How we lost the industrial manufacturing edge

One major trend in Philippine economic development is, despite rising income, the proportion contributed by industry to total output is one of relative decline. But at this stage of our development, this should not yet be the case.

Industry – and more specifically, manufacturing – contributes substantially to the provision of steady work and incomes in most growing economies. Given the high level of unemployment in the country and the persistent presence of a large informal sector where enormous underemployment resides, industry is the answer for generating high quality jobs.

“Decline of industrial and manufacturing to total output.” In national income accounting, the industrial sector is comprised of mining, manufacturing, construction, and utilities. Manufacturing represents around 70 percent of total industrial output, thus accounting for a large part of that sector.

In 1980, the value added from the industrial sector was 40.5 percent of output (measured as GDP – gross domestic product). The contribution of manufacturing to GDP was 27.6 percent.

In 2012, the total value of the industrial sector to GDP was 32.6 percent. The manufacturing sector itself, the major component of the industrial sector, was 22.1 percent of GDP.

Between 1980 and 2012, the industrial sector’s output fell as a percentage of GDP by 7.9 percent. Correspondingly, the share of manufacturing output to GDP dropped by 5.4 percent. This pattern of decline in relation to total output represents substantial structural change .

Business ( Article MRec ), pagematch: 1, sectionmatch: 1

The indicative de-industrialization of the economy is real but unwarranted. The high level of unemployment and underemployment within the economy cries out loud that something is amiss.

“A two-track industrial sector.” This experience of a relatively declining industrial sector contravenes the usual stories of other developing nations, especially among the high growth ones.

For most others, the route toward rising incomes is through the high dynamism of the industrial sector – in particular, manufacturing. In view of a similar pattern of relative decline in the contribution of agriculture during the same period to the nation’s output, the Philippine economy is veering toward an economy mainly propelled by growth in services.

Industry became the laggard sector. Starting almost at the same time that Taiwan and South Korea moved into industry, the industrial sector was unable to change market directions from the initial import substitution strategy in a timely manner.

A complex set of factors was responsible for this inability to turn industry into the engine of economic growth. Firstly, there was strong economic nationalism sentiment that was simply bent on an inward-looking strategy of protection. The country’s business elite had gone into industry early and it wanted domination of the domestic market. It resisted reforms to open the economy.

Secondly, the presence of the restrictive economic provisions in the Constitution and subsequent protectionist measures that were adopted within the industrial sector encouraged the business elite to resist foreign capital as a means of dominating the domestic economy.

Lastly, the provisions of the Laurel-Langley Agreement served to further complicate the economic reform issues. All these major reasons held back reforms that would usher in greater economic competition.

The political process was unable to move sufficient reforms to drastically change market directions early enough. Hence, for a long time, the industrial sector became a bastion of protection.

“The export processing zone route.” There was however a window of high growth for industry that helped to save the overall picture. I mean here the relative success that the country achieved in the case of export processing zones. These zones attracted, essentially, export oriented manufacturing production.

The growth of Philippine manufacturing exports came however from the foreign direct investments that were encouraged to set up in these export processing zones. These factories came from outside the mainstream of industrial sector of the country.

The export processing zones attracted firms in electronics assembly and other forms of labor-using industry. They put the country in the production network for computers and other high end industrial products.

In the mainstream industrial sector, Filipino enterprises dominated. This was the highly protected sector that was fostered by investment incentives that were mainly designed to encourage domestic industrialization.

“Two-track industrial route inconsistent.” Eventually, this two-track route would delineate a sharp feature in the economy’s industrial structure. One sector – the main one – was the domestic industrial market that thrived on a protectionist strategy.

The other part of manufacturing was located in export processing zones. Attracting mainly foreign direct investors, the export processing zones had access to raw material inputs at world prices for reprocessing, assembly and then re-export.

Such a two-track industrial sector was inimical toward domestic economic integration. Unless the main economy welcomed more reforms, it would not be able to integrate the domestic economy with a highly export-oriented industrial sector. A standoff in this integration of course meant that the industrial sector would not be internationally competitive.

The business elite in control of the domestic economy resisted foreign investments that would expose them to more competition. It saw foreign direct investments as reducing opportunities for domestic enterprises to grow.

The domestic industrial sector was high cost, due to tariff barriers and other monopoly restrictions. Such high cost also emanates from labor market policies.

“Reforms through accession to treaties.” Eventually, the force of international arrangements –the World Trade Organization (WTO) and the progression of ASEAN into a free trade zone – would expose this lack of domestic industrial reforms. Philippine industry had to face up to a more competitive international setting.

A direct consequence of the economic reforms in industry and the entry of the country into the new world order of the WTO is that many of the high cost domestic industries that were protected by high tariff walls had little chance of economic survival.

Trade and industrial reforms of the 1990s led to the demise of many enterprises that could not withstand competition. With the prospective enlargement of free trade under ASEAN, more of the domestic industries that tend only to serve the domestic market for industrial goods will face stiffer competition. –Gerardo P. Sicat (The Philippine Star)

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/