Understanding the Philippine Economy During the Commonwealth Period

The years between 1935 and 1946 mark a crucial time in Philippine history: the Commonwealth Period. This era was a transition phase, where the Philippines was granted self-governance under American supervision, preparing for full independence. While the political landscape was changing rapidly, the economy faced its own set of unique opportunities, challenges, and policies aimed at building a foundation for a truly independent nation. Understanding the Philippine Economy During the Commonwealth Period gives us valuable insights into the roots of many economic issues and structures that persisted for decades.

This period was shaped by the legacy of American colonial rule, global economic conditions, and the ambitious goal of economic self-sufficiency alongside political freedom. It was a time of deliberate planning, experimentation, and facing harsh realities, culminating in the devastating disruption of World War II.

The Economic Landscape Inherited

When the Commonwealth of the Philippines was inaugurated in November 1935, it inherited an economy largely shaped by the policies of the American Insular Government that preceded it. The core characteristics were:

Agricultural Dominance: The economy was heavily reliant on agriculture, with primary products like sugar, coconut, abaca (hemp), and tobacco being the main exports. Rice and corn were the staple food crops.
Dependence on US Trade: A system of preferential trade (often referred to as “free trade” but with some limitations and quotas) had been established between the Philippines and the United States. Philippine goods, especially agricultural products, enjoyed low or no tariffs when entering the US market, and American goods received similar treatment entering the Philippines. This relationship deeply integrated the Philippine economy with that of the United States.
Limited Industrialization: While there were some processing industries (like sugar mills, coconut oil factories), large-scale manufacturing was minimal. Most manufactured goods were imported, primarily from the US.
Infrastructure Development: The American colonial government had invested in infrastructure like roads, bridges, ports, and communication systems, mainly to facilitate trade and administration. The Commonwealth aimed to continue and expand upon this.
Agrarian Issues: Land ownership was highly unequal, with a small percentage of landowners controlling vast tracts of land. Tenancy was widespread, leading to poverty, debt, and social unrest among farmers, particularly in Central Luzon.

The Tydings-McDuffie Act of 1934, which paved the way for the Commonwealth, also outlined economic provisions. It continued the preferential trade relationship but introduced quotas on key Philippine exports like sugar, coconut oil, and cordage entering the US market. These quotas were a signal that the completely open access of the past would change, forcing the Philippines to prepare for a time when its goods would face full tariffs in the US. This looming economic adjustment was a major concern for the Commonwealth government.

Goals and Philosophy of Commonwealth Economic Policy

The primary economic goal of the Commonwealth government, led first by President Manuel L. Quezon and later by President Sergio Osmeña, was to prepare the nation for economic independence alongside political independence. This meant:

Reducing Dependence on the US Market: Diversifying markets for Philippine exports and reducing reliance on preferential trade.
Promoting Industrialization: Building a domestic manufacturing sector to produce goods consumed locally and reduce reliance on imports.
Addressing Agrarian Problems: Improving the lives of farmers, reducing tenancy, and promoting more equitable land distribution.
Developing Infrastructure: Further investing in transportation, communication, and utilities to support economic growth and national integration.
Establishing Fiscal Stability: Building a sound financial system capable of supporting an independent government.

President Quezon famously spoke of “social justice,” which had economic dimensions, aiming to uplift the common man. This philosophy influenced policies related to labor, land, and wealth distribution, although implementing significant changes proved challenging. The government recognized that political sovereignty would be fragile without economic stability and the capacity to stand on its own feet in the global economy.

Major Economic Policies and Initiatives (1935-1941)

The early years of the Commonwealth (before the disruption of World War II) saw the government implement various policies to achieve its economic goals.

Trade and External Relations

The preferential trade relationship with the US dominated this area. While it provided a secure market for major exports and fueled economic activity, it also discouraged the development of industries that could compete with American goods and made the economy vulnerable to changes in US policy.

