ASEAN
17 June 2014
Philippines' "opportunity point"
The Philippine economy stands at an "opportunity point", where its improving policy environment is intersecting with a loss of competitiveness of some its neighbors, like China.
The Philippine economy stands at an "opportunity point", where its improving policy environment is intersecting with a loss of competitiveness of some its neighbors, like China.
The Philippine economy has indeed grown strongly over the past decade or so, driven in part by service sector exports. But this is not sufficient to upgrade and transform the Philippine economy and society. It needs to develop stronger industrial base to enable the economy to “walk on two legs” of industry and modern services. It cannot leap-frog the necessary development of a dynamic manufacturing sector.
The Philippines was long considered the "sick man" of Asia. Despite starting strong in the early post-war period of the 1950s and 1960s, its economic performance was weak in the ensuing decades. In particular, while its neighbors became the global industrial factory, the Philippine experienced de-industrlialization and weak productivity growth.
The new millennium saw a turnaround in the Philippines, as a recent Asian Development Bank report analyzes. Its economy achieved annual growth of 4.8% on average in the first decade of the 2000s, much better than 2.9% in the 1990s and 1.7% in the 1980s. Booming migrants' remittances drove private consumption and real estate investment. Business process outsourcing (BPO) became a dynamic service export.
The BPO sector has been able to exploit the high-skilled segment of the Philippine population, with its strong English-language capability, and service-friendly personality. It accounts for 15% of the country's exports of goods and services, and the Philippines is now the third largest BPO destination after India and Canada.
But while the BPO may make an important contribution to exports, its contribution to the overall economy is much less. It only employs about 1% of the workforce. And the BPO sector has very few linkages to the rest of the economy which might create extra jobs. This is in sharp contrast to the manufacturing sector which requires components and other inputs as backward linkages, and marketing and sales as forward linkages. In short, the BPO sector is not sufficient to lead the economy's growth.
Despite the success of the BPO sector, overall the Philippine service sector has very low productivity, even though it has been the economy's leading growth sector. Thus, the Philippine economy is still afflicted by chronic problems of high unemployment and under-employment, slow poverty reduction, and low investment despite overall strong economic growth. In fact, one-quarter of the Philippine work force is either unemployed or under-employed.
A country like the Philippines, with a large and growing low/moderate skilled workforce cannot achieve transformational development with sluggish industrialization. It needs to develop stronger industrial base to enable the economy to “walk on two legs” of industry and modern services. Economic upgrading can take place if the higher productivity manufacturing sector absorbs labor from the low-productivity service and agriculture sectors.
The ADB report proposes targeted public sector support, which focuses on specific industries and products, for industrial upgrading and diversification. This recommendation is clearly inspired by the "developmental state" thinking of Japanese and Korean policy experience.
Experience shows however that there can be many risks in such an approach. Governments may not be more capable than the private sector in picking industry winners. It's also difficult to avoid cronyism and corruption when government and business join forces. And unwinding the developmental state can prove difficult when and if developmental success is achieved, as the case of Japan today shows. Government-led development is anathema to the process of "creative destruction" which is at the heart of an efficient market economy.
The Philippines has a huge potential to become a key production base within the Asian regional production networks. And the timing might be right just now for the Philippines to join East Asia's fast track development path.
Wage costs are now rising in China and other countries. China's bellicose behavior with its neighbors is reducing its attractiveness as a production base. And natural disasters in Japan and Thailand have highlighted the wisdom of not concentrating regional production in a small number of countries.
What the Philippines needs to do is concentrate on the basics. Strong investment in basic infrastructure is necessary in areas like transport, electricity and IT infrastructure. More sustained efforts are needed to tackle corruption. And bureaucratic barriers to doing business must be eased.
Progress in all of these areas will be crucial to attract more foreign direct investment. FDI has been part of the secret of success in countries like China, Malaysia, Thailand, Singapore, and Vietnam, but a weak point in the Philippine performance.
In this regard, a huge potential motor of development could be the Philippines' enormous diaspora community. High skilled migrants in countries like the US, Canada and Australia have large savings and know-how, as well as excellent local market knowledge. Don't forget that much of China's initial burst of foreign direct investment for trade came from its own diaspora in Hong Kong and Taiwan. Rather than trying to pick industry winners, the Philippine government would do well to keep reminding their own expatriates of emerging opportunities at home.
Things have indeed been improving, especially under the leadership of current President Aquino. The Philippines is one of the countries showing the most improvement in this year’s Global Competitiveness Report of the World Economic Forum. It has advanced 22 places since reaching its lowest mark in 2009. It has made important strides with respect to its public institutions, trust in politicians, corruption and red tape, the macroeconomic environment and the financial sector. Clearly, much further progress will be necessary, especially for the country’s infrastructure which is still in a dire state, particularly for sea and air transport.
All things considered, the Philippines stands at an "opportunity point", where the improvement in its own policy environment is intersecting with a loss of competitiveness of some its neighbors. And the experience of the Philippine BPO sector shows that the country is very capable of success.
