By Junhong Chang and Nestor A. Espenilla, Jr.
ASIA is known as a manufacturing powerhouse. Yet, in the future, a growth strategy heavily focused on manufacturing for exports may not bring significant success, as it did for the likes of Japan, Korea, and China.
In recent years, manufacturing has not generated growth and employment as it used to. At the same time, clues to alternative ways forward may be found in the experiences of economies that have embraced services as an alternative engine of growth and employment. The Philippines is a prime example.
The ASEAN+3* Regional Economic Outlook (AREO) 2018 recently published by the ASEAN+3 Macroeconomic Research Office (AMRO) notes that strong macro forces are challenging the traditional growth catch-up model. Newly emerging economies used to reap economies of scale, bring in foreign-currency earnings, and attract investments by producing simple to increasingly complex goods for exports. Now rapid technological advancements have raised the bar for new manufacturing entrants and participation in global value chains, as well as investments in capital and skills to improve competitiveness. In the past, economies moved up from manufacturing and later diversified into services. Now technology and the rapidly changing production processes have given the services sector a more prominent role, both as a key enabler of manufacturing, and as a growth driver and jobs creator.
Consider the following developments.
Globally, many types of services have become indispensable for manufacturing. Without research and development, transport and logistics services, and marketing and sales, goods cannot go from factory floors to consumers or other manufacturers. In the ASEAN+3 region services sector’s share of exports in value-added terms has jumped over the past three decades to reach 30-50%.
Many services have become more tradable, thanks to the revolution in information and communications technology. Call center services, as well as accounting, legal, and human resource management services are provided across borders and subject to international competition. The travel and tourism sector has grown tremendously, alongside a rising global middle class, changing consumer preferences, and improved connectivity. Today, in most ASEAN+3 economies, services account for more than half of GDP and employment.
Could countries like the Philippines converge with high-income countries rapidly, without adopting the traditional manufacturing-for-exports growth strategy? This is entirely feasible.
Services account for a hefty 40% of the Philippines’ total exports, driven by the business process outsourcing (BPO) sector. BPO employs more than 1 million workers, mostly with college degrees, in a country with a young growing population. It pays wages three to five times higher than the national average. Over the past decade, the Philippines’ BPO sector has expanded across the archipelago, bringing jobs and prosperity to the provinces. Its value proposition has broadened from call center services to include more complex functions such as back office support, data transcription, animation, and software development.
The Philippines recognizes this and is meeting the challenge head on. According to an International Labor Organization estimate, up to 90% of jobs in the country’s BPO sector face disruption from automation. The remainder will require higher-order skills. Public sector agencies and private enterprises are exploring means to harness, rather than resist, technology. One example is using artificial intelligence-enabled software or robots to perform tasks quickly, work 24/7, and produce high-quality output. Another example is embracing cloud technologies to develop BPO as a specialized service provider, opening up the small and medium-sized enterprises market, which offers a more tailored approach to providing needed services.
The Philippines has an edge over many other economies in terms of human resources. A large segment of the country’s work force is young, educated, English-proficient, and IT-savvy. While the Philippines is playing catch-up in building physical infrastructure, the BPO sector places a premium on soft ecosystems. As the government’s “Build, Build, Build” program gathers momentum, the country can emerge as a very strong player in services. The same would apply to the travel and tourism sector.
More and more tourists of the future will likely demand experiences best delivered by skilled workers applying high-technology methods.
For example, preferences are growing for more complete inflight experiences, including customized meals and fresher entertainment. For medical tourism, a fast-growing segment, experiences sought after may range from physicians’ advice and treatment administered by physiotherapists to entertainment during waiting periods and after-treatment counselling services. All of these need highly skilled and highly adaptable workers.
Having not pursued the traditional manufacturing-for-exports growth strategy, the Philippines’ experience in harnessing BPO and other segments of the services sector provides some valuable insights on ways the region can stay plugged into the global economy, propel growth, create good jobs, and improve livelihoods.
* The ASEAN+3 region includes the 10 members of the Association of Southeast Asian Nations (ASEAN); and China; Hong Kong, China; Japan; and Korea.
Junhong Chang is Director of the ASEAN+3 Macroeconomic Research Office (AMRO) and Nestor A. Espenilla, Jr. is the Governor of the Bangko Sentral ng Plipinas (BSP).