Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment

  

Throughout history, sovereign debt crises have never been about mathematics alone. They have always been political crises. Governments refuse to cut spending because elections are won by promising benefits, not sacrifices. Every political party campaigns on giving voters something while sending the bill to future generations. Eventually the markets stop believing those promises can be financed. That is when governments resort to higher taxes, financial repression, capital controls, inflation, and every other desperate measure designed to preserve the system—Martin Armstrong 

In this issue:

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment

I. Introduction: The First-Half Reckoning

II. EO 110 and the Politics of Deferred Adjustment

III. 1H 2026’s Record Fiscal Deficit and Record Public Debt Exposes the Cost of Deferred Adjustment

IV. The Adjustment Migrates to the Nation's Balance Sheet

V. Borrowed Stability: June’s BOP and GIR Improvements

VI. The BSP's Narrowing Policy Space

VII. The Politics of Deferred Adjustment: Increasing the Annual Income Tax Threshold

VIII. The Politics of Deferred Adjustment: Removing System Loss Charges from Electricity Bills

IX. Conclusion: The Record Twin Deficits and the Sovereign-Fiscal Doom Loop 

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment 

How Pandemic-Era Policies, EO 110, and Financial Interventions Transferred Inflationary Pressures Across Balance Sheets

I. Introduction: The First-Half Reckoning 

The previous installments of this series argued that the Philippine government's response to the 2024 oil shock did not eliminate the inflationary adjustment. It redirected it. 

This adjustment process did not begin with the oil shock. During the pandemic, emergency measures designed to stabilize demand, preserve employment, and prevent a deeper contraction were introduced as temporary countercyclical responses. Over time, however, many of these interventions became embedded features of the economic framework. EO 110 represented not a departure from that approach, but an extension of an already established pattern of using policy intervention to absorb economic pressures. 

Following the pandemic-era policy expansion, policymakers continued to rely on administrative controls, fiscal support, monetary accommodation, and regulatory intervention, with EO 110 extending this approach during the oil shock. 

The immediate objective was understandable: to soften the inflationary shock and sustain economic activity. Instead of allowing relative prices to coordinate the necessary adjustment, however, these measures shifted it across public and private balance sheets. 

The first half of 2026 marks an important point in that process. The National Government recorded the largest January-to-June fiscal deficit on record. Outstanding public debt surpassed Php 19 trillion for the first time after posting the second-largest first-half increase on record, while the merchandise trade deficit reached a record first-half level despite June's record exports. 

The Iran war's oil shock intensified these underlying dynamics within the Philippines' savings-investment gap development model. As policy increasingly relied on fiscal transfers, credit expansion, and regulatory intervention rather than market adjustment, leverage accumulated, the economy became progressively less adaptive, and policy choices became increasingly constrained. 

This dynamic now extends beyond the fiscal accounts. The Bangko Sentral ng Pilipinas (BSP) faces a narrowing range of monetary options, while new proposals to reduce income taxes and electricity costs promise immediate relief by shifting additional adjustment into the future. 

This installment examines how successive interventions have transformed a temporary inflationary shock into a broader stagflationary process.

II. EO 110 and the Politics of Deferred Adjustment 

Every economic shock requires adjustment. The question is not whether adjustment occurs, but how. 

The same principle applied during the pandemic. Emergency measures that were initially justified as temporary responses to an extraordinary shock gradually became embedded in the economic structure. What began as countercyclical intervention increasingly became a mechanism for sustaining conditions that required continued intervention. 

In an unhampered market, adjustment proceeds through changes in relative prices, profits, losses, production, and consumption. Government intervention can alter that process by redistributing costs across households, firms, taxpayers, borrowers, or future budgets. It can delay or redirect adjustment. It cannot repeal scarcity. 

EO 110 exemplified the continuation of this tradeoff. Like earlier pandemic-era measures, it sought to prevent an immediate economic contraction by absorbing part of the shock through government intervention. The policy reduced visible price pressures and provided temporary relief, but it also extended the process of transferring adjustment away from market signals and toward institutional balance sheets. 

The remainder of this article examines how that transferred adjustment became increasingly visible during the first half of 2026. 

III. 1H 2026’s Record Fiscal Deficit and Record Public Debt Exposes the Cost of Deferred Adjustment 

The first-half fiscal accounts reveal the balance sheet that absorbed a significant portion of the adjustment. 

The National Government recorded a Php 786.8 billion fiscal deficit during the first six months of 2026—the largest January-to-June deficit on record. 

While this represented 47% of the DBCC's full-year deficit target of Php 1.659 trillion, fiscal pressures typically intensify in the second half as government spending accelerates. 

Continued oil-shock subsidies and intervention programs amid strained economic conditions increase the risk of further fiscal deterioration. 

The record first-half deficit was not merely a budgeting outcome. It represented the financing cost of sustaining expenditures that continued to exceed revenues. 

The gap was covered through borrowing. Yet borrowing did not simply finance current expenditures. 

Figure 1 

First-half net public borrowing surged to Php 1.357 trillion, the second-highest level on record, narrowly below the Php 1.371 trillion recorded during the pandemic-driven stimulus driven expansion of 2021. The magnitude was consistent with the record Php 786.8 billion first-half fiscal deficit, reflecting the increasing reliance on debt financing to sustain government expenditures. (Figure 1, topmost pane) 

The first semester borrowing represents 50.67% of the DBCC’s proposed Php 2.68 trillion borrowings in 2026. 

Borrowings in June 2026 jumped Php 519 billion month‑on‑month, the biggest surge since March 2022 at the height of the pandemic. (Figure 1, middle graph) 

The composition of borrowing also highlights growing external exposure. By June, foreign-currency denominated debt accounted for 32.67% of total debt, only slightly below April's 32.78% level—both among the highest since 2020. This occurred alongside record low peso, increasing the sensitivity of public finances to exchange-rate movements. (Figure 1, lowest image) 

Borrowing therefore expanded not only the government's debt stock but also future financing obligations.

Figure 2 

Total debt servicing surged 59.7% in 1H 2026, reaching the second-highest nominal level since 2024. (Figure 2  topmost window) 

Interest payments alone accounted for approximately 15.2% of government spending, the highest share since 2009, while amortization soared 110% as maturing obligations were refinanced. (Figure 2, middle chart) 

Government borrowing increasingly financed not only today's spending but yesterday's deficits. 

Today's deficits become tomorrow's debt service obligations. 

The adjustment postponed in one period reappeared in another. 

This is why the deficit alone understates the fiscal challenge. The larger issue is that debt service expanding claim on future public resources continues to grow. Every peso committed to interest payments and refinancing reduces the government's capacity to respond to future shocks without additional borrowing. 

The consequence extends beyond the Treasury. As financing requirements expand, fiscal policy becomes increasingly dependent on stable credit markets, abundant liquidity, and investor confidence. What began as an oil-shock response has gradually evolved into a broader financing constraint. 

And government financing does not end at the public balance sheet. 

It extends to the nation's balance sheet. 

The alternative is to inflate debt away — whether through the inflation tax or financial repression. 

