Introspective
Business World, 11 April 2016
In one workshop called FIL 2040, Friday, 8 April, organized to ruminate over possible futures for the Philippines which has been mired in the last 40 years, as it were, on south side of mediocrity, I was gladly surprised that Diosdado ‘Dado’ Banatao was a resource person. Dado is a rare Pinoy who made it big in Silicon Valley, way more prestigious than in the pugilist’s ring in Las Vegas. He was coming to us during the workshop via video feed all the way from California. The soup du jour was how to engineer in the next 25 years a breakout of the long-term secular decline that pushed the Philippines to the bottom of the Asian league table
Dado had many interesting points but three in particular stuck with me. The first is that he asked Michael Spence, an Economics Nobel Memorial Prize winner and a fellow member of one of the many boards that Dado graces, how the few countries that made it to OECD status in fact did it. Spence’s answer was succinct: “Inclusive growth.” That is a call familiar to the gathered luminaries in the workshop but the timing of its recall cannot be more bang on. Just announced in the broadsheets of the day was that Tessie Sy and Robina Gokongwei had made it to the Forbes list of Asia’s most powerful women. They represent both wealth and power. The controversy of the day also just happens to be the Kidapawan incidence where farmers or so-called farmers clashed with police resulting in two farmer deaths and two policemen in coma — the undercurrent being that poverty and hunger consequent to the El Niño drought was driving people to desperate and even illegal measures such as blocking a highway. The night before the workshop in a BBC interview, Thomas Piketty of Capital fame was saying that inequality breeds social unrest which stops growth, reaffirming what Berg and Ostry (2011) had shown that income inequality shortens episodes of growth. Fair sharing of the harvest or in the Kidapawan’s case, of the no-harvest, ensures that growth is sustained. In the Philippines, sustained rapid growth of decadal variety is still an aspiration. That poverty incidence still remains high in the Philippines should surprise no one.
The second point is that many large reputable companies — even those that had abided with us for some time — had left the Philippines. Such, for example, is Intel, the first semiconductor company to locate in the Philippines in 1974, which relocated to Malaysia in 2010. No wonder, our share of direct foreign investment is dismally low what with such news as Intel exit, the PIATCO fiasco, and the Tampakan Gold and Copper Mine fiasco which aborted 2,000 high-paying stable jobs. The flight of foreign capital is happening in the traded goods sector.
Dado’s third is that, on the innovation league table, we are fast headed for the dregs in the region. The second and third points are systematically related. Innovation in the J. Schumpeter’s view is the engine of sustained growth. But the incentive to innovate is in the A. Smith’s view a function of the size of the market. The returns to innovation is pittance in narrow domestic markets. Thus, generally, innovation is more rapid in firms whose market is global, implying that these firms are in the traded goods sector especially the merchandise export sector. But the Philippine GDP is 57% Service Sector which sell to the narrow domestic markets prone to rapid saturation.
Manufacturing is just around 20% of GDP. Plus, there is the Baumol Effect which states that the Service sector as incubator of innovation is a comparative midget. Putting it colorfully, you don’t expect innovation in barbershops! Thus, the dearth of innovation and the flight of tradable sector foreign investment are slices of the same loaf: A policy regime that punishes investment in the traded goods sector. This policy regime includes the land policy (CARP) which continues to drive private capital out of Agriculture and Agri-Industrial concerns. It also includes an exchange rate regime that fails, in D. Rodrik’s weak institutions view, to level the playing field for Manufacturing and Agriculture and instead makes smuggling of agricultural products (rice, pork, onions and garlic of recent controversy) very profitable. Choking the tradable goods sector that generates the durable and high-paying jobs chokes poverty reduction.
More apropos, wealth sharing in the Service sector where capital gains is king is inherently more unequal than in the Manufacturing sector where value-added is king.
For the long-term performance of the Philippine economy I prefer the label development progeria: the industrial share dynamics in a low income economy that mimics the industrial share dynamics of high-income mature economies. In high-income mature economies, the Service sector share rapidly forges ahead while the Manufacturing sector retreats dictated by logic of the factor price movements and the shift of consumption patterns consequent of high incomes. Economic growth among these slows down considerably. Development progeriacs experience a rapid growth of the Service sector share and the retreat of the Manufacturing share but without the high incomes. What’s more, as in affluent OECD countries, growth among progeriacs is slow and convergence is blocked. Priority one: stop choking the traded goods sector!
How to give Manufacturing a breathing space? Daway and Fabella (2016)* explored this question using cross-country data for countries with per capita incomes less than $10,000 and found that an exchange rate policy favoring the traded goods sector, governance quality, and the investment rate (GFCF/GDP) are strong positive correlates of the Manufacturing share while the growth and the capacity of the Services to absorb labor are strong negative correlates. If we are to break the cruel chains of development progeria, we shall have to unshackle Manufacturing and Agriculture.
*S. Daway and R. Fabella [2015] “Development progeria: the role of institutions and the exchange rate”, Philippine Review of Economics December 52(2). Available upon request from ssdaway@econ.upd.edu.ph.
