Which among the following pairs of countries would you consider to have a larger share of their exports in high-tech manufactures:

a. Korea or Japan

b. Philippines or Singapore

c. China or the United States

d. Mexico or Germany

The answers are found below:

a. Korea b. Philippines c. China d. Mexico

Surprised? Certainly these facts run counter to the commonly held beliefs about rich and poor countries. The most intriguing insight in all this is that the Philippines, the poorest of the four emerging countries just cited, long considered a laggard in its region as far as exports and investments are concerned, has emerged as a world leader in this regard, edging out Singapore, the former front-runner since 1996. See for yourself here.

Other interesting observations are: (1) China has been ahead of the US since 2005, (2) Korea has led Japan since 1997, and (3) Mexico has edged out Germany since 1994. Safe to say, the strong performance of these emerging economies over their richer peers cannot be considered a fluke or the result of luck. In economic terms, a “structural shift” has occurred in these economies which have traditionally been exporters of cheap, basic commodities.

What accounts for this increasing specialization in high-tech manufactures by emerging economies? More importantly, what does it say about their future prospects for growth? Is it a healthy sign or is too much specialization counter-productive?

Let us first define what high technology means in this context. According to the World Bank definition, these manufactures include “products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery” or in other words, products with a high innovation component.

In the Philippines, electronics is the biggest contributor to exports accounting for about 60%. They consist of a wide variety of products with different applications from consumer, auto, office, computer related, to telecommunication, medical and industrial uses. Data from the National Statistics Office for 2008 and 2009 show the value of electronics exports exceeding $20 billion per year, while imports are roughly 68-70% of their totals. This runs counter to the common perception that these domestic industries belong to the low value adding category.

According to Ricardo Hausmann from the Center for International Development at Harvard University, a professor of the Kennedy School of Government, the complexity of products made by a nation is a reflection of the capabilities that exist within it. Nations that produce highly elaborate products have exhibited the ability to grow and develop due to the fact that very few countries are able to replicate the same conditions required by such activities (here he is explaining his theory of development based on this notion).

It is more than a question of incomes or wealth. Sri Lankans have an average income slightly above Filipinos, yet their major exports are in textiles and garments. The lack of infrastructure, rule of law and good governance does not seem to deter the presence of high-technology industries in the Philippines. The abundance of engineers and highly skilled, flexible workers appears to be the main driving force.

The incoming head of the Bureau of Investments (or BoI) Cristino L. Panlilio has signaled a shift towards outward looking producers in its identification and attraction of investors as part of the rationalization of fiscal incentives used to attract them. This is a welcome move as it seeks to channel the resources of the state more efficiently at expanding activities that the country has exhibited the capacity to perform. This is only half of the equation though, as the other half involves monitoring and continuously rewarding winners and punishing losers or  “a full audit of companies’ performance versus their commitments to enjoy incentives.”

For the country to build on its export capabilities, such a dual pronged approach will be needed, not the shot-gun method that has been applied in the past. The emphasis on improving education, rule of law and good governance are complementary to this, but a robust and well-targeted industry policy should be at the core of the overall strategy to attract investments and create jobs.  It will be another fallacy to assume otherwise: that merely opening markets and instituting the rule of law will do the trick.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • Ped Salvador

    The Philippine electronics industry is made up of over 700 firms of which around 75% are foreign-owned and 25% domestically. Companies in the finished electronic products sector are classified into two: large companies that are either subsidiaries of trans-national or joint ventures, and small or medium Filipino owned firms. In the electronic components sector there are the third party subcontractors, which are mainly Filipino owned, and the multinational plants which cater to the requirements of their parent companies. From 2005 to 2010, exports are mainly in electronics components and computer peripherals and minor in industrial,communication and consumer applications.

    These over 700 firms are the so called contributors of the billion dollars revenue for the Philippines. Foreign owned companies(75%) contributed mostly by providing jobs to the Filipino workers. Direct and indirect materials are also mostly foreign including sub-assemblies.Local companies (25%) contributed via employment and the supposed to be value added component. This value added component means the use of materials produced in the Philippines both direct and indirect, use of local consultants, etc. in other words, Filipino made quality inputs to the production processes.

    Having been employed in the Electronics Industry for 23 long years i have observed and experienced the ins and outs of this sector.

    Technology exporter is a misconception, when it is being referred to the Philippines dealing with research and development. Local electronics subcontractors are just following the production specifications being provided by their customers both local and foreign. If the meaning is producing high technology devices, yes the Philippines is considered one of the best if not the best country to contract with because of inherent skills and dexterity of Filipino workers.

    In 1997 i made a study on the contribution of Manufacturing sector in the industrialization of CALABARZON and conclude for the minimal productivity contribution of such an effort. Workers particularly in the government economic zones including electronics companies are receiving subsistence wages and salary which fairly improve their purchasing power that will boost the community economic development.

    Today contractualization is very rampant and many companies are abusing OJT which pay only 75%% of the minimum wage. There are Japanese companies also that send employees in Japan for training on complicated processes but actually using this avenue to economize further their production cost.

