Industrial policy for the Philippines: Rich countries adopting industrial strategies

(Part 4)

The Philippines is no longer the “Sick Man of Asia.”

Since 2011, its GDP has been one of the fastest growing in the Indo-Pacific region, together with India and Vietnam. Over the last 40 years, after the end of Martial Law in 1986, slowly and painfully, a series of competent economic managers, appointed even by some rather undesirable political leaders, have been addressing the major economic policy errors described in previous articles.

To refresh our memory, the Philippines failed to become a tiger economy because it followed the wrong economic strategy (prolonged import substitution industrialization combined with an utter neglect of agricultural development) combined with weak institutions, crony capitalism, debt dependence and political instability. Unlike the East Asian Tigers, it was unable to fully implement export-led industrialization, long-term infrastructure investment, technical skills development and good governance.

Although — as the flood control scandal has demonstrated this year — corruption continues unabated, significant economic policy reforms and institution building have occurred. The Central Bank of the Philippines is ranked as one of the best in the ASEAN. Some of the best and the brightest economic and financial managers have been appointed to head key positions in the Cabinet under successive Administrations. Import substitution has given way to export orientation through lower tariff rates, market-determined interest and foreign exchange rates, and the promotion of many more export processing zones. The limit to 100% foreign equity imposed on FDIs has been removed, except in public utility distribution, education, and media. There is greater political will to limit the debt to GDP ratio to the 60% level. There are serious efforts to keep the spending on infrastructures at 5% to 6% of GDP. Major educational reforms are geared towards giving greater importance to technical and vocational education and enterprise-based training programs. Most important of all, the Marcos Jr. Administration has given the highest priority to food security and agricultural development. This year has seen agriculture grow at hefty rates of 7% in the second quarter and 2.3% during the third quarter compared to negative rates in the past.

These policy reforms and institution building accomplishments, despite the continuing challenges to good governance, have enabled the economy to grow at close to 6% annually for more than a decade now, under three Administrations (2011 to 2025). This rate of growth, however, is not sufficient to generate enough resources to bring down the poverty incidence from the very high 16% today to a single-digit level, comparable to such ASEAN peers as Singapore, Thailand, Vietnam, and Malaysia. There should be serious efforts to accelerate the GDP growth rate to 8% or more. This can be made possible if specific measures can be implemented to enable certain leading sectors to grow at above-average rates. This would require some form of industrial policy or another. We shall examine in this article what form of industrial strategy is needed in the Philippines today given the opportunities and threats that both the domestic and global economies present. We shall, of course, take into account some of the continuing weaknesses of the country as well the strengths that have been accumulated over the last 30 or so years as a result of economic policy reforms and institution building.

INDUSTRIAL STRATEGY
As a former chief economist of the Bank of England, Andy Haldane, wrote in the Financial Times, industrial strategies are no longer limited today to the Asian tigers. In the highly industrialized economies, such as in the US and the UK, there is a renewed passion for industrial strategies.

The very destabilizing tariff moves under the Trump Administration in the US are based on certain assumptions about what industries should be revived or strengthened in the US, especially in competition with those of China and some of the other largest exporters to the US.

Last June, the UK government announced an industrial strategy whose centerpiece was a set of targeted strategies for the eight industrial sectors which, on various metrics, offered the greatest growth potential. Among them were advanced manufacturing, life sciences, the creative industries, and financial services.

China is even more detailed. In its Made in China 2025 announcement, there are 10 sectors targeted: Advanced Information Technology; Automated machine tools and robotics; Aerospace and aviation equipment; Maritime engineering equipment and high-tech ships; Modern rail transport equipment; New-energy vehicles and associated equipment (e.g., electric vehicles, hybrids); Power equipment (including renewable energy technologies); Agricultural machinery; New materials (advanced materials, specialty materials); and Biopharma and advanced medical devices (as well as medical/healthcare technologies).

Mr. Haldane, however, cautions that a sector-based blueprint is too narrow and partial to lift the UK’s growth prospects in a significant and inclusive way. He points out that the vast majority of British jobs are in the “everyday” not the “superstar” economy, e.g., public services and health, retail and hospitality, distribution and construction. Choosing “superstar sectors” alone would be insufficient to generate strong inclusive growth. There will be no rising tide to lift all boats. There is no evidence that focusing on high-growth industries will have sufficient trickle-down effects to address mass poverty, especially in a country like the Philippines where the majority of the poor are in the neglected rural areas.

The limitations of industrial strategy alone are especially acute in the Philippines where mass poverty is rampant and the majority of workers are in the “everyday” economy in which they are living hand-to-mouth, especially in the countryside.

The first economic sectors that need special attention and funding from the Government are those that are pre-requisites to the development of any industry. As we learned from our failed efforts in the past to become a “tiger economy,” these are infrastructures (e.g., roads, railroads, airports, etc.); public utilities (energy, telecoms, water); education (especially technical skills training); and an efficient and honest government.

In his column for the Financial Times, Mr. Haldane cites the works of one of the leading proponents of industrial strategy, Dani Rodrik of Harvard University. Rodrik’s “industrial policy for good jobs” puts high skills and good jobs at the center of strategy, both as a means of enabling strong, inclusive growth (economically) and an end in itself (socially). This approach to industrial strategy provides workers with practical job and skill progression pathways; businesses with details on the talent pipeline they need nurture to thrive; learning providers with data on the programs needed to meet local needs; and governments to supporting investments in housing, transport, and healthcare.

We should celebrate the recent emphasis being given by both our government and the business sector to Rodrik’s “industrial policy for good jobs.” Ever since President Ferdinand Marcos, Jr. suggested in his second State of the Nation Address that our K to 12 curriculum be geared towards technical education and away from the traditional focus on college diplomas, there have been real efforts to establish more “Enterprise-Based” skills training programs that are providing our youth with practical job and skills progression pathways. It is also providential that this trend is being bolstered by the increasing importance given to the Technical Education and Skills Development Authority or TESDA that fortunately is now led by a most competent educator very familiar with the work-study or dual education system originated by the Germans.

Secretary Francisco “Kiko” Bantug Benitez, Secretary General of TESDA, is the right person at the right time. Under his leadership, there will be greater and more effective efforts to address the mismatch between what our educational system is producing and what the industrial world is demanding. For example, as we continue to focus on the completely indispensable infrastructure building program, despite the temporary reverses caused by the flood control scandals that revealed rampant corruption among government officials in both the legislative and executive branches, the “dualvoc” system will help address the ironic shortage of plumbers, electricians, carpenters, masons, mechanics, and electro-mechanic workers in general. This clearly highlights that any effective industrial strategy must be preceded by an “industrial policy for good jobs.”

(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