Making Philippine economic growth inclusive in the context of regional integration

Recent Philippine economic performance has been phenomenal, driven by a dominant services sector. Last year, the country’s gross domestic product (GDP) grew by 7.2 percent, outpacing the previous year despite the devastation caused by Typhoon “Haiyan” and other natural disasters. Services, which account for nearly 60 percent of GDP, grew by 7.1 percent; industry expanded by 9.5 percent. Agriculture, meanwhile, managed to grow by 1.1 percent. On the demand side, growth in household and government consumption slowed down to 5.6 percent and 8.6 percent, respectively, while capital formation jumped by 18.2 percent. For 2014, our think tank, the Philippine Institute for Development Studies, forecasts Philippine GDP to grow by 6.6 percent (Navarro and Llanto 2012).

Compared with neighboring countries, the Philippines equaled or outpaced China in the first two quarters of 2013, and grew faster than Indonesia, Malaysia, Thailand, and Vietnam in all four quarters of last year.

There has been a lot of good news in the Philippines recently. Better governance as shown, for instance, by improved fiscal health, has earned successive sovereign credit rating upgrades for a country once known as Asia’s basket case. One year after getting investment-grade status, the Philippines was again given an upgrade by S&P, which said the latest action was due to its belief that “ongoing reforms to address shortcomings in structural, administrative, institutional, and governance areas will endure beyond the current administration” (Batino and Yap 2014).

Also in 2013, the Philippines rose six places to 59^th out of 148 countries in the competitiveness ranking of the World Economic Forum. In the World Bank-International Finance Corp. Doing Business Report, the Philippines jumped 25 places to 108^th out of 189 countries in 2014 from 133^rd in 2013.

Still, structural problems persist. Unemployment is stuck at above 7 percent, with many Filipinos in poor-quality jobs. One out of five people with jobs is considered underemployed. Poverty incidence remains high, although the national government has claimed a downtrend (National Economic and Development Authority 2014a). One out of every four Filipinos is below the official poverty line, while one out of every 10 is in subsistence or extreme poverty.

This is the result of the boom-bust cycle that has characterized the Philippine economy in the past decades (Aldaba 2013a). Growth benefitted only a few sectors of the economy and failed to lift millions out of poverty. The Philippines leaped to becoming a service-sector led economy without first industrializing, or even developing its agriculture sector (Fabella and Fabella 2012). The poor and less educated have been unable to get better-paying jobs that the educated class has been enjoying in the buoyant services sector. Services today account for more than half of employment. Only 15 percent are employed in industry. What’s telling is that around a third of workers are in agriculture, producing the equivalent of only 12 percent of GDP and shrinking.

What happened to Philippine manufacturing? Its share of GDP at current prices had stagnated at around 20 percent, significantly lower than its neighbors. Thus, its share of employment has been low, at around 10 percent (Aldaba 2013b). Weak economic conditions, meanwhile, had failed to attract much-needed foreign direct investments. The Philippines is lagging way behind Vietnam in this regard.

Comparing per capita incomes across the region, Indonesia has long pulled away from the Philippines. Other neighbors shifted to a higher path as a result of their economic policies. Clearly, the Philippines has a lot of catching up to do.

The question is how the Philippines can participate meaningfully in the ASEAN Economic Community (AEC) and other free trade agreements. A noteworthy development is the recognition by both the Executive and Legislative branches of government, backed up with evidence from policy research, that inclusive growth can be pursued in the context of regional integration, thus common prosperity. Policymakers have recognized that the Philippines can industrialize without having to stick to inward-looking policies and that integration can in fact push the country toward industrialization.

The Updated Philippine Development Plan (PDP) supports a Comprehensive National Industry Strategy (CNIS) that aims to revive manufacturing and thus boost the sector’s contribution to economic output and employment. The basis of the CNIS will be industry roadmaps to achieve competitiveness in preparation for regional integration (NEDA 2014b). The roadmap project seeks to rebuild or strengthen manufacturing capacity and maintain competitiveness. Manufacturers must be able to shift to high value-added industries and deepen participation in regional integration (Aldaba 2013a).

With policy research from our Institute, the Department of Trade and Industry (DTI), through the Board of Investments (BOI), launched the Industry Development Plan or IDP in January 2012. So far, 26 industry roadmaps have been produced (DTI 2014). Each roadmap is supposed to have a 15-year growth trajectory. The industry must also outline what policy and industry-level support measures are needed to attain its goals. This year, DTI-BOI will work on six main activities:

(1) continued implementation and monitoring of the completed roadmaps;

(2) completion of remaining industry roadmaps;

(3) information dissemination on the industry roadmaps’ contents;

(4) revival of the Industry Development Council;

(5) preparation of feasibility studies and capacity-building sessions for key stakeholders; and

(6) advocacy programs to undertake policy and industry-level reforms.

Roadmaps for manufacturing, automotive, automotive parts, biodiesel, cement, ceramic tiles, chemicals, copper and copper products, electric vehicles, electronics, furniture, iron and steel, IT-BPM, mass housing, metalcasting, motorcycle, petrochemicals, plastics, pulp and paper, rubber products, tool and die  and natural health products have been completed. The roadmaps for aerospace, bamboo, coco coir, creative industries, medical travel, mineral processing, processed foods (i.e. fruits), processed meat and marine products, shipbuilding, garments, printing, and home appliance are expected to be completed before the year ends (DTI 2014).