That story is reflected in the country's record first semester twin deficits. 

IV. The Adjustment Migrates to the Nation's Balance Sheet 

Fiscal deficits tell only half the story. 

The other half appears in the country's external accounts. 

Government can finance expenditures through borrowing. A nation, however, cannot indefinitely sustain domestic absorption above domestic production without relying on external financing to bridge the gap. 

That is exactly what the first half of 2026 reveals. 

June's trade report generated optimism after merchandise exports surged 24.1 %to a record $8.8 billion, while imports increased 19.7 %to $13.07 billion, narrowing the monthly trade deficit to approximately US$4.9 billion. Q2 2026 data showed 24.95% surge in exports while imports jumped 20.44%. (Figure 2, lowest visual) 

Part of this strength coincided with the ongoing global AI ‘arms race’ investment cycle, which has supported demand for semiconductor and electronics exports.

Figure 3

However, the monthly improvement did not alter the broader trend. June's trade position remained comparable to the Russian-Ukraine oil shock of 2022 levels, while the first-half trade deficit reached another record.  (Figure 3) 

The deterioration was reinforced by a record second quarter, with the first-half deficit exceeding even pandemic-era levels. 

This outcome should not be surprising. 

EO 110 softened part of the oil shock. Fiscal policy sustained domestic spending. Monetary policy, including the BSP's ‘soft peg’s regime’, and liquidity support, maintained financial conditions. These measures supported demand, but they barely created additional productive capacity. 

Demand continued to expand while production struggled to keep pace. When the 2026 Iran war intensified oil-market pressures, the adjustment appeared through the import channel, similar to the 2022 oil shock following Russia's invasion of Ukraine. The difference was reflected in the size of the import bill. 

This is why the fiscal deficit and trade deficit should be viewed as interdependent forces. 

One reflects government spending beyond government revenues.

The other reflects national spending beyond national production. 

Both describe the same adjustment process from different balance sheets, requiring funding. 

A country that consistently imports more than it exports must obtain foreign exchange from somewhere else—through remittances, tourism, exports, foreign investments, or borrowing. When those sources fail to keep pace, dependence on external financing inevitably increases. 

The first-half data suggest that this dependence is becoming more pronounced. 

V. Borrowed Stability: June’s BOP and GIR Improvements

Figure 4 

The June improvements in the Balance of Payments (BoP) and Gross International Reserves (GIR) should be viewed in the broader context of the first-half accounts. June registered a US$3.403 billion BoP surplus, while GIR edged up to US$104.74 billion. (Figure 4, upper diagram) 

Although the BOP rebounded sharply over the past two months, the second-quarter merely returned to its long-term trend resistance despite the peso trading at or near record lows against the U.S. dollar. (Figure 4, lower graph) 

Both indicators strengthened during June and were widely presented as evidence of improving external stability. But the improvement deserves closer examination. 

A significant contributor was foreign borrowing by the National Government. In June alone, the government raised US$2.5 billion from the international capital markets and secured an additional US$1 billion through a World Bank syndicated financing package. These inflows increased foreign exchange liquidity and contributed to the rise in international reserves. 

However, these external inflows also carry future obligations. Foreign borrowing strengthens the immediate external position, but it expands debt-service requirements and increases exposure to global interest-rate and exchange-rate conditions. The same borrowing that supports reserves today creates additional claims on future fiscal resources. 

More importantly, external debt creates future dollar obligations. Each additional foreign liability increases the economy's effective “dollar short” position by adding claims on future foreign-exchange earnings. 

That is to say, foreign exchange reaches the economy through fundamentally different channels. It can be earned through productive activity—exports, remittances, tourism, business process outsourcing (BPO), and foreign direct investment (FDI)—or obtained through external borrowing backed by future repayment. 

The Balance of Payments (BoP) records both as foreign exchange inflows without distinguishing their source. International reserves likewise reflect the accumulation of these inflows regardless of whether they originate from current production or future obligations. 

Financial markets, however, eventually distinguish between the quality and sustainability of those flows. 

The first-half accounts suggest that organically generated dollar inflows have become less robust. 

• Foreign direct investment (FDI) has fallen to its lowest level in a decade. 
• At the onset of the Iran war's oil shock, several major tourism destinations—including Boracay, Baguio, Hundred Islands, and Eastern Visayas—reported a plunge in visitor traffic. 
• Remittance growth has slowed to a 4-year low in May 
• BPO industry has signaled weaker expansion targets. 
• At the same time, the recent surge in merchandise exports has been supported by the global AI investment cycle, leaving the trade balance vulnerable should that cycle slow. 

Against this backdrop, external borrowing has assumed a more prominent role in supporting the country's external accounts. 

The first-half data therefore suggest that part of the apparent improvement in external stability reflects increasing reliance of foreign exchange financing rather than a broad strengthening of the economy's underlying capacity to generate dollar earnings. 

Intervention may have altered the transmission of adjustment, but it did not eliminate the adjustment itself. Instead, it increasingly appeared on both the government's and the nation's balance sheets. 

The apparent easing of inflation was financed through deteriorating public and external balance sheets, deferring rather than eliminating inflationary adjustment while deepening stagflationary pressures. 

VI. The BSP's Narrowing Policy Space 

The cumulative effects of this adjustment migration now confront the Bangko Sentral ng Pilipinas (BSP). 

In theory, central banks fight inflation by tightening monetary policy. In practice, that choice becomes increasingly constrained as leverage accumulates across the economy. The first half of 2026 illustrates this dilemma. 

The BSP raised policy rates only twice and has recently signaled ‘small chances’ for aggressive tightening. At the same time, it continued supporting liquidity through historic reserve requirement reductions in 2025, recent regulatory relief measures for banks, including capital relief, and peso support measures. 

The policy pattern was clear: maintaining financial stability had become as important as controlling inflation. 

The reason lies in the changing structure of the economy. 

Higher interest rates may weigh less on households and private borrowers, but they sharply escalate government financing costs, magnify conglomerate refinancing pressures, and constrict credit conditions throughout the banking system. 

As debt accumulates across public and private balance sheets, monetary tightening becomes progressively more costly. 

This creates an unavoidable policy tradeoff. Measures that strengthen inflation control can increase stress across highly leveraged sectors, while measures that protect financial stability can prolong excess liquidity and delay adjustment. 

Since no monetary policy action is neutral, every choice redistributes costs across different parts of the economy.

Figure 5

The BSP's own 2025 Financial Stability Report (FSR) highlights substantial refinancing requirements “wall of maturities” among large Philippine conglomerates over the coming years. These obligations coincide with record government borrowing and expanding sovereign financing requirements. Both depend on the same financial system. (Figure 5, topmost image) 

This helps explain the increasing political priority of financial‑system stability in policy decisions. The regulatory response has provided repeated forms of support to the banking sector, most recently through various forms of regulatory relief including capital relief measures, reserve‑requirement reductions, and expanded deposit‑insurance coverage. 

These actions may strengthen bank balance sheets, but they also raise questions not only about how effectively monetary accommodation is transmitted into productive economic activity but, more importantly, at what cost — and who bears them. 