    Government industrial policies need to be strengthened and reformed to protect workers. We should go out from the previous pronouncement of a country with cheap labor. Local companies, IMI an Ayala company and IONICS had already transferred some of their facilities in China because of cheap labor. We need to design and incorporate more value added processes in our assembly and production. The government should look into providing incentives and more support for Filipino investors that will focus on vertical integration and fast tract research and development that will boost further the Electronics Industry sector using our very owned skilled manpower and Filipino suppliers, This is the essence of Philippine economic development.

    Thanks for giving me the opportunity to provide comments. More power!

    • Thanks for that Ped! (full disclosure: Ped and I have known each other for quite some time, and I solicited his feedback to this article knowing full well his concerns and advocacy for the industry). I certainly welcome such comments here.

      I would only beg to differ on a few points:

      The first is that in 1997, you say that the contribution or value add of Philippine producers were quite minimal. However, nowadays, I would dare say that the picture is different as evidenced by the export to import ratios. I appreciate the anecdotal evidence you provide, but the numbers simply paint a different picture. Perhaps this is the subject for further investigation.

      The second has to do with the “abuse” of the OJT’s being paid less than the going wage. Such an arrangement of course is not without precedent elsewhere. Paid apprenticeships and traineeships in Australia are subject to a contract of training which could go for as long as 3 years for example. My position is that better for our workers to gain such work experience and skills in a workplace that has better occupational health and safety practices than for them to be working in the sweatshops or informal sector where wages are much lower.

      Finally there is the competition from China where wage pressures have been felt, a sign that their industrial capacity is reaching its limits as well. As China’s per capita GDP overtakes many Asian countries, including the Philippines, its cost advantage will erode. The Philippines will have to compete with other up and coming players in the region. There is certainly no time to rest on our laurels.

      • Ped Salvador

        Im hoping that Pnoy administration can address this issue and maximize the potential of this industry to the fullest to answer the need for more jobs for the Filipinos!

  • liberdad

    Refudiation is something people like Sarah Palin do. Tama ka man o hindi, I think what you are discussing here adds breadth to possibilities for the Filipino. Leaves much to think about, to consider, and perhaps act on. Doon pa lang, may mabuti ka nang nagawa. Salamat po! Hindi ako ekonomista pero nag-aral ako ng regional development, and so far, your conclusions match the theories of what I’ve read and learned, kahit iba conclusions mo. I like it, thinking outside the box. The next step for us Filipinos is to realize, there is no box and that possibilities for the future are endless when we realize this 🙂

    • Ditto.

      This particular transplant heartily agree with this particular observation.

      Indeed, there is no box, and it is good to have Mr. Santos about reminding us of that in pragmatic terms.

  • While I’m not sure of how accurate your figures are, I do hope that your analysis is correct. As you said, “Lord knows such positive news comes few and far between.”

    Mabuhay ang Pilipinas!

    • I do this sort of thing for a living PP, but of course if you don’t believe me, just consult the stats.

      I welcome anyone to (in the words of Sarah Palin) “refudiate” my claims. Just follow the links in the article which will lead you to the National Statistics Office figures for exports and imports.

      Mabuhay tayong lahat!

  • Well, the title was spot on. “Fallacies” the Philippines as a “technology exporter” is fallacious because it glosses over the fact that despite the volume of technology exports, the country has no real benefit from it in terms of benefiting for progress.

    There’s no technology transfer, the electronics manufacturing industry does not spur sustainable economic activities around it, and benign0 has also nailed it, they’re just here for our cheap labor.

    Again, it’s the same old “import dependent, export oriented” economy which nothing but a modernized version of a colonial state.

    • Hi Jhay, the arguments that you make about no technology transfer and benefits for progress, I would like to know what do you base them on? I myself used to make the same arguments based on news reports and articles. When I consulted the actual data, I came to a different conclusion.

      Consider how diversified the products we are currently making. From 3G handsets, flat screen TVs, GPS devices and hybrid car equipment, iPods, scanners and others. These are spillovers from previous investments made in other areas like CD ROMs and computer chips. Most of the companies supplying to the big multinationals are Filipino owned based on their industry body, SEIPI’s, statistics. Clearly there is some technology transfer going on.

      What about the thousands of managers, engineers and skilled workers employed in this sector who are paid a decent living wage and have good working conditions? Surely there are benefits that accrue to them and their families.

      Against this evidence, can we still mount the argument you have made (which I suspect is not really yours, but borrowed from elsewhere)?

  • benign0, I wasn’t counting volume here, I was measuring value in terms of dollars. If you look at the value of output per worker, it has been increasing over the last five years.

    A high-labour value add is arguably good for an emerging economy like ours because it means our workers are productive. I would argue that a skilled operator in electronics gets paid more than one in textiles, and has better working conditions. And there are more countries that can produce textiles, but not a whole lot who can make navigation systems. It’s just a question of where to position yourself.

    As for the alleged error of applying the label “technology exporter” to our exports, what means of measurement would you offer that can be applied consistently across all countries instead? In this case, the same yardstick has been applied to all countries involved and the Philippines came out on top. What about Singapore and Korea? Will you mount the same argument against them?

