Use your coconut: Of investment gaps and how to fill them (conclusion)

The Philippines has been trying to crack open the investment nut by lifting its competitiveness for such a long time but has not been getting very far. Here’s why.

Continuing on from the first part where we looked at the country’s investment gap of over half a trillion pesos a year, we now turn to the problem of how to fill it and bring unemployment down. The imperative to boost competitiveness is based on the notion that low social returns on investment are due to a lack of opportunities to invest due to poor governance, inadequate infrastructure, and bad local finance.

Government failures caused by macro risks like poor fiscal, monetary and financial policies along with micro-risks including corruption, high taxes and weak property rights lead to a lack of incentives for investing in new ideas. These failures block the supply of innovation and investment. While this forms conceivably part of the problem, it does not necessarily explain the entire puzzle.

A missing piece is the demand not forthcoming from entrepreneurs for existing technology and capital even when it is available due to market failures. Dani Rodrik and Ricardo Hausmann talk about how this comes about when there are significant hidden costs associated with information and coordination. I will try to explain these failures using the coconut analogy.

Imagine that several decades after Robinson Crusoe left the island of Despair, a number of coconut plantations were established. The owners of these plantations were competing for a shrinking share of the coconut trade that existed between several islands in the vicinity. To improve their earnings, they each could find different ways of using the coconut. The process of discovering what types of products could be made comes with a cost caused by free-riders.

The evidence shows that low income countries actually develop first by diversifying their exports. The degree of specialization follows a U-shaped curve with income (diversifying more until reaching about the same level of income as Ireland before specializing). They do this by imitating technology already developed in rich countries. Instead of competing by creating new technology, they find cheaper ways of using existing modes of production in diverse sectors.

This process of “self-discovery” as Rodrik termed it often comes at a cost to the first-mover within a country, a cost which imitators do not incur. This creates a market failure because no one is willing to invest in this process since the information generated by it (“which goods can be produced more cheaply at home”) usually cannot be protected by patents.

This random process of discovery is why such countries as Pakistan and Bangladesh with similar levels of development and competitiveness produce very different products (the former produces soccer balls while the other produces hats). Korea and Taiwan also offer the same lesson (one produces microwave ovens and hardly any bicycles unlike the other). For the entrepreneurs who first ventured into these markets and were protected from the free-riding copycats, huge profits were on offer.

Bailey Klinger and Daniel Lederman have shown that their measure of export diversification, the frequency a country introduces new products into its export mix, is directly related to the height of entry barriers. This is a stunning result since it goes against the prevailing consensus on efficient and well-functioning markets.

Rather than the Global Competitiveness Index cited in the first part of this piece, which is based on subjective surveys, Klinger and Lederman used the World Bank’s Doing Business indicators for measuring barriers to entry which are based on objective measures like the number of days for starting and closing a business. They found that the higher the cost, the greater the returns to innovation from self-discovery.

The barriers in effect performed the role of greenhouses, protecting fragile innovative start-ups from the harsh winds of the free market. This counter-intuitive conclusion robustly supported by the evidence is consistent with the market failure argument. It violates the prevailing theory that increased specialization for poor countries and lowering costs of doing business is the way they should attract investments.

This is also borne out by the development experience of Japan which used “administrative guidance” to encourage many players within emerging industries to consolidate into oligopolies, Korea which offered loan guarantees as a way to subsidize the discovery costs of large diversified business conglomerates, India with its licensing raj which allowed a few pioneering software companies to gain economies of scale without the fear of new entrants, and Brazil which sponsored competitions for innovation with significant exclusive licenses going to the winner.

Klinger and Lederman state that this does not imply that there are no negative effects due to protection. What their study shows is that the positive effects swamp them. This means that rather than justifying protectionism, what it does is build a case for state support for emerging industries. I will have more to say regarding this in a moment.