Quotas: The Tydings-McDuffie Act imposed quotas on sugar, coconut oil, and cordage. For sugar, the quota was particularly significant as it capped the amount that could enter the US tariff-free, impacting the industry which had grown heavily dependent on that access.
Preparation for Full Tariffs: The Act also stipulated that after ten years (in 1946), full tariffs would apply. This meant Philippine exports would become more expensive in the US, potentially reducing demand and harming key industries. The Commonwealth government explored ways to make its products more competitive and sought alternative markets, but progress was slow due to the strong ties with the US.
Diversification Efforts: While challenging, there were discussions and some limited efforts to open trade relations with other countries, particularly in Asia and Europe.

Agricultural Policies and Agrarian Reform

Addressing the issues in the agricultural sector was critical, both for economic stability and social peace.

Land Reform Legislation: The Commonwealth government passed several laws aimed at improving tenancy conditions and providing land for the landless.
- Commonwealth Act No. 178 (Rice Share Tenancy Act, 1933, amended by CA 461): This law, passed just before the Commonwealth but implemented during it, aimed to regulate sharecropping, setting specific divisions of the harvest between landlord and tenant. However, its implementation was often weak due to landlord resistance and tenant fear of eviction.
- Commonwealth Act No. 20 (Rural Program Administration): Established to purchase large estates (haciendas) and subdivide them for resale to tenants. This was a direct attempt at land redistribution.
- Commonwealth Act No. 441 (National Land Settlement Administration – NLSA): Created in 1939, this was a more ambitious program focused on resettling landless families from densely populated areas (like Central Luzon) to frontier areas, particularly in Mindanao (like Koronadal Valley). The aim was to provide them with land and support to start new lives.
Agricultural Development: The government also invested in irrigation systems, agricultural research (through agencies like the Bureau of Plant Industry), and cooperatives to improve farming methods and productivity. The focus remained largely on export crops, but efforts were made to increase rice production for food security.

However, despite these efforts, deep-seated agrarian problems persisted. Landlord power, lack of resources for enforcement, and the sheer scale of tenancy meant that government programs only reached a fraction of the affected population. Social unrest continued, particularly in areas with high tenancy rates and absentee landlords.

“Social justice is more than justice. It is the promotion of the welfare of all the people, the adoption by the Government of measures calculated to insure economic stability of all component elements of society, through the maintenance of a proper economic and social equilibrium in the interrelations of the members of the community, constitutionally, through the adoption of measures legally justifiable, or extra-constitutionally, through the exercise of powers underlying the existence of all governments on the time-honored principle of salus populi est suprema lex.” – President Manuel L. Quezon, explaining his social justice program, which included economic dimensions.

Industrialization Efforts

Recognizing the danger of over-reliance on agriculture and imports, the Commonwealth government sought to encourage local industries.

National Economic Council (NEC): Created in 1936, this body was tasked with advising the government on economic and financial matters, including planning for industrial development.
National Development Company (NDC): This state-owned enterprise, established earlier but revitalized during the Commonwealth, was intended to invest in and operate strategic industries where private capital was lacking. It engaged in ventures like textile manufacturing, footwear production, and shipping.
Support for Small and Medium Enterprises: Efforts were made to provide technical assistance and some financial support to smaller local businesses.

Progress in industrialization was limited though. Several factors hindered growth: the small domestic market, lack of capital, limited infrastructure outside major cities, and the competitive disadvantage against tariff-free American manufactured goods. The focus remained primarily on processing agricultural products rather than developing heavy industry.

Infrastructure Development

Investment in public works continued, seen as essential for connecting production centers to markets, facilitating trade, and supporting overall economic activity.

Transportation: Construction and improvement of roads, bridges, and ports continued. Inter-island shipping remained crucial.
Public Utilities: Expansion of power and water supply systems, primarily in urban areas.
Communication: Improvement of telegraph and postal services.

These investments laid some groundwork for future growth but were concentrated and still limited in reach compared to the needs of the archipelago.

Fiscal and Monetary Policy

The Commonwealth maintained a conservative fiscal policy, emphasizing balanced budgets.

