We are not bound to walk this path again

Last week, we wrote about the scars and deeper wounds in the Philippine labor market with a recall of the International Labor Organization’s (ILO) forecast at the height of the pandemic in April 2020. The ILO projected that “one quarter of total employment in the Philippines is likely to be disrupted by the impact of COVID-19 on the economy and labor market.”

It’s sad enough that we have suffered lower earnings and working hours, or outright loss of jobs because of the virus, but that it has also been holding hostage a whole generation of our young people with sub-standard learning and training is just too much. It’s like inflicting a hairline fracture on our future.

But are we bound to walk this path again?

As we celebrate Labor Day on May 1 next week, we received an advisory from the health authorities that while Metro Manila and other provinces are under Alert 1, some 26 provinces ranging from Benguet and Ifugao in Northern Luzon to Sulu and Tawi-Tawi in Southern Mindanao, continue to languish under Alert 2. Vaccination remains limited three years after the virus first appeared in Wuhan, China. The Pharmally scandal continues to be archived. We have yet to appoint the head of the Health department.

This is no joke.

Confirmed cases nationwide continued to rise as last week’s average daily new infections expanded by 32%. This translates to 450 cases against the previous week’s 341. While the share of severe cases is less than half a percent and hospital use is below capacity, these last three years should have taught us to be more risk-conscious and pro-active in arresting a possible surge as we struggle against the heat of summer. This is the best time to go to the beach, or a resort, and propagate the virus.

Which reminded me of the Bangko Sentral ng Pilipinas (BSP) launch of the book, Labor Market Implications of the COVID-19 Pandemic in the Philippines, on March 1 this year. We recall reading on the BSP website BSP Governor Philip Medalla saying, “much remains to be learned about the economic implications of COVID-19 pandemic, not just in the labor market but … (also in) the development of human capital.”

It is just incredible that the coverage in the press has been quite muted, given the awesome content of the 400-page volume.

Written by BSP staff, university professors, research experts, and former public officials, the contributions in the book range from the impact of the pandemic on employment, wages, and labor productivity to the retirement system and overseas remittances. It is also refreshing to read policy papers on monetary policy and the labor market as well as possible areas of collaboration between monetary policy and public finance in the post-pandemic era.

Which brings us to the more structural dimensions of the pandemic. This was very well captured by the second article in the book, entitled “Labor Productivity, Structural Change, and COVID-19,” written by former National Economic and Development Authority (NEDA) Secretary and now University of the Philippines (UP) Professorial Lecturer Emmanuel F. Esguerra and UP Associate Professor Karl L. Jandoc.

Esguerra and Jandoc observed that the pandemic further impinged on the Philippines’ modest labor productivity gains in the last two decades. Earlier, reflective of the kind of economic and policy environment in the Philippines as well as the existing labor market institutions, those modest gains unsurprisingly failed to put the country ahead, or at least at par, with its regional peers. The authors cited the World Bank (2018) which reported that structural change has hardly contributed to the country’s growth in productivity.

Using the standard breakdown of labor productivity into intrasectoral and intersectoral components, the paper argued that labor productivity has been growing since 2000 except during the Global Financial Crisis of 2008-2009 and, of course, the steep decline during the pandemic. About four-fifths of productivity growth derived from within-sector productivity gains.

Within-sector, or intrasectoral, gains result from firms’ adoption of new technology, improvement of production processes, or higher efficiencies realized due to international trade. There was very little from structural change, or intersectoral components, or when labor moves from lower to higher productivity sectors.

It was important for Esguerra and Jandoc to have zeroed in on labor productivity because, as the literature demonstrates, “the gaps in per capita incomes and material wellbeing across countries are traceable to differentials in productivity.” Progress is driven by productivity gains.

Citing the study by M. McMillan and D. Rodrik (“Globalization, structural change, and productivity growth in making globalization socially sustainable,” 2011), the paper made the point that structural change could in fact reduce, rather than increase, economic growth. This was experienced in some parts of Latin America and Sub-Saharan Africa. Globalization appeared to have failed to effect structural change, with labor moving in the wrong direction. Labor displacement due to trade liberalization gave way to workers moving away from manufacturing to lower productivity services.

What is tragic in the case of the Philippines is that, as the World Bank (2016) quote clarified: “Economic growth created jobs, but failed to improve their average quality. Most workers have not benefited from growth in terms of higher real wages. This is in sharp contrast to developments in other Asian countries, which saw a considerable increase in real wages.”

Part of the reason is our failure to build the country’s manufacturing base and provide high-productivity jobs to low-skilled and semi-skilled workers alike. Up to this day, one can say that even agriculture remains primitive, services remain mostly informal.

Where do we expect productivity and economic growth to come from?

The pandemic’s economic scarring and deskilling impact, especially on the young people, is too graphic to be ignored. Their learning and training activities were severely impaired. Therefore, what else can we expect but a further deterioration in labor productivity and the quality of the workforce in the future. There is no such thing as simply restoring the labor force to where they were before the pandemic. The economic milieu was flawed in the first place. What the health crisis did was simply to show the weaknesses of the system, and to exacerbate them.

Esguerra and Jandoc’s resonating message is indisputable. It is imperative to increase investments in human capital for reskilling and to overhaul the school curricula to reverse the learning losses during the pandemic. They also called for more careful formulation of industrial policy because of how global trade is unfolding today, that getting into global value chains may not work as before because the big players have increasingly shifted to reshoring or nearshoring. De-industrialization has also been reported even at lower income levels.

The paper suggested relying more on the intrasectoral component of labor productivity. There is value in nurturing tradeable services to leverage on labor in the informal sector and drive them to higher productivity sectors. The regulatory framework should be further liberalized. Budget support should be available to provide complementary inputs to education and training activities like school buildings and curriculum development. Low-end services cannot be ignored. Policies can be enhanced to expand intangible capital including business development, advertising, and software. Digitalization is indispensable.

By no means did the authors suggest moving away from agriculture. In fact, they suggested that enhancing labor productivity here would have the biggest potential impact in reducing poverty and inequality. More investments are critical. Agriculture continues to suffer from lack of scale, stifling traditional intervention measures like commodity price support and input subsidies, and weak labor market regulations. A rethink of public policies should address these weaknesses that were made more apparent during the pandemic.

Today, society is enamored with a whole-of-nation approach to cover all grounds, that nothing is missed, no one is left behind. There should be no issue that the BSP ought to popularize the key messages contained in this book, and extract from there the policy implications and concrete measures to the public.

We don’t need a pandemic resurgence to motivate this, the persistence of economic and social problems that have pulled us back behind many ASEAN counterparts are more than enough.

We are not bound to walk this path again.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.