Counting chickens

President Aquino III expressed his intention to revive Philippine manufacturing. That’s welcome news. But instead of counting chickens before they’re hatched, he should focus on fixing the things that need to be fixed to make the Philippines an attractive place for foreign and domestic manufacturers. The to-do list is quite formidable, however.

Many analysts are saying that quite a number of foreign firms in China are looking for an alternative site for their manufacturing activity. The costs of labor in China have become prohibitive. Factory jobs have become unattractive for young Chinese, a consequence of the one-child policy of the past, who have become more educated and more attracted to non-factory jobs.

In the past and at present, China is still the world’s number one manufacturing capital of the world. It managed to suck in factory jobs from all over the world. The Philippines is no exception, As a result, manufacturing has progressively shrunk since the 1980s.

The recently re-estimated data series, starting with 1998, showed significant erosion of manufacturing activity. The share of manufacturing to total output contracted from 24.5% in 1998, the height of the Asian financial crisis, to 23.7% in 2005 and then to 22.2% in 2010. Last year, 2011, its share contracted further to 17.1%.

This progressive disappearance of manufacturing in the local economic landscape is unfortunate. Why? Because the sector has not been a source of steady, decent-paying jobs in the past.

In January 1995, the number of workers in manufacturing as percent of total employed workers was 10.4%. This ratio went down slightly to 9.8% in January 1997, up again to 10.3% in January 2001, and down again to 9.5% in January 2005. In January 2012, this ratio was sharply down to 8.1%.

The number of jobs lost in manufacturing, expressed in today’s work force is enormous. From 10.4% in 1995 to 8.1% in January 2012, a loss of 2.3 percentage points, roughly 860,062 factory jobs. This incremental job loss is several times over the number of jobs in the business process outsourcing industry.

No doubt, the revival of manufacturing is a goal worth pursuing. It should be a key element of any sustained, strong and inclusive growth strategy. And it is exactly what a labor-surplus economy like the Philippines needs.

Sadly, our overeager economic managers risk building false expectations once more. The reality is that the revival of manufacturing will not happen overnight, and not without strong positive actions on the part of the government. There are lessons to be learned from the premature announcement of the public-private partnership (PPP) initiatives.

Here are a few of the things that the government has to fix before it could expect foreign manufacturing firms to come to the Philippines.

First, it has to fix the expensive costs and unreliable supply of electricity. The consensus is that this problem will get worse before it gets better. The long-term solution to the power brownouts and expensive power costs are yet to be finalized and put in place. The development of cheaper sources of energy — hydro and geothermal — could take many years.

The short-term measures are going to lead to higher, not lower, power rates. Power barges are more expensive sources of electricity, and with soaring oil and oil product prices in the global market, the rise in power rates is likely to be exponential rather than linear.

Second, the government has to address the high costs of doing business in the Philippines. A recent joint publication of the World Bank and the International Finance Corp., Doing Business 2012, published on October 20, 2011, ranked the Philippines 136 out of 183 countries in the world, way down in the lower fourth of all countries in the study.

Worse, the Philippines ranked the poorest among ASEAN-5 countries. Thailand ranked third, Malaysia fourth, Vietnam 98th, and Indonesia 129th. This means that if firms in China would limit its relocation sites to ASEAN-5 countries, the Philippines will be their last choice.

The ease-of-doing-business index averages the country’s percentile rankings on 10 topics, namely: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.

On starting a business, the Philippines ranked 158 out of 183 countries, or in the bottom fourth of all respondent countries. Other ASEAN-5 countries have done much better. Malaysia ranked 50th, Thailand 78th, Vietnam 103rd, and Indonesia 155th.

The study adds: “[t]he employing workers indicators are not included in this year’s aggregate ease of doing business ranking. The ease of doing business index is limited in scope. It does not account for an economy’s proximity to large markets, the quality of its infrastructure services [other than services related to trading across borders and getting electricity], the strength of its financial system, the security of property from theft and looting, macroeconomic conditions or the strength of underlying institutions.”

Employing worker indicators and the quality of infrastructure — two factors that the Philippines are generally weak — are not part of the ranking numbers. Include them and the Philippine ranking would be further down the list.

Third, the Philippine government has to fix its crumbling public infrastructure. Its premier international airport is rated the world’s worst.

To date, after nearly one-third of Mr. Aquino’s term has been used up, not a single major public infrastructure has been completed. Instituting reforms and revamping procedures were used as an alibi for underspending. There is a growing perception that the government is simply not capable of moving projects that are already funded; in the old days, this is called poor absorptive capacity.

Good serviceable roads are being torn to give way to better roads. The incremental increase in existing capital stock is marginal. But deduct from the existing capital stock the roads and bridges which were wiped out by the series of damaging typhoons and floods in Luzon, Visayas and Mindanao.

There are many more challenges that need to be addressed, such as peace and order, policy consistency, and an inequitable, inefficient, and low-yielding tax system. The present tax system is biased against manufacturing while it favors investment in real estate.

The harsh truth is that these problems have to be addressed before investors might decide to come. Many of these problems can’t be fixed overnight. But the long-term nature of the solutions to most of these problems should not be used as an excuse for not dealing with them decisively and urgently. Otherwise, the Philippines will miss the investment boom once more. –Benjamin E. Diokno, Businessworld

Benjamin Diokno is professor of Economics at the School of Economics, University of the Philippines (Diliman). He was formerly Secretary of Budget and Management under the Estrada administration and undersecretary for budget operations under the Aquino 1 administration.