The credit data provide part of the answer. Despite years of liquidity support and policy accommodation, lending to micro, small, and medium enterprises (MSMEs) remains limited, accounting for less than 5% of total bank lending in Q4 2025. 

As an aside, curiously, the BSP's Q1 2026 presentation subsequently reflected the same figures as the previous quarter, an apparent reporting error that complicates assessment of MSME credit conditions. 

Meanwhile, banks have increasingly accumulated government securities, reinforcing the linkage between sovereign financing needs and the banking system. The share of banks' net claims on the central government (NCoCG) remained near record levels at 20.32% in June, only slightly below the previous peak of 21.06%. In nominal terms, NCoCG remained near record highs at Php 6.236 trillion in June 2026. (Figure 5, middle diagram) 

Relative to money supply, NCoCG accounted for 30.84% of M3 and 31.68% of M2, reflecting a sustained upward trend since 2019. (Figure 5, lowest chart) 

Government securities have therefore become an increasingly important component of bank assets and system liquidity, deepening the interdependence between sovereign financing and financial-system stability. 

This creates the conditions for a sovereign-bank feedback loop: higher government financing requirements increase banks' exposure to sovereign assets, while banks' capacity and willingness to absorb government securities can reduce immediate financing pressures, potentially reinforcing continued fiscal expansion. 

It also intensifies crowding-out pressures, as the government, banks, and large conglomerates increasingly compete for a limited pool of diminishing domestic savings. As public-sector financing needs expand, fewer resources remain available for smaller and more productive private-sector activities. 

The result is a financial system increasingly oriented toward supporting sovereign and incumbent balance sheets rather than broad‑based private‑sector credit expansion, expanding concentration risks. 

This institutional orientation also raises broader questions regarding the revolving-door political dynamic and regulatory capture. 

The BSP Monetary Board are mostly members with extensive backgrounds in banking, large conglomerates, multinational corporations, and multilateral institutions. Such expertise provides valuable financial-system knowledge and institutional experience. However, close interactions and past relationships between regulators, financial institutions, and major corporate sectors can create institutional incentives that favor preserving the stability of existing financial structures — governed by public choice theory, where individual interest, rational ignorance, and rent‑seeking dynamics may shape policy decisions. 

The central concern is whether policy priorities become disproportionately focused on safeguarding incumbent and national balance sheets at the expense of broader credit transmission, productive investment, and ultimately, the economy itself. 

The resulting policy trade-offs will shape the economy's trajectory: whether continued intervention deepens the conditions associated with stagflation, or whether productivity gains ultimately restore greater economic flexibility and resilience. 

VII. The Politics of Deferred Adjustment: Increasing the Annual Income Tax Threshold 

As monetary policy becomes more constrained, political pressure naturally shifts toward fiscal and regulatory solutions. 

The President's proposal in the 2026 State of the Nation Address (SONA) to raise the annual income tax exemption threshold from Php 250,000 to Php 350,000 illustrates this transition. 

After several years of elevated inflation, allowing workers to retain more of their income restores part of their lost purchasing power and may strengthen incentives to work, save, and invest. 

This is a welcome development, but it embodies a fiscal catch‑22 — cushioning inflation’s blow to purchasing power while eroding government revenue at a moment when fiscal space is already dangerously narrow. 

Authorities estimate that the proposal would result in approximately Php 66 billion in foregone revenue. If government spending remains unchanged, the revenue reduction simply widens the financing gap. 

The burden does not disappear; it shifts through other channels—higher taxation elsewhere, additional borrowing, future taxation, expenditure reductions, or inflation.

VIII. The Politics of Deferred Adjustment: Removing System Loss Charges from Electricity Bills 

The same principle applies to another populist SONA proposal: removing system-loss charges from electricity bills. 

Consumers understandably welcome lower electricity costs. However, electricity lost during transmission and distribution remains a real economic cost. Removing the charge from one part of the bill does not eliminate the underlying loss.

Figure/Table 6 

The Philippines is not unusual in the magnitude of physical system losses, which are broadly comparable with several Southeast Asian peers. The difference lies in regulatory treatment. Rather than fully embedding these costs within network tariffs, the ERC has historically allowed a separate recoverable system-loss charge, although the allowable cap for private distribution utilities has been reduced to 5.5% since 2021. 

The actual policy question, therefore, is not whether system losses exist. It is who absorbs the cost and whether the regulatory framework creates incentives to reduce those losses. 

Someone ultimately pays. 

Distribution utilities may absorb part of the burden, but persistent losses could eventually require government intervention, subsidies, or greater public-sector involvement. Taxpayers may bear the cost directly. Regulators may redistribute it through other tariff components. 

The accounting changes.

The economics do not.

This has been the recurring theme throughout this series. 

Again, government intervention can redistribute costs. It cannot abolish them. 

Every intervention changes who pays, when they pay, and where the adjustment appears. 

The deeper issue is the institutional structure created by years of regulatory intervention. EPIRA introduced elements of liberalization, but the electricity sector remained heavily regulated, producing a hybrid system where market mechanisms operate alongside extensive administrative control — selective monopolies. 

This structure has also generated distorted incentives. Under rate-of-return regulatory frameworks, firms may have incentives to expand their regulated capital base because higher approved investments can translate into higher allowed returns. The Averch-Johnson effect illustrates how such arrangements can encourage capital expansion beyond what would occur under a fully competitive market. 

In this environment, system losses can become more than an operational problem. They may also provide justification for additional capital expenditures, infrastructure programs, and regulated cost recovery. The result is that inefficiencies become embedded within the regulatory structure rather than creating sufficient incentives for cost minimization. 

The push to remove system-loss charges may also become part of broader efforts to revise or even overhaul the Electric Power Industry Reform Act (EPIRA). 

Populist ‘free lunch’ relief measures may boost approval ratings and improve electoral prospects—given the Philippine leadership’s recent record low popularity ratings, but scarcity ensures that there is no free lunch. 

Yet, the political economy of intervention lies in the redistribution of costs: benefits are concentrated and immediately visible, while the burdens are often dispersed across taxpayers, future budgets, consumers, and future generations. 

This is the dynamic the great French economist Frédéric Bastiat described in his distinction between what is seen and what is unseen. When political authority redistributes costs while concealing the economic burden from those who ultimately bear it, intervention becomes a mechanism of “legal plunder” — the use of policies to effect invisible redistribution. 

The recurring pattern throughout this series is that intervention changes the location and timing of adjustment. It does not eliminate scarcity. The costs remain embedded in weaker balance sheets, distorted incentives, and reduced economic adaptability. 

IX. Conclusion: The Record Twin Deficits and the Sovereign-Fiscal Doom Loop 

The first half of 2026 demonstrates the consequences of deferred adjustment, now reflected in record twin deficits. 

The stagflationary pressures examined throughout this series did not originate from the oil shock alone. The shock exposed the accumulated consequences of a development model constrained by a persistent savings-investment gap, where years of deepening intervention preserved demand while weakening the economy’s capacity to adjust. 

