Good news from the manufacturing sector

Political noise may weigh heavy on business confidence but for so long as the manufacturing sector grows at a good pace, we can all be assured that the country is still headed towards the right direction.

In its third quarter economic report, the National Economic and Development Authority (NEDA) announced that the manufacturing sector expanded by an impressive 9.4%, the highest growth rate in the region. Our manufacturing sector outpaced that of China and Malaysia, which grew by 6.8% and 5.8%, respectively.

The expansion of the manufacturing sector was driven by increased outputs of electronics, food and beverages, petroleum, chemicals and automobiles. Interestingly, the full effect of government’s infrastructure program has not yet been factored into the equation. Hence, we can expect even more robust growth in the quarters to come.

A strong manufacturing sector is the foundation of a strong economy. This is because manufacturing industries generate jobs by the millions while offering security of tenure, competitive salaries and opportunities for career advancement. It promotes stronger inter-industry linkages where all those connected to the supply chain benefit. Above all, it pushes innovation and technological development within an economy, allowing it to grow in sophistication.

No doubt, a resurgence in the manufacturing sector is upon us.

It started in 2011 when the Department of Trade and Industry (DTI) launched a program called the Comprehensive National Industrial Strategy. At the heart of it are what they call “industry road maps.” These road maps provide the framework and chronological steps in which to elevate certain industries from its infant stage to a level of global competitiveness.

To date, more than 60 industrial road maps are in various stages of implementation. Those in advanced stages include the electronics, garment, textile, auto parts, chemical and food production industries. This is why they are competitive enough to compete in the export market.

The manufacturing sector has grown in good pace since the industry road maps were put into effect.

Between 2011 to 2014, the sector posted an average growth rate of 6%, accelerating to 7% in 2015 and rallying by 8.3% in 2016. Under the management of current DTI Secretary Mon Lopez, the sector is expected to realize double digit growth if not this year, then by 2018.

With growth at this pace, we can all look forward to becoming a full fledged industrial economy by the year 2025. This is significant because being an industrial economy will allow us to finally graduate from being a lower middle income society (which we are today) to an upper income one where per capita income exceeds $10,000.

INDUSTRIALIZATION IS FUNDAMENTAL TO INCREASE INCOMES
Policy makers in the ’80s and ’90s made a deliberate attempt to bypass the process of industrialization and make the country leapfrog from an agricultural economy to one based on services. They succeeded.

Today, the service sector makes up 59% of the economy and yes, we have graduated from being a low income society to a lower-middle income one.

We have done so by being the world’s preeminent provider of “low cost” employees such as call center operators, maritime staff, waiters, bellhops and retail front-liners. But unfortunately, this is as far as this policy will take us.

In a paper published by Changyong Rhee, Chief Economist of the Asian Development Bank, he asserted that it is relatively easy for any economy to graduate from low income status to lower-middle income status where each household earns between $3,500 to $5,000 a year. But to take the economy to the level of South Korea or Taiwan, where per capita income is north of $10,000, is a different story. It necessitates technical competence in such fields as advanced sciences and engineering. All these require the presence of a strong manufacturing base.

“Advanced and sophisticated manufacturing is key to provide advance complimentary services,” says Rhee. So for as long as the manufacturing sector in the Philippines remains underdeveloped, the country will continue to languish in middle income purgatory.

This is painfully evident in our agricultural sector.

The Philippine’s failure to industrialize caused agricultural outputs to stagnate at 1970s levels. Our inability to manufacture even the most basic plowing, tilling, and cultivating machines have left farmers with no choice but to rely on animal driven methods which are highly inefficient. Farmers who can afford imported machines pass-on the cost to the consumer. This, in turn, has made most local agricultural products more expensive than those from Thailand.

It is also evident in the BPO sector.

With due respect to our call agents, call center services are considered to be the lowest wrung of the business outsourcing industry given its basic technical requirements. This is why call center agents earn just $20 a day, on average. In contrast, countries like India whose manufacturing sector have given its people competence in such fields as digital engineering, industrial design and applied chemistry, are able to command as much as $150 a day for their services.

This proves that a strong manufacturing sector is a basic requirement to achieve high incomes.

STRUCTURAL REFORMS
The good news is that we are on the right track. Our growth rates affirm it. Moving forward, a few structural reforms are necessary to sustain the growth trajectory we are on.

When the DTI drafted its industry road maps, it had a vision to make the Philippines a fully integrated manufacturing economy with forward and backward linkages by the year 2025. The goal was to make the Philippines either a manufacturing hub and/or part of international supply networks of such companies as Hewlett Packard, Toyota, and Nestle. In addition, the DTI aspired to increase the value-added ratio of our manufactures from 23% today to 30%, by 2025.

So what remains to be done to realize these goals?

The first is to rid the manufacturing sector of its impediments to growth. They are: High power cost, smuggling, insufficient/inefficient infrastructure, and a lack of foreign direct investments (FDIs), particularly those that infuse new technologies.

There is light at the end of the tunnel in as far as FDIs are concerned.

In a recent pronouncement, President Duterte declared his full support towards relaxing the industry black list and equity ownership limitations for foreign investors. This single move could unleash an avalanche of FDIs that can change the manufacturing sector tremendously.

Since this will require an amendment of the constitution, we hope the members of the legislature will cooperate.

Other structural reforms that must be addressed consist of elevating the skills of our work force, filling the remaining gaps in the supply chains of key industries, increase spending in research and development and having our manufacturers migrate to clean technologies.

In a private chat I had with DTI Sec. Lopez a few months ago, the secretary reiterated his commitment to hasten the development of the manufacturing sector. The DTI has our full support. Done right, we can find ourselves as a upper middle income economy with advanced manufacturing industries in just eight years.

Andrew J. Masigan is an economist.