Reviewing our trade and industrial policy

Trade led Asia-Pacific regional recovery
Trade led Asia-Pacific regional recovery
By Nepomuceno Malaluan

Recently, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) released its 2011 Asia Pacific Trade and Investment Report titled “Post-Crisis Trade and Investment Opportunities”. Dr. Rafaelita Aldaba, Senior Fellow of the Philippine Institute for Development Studies, presented report highlights in a forum that also discussed how the identified opportunities could work for the Philippines.

It was pointed out that the Asia-Pacific region has bounced back strongly after the global economic crisis. Export and import values in the region have returned to pre-crisis levels and investment flows are recovering. The report identifies three major areas of emerging trade and investment opportunities: rising intraregional demand; trade in services; and climate-smart goods and technologies. Protection was identified as a risk factor, both border and behind-the-border mechanisms.

Given the serious global economic stresses re-emerging in Europe and the US, the report’s post-crisis framework may need adjustments now. Still, even assuming the Asia-Pacific resilience sustains the identified opportunities, it is questionable whether the Philippines can actually take advantage of these opportunities.

For one, the report shows our trade performance lags; the Philippines is a persistent merchandise trade deficit country throughout the past decade. Relative to our ASEAN comparators, we perform poorly in exports. In world exports ranking, Malaysia ranks 22nd, Thailand 25th, Indonesia 30th, and Vietnam 40th. We rank 55th.

Relatedly, our production base for trade has been eroded in recent decades. Instead of taking off, industry share in GNP has dropped, along with agriculture. What has been robust is services, coupled with the strongly rising share of net factor income from abroad, in the last 15 years.

This trend in our economic structure reflects capital and labor movements. The country’s 40 richest have been diversifying away from agriculture and manufacturing into services and non-tradables, particularly utilities, property, retail trade, and infrastructure.

A big chunk of our globally competitive labor is going abroad, for lack of opportunities here. That leaves a large section of less mobile labor trapped in struggling sectors. In 2010, of the 36 million employed, 5.7 million were farmers, forestry workers, and fisherfolk; 11.6 million were laborers and unskilled workers. Combined, they make up almost half of total employed. This vulnerable labor segment is marked by lack of education, with 8.6 million having education zero to grade six education at most.
It is also questionable whether the country’s policy track enables it to take advantage of the opportunities identified.

For one, our trade liberalization strategy has been too aggressive for our own good. Compared to our ASEAN comparators (except Singapore), and even across Asia-Pacific, our tariff is one of the lowest in simple average. The Philippine WTO tariff profile, in comparison with its neighboring developing countries in 2009, shows it has made far deeper tariff reduction, especially in agriculture. Since the Philippines was an early starter in unilateral liberalization, the difference may even be wider in earlier years.

At the level we liberalized, we may have run agriculture and industry to the ground.

For another, our policymakers have been too concerned with the rules of the game, not how we play the game. Perhaps, instead of viewing protection as a risk, we should look closely at how the various border and behind-the- border mechanisms are being used by the other players of the game. Examining what is generically and badly labeled as protectionism could in fact show a sound industrial policy and strategy for taking advantage of the trade and investment opportunities outlined by the report.

Just to give an indication of this, let me quote excerpts of the recommendations in a joint 2010 study by the Office of the National Economic and Social Develop Board of Thailand and the World Bank, titled “Industrial Change in the Bangkok Urban Region”:

“The region should aim to build capabilities in a number of areas—in the manufacturing sector, autos, textiles and food processing are the most promising. In services, logistics, marketing, design and publishing could become important sources of growth and co-create value with manufacturing activities. Their prospects would be enhanced through localized clustering that boosts productivity and innovativeness.

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Localized clustering and innovation that would promote sustainable growth are within reach. Whether this occurs will depend upon four factors, assuming of course that the business climate encourages investment.

(1) A well-articulated and strongly championed government strategy for the development of the Bangkok urban region that emphasizes the role and functions of clusters and wins the active support of other major stakeholders.

(2) Major local firms – and a pool of smaller firms augmented by start-ups with innovative products or services – must set the pace and with policy encouragement, make technological advances central to their competitiveness. x x x

(3) Existing and new firms will need all the help they can get from two sources. First, two or three universities in the Bangkok urban region must achieve levels of excellence in teaching and S&E research comparable to the best in Asia if not the world. In particular, they must focus on engineering and bioscience departments that can cater to the needs of the leading industries and become a source of entrepreneurship as well. Efforts by universities, when matched by a change in attitudes of management, can together accelerate the tempo of technological change and push Bangkok’s industrialization to the next level. Second, managers and entrepreneurs will need assistance from providers of finance, of research, of design and other services. These are adequate but they must become world class…”

Implicit in just these few excerpts is a government taking an active role in guiding the direction of industry. In contrast, the new Philippine Development Plan shows that in the economic sphere, our strategy still eschews intervention. But more than 20 years of such strategy has given the country few outcomes to brag about.

Lawyer Nepomuceno Malaluan is Trustee at Action for Economic Reforms and member of the trade working group, Focus on the Global South Development Roundtable Series.

Guest Writer

  • so enlightening opinion…

  • GabbyD

    “In contrast, the new Philippine Development Plan shows that in the economic sphere, our strategy still eschews intervention”

    huh? check out chapter 3… it reads basically like his quotations from Bangkok’s plan.

    i’d put a link here, but it’d be eaten up. just google the plan and it will have it there.

    ugh…

  • J_ag

    Mr. Santos there is good article in the WSJ about the effect of China -U.S trade on the loss of manufacturing jobs in the U.S. 