Currency: The Philippine peso remained pegged to the US dollar ($1 = 2 pesos), providing monetary stability but also limiting the government’s flexibility in managing the exchange rate for economic policy purposes.
Revenue: Government income primarily came from taxes (including internal revenue and customs duties) and earnings from state enterprises. The US also provided some financial aid, particularly from excise taxes collected on Philippine products (like coconut oil and sugar) processed in the US and returned to the Philippine Treasury. This return of taxes was a significant source of funding for the Commonwealth government, used for various development projects.
Expenditure: Spending focused on administration, education, public health, defense (establishing the Philippine Army), and public works.

Key Sectors of the Commonwealth Economy

Let’s take a closer look at the performance and challenges within the major economic sectors.

Agriculture

Agriculture was the backbone of the economy, employing the vast majority of the population and accounting for the bulk of exports.

Sugar: The most important export crop, heavily reliant on the US market quota. While profitable for landowners and millers, the benefits often did not trickle down to the tenant farmers. The industry faced uncertainty due to the changing US trade policy.
Coconut: Copra (dried coconut meat) and coconut oil were significant exports. Like sugar, this industry was sensitive to US market access and global prices.
Abaca (Hemp): Used for rope and cordage, this was another traditional export, also affected by quotas in the US.
Tobacco: Primarily grown in Northern Luzon, exports faced competition and changing demand.
Rice and Corn: Staple food crops. While efforts were made to increase production, the Philippines often still needed to import rice to meet domestic demand. The challenges of tenancy and low productivity were particularly acute in rice-growing regions.

Table: Selected Philippine Exports and Destinations (Approx. Values & Destinations, Commonwealth Period)

Export Product	Primary Destination	Importance in Economy	Key Issues
Sugar	United States	Highest Export Value	US quota, tenancy, reliance on single market
Coconut Products	United States (Oil)	High Export Value	US quota (oil), price volatility, processing
Abaca (Hemp)	United States	Important Export	US quota (cordage), competition, quality
Tobacco	United States, Europe	Moderate Export	Quality control, changing demand
Lumber/Logs	United States, Japan	Growing Export	Sustainable logging practices, processing
Gold	United States	Significant Value	Price fluctuations, production costs

Source: Based on historical economic reports and trade data from the era.

Industry

Industrial activity was limited but slowly developing.

Processing: The most significant industrial activities involved processing agricultural raw materials (sugar milling, coconut oil extraction, cordage manufacturing).
Consumer Goods: Some light manufacturing existed, producing goods like textiles, food products, and beverages, mainly for the domestic market. The NDC’s ventures aimed to expand this.
Mining: Gold mining was a significant industry, with gold being an important export. Other minerals were also extracted but on a smaller scale.

The industrial sector faced strong competition from US imports, which benefited from the preferential trade agreement. Developing a robust manufacturing base required significant capital, technology, and a protected domestic market, which the Commonwealth structure did not fully provide.

Trade

Trade was the engine of the economy, but its overwhelming focus on the United States created both benefits and vulnerabilities.

Benefits: Guaranteed market access for key exports allowed these industries to thrive and generated substantial income for the government (via returned excise taxes) and exporters.
Vulnerabilities: It made the economy highly sensitive to US economic conditions and policy changes. It also created a disincentive to develop industries that would compete with American goods or to aggressively seek markets elsewhere. The quotas and the looming imposition of full tariffs after 1946 cast a long shadow over the future of export-oriented industries.

“The free trade system with America has brought material prosperity… but it has also brought about a situation where our economic life is almost entirely dependent upon the American market… We must prepare for the time when this dependence will cease, and we must begin now.” – A summary of the views held by many Philippine leaders regarding the trade relationship.

Public Finance and Banking

The Commonwealth government worked to strengthen its financial institutions.

Budgetary Policy: Strived for fiscal discipline, largely maintaining balanced budgets before the war.
Banking System: The banking system, including the Philippine National Bank (PNB), played a role in financing trade and some domestic ventures. The monetary system was tied to the US dollar.

