World Bank says RP needs to move up the value chain

THE PHILIPPINES, along with other countries in the East Asian region, needs to reinvent itself and move up the value chain to achieve rapid growth, the World Bank states in a new book.

In The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World launched yesterday, the Washington-based institution said implementation of key reforms would allow countries in the region to go back to the high growth rates achieved over the past three decades.

It noted that expected lower growth in the United States, Japan and Europe — due to high public debt burdens, continued rehabilitation of bank balance sheets, increased risk aversion and policy uncertainty about proposed financial reforms — meant developing countries would face slower export growth, costlier international finance and a difficult trading environment.

“The most important question confronting East Asian policymakers is whether, despite these conditions, their economies can resume the rapid growth rates they achieved over the past three decades. We believe the answer is ‘yes’ — but it depends on key structural reforms in countries and at the regional level,” the World Bank said.

It would be premature to withdraw stimulus measures until global recovery firms up, the bank said, and countries in the region must focus on medium-term reforms to ensure the momentum of recovery.

The World Bank said the Philippines, along with Indonesia, Malaysia and Thailand — all middle-income countries — must raise investments in physical and human capital if they are to move up the value chain.

“With the rise of China and India as favored investment locations for labor-intensive manufacturing, the middle income countries of East Asia have to reinvent themselves if they are to grow rapidly,” it said.

The four Southeast Asian countries, the bank said, can no longer compete in terms of low-cost, labor-intensive production and break into “fast growing markets for knowledge and innovation-based products and services.”

“Moving up the value chain requires investment — in infrastructure, machinery and equipment, education, skills, information technology, etc.,” it said, adding that investments in the four countries declined in the past decade following the Asian financial crisis.

In Malaysia, the World Bank said the low investment level was due to rigidities in the labor market and entry barriers that discourage private investors. For Indonesia, public infrastructure was seen as the constraint, while in Thailand, political conflict has created uncertainty among investors.

“[I]t is probably a combination of these reasons for the Philippines,” the World Bank said.

The necessity of improving the quality and access to education, particularly secondary and tertiary education, was stressed. “[Education] will be central to developing the skilled labor force needed to move up the value chain,” the bank said.

Apart from country-level structural reforms, working on regional economic integration will likewise help East Asian economies as this has been instrumental in driving much of past growth. Further economic integration, the bank said, can be pushed via lowering the cost of logistics and simplifying behind-the-border procedures and rules, lowering barriers to investment and promoting trade in services.

“Such reforms will increase predictability, reduce the cost of doing business, lower export and import delays, remove uncertainty surrounding unofficial payments, and discourage favoritism in administrative decision making,” the bank said.

The World Bank added that as the region moves towards greater financial integration with the launch of the Chang Mai Initiative Multilateralization last March, creating an independent regional surveillance unit to monitor member countries and support decision-making was a priority.

Infrastructure and a regulatory framework for the Asian Bond Market initiative are also a priority, the bank said.

Addressing migration issues such as an influx of unskilled migrants, brain drain, worker exploitation and growing dependence on remittances should also help in regional integration, it said.

And as catastrophic events such as floods, droughts, and storms for countries like the Philippines, Vietnam and Indonesia become more frequent, mitigation and adaptation should also be part of the region’s priorities, the World Bank said.

“East Asian economies have an opportunity to turn the challenge of climate change into growth. With investment rates in the region higher than in most developed countries and many developing ones, a significant portion of the capital stock can embed green technologies within a few years,” it said.

The application of such technologies, it said, could also lead to eventual mastery which could give the region a competitive advantage.

The World Bank expects the East Asian region to grow by 8.7% this year and by 8% next year.

The Philippines was forecast to grow by 4.4% this year and by 4% in 2011, slower than the government’s targets of 5-6% and 7-8%. respectively. — Louella D. Desiderio, Businessworld