    Thought theoretically open trade would eventually raise all boats the rapid pace of outsourcing manufacturing jobs together with keeping their currency undervalued have created untenable conditions in both Europe and the U.S. Most of the outsourced manufacturing were done by American, European and Japanese corporations. 

    They have created an Asian supply chain with China in the center. Now the greatest challenge the planet faces is how to turn that export orientation into domestic demand in the exporting countries of Asia.

     That would mean a revaluation of exporting countries currencies and a shift of trade and investments from developed to developing. All this in an age of the end of easy oil and the shift to tough oil. 

    This not for children.. 

    • GabbyD

      actually, that WSJ article lost the point — the gains from trade are larger than the costs they focused on…

  • Too much faith in the Washington Consensus of open markets and small governments in the 1990s led to the overzealous reduction of tariffs ahead of our WTO commitments (which incidentally eroded government revenues and contributed to our fiscal crisis in the early 2000s). Yet, opening markets did not stimulate our exports as this piece notes. Neither will anti-corruption drives necessarily improve matters.

    The developmental path trodden by East Asia requires a different kind of role for government that the Good Governance agenda prescribes. It requires greater intervention and capability on the part of the state in “governing the market” to move investments away from unproductive sectors into more productive ones.

    To do that a competent economic bureaucracy needs to be set-up and staffed with competent merit-based appointees. The current squabble between officials of the finance and trade departments over which sectors to include or exclude in the fiscal incentives scheme for one needs to be resolved through some kind of independent economic planning board, which we at present don’t have because the NEDA and our PDP says that government has to stay out of the market.

    • Manuelbuencamino

      Doy,

      I don’t know if this adds to your comment. Maybe I misunderstood you. But I hope I did not. Because I agree that government should stay out of the market when it is doing well by itself. However, when there is no market to begin with then it falls on the government to create a marketplace or at least an environment where markets will grow.

    • Manuelbuencamino

      Doy,

      I don’t know if this adds to your comment. Maybe I misunderstood you. But I hope I did not. Because I agree that government should stay out of the market when it is doing well by itself. However, when there is no market to begin with then it falls on the government to create a marketplace or at least an environment where markets will grow.

      • I would answer that by referring you back to the article, where it says the Philippines was too conscious about following the “rules of the game” (liberalizing, stepping back and letting markets “work their magic”) rather than “how the game is played” (giving local import-substituting and export-oriented industries a leg up against their foreign competitors through industry policy that tied in with trade policy).

        Creating a “marketplace or at least an environment where markets will grow” is what the government has been doing the past 20 years through macroeconomic stabilization and deregulating markets. Add to that the social protection that acts as a safety net, that’s the second leg. The third leg of the Washington Consensus plus is good government, rule of law, reduced red-tape.

        Watch how China is able to circumvent that by keeping their currency artificially low, requiring foreign investors to enter joint ventures with state owned enterprises which guarantees them protection from expropriation and extortion and until very recently suppressing the rights of workers. This is in a country where judicial independence and rule of law is absent. They may have joined WTO, but they are not necessarily taking a step back and letting markets rip.

        I am not saying we have to necessarily copy China’s model, nor the other countries in East Asia. What we have to do though is figure out a set of arrangements that will work in the Philippine setting. Now is perhaps an opportune time because China has reached “peak cheap labor”. Investors are again looking around the Asian region for the best deal. We need to do our homework and fast if we are going to get back in the game. A review of industry and trade policy would be so timely.

        • J_ag

          One thing you failed to mention is the fact that China kept its currency pegged for a long period of time. It allows its adjustment entirely based on a glacial timeline in line with its industrial policy with heavy state intervention and participation at the up stream of its industrial sector. 

          Plus it has a system of internal migration laws that has led to an underclass of migrant labor that continues to be used as a the cheap labor source. 

          The cut in demand for the traditional cheap Chinese garments, electronics and toys have forced the Chinese to go up value added chain creating labor shortages for more skilled labor.  The migrant labor force are also being forced to move away from the more prosperous eastern part of China where living standards have gone together with and living costs. 

          The Chinese can adjust quickly since they are a one party state. 

          The Philippines still does not have an agri-industrial base for which products can be produced with short turn around times. 

          Our so called macro-economic fundamentals is still wrapped around a de- facto common currency arrangement with the dollar. 

          Hence Tetangco is like Goldilocks – in managing the forex rate.  Too big a drop in peso value vs the dollar means higher prices for all to low a peso value means OFW and exporters suffer and demand could collapse. 

          My take on this is without an industrial policy in place around a state economic body to include fiscal and monetary policy to be used as tools in this endeavor for long term sustainable development is to let the dysfunctional markets alone.

          Allow the peso at this time to gain further strength.  Allow a crisis to happen. 

      • J_ag

        Creating an environment would presuppose that the State is powerful enough to break up hardened constituencies that prevent the formation of functioning market mechanisms. 

        Markets are mechanisms all tied up by a culture of trust and bound by a system of  a tolerable rule of laws and property rights. 

        That foundation is totally lacking in a country where families and relationships override the functions of the State. 

        The system we have rewards and extols the influence peddlers and those who game the rule of law to get rich.  

        There can be no effective markets without effective state power. 

        It was pitiful that the President used a proposed the buko juice story based on external demand as a reason for optimism about the Philippine economy.. 

        While the whole world is facing a problem of a lack of demand based on secular and structural causes we can find hope in buko juice. 

        The share of net exports of China the so called manufacturer of the world is only 18-20%.  The rest of the economy is internally driven.