Inclusive growth in Philippines? Not with BPO, remittances

MANILA, Philippines – Unless the government supports policies that promote a more robust manufacturing sector, the Philippines has a long way to go to achieve inclusive growth, the Asian Development Bank (ADB) said in a recent report.  

The Philippines’ reliance on business process outsourcing (BPO) industry, as well as remittances-driven private consumption, do not provide higher paying jobs needed to reduce poverty, stressed the Asian Development Outlook 2012 released Wednesday, April 11.

Thus, while BPOs and consumption have fueled economic growth in the past years, ADB noted that the impact of this growth has barely trickled down to most of the population, totaling 92.3 million as of 2010.

“The Philippines is making slow progress on the goals related to poverty, primary education, and maternal and child health,” the report said.

Not with BPO alone

The ADB noted that there has been a “weak link between growth and development.” This was largely because unemployment and underemployment stayed high.

The service sector, led by the BPO industry, has made the most contribution to economic growth and job creation. However, the BPO industry, which rapidly expanded over the past 7 years, has absorbed only about 1% of the labor force, pulling down the aggregate high-productivity employment.

Labor productivity in BPO-led service sector has been less than half that of industrial sector over the past 30 years. Labor productivity rose by only 10% during the period, ADB noted.

“Many workers are in low-productivity jobs and real average wages have declined. With a Gini coefficient of 45, income inequality is also high. The incidence of poverty fell from 33.1% in 1991 to 24.9% in 2003, but then turned up to 26.4% in 2006 and stayed around that rate in 2009,” the ADB reported.

From “Asian Development Outlook 2012: Confronting Rising Inequality in Asia”From “Asian Development Outlook 2012: Confronting Rising Inequality in Asia”

Also, BPOs hire skilled workers, leaving behind a large and increasing number of underutilized workers “with moderate skills,” ADB said.

ADB Philippine Country Senior Economist Norio Usui explained that the services sector, particularly the BPO industry, can only employ Filipinos with college degrees. This means that other workers who only have high school diplomas and moderate skills have no chance to take part of the growth in this sector.

“BPO is good for the economy but only a college graduate can get a job. How can high school graduates or less educated workers benefit from BPO? There is nothing wrong with BPO, but the Philippines needs another source of growth that will benefit moderately skilled workers,” Usui said at the sidelines of the ADO launch on April 11.

“Given the increasing number of the population, increasing number of the workforce, of labor in this country, the key is to create jobs. If  people can get a job, they can improve their life,” he added.

Thus, the report concluded that “it is unlikely that BPO alone can drive inclusive growth.”

Higher paying jobs

The ADB said the “root cause” of the lack of inclusive growth is “a stagnant industry sector.”

It noted that high-performing Asian economies went through this dynamic structural transformation: output shifts from low-productivity goods into high- productivity ones, particularly manufacturing. Labor then also shifts to manufacturing from agriculture.

“Industry in these economies has maintained productivity gains by upgrading technology and manufactured products. This transformation sustains growth and generates better-paying jobs to reduce poverty. But in the Philippines, industry’s share of GDP declined from 39% in 1980 to 32% in 2011. Manufacturing accounted for just 22.4% of GDP and 8.3% of employment that year,” it said.

Political instability in the 1980’s was the said to be the underlying reason for the current stagnant industry sector. The Philippines missed the eastward tilt of global manufacturing firms’ factories then, the ADB said.

The Philippines caught up in the 1990’s when it attracted mostly assembly-based electronics work, but the country’s troubles in electricity supply, problematic transport networks, and poor governance have resulted in lack of upgrades and diversification in export products.

With merchandise exports highly concentrated in electronics (about 60% of total exports), particularly semiconductors (about 77% of total electronics exports), the Philippine economy has been “structurally vulnerable to downturns in global electronics demand and to disrupted electronics production chain.

The Philippines suffered this in in 2011 when exports fell in the second half of 2011, while exports generally increased in other Southeast Asian countries.

“The failure of industry to move up the value chain because of weak infrastructure and a cumbersome business environment has limited the creation of higher paying jobs needed to reduce poverty,” ADB said.

Thus, about 9.5 million Filipinos, or nearly 10% of the population, work abroad because of a lack of good jobs at home.

Fixed investments

Yet, the economic growth quickened in 2000–2011. Noteworthy, though was how fixed investment, as a share of GDP, declined to 19% in the most recent years (it was 19.3% in 2011, for example), from slightly above 20% in 2000.

By contrast, the investment rate in Indonesia has climbed from about 19% to 32% over the same period.

From “Asian Development Outlook 2012: Confronting Rising Inequality in Asia”From “Asian Development Outlook 2012: Confronting Rising Inequality in Asia”

Thus, the ADB prescribes that “The government…play a strategic and coordinating role in creating incentives for industrial development and providing targeted support for selected products, with benchmarks for success and sunset clauses for phasing out support.”

“Specifically for industry, the government could consider support for diversification and value addition. Decisions on restructuring, innovation, and product mixes are matters for the private sector,” it added.

It also urged the Aquino government pursues its promise of accelerated public spending, particularly in much-needed infrastructure.

It projects a 4.8% growth for the Philippines in 2012 after a lackluster 3.7% in 2011, a year marked by costly delays in some of the planned public–private partnerships, which include airports, highways, and water supply operations.

“Forecasts for 2012 and 2013 assume that the government will raise spending, follow through on its commitment to improve the business environment, and carry out the PPP [projects],” it stressed. – Rappler.com