The Philippine economy, 1998 to 2010: (Part III) Foreign trade in the economy

The Philippine economy operates in the wide world of international trade in goods and in the movement of economic resources. The extent of this role in trade has risen and provides a promising future. This much can be discerned from the recently rebased national income series based the constant prices of 2000.

“Income and expenditure with foreign trade.” Earnings from exports determine the country’s available income to spend on imports of foreign goods. In this sense, a country imports only as much goods as its export earnings will allow.

With the country’s economic liberalization, the country’s exports and domestic economic activity expanded significantly. The expansion of new exports raised the level of the country’s demand for foreign goods as well.

By 1998 – the beginning years of this review – the domestic economy had already expanded its participation in international trade widely. The Asian financial crisis which began the year before adversely reduced international trade and this showed in the initial early years from 1998.

“Exports.” The size of Philippine exports as a percent of GDP is high. It rose from 1998 to 2010, noting that in view of the regional economic crisis of 1997, export earnings fell in 1998 relative to the previous year. Domestic and international recovery during the period resulted in the continued rise of exports as well as change in its composition. In 1998, exports was 44.3 of GDP; in 2000, 51.4 percent; and in 2010, 50.6 percent.

Throughout 1998 to 2010, total real exports increased at 6.2 percent per year. The latter period from 2003 to 2010 marked a higher rise of exports, representing recovery from the financial crisis of the earlier period. Electronics and related processing semiconductor exports still dominated the goods trade accounting for around 70 percent of total export trade in goods.

“Exports of services.” A distinctive feature of the rise in exports was the change in the composition of exports. Though exports of goods recovered, the earnings rose more sharply in the export of services. The average real growth of export of services from 1998 to 2010 was 9.1 percent per year. The export of services fell by one percent per year from 1998 to 2002. Then, the recovery, including the growth of new services exports, was strong thereafter. From 2003 to 2010, the export of services rose at 14.3 percent per year.

The export of services came from the expansion of back-office services, predominantly of call centers. The high cost of such services in highly complex industrial organizations in the US and other countries led to the international outsourcing of such services.

Countries with highly educated labor force like the Philippines began to win outsourcing contracts for these services. The Philippines has become a principal source of outsourcing of back office operations.In turn, such opportunities for sub-contracting arose because of the international revolution in telecommunications.

The international telecommunications revolution brought down the costs of international communications. This in turn encouraged the sub-contract of back-office operations to the Philippines. This was of course accompanied by a liberal framework for the entry of foreign investments in this area as well which led to the transfer of their call center facilities to countries with the comparative advantage in offering lower costs.

Within the services export sector, tourism and transportation account also for a segment of the earnings in the export of services. These two segments of services have enormous potentials for the country. But regulations on air transportation and various economic restrictions have held back progress in the rapid expansion of international tourism services. Foreign direct investments in these sectors have been meager (compared to other countries).

The government’s recent adoption of an open skies policy will allow more foreign carriers to bring in new tourists. Moreover, there has been in recent years a continuous increase in the construction of new hotel and other tourism facilities in the country marking potentially a new optimism about the future rise of tourism in service export earnings. But these gains are prospective.

“The import side.” Imports are essential to keep the domestic economy working: fuel for industry and the home, food, machinery and technological knowledge imbedded in the machine designs. The country’s industrial exports are also dependent on imports for their raw materials in production. This is especially true in the semiconductor and computer industries. These industries have a global sourcing of their raw material inputs. The Philippines is just one part of this large international production network.

From 1998 to 2010, real imports grew by 4.8 percent per year while real domestic output just slightly above this rate, at 4.6 percent per year. The levels of exports and imports have to be related to understand how exports permit the country’s growth of imports.

In 1998, imports were substantially higher than exports, by 6.4 percent more than export earnings. By 2010, however, real exports had caught up and even exceeded imports by a small percent. In general terms, the position attained by 2010 had improved the country’s external picture.

“The domestic economy is still fragile and highly import dependent.” Even as the country’s external position has improved immensely, the economy remains highly import dependent and therefore more fragile as a result. This is because many aspects of still uncorrected economic policies keeps the country high cost and less competitive in many aspects of domestic industry.

The reasoning is structural. The solution to the problem cannot simply be tied up with improving the governance of policies – like the fight against corruption, which has often been repeated as the key objective of the present government. This policy will bring reward and encomiums from investors and the general public alike if and when it brings in successful outcomes.

Many home and export industries do not have strong domestic input base. The domestic chain of productive activity is weak. The reason is that domestic costs are high – brought about by high labor costs that are often induced by government actions and by high utility costs, especially electricity.

Any efforts to strengthen the internal chain of production would require the government to address economic policy reforms that deal with the key problems regarding the promotion of improved competition. Among others, this leads toward an understanding of how economic restrictions imbedded in the country’s political constitution need to be brought toward the realm of ordinary policies. Another issue is to address labor market reforms and associated policies in order to reduce the high costs of domestic labor. –Gerardo P. Sicat (The Philippine Star)

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