Why is manufacturing being neglected?

IN HIS speech at the Euromoney Philippine Investment Forum on Monday, President Aquino unveiled three priorities of his administration: agriculture, tourism, and infrastructure. I agree with the priorities, but why is manufacturing not mentioned? Manufacturing, whose share to total economic output is almost twice that of agriculture, is and could be a major contributor to job creation.

Put differently, if the Philippine government were truly committed to achieve “better,” rather than simply higher, growth, it should also focus on reviving Philippine manufacturing.

The share of manufacturing to gross domestic product (GDP), contracted from 23.5% in 1998 to 20.4% in 2012. The shrinking share of Philippine manufacturing ought to be reversed. Now, there exists a rare window of opportunity for this to happen.

With the costs of production rising in export-leading China, many foreign firms in China are scoping for places where they can relocate their factories. Indonesia, Vietnam, Thailand and the Philippines have emerged as strong alternative factory sites.

But the Philippines has to do much more than its ASEAN-5 neighbors. It has to fix many constraints to growth: strong peso, poor infrastructure including inadequate, costly and unreliable power supply, and high costs of doing business.

These problems have to be fixed not only to revitalize Philippine manufacturing but also to make the country an attractive place for investments. And we need foreign direct investment badly in order to propel the economy on a higher, sustainable growth path.

“FDI is the driver of competition, innovation and growth,” said Anoop Singh, the International Monetary Fund Asia and Pacific Department director. Matt Hildenbrandt, J.P. Morgan Bank chief Philippine economist and head of Asia Sovereign Credit Strategy, noted the need to improve on infrastructure and business climate to attract more foreign investments.

The general consensus is that the Philippines has to open up the economy in order to attract more foreign direct investments. How this can be done without amending the restrictive provisions of the Philippine Constitution is a puzzle to me.

MAJOR CONSTRAINT: STRONG PESO

Due to the strong peso, Philippine exports have plummeted in recent years. Exports have yet to recover from their past glory. Recent exports numbers show that the problem remains.

Philippine exports in January fell for the first time in five months as demand for the country’s electronics products remained weak, the National Statistics Office reported Tuesday. Total merchandise exports declined by 2.7% year-on-year to $4.01 billion.

Exports of electronic products continue to stumble. Outbound shipments of electronics plunged 31.9%, the steepest fall since February 2009.

It is refreshing to hear that finance and monetary authorities are speaking with one voice in addressing the strong peso. Finance Secretary Purisima said that his department was studying together with Bangko Sentral ng Pilipinas (BSP) the proposal for the government to either go slow on securing foreign debt or exclusively tap the local market for its commercial borrowing needs this year. Belatedly, but it’s about time!

“If we need not borrow internationally to support the BSP then we will do it,” Purisima told reporters on the sidelines of the Euromoney-organized investment forum. The central bank had suggested that the government reduce its foreign borrowings to help temper the continued appreciation of the peso.

Finally, some reassuring words. But they are just words; the real test is what happens to the peso in the days ahead.

SUSTAINING REFORMS

Most panelists in the Euromoney forum agree on the importance of sustaining reforms. One can’t and shouldn’t rest on past laurels. In reality, very few reforms have been adopted by the Aquino administration to date — the Reproductive Health law being one.

The conditional cash transfer (CCT) program is another one. It has the potential of providing the children of the poor opportunities for advancement in the future. But it needs to be administered more efficiently. And in order to sustain it, the program has be insulated from politics; otherwise, its credibility will be eroded.

The sin taxes will be able to increase the tax yield slightly (best estimate: 0.3% of GDP) but they do not constitute real reform. Still, the tax system still to be revamped to increase its revenue yield, improve efficiency and enhance fairness.

The best way to sustain reform and improve institutions is by doing the reforms sooner rather than later, showing that reforms indeed work, thus demonstrating the risks of policy reversals.

The time for making promises are over, the time for solid accomplishments is now. The promise to increase spending for public infrastructure to 5% of GDP (from the present 2.0%) in 2016 is good, but even better is to achieve the goal from 2013 to 2016.

The fact that the much publicized public-private partnership (PPP) initiatives have barely moved shows what’s wrong with the present administration: indecision.

While there’s a universe of good, financially feasible projects, none has yet been started. In the Euromoney Philippine Investment Forum the following was raised: How have public-private partnerships progressed? At the end of the day, the question was conveniently unanswered.

Here’s a specific example of policy indecision: Is the Philippines going to have one or two major international airports (Manila and Clark)? The indecision has disappointed private sector investors.

When will the NAIA-3 fiasco be finally resolved?

When will the C-6 highway project be started? Is it going to be started at all? Will it see the day before the end of 2016?

What is this government’s long-term energy policy? What is the future of natural gas development in the Philippines? When will the Philippines be totally independent of imported oil? When will new power capacities be on stream and by how much?

What’s the government’s plan with MRT-3? Doesn’t the present plan represent a policy reversal — from private sector provision back to government control? The MRT-3 mess shows the risks of political indecision (or political will to raise the fees) and a poorly written public-private contract. There ought to be some lessons to be learned for future PPP projects.

On the development of political institutions, here are some questions that need clear answers: When can we have a Commission on Elections (Comelec) that is truly independent and manned by men who are politically non-aligned, competent and with unquestionable probity? The controversy surrounding the recent appointments, subsequently withdrawn, of two commissioners cast serious doubts on the commitment of the present administration to strengthening political institutions.

When will the Freedom of Information (FOI) bill be finally enacted into law? An administration that is truly committed to openness, accountability and fiscal responsibility should have the FOI law passed many moons ago.

Back to the question: Why was the revival of manufacturing omitted in the President’s priority list? Is it because revitalizing the sector requires addressing some hard constraints, such as, strong peso, poor public infrastructure including the costly and unreliable power supply, and the high costs in the country. But these constraints need to be faced in order to achieve strong, sustainable and inclusive growth.

Benjamin Diokno was secretary of budget and management from 2008 to 2001. He is professor of Economics at the University of the Philippines School of Economics.
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