Out of poverty with job creation

VIEWED HISTORICALLY, the recent performance of the Philippine economy has actually been reassuring: Favorable trends include a declining public debt and fiscal deficit, recurring current account surpluses, low inflation, a healthy banking sector, and recent and forthcoming credit rating upgrades. Throughout the latest global economic shocks, remittances from oversees Filipino workers and revenues from the country’s vibrant business process outsourcing (BPO) services have helped the Philippines maintain a healthy growth rate. Remittances have also been the backbone of the strong, sustained growth of private consumption, domestic trade, and real estate, among others.

So far so good. But while one would normally expect such solid economic growth to lead to sizeable poverty reduction, this has not been the case. Between 2003 and 2009 the number of people living in poverty actually rose by 3.3 million to 23.1 million overall.

Identifying and addressing that languid link between economic growth and poverty reduction is the primary development challenge facing the Philippines.

Job creation is the cornerstone of the country’s pathway out of poverty. Limited job opportunities do not afford many occasions for people to create a better life for themselves and their families. But how can the Philippines find the right road to inclusive growth?

The key to the success of many high-performing Asian economies has been a dynamic structural transformation where the composition of output shifts from low-productivity to high-productivity goods, where labor moves from agriculture to industry, and exports become more diversified. These economies have maintained productivity gains by systematically upgrading technology and manufactured products, boosting labor productivity, raising household incomes, and fostering inclusive growth.

The Philippines’ economic transformation has been unique, however. Rather than move from agriculture to industry, output and employment shifted dramatically away from both agriculture and industry into services, especially in low-productivity branches such as retail, trade, transport, personal services, etc. Why this has happened is a story too long to narrate here; too-protracted agrarian reform, overregulated industrial relations, a degraded infrastructure, fragmented policymaking, and an overvalued currency are part of a familiar list. In any event, low-productivity services have been the easiest outlet for the poor and the unskilled.

The growth of services has been further accentuated by the rapid expansion of the BPO sector, allowing the Philippines to take advantage of the global service revolution. Over a short period, the country has emerged as a top destination globally for BPO services, including higher value-added knowledge process outsourcing services. But while the BPO industry has provided an important boost to the economy, it cannot be relied on to deliver inclusive growth. This is obvious from the type of education and skills the BPO industry requires—college level abilities that many of the poor cannot realistically access. To provide employment for the growing mass of skilled and unskilled working-age population, the Philippines cannot dispense with developing a stronger and more diversified industrial base. This is the only way to better ensure that the benefits of growth are shared by all.

While the country’s industrial sector has historically grown at much slower rates than its regional peers—inhibiting GDP growth and resulting in the slow poverty reduction—this does not have to be the case moving forward.

It has already made notable progress in resolving some longstanding challenges that affect all economic sectors. These include addressing the tight fiscal position, weak business and investment climate, cumbersome business procedures, property right concerns and rigid labor market conditions. It has also recognized that the current tax incentives for investment, export, job creation and regional development are not sufficient to draw enough investors, particularly foreign ones, or spur local entrepreneurs in industry. This situation suggests that broad stroke “horizontal” approaches to promoting industry may be necessary but perhaps not sufficient to spur an industrial revival, and there may be a need for a new approach, or at least a supplemental one.

Such a view and approach are suggested by a recent report of the Asian Development Bank. Titled “Taking the Right Road to Inclusive Growth,” the report shows how promising lines of manufacturing can be developed with relative ease, mainly because they use capabilities already available in the Philippines’ current export products. These product lines can be chosen either because they use labor intensively, or carry some technological potential, or provide beneficial “spillovers” to other industries. The report suggests that by paying closer attention to the characteristics and problems of specific industries—primarily through close consultation and problem-solving sessions with broad industry councils—practical bottlenecks can be cleared to pave the way for an incipient industrial revival, even while broad economy-wide reforms are still in progress.

To be sure, institutional challenges will remain formidable, and exact mechanisms of coordination are something scholars can study but only Philippine society and polity themselves can transact. After all, the Philippines has not had a fortunate history of industrial planning. On the other hand, especially now that governance capacities are improving through an approach that avoids the excesses of heavy-handed planning or cronyism, there is a real chance of unlocking the Philippines’ enormous potential as a key production base in this region. With tightening labor markets in some countries, recovery from natural disasters in others, and the appreciation (again) of the Japanese yen, there are growing opportunities for the Philippines to draw foreign investors as well as entice domestic players to take a second look at the manufacturing industry.

Once the country develops robust industry and modern services, many more job opportunities will be generated for a much wider cross-section of society. Only then can there be hope that the country can find its way out of the thickets of poverty much faster—because it would be walking on two legs.

Kunio Senga is the director general of the Asian Development Bank’s Southeast Asia Department. Emmanuel de Dios is a professor of economics at the University of the Philippines.