ADB tells Aquino to start “picking winners”

According to the Asian Development Bank, the Philippines needs to beef up its industrial policy if it is to achieve rapid and inclusive growth.

Taking the right road to inclusive growth, the report that Norio Usui penned is chock full of evidence in support of this position. The ADB has added its voice to UNIDO in arguing the case for industrial policy to be adopted by developing countries. This is against the grain of thought held by the World Bank, the IMF and the WTO which continue to hold on to the “Washington Consensus” that free markets and good governance are all that is needed for countries to prosper.

Unlike other reports that are full of analysis that mostly describe the problem but offer very little advice (mostly motherhood statements) this one drills down to specific prescriptions and targeted sites for intervention. Usui uses the analytical and methodological tools developed by Dani Rodrik of Columbia University and Ricardo Hausmann of Harvard (both of whom I have featured here and here) to plot out the “product space” into which the Philippines could best diversify its manufacturing and export base.

On a personal note, I was quite excited to see the “Top 20” charts he assembled of products which were closest to our current revealed comparative advantage, which had the greatest potential for spillover, and which had the greatest impact in terms of labour employment. Having done a similar exercise for a development agency in Australia which identified the technology intensity and revealed comparative advantage of the jurisdiction, I was never able to identify the areas in which to diversify. What Usui has done represents the cutting edge of developmental diagnostics at an industry level.

The irony is that the Philippines has demonstrated the capacity for producing highly sophisticated products which is normally associated with richer countries (a point that Hausmann made in The Economist). The problem is that without sufficient public intervention to deal with coordination and information problems and other market failures, such diversification will not occur.

Usui makes the point that while the decline of manufacturing has in part been offset by the growth of services (business process outsourcing being the most recent trend that supported growth throughout the 2000s), growth in employment, productivity and incomes have not kept pace with our ASEAN counterparts. To catch-up, growth would be required in manufacturing to supply “a second leg” with which the economy could pick up the pace.

Despite the presence of broad based programs to attract investments, reduce regulatory red-tape and corruption through the BOI and the PEZA, incentives have been largely redundant and used inefficiently. Although poor infrastructure and costly energy costs the oft cited reasons why investor shy away have some basis, Usui shows how that it may not necessarily be the overriding barrier or cost driver across the board.

In short, specific, targeted, industry-supported interventions and incentives are what would be needed for our manufacturing sector to grow and diversify. These interventions could range from supplying concessional loans or co-investment (something I discuss here), supporting the entrepreneurial process of self-discovery over how to adapt foreign technology to local capacity through research and development (something borrowed from Rodrik), coordinated infrastructure investments to providing subsidies for training (something I discuss here).

To counter the argument that such measures are difficult for weak governments to implement and merely give rise to cronyism and rent-seeking, Usui supplies the remedies acquired through practice by the East Asian economies in their path to development: sunset clauses and exit strategies, clear targets, monitoring and evaluation and contingent cost-recovery mechanisms.

In a previous post I have estimated the quantum of investment required to bring unemployment down to manageable levels along with the policy instruments required for encouraging such investments. What Usui has done is basically identify the sectors to target and engage.

If the government were to spend 200 billion pesos over the course of the next four years to co-invest in private-led initiatives that would generate five times that amount in counterpart funds (we currently have over one trillion pesos locked away in special drawing assets in the banking system) that would raise GDP by about 3% points a year. Add that to the 4-5% growth trend at present, and the government would just about hit its growth target of 7% over six years.

Unlike the scattergun approach being used to implement good governance which like the fiscal incentives program could prove highly inefficient and ineffective, I have recommended a targeted approach appropriate for our level of economic development by focusing on revamping the economic bureaucracy (covering both industry policy and revenue collection and enforcement). Usui supports this view by endorsing industry councils based on the East Asian model.

As I have mentioned before, it is not necessarily a lack of resources that is the problem (we can tap our foreign reserves if we have to, which incidentally will dampen our currency which at the moment is overvalued and hurting manufacturing). Rather it is the poverty of ideas and the ideological and dogmatic blinkers that have prevented successive governments from putting into practice pragmatic solutions to mend the country’s ills.

As the ADB points out, the country is well poised for economic growth given its openness to trade, sound banking system, and benign macroeconomic environment. External events like currency adjustments and wage inflation in China could also provide a precious window of opportunity for us. But there is no time to waste as other countries in the region are rapidly acquiring the capacity to produce highly sophisticated products as we have. The report concludes by saying

Structural transformation, by its nature, is a long process. Challenges may look overwhelming. It cannot happen tomorrow, but in a future within our reach. The Philippines has a huge potential to become a key production base within the regional production network … The government needs to be pragmatic enough to exploit the precious opportunities. Strategic public sector support that embodies a long-term vision of the economy makes it possible to change the economic structure that drives inclusive growth in the Philippines. Success is not always as distant as it seems.

I couldn’t agree more. Let’s hope someone in the Palace is listening.

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.

  • The Aquino government could use the policy recommendations of this report and make it the corner-stone of its development approach. The ramping up of social services to reduce poverty, the K-12, CCT and health insurance programs, originated from the previous government.

    The usual macro-policies, increasing trade openess, infrastructure spending, improving regulation and institutional settings, have proven insufficient in promoting growth, employment and productivity. Daang matuwid, the narrow path, needs to be even more narrowly targeted and intensified in the economic bureaucracy.

    If PNoy adopted this new policy directive and follows through, I predict it will be THE singular best achievement of his administration, leaving the Hacienda Luisita issue aside. Millions of employed workers and business people will owe their good fortune to his government. The now pejorative word “noynoying” will have a different positive connotation come the end of his term.

    • UPnnGrd

       If Noynoy wants to leave a legacy of being a super-good padre-de-familiya and he increased double-fold or better  the benefits to the elderly plus to the students,  then “noynoy-ing” may become the equivalent of “taxer-upper-riser”. 

      Maybe noynoy should just be Mister-Nuke —- Power to the People!!!

  • UPnnGrd

    Maybe Pilipinas can make a strong push to be the Monaco of the Philippines.

    ADB is pushing old-line — to be a manufacturing facility — but maybe Malakanyang’s imagery of NEXT WINNER is Hacienda Luisita meaning for Pilipinas to be Hacienda Luisita to the world —- food production!!! ( If not food, then that stuff where, after more forests are razed, then they raise that stuff that gets processed into ethanol — PersiNoynoy seems to be following guLLOO’s footsteps in leasing more thousands of hectares to China and others so they can raze forests or transform agri-land so they can raise for Ethanol.)

  • Manuelbuencamino

    Picking winners.