economic Cooperation (APEC) forum. The Philippines is a member of the UN and some of its specialized agencies, and began a 2-year term as a member of the UN Security Council in January 2004, serving 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 Islamic Conference (OIC). The Philippines has played a key role in ASEAN in recent years and 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 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 also participated in Operation Iraqi Freedom, deploying some 50 troops to Iraq in 2003. (These troops were subsequently withdrawn in 2004 after a Filipino overseas worker was kidnapped.) 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. The welfare of the some seven million overseas Filipino workers is considered to be a pillar of Philippine foreign policy. Through foreign exchange remittances, these workers account for approximately 10% of the gross domestic product.

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 U.S. remain strong. The Philippines modeled its governmental institutions on those of the U.S., 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 2 million Americans of Philippine ancestry in the United States and more than 130,000 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 Mt. Pinatubo that the U.S. 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 agreement. As a result, the Philippine Government informed the U.S. on December 6, 1991, that it would have one 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 ship-repair 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 U.S. has conducted ship visits to Philippine ports and has resumed large combined military exercises with Philippine forces. Key events in the bilateral relationship include the July 4, 1996 declaration by President Ramos of Philippine-American Friendship Day in commemoration of the 50th anniversary of Philippine independence. Ramos visited the United States in April 1998, and then-President Estrada visited in July 2000. President Macapagal-Arroyo (PGMA) met with President Bush in an official working visit in November 2001 and made a state visit in Washington on May 19, 2003. Numerous U.S. Cabinet-level visits to the Philippines punctuated this period, culminating in a visit by Secretary of State Colin Powell in August 2002. 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 Macapagal-Arroyo has repeatedly stressed the close friendship between the Philippines and the United States and her desire to strengthen bilateral ties further. Our governments seek to revitalize and strengthen our partnership by working toward greater security, prosperity, and service to Filipinos and Americans alike. Inaugurated into office on the same day as President Bush, President Macapagal-Arroyo lent strong support to the global war on terrorism and the coalition against Saddam Hussein.

Balikatan (Shoulder-to-Shoulder) 02-1 in 2002 contributed directly to the Philippines armed forces efforts to root out Abu Sayyaf terrorists and bring development to one formerly terrorist-plagued island. The U.S. and the Philippines have intensified their annual cycle of combined military training around the country as well as the military's civil affairs and humanitarian projects, funded by $70 million in U.S. Foreign Military Financing projected between 2004-06. Moreover, the International Military Education and Training (IMET) program, $2.7 million in FY 2004, is the largest in Asia and the second largest in the world. At $148 million the Philippines is the number one recipient in Asia of Excess Defense Articles. The Mutual Logistics Support Agreement (MLSA) was signed in November 2002 after a year-long negotiation process. Similarly, law enforcement cooperation has reached new levels. U.S. and Philippines agencies have cooperated to bring charges against 15 Abu Sayyaf terrorists, implement our extradition treaty, and train some 700 Filipino law enforcement officers in 2002. In October 2003, the United States designated the Philippines as a Major Non-NATO Ally. The same month, the Philippines joined the select group of countries to have ratified all 12 UN Counterterrorism Conventions.