The Philippines' development prospects are now brighter than they have been for a very long time.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
The Philippine economy has indeed grown strongly over the past decade or so, driven in part by service sector exports. But this is not sufficient to upgrade and transform the Philippine economy and society. It needs to develop stronger industrial base to enable the economy to “walk on two legs” of industry and modern services. It cannot leap-frog the necessary development of a dynamic manufacturing sector.
The Philippines was long considered the "sick man" of Asia. Despite starting strong in the early post-war period of the 1950s and 1960s, its economic performance was weak in the ensuing decades. In particular, while its neighbors became the global industrial factory, the Philippine experienced de-industrlialization and weak productivity growth.
The new millennium saw a turnaround in the Philippines, as a recent Asian Development Bank report analyzes. Its economy achieved annual growth of 4.8% on average in the first decade of the 2000s, much better than 2.9% in the 1990s and 1.7% in the 1980s. Booming migrants' remittances drove private consumption and real estate investment. Business process outsourcing (BPO) became a dynamic service export.
The BPO sector has been able to exploit the high-skilled segment of the Philippine population, with its strong English-language capability, and service-friendly personality. It accounts for 15% of the country's exports of goods and services, and the Philippines is now the third largest BPO destination after India and Canada.
But while the BPO may make an important contribution to exports, its contribution to the overall economy is much less. It only employs about 1% of the workforce. And the BPO sector has very few linkages to the rest of the economy which might create extra jobs. This is in sharp contrast to the manufacturing sector which requires components and other inputs as backward linkages, and marketing and sales as forward linkages. In short, the BPO sector is not sufficient to lead the economy's growth.
Despite the success of the BPO sector, overall the Philippine service sector has very low productivity, even though it has been the economy's leading growth sector. Thus, the Philippine economy is still afflicted by chronic problems of high unemployment and under-employment, slow poverty reduction, and low investment despite overall strong economic growth. In fact, one-quarter of the Philippine work force is either unemployed or under-employed.
A country like the Philippines, with a large and growing low/moderate skilled workforce cannot achieve transformational development with sluggish industrialization. It needs to develop stronger industrial base to enable the economy to “walk on two legs” of industry and modern services. Economic upgrading can take place if the higher productivity manufacturing sector absorbs labor from the low-productivity service and agriculture sectors.
The ADB report proposes targeted public sector support, which focuses on specific industries and products, for industrial upgrading and diversification. This recommendation is clearly inspired by the "developmental state" thinking of Japanese and Korean policy experience.
Experience shows however that there can be many risks in such an approach. Governments may not be more capable than the private sector in picking industry winners. It's also difficult to avoid cronyism and corruption when government and business join forces. And unwinding the developmental state can prove difficult when and if developmental success is achieved, as the case of Japan today shows. Government-led development is anathema to the process of "creative destruction" which is at the heart of an efficient market economy.
The Philippines has a huge potential to become a key production base within the Asian regional production networks. And the timing might be right just now for the Philippines to join East Asia's fast track development path.
Wage costs are now rising in China and other countries. China's bellicose behavior with its neighbors is reducing its attractiveness as a production base. And natural disasters in Japan and Thailand have highlighted the wisdom of not concentrating regional production in a small number of countries.
What the Philippines needs to do is concentrate on the basics. Strong investment in basic infrastructure is necessary in areas like transport, electricity and IT infrastructure. More sustained efforts are needed to tackle corruption. And bureaucratic barriers to doing business must be eased.
Progress in all of these areas will be crucial to attract more foreign direct investment. FDI has been part of the secret of success in countries like China, Malaysia, Thailand, Singapore, and Vietnam, but a weak point in the Philippine performance.
In this regard, a huge potential motor of development could be the Philippines' enormous diaspora community. High skilled migrants in countries like the US, Canada and Australia have large savings and know-how, as well as excellent local market knowledge. Don't forget that much of China's initial burst of foreign direct investment for trade came from its own diaspora in Hong Kong and Taiwan. Rather than trying to pick industry winners, the Philippine government would do well to keep reminding their own expatriates of emerging opportunities at home.
Things have indeed been improving, especially under the leadership of current President Aquino. The Philippines is one of the countries showing the most improvement in this year’s Global Competitiveness Report of the World Economic Forum. It has advanced 22 places since reaching its lowest mark in 2009. It has made important strides with respect to its public institutions, trust in politicians, corruption and red tape, the macroeconomic environment and the financial sector. Clearly, much further progress will be necessary, especially for the country’s infrastructure which is still in a dire state, particularly for sea and air transport.
All things considered, the Philippines stands at an "opportunity point", where the improvement in its own policy environment is intersecting with a loss of competitiveness of some its neighbors. And the experience of the Philippine BPO sector shows that the country is very capable of success.
The Philippines' development prospects are now brighter than they have been for a very long time.
Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com