From Lazy Liberalization to Lazy Protectionism

This piece is critique of the President's recent pronouncements to slow
down tariff reduction schedules. It is argued in this piece that by
merely focusing trade policy, be it liberal or protectionist, the
government fails to address the roots of Philippine industrial atrophy.


The author is Trade and Industrial Policy Analyst of Action for
Economic Reforms, and Instructor at the Department of Economics, School
of Social Sciences, Ateneo de Manila University.

That unbridled globalization is no longer in vogue is not news to many
people. The swift opening up of domestic markets to foreign competition
has failed to deliver what it once loftily promised… economic growth,
prosperity, and development. In truth, the current brand of
globalization has only served to highlight inequalities within and
among nations, and has only exacerbated economic vulnerabilities and
social cleavages that continue to threaten societies and nations today.

However, to hear President Macapagal – Arroyo declare that she too has
come to realize this fact is definitely news. A strong proponent of
liberalization programs in the 1990s, the President's recent
declaration to slow down the reduction of tariffs "to encourage the
manufacturing sector and signal industrial policy" sent market
fundamentalists into cardiac arrest, made disciples out of industry
leaders, and left most progressive thinkers bemused, if not downright
skeptical. Is this an honest-to-goodness shift in policy framework, or
is it simply a signal of the administration's kowtow to pressure or
particularistic interests?

The President's pronouncements are without a doubt a spark of hope for
many of our industries. In the absence of supporting measures to ensure
business viability and transformation, liberalization has led many
local industries to atrophy, and in the face of competitor countries
like China, India and Vietnam, has made each of us witness to the
erosion of our competitive advantage in cheap labor. One has to ask,
however, whether protection in the form of slower tariff reductions, in
and by itself, will be enough to guarantee revitalized industries and
better quality jobs.

The fact of the matter is that liberalization and protection are but
two sides of the same coin. Each has its own claims to industrial
promotion, the former promising more efficient production and resource
allocation, the latter ensuring better and less risky profit incentives
for business. Each too has its own downsides: liberalization may lead
to destruction of presently inefficient industries and job loss, while
protection nurses these inefficiencies and allows them to persist. Both
suggest a certain attitude towards the free market: openness or
distrust.

The foremost truth that binds the two, however, is that neither is
sufficient to promote the growth and development of industry. The
clearest and most resonating lesson of the East Asian Miracle is that
coherence and completeness of a country's industrial promotion
strategy, which definitely includes but should not be limited to trade
policy, are of primary importance.

Not all industries that are presently uncompetitive are inherently
uncompetitive in the longer term if they are given the time and
resources to develop new skills and master new technologies. An equally
crucial point to emphasize, however, is that there are certainly some
inherently uncompetitive activities that deserve to be closed down
immediately, and some that can be exposed immediately to international
markets. In between lies the bulk of manufacturing industry, which has
to undergo a process, varying in duration and content by activity, of
"relearning" and new capability acquisition, after which it can cope
with import competition and establish a position in export markets.

Therefore, rather than taking liberalization alone or protection alone,
the strategy should be to customize industrial policy according to the
specificities of each industry, guided by a realistic assessment of
their competitiveness potential and a clear evaluation of which are
viable in the medium term and which are better left to disappear in
view of the costs involved. In short, the best way to approach
industrial strategy is still to gear it directly to enhancing
industrial competitiveness.

Given however that industries have varying levels of competitiveness
potential, and that resources and skills in the government and the
economy at large are very limited, it is best to adopt a targeted and
selective approach. As targeting and selectivity require huge amounts
of information, this strategy should clearly be developed after a close
study of and in collaboration with the industrial sector. This
admittedly involves some degree of inspired guess-work, but even the
Nobel Laureate Joseph Stiglitz asserts that making mistakes is better
than not taking risks. Such should perhaps NEDA Director General Neri's
top priority. Moreover, the programme should be pre-announced so that
enterprises have time to adjust, and once announced, government should
stick to it to ensure its credibility. Government must not consent to
backsliding that allows inefficient performers to survive indefinitely
and that creates room for rent-seeking activities and corruption.
However, an important caveat as well is that all interventions have to
be designed flexibly and monitored constantly so that mistakes can be
rectified as they become apparent. There are good examples in the
private sector on how to do this, but perhaps the most effective check
is to impose performance requirements (e.g. export growth) and to make
officials more directly accountable. Finally, and perhaps most
importantly, such a programme must be situated within a broader,
long-term national development framework that is cognizant of socially
sensitive and essential industries that, regardless of competitiveness
and efficiency considerations, deserve to be protected and nurtured.

Moreover, in light of the hostile stance of the global market towards
selective interventions, a sincere effort at industrial promotion must
also include the pursuit of more proactive and aggressive negotiation
position in bilateral and multilateral trade agreements. This would
mean, in the immediate term, closely watching and actively
participating in the discussions running up to and during the Cancun
Ministerial of the World Trade Organization.

Unfortunately, there is little evidence that the President is willing
to play a more activist role in industrial promotion beyond simply
sticking to bare minimums. In the same speech where she made her bold
declarations against unbridled globalization, she too said,

"Officials… are the last people who should second-guess a business
activity. At most, they should monitor businesses for the harm they
might do the community. But that is all. … Let the market separate the
good from the bad."

At the end of the day, while tariff barriers may offer some protection
to domestic industries, their fate still largely relies on the market…
the same market that recognizes no potential, knows no time dimension,
nor admits any of its failures in reality. It seems that the
President's therapy for the havoc that lazy liberalization wreaked on
Philippine industries is nothing but lazy protectionism. For in the
absence of a clear and comprehensive strategy of harnessing the
potentials of Philippine industry, lazy protectionism is better than
lazy liberalization in one and only one way… It paves the way for
industries to lobby government officials for their own particularistic
interests, fattening the pockets of those who wield the power to
protect.

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