Three legs: Manufacturing, agriculture, services

ANY serious problems that Filipinos face today are not new — poverty, joblessness, trade imbalance, education and training, climate change, and health issues. Improving the three sectors — manufacturing, agriculture and services — can help solve some of the country’s problems.

A tale of two economists

A dozen years ago, I listened with interest to the foremost Japanese economist Norio Usui of the Asian Development Bank (ADB) in Manila. He worked for ADB for 15 years (2000-2002 and 2005-2009) where he managed economic monitoring and policy dialogues with over 15 developing countries, including the Philippines. We would invite him to the People Management Association of the Philippines (PMAP) and the Philippine Society of Fellows in People Management, and we would have great conversations. His thesis was that the Philippine economy must stand on three legs.

Dr. Usui has analyzed the Philippine economy “through the lens of structural transformation to clarify the root causes of the country’s lagged growth performance in the regional context.” He concluded that “the main culprit behind lagging growth is a chronic productivity growth deficit as a result of stagnant industrialization. High unemployment, slow poverty reduction and stagnant investment are a reflection of stagnant industrialization.”

Norio’s prescription is simple: revitalize manufacturing and agriculture, even as we continue developing the services sector.

I checked the archives of another national paper where I used to write. On May 29, 2016, I wrote in that paper:

In 2013, my friend Dr. Karl Kendrick Chua, senior country economist at the World Bank, wrote the Philippine Development Report. He believes that “the reason why the country is not able to massively create good jobs despite higher economic growth in recent years is its long history of policy distortions that slowed the growth of agriculture and manufacturing in the last six decades. There is no simple way to address this jobs challenge, as this is linked to deepseated, structural issues in the economy. A unique window of opportunity exists today to accelerate reforms that will help create more and better jobs.”

Chua’s World Bank study points to “decades of policy distortions, underpinned by centuries of extractive institutions as the root cause for the Philippines’ economic ills today. Lack of competition, complex regulations, insecure property ownership, and lack of investments have led to very low agricultural productivity and weak manufacturing in the Philippines. The outcomes are predictable — poverty, increasing informality and out-migration.”

Norio is now back in Japan, as a practitioner-track professor of the Economic Development for International Development Program (IDP) at the International University of Japan. He has a doctoral degree in Agricultural Economics (1996, University of Tokyo).

Karl left the World Bank in 2016 to join the government as undersecretary of Finance and later as secretary of the National Economic and Development Authority (NEDA). He is now a member of the Board of Directors of BPI and a consultant on digital transformation and other matters.

The labor perspective

Recently, we invited my friend Mr. Khalid Hassan, country director of ILO Country Office for the Philippines, at AmCham where he delivered a talk, “Revitalize Agriculture: Leveraging Opportunities for Food Security and Livelihood.”

Mr. Hassan premised his discussion on the proposition that the Philippines is strategically located in a high-growth region. He traced the Philippine economy’s growth from its early agricultural beginnings and its shift to industrialization. He said, “Despite having an early lead in industrialization, the Philippines has deviated since the 1970s from the usual trajectory of economic take-off led by industrial growth. There were short periods of manufacturing resurgence since the 1990s, but these were usually disrupted by adverse shocks.”

The Philippines had a leading rice technology when we started intensifying manufacturing as an import substitution strategy. We almost neglected agriculture, which once made us a leading exporter of sugar, copra and abaca hemp.

I fully understand what Mr. Hassan meant. The Philippines used to have steel mills in Mindanao and Metro Manila since 1952, and a Ford body stamping plant in Bataan in 1976. Sarao was mass producing locally designed jeeps, using surplus Japanese diesel engines, since 1953. Radiowealth produced television and stereo sets in 1955. Now, we import all of these products made from iron ore that is abundant in the Philippines.

Khalid continued, “Ultimately, industry was unsuccessful to re-enter its high-growth era in earlier decades. Meanwhile, the Philippines transitioned into a service-driven economy, without having developed a dynamic manufacturing base and a productive agriculture sector.”

Khalid adds, “The Philippines is experiencing what can be called a ‘path dependence’ where policy decisions did not respond to evolving challenges, but rather continued to produce weak industrial competitiveness and lack of productive employment. This kept investments and demand for skills low, feeding a vicious cycle that makes diversification, upgrading, and deep structural transformation increasingly difficult through time.”

To worsen the situation, Khalid continued, “The Covid-19 crisis and now the food crisis have exacerbated these challenges and led to a massive disruption of the economy and the labor market. It has also revealed the vulnerabilities of the sectors and firms that are dependent on foreign trade and intermediates.”

ILO research

Mr. Hassan shared important trends that the International Labor Organization has seen in its recent research:

First, the challenge in the competitiveness of the Philippines has increased over the last two decades, which showed a “decrease in the number of exports with comparative advantage and the number of export firms decreasing.”

As a consequence, the Philippines has become more of a market of consumer goods rather than a hub of manufacturing exports.

Second, the Philippine industrial base has become “less integrated throughout the years, which constrains firms from domestically sourcing their inputs in the most cost-efficient manner.”

Third, the Philippines has “languished in low value-added segments of production, demonstrating a comparative advantage in labor-intensive, lower-value export goods, and a comparative disadvantage in higher-value, capital-intensive imports.”

Fourth, “industrial catch-up and diversification toward more complex products is becoming increasingly difficult,” slowing down the pace of economic diversification. While the Philippines has diversified, the volume of its new products is too small to contribute to overall growth.

Here’s my conclusion: Unless we correct deep-seated structural defects in our economy, we will continue to be the dumping ground of food products and basic commodities that we can grow or make in our country. We shall forever be an exporter of iron ore and raw minerals and an importer of finished products made from these minerals. We will continue to send Filipino workers abroad where there are more remunerative, high-value and decent jobs than here at home.

We don’t have to reinvent the wheel. Progressive countries are shifting from globalization to hyperlocalization. Let’s strengthen the economy’s three legs — manufacturing, agriculture and services. This will help make us self-sufficient in food and basic commodities and reduce poverty incidence.

Ernie Cecilia is the chairman of the Human Capital Committee and the Publication Committee of the American Chamber of Commerce of the Philippines (AmCham); chairman of the Employers Confederation of the Philippines’ (ECOP’s) TWG on Labor Policy and Social Issues; and past president of the People Management Association of the Philippines (PMAP). He can be reached at erniececilia@gmail.com