At the Badonkadonk bar in Manila’s historic Ermita district, a lone tourist sits on the balcony at sunset. The tortured cry of a drunken karaoke singer nearby competes with an Alicia Keys video on the club’s widescreen television.

The bar, one of the newest in the area, is modern and well-appointed with chilly air-conditioning, cowboy-themed waitresses and a booming sound system, but it is a rarity. The view of Manila's oldest tourist district from the bar's balcony quickly snaps visitors back to reality. On the street below, a homeless man in tattered underwear can be seen bathing in a bucket. A few feet away, an elderly woman sleeps on the sidewalk in a bed made of cardboard and rags. Her slippers are placed neatly beside her, as pedestrians step by gingerly.

Nearby streets offer similar scenes. The few tourists who venture into the area must avoid sewage in the streets, persistent panhandlers and aggressive transvestite prostitutes – as well as thousands of homeless people who have established semi-permanent residences along the sidewalks and alleys.

Ermita wasn’t always like this. The district, situated along the waterfront of Manila Bay, was once home to the local elite. It was a citadel for Spanish colonizers in the 1800s — it is named for a Spanish-era hermitage — and an enclave for Americans when the country became a colony of the United States after 1900.

The country’s colonial rulers, and later wealthy Filipinos, rode through Ermita in smart horse-drawn carriages among quaint shops and outdoor cafes. The neatly aligned streets were laid out in the early 1900s by the architect Daniel Burnham, who also designed the Flatiron Building in New York and drew up a master plan for Chicago. In the years leading up to World War II, Ermita was home Gen. Douglas MacArthur, who lived in the nearby Manila Hotel.

During the war, much of the neighborhood was destroyed by fierce fighting and sustained bombing campaigns. But after the Philippines achieved independence in 1946, it retained its importance. The country’s Supreme Court, National Museum and largest hospital – as well as the sprawling United States Embassy – were established in Ermita and remain there today.

But during the Vietnam war, when tens of thousands of American military personnel visited the Philippines for rest and recreation, the neighborhood changed character. Under the tacit approval of the late dictator Ferdinand Marcos, foreign-owned nightclubs opened in the area. By the 1980s, Ermita had become one of Asia’s most raucous red light districts, with thousands of mostly Western male tourists roaming the streets. Cavernous nightclubs competed to put on the most audacious shows. Surrounding the go-go bars were restaurants, hotels, car rental agencies, casinos and hundreds of businesses vying for the 24-hour tourist trade.

In the early 1990s, then-Mayor Alfredo S. Lim declared the area a disgrace and refused to renew the business permits of about 350 mostly foreign-owned nightclubs. In their place, he promised to build a "mini-Disneyland" – a high-end tourist venue catering to families.

Two decades later, the foreign-owned night spots are still mostly gone but the new tourist district has yet to rise. Today, Ermita is a collection of money-change shops, overseas job recruiting agencies and seedy bars tucked in among the abandoned remnants of the huge nightclubs that once lined the streets. Extended families, including small children and pets, live in makeshift shelters built in the shadows of the burned out hulks of former clubs. A few art galleries and resilient restaurants can be found as well.

During a recent walk along the Manila Bay boardwalk, which runs parallel to Ermita, the sky turned to a spectacular, brilliant orange as the sun set over the water. But not a single tourist could be seen. The park benches were being used as beds. Several children were sniffing solvent from a bag. A woman had built a ramshackle shelter out of an umbrella and had strung up tattered Christmas decorations over her makeshift home.

When asked in a recent interview about Ermita, Joseph Estrada, a former Philippine president who was elected Manila’s mayor in May, frowned and said: "Some prostitutes hang around there."

He is aware of the problems in Ermita, he said, as well as the neighboring, less destitute entertainment district of Malate, he said. "That’s my next project. I will bring back the old glory of Ermita and Malate. But we cannot do it all at the same time because Manila is bankrupt."

Shuffling through the papers on his desk, Estrada produced a letter from the country’s largest power provider stating that the city has an overdue electricity bill of more than 613 million pesos. This is in addition to more than five billion pesos in other debts, he said. "They might cut off our power," he said.

At the Shwarma Snack Center, on a small road in the gritty center of Ermita, Ramez Sarmiti pondered why his restaurant has survived while so many other establishments in the area have failed. The restaurant serves no alcohol, but the Jordanian owner said that was not for religious reasons.

"We specialize in food," he said. "People come here to have a meal and a smoke."

Inside the restaurant, bearded Middle Eastern men smoked water pipes beside Western tourists enjoying kebabs, tikka, hummus and babaganoush. Just outside, shady-looking characters were selling what they claimed were Rolex watches and Viagra.

"We have survived but once this area is improved, our business will improve," said Mr. Sarmiti. "This is a tourist area. There should be a reason for people to come here, like a night market, not just a place for purse snatchers and street children begging for money."

A few blocks away, Alma Manangay, a 32-year-old employee of a soft drink distribution company, pointed to the roof of the scarred concrete building where cases of sodas were stacked to the ceiling.

"Those were the stage lights," she said, pointing the remnants of the nightclub that once occupied the building. She said that she did not live in Ermita when it was a booming red light district, but thought it would help if the big nightclubs returned.

"We’ll be the dancers!" she yelled, grabbing a co-worker and laughing while dancing among the soda bottles. "I’m just joking," she said, suddenly serious.

At the mayor’s office, when Estrada was asked if he would revive Ermita by allowing a red light district to re-emerge, he said: "No, but this is a tourist spot, there should be first-class restaurants, cocktail lounges."

Mayor Lim had said the same thing two decades ago – that the area would be transformed into a high-end tourist destination. But no tax breaks, investment incentives or master plans were ever put forward to renew the area.

Estrada said he could not take responsibility for the actions of his predecessor.

"Manila has been left behind by the neighboring cities," he said. "It’s a shame, because Manila is the capital city of the Philippines. We have to work double time to bring back the old glory of the city."

"It’s a tough job," he added.