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No Free Lunch

An Asian anomaly

/ 04:05 AM October 22, 2019

Nobel laureate economist Paul Krugman, while on a study visit here in 1992, remarked that the Philippines was a Latin American economy on the wrong side of the Pacific. That was when the “East Asian miracle” had been playing out in many of our neighboring economies, marked by strong export growth driving the manufacturing sector, low inflation, low unemployment and rapid overall economic growth.

In Southeast Asia, Thailand and Malaysia in particular were described as NICs or newly industrializing countries, sharing similar features with “Asian tigers” Taiwan, South Korea, Hong Kong and Singapore, all dynamic and rapidly expanding economies at the time. Poverty rates had dramatically fallen as they sustained 8-10 percent GDP growth for nearly a decade.

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The Philippine economy was nothing like its neighbors then. It had double-digit inflation and unemployment rates, the economy was barely growing, and more than a third of the population were poor. The economy had not undergone the rapid transformation its dynamic neighbors had seen, puzzling many casual observers. Its key features typified the Latin American experience at the time, prompting Krugman’s observation.

More recently, the Asian Development Bank (ADB) has been documenting the Asian economic development story over the past 50 years of the bank’s existence, and the Philippines’ stark deviation from the common experience in the region comes out strongly. Its general synthesis of the economic transformation in Asian economies notes how “agricultural growth contributed to the development of other sectors. Increased food surplus helped prevent the rise of living costs for urban workers. Low food prices enabled urban households to spend more on education and health, in the long run contributing to the increased supply of productive labor.”

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It continues: “Agricultural development helped industry by increasing demand for agricultural inputs (fertilizers, pesticides and tractors) while also increasing supplies of agricultural raw materials to manufacturing (such as cotton for textile and wheat for instant noodles). The rural population’s improved living standards increased domestic demand for nonagricultural goods and services, providing a nascent and expanding market to nurture the growth of firms outside agriculture in the early stage of development. Finally, rural savings were channeled to finance urban and industrial development. Overall, the continued dynamism in agriculture and
the rural economy is an integral part of the economy-wide structural transformation.”

This account of Asian economic transformation typifies the textbook economic development story describing the historical experience of countries worldwide that have undergone the stages of the development process. The critical element lies in the last sentence, referring to a dynamic agriculture sector and rural economy, the one key feature we sadly didn’t have. Our own agriculture sector, rather than being the economic driver it has been to our neighbors, has instead been the perennial drag holding down the rest of our economy. The supreme irony is that the Philippines, through the University of the Philippines College of Agriculture in Los Baños, had been the region’s knowledge and education center for agriculture in the 1960s and 1970s.

What made us turn from being the region’s teacher to the region’s laggard in agriculture? There must be a confluence of several peculiar factors (politics and governance not the least of them) to explain our sad trajectory, but an observation made by ADB provides a clue: “Changes in dietary demands in Asia due to rising incomes and more open foreign trade (emphasis mine) enabled production diversification into higher-value crops and livestock, which contributed to increased land and labor productivity.”

Trade openness is a policy that we have been late to adopt relative to our neighbors, whose outward orientation and trade openness impelled the strengthening of their farm sectors. Meanwhile, we wasted decades falsely believing that trade protection would strengthen ours.

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