Our Institute’s policy research also led to congressional approval of budget support for a Manufacturing Revival Program to be led by DTI with the help of nine other government agencies. The government expects that the revival of the manufacturing industry will “enhance productivity, increase the number of products for various markets, and provide quality employment.” In the years 2015 and 2016, the manufacturing sector is expected to account for 23 percent to 23.5 percent of GDP (Department of Budget and Management 2013).

As mentioned earlier, maximizing opportunities offered by regional and global integration, particularly those initiated by the Association of Southeast Asian Nations (ASEAN), is one of the strategies identified by the Updated PDP. Advocacy programs will be intensified to “encourage businesses, particularly MSMEs, to maximize benefits from opportunities offered by Philippine participation in free trade agreements and the ASEAN Economic Community 2015.” Local industries will be encouraged to “make use of preferential agreements not only through education and information campaigns but also through business matching activities.” More importantly, the new Philippine Export Development Plan for the period 2014-2016 will seek to “diversify export products as well as adapt to the changing global demands and emerging issues” (NEDA 2014b).

While it will not happen by 2015, the Philippines expects to benefit from what will hopefully be a priority project under the ASEAN Master Plan for Connectivity. A network connection under the ASEAN Ro-Ro and Short Sea Shipping Network will link two major cities in Southern Philippines to Bitung in Indonesia (Navarro and Llanto 2013).

A survey (Hu 2014) commissioned by the Asian Development Bank (ADB) showed that Philippine businesses are among the most aware of ASEAN free trade agreements with dialogue partners, in particular China. Eighty percent of Philippine businesses said they were aware of the ASEAN-China Free Trade Agreement (ACFTA)—a remarkable figure as the Philippines was the last to join the ACFTA Early Harvest Program. This was a much higher rate compared with awareness levels for the ASEAN-ANZ, ASEAN-Korea, and ASEAN-India agreements.

Data also show that utilization of ASEAN free trade deals is increasing, an indication that more enterprises are opening up to the new trading regime. The Philippines has in fact joined Cambodia, Indonesia, and Thailand in the list of ASEAN member-states with the highest utilization rates in the ASEAN Free Trade Area. Issuance of certificates of origin has also been increasing (Medalla 2012).

Still, much needs to be done by way of generating public support especially for the planned ASEAN Economic Community in 2015. Only 44 percent of businesses surveyed were aware of AEC 2015 based on the ADB report. In the Philippines, 80 percent were not aware of ASEAN integration (Hu 2013). It is hoped that with the government and private sector in full swing with efforts to revive manufacturing, Filipino enterprises will be able to tap regional production networks, boost employment and economic growth, and share and contribute to the common prosperity aspired for in this part of the globe.

(Presentation during the CASS Forum 2014: "China and its Neighboring Countries: Towards Common Prosperity and Development" held May 27-28, 2014 in Beijing, China)

References

Aldaba, R.M. 2013a. AEC 2015 and transformation of the Philippine manufacturing industry. Power Point presentation during the PIDS-NEDA AEC Workshop, 12 September, Makati City, Philippines.

Aldaba, R.M. 2013b. Why a new industrial policy for the Philippines is critical. PIDS Policy Notes. January: 1-2.

Batino, C. and C. Yap. 2014. Philippines wins S&P upgrade as Aquino’s changes seen enduring. Bloomberg.com. 9 May. [online] http://www.bloomberg.com/news/2014-05-08/philippines-wins-s-p-upgrade-as-aquino-s-changes-seen-enduring.html [accessed 21 May 2014].

Department of Budget and Management. 2013. National Budget Memorandum No. 119. 23 December.

Department of Trade and Industry. 2014. DTI-BOI industry development program goes full steam. Press release. 19 March. [online] http://www.dti.gov.ph/dti/index.php?p =154&type=2&sec=2&aid=1320 [accessed 21 May 2014].

Fabella, R.V. and M.C. Fabella. 2012. Development progeria? In Looking back, moving forward: 25 years of BusinessWorld. Quezon City: BusinessWorld Publishing Corp.

Hu, A. 2013. ASEAN Economic Community Business Survey. In The ASEAN Economic Community: A work in progress edited by S.B. Das, J. Menon, R. Severino, and O. L. Shrestha. pp. 442‐481. Manila: Asian Development Bank.

Medalla, E.M. 2012. Managing the ASEAN economic integration process in the Philippines: An assessment of progress in trade liberalization and facilitation. PIDS Discussion Paper Series No. 2012-41. Makati City: Philippine Institute for Development Studies.

National Economic and Development Authority (NEDA). 2014a. High economic growth, investments in social dev’t reduced poverty in first half of 2013. Press release. 29 April. [online] http://www.neda.gov.ph/?p=2973 [accessed 21 May 2014].

_____. 2014b. Chapter 3: Competitive industry and services sector. In Philippine Development Plan 2011-2016 mid-term update with revalidated results matrices. Pasig: NEDA. [online] http://plans.neda.gov.ph/pdp/ [accessed 21 May 2014].

Navarro, A.M. and G.M.  Llanto. 2014. The Philippine economy in 2013 and prospects for 2014. Development Research News. January-March: 8.

_____. 2013. Infrastructure and logistics: Moving towards AEC 2015. Power Point presentation during the PIDS-NEDA AEC Workshop, 12 September, Makati City, Philippines.