The twin deficits reveal the same imbalance across different balance sheets. The fiscal deficit reflects government spending beyond available revenues. The trade deficit reflects domestic absorption exceeding productive capacity through persistent import dependence. Both imbalances require continuous financing through borrowing, foreign exchange inflows, and the recycling of existing capital flows. 

At the same time, peso support through the BSP’s soft-peg framework, external financing dependence, and the refinancing requirements of large conglomerates have increased the economy’s reliance on continued liquidity and favorable credit conditions. 

But the deeper consequence is the concentration of financial linkages created by a system increasingly reliant on balance-sheet expansion rather than productive adjustment. 

As banks accumulate greater exposure to government securities, the risks of a sovereign-bank doom loop deepens: fiscal expansion increasingly depends on financial-system support, while financial stability becomes increasingly dependent on sovereign balance-sheet credibility. Large corporate balance sheets remain similarly connected to bank led financing conditions and continued accommodative policy support.  

The result is a growing concentration of financial resources around sovereign and incumbent balance sheets. As these linkages deepen, the financial system becomes increasingly oriented toward sustaining existing obligations rather than expanding broad-based productive investment. 

This is the consequence of weakening the adjustment mechanisms that normally discipline capital allocation. When price signals, losses, and capital reallocation are suppressed, malinvestments persist and accumulate until they appear as financial distress. 

The policy path therefore narrows between two outcomes. Tightening risks exposing accumulated duration and leverage vulnerabilities. Continued accommodation risks extending the intervention loop and deepening the distortions behind stagflation. 

The adjustment was never eliminated. It is being transferred until the system approached its limits. 

The ultimate risk is that the same mechanisms used to postpone adjustment eventually become the channels through which adjustment occurs—through a broader financial and economic crisis.

___ 

References: 

Stagflation, Part 12: The Philippines' Balance-Sheet Origins of Inflation 

Stagflation Part 11: The Intervention Ecosystem Behind Moody's and Fitch's Banking Warnings 

Stagflation Part 10: The Politics of Contradiction—Rate Hikes, Liquidity Addiction, and External Constraint Under Balance-Sheet Stress 

Stagflation Part 9: The Good News Mirage — Statistical Stability Amid Structural Fragility 

Seed Article 

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

 

The Philippines’ Drift Toward a War Economy

  

WAR is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives― Smedley Butler, War Is a Racket 

In this issue:

The Philippines’ Drift Toward a War Economy

I. Introduction: The Emerging Global War Economy

II. A Post Bellum History of the Return of U.S. Military Infrastructure

III. Strategic Rents and the Incentives of Power

IV. The Anatomy of a War Economy

V. The Current State of Philippine Military Spending

VI. The Invisible Subsidy

VII. The Proposed Drift: From 1.3% to 4% of GDP

VIII. Pax Silica Initiative and the Strategic Investment Priority Plan (SIPP)

IX. The SIPP as the Fiscal Engine

X. The Economic Opportunity Cost

XI. The Geopolitical Dimension

XIA. Side Note: BCDA’s Rebuttal

XII. Strategic Integration and Its Trade-offs

XIII.  The Unseen Trade-offs

XIIIA. Sovereignty and Strategic Dependence: The GCC-Operation Epic Fury Experience

XIIIB. From Economic Infrastructure to Strategic Targets

XIIIC. Fiscal and Capital Allocation Risks

XIIID. Strategic Rents and Political Incentives

XIIIE. Technological Concentration and Market Risk

XIIIF. Energy and Opportunity Costs

XIIIG. Reciprocity Is Never Guaranteed

XIV. Conclusion: The Philippines and the Drift Toward a Security (War-Time) Economy 

The Philippines’ Drift Toward a War Economy 

How intensifying geopolitical rivalry, strategic rents, and security priorities are reshaping Philippine economic policy 

I. Introduction: The Emerging Global War Economy 

As of this writing, the world is witnessing the largest concentration of geopolitical tensions since the end of the Cold War. 

• Russia and Ukraine remain in their fourth year of open conflict. 
• In the Middle East, the United States and Israel, alongside their Gulf Cooperation Council partners, are engaged against the Iran axis. 
• Tensions — some already crossing into open conflict, others not yet — stretch across multiple theaters: Russia-Ukraine's grinding war of attrition in Europe; insurgencies from Mali to Somaliland across Africa; and territorial disputes over the South China Sea, Taiwan, the Senkakus, and the Kurils across Asia. 

The world has become increasingly defined by strategic rivalry rather than post-Cold War economic integration. 

The Philippines is not a bystander to this pattern. Its own claims in the Spratlys and at Scarborough Shoal have produced repeated confrontations with China — water cannons, ramming, and close-quarters clubbing incidents among rival coast guard and militia vessels — that place the country squarely inside the same rising-tension map. 

While these incidents fall short of conventional war, they have steadily elevated the country's strategic importance within the broader Indo-Pacific security architecture. 

Figure 1 

The changing global environment is increasingly reflected in economic data. The International Monetary Fund (IMF) observes that "the number of active conflicts has surged in recent years to levels not seen since the end of the Second World War," prompting many governments to reassess their priorities and increase defense spending.  (Figure 1, upper window) 

The Stockholm International Peace Research Institute (SIPRI) likewise reports that global military expenditure reached a record US$2.887 trillion in 2025, equivalent to 2.5 percent of world GDP—the highest military burden since 2009—with the United States, China, and Russia accounting for more than half of global spending. (Figure 1, lower graph)

Figure 2 

Of course, these developments did not emerge in a vacuum. 

Since the Global Financial Crisis—and accelerating after the pandemic—the global economy has experienced a gradual reversal of decades of economic integration. Trade restrictions have multiplied, industrial policy has returned, supply chains have been reorganized around geopolitical considerations, and governments increasingly view trade, technology, finance, and energy as instruments of national security rather than merely economic exchange. The IMF describes this process as geoeconomic fragmentation—a policy-driven reversal of economic integration, of which international trade is a central component. (Figure 2, upper image) 

The observation commonly attributed to the great proto-Austrian French economist Frédéric Bastiat is particularly relevant: "When goods do not cross borders, armies will." The insight captures an enduring relationship between commerce and conflict. As economic integration weakens, strategic rivalry increasingly fills the space once occupied by mutually beneficial exchange. 

The trend is increasingly reflected in the data. After reaching historic highs, global trade as a share of GDP has retreated as governments increasingly prioritize resilience, strategic autonomy, and security alongside efficiency. (Figure 2, lower chart) 

The Trump administration's "Liberation Day" tariffs are one manifestation of this broader shift, demonstrating how trade policy has itself become an instrument of geopolitical competition and hegemonic control. 

It is within this broader transformation that the Philippines should be understood. It is not merely a participant in geopolitical tensions; it is whether its institutions, fiscal priorities, industrial policy, and strategic partnerships are gradually adapting to a world in which geopolitical frictions increasingly shape economic decision-making. 

To examine that question, we begin with the historical evolution of the American military presence in the Philippines—from the postwar bases, to the Visiting Forces Agreement, to the Enhanced Defense Cooperation Agreement EDCA, and finally to today's emerging security-industrial initiatives. 

