‘Lack of industrialization: Government’s failure’

By John Mangun, Business Mirror, May 9, 2019

BACK in the late 1990s, a friend of mine owned a factory. A factory is a business where raw materials come in a door at one end. That raw materials pass through a system of technology, machinery and workers, coming out at another door as finished products.

I feel the need to explain what a “factory” is because some experts—often consultants of foundations and think tanks who talk about “industrialization” and “manufacturing”—do not seem to understand those terms. Along with those two words is a phrase most commonly associated—“government policy.”

When they speak, you almost see a vision of great belching smokestacks reaching to the sky, making coke from coal with shooting flames to smelt iron ore into steel. Also great complexes where thousands of workers produce automobiles from an assembly line once every two minutes or so.

My friend was part of the “industrialization” of the Philippines. At one end, bleached raw cotton entered his factory, and every kind of thread—used to sew the lace on wedding gowns to repairing fishing nets—came out the other. In between were $2 million of equipment from a cotton gin and a carding machine where the roving was spun and twisted. The thread was then dyed, rinsed in caustic soda and then wound on to spindles or bobbins.

About 10 members of the 80-person work force—mostly women—worked in a separate section taking the bulk spindles and repacking the thread to retail consumer size.

Over time, the three-shift operation became two shifts, and then only one. A competitor or two of my friend eventually stopped manufacturing thread completely, as he also finally did. The financial reality was that importing raw cotton from China and manufacturing thread was a losing proposition.

It was profitable only to import finished thread from China in bulk and repack it into consumer sizes. The 80-employee factory was reduced to 20 workers.

Those that believe that the government can and should control the economy are ignorant and clueless. Yes, government policy can help or hinder, but it cannot change financial realities. The area south of Metro Manila used to be dotted with sport shoe and garment factories, which all used my friend’s finished threads.

When the production of those goods moved to China, so did my friend’s business. Back then, an amazing 90 percent of all Christmas ornaments from shiny globes to wooden “Santa in a sleigh” came from the Philippines. That product now virtually comes from China too.

Certainly, the Philippine government could have taxed the import of finished Chinese thread out of business. But then the consumer would have had to pay significantly more for the product in return for protecting my friend’s business. And no government policy could have saved the Christmas ornament, sport shoe, or garment business.

I have another friend who is a health-care professional. A treatment device he uses nearly every day is imported from the United States and costs P30,000. He now buys a similar product with the same performance quality for P3,000, imported from China. The difference is, the US product lasts five years and the Chinese one wears out after one year. He saves 50 percent buying from China and would be a fool to do otherwise.

The “think tanks” will continue thinking—and complaining—about “government policy.” But they are like the person who says, “the Philippines should export more goods.” But when I ask, “What goods should the Philippines export?” the conversation comes to an end.