Crossroads (Toward Philippine economic and social progress)
Philippine Star, 1 June 2016


Employment creation is the most effective weapon against poverty eradication. There are very hopeful signs that the incoming government of president-elect Duterte will move well on this front.

However, the practice of contractualization, which president-elect Duterte wants abolished, requires a broader study of the inconsistencies and rigidities of the labor market in order to foster the nation’s greater good.

Concerning this issue, I discuss three elements: (1) raising the demand for jobs by referring to investment and growth policies; (2) lessons of history, taking into account the typical East Asian model of labor market policies; (3) inconsistencies and inflexibilities of the current regime of labor market policies.

Growth policies to raise the demand for employment. There are announced initiatives by the new government that are likely to raise the demand for jobs in the whole economy.

Lifting or amending the restrictive provisions to foreign direct investments in the Constitution, especially if done early in the term of the new president, would open the country to more foreign direct investments.

This will reverse the limited role of foreign capital in the growth of the Philippine economy. This could accelerate even the performance of the overall economic growth rate beyond the six percent average of recent years.

Although foreign capital is allowed participation up to 100 percent in lines of activities in the export industries and in a few pioneer sectors of industry, in general, the participation of foreign capital in the domestic economy is restricted.

Such restrictions have little validity today. The economies of other ASEAN countries host many foreign companies that export to the other member countries of the region. Raising the inflows of foreign capital to the country to produce for the domestic Philippine market also strengthens the competitive position of the country in ASEAN.

The jobs created by foreign direct investments would be more permanent and higher-paying than those induced by domestic enterprises mainly selling to the domestic market. These are in addition to those generated in industries that were hitherto restricted mainly to Filipino capital before.

Thus, new employment is likely to be more widely spread across the organized sectors of the economy – in commerce, agriculture and industry.

Lessons of East Asian history in labor markets. In general, the lessons learned from labor market policies are instructive for the Philippines. This includes the labor market policies adopted by both China and Vietnam — two Communist countries that have succeeded in accelerating economic growth and the welfare of workers over a short period of time.

The typical East Asian model of economic growth has relied on focusing economic policies on generating jobs through the high investments in industry and agriculture.  The labor market policies paid less attention to “minimum wages.” They emphasized attraction of industry, of foreign direct investments, and of labor welfare policies based on creating sustained jobs.

When they passed minimum wage regulations, the “minimum” was based on a truly low minimum wage for the typical unskilled workers and for young, inexperienced members of the labor force. It was not “high” to accommodate a “living wage.”

Countries that have followed this approach in the early stages of their industrialization within East Asia include South Korea, Taiwan, Hong Kong, Thailand and Indonesia. (We started the other way, a high minimum wage.)

By emphasizing the generation of jobs, the governments encouraged the growth of enterprises that became economically viable and profitable.

China – the outstanding “miracle” economy of East Asia – abandoned its strict culture of Marxist economics and embraced capitalist market models. The government used low wages as the attraction point for enriching the whole country.

The unlimited labor supply of China was used as the means to build state power through industry – by inviting foreign capital to come and exploit it to the fullest to open export markets. Along with this strategy, Chinese enterprises also grew and became part of the large expansion of the Chinese economy.

Such is China’s rapid rise in incomes and productivity, all within three short decades. (The improvement in Chinese living standards came when its accumulated export surpluses led to the rapid appreciation of the Chinese currency. This was the fruit of its industrialization program and the opening of its economy to the world.)

Vietnam – an economy based on the same economic system as China – has achieved growth by practically copying many of the measures adopted by China to raise its position in the world economy. (Today, Vietnam is a stronger economic partner of the United States compared to the Philippines!)

Reforming the labor markets and rendering it more flexible. Current labor market policies in the Philippines are geared to protecting labor and not to promote the widest employment of the labor force.

The move to abolish contractualization provides an opportunity to reform the inconsistencies and to introduce the objective of generating wider employment. A careful assessment of the labor code might call for an effort to improve existing policies in favor of generating more employed workers.

Moreover, there are typically many industries that require labor sub-contracting in order to manage their operations efficiently. Many of these industries actually pay higher than the minimum wage and are deemed outside the range of the problems posed by contractualization as a practice.

A major provision of the labor code is the requirement that workers who are employed beyond six months are required to be made part of the “regular” workforce of the firm.

All the costs and perquisites of regular employment are added: contributions to social security, workmen’s compensation, Pag-ibig contributions; 13th month pay; overtime and holiday pay; standard leave with pay; and of course, pay at least equal to the minimum wage.

The reform of the labor marker requires understanding the hard choices for national policy. It boils down to asking the question: which is more important, to generate more employment opportunities for the many in the labor force who are seeking employment or to accommodate the demands of those who are already employed for improved wages and protection by state action.

For instance, organized labor is demanding an increase of the minimum wage and abolishment of regional minimum wages. We might recall that regional wages came about during the active labor unionism of the late 1980s. Then, labor disturbances drove away the foreign investors in the local garments industry and left many workers unemployed.

The country’s labor situation would improve more quickly by following the track of the East Asian model described earlier.