Middle-income trap

Last Sunday, Sen. Edgardo Angara was the commencement speaker at the University of the Philippines Diliman.  His challenge to the graduates was to build a middle class, which he said was a potent force for the social transformation of the country. Senator Angara did express concerns that the middle class was too small, maybe even “vanishing.”

The next day the International Monetary Fund raised concerns that emerging Asian economies, including the Philippines, are susceptible to the “middle-income trap,” where the economies stagnate at middle-income levels rather than move on to high-income status.

By coincidence, I’ve been attending meetings this week with Dutch and Filipino partners in a project called Emit, or Escaping the Middle-Income Trap. Emit is a joint project of Erasmus University in the Netherlands and UP, with support from the Dutch government agency Wotro.

For the Philippine component of the research, we are looking at the Calabarzon (Cavite-Laguna-Batangas-Quezon) area in Southern Luzon, which best exemplifies what this MICT (the academics’ jargon abbreviation for “middle-income country trap”) may be.

A few months ago I wrote a column “Hope in the South” about the economic boom in an area that includes some towns in Laguna (notably Santa Rosa), extending to Silang and Tagaytay in Cavite. There’s a real estate boom, numerous shopping centers selling branded (the genuine ones) products, export processing zones. Several of Metro Manila’s best schools have set up branches there: Xavier Nuvali, St. Scholastica’s, and De la Salle, with Miriam and the University of Santo Tomas to follow soon.

I was there on Labor Day and could feel the upbeat mood of people there, one of unbounded optimism of still better times to come. When I told my UP colleagues in the Emit project about this, one of them remarked, “Sounds like a gold rush.”

The “gold rush” began with the export processing zone that did create new jobs, mainly for women to work in assembly plants. In more recent years, the BPOs (business process outsourcing centers) provided another infusion of capital, and jobs, for the area. Perhaps as, if not more, important than the export processing zone and the BPOs is the export of labor. Entire towns have been known to adopt Italian architecture because money is sent in by Filipinos working there.

But grinding poverty remains, made even more glaring because of the trappings of development—for example, a new city hall, or shopping mall. The Emit project at UP is still gathering data to look at why this is happening in the Philippines. The project involves a lot of very quantitative research looking, for example, at company investments, employment generation, as well as other new economic activities. We are particularly interested in how foreign firms may stimulate local firms as suppliers of goods and services.

The UP School of Economics is handling the numbers-crunching while the UP College of Social Sciences and Philosophy will be doing more qualitative research, gathering “stories” from households, communities and companies about their perceptions and experiences of development.

Testing hunches

Research involves testing of hypotheses (kutob  in Filipino), and we have no lack of such hunches. The IMF’s advice early this week to the Philippines and other middle-income countries is to improve infrastructure and diversify exports.

The Emit project is interested in getting more detailed information around the transitions from one stage of development to another. Our Dutch counterparts (who include a Filipino, Annette Pelkmans-Balaoing, and a management professor, Rob van Tulder) have been creating databases to look at countries throughout the world, comparing their trajectories of development. Central to these trajectories is “positioning,” being at the right place at the right time in a global value chain. This early, it is clear the Philippines has persisted at producing “low-value” products in this global chain, and we need to work more on our educational system to produce graduates who can innovate and create new higher-value products and services in a world where so much wealth is being created through knowledge-based industries.

I thought of Nuvali with all its plush stores, selling expensive products produced in other countries (notably China), while local products are still limited to snack items and trinkets. The other week I wrote about a National Academy of Science and Technology forum, where expert economists described the Philippines as going through progeria, a medical condition where we prematurely mature—that is, failing to develop our agriculture and manufacturing industries, we jumped into a service-dominated economy that benefits mainly the upper classes and, to some extent, the middle class.

The last Labor Day observance left many workers unhappy because there was no new wage hike. But this vicious cycle will continue, the poor kept in an endless battle for higher wages that just can’t keep pace with spiraling costs of food and essential commodities, thanks to our neglect of agriculture and manufacturing.

Precarious treadmill

I thought, too, of Senator Angara’s warning about the precarious existence of our small and perhaps vanishing middle class. One of his most striking observations was that “a single stroke of fate—one accident, calamity, or crisis—can send you (the middle class) falling through the cracks.”  I’ve seen that all too often as a university administrator, with middle-class students having to drop out because of an illness in the family, or an overseas worker parent being laid off and unable to get a new job at home.

If there is an MICT that threatens the Philippines as  a nation, there is, too, a similar trap that middle-income Filipino families should try to avoid. We are not very good at diversifying: Look at Internet marketing sites like Sulit and you’ll find everyone trying to sell the same products (usually imported electronics). In terms of our children’s education, we go for the flavor of the month—hotel and restaurant management, for example.

Mind you, the problem is not so much with the course itself as with our ability to innovate, to create a market niche. An education major with good training may find a job, for example, as a curriculum engineer. The other night I had dinner with visiting professors of a Taiwan university that was now offering all kinds of innovative degree programs, including one in vegetarian nutrition. It may sound strange putting in four years to study vegetarian cooking and nutrition, but we’ve seen how Taiwan—poorer than the Philippines until the late 1960s—has been able to anticipate new needs, and to develop innovative technologies for those needs.

Escaping the MICT is not just about infrastructure and technology. Inclusiveness, referring to the involvement of all economic classes in society and a sharing of the benefits of development, is central as well to escaping the MICT. We’re looking, with much apprehension, at how much of this inclusiveness has accompanied development in the Philippines.

If anyone feels the MICT, it’s the poor, with the “T” perhaps not so much a trap as a treadmill. Hard work, maybe even good exercise, but not moving forward.

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