Reopening the economy: Economists identify sectors to be prioritized

By Marissa Mae M. Ramos, Researcher

AS QUARANTINE restrictions ease around the country, a group of economists identified key industries that should be prioritized in reopening and securing assistance, based on their impact on the rest of the economy.

In an unpublished paper titled “Prioritizing Sectors of the Philippine Economy,” economists Cid L. Terosa and Peter L. U from the University of Asia and the Pacific used the statistics agency’s 2012 input-output tables to rank industries based on their respective “multipliers” to the economy.

According to the economists, most of the top-ranked industries are related to consumer spending and production of services. These include food manufacture, accommodation and food services, public administration, and construction.

“All sectors have been hurt by the pandemic, some more and others less. This paper proposes using output multipliers adjusted for demand and employment impact from the input-output table to gauge what industries have relatively more economic impact and merit prioritizing in terms of earlier reopening, or possible assistance,” the economists said.

In this context, a “multiplier” refers to the degree that a sector’s additional output affects the output of other sectors in the economy. Released in 2017, the 2012 Input-Output tables are the latest data available that show interrelationships of production between sectors.

“The idea behind it is simply that every industry uses as inputs the products or outputs of some other industries in the economy. Each industry must produce enough of its output to meet the requirements of other industries’ need for it as inputs to their own respective production activity (or intermediate demand), and that of households and government for final consumption, businesses for investment spending, and demand from outside the country (exports),” the economists said.

One approach in identifying the more important sectors in an economy is to look at “output” multipliers. “[I]f the demand for the product of a sector were to increase (and be satisfied), by how much would the output of all sectors in the economy increase?…All things equal, we would instinctively prioritize a sector with a greater output multiplier over another,” they added.

As output multipliers are limited to the production side and thus may not represent what is demanded in the economy, the authors further adjusted these to account for each of the sector’s share to total domestic consumption as well as their “labor intensiveness.” They called these the demand-employment (D-E) adjusted global multipliers.

TOP-RANKED SECTORS
Based on the economists’ findings, the following ranked high on the list: food manufactures; accommodation and food service activities; public administration and defense, compulsory social security; construction; wholesale and retail trade; and maintenance and repair of motor vehicles.

“Not surprisingly, [the] Food Manufactures sector ranks the highest. This coincides with and reinforces the IATF’s (Inter-Agency Task Force) inclusion of food among the initial list of essential businesses,” the economists said.

On the other hand, they said most of the agricultural sectors, which presumably provide raw materials for food manufacturing, are ranked low. “This is because the agricultural sectors are typically at the start of their respective supply chains. Thus, they would not stimulate much backward linkage activity,” they said.

While the findings suggest giving priority to high-ranking sectors, Messrs. Terosa and U cautioned these figures were “predicated on the assumption that all sectors in the economy are operating under normal conditions.” They cited several of the high-ranking industries are now challenged by physical distancing measures.

For instance, the backbone wholesale and retail trade sector was stifled by the closure of malls and other retail establishments. With the easing of lockdowns, hotels and restaurants are only allowed to operate at limited capacity.

“Even if hotels were allowed to open up again, it would likely not see a lot of foreign travelers as air travel worldwide remains mostly grounded. It would have to rely solely on domestic tourism,” they said.

The economists also cited the high ranking of the construction industry. “Former NEDA (National Economic and Development Authority) Secretary Ernesto M. Pernia had reportedly voiced his disagreement in locking down even construction in priority government infrastructure projects. [The rankings] would support the move to allow construction activity to reopen in the GCQ (general community quarantine),” they said.

Other high-ranking sectors include other service activities; transport equipment; education; arts, entertainment, and recreation; banking institutions; and, computer, electronic and optical products.

CAVEAT
Aside from the dated nature of the 2012 Input-Output tables, the economists noted further caveats in reading into the multiplier rankings.

“It is tempting to interpret [the rankings] as a formula for sequential reopening of sectors in the economy but one must be careful. A sector in the top 10… might not be able to be productive because a lower ranked sector has not been allowed to operate or is severely constrained. Policy makers would have to make a judgment whether the lower ranked industry might also have to be allowed to operate to allow the higher ranked to make its impact,” Messrs. Terosa and U said in an e-mail response to BusinessWorld.

“Similar to the adage ‘No man is an island,’ so also is no industry an island; for all industries are interrelated with each other in an economy. Admittedly, some are more interrelated than others and those that are more interrelated usually end up having more impact on an economy,” they added.

Nevertheless, the economists hoped policy makers can use the multiplier’s rankings as “an initial guide” in prioritizing sectors to prepare for the so-called new normal.

The entire Luzon island was locked down in mid-March, with work, classes, and public transportation suspended to contain the pandemic. The strict quarantine was extended twice for the island and thrice for Metro Manila where reported cases of infections were mostly concentrated.

The lockdown in Metro Manila was eased to a general lockdown on June 1, which was extended until June 30.