Moving on to the second form of market failure which is due to coordination costs, picture the island once again. To transport various coconut products to other parts of the area, investments in seafaring ships and the training of sailors are necessary. These complementary investments are needed for an expansion of production to occur. Unfortunately, no one is willing to coordinate with the other inhabitants who live near the shore who could profit from such activities, so nothing happens.

Taiwan’s experience with the orchid industry is illustrative. When the world price of sugar declined, the state figured that shifting farm production to this high end product would prove beneficial. This required coordinated investments in things like greenhouses and storage facilities which the state encouraged and subsidized. The same type of intervention was performed by Fundacion Chile a partly state-owned enterprise which gave rise to a new salmon exporting sector.

The faltering seaweed industry located mostly in the Autonomous Region of Muslim Mindanao and the nascent industry of coco juice seem to be suffering a combination of the market failure problems discussed above. Our electronics industry which is highly specialized in “screwdriver” assembly operations as South Korea once was could be expanded likewise to incorporate more value adding steps in the manufacturing process.

The usual ways by which governments address these market failures is by offering subsidies to defray the costs of “self-discovery” (by sponsoring contests which award a prize to the best solutions for example), financing high risk ventures at the pre-commercialization phase and coordinating complementary investments in specific areas such as research and development, infrastructure and general training.

Think of it this way: instead of borrowing from foreign governments to pay their suppliers to develop our infrastructure (think broadband and high-speed rail) we should be licensing their technologies and awarding these to local firms which can prove they can use it cost effectively to build what we need. This should also apply to contracts awarded to private firms partnered with foreign companies. They should be conditioned on meeting certain local content requirements. Defense contracts should increasingly source local producers as well.

The Department of Transportation and Communication is already on the right track by seeking to borrow to pay for the build while privatizing the operations and maintenance of certain projects like light railways. In time we could be exporting some of these products and services if we create local expertise. South Korea did this with its ship building industry in the 1970s with Hyundai Heavy Industries becoming the world’s leading exporter within a decade. It did this even as global demand for ships declined.

Where will the government get the money to do all this? From itself, by using the savings remitted by overseas Filipinos and stored with the central bank in the form of foreign currency reserves–an unorthodox view that even the “humbled” former dean of the UP Economics School holds! If the government were to set aside a third of the currency surplus flowing in each year (see previous posts on this) amounting to around fifteen billion dollars to fund these activities and assuming a one-for-one investment multiplier, a total of four hundred and fifty billion pesos worth of spending could be generated annually (adding 4.5% points to GDP growth!). This would fill up to eighty percent of the investment gap.

The need to diversify our exports is already apparent with an inordinately high specialization in electronics posing a huge risk to future growth in the face of uncertainty of demand from advanced economies. It is also clear that despite very benign inflation and low real interest rates, private firms fail to undertake investments that would lift the productivity of their idle capital. This underinvestment problem is why such a large proportion of our workforce remains unemployed or underutilized.

Stimulating demand for innovation and investment by addressing market failures should be the priority. The biggest barrier for the Philippines to adopting such a strategy will not be an inadequate bureaucracy as many of our top bureaucrats are well-informed and educated; it won’t be for lack of funds as a substantial amount of national savings remain untapped; it won’t be for lack of ideas as there is a wide gap between domestic and foreign technology that can be filled.

The biggest barrier will be attitudinal as it would mean countering the development mindset that has dominated for such a long time which is largely donor-driven. Having drunk the policy “cocktail” put together according to their orthodoxies to no avail, giving us the title of being “the sick man of Asia”, it is about time we developed our own recipes for stimulating economic dynamism in line with local conditions. I now leave you with a song about the coconut which should punctuate this final thought.

Securing our future through Agriculture

Image courtesy of COCAFM

The average age of Filipino farmers, according to the Chairman of the Senate Committee on Agriculture and Food Sen. Kiko Pangilinan, is 57. Meanwhile, the average age of the Department of Agriculture‘s (DA) employees is mid 50’s.  Aren’t  the figures alarming?