II. A Post Bellum History of the Return of U.S. Military Infrastructure 

The story of the Philippines’ contemporary security orientation begins in the aftermath of the Second World War. The archipelago emerged from the war devastated, but also transformed into one of the most strategically important American outposts in Asia. 

Under the 1947 Military Bases Agreement, the United States secured long-term access to major installations, most notably Clark Air Base and Subic Bay Naval Base, which became central nodes in Washington’s Cold War posture in the Pacific. 

For decades, these bases were more than military installations. They shaped local economies, generated employment, and embedded large portions of Philippine territory into the logistical and strategic architecture of American power. Yet they also became symbols of constrained sovereignty, unequal alliance relations, and the persistence of a foreign military presence long after formal colonial rule had ended. 

Large foreign military installations have historically generated localized economic ecosystems extending well beyond defense activities. Businesses naturally emerge to serve concentrated demand for housing, transport, food, entertainment, and retail services. Informal and illicit markets may also develop, including prostitution, gambling, drug trafficking, and organized crime, alongside recurring jurisdictional disputes involving foreign military personnel. Similar patterns have been documented around major overseas bases in the Philippines, Okinawa, and South Korea. While these social externalities were not the sole reason behind the Philippine Senate's rejection of the Military Bases Agreement in 1991, they formed part of the broader historical experience that shaped public perceptions of long-term foreign military presence. 

That postwar arrangement reached a historic turning point in 1991, when the Philippine Senate rejected the renewal of the bases treaty. The decision led to the withdrawal of U.S. forces from Clark and Subic, marking what appeared to be the ‘end of an era.’ 

Back then, for many Filipinos, the expulsion of the bases represented a reassertion of national sovereignty and a decisive break from the country’s Cold War dependency. 

But the withdrawal was not permanent. In 1999, the Visiting Forces Agreement (VFA) restored the legal framework for the rotational presence of American troops in the Philippines. The VFA did not recreate the old permanent bases, but it reopened the door to joint exercises, military cooperation, and the gradual re-entry of U.S. forces into Philippine territory. 

The process deepened in 2014 with the Enhanced Defense Cooperation Agreement (EDCA). EDCA granted the United States access to selected Philippine military facilities for the prepositioning of equipment, construction of infrastructure, and rotational deployment of forces.

Figure 3 

There are presently 9 EDCA quasi-bases. (Figure 3) 

Officially, these are not permanent American bases; they remain Philippine-owned facilities. Yet the distinction has become increasingly paradoxical as some EDCA sites host advanced military assets (examples, Typhon missiles, High Mobility Artillery Rocket Systems (HIMARS),  Navy-Marine Expeditionary Ship Interdiction System (NMESIS), Marine Air Defense Integrated System (MADIS) and MQ-9A Reaper Drones) and function as part of a broader U.S.-aligned strategic network in the Indo-Pacific. 

This evolution—from postwar bases, to expulsion, to rotational access, to EDCA facilities—forms the historical foundation of the Philippines’ current geopolitical trajectory. 

The issue is whether the functional return of military infrastructure, under new legal and political terminology, is gradually reshaping the country’s economy, fiscal priorities, and strategic risk profile. 

III. Strategic Rents and the Incentives of Power 

The postwar bases relationship also carried a financial and political-economy dimension. U.S. military and economic assistance to the Philippines was not simply humanitarian or developmental; it was closely tied to the country’s strategic value during the Cold War. 

Historical records show that negotiations over base access were accompanied by military assistance agreements, while later U.S. and multilateral support helped sustain the Philippine state during periods of fiscal stress. 

The postwar bases relationship did not merely coincide with corruption and cronyism — it helped entrench them. 

By linking strategic military access to foreign aid, debt accommodation, and geopolitical backing, the alliance reduced the normal fiscal constraints that would otherwise discipline the Philippine state. 

Political elites could draw not only on domestic taxation and productive savings, but on external strategic rents and easier access to foreign credit — conditions that made the dramatic surge in foreign borrowing, the expansion of politically connected projects, and the persistence of patronage networks during the Marcos era considerably more durable than they could have been otherwise. 

When governments gain access to large external resources tied to geopolitical utility, they acquire greater capacity to distribute privileges, sustain patronage networks, and postpone the fiscal consequences of imprudence. The bases era demonstrates this dynamic with unusual clarity: aid linked to strategic access, a surge in foreign borrowing during the Marcos period, and an institutional legacy of debt-service prioritization all reflect how geopolitical alignment can expand discretionary power, weaken fiscal discipline, and concentrate economic privileges among politically connected actors — not as an accidental byproduct, but as a structural feature of the arrangement. 

As author James Bovard wrote, A 2002 American Economic Review analysis concluded that “increases in [foreign] aid are associated with contemporaneous increases in corruption,” and that “corruption is positively correlated with aid received from the United States.” 

IV. The Anatomy of a War Economy 

Economic historian Robert Higgs, in his landmark work Crisis and Leviathan (1987), describes a war economy not simply as an economy at war, but as a system in which the state progressively centralizes control over resources, production, credit, and consumption in the name of security or emergency objectives. The defining feature is not the presence of battlefield conflict alone; it is the gradual substitution of decentralized market allocation with politically directed allocation. 

In this framework, the relevant characteristics are not limited to military conscription or rationing. They include the expansion of state discretionary power, the redirection of fiscal resources toward security priorities, the use of debt and monetary accommodation to sustain strategic spending, and the integration of private industry and infrastructure into national-security objectives. 

To be sure, the Philippines is not a full wartime command economy yet. But the question is whether the cumulative direction of policy — military facilities, fiscal priorities, strategic infrastructure, and industrial incentives — reveals a gradual drift toward a more centralized, security-oriented political economy: not war by name, but increasingly war by institutional logic. 

V. The Current State of Philippine Military Spending

Figure 4 

The most visible evidence of this drift is the rise in declared military expenditure. According to SIPRI, Philippine military spending in constant U.S. dollars grew by 14.68% in 2025, after already rising by 6.59% in 2024. Military expenditure also increased from 4.77% to 5.40% of total government spending between 2024 and 2025, while its share of GDP rose from 1.19% to 1.30%. (Figure 4) 

These figures matter because they show that defense is becoming a more prominent fiscal priority. Yet they also reveal a limitation: SIPRI records only the military expenditure that governments officially classify as military spending. It captures the declared surface of the budget, not the full economic footprint of a security architecture. 

VI. The Invisible Subsidy 

The true cost of strategic alignment extends beyond the official defense budget. It includes private infrastructure, logistics, land, energy, telecommunications, and corporate capital that may be indirectly mobilized to support a broader regional security network. 

SIPRI does not measure how much private-sector wealth is committed to roads, ports, airports, warehouses, fuel depots, communications systems, and utility capacity serving EDCA-accessible locations or other security-linked infrastructure. Nor does it capture the opportunity cost of capital that could have financed MSMEs, manufacturing, agriculture, or civilian innovation but is instead drawn into strategic projects. 