Economic Challenges Faced

The Commonwealth period was characterized by persistent economic challenges that the government attempted, with varying degrees of success, to address.

Over-reliance on the US Market: This was perhaps the most significant long-term challenge. The entire export sector was structured around the US market, making the transition to full independence precarious. Efforts to diversify were limited by the inertia of the existing system and the difficulty of competing globally without preference.
Agrarian Unrest: The failure to fundamentally solve the problems of land ownership, tenancy, and rural poverty led to continued social tensions and, in some areas, armed peasant movements, particularly in Central Luzon. These issues highlighted the disconnect between economic growth driven by exports and the living conditions of the majority of the population.
Limited Industrial Base: The lack of significant manufacturing capacity meant that the Philippines had to import most manufactured goods, draining foreign exchange and limiting job creation outside of agriculture.
Unemployment and Underemployment: While export sectors generated wealth, the benefits were often concentrated. High population growth and the seasonal nature of agricultural work contributed to unemployment and underemployment, particularly in rural areas.
Regional Inequality: Economic development was often concentrated in areas producing export crops or near major ports and cities, leaving many regions with limited opportunities.
Preparing for Independence: The overarching challenge was implementing policies within a limited timeframe (10 years) that could truly prepare the economy for the shock of losing preferential access to its largest market. This required not just policy changes but also fundamental structural shifts in production and trade patterns.

These challenges were being actively debated and addressed by the Commonwealth government when history took a dramatic turn.

The Catastrophic Impact of World War II (1941-1945)

Just as the Commonwealth was settling into its transition phase, World War II reached the Pacific. The Japanese invasion in late 1941 and the subsequent occupation fundamentally disrupted and devastated the Philippine economy.

Physical Destruction: Intense fighting, particularly during the Japanese invasion (1941-42) and the American liberation (1944-45), destroyed cities, infrastructure (ports, bridges, roads, factories), and agricultural land. Manila, the capital and economic heart, was severely damaged.
Disruption of Production: Agricultural production plummeted as farmers were displaced, land was damaged, and trade routes were cut off. Export crop production (sugar, coconut, abaca) virtually ceased. Mining operations stopped.
Collapse of Trade: International trade came to a complete halt, isolating the economy.
Inflation: The Japanese occupation government issued its own currency, the “Mickey Mouse money,” which rapidly lost value, leading to severe inflation and economic hardship for the population.
Loss of Assets: Factories, machinery, transportation equipment, and other economic assets were destroyed, seized, or deteriorated during the war.

By the time the war ended in 1945, the Philippine economy was in ruins. Infrastructure was decimated, productive capacity was minimal, and traditional trade relationships were shattered. The progress made during the early Commonwealth years was erased, and the challenges inherited from the pre-war period were exacerbated.

The Post-War Transition and Legacy

The Commonwealth technically continued until July 4, 1946, but the latter part of this period was dominated by the immediate aftermath of the war. The focus shifted to survival, initial relief, and planning for reconstruction.

Immediate Hardship: The population faced severe shortages of food, housing, and basic necessities. Inflation was rampant.
Reconstruction Needs: The scale of destruction required massive investment in rebuilding infrastructure, housing, and productive capacity.
Negotiating Independence: The Philippine government had to negotiate the terms of its independence with the United States amidst this economic devastation. Post-war agreements, such as the Philippine Rehabilitation Act of 1946 (which provided reconstruction aid conditioned on certain economic provisions favorable to the US, like the Bell Trade Act allowing parity rights for Americans in Philippine resources), shaped the economic path of the newly independent republic.

The Philippine Economy During the Commonwealth Period, therefore, has two distinct phases: the pre-war years of planned transition and development efforts, and the war years of destruction and collapse. The pre-war period showed the difficulties of reforming a colonial economy heavily tied to the colonizer, particularly in diversifying trade and addressing deep-seated social issues like land inequality. The war underscored the vulnerability of the nation’s infrastructure and productive capacity to external shocks.

