One leg short

“The Philippines is one of the world’s major development puzzles,” then UP School of Economics professor Arsenio Balisacan wrote in 2003. Today, Balisacan heads the National Economic and Development Authority under the Aquino administration. He has his hands full, as an Asian Development Bank conference held in UP Cebu showed.

If Filipinos are to break free of the poverty treadmill, the economy “must walk on two legs,” namely, services and industry, says the new ADB report titled “Taking the Right Road to Inclusive Growth.”

Here, the economy increasingly relied on the “one leg” of services, ADB’s country director Neeraj Jain and economist Norio Usui stressed at the forum. Almost 60 percent of gross domestic product today comes from this “one leg.” Industry’s share of GDP slumped from 39 percent to 32 percent over a decade.

Take business process outsourcing’s track record. BPO grew at double-digit rates. It scurried up the value chain from traditional call services to software development and medical transcription. “The Philippines is now the third largest BPO destination, after India and Canada,” the ADB officials said.

BPO employs only about 1 percent of a labor force where 1.2  million are jobless and 1.4 million are underemployed. Those hired are college graduates. “BPO does not help the more impoverished or less educated… In the near future, it is unlikely that development of services, even with the growing BPO sector, would be solely sufficient to bring the economy into inclusive growth.”

The “other leg” of  industrial upgrading and product diversification withered, conferences at UP Cebu and business groups heard. For example, “the initial success in electronics did not translate into… more sophisticated segments of electronics…. The country went through a process of de-industrialization from the early 1980s,” the report notes. A useful footnote would point out these straddled the last years of the Marcos dictatorship.

Other Asian countries altered their development strategy toward promoting exports and attracting foreign direct investment. Output shifted from traditional primary sector to modern industry. Structural recasting sustained growth and created jobs that whittled down penury.

The Philippines took “the road less traveled.” In the 1950s and 1960s, the country was a regional economic pacesetter. It had then “a relatively advanced manufacturing sector and the highest school enrollment.”

As the 21st century unreeled, Philippine per capita GDP had dropped to the bottom in the Asean-4. “Now, even the gap with Vietnam is narrowing.” Don’t pin the blame on high population growth, Usui counseled. Malaysia had similar population growth over the same period.

What happened? We went on a joy ride with our overseas workers’ “padala” or remittances, which bankrolled private consumption. The booming services sector did not morph into higher employment.

Informal work and emigration remain a major escape route for underutilized labor. “It is not uncommon to see college-educated maids and college-educated taxi drivers,” the report adds. “Deployment of OFWs and massive underemployment mask the extent of domestic joblessness.”

“Productivity isn’t everything,” we read in “The Age of Diminished Expectations.” “But in the long run, it is almost everything.” Philippine productivity, over 15 years, ran along a flat line. In contrast, productivity in Indonesia, Malaysia and Thailand almost doubled.

In the turbulent decade ahead, as in the past, three challenges will dog the Philippines: massive unemployment, turtle-paced poverty reduction and stagnant investment. “A first step toward that long set-aside industrial development is to undertake broad-based—and the key word is “structural”—reforms.

These must address long-standing challenges, such as underprovision of basic infrastructure, weak governance, and an unfavorable perception of the country’s business environment. “Foster structural transformation to generate the jobs needed for the ballooning numbers of working-age Filipinos.”

Learn from history too. “The growth miracle of East Asian economies started in the 1970s. These countries shifted their development strategy toward promoting exports and attracted direct foreign investments. These led to output of high-productivity goods of increasing sophistication. The firms absorbed rural labor pools and reduced poverty. A growth miracle sustained for decades involves the continual production of new goods, not merely continued learning on a fixed set of goods.”

Policymakers need to move beyond shotgun-incentive approaches. Think of more focused ways to target interventions that would help new products. It is vital that an “institutional mechanism be created to identify specific product where interventions are crucial.”

“The Philippines has enormous potential to become a key production base within the region,” Jain and Usui said. “With tightening labor markets in some countries, recovery from natural disasters in others, and the appreciation of the Japanese yen, there are growing opportunities for the Philippines to attract foreign investors.”

“Public sector support is not easy,” the study cautions. “It requires competent bureaucrats under a strong political leadership that places high priority on economic development.” The reform-minded Aquino administration can count on a private sector that responds to vision.

Structural transformation, by its nature, is a long process. It cannot happen tomorrow. “Success is not always as distant as it seems…. A future is within our reach.”

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