No public accounting can fully reveal the magnitude of this indirect subsidy. But the absence of a precise number does not negate the economic reality: labor, land, energy, and capital are finite. When they are redirected toward security-linked purposes, they are necessarily unavailable for alternative civilian uses. 

VII. The Proposed Drift: From 1.3% to 4% of GDP 

The current military burden becomes far more consequential when viewed against Defense Secretary Gilberto Teodoro Jr.’s call to raise defense spending to 4% of GDP. Using SIPRI’s 2025 estimate of 1.3% of GDP as the baseline, such a proposal would imply a dramatic expansion of the military share of the Philippine economy. 

A move from 1.3% to 4% of GDP would not be an incremental modernization program. It would represent a structural reallocation of national resources toward security priorities, requiring either higher taxation, greater public borrowing, reduced civilian spending, inflation pressures, misallocations or some combination of all these. 

The issue is whether a tripling of the defense burden can occur without intensifying fiscal deficits, debt service, inflationary pressures, and the depletion of savings and capital available to MSMEs and other civilian sectors. 

VIII. Pax Silica Initiative and the Strategic Investment Priority Plan (SIPP) 

The drift toward a security-oriented, or wartime, political economy becomes most visible not only in the defense budget but also in the architecture of industrial policy. Pax Silica and the Strategic Investment Priority Plan (SIPP) suggest that the Philippine state is moving beyond merely encouraging private investment; it is increasingly involved in constructing the physical and fiscal platform upon which strategically important industries will operate. 

Pax Silica, according to the U.S. State Department and the U.S. Mission to ASEAN, is a U.S.-led strategic initiative aimed at building a secure and resilient silicon supply chain, spanning critical minerals, energy inputs, advanced manufacturing, semiconductors, artificial intelligence infrastructure, and logistics networks. 

Pax Silica is presented as a high-technology development initiative centered on artificial intelligence, semiconductors, data infrastructure, and advanced manufacturing. Yet its broader significance lies in its structure: the state is expected to help assemble the land, power capacity, logistics corridors, fuel infrastructure, communications systems, and investment incentives required before private investors occupy these strategic platforms. 

This represents a significant departure from a conventional market process. Under a market-driven model, private investors typically bear the primary responsibility for assembling capital, infrastructure, and project risk. Under the Pax Silica model, the state assumes a larger role by pre-building enabling infrastructure, socializing a significant portion of upfront costs and risks, and directing private capital toward a strategically selected industrial platform. 

For this reason, Pax Silica cannot be analyzed simply as an industrial-park project. It represents a form of state-directed capital allocation in which public resources are concentrated toward sectors considered strategically necessary. 

The benefits of this arrangement may accrue disproportionately to a concentrated group of politically connected strategic stakeholders, creating opportunities for the formation of new strategic rents among firms and actors positioned to benefit from state-directed allocation. 

The underlying objective is not primarily the maximization of economic returns. Rather, economic activity is being organized around a security objective: reducing dependence on China and building an alternative high-technology and defense-industrial supply chain amid intensifying strategic competition between the two powers. Commercial benefits may emerge from this process, but they are subordinate to the geopolitical purpose of strengthening strategic security supply chain. 

This is the defining feature of a security-oriented political economy: scarce resources are increasingly allocated not solely according to market profitability, but according to their perceived strategic value. 

IX. The SIPP as the Fiscal Engine 

The Strategic Investment Priority Plan (SIPP) provides the fiscal and regulatory mechanism that enables this process. Through tax incentives, duty exemptions, accelerated depreciation, and other investment privileges, the SIPP channels state support toward sectors identified as strategically important by the administration. 

Its Tier II and Tier III categories appear particularly aligned with the requirements of Pax Silica, accommodating the capital-intensive sectors and infrastructure needs associated with advanced manufacturing, semiconductors, artificial intelligence, data centers, critical mineral processing, and related strategic industries. 

When combined with Pax Silica, the result is a powerful concentration mechanism: public land, public infrastructure, public energy capacity, and fiscal incentives are assembled in advance and aligned with private investment in sectors considered essential to strategic supply-chain development. 

This represents more than a conventional investment-promotion framework. The state is not merely reducing barriers for private capital; it is actively shaping the conditions under which capital is directed toward strategically selected sectors. In doing so, scarce national resources are increasingly organized around geopolitical priorities, particularly the effort to build alternative high-technology and defense-industrial supply chains amid intensifying strategic competition with China. 

The significance of this arrangement lies not only in the industries being promoted, but in the institutional process through which they are prioritized. When access to infrastructure, fiscal incentives, and state-supported platforms is concentrated among politically connected strategic stakeholders, including selected investors, technology firms, and geopolitical partners, new forms of strategic rent emerge. 

The SIPP therefore functions not simply as an investment incentive program, but as the fiscal engine through which domestic economic capacity is increasingly aligned with broader security objectives. Economic activity remains present, but its organization is increasingly shaped by strategic considerations beyond immediate market allocation. 

X. The Economic Opportunity Cost 

Every peso devoted to pre-building strategic infrastructure is a peso that cannot simultaneously finance other productive uses. The opportunity cost among many includes: 

• Energy capacity that could support households, MSMEs, and regional industries.
• Public infrastructure funds that could be directed to agriculture, manufacturing, transportation, or local enterprise.
• Fiscal incentives that reduce potential government revenue available for health, education, and civilian development.
• Credit and savings that may be crowded toward large strategic projects rather than dispersed entrepreneurial activity. 

A centralized hub such as Pax Silica may generate impressive headline investment figures, but headline investment is not the same as broad-based capital formation. If the project primarily channels public resources into a concentrated strategic platform, it may deepen the very centralization that weakens MSMEs and depletes the savings-based capital foundation of the civilian economy. 

XI. The Geopolitical Dimension 

Pax Silica also carries a geopolitical dimension that is absent from ordinary industrial policy. AI infrastructure, semiconductor production, data centers, fuel pipelines, logistics corridors, and communications networks are not merely civilian assets; they are dual-use assets with potential strategic and military relevance. 

As these assets become integrated into a broader U.S.-aligned technological and security architecture, they may alter the Philippines’ risk profile. The country is no longer simply hosting military facilities; it may also be embedding critical economic infrastructure into a regional strategic network. 

The danger is therefore twofold: economically, Pax Silica may accelerate the centralization of capital allocation and crowd out civilian enterprise; geopolitically, it may increase the visibility and vulnerability of Philippine infrastructure in any future regional escalation of conflicts. 

XIA. Side Note: BCDA’s Rebuttal 

BCDA has defended Pax Silica primarily through the lens of environmental compliance, water availability, and local safeguards. Those concerns are important, but they do not address the deeper economic and geopolitical question raised here: whether the pre-allocation of massive power capacity, fuel pipelines, free-rent incentives, and strategic infrastructure represents a form of state-directed capital allocation that can strain domestic grids, deepen economic fragility, and increase geopolitical exposure. 

The issue, therefore, is not merely whether Pax Silica is environmentally compliant. It is whether the project marks another stage in the Philippines’ integration into a U.S.-aligned strategic and technological architecture, with consequences that extend far beyond the environmental debate. 

