Econ growth sans development

What’s wrong with PH strategy?

Those who are seeking genuine answers would do well to read a couple of books written by the late woman economist from MIT (Massachusetts Institute of Technology), Alice H. Amsden.

Start with the one with the title that should interest us: “The Rise of ‘the Rest’: Challenges to the West from Late-Industrializing Economies” published in 2001. (Unfortunately she is tough reading for those unfamiliar with the economist’s technical jargon.)

The subject is interesting for us for three reasons.

It studies how certain countries in Asia and Latin America that were among the underdeveloped countries after World War II achieved rapid industrialization within the first three post-war decades. Since they were not among the countries that industrialized in the 18th and 19th centuries, she referred to them as “the rest.”

“The rest” were also described as “late-industrializing economies” because they had to “catch up” largely using technologies developed by the early industrializers. To quote her: “After World War II, a handful of countries outside the North Atlantic—‘the rest’—rose to the ranks of world-class competitors in a wide range of mid-technology industries. National incomes soared at unprecedented rates and per capita incomes doubled within decades.”

And significantly: “In 1965 ‘the rest’ supplied less than one-twentieth of world manufacturing output. By 1995, it supplied nearly one-fifth…. For the first time in history, backward countries industrialized without proprietary innovations.

They caught up in industries requiring large amounts of technological capabilities without initially having advanced technological capabilities of their own. Late industrialization was a case of pure learning, meaning a total initial dependence on other countries’ commercialized technology to establish modern industries.” (Italics in the original.)

CALL center agents in Manila . ROMY HOMILLADA

It is interesting for us because the countries in Asia she includes among “the rest” are “China, India, Indonesia, South Korea, Malaysia, Taiwan and Thailand.” Interesting for us because the Philippines is not on the list.

If we understand why we are excluded, we might understand what has been wrong with our economic strategy.

Amsden views industrialization as a process in which the principal asset of a nation’s production system shifts from primary or natural resources, like land for agriculture, pasture, forestry or mining, to “knowledge-based assets,” like mechanical or chemical plant for processing materials into intermediate or final product.

Speedy transition

What differentiated “the rest” from “the remainder” was their ability to make this transition more readily and speedily. That ability depended on two historical factors: “the type of manufacturing experience a country had acquired in the early stage of this transition; and … how equally resources were divided within the primary sector.”

Even more interesting: Of these two factors she cites as significant preconditions for the notable performance of “the others,” the manufacturing experience in the Philippines was certainly at least as deep as that in Taiwan and South Korea, and certainly much deeper than that in Thailand and Indonesia.

An active government promotion of industrial development? The Philippines had a development planning agency ahead of all these countries. The National Economic Council was created by Commonwealth Act No. 2 in 1936 after the National Defense Act (C.A. No. 1).

National Development Co. was established shortly after under the Commonwealth government. It pioneered in a modern textile mill and canning of cultured bangus before the outbreak of the Second World War.

Modern centrifugal sugar mills were established in several sugar districts in Luzon and the Visayas. My father, Dr. Manuel Roxas, built the teaching centrifugal mill in the College of Agriculture of the University of the Philippines after his return from MIT in Boston and the University of Wisconsin, turning out Filipino sugar technologists all through the second and third decades of the 20th century.

Ang Tibay

Private Filipino investments in manufacturing? Certain sugar districts were centered on Filipino-owned sugar mills. Toribio Teodoro established the first Filipino-owned modern shoe factory, Ang Tibay, in the 1930s.

My father launched the first Filipino-owned modern food canning company in 1935, Rose Packing Corp., mass-producing Chinese-style (Hoc Shiu) ham, American-style bacon, longanisa and canning Filipino dishes, like adobo and estofado, American-style pork and beans, and for the first time in history, canned carabao mangoes.

Institutional sources for long-term financing of industrial assets? Amsden singles out the establishment of development finance institutions in the countries of “the rest.”

The Philippines had such an institution ahead of the other countries in Asia. Rehabilitation Finance Corp., established to finance postwar reconstruction, became Development Bank of the Philippines to finance development projects in the 1950s.

The Philippines developed its money and capital markets to a far more advanced stage than any of these countries, including Singapore, in the late 1960s and 1970s. Filipinos started the first investment bank in Thailand, Malaysia and Indonesia.

They served as consultants to the Taiwan Ministry of Finance for the development of money markets. The South Koreans sent more than a dozen trainees to Bancom Development Corp. in the early 1970s for training.

Special incentives for pioneer industries? The Industrial Incentives Act creating the Philippine Board of Investments was passed in the Philippines ahead of those in the other Asian countries included among “the others.”

The Philippines failed to make the grade owing to the second factor, “how equally resources were divided within the primary sector”—the concentration of land ownership. By Amsden’s analysis, based on 1960 data, the “countries with the most equal land distributions were Korea, Taiwan and Thailand (Gini coefficient below 0.5).

