Bernardo M. Villegas
As the advanced economies of the world are already transitioning towards the fourth industrial revolution (the digital age), the Philippines is still struggling to undergo the first three stages of mechanization, electrification and electronification. Because of serious mistakes in economic policy in the past, Philippine manufacturing has lagged in comparison to its East Asian peers. Manufacturing has contributed very little to employing the Philippine labor force (averaging less than 15 percent) and contributing to Gross Domestic Product (GDP) (less than 20 percent). As I have discussed many times in previous columns, we made the terrible mistake of following the “Latin American formula for economic disaster, i.e. an inward-looking, import-substitution, protectionist, ultranationalist industrial policy that spawned a host of capital-intensive, unproductive industries that died a natural death with the advent of globalization. Unlike especially our neighboring East Asian tiger economies, we failed to make full use of our demographic dividend after the Second World War by failing to promote export-oriented, labor-intensive industries. To make matters worse, we completely neglected rural and agricultural development.
Things turned for the worse in the last decade of the twentieth century when we lost even the few labor-intensive industries that we had, like garments and shoe manufacturing, when they all migrated to China which at that time was like a sucking sound attracting investments from all over the world because of the cheap wages that were still prevailing immediately after the capitalist revolution of Deng Xiao Peng. Some of our leaders were even resigned to the possibility that we would completely miss the industrial revolution and just morphed into a service-intensive economy and leapfrog into the fourth industrial revolution. Fortunately, as the recent World Bank Report entitled “Growth and Productivity in the Philippines,” the Philippines has been given a new lease of life in the industrial age. The period 2010 to 2016 is especially critical in this new opportunity to build a stronger manufacturing base.
According to the World Bank Report, growth in the Philippine manufacturing sector accelerated in 2010 to 2016 and outperformed the growth of some of its East Asian neighbors. Between 1998 and 2016, the country’s manufacturing value added (VA) in constant 2010 US$ grew at an annual average of 4.8 percent outpacing the growth of regional peers such as Thailand and Indonesia. Strangely enough, much of the faster growth happened after the 2009 global recession (the Great Recession), with the manufacturing sector growing at an average annual rate of 7.5 percent in 2010 to 2016, significantly higher than the average of 3.0 percent per year in the period 2003 to 2009. This growth in manufacturing value added was accompanied by slower employment growth in manufacturing at 1.4 percent annually between 1998 and 2016. As a result, labor productivity in the manufacturing sector grew at an annual average of 2.9 percent between 1998 and 2016, higher than the annual average of 2.5 percent and 2.3 percent for regional and structural peers (countries with similar economic structures) in the same period.
This high productivity growth in the manufacturing sector can be attributed to a transition to more skill-intensive products. Between 1998 and 2016, there was a gradual decline in the share of textiles, wearing apparel, and paper products in total manufacturing output and an increase in the share of telecommunications and transport equipment. In 1998, food manufacture; radio, television, and communication equipment and apparatus; and chemical products represented about half of all manufacturing output. In 2016, the share of these three product lines increased to about two-thirds of the country’s manufacturing activities. This resulted in an average of 3.5 percent annual contraction in the exports of articles of apparels in 1998 to 2016, leading to a drop of their share of total exports from 8.8 percent in 1998 to 1.5 percent in 2016. Meanwhile, the export of electronic components grew by an average of 5.5 percent annually in the same period.
There are prospects for an even brighter future for manufacturing with the ongoing shift of manufacturing investments from China to Southeast Asia for two reasons. The first is the already very high level of wages in China. The second is the ongoing trade war between the US and China which may motivate foreign investors in manufacturing in China to relocate their operations to Southeast Asia as a way of avoiding the high tariffs being imposed by the US on Chinese exports. There is also the decided bias of the Taiwanese government to ask their investors in China to “look South”, i.e. to relocate to Southeast Asia. These opportunities are already being fully exploited by Vietnam, where Foreign Direct Investments (FDIs) in manufacturing have soared in recent years. The Philippines can still shoot itself on the foot if Congress decides to remove the tax incentives being enjoyed by manufacturing operations that are located in the export processing zones as part of the so-called TRABAHO tax reforms. The argument that these export-oriented enterprises are already profitable and, therefore, do not need tax incentives misses a very important point. The Philippines is competing with other countries like Vietnam, Indonesia, Thailand and Myanmar in attracting these manufacturing enterprises. Unfortunately, our country still has serious handicaps such as extremely high rates of electricity, still-to-be-improved infrastructures, and a very low ranking in ease of doing business. The tax incentives are still needed to compensate for these negative traits. I am happy to note that most members of the Senate are not in favor of removing these tax incentives.
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