Industrial policy for the Philippines: Why we failed miserably

(Part 3)

In the 1950s, the Philippines was considered — together with Burma — the most promising economy in East Asia, way ahead of Singapore, Taiwan, Hong Kong, and South Korea. Like Burma (called Myanmar today), it failed miserably to live up to these expectations, falling very much behind the four East Asian tigers.

During the first four or five years of Martial Law under the leadership of the late President Ferdinand Marcos, Sr., when technocrats like Alejandro Melchor, Armand Fabella, Placido Mapa, Jr., Cesar Virata, David Consunji, Vicente Paterno, and a few others were at the helm of the economy, there was still hope that the Philippines could be a potential “fifth” tiger. During the second half of the 1970s, GDP growth rates averaged 6% to 8%. Unfortunately, by the late 1970s certain political events led to the transfer of economic leadership to the so-called “cronies” who, through monopolizing strategic industries like coconut, sugar, infrastructure, and public utilities, laid the foundation for the Philippines to be known as the “sick man of Asia” by the end of the 20th century.

A major reason for the failure of the Philippine economy to grow and eradicate poverty was a weak and inconsistent industrial policy. Unlike the Tigers, which had consistent export-oriented strategies, the Philippines often vacillated between import-substitution and protectionist policies without any long-term vision. Unlike South Korea or Taiwan, there was little government pressure on firms to become world-class exporters.

As we saw in examining the industrial policies adopted by the Four Tigers, each of them had a short period of protecting “infant” industries through tariffs, subsidized credit, and undervalued local currency. In less than a decade, however, each of them graduated to an export-oriented strategy to take full advantage of the demographic dividend they were enjoying then, and to make up for their lack of natural resources. Since their domestic markets were limited by their relatively small populations and low per capita incomes, they wisely took advantage of the large consumer markets of Western Europe, North America, and Japan by getting into such labor-intensive industries as textiles, garments, toys, wigs, food products, furniture, and other basic consumer products.

In contrast, the Philippines lingered too long in protecting the so-called infant industries, getting stuck in import substitution. Instead of making full use of its abundant labor force, the State fostered such capital-intensive industries as steel, chemicals, ore processing and ship building too early in the stage of industrialization. For too long, the Government kept import tariffs too high, real interest rates too low, and the peso too strong. Because of the coddling of these import-substituting industries for too long, they became complacent and failed to become competitive globally. The domestic market at that time was still too small to permit these inward-looking industries to reach the economies of scale needed to lower costs.

I remember a debate I had with a well-known Filipino economist who kept on insisting on the need to continue protecting these “infant industries” well into the 1970s. I sarcastically retorted that those infant industries had been so pampered as to turn them into “Bonjing” industries (Bonjing was a famous character in comics and TV who was an overgrown and retarded “infant”).

An even more serious policy error was the utter neglect of the countryside and agricultural development. Because of the unrealistically over-valued peso in relation to the US dollar, it was easy to attain food security through imports. There was no serious effort to endow farmers with the infrastructure (farm to market roads, irrigation and post-harvest facilities, agricultural extension services, and access to credit) they needed. Much of the already limited government revenues was channeled to subsidizing the so-called infant industries that sooner or later died a natural death with the increasingly globalized economy, especially those that fell into the hands of the cronies of President Marcos Sr.

Agriculture relatively neglected, especially in comparison with how neighboring ASEAN countries like Thailand, Malaysia, and Vietnam lavished their farming sector with the most generous assistance. Even the two tigers that had very little land, Taiwan and South Korea, invested heavily in land reform and rural productivity. During that same period, the Philippines retained a feudal land ownership system. The resulting low agricultural productivity suppressed rural incomes, keeping domestic demand weak. A large share of the population remained poor, unable to contribute to broad-based growth.

In the 1980s, an agrarian reform program, though well intentioned, was grossly mismanaged. The only result of what was called CARP (Comprehensive Agrarian Reform Program) was the splitting of millions of hectares of land into small units of two hectares or less. There was no follow through of investments in infrastructure and other resources badly needed by the agrarian reform beneficiaries to be more productive, as happened in Taiwan and South Korea, and several decades later in Thailand and Vietnam. This explains why more than 70% of those Filipinos who fell below the poverty line were these millions of landed farmers who had nothing else but a piece of land. At least when they were tenants, their respective landlords provided them with the necessary inputs and technical assistance to enable them to eke out a living from the land they tilled.

Political instability and governance problems were also to blame for the failure of the Philippines to become an economic tiger. There were frequent destabilizing political changes, particularly after the declaration of martial law (1972 to 1986). Investor confidence was seriously undermined. Corruption — which exists up to today — and crony capitalism (a phrase coined by Jaime Ongpin, a famous business executive and major critic of the Marcos dictatorship) meant that industries grew based on political favor rather than efficiency or competitiveness. The People Power revolution that peacefully unseated President Marcos in 1986 led to the restoration of democracy but unfortunately introduced more instability as it was racked with multiple military coup attempts. It took time for the political situation to stabilize, delaying much needed private investments.

To make matters worse, a provision in the revised Philippine Constitution that was ratified by the Filipino people in 1987 contained a provision that seriously limited the inflow of Foreign Direct Investments (FDI) which were badly need by the country to supplement the very inadequate savings of the country. It was only in 2020 that this limitation was removed. Meanwhile, Vietnam cornered FDIs with an inflow of foreign equity capital more than double that of the Philippines.

A final explanation why the Philippines failed to be an economic tiger was under investments in both physical and human capital. The East Asian Tigers were investing 6-8% of their GDP in physical infrastructure at their growth peaks. The Philippines seriously lagged at a measly 2-3%, resulting in weak logistics, power shortages, and high transport costs that further discouraged manufacturing and exports. As regards human capital, while literacy was high, the Philippines sorely neglected technical and vocational education, following the wrong example of the US in giving the highest importance to obtaining college diplomas even if the products of these undergraduate programs did not have the skills demanded by the market.

To summarize, the Philippines failed to become a tiger economy because of weak industrial policy, political instability, crony capitalism, lack of technical education, inadequate physical infrastructure, lagging rural reforms, and a failed agrarian reform program. The Tigers succeeded by doing the opposite: they had stable governance, strong state-led industrial policies, effective agrarian reform, heavy investments in infrastructure and technical education, and export-oriented growth.

(To be continued.)

Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and a visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.

bernardo.villegas@uap.asia