Reviewing our trade and industrial policy

Lawyer Nepomuceno Malaluan is Trustee at Action for Economic Reforms and member of the trade working group, Focus on the Global South Development Roundtable Series. This piece was published in the September 26, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

 

Recently, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) released its 2011 Asia Pacific Trade and Investment Report titled “Post-Crisis Trade and Investment Opportunities”. Dr. Rafaelita Aldaba, Senior Fellow of the Philippine Institute for Development Studies, presented report highlights in a forum that also discussed how the identified opportunities could work for the Philippines.

It was pointed out that the Asia-Pacific region has bounced back strongly after the global economic crisis. Export and import values in the region have returned to pre-crisis levels and investment flows are recovering. The report identifies three major areas of emerging trade and investment opportunities: rising intraregional demand; trade in services; and climate-smart goods and technologies. Protection was identified as a risk factor, both border and behind-the-border mechanisms.

Given the serious global economic stresses re-emerging in Europe and the US, the report’s post-crisis framework may need adjustments now. Still, even assuming the Asia-Pacific resilience sustains the identified opportunities, it is questionable whether the Philippines can actually take advantage of these opportunities.

For one, the report shows our trade performance lags; the Philippines is a persistent merchandise trade deficit country throughout the past decade. Relative to our ASEAN comparators, we perform poorly in exports. In world exports ranking, Malaysia ranks 22nd, Thailand 25th, Indonesia 30th, and Vietnam 40th. We rank 55th.

Relatedly, our production base for trade has been eroded in recent decades. Instead of taking off, industry share in GNP has dropped, along with agriculture. What has been robust is services, coupled with the strongly rising share of net factor income from abroad, in the last 15 years.

This trend in our economic structure reflects capital and labor movements. The country’s 40 richest have been diversifying away from agriculture and manufacturing into services and non-tradables, particularly utilities, property, retail trade, and infrastructure.

A big chunk of our globally competitive labor is going abroad, for lack of opportunities here. That leaves a large section of less mobile labor trapped in struggling sectors. In 2010, of the 36 million employed, 5.7 million were farmers, forestry workers, and fisherfolk; 11.6 million were laborers and unskilled workers. Combined, they make up almost half of total employed. This vulnerable labor segment is marked by lack of education, with 8.6 million having education zero to grade six education at most.

It is also questionable whether the country’s policy track enables it to take advantage of the opportunities identified.

For one, our trade liberalization strategy has been too aggressive for our own good. Compared to our ASEAN comparators (except Singapore), and even across Asia-Pacific, our tariff is one of the lowest in simple average. The Philippine WTO tariff profile, in comparison with its neighboring developing countries in 2009, shows it has made far deeper tariff reduction, especially in agriculture. Since the Philippines was an early starter in unilateral liberalization, the difference may even be wider in earlier years.

At the level we liberalized, we may have run agriculture and industry to the ground.

For another, our policymakers have been too concerned with the rules of the game, not how we play the game. Perhaps, instead of viewing protection as a risk, we should look closely at how the various border and behind-the- border mechanisms are being used by the other players of the game. Examining what is generically and badly labeled as protectionism could in fact show a sound industrial policy and strategy for taking advantage of the trade and investment opportunities outlined by the report.

Just to give an indication of this, let me quote excerpts of the recommendations in a joint 2010 study by the Office of the National Economic and Social Develop Board of Thailand and the World Bank, titled “Industrial Change in the Bangkok Urban Region”:

“The region should aim to build capabilities in a number of areas—in the manufacturing sector, autos, textiles and food processing are the most promising. In services, logistics, marketing, design and publishing could become important sources of growth and co-create value with manufacturing activities. Their prospects would be enhanced through localized clustering that boosts productivity and innovativeness.

x x x

Localized clustering and innovation that would promote sustainable growth are within reach. Whether this occurs will depend upon four factors, assuming of course that the business climate encourages investment.

(1) A well-articulated and strongly championed government strategy for the development of the Bangkok urban region that emphasizes the role and functions of clusters and wins the active support of other major stakeholders.

(2) Major local firms – and a pool of smaller firms augmented by start-ups with innovative products or services – must set the pace and with policy encouragement, make technological advances central to their competitiveness. x x x

(3) Existing and new firms will need all the help they can get from two sources. First, two or three universities in the Bangkok urban region must achieve levels of excellence in teaching and S&E research comparable to the best in Asia if not the world. In particular, they must focus on engineering and bioscience departments that can cater to the needs of the leading industries and become a source of entrepreneurship as well. Efforts by universities, when matched by a change in attitudes of management, can together accelerate the tempo of technological change and push Bangkok’s industrialization to the next level. Second, managers and entrepreneurs will need assistance from providers of finance, of research, of design and other services. These are adequate but they must become world class…”

Implicit in just these few excerpts is a government taking an active role in guiding the direction of industry. In contrast, the new Philippine Development Plan shows that in the economic sphere, our strategy still eschews intervention. But more than 20 years of  such strategy has given the country few outcomes to brag about.

No comments yet.