Crossroads (Toward Philippine economic and social progress)
Philippine Star, 17 October 2012


Two newsworthy events in industry took place last week. The Philippine Chamber of Commerce and Industry had its yearly convention and, as usual, presented its list of problems that it wants the government to do to help industry in the country. The second event is the inauguration of a new manufacturing plant of Nestle, the Swiss multinational giant, in Batangas worth nearly P5 billion in investment .

These two items makes me reflect on the country’s industrial experience and hopes for the present. So, I review early independence industrial policies today.

The Philippine Chamber of Industry. The PCI was the youngest, but preeminent among the business chambers in the country that existed during the early decades of independence. Other influential business groups then had their origins during the American colonial days.

There were in fact more traditionally powerful chambers that influenced economic policy in those times. The more dominant and historic PCC (the Philippine Chamber of Commerce) represented the commercial interests of Filipino businessmen during the American colonial period. In the 1990s, the PCI and the PCC merged – and became the PCCI – to create a single voice for Philippine business. The American Chamber of Commerce (ACC) was the other major chamber during that period.

As long as the Americans were in charge of the country’s destiny, the ACC’s voice was heard. At the start of Philippine independence in 1946, the ACC demonstrated its influence on Washington D.C. as the US government pushed for the parity amendment to the Constitution in exchange for war damage payments and a long term economic adjustment based on bilateral trade relations. That parity amendment in 1947 gave a 25 year period of enjoyment of the “restrictive economic provisions” of the Constitution to American citizens.

As the era of import and exchange controls took over, a controversy arose in economic policy questioning the exchange rate policy. The overvalued peso penalized the country’s export earners and shifted support to the industrial sector.

Thus, during the two decades of independence when the ill effects of industrial policies based on import and exchange controls began to be questioned, a clash of interests of the PCI and the CANR (Chamber of Agriculture and Natural Resources) came out in the open and questioned the benefits of the import substituting industries. For a long period, the policy dilemma was resolved to help the industrialists.

Protectionist industrialization. Protectionism began with the nationalist provisions of the Philippine Constitution. As new industries were set up, more privileged promotion of import substituting industries took place. During the height of protectionism, “Filipino First” became a rallying cry of politicians and new industrialists.

 When the wisdom of such policies began to be questioned, the entrenched industrial and economic interests profited from the alliance with the political Left. They capitalized on nationalism as a political weapon against policy change. However, the industries that were nourished had high production costs.

Though these industries substituted imports in the domestic market, they were highly dependent on foreign inputs. Also, the final products often did not measure up to the test of international competition. They only produced profits for the industrialists, thanks to incentives, the over-valued peso and exchange rationing.

From yet a different perspective, Filipino consumers were paying a high price for the goods that were being produced at home which they could import more cheaply. Consumers did not flinch even though they were much disadvantaged. Many of them were workers who were employed in the protected industries. But the strategy also had limited employment impact as the markets did not grow well enough to create new employment.

Industrialists defended this state of affairs through the infant industry argument. They contended that eventually, through experience and growth of the internal market, the same industries would improve over time. But as proven through the years, their reliance on support from the government did not change their constant demand for protection.

These interests also were able to prevent competition in the domestic market by effectively blocking the entry of foreign capital in banking, industry and commerce. Assisted by the nationalistic and protectionist clause in the political constitution, the end of the parity provision meant that some industries in mining and public utilities as well as land ownership would be available to Filipino control (60-40 clause) .

Consequences of parity: before and after. In the meantime, although the approval of parity rights was premised on the encouragement of more American investments, those predictions did not fully materialize. One reason was that nationalistic policies like retail trade nationalization and the presence of exchange controls limited American investments. Even the public utilities under American hands, notably the telephone company and the electricity franchise (Meralco), did not enjoy capacity upgrades that improved capacity with the result that their services deteriorated over time.

By the end of parity rights (in 1973), the utilities had been brought into Filipino control. The underinvestment in the utilities continued even under Filipino hands. In fact, those who took control of the utilities – mainly some of the financial and industrial kingpins in the country – did not have sufficient capital to expand the capacity of these utilities. Another complication in the change of ownership was that the ownership control for these utilities stimulated political struggles among the key stakeholders.

As world trade approached greater internationalization especially after the 1990s, local industries found themselves somewhat still insular in character. They were unable to make the transition toward the challenge of market competition. Many of the import substituting industries collapsed under the pressure of import competition as the government undertook economic liberalization. The period of retreat in industry began with the failure of many uncompetitive domestic industries as the government adopted more open economic policies.

According to the national income accounts, industry (which included manufacturing) was 31.4 percent of GDP (gross domestic product) in 1960. By 1980, this became 40.5 percent of GDP. The decline of industry with respect to GDP was evident by 2000, at 33.8 percent of GDP. Finally, in 2010, industry contributed even less, 33.8 percent of GDP.

Separating manufacturing from the broader definition of industry (which included public utilities), the contribution of manufacturing to GDP during the same years: 1960. 1980, 2000, and 2010 were (all as percent of GDP, respectively): 24.8, 27.6, 24.3, and 22.2. The decline was most marked after 1980. The contribution of manufacturing to GDP fell from 27.6 percent in 1980 to 22.2 percent in 2010, 20 years later.

Actually, industry and manufacturing have grown in absolute size. After all, the total economy measured by the GDP was expanding by an average of 4.5 percent per year. But the expansion of some sectors, like services, and some agricultural industries had outpaced the growth of industry and of manufacturing.

(To be continued next week.)