Jumpstarting industry: Opportunities and barriers

There is talk these days about reindustrializing. And there are urgent reasons why. According to statistics, industry – and manufacturing in particular – has been a declining contributor to total GDP for over three decades now. From industry, jobs of greater permanence and high productivity can be generated.

“Changing economic perceptions.” New perceptions about the Philippine economy (despite Yolanda’s destruction) are still favorable, to wit, “investment grade rating”; “7 percent annual growth”; “large labor pool of educated and English-speaking work force”; and “rising cost of labor in China and other countries.”

Recently, I spoke before the 3rd Manufacturers’ and Producers’ Summit at the Hotel Intercontinental on problems and opportunities faced by industrialists in the country today. Such talk is relevant for the Philippine Chamber of Commerce and Industry (PCCI), the nation’s chamber of businesses in the industrial and commercial sector.

“Two tracks of Philippine industry need to converge.” In my Nov. 11 Crossroads essay, “How we lost our industrial edge”, I explained how the two-track industrial pattern developed in our country.

We have essentially two industrial sectors: one caters mainly to the domestic market and the other exports its output but imports all its raw materials. The two sectors need to trade with each other more to spread the benefits from their market growth.

The “domestic” industrial sector is highly protected from entry of foreign direct investments. The domestic industrial sector covers a wide range of manufacturing activities. However, the industrial enterprises have limited capacity and they do not enjoy economies of scale. Also, manufacturing costs are high relative to internationally imported goods. In short, the domestic industrial sector is limited to the local market and is less internationally competitive.

In the second, distinctive industrial sector is mostly composed of FDI enterprises operating in export processing zones and produce goods mainly for the world market. Most of the enterprises hire Philippine labor to assemble imported raw material inputs. Business processes are efficient, rapid and low cost compared to the domestic industrial sector.

This two-track model of industry should have corrected itself many years ago. The export processing zone model of enterprises was initiated partly to induce the domestic industry to become more efficient.

This has not happened. Despite the reduction of average tariffs and other barriers, industrial incentives in the domestic sector excluded foreign direct investments from entry into the sector. With the exception of a few pioneering ventures allowed in the domestic economy. BOI incentives, regulations and overall industrial climate favored the exclusive control of the domestic industrial sector by citizens.

Among successful ASEAN member nations, their industrial sectors emerged much stronger than ours because they allowed foreign direct investments to share in the growth of the domestic industrial sector. FDIs were allowed to participate with a higher degree of foreign equity participation than that allowed within the Philippine context. They expanded the market base and the supply network within their industrial markets.

In this way, the inflow of FDIs into their economies helped to increase the sophistication and variety of their domestic manufacturing sector. They also developed greater economic scale in their operations. As a consequence, many of the FDIs encouraged had more linkage to the domestic economy.

Today, more than ever, it is desirable to encourage the integration of these two parts of the industrial economy. This can be achieved if the country’s investment policies would permit greater participation of FDIs in the domestic economy that is still protected by regulations and BOI investment incentives inherently tilted to favor domestic capital only.

“Barriers to industrial resurgence.” Several important barriers hinder the growth of domestic industry. The costs associated with these barriers cumulate together and they make industrial operations and distribution of goods less competitive.

These barriers include the high cost of energy; infrastructure deficiency which leads to poor logistics; high cost of doing business (corruption, business processes, and regulations); and last but not least, labor costs (especially in relation to labor-intensive industries).

The “Doing business” costs related to corruption, regulations, and business processes are getting addressed by the government. The persistent efforts in this regard show very positive signs  in the recent improvements in international surveys.

Energy cost is one of the highest in modernizing East Asia. The situation is a legacy of the country’s energy deficiency resulting from the government’s mistake in not putting into use the finished nuclear power plant. The abandonment of nuclear electrification program has led to an escalating cost of energy in the country in the extreme because of the measures applied to resolve the serious electricity shortage that occurred in the 1990s. Today, the after -effect of those measures still constitutes a major challenge to the government still.

Poor logistics is an outcome of infrastructure deficiency. Under-investment in infrastructure during the last 30 years is taking its toll. For many years, the country had lived off (sad to say) on the infrastructure investments undertaken during the martial law period.

One of the major barriers toward raising employment in the country – the employment of the young just out of school and of a lot of unskilled and semi-skilled workers still dependent on the rural sector for their livelihood – are problems tied up with labor market policies. I will discuss labor market issues as part of the industrialization problem next week.

“The restrictive economic provisions of the Constitution once again(!).” Many barriers to further industrial development and the improvement of the country’s competitive position vis a vis ASEAN neighbors could be resolved, if the policies concerning foreign direct investment were less restrictive within the whole economy.

This again simply emphasizes the relevance of the restrictive economic provisions of the Constitution to the country’s weak industrial performance. President Aquino continues to ignore the issue of amending or liberalizing these provisions. I am glad that Speaker Belmonte is still pushing the issue. He is right.

The most efficient means of dealing with these problems is through constitutional amendment. Alternative measures could help to solve some of the problems. However, they do not have the powerful impact that an appropriate Constitutional amendment could offer in altering the national industrial direction.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/