To solve this hounding problem in the Philippine agricultural sector, DA Secretary Proceso Alcala announced during the third Cabinet Cluster on Climate Change Mitigation and Adaptation and Food Security on Wednesday, July 13, that the Aquino government is providing scholarship grants to Filipinos especially the children of farmers to encourage them to take-up courses in agriculture.

“Ang malaking kikitain ang nag-aakit sa mga magsasaka para payagan ang anak niya na kumuha ng agricultural classes. Meron po tayong scholarship funds,” said Alcala.

In addition, the DA Secretary affirms that government programs in agriculture are now in place to help farmers and empower them with proper farming practices and the provision of funding support to increase their productivity in their respective communities.

“Kung iyon pong magulang (farmers) nabigyan natin ng pagkakataon na kumita

Image courtesy of COCAFM

na hindi naman po sila nag-aral ng kumpleto nung una pero dahil sa tamang tulong ngayon na technical, may access sa funds, with that marketing help (from the government), kumikita na po sila ng mas mahigit sa isang ordinaryong empleyadong sumusweldo sa banko,” Alcala stressed.

With the continuous rise in unemployment rate in the country, Sec. Procy said that it is more wise and practical to send children in agricultural schools which are more affordable than allowing them to take-up expensive courses that won’t land them a job.

Sec. Proceso Alcala said that the Department of Agriculture is working hard to achieve and implement effectively government programs to meet President Aquino’s order to advocate and support the productivity of farmers in the countryside or rural areas where help is most needed.

On the other hand, the DA secretary also emphasized the need of Filipino farmers to undergo training in pest management, organic farming and other services to sustainable management of crops, livestocks and grains.

Sen. Kiko Pangilinan, who has been closely working with Sec. Alcala, said in one of his press releases that there are lots of opportunities in farming and what’s needed is actually a synergy of the whole chain–from the producers to the traders.

Image courtesy of COCAFM

The Senator also wishes to change how farmers are generally perceived and turn them as “farmpreneurs.” (coined from the word farmer and entrepreneur)

“We will build their capacity to earn more by providing them the means to sell their products directly to market via our fellow AF2025 convenors. We also have in AF2025 the built-in network to ensure the sustainability of the project,” said the Senator.

Sen. Pangilinan along with the Department of Agriculture and the private sector convened the Agriculture and Fisheries 2025 (AF2025), gathering for the first time representatives of farmers, traders, suppliers and media to craft a long-term plan in addressing the country’s various agriculture and fisheries issues.

“This is an out-of-the box way of approaching decades-old problem of unemployment, poverty, and food self-sufficiency. And this is exactly the proverbial shot in the arm needed to boost further what the DA under the Aquino administration has accomplished. It is about time our agriculture and fisheries sector get the recognition and status that they deserve,” conveyed Pangilinan.

Why Facebook matters to Filipinos, and Philippine business

Twenty-one million. That’s how many Filipinos are on Facebook, according to Jim Ayson’s must read piece on The Philippines as a Facebook Nation.

The Philippines ranks (at the time of this writing) fifth in the world, in terms of Facebook population.

Both are huge numbers.

To put it in proper perspective, Facebook’s Filipino population is almost twice that of Metro Manila’s. It can almost be a province of the Republic.


Let’s reframe our understanding.

For a lot of people, Facebook is the Internet.” —Jim Ayson

Facebook is the number one place where people from the Philippines go to on the Internet. It is bigger than Yahoo. It is bigger than Google. It is bigger than YouTube. Facebook consumes everything.

Twenty-four percent of Pro Pinoy’s traffic comes from Facebook, for example, and most sites from the Philippines probably registered something similar, if not more. It is invaluable.

In all the talk about the rise of blogging’s influence in the country, and how the Telcos want to squeeze out Filipino’s use of the Internet, it is important to note how little this online world really is.  How little traffic originates from Philippine businesses really is. Just look at the top 100 sites on Alexa for Philippines. How many of those are from local companies, or media entities, and how many are global?  Ok, that sounded a little bit more nationalistic, and insular, which is really not what I meant.  Indulge me for a bit?

