Finding an appropriate industrial policy in the knowledge economy

Industrial Policy (IP) in the Philippines started at the end of the World War 2 with a regime of regulated free trade with the US, our primary trading partner at that time. This strategy is embodied in the Bell Trade Act of 1946 which had the following major provisions:

• It mandated preferential tariffs on US products imported into the Philippines;

• It fixed the exchange rate between the Philippine peso and the US dollar at two to one; and,

• It granted “parity rights” to US citizens and corporations (a provision which required an amendment to the 1935 Philippine constitution).

The Bell Trade Act was superseded in 1955 by the Laurel-Langley Agreement which contained the following important provisions:

• It abolished the authority of the US to control the exchange rate between the dollar and the peso;

• It made parity rights reciprocal; and,

• It provided for the progressive application of tariffs on Philippine goods exported to the US.

Subsequent to the post-war era, IP consisted mainly of the following measures:

• Those intended to substitute relative free trade as mandated by the Bell Trade Act and the Laurel-Langley Agreement with import controls;

• Transition from import orientation to export orientation;

• Foreign-Exchange controls, and,

• a Filipino First Policy endorsed by nationalists Claro M. Recto and historian Renato Constantino.

In the immediate past, IP in the Philippines consisted primarily of picking or attracting assumed winners, such as car manufacturing and shipbuilding. These post-war IPs defined the industrial landscape of the Philippines in the few decades following the end of WWII.

The fact that we remain stuck in the Middle-Income Trap suggests that IP in the Philippines has been far from successful in improving the economic performance of the country. We have been left far behind by our Asian neighbors in pursuing traditional manufacturing industrial policy which focuses largely on automotive manufacturing, shipbuilding and other heavy industries, and catching up with them is highly improbable.

We should instead take an alternative path to industrial development, one that offers more opportunities for innovation and growth.

FROM INDUSTRIAL TO KNOWLEDGE ECONOMY
We hold the position that a well-defined IP which specifies industries intended for development is appropriate only in industrial economies where economic value is created primarily through physical-resource-based production, and not in today’s Knowledge Economy where knowledge-based production is dominant.

IP in the Knowledge Economy is not about picking winners as it used to be, but setting up the intellectual and informational environment that is conducive to creativity, research, and innovation.

What, then, are the major differences between IP in the industrial age and in the knowledge economy?

• IP in the industrial age specified measures intended to nurture particular sectors through subsidies, tax incentives, and protective tariffs in order to build up the physical capital to enhance productivity. By contrast, IP in the Knowledge Economy consists of measures intended to create intangible assets, such as data, computer software, R&D capabilities, and human capital.

While the shift in the economic setting indicates what an effective IP looks like in the Knowledge Economy, it does not make it irrelevant. We should, however, revisit the traditional approach to IP to make it more in keeping with new realities.

PROPERTIES OF KNOWLEDGE
To begin which, knowledge and knowledge goods have certain unique properties that distinguish them from physical goods and resources, foremost among which are the following:

a.) They are subject to increasing returns, that is they become more productive the more they are produced;

b.) They are subject to network effects, which means that they become more valuable the more widespread they are used or possessed, a property best illustrated by social platforms, such as Facebook and Instagram, and digital devises, such as smartphones and computer software; and,

c.) They are non-rivalrous, which means that they can be shared with others without the original owner losing any value. In conjunction with (b), this property of knowledge implies further that knowledge and knowledge goods are more valuable when shared with others than kept to oneself.

These properties of knowledge and knowledge goods imply that economies will tend to be composed of small numbers of collaborating enterprises rather than several competing ones as envisioned by classical economics.

This leads us to conclude that in lieu of a well-defined IP which seeks to produce physical goods, such as construction materials and automobiles, we should instead focus on the production of services, such as financial and managerial consulting services, and the production of so-called knowledge goods, such as computer software, medical services, biotech products, and semi-conductors — all of which are knowledge- and information-based.

In the knowledge world, government IP consists primarily of providing the needed incentives, such as subsidies and tax breaks, to promote the following:

1.) Helping universities and research institution align with private industry and business organizations in order to encourage R&D and innovation;

2.) Promoting global competitiveness by attracting knowledge workers, assisting universities and businesses develop the needed human capital, and encouraging investment in high-value tech business establishments; and,

3.) Creating and disseminating knowledge and making it more readily accessible.