Equitable land distribution

Postwar land reform in Japan, Korea and Taiwan created some of the world’s most equally distributed economies (nationalizations in Malaysia after 1960 reduced inequalities as well).

Institutional and other factors may create in a country a situation where market incentives attract business activity and investments in directions contrary to those required by the natural evolution of an appropriate supply chain. This comes out in Amsden’s analysis.

The countries in “the rest” have an equitable distribution of land. High degree of concentration in the ownership of land skews investments toward real estate development projects rather than production of primary and intermediate products, and the development of appropriate supply chains in the different regions of the country.

Unsustainable urbanization

This creates a powerful trend toward premature, inappropriate and unsustainable urbanization.

In the late 1970s and 1980s, a label became popular to refer to these late-industrializing countries: NIEs for newly industrializing economies. The Japanese social scientist, Mushakoji, coined another term, “JapaNIES” to distinguish those that followed the Japanese pattern of development—Taiwan and South Korea.

The strategy started with an effective agrarian reform program. This meant a deliberate program to establish as the basis of its agrarian economy communities sustained by a system of small, owner-operated, commercial farms raising diversified products that included food, feeds, dairy, poultry and fishery in farm systems marked by intensive agriculture and husbandry.

Intensive culture of diversified crops and animals generated high value-added products per hectare of land and raised incomes that made farmers markets of each other’s products. They also became the markets of intermediate and final consumer products, tools and farm equipment, and consumer durables that the new import-substituting enterprises manufactured.

At the same time, the flow of food products to town markets brought food prices down, making it possible for real wages to rise without added costs to employers.

Home-based markets

The generation of rural incomes created a large domestic market so industrialization in these countries could look to home-based markets for their primary viability, enabling firms to grow and eventually raise their productivity to be able to compete in the export markets.

In Japan, Toyota was established looking to a demanding home-based market for small cars. In Taiwan, the large plastics firm of Y.C. Wang and the appliance firm of T.S. Lin were organized to cater to the large rural market that agrarian reform created.

The Taiwanese computer industry did not grow from the spontaneous and undirected workings of the market but from the program designed and organized by planner K.T. Li, who located and attracted back to Taiwan, and selected technical and entrepreneurial overseas Chinese from Silicon Valley. He subsidized entrepreneurs to go into the heart of computer manufacturing—the wafers of integrated circuits, and the translation of design into circuit boards and entire devices.

It is not surprising that neither of the two planners of Japanese reindustrialization and Taiwan’s development after World War II was an economist. Saburo Okita, who orchestrated Japan’s recovery, was an engineer. Taiwan’s “miracle” was planned and managed by K.T. Li, who was a Cambridge-educated physicist.

There is a third reason why the study is significant. Amsden is rightly described as a “heterodox development economist.” Orthodox neoclassical analyses attribute the post-World War II “economic miracles” to the adoption of laissez-faire policies by governments, leaving investment decisions to free markets, and the emphasis on production for exports and sensitivity to global competitive positions.

Appropriate intervention

Appropriate intervention by the government meant that political leaders and economic managers in government had clear ideas of a right pattern of economic development and intervention that sought to develop production structures appropriate for the natural resource endowments and living styles of local populations.

Intervention adjusted incentives and market prices to make the right decisions attractive when the free market set “right prices” that were “wrong” and when right decisions required “wrong” prices.

This aspect gives the term “development” a meaning of great relevance, in contrast to mere “economic growth.” Development involves the systematic construction of an appropriate economic structure, with engineering and architectural properties appropriate for the natural endowments of each country’s regions and their people. And an appropriate sequence for the building of these structures. The term that has become popular is “supply chain” or the French term filiere.

Sustainable growth

The six marks of an inclusionary and sustainable social, ecological and economic development and growth are the following:

The inclusionary principle: Every community, including groups of indigenous peoples, has established on its habitat a production and distribution system in which all involuntary poverty has been eradicated;

The principle of territorial domain: Every community has established a right, honored by history and law, to its own territorial domain (i.e., expanding the principle of ancestral domain to all communities in the country.);

A developed local economy: Reference to an interlinked structure of natural and physical capital that supports a production and distribution suited to the natural endowment of each community and its habitat, and the lifestyle and values of its constituents.

Sustainable use of resources in all three domains—social, ecological and economic;

The principle of self-determination and subsidiarity; and

Growth to support present and future generations.

It is worrisome when the result of a Philippine growth strategy is growth without employment.

An employment-centered policy focuses on enterprise investment. By contrast, the conventional programs emphasize the attraction of foreign investment and focus on the expansion of BPOs that serve foreign economies and export-oriented production.

The programs are simply meant to raise GDP without any concern for systematically building up the interconnected local supply-chain structure that is the mark of a self-reliant, sustainable domestic economy—the very same policies that have kept the Philippines from becoming part of the developing “rest” in Asia. –Sixto K. Roxas, Philippine Daily Inquirer

(Sixto K. Roxas is the chair of the Maximo T. Kalaw Institute for Sustainable Development.)