The author is an associate professor and the chairman of the Economics Department of the Ateneo de Manila University. He is also the editor of the book, “The Filipino Worker in the Global Economy,” published by the Philippine APEC Study Center Network.

It may be a surprise to some of you, but the Philippines ever since had
been engaged in a competitive strategy. Protectionism – the policy of
protecting domestic industries in order to create a capital-intensive
industrial base – was a plan implemented by the country aimed at
generating continued growth, and ultimately spurring progress and
development. Unfortunately, the outcome of such a policy was the
opposite of what we were hoping. Trade protection (or the whole gamut
of policies from import substitution to “competitive clustering” and
“picking out winners”) is not based on an economics of national
interest, but really formulated within a politics of special interest.
Politics can sometimes produce economic policies that are in fact
irrational but made to look brilliant. To see why one must go beyond
the abstract concepts of gains and benefits from free trade and
competition toward a specific listing of the costs and benefits of
trade protection and competitiveness.

The main difficulty with these previous strategies on competitiveness
is that eventually these merely cause a transfer of resources away from
unprotected industries toward those that are considered virtuous. In
the process, these create a disincentive to be more efficient and a
hindrance to “learning by doing” since these protected corporations
will in the process profit anyway. In effect, rent seeking is
engendered. Consumers end up paying more than the costs of “cheaper”
foreign products, and more importantly, the effect on growth and
productivity is restricted.

The key question really is what determines and sustains competitiveness
in its truest sense. To some extent, government policies and
intervention influence competitiveness. However, more predominantly, it
is the available set of resources in a country that will indicate which
industry will have an advantage. If an industry uses a resource that is
more abundant in the country, the product will cost lower than those
similar products in other countries where such a resource is scarce.
Hence, because of trade, industries will benefit from the higher prices
found in the other countries. Consequently, the country becomes
competitive because of its specialized resources that are abundant or
that can be obtained at a lower cost.

For countries with abundant labor supply, competitiveness suggests that
workers will inevitably be paid at a very low level, and be forced to
work in poor working conditions. I say inevitably because we know that
firms are not in the business of caring for their workers’ health and
nutrition. The workers will be paid at the minimum, just enough for
them to remain in the firms’ employ given the other alternatives. These
alternatives of course may be the worst states of conditions, for
instance, when people may in fact voluntarily work in garbage dumps
such as Payatas and Smokey Mountain.

Yet, whenever competitive export growth is experienced, a significant
measurable improvement in the lives of the ordinary workers is found.
Partly, this is because, with a larger market, particular firms will
now be forced to raise wages in order to attract workers to join them.
More importantly, continued export growth creates “ripple effects”
throughout the whole economy. With lesser pressure on land, rural wages
will begin to rise. With the growth of the manufacturing sector, the
unemployment surplus in the urban areas will shrink. As the export
growth becomes even more established, wages will sooner or later be
almost at the same level as developed countries. This will then lead to
lesser families working and residing in the garbage dumps.

If you are not convinced, all you have to consider is the fact that
wages here in the Philippines, at least in several industries that have
gained a foothold in world market, such as those in information
technology, are no longer considered cheap even as these industries
retain their competitiveness. Thus, higher wages and competitiveness
are not contradictory.

Nevertheless, higher wages must be accompanied by higher labor
productivity. This means that each worker should produce additional
amounts of output. With higher productivity, firms can afford to raise
wages and remain competitive since the workers are able to produce
substantial amount of goods that can be sold in the markets, thereby
earning higher revenues for their employers.

Labor productivity in turn is improved by human capital investments,
such as education, health, nutrition, and housing, as well as access to
capital and technology. Raising labor productivity will then require a
substantial amount of public and private investment, and perhaps a
significant degree of wealth distribution for households to raise their
human capital.

This last point suggests that while competitiveness is a prerequisite
to economic development, it is not sufficient. A full complement of
institutional reforms will be required in order to reap the gains of
trade openness. In fact, institutional reforms have to be pursued even
without agreeing to integrate with world markets, and promoting a
trade-oriented policy is definitely not a substitute for these reforms.
Of course, substantial costs for institutional reform must be incurred,
and these need to be spent whether we open our markets or not. The
value of competitiveness, however, is that it allows us a greater set
of options for building our resources and more importantly forces us to
address these issues of growth, institutional reform and distribution
more efficiently. In other words, competitiveness would not be an end
in itself, but the means towards more sustainable reforms.

Unfortunately, some manufacturing industries in poor countries, like
the Philippines, may have to start at lower real wages to be
competitive. With the subsequent gains coming from trade owed mainly to
workers’ efforts, the necessary taxes and subsidies should then be
established in order to allow eventually an improvement in productivity
and a broad-based improvement in the workers’ welfare. Far from being
the cause of workers’ hardships, a sustained competitive policy,
followed by institutional reforms to redistribute its benefits, is the
only feasible strategy for improving the well-being of the Filipino
worker. This is what we should prepare for as we begin our recovery in
the next few months.