Resuming our industrialization

In the classic economic development story, a country at the early stages of development starts out as an agrarian economy where the agriculture sector dominates in both output and employment, relative to the other two major economic sectors of industry and services. As agriculture grows and productivity increases with technological change, the sector provides a growing market for the products of industry, and releases surplus labor that further propels industrial growth. The economy moves on to the industrialization stage marked by further rises in incomes and employment, supported by scientific and technological innovation. Wealth accumulates and the economy matures, eventually “graduating” into services sector dominance as higher incomes support growing demands for services of various kinds.

This economic evolution is a story that had been played out in most of today’s developed economies. Industrialization was a critical stage that catapulted them to high-income levels. Our four closest Asean neighbors—Indonesia, Malaysia, Thailand and Vietnam—have all seen their industry sector’s shares of total gross domestic product (GDP) breach 40 percent within the last two decades. Industry’s GDP share in Indonesia went as high as nearly half (48.1 percent), while the same peaked at 47.4, 41.5, and 40.1 percent for Malaysia, Vietnam and Thailand respectively. All four continue to have an industry GDP share exceeding 40 percent. In the Philippines, the highest we reached was only 34.6 percent, and it was down to 30.3 percent as of 2012.  This share hardly changed through the last two decades, and stayed mostly within the 31-33 percent range. Meanwhile, our neighbors saw their industry sectors become the largest sector in the economy at some point. Here, however, the services sector had consistently been the largest, and its GDP share rose from 45 to 57 percent from the early 1990s through the present. The growing dominance of services came out of the share of agriculture, whose share dropped from 22 to under 12 percent within the same period.

Back in the 1990s, some suggested that the Philippine experience was one of “leapfrogging” the industrialization process; that is, we were jumping straight from agriculture to services sector dominance as if accelerating into early maturity. We now know with hindsight that this was not exactly a good thing. Our failure to attain wider and deeper industrialization at the time appears to have taken a toll not only on our overall economic growth rates, but also on the inclusiveness of that growth. What thrived instead were services industries like real estate, banking and insurance, transport, telecommunications and mass media—all industries where the benefits of growth historically tend to be narrowly distributed. Our much higher level of poverty and inequality relative to our neighbors must at least partly be attributable to this unusual structural growth pattern wherein we failed to industrialize as much as our neighbors did in recent decades.

The good news is that all is not lost. We can yet get back on the industrialization track, and there’s statistical and anecdotal evidence that this is in fact already happening. We seem to have reached a turning point in 2010, when manufacturing somehow found renewed vigor. The proof can be clearly seen in the data. The National Statistics Office has tracked growth of key manufacturing industries via the Monthly Integrated Survey of Selected Industries (MISSI). Annual growth reported by the MISSI averaged -4.0 percent (volume of production) in the period 2004-2009—that is, covered manufacturing industries had actually contracted through that six-year period. But the last three years (2010-2012) saw a complete turnaround, with annual growth averaging an impressive 10.9 percent. Furthermore, capacity utilization has gone up nearly 2 percentage points, from an average of 80.3 percent in 2004-2009 to 83.1 percent in 2010-2012.

A similar breakout may be seen in the GDP accounts, which track manufacturing sector growth more comprehensively. The data reveal that overall manufacturing growth averaged only 3 percent annually in 2004-2009, but has averaged 7.5 percent in 2010-2012. But there’s more evidence beyond the statistics of a latent resurgence in Philippine manufacturing. Unknown to most of us, we have already become the fourth largest shipbuilding country in the world, according to industry insiders. This we owe to substantial investments in shipbuilding and repair facilities within the past decade especially from Korea and Australia in Subic and Cebu—and more are coming, we are told. In Batangas City, a sprawling area is being prepared for the impending entry of manufacturing industries that will make use of the products of a large petrochemical complex that has been in operation there for years. The management of the Phividec Industrial Estate in Misamis Oriental (PIE-MO) now reports an average of six new locators per year, whereas it averaged only two to three in the past. It is already looking to expand further eastward to accommodate interested new locators. Likewise, the Mindanao Container Terminal servicing has already been slated for further expansion. In general, manufacturing activity at the small, medium and large scales appears poised for renewed growth due to high levels of business confidence clearly manifested in the quarterly survey of business expectations by the Bangko Sentral ng Pilipinas.

All these to me are hopeful signs that we are getting back on the industrialization boat that we missed in decades past—and with that would hopefully come more inclusive growth.

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