Arresting jobless and industry-less growth

Rene E. Ofreneo is a member of the governing body of Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad column of BusinessWorld, May 30, 2005 edition, p. S1/4 .

The Employers Confederation of the Philippines (ECOP) has come out with two sad observations about the economy: Growth has been jobless, and the formal sector has been shrinking. Both necessitate bold adjustments in the government’s economic, industrial, and, yes, fiscal agenda.

Joblessness has not declined since the l997-98 Asian financial crisis. Over four million of the nation’s work force today are officially unemployed. As to underemployment, there seems to have been some improvement, as indicated by the decline in the underemployment rate – from 22.1% in l997 to 17.6% in 2004.

However, the fact is the “informalization” of labor is growing, which means the declining capacity of the economy to create quality jobs. In l999, there were 6,013,688 workers employed in 826,769 establishments. In 2003, the number of workers in the registered enterprises declined by a million (from six to five million), while the number of establishments declined to 719,420. Most of the job losses are occurring in the small- and medium-size category of enterprises.

Employment in domestic manufacturing has been sliding. It now accounts for less than 10% of the total employed, compared to 10% to 12% of the total work force in the l960s.

A large and expanding informal sector means the present debate on the minimum wage is meaningless to the majority of the work force. Many protective labor laws do not apply to these informal sector workers. Informal sector employment is generally a “coping mechanism” by those unable to land a job in the formal sector or launch a business that can be formally registered with the authorities.

A large and expanding informal sector also means the economy is hollowing out, meaning the industrial sector is stagnant or weakening. We can cite many factors to explain why the economy is hollowing out: Low savings rate, weak entrepreneurship, lack of competitiveness of local industries, high cost of power and doing business, political turbulence, etc.

One major explanation, too, is the failure of the Philippines to achieve industrial transformation after implementing structural adjustment programs (SAPs) starting in l980, characterized by doctrinal liberalization, deregulation and privatization measures.

Based on the World Bank’s World Development Indicators (2001), the hollowing-out process deepened in the l990s, which was ironically the decade when the Philippines deepened its tariff reduction program ahead of other ASEAN and Asian countries.
According to Ambassador Manuel Teehankee in Geneva, our World Trade Organization (WTO) binding rates are similar to those of Thailand. However, Thailand’s applied or actual tariffs imposed on industrial and agricultural products are three times higher compared to the Philippines. And yet, Thai exports are doing much better. Tariffs of other export dynamos such as China, India, Brazil and South Africa are even higher.
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Moreover, Philippine industrial and agricultural producers have to contend not only with the super-low tariffs, but also with the widespread problem of smuggling, both outright and technical.

An example of the latter is graphically illustrated by the case of the shoe industry. Between l998 and 2002, the volume of shoes imported into the country rose to 2,227,121 pairs, from 41,417 pairs, and yet the total value of duty and VAT revenues collected by the government for these imported shoes increased to only $338,141.00, from $118,656.60 in l998. This is due to the under-declaration of the values of shoes, with leather shoes being valued at only $0.50, way below the value of the leather material used. Such undervaluation is made possible not only by collusion among the importers and some Customs officials, but also by the lack of more stringent policy guidelines on how to implement the shift to transaction valuation under the WTO agreement. Ironically, the tariff rates for shoes in 2003 were 7% for the Philippines, 40% for Thailand and 45% for China.

The twin problems of smuggling and super-low tariffs, aggravated by the high cost of doing business in the Philippines, have seriously injured and caused the collapse of many domestic industries (e.g., textiles, tires, batteries, vehicles, automotive parts, tiles, glass, etc.) and agricultural producers (e.g., onion, garlic, vegetables, etc.). Hence, many unions today are in crisis too because many of the unionized firms have either closed or downsized operations.

Also, the major export industries, mainly electronics and garments, are not faring well lately. The electronics sector has not been growing since 2000 because of the global softening of demand and the growing attractiveness of China and Vietnam as alternative relocation sites for electronics assemblers. On the other hand, the quota-driven Philippine garments industry has been shedding tens of thousands of jobs because the quotas are gone and because it is unable to compete with the Chinese, Indian, Pakistani and Vietnamese garments producers, except in the T-shirt and denim categories.

These developments require a serious rethinking of the existing development strategies, including a re-thinking of the fiscal program. The taxable sector of the economy, represented mainly by the industrial sector, keeps on shrinking, while the informal sector, which is largely untaxed, keeps on expanding.

Recently, a number of NGOs formed an informal coalition in support of tariff re-calibration. The idea is not to return to old-style high-tariff system of protectionism, but to equalize Philippine tariffs with other countries in order to make the business playing field fair and equal for the local industrial and agricultural producers. The proposal for tariff re-calibration also got the enthusiastic support of the business sector through a resolution adopted during the recent ECoP conference.

This is a good beginning. But it is also abundantly clear that what is needed is a major overhaul of the country’s trade and development regime, if we want to arrest the jobless and industry-less growth process and catch up with our fast-growing Asian neighbors.

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