XII. Strategic Integration and Its Trade-offs 

Every public investment project promises rewards. Pax Silica and the broader Strategic Investment Priority Plan (SIPP) are no exception. Government officials present them as catalysts for artificial intelligence, semiconductor manufacturing, digital infrastructure, high-value employment, foreign direct investment, and the transformation of the Philippines into a regional technology hub. Together with expanding defense cooperation, they are expected to strengthen national security, improve technological capabilities, and position the Philippines as an indispensable partner in the Indo-Pacific. 

These advertised objectives form the central justification for the strategy. Investments that raise productivity, create employment, and expand technological capabilities may generate economic benefits. The visible gains attract immediate attention, while the less visible trade-offs emerge through changes in capital and resource allocation, fiscal commitments, and geopolitical exposure. 

XIII.  The Unseen Trade-offs 

XIIIA. Sovereignty and Strategic Dependence: The GCC-Operation Epic Fury Experience 

One of the least discussed consequences of deeper strategic integration is the gradual erosion of policy autonomy. 

Sovereignty is rarely surrendered in a single treaty or executive agreement. More often, it diminishes incrementally as military facilities, logistics, intelligence, industrial policy, infrastructure, and critical technologies become increasingly integrated into the strategic architecture of a more powerful ally. 

This is not unique to the Philippines. It reflects the institutional logic of asymmetric alliances. As integration deepens, the larger power naturally makes decisions according to its own strategic priorities, while the smaller partner must increasingly adjust to choices over which it exercises comparatively less influence. The relationship therefore changes not only the distribution of military capabilities, but also the distribution of decision-making power and strategic risk. 

Figure 5 

The recent U.S. operation against Iran illustrates this institutional dynamic. In its assessment of the episode, the Jewish Institute for National Security of America (JINSA) observed that the Gulf Cooperation Council's security framework had long rested on the expectation that the United States would consult its regional partners before undertaking military actions that could expose them to retaliation. Yet according to the study, Operation Epic Fury was not preceded by broad consultation across Gulf governments, despite exposing the region to heightened strategic risks. (Figure 5) 

Whether coordination occurred through limited elite channels is secondary. The episode demonstrates how, in asymmetric security relationships, the dominant power's strategic priorities may ultimately prevail over the preferences of its partners. 

As the Philippines becomes more deeply integrated into the U.S. security architecture through EDCA facilities and related strategic infrastructure, the practical question becomes one of sovereignty. To what extent would future operations launched from Philippine territory ultimately reflect Philippine strategic priorities, and to what extent would they reflect those of Washington? The answer will depend not simply on treaty language or diplomatic assurances, but on where effective strategic discretion resides when interests diverge. 

Recent U.S. actions toward both allies (Greenland, Canada, Nato plus tariffs) and rivals demonstrate that American policy is ultimately guided by American national interests. That is neither unusual nor unique; it is how great powers behave. 

The implication for the Philippines is straightforward: deeper strategic integration also means greater exposure to the consequences of decisions shaped by U.S. priorities. 

The historical progression from the postwar U.S. bases, to the Visiting Forces Agreement (VFA), to the Enhanced Defense Cooperation Agreement (EDCA), and now toward Pax Silica and the Strategic Investment Priority Plan (SIPP), reflects an expanding architecture of strategic integration. What began primarily as military access increasingly encompasses infrastructure, logistics, technology, energy systems, industrial policy, legal institutions, and bilateral political relationships. As these become progressively integrated with U.S. strategic objectives, the institutional centre of gravity likewise shifts. Strategic priorities increasingly influence the allocation of capital, public resources, infrastructure, and government policy—in favor of the US. 

Yet, strategic dependence is cumulative. Every additional layer of integration—whether military facilities, logistics, technology, energy systems, industrial policy, or legal institutions—increases the cost of policy independence while strengthening U.S. strategic leverage. As dependence deepens, so too does the likelihood that American strategic priorities will prevail whenever they diverge from Philippine preferences. Sovereignty is therefore not diminished by any single agreement, but by the cumulative institutional dependence created over time.

Figure 6 

The implications extend beyond political autonomy. They also reshape the country's risk profile. Modern military strategy increasingly targets not only armed forces, but also the logistics, communications, energy systems, and technological infrastructure that sustain military operations. The recent conflict with Iran demonstrated that U.S. bases and associated strategic infrastructure can themselves become objects of retaliation. Analyses from both the Jewish Institute for National Security of America (JINSA) and the Council on Foreign Relations (CFR), despite approaching the issue from different perspectives, underscore two complementary realities: asymmetric alliances often leave smaller partners with limited influence over operational decisions, while the physical infrastructure supporting those alliances may itself become a strategic target—Iran has repeatedly targeted US bases in the region. (Figure 6) 

At the onset of the conflict, the New York Times mapped strikes on several US bases in the Middle East, documenting the extent of the damage. 

For the Philippines, this raises a broader political-economy question. As EDCA facilities expand and complementary projects such as Pax Silica, strategic logistics, fuel infrastructure, and energy-intensive developments become increasingly integrated into the regional security architecture, they may generate economic opportunities while simultaneously increasing the country's geopolitical and kinetic risk profile. 

The current administration's reported rejection of requests for separate legal jurisdiction and diplomatic immunity for the Pax Silica project deserves recognition. Such decisions, however, reflect current political preferences rather than permanent institutional constraints. Future administrations may reach different conclusions as strategic investments deepen, dependence increases, and geopolitical circumstances change. Institutional change is often incremental: each additional accommodation reduces the political and institutional cost of the next. 

XIIIB. From Economic Infrastructure to Strategic Targets 

As noted above, modern conflict increasingly encompasses economic infrastructure alongside conventional military installations. Fuel depots, logistics corridors, communications networks, AI infrastructure, semiconductor facilities, ports, and power systems may all become strategically significant because they support military operations even while serving civilian purposes. 

Recent conflicts illustrate that retaliatory strikes have extended beyond traditional bases to include logistics networks, energy infrastructure, and AI-related facilities that underpin military capability. 

The Iran conflict offers a pointed example: strikes on AI and data infrastructure were justified precisely because, as the Responsible Statecraft noted, U.S. strategic doctrine had made civilian AI infrastructure inseparable from military operations over time. The civilian origin of the asset offered no protection once it became operationally load-bearing for the military. 

The issue is whether deeper integration into a regional security architecture gradually changes the strategic risk profile of infrastructure that would otherwise remain predominantly civilian. 

XIIIC. Fiscal and Capital Allocation Risks 

Every strategic commitment requires resources. 

Defense modernization, strategic infrastructure, dedicated power generation, transport links, fiscal incentives, tax concessions, and publicly supported industrial hubs all compete for the same pool of national savings, public finance, skilled labor, land, and energy. 

When these initiatives rely increasingly on deficit spending, public borrowing, or preferential fiscal treatment, the opportunity costs extend beyond government accounts. Capital that could otherwise support MSMEs, agriculture, manufacturing, and decentralized entrepreneurship becomes increasingly concentrated in politically prioritized sectors. 