How little in the sense that most Filipinos use work places and Internet cafes to browse the Internet, and how much of it is spent on Facebook, and little else simply because they don’t have access to it everywhere in their lives.

One way of looking at that is to see it splashes cold water on how influential bloggers, and Filipino net entrepreneurs really are.   But personally, I prefer looking at it from the perspective of how huge this market is, and how great the potential is, and how much more we can take it.

The rise of Mobile Internet in the country will be a game changer as big as GSM and text messaging was to Filipinos. Already we are seeing more and more people tied to their Blackberries. How much more is this going to grow once a nation explodes on mobile space?

It is cheaper to deploy wireless technologies now, and in an island nation such as the Philippines, it is the only way to go. It is why I do not understand why telecommunication companies are simply considering this as a value added service when in fact they should be directing their attention into investing, on bringing the technology to the general public. Making it so affordable that even the lowly janitor can afford it, and can pay meals with it.

It is time to exchange the SMS market, with a market driven by mobile internet. In a country that values PrePaid, one would argue that turning a mobile phone into a wallet would be big business too. Smart and Globe are already doing this, with their respective offerings but it isn’t quite enough is it?

Of course this is a matter of speculation. As a matter of disclosure: I own no stock in any local telecommunications provider, and I am not privy to their internal numbers.

The Telecommunications providers seem to think that they are protecting shareholder value, and have a free market going. Protecting shareholder value is also about creating new businesses rather than milking old business models that are clearly up. As a consumer, from my perspective, I think telecommunication providers simply lack balls.

I have argued that Facebook is done.  There is something fundamentally flawed with Facebook, and revenue generation. Yes, It made over a billion dollars in new financing, nearly a billion revenue and yes, in SecondMarket, Facebook is valued over US$70 billion dollars. As a business, it looks and feels like the end of Web 2.0, and that the next version of the Web would easily eclipse it.

I see it as a market waiting to grow up.  There is huge potential.

This is why Facebook matters to Filipinos, and Philippine business.

What the Philippine ranking of Facebook; what alexa ranking tells us is not about the quality of Filipino users on the Internet, nor the level of the discourse we engage in.  The average CPC doesn’t tell us how little the market is worth.  They all tell us less about what Filipinos value more, but more about the opportunities that exist right now, not just for media, but also of communication, commerce and how much more we can gain by unleashing the Internet on Filipinos. Do you see it?

Photo credit: Facebook logo is in the public domain.

Philippine entry wins top prize in BBC's World Challenge 2010

One year after Efren Penaflorida won as CNN Hero of the Year, the Philippines again wins a global tilt for great, changemaking ideas when  Alternative Indigenous Development Foundation Inc. (AIDFI), an organization based in Bacolod City, bagged the top prize in BBC’s World Challenge 2010.

According to its website, World Challenge “is a global competition aimed at finding projects or small businesses from around the world that have shown enterprise and innovation at a grassroots level.” Now on its sixth year, it is organized and supported by BBC World News and Newsweek, in association with Shell.

“[This global competition] is about championing and rewarding projects and businesses which really make a difference,” the World Challenge website further said.

AIDFI bested11 other entries from Denmark, Guatemala, India, Kenya, Madagascar, Malawi, Mexico, Peru, Rwanda, Tanzania, and Zambia. Their project entries ranged from a coral park run entirely on solar power and water heating; a student-founded “solar energy kiosk” powering a remote African village; an online portal that connects African entrepreneurs with funding from donors and investors from around the world; and a number of others.