    I admit in writing this, I am running against the established wisdom of my fellow economists. I used to hold your views as well, but I believe these arguments about low-value add are a bit dated. That’s why I wrote this piece, so that we could take stock of things and let perception catch up with reality.

    • Same banana. Even if you count it in dollar terms, the question still stands:

      How much of the value of the export was added/created in the Philippines?

      Say for example you export $100 worth of calculators, and $95 of that is accounted for by materials, handling, design, pre-assembly, and transport that happened before the kits for assembly arrived as an import at a Philippine port and hauled to the assembly plant in Cabuyao.

      That means, the Philippine leg of the value chain contributed only $5 to the value of this export. The net added value of Pinoy enterprise is a small fraction of the total gross value of the export.

      Dig deeper into your figures, dude. Are those gross export value? Or net added value (gross export value minus gross import value of the input to assembling those trinkets)?

      You will most likely find that adjusted to take into account only net-added-value the value of Pinoy exports will be UTTERLY DWARFED by our neighbours. 😉

      • I was interested in that question myself, which is why I consulted the export and import tables. By looking at the net of exports over imports, I got a rough calculation of 42-45% that our exports exceed imports in electronics.

        That is a conservative estimate, because it doesn’t take into account the consumer electronics and telecom devices we import for consumption purposes. If you remove consumer electronics, that goes up to 47% in the previous year.

        It is true the point you make, that in gross terms, Singapore will beat the Phils. Although both these countries produce round about the same GDP of $180B, exports only account for 40% of GDP in RP while Singapore’s exports exceeds 100%(!), but that shouldn’t detract from the fact that structurally, our exports are still more intensive in hi-tech manufactures.

      • Most of these assembly plants are also located in ‘export processing zones’ and other “zones” that isolate them and other business operations from the local community. They don’t pay taxes to the local government and workers come from all over the country to work there. In short they represent a drain on local community resources and infrastructure without commensurate contribution to these community’s coffers.

        They are almost like artificial implants. These factories may as well be foreign embassies. Worse, a lot of these outfits were given perks in the form of tax holidays and other subsidies.

        Those foregone taxes and the costs of these subsidies are, to be fair, the price our society is paying for the lack of any inherent ability in Da Pinoy to create capital indigenously.

        • The fact that most of their suppliers are Filipino owned means there has been some capacity for Pinoys to create capital. The low-savings argument is also no longer true. Since, the early 2000’s, the Philippines’ domestic savings has exceeded domestic investments. We are a net saving economy!

          As far as the foregone taxes are concerned, you are absolutely right on the money, which is why I welcomed the pronouncements of trade and finance officials to rationalize fiscal incentives. It is long overdue. Many of these are redundant and unnecessary. The consensus is forming from academics, business and government that major streamlining is needed to arrest the erosion of our tax base.

          Finally, as far as the “lack of community involvement” is concerned, don’t the people who work in the EPZAs live in the community? eat and shop there? send their kids to school, engage in tourism, buy cars or use public transport? attend weddings, birthdays, etc.. etc… Wouldn’t it still be preferable to have them live and work there than to lose these out to Vietnam or Malaysia? You might have failed to consider these economic and social impacts in your haste to dismiss them as a “drain”.

  • Right, Benign0 has answered my question as to how a technology producer can’t seem to process credit card payments and has government offices bogged down in paper . . . in 2010.

    It also seems odd to me that, on one hand, the Bureau of Investments is wiilling to depart with cash money to incent investment whilst Customs is whacking away at importers and exporters with sticks and fees and . . . oh, yes . . . more paper.

    I’d say, make a commitment to getting foreign money and SKILL into the country to break up the log-jammed oligopolistic markets, stop being two faced about it, and move into the modern world. There is no great pride to be had by holding on to a closed Filipino society that stands still as other nations rocket into advancement.

    • Hi Joe, unfortunately the retail and public sectors are not really part of our export sector. There are truly many absurdities that will confront an investor or exporter/importer in dealing with government policy and agents, but that has not deterred these locators from persisting in the Philippines.

      Despite these huge hurdles, it is the talent of the workforce, abundant, and yes, cheaper compared to other countries where such production can be alternatively located, that attracts them. And at least the BoI now acknowledges that it needs to rationalise incentives. Maybe by raising more taxes this way, it can start to improve our roads and services to the export sector.

      This little known fact about the structure of Philippine exports should be celebrated, not to the extent that we forget about improving elsewhere, but celebrated nonetheless. Lord knows such positive news comes few and far between.

  • Dude, you’re counting the volume of the output but not taking into account the nature of how this output was produced.

    Technology exports from the Philippines have a HIGH labour-added-value component and a LOW design-added-value component. In short, the Philippines is simply an assembly step in the whole technology value chain. A source of CHEAP LABOUR to put together pre-fabricated parts whose blueprint for assembly was developed by the bigger minds living in more advanced societies, in other words.

    Claiming we are “technology exporters” is like a stenographer making a claim to authoring a document that she merely typed out for his/her boss.