The issue is therefore not simply higher government expenditure. It is the gradual centralization of capital allocation through state-directed strategic priorities. 

Over time, this concentration weakens the savings and productive capacity required to sustain broad-based investment and productivity growth. As capital becomes increasingly directed toward strategic sectors while household purchasing power faces pressure, the economy may become more vulnerable to stagflation—slower real economic growth accompanied by persistent cost pressures. 

The burden of such a transition falls disproportionately on households and smaller enterprises through weaker wage growth, diminished purchasing power, and reduced access to credit, while the principal beneficiaries are sectors receiving strategic preference, fiscal incentives, and privileged access to state-directed resources. 

In the end, politically directed allocation risks magnifying existing asymmetric benefits—concentrating gains among strategically connected actors while dispersing costs across the wider economy: inequality. 

XIIID. Strategic Rents and Political Incentives 

History demonstrates that geopolitical importance can create strategic rents. 

When governments obtain external financing, infrastructure assistance, or diplomatic backing because of their strategic value rather than their productive capacity, fiscal constraints become less binding. Greater access to external resources expands the state's ability to allocate privileges, negotiate incentives, and postpone the consequences of fiscal imbalance through borrowing and external support. 

The Philippine experience during the Cold War illustrates how strategic importance coincided with debt accommodation, preferential financing, and expanded political discretion—conditions that contributed to the vulnerabilities exposed during the 1983 debt crisis. Similar incentive structures may emerge under contemporary institutional arrangements. The circumstances are different, but the underlying mechanism remains familiar: strategic rents can reduce fiscal discipline, expand discretionary power, and encourage the concentration of economic privileges among politically connected actors. 

XIIIE. Technological Concentration and Market Risk 

Pax Silica also represents an entrepreneurial wager on the future trajectory of artificial intelligence and semiconductor investment. Governments can assemble land, infrastructure, energy capacity, and fiscal incentives; they cannot guarantee sustained private-sector demand or the profitability of the industries they seek to attract. 

Should the current AI investment cycle weaken, or should global technology markets experience a significant correction or even a broader bubble collapse, publicly supported infrastructure could face underutilization, lower occupancy, and disappointing returns—leaving taxpayers to absorb costs that private investors would ordinarily bear. 

XIIIF. Energy and Opportunity Costs 

The proposed allocation of up to 5,000 megawatts of electricity highlights another unseen trade-off. 

Electricity, like capital, is scarce. Every megawatt committed to one strategic project is unavailable for alternative productive uses. During periods of constrained supply, preferential allocation toward one investment platform necessarily affects the availability and cost of energy for households, manufacturers, agriculture, and smaller enterprises. 

The debate therefore extends beyond environmental sustainability. It concerns the political economy of allocating scarce national resources toward strategically selected industries. 

With the current fragility of the Philippine energy system, the additional demand created by Pax Silica may introduce not only the risks of shortages and outages, but also a shift in the hierarchy of energy allocation toward geopolitical rather than domestic objectives. 

As energy infrastructure becomes integrated into the broader security architecture, energy policy may increasingly prioritize geopolitical considerations, particularly during periods of constraint or emergency or conflict. 

BCDA has responded primarily to environmental concerns surrounding Pax Silica. Those issues are important, but they do not address the broader economic and geopolitical questions surrounding concentrated state investment, strategic infrastructure, energy allocation, and the country's evolving role within a regional security architecture. 

The central issue is whether the commitment of scarce energy capacity to strategically prioritized infrastructure represents another stage in the reallocation of domestic resources toward geopolitical objectives.

XIIIG. Reciprocity Is Never Guaranteed 

Finally, strategic cooperation should not be confused with guaranteed economic reciprocity. Alliances, treaties, and strategic partnerships are often perceived as mutual relationships, but they do not create permanent obligations across all areas of policy. 

In a geopolitical system defined by power asymmetry, stronger states ultimately retain greater ability to shape the terms of the relationship according to their own national interests.

Figure 7 

Recent U.S. tariff measures affecting Philippine exports serve as a reminder that security partnerships and economic policy are governed by different political incentives. 

Close military cooperation does not necessarily translate into favorable trade treatment. The experiences of U.S. relations with NATO partners, Canada, and other allies demonstrate that even longstanding security relationships remain subject to changing domestic priorities and strategic calculations. 

Political economy ultimately reflects changing human choices rather than permanent diplomatic commitments. Strategic alignment may strengthen one dimension of bilateral relations while providing limited protection against shifts in economic policy or even geopolitical interests. 

International relationships are not fixed arrangements; they evolve as interests, leaders, and geopolitical circumstances change—as the GCC framework showed. 

XIV. Conclusion: The Philippines and the Drift Toward a Security (War-Time) Economy 

The rising intensity of global conflicts and the fragmentation of the post-Cold War economic order are reshaping how states organize economic policy. Across the world, governments are increasingly treating trade, technology, energy, infrastructure, and industrial capacity as instruments of national security rather than merely engines of economic efficiency. 

That transformation is now increasingly visible in the Philippines. 

The return of U.S. military infrastructure through EDCA, the expansion of defense commitments, the alignment of industrial policy through Pax Silica and the Strategic Investment Priority Plan (SIPP), and the growing integration of critical infrastructure into a regional security architecture represent a broader reorientation of the Philippine economy toward the requirements of geopolitical competition. 

A war economy is not created only when tanks move, soldiers mobilize, or battlefields emerge. Those are the visible symptoms. The underlying process begins earlier: when the state increasingly directs capital, energy, technology, infrastructure, and production toward strategic priorities, often at the expense of decentralized private-sector allocation and alternative civilian uses. The Philippines has already moved in this direction through political choices that embed the country more deeply into the hegemonic competition between great powers. 

Economic decisions are increasingly evaluated not only according to productivity and market returns, but according to their contribution to strategic objectives. 

History demonstrates that geopolitical importance creates powerful incentives. External support, strategic financing, and security partnerships can strengthen states, but they also weaken fiscal discipline, expand political discretion, and concentrate economic privileges among actors positioned to benefit from state-directed allocation. 

The resulting risks are therefore twofold. 

Domestically, the increasing centralization of capital, energy, and industrial policy weakens the decentralized entrepreneurial foundations necessary for broad-based economic growth. 

Externally, deeper integration into a great-power security architecture increases exposure to conflicts shaped by interests beyond Philippine control. The experience of Ukraine and Iran demonstrates how smaller states positioned on the fault lines of geopolitical rivalry can become arenas where larger strategic contests are played out. 

In short, rather than simply delivering economic gains, Pax Silica and the SIPP deepen existing economic and financial fragility by concentrating capital allocation, increasing strategic dependence, and exposing the Philippine economy to greater external shocks. 

The danger is not only that the Philippines becomes involved in great-power competition. The greater danger is that the emerging era of multipolar rivalry—most importantly the Thucydides Trap dynamic between the United States and China—becomes the organizing principle of the Philippine economy: centralizing economic decision-making at home while increasing vulnerability to conflicts abroad.