The United States is also working closely with the Philippines to reduce poverty and increase prosperity. The U.S. fully supports President Macapagal-Arroyo's "Strong Republic" reform agenda for rooting out corruption, opening economic opportunity, and investing in health and education. USAID programs, worth $16 million in FY 2005, support the Arroyo Administration's war on poverty as well as the GRP reform agenda in critical areas, including anti-money laundering, rule of law, tax collection, and trade and investment. Other USAID programs worth $23.2 million bolstered the government's efforts to heal divisions in Philippine society through a focus on conflict resolution, livelihood enhancement for former combatants, and economic development in Mindanao and the Autonomous Region in Muslim Mindanao, among the poorest areas in the country. Meanwhile, important programs continue in modern family planning, infectious disease control, environmental protection, rural electrification, and provision of basic services--as well as PL 480 food aid programs, which together totaled $70 million in FY 2005. In November 2004, the Philippines became eligible for the Millennium Challenge Account (MCA) Threshold Program. In August 2005, the country's concept proposal for the threshold program, addressing corruption in revenue administration, was approved for the development of a Threshold Country Plan for $20 million. Nearly 400,000 Americans visit the Philippines each year. Filipinos living in the United States remitted about $4.1 billion to the Philippines in 2003. Providing government services to U.S. and other party's citizens, therefore, constitutes an important aspect of the bilateral relationship. Those services include veterans affairs, social security, and consular operations. Benefits to Filipinos from the U.S Veterans Affairs and Social Security administrations totaled, $143.9 million and $246.7 million, respectively. Many people-to-people programs exist between the U.S. and the Philippines, including Fulbright, International Visitors, and Aquino Fellowship exchange programs, as well as the U.S. Peace Corps.

Trade and Investment
Two-way U.S. merchandise trade with the Philippines amounted to $16.2 billion in 2004 (U.S. Department of Commerce data). According to Philippine Government data, some 16% of the Philippines' imports in 2004 came from the U.S., and about 18% of its exports were bound for America. The Philippines ranks as our 21st largest export market and our 28th largest supplier. Key exports to the U.S. 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 United States traditionally has been the Philippines' largest foreign investor, with about $6.3 billion in estimated investment as of end-2004 according to official U.S. statistics (U.S. Department of Commerce data). Since the late 1980s, the Philippines has committed itself to reforms that encourage foreign investment as a basis for economic development, subject to certain guidelines and restrictions in specified areas. Under President Ramos, the Philippines expanded reforms, opening the power generation and telecommunications sectors to foreign investment, as well as securing ratification of the Uruguay Round agreement and membership in the World Trade Organization. As noted earlier, President Macapagal-Arroyo administration has generally continued such reforms despite opposition from vested interests and "nationalist" blocs. A major obstacle has been and will continue to be constitutional restrictions on, among others, foreign ownership of land and public utilities, which limits maximum ownership to 40%.

Over the last two decades, the relatively closed Philippine economy has been opened significantly by foreign exchange deregulation, foreign investment and banking liberalization, tariff and market barrier reduction, and foreign entry into the retail trade sector. The Electric Power Industry Reform Act of 2001 opened opportunities for U.S. firms to participate in the power industry in the Philippines. Information and communications technologies, backroom operations such as call centers, and regional facilities or shared-service centers are likewise leading investment opportunities.

Principal U.S. Embassy Officials
Ambassador--vacant
Charge d'Affaires, ad interim--Darryl Johnson
Deputy Chief of Mission--Paul W. Jones
Political Counselor--Scott R. Bellard
Economic Counselor--Robert Ludan
Consul General--Richard D. Haynes
Management Counselor--Sharon E. Ludan
Commercial Counselor--David Fulton
USAID Mission Director--Jon Lindborg
Agricultural Counselor--David Miller
Transportation and Safety Administration--Bert Williams
Defense Attach� Office--Colonel Terry P. Cook.
Joint U.S. Military Assistance Group--Colonel Mathias R. Velasco
Regional Security Officer--William H. Lamb
Legal Attach�--Stephen P. Cutler
U.S. Drug Enforcement Administration--Timothy C. Teal
Veterans Affairs--Barry M. Barker
Social Security Administration--Thomas Ashley
American Battle Monuments Communication--Daniel L. Neese
U.S. Peace Corps--William J. Benjamin

The U.S. Embassy is located at 1201 Roxas Boulevard, Manila; tel. (63)(2)528-6300; fax 522-4361. Website: http://manila.usembassy.gov/. 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/wwwh3012.html; and the Foreign Agricultural Service: tel (63)(2)887-1137; fax 887-1268; website: http://manila.usembassy.gov/wwwh3011.html.

[This is a mobile copy of Philippines (09/05)]