The economic problems and structures present during the Commonwealth – the dominance of agriculture, the challenges of industrialization, agrarian issues, and the complex trade relationship with the United States – did not disappear with independence in 1946. They continued to be central concerns for the leaders of the Third Republic and shaped the economic history of the Philippines for decades to come. Understanding this period is key to understanding the long-term economic trajectory of the nation.

Key Takeaways:

The Philippine Economy During the Commonwealth Period was primarily agricultural and heavily dependent on preferential trade with the United States.
The Commonwealth government aimed to prepare the economy for independence by diversifying trade, promoting industrialization, addressing agrarian issues, and developing infrastructure.
Policies like the National Land Settlement Administration and the National Development Company were established, but faced significant challenges and limited success in fundamentally transforming the economy.
Deep-seated problems like unequal land distribution, high tenancy rates, and reliance on the US market persisted throughout the pre-war Commonwealth years.
World War II caused catastrophic destruction to the Philippine economy, wiping out infrastructure, production, and trade, leaving the nation facing immense reconstruction challenges upon gaining full independence.
The economic challenges and structures of the Commonwealth period laid the groundwork for many economic issues faced by the Philippines in the post-independence era.

Frequently Asked Questions (FAQ):

What was the main characteristic of the Philippine economy during the Commonwealth? The main characteristic was its heavy reliance on agriculture and its strong dependence on preferential trade with the United States for exporting key products like sugar and coconut.
How did the Commonwealth government try to prepare the economy for independence? The government tried to prepare by implementing policies aimed at diversifying export markets, promoting domestic industries through entities like the National Development Company, addressing land inequality through programs like the National Land Settlement Administration, and investing in infrastructure.
What were the biggest economic problems faced during this period? Major problems included over-reliance on the US market, persistent agrarian issues (tenancy, land inequality) leading to social unrest, and a limited industrial base unable to meet domestic demand or compete internationally.
Did the Commonwealth government successfully solve the land problem? No, despite implementing laws and resettlement programs, the government did not successfully solve the deep-seated problems of land inequality and tenancy during the Commonwealth period. Resistance from powerful landowners and limited resources were significant obstacles.
What was the impact of World War II on the Commonwealth economy? World War II had a devastating impact. It caused widespread destruction of infrastructure and productive capacity, completely disrupted trade and production, and led to severe inflation, leaving the economy in ruins by the time the war ended.
How did the trade relationship with the US affect industrialization efforts? The preferential trade relationship made it difficult for nascent Philippine industries to compete with tariff-free or low-tariff American manufactured goods, which discouraged domestic industrial growth.
What was the significance of the Tydings-McDuffie Act for the economy? Besides setting the timeline for independence, the Act introduced quotas on key Philippine exports to the US and scheduled the future imposition of full tariffs, signaling the need for the Philippines to find new markets and diversify its economy to survive economically after independence.

Conclusion

The Philippine Economy During the Commonwealth Period represents a critical chapter in the nation’s economic history. It was a time of deliberate, albeit challenging, transition from a colonial economy directly managed by the United States to one poised for nominal independence. The government of the Commonwealth embarked on programs aimed at achieving greater self-sufficiency, diversifying trade, fostering local industries, and tackling deep-rooted social problems like agrarian inequality. While notable efforts were made and some groundwork was laid in infrastructure and planning, the inherent structures of dependence, particularly on the US market, and the complexities of internal social issues proved difficult to overcome within the limited timeframe. The ultimate trajectory of the Commonwealth’s economic journey was tragically cut short and then fundamentally altered by the outbreak of World War II, which left the country’s economy shattered. The challenges and lessons learned from the Commonwealth era, however, profoundly influenced the economic policies and struggles of the independent Republic of the Philippines that emerged from the war’s ashes. Understanding this period is essential for appreciating the complex path of Philippine economic development.

Category: American Colonial Period (1901-1946), Commonwealth Period