According to the official project description for AIDFI’s World Challenge entry:

AIDFI ram pump - BBC World Challenge 2010
The hydraulic ram pump of AIDFI | Image from BBC World Challenge website

It’s baffling how some inventions fail to achieve a tipping point. The hydraulic ram pump – which has been around for a couple of centuries. falls into this category. The Alternative Indigenous Development Foundation Inc. (AIDFI) is determined to see the ram pump finally come into its own. Using the power of a river’s flow to literally push water uphill without any other energy input, it’s proving to be a boon for poor villagers living in mountainous regions.

The ram pump can save both hours of back-breaking work carrying water and cash where expensive water pumps are replaced. AIDFI has introduced the ram pump to over 170 upland villages, and has plans to spread the benefits far and wide among poor communities.

*Learn more about the ram pump and how it works HERE.

According to AIDFI’s website, “The awards ceremony will be broadcast on the 4th of December 2010 on BBC World News and to be announced on the website on the same day and profiled in Newsweek magazine in the December 21 issue which will be on sale on 14th of December 2010.” The victory was announced ahead of time to Philippine viewers through the late-night news program Bandila, and supposedly confirmed by the BBC.

Center for Social Innovation Night on December 1

Some of our Pro Pinoy readers might be interested so we are posting this.

Do you want to get rich and create wealth for others at the same time?

Do you have a great business idea but have no idea how to make it work?

Do you know what you want to do but have no team to work with?

Do you want to start a business but have no idea what to do?

We have the perfect venue for you.

Join us on December 1, 2010, 7:00-9:00pm for the first

Center for Social Innovation Night at Y408, De La Salle University – Manila.

Guest speakers:
Tony Meloto
Cito Lorenzo

Other social enterprises will also share their experiences in establishing and sustaining their businesses.

What is the Center for Social Innovation?

The Center for Social Innovation (CSI) is a new program of Gawad Kalinga that aims to create wealth in GK communities through the establishment of sustainable social enterprises. The CSI model of business emphasizes partnerships with stakeholders such as the GK communities, large corporations, private investors, and entrepreneurs in order to create businesses that are pro-poor as well as pro-environment. CSI aims to fly Filipino brands by supporting young entrepreneurs as well as encouraging innovations and entrepreneurship within the GK communities.

For more information about CSI, kindly check the attachment.

Business and economics faculty and students are highly encouraged to attend this event. For professors who would like to make this an alternative class, kindly coordinate with us so that we can facilitate registration for you.

For CSB students, alumni and outsiders, kindly confirm attendance with us on or before Tuesday, November 30, 2010, 4:00pm.

For inquiries and confirmation of attendance, kindly send an SMS to Carmel Puertollano at 09272101506 or 09331598070. You may also e-mail her at [email protected] Thank you very much!

Global Pinoy Bazaar 201OVE: Instilling Pinoy love and pride one product at a time

If you are a sale freak and have never heard of Global Pinoy Bazaar yet, then better re-tune your antenna because you’re missing half of your life by missing out on this one.

Global Pinoy Bazaar is an annual Christmas holiday bazaar of Yabang Pinoy, a group of young and idealistic advocates and volunteers who pioneered in changing the mindsets of their countrymen by effecting positive social change through various programs and activities, such as Todo Patintero, Piso para sa Bayan, Yabang Pinoy goes to school, Yamang Isip at Takbong may Yabang. Read more

Ateneo's Cultura Verde wins Entrepreneur Student Challenge

Eileen Ang of Entrepreneur wrote,

Beating 25 other groups, Cultura Verde, which means “green culture” in Spanish, is composed of Mary Felicci Ongchuan, Joey Ermita, Eleonor Japzon, Erika Ty, MJ Arevalo and David Nadela—all students at Ateneo de Manila University.

Under the brand “SOULe,” the business produces affordable, stylish and limited-edition shoes using materials such as worn-out airplane tires, old clothes and selected bits of scrap cloth. This way, the fledgling company, which got its start in a bazaar this July, provides the market with “innovative and fashionable footwear while offering a solution to “growing environmental and social concerns,” the group says.

via @ninaterol
Photo via Cultura Verde on Entrepreneur