Missing links to a stronger export sector

Fiscal incentives alone cannot produce a strong export sector. Our export sector contributes 28 percent of our GDP versus the global average of 45 percent among 142 exporting countries. We still export a lot of raw materials (like base metals and minerals) and import the finished products that made use of our raw materials. Locally manufactured goods that we export, save for a few, still largely involve assembly processes, or low value-added manufacturing processes, almost as it were three decades ago.

There are enviable countries that have progressed dramatically, and we have something in common with them. The likes of Japan, Taiwan, South Korea, Singapore and our Philippines were all ravaged by war. The difference is that it took them, except us, a couple of decades to turn into powerhouse exporters of the world.

How they did it is an open secret. Before they became exporters, they were manufacturers. They made their manufacturing sector strong to make their export sector strong. They upgraded or graduated from assembly process to process engineering, product development, and research and development (R&D) on what to innovate or invent.

The sad fact is that we have remained essentially stuck to assembly, except for a few exporters that have innovated. We may have gone up in rankings recently in innovation (most likely courtesy of our tech startups) but we still have little to show in innovation in the manufacturing sector – the game changer for the countries that rose to developed or First World status.

Now, this article is not about putting government agencies down because we do have the Department of Science and Technology (DOST) for its programs on innovation, and the Department of Trade and Industry (DTI) that encourages technology and works with startups. We even have a new law passed – the Philippine Innovation Act. On top of that, our investment promotion agencies work really hard to attract exporters to the country.

The fact that we were really not able to move the needle may mean that we need to emulate what other countries did to be successful.

Japan, the world’s fourth largest exporter, has been manufacturing and exporting high-tech products. But when it was trying to rebuild, it deliberately avoided, where it could, finished products and imported items that were high-tech or not at the same level as those that they manufactured.

Taiwan, with 70 percent of its GDP coming from exports, manufactures and sells electronics and communication audio-video products for which it is known. It even sells to China, its biggest market despite politically strained relationships.

South Korea initially adopted a protectionist import substitution manufacturing policy before it developed itself into a solid export-based economy in just two decades.

The key to success of practically all exporting countries is the development of their human resource. A prime example is Germany, the world’s top exporter that has concentrated on developing manpower needed by the industries it wanted to be strong on. It relied on a strong vocational and technical schooling program to develop a workforce with high industrial skills. Students enrolled in the program spend more time in factories and plants and less in the classroom, making them employment-ready and fit for promising careers. Germany also gave fiscal support to its SMEs that venture into industrial manufacturing.

These countries also encourage foreign professionals and highly skilled people to come and live there, and they take advantage of their talents. It is an issue here because foreigners are not allowed to practice their professions here but if they are, they have a tough time in getting licenses or permits. So we miss the train on these technology transfers and our skilled workers become complacent with their skills because they are not challenged.

The other X factor is innovation where we have a dearth of. We need what other countries have: a functional R&D program that has labs that can do reverse engineering on high-tech products. The R&D labs by public and private sectors, including the academe, can help us graduate from assembly, to process engineering, then to product development.

And as to foreign exporters that enjoy incentives, part of the conditions of their incentives should be to work with the academe to support voc-tech training programs. This can help them economize on labor costs by virtue of a flexible workforce. It is different from merely being given incentives to do training (like double deduction for training expense) versus requiring them to have that program with our academic institutions. Also, foreign exporters should further be incentivized if they transfer technology or special skills to their local value chain of suppliers.

So back to these war-ravaged countries that are now developed countries courtesy of, in no small terms, a successful export program. The large part of their plan isn’t exactly rocket science. They looked at what industries they needed, they directed or attracted their young population to these industries by training them well, they attracted and leveraged on foreign talent, and they have purposeful or well-directed innovation programs.

The other part of the equation that all of them have is something which Singapore, a powerhouse exporter has as a country and a nation – good governance and discipline. No government is an angel, but for these successful countries, there is quality government intervention, and budgets for their critical national programs were not crippled by corruption.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.