Business World, 23 January 2011

Among the paradoxes of Philippine economy is its surprising emergence as a service economy without having gone through a period of industrialisation. Sometime in 1997, services overtook agriculture as the economy’s largest employer. Services now claim the largest share of employment: 51 percent, compared with agriculture’s 34 percent and industry’s even smaller share of 14 percent. Meanwhile, the shares in GDP of services, agriculture, and industry are 42, 18, and 32 percent, in that order (more about this later).

You might think this is all because of the burgeoning business-processing phenomenon, but you would be wrong: services surged well before there were any call-centres.

In the typical pattern of industrialisation, industry first overtakes agriculture before itself being surpassed by services. That is what has been observed historically both for the West and Asia. The Philippine paradox is that even as agriculture declined rapidly, industry stagnated, so that services quickly outstripped them both.

So what really happened and why? Here’s a reconstruction.

Half of the blame must be laid at the door of agrarian reform. Not land redistribution per se, but rather the time it took to do it. Land reform in Japan and South Korea took all of three years. Taiwan’s reform was already extended at eleven years. In the Philippines, however, agrarian reform has already taken more than five decades. Indeed by the time the CARP extension ends in 2014 the country will have been pre-occupied by land reform for almost sixty years. (Why it has taken so long is another story.)

From first principles, however, we know that when property rights are fuzzy or under question, little investment is likely to occur. More than fifty years of uncertain land-rights was bound to drive private capital and credit away from agriculture. No new investment, means little growth and employment, so it is no surprise agriculture has the lowest productivity of the economy’s branches. Low productivity in turn leads to low incomes, so the unsurprising result is an exodus out of traditional agriculture. (To check the productivity of sectors, divide their GDP shares with their employment shares. The answer is that sector’s labour productivity relative to the overall labour productivity. It is about 1 for services, 2.3 for industry, and 0.6 for agriculture.) With industry more than twice as productive as services, why are not more people employed there?

The problem is that industry cannot take in the agricultural exodus. Formal employment in industry has long been hobbled by all sorts of laws and rules that specifying work conditions, from minimum wages, to bonuses, to social security, Medicare, and housing, to hiring, firing, and retirement. These are rules only the largest and most productive firms can afford, so it is no wonder the industrial sector consists only of two types of firms – those too large to hurt, and those too small to matter.

Shut out of productive industry, then, the surplus population has access only to the most un-structured and un-regulated alternative, namely, self-employment and primarily in services. Entering services is easier than entering industry, since it requires much less capital. Not finding employment, people create their own. As much as 43 percent of the work-force today consists of the self-employed and of unpaid family workers, many of them having morphed, among others, into household help, kuliglig and jeepney drivers, sidewalk vendors, superfluous shop attendants and wait-staff, biyaheros and watch-your-car boys – and the ever-versatile lumpenproletariat. They have proliferated not only in the metropolises but even in smaller urban centres. Such services unfortunately have low productivity, low incomes, and low prospects.

Notwithstanding the brave new world of the BPOs, therefore, much of the rise of services in this country thus far has signified ambiguous progress at best. Put it another way: the BPO sector was boosted by a deregulation (of telecoms) and technological progress (digital information and communication). Fat lot of good that does the pedicab driver, who if anything has backpedalled his way from motor technology to human power!

With agrarian reform ending in 2014, it remains to be seen whether country can still retrace its steps. Can agriculture get a second chance when the land market opens up again? Will capital then enter agriculture and will more agro-processing jobs open up to reabsorb people now trapped in low-productivity services? Can industrial arrangements be made more flexible so that even small and medium firms get a chance to expand industrially? Can we still retrace our steps back to the “right path” (tuwid na daan, as PNoy puts it) and get more balanced development?

But I forget: such questions may be too hard and distant for a society whose concerns rarely extend beyond the latest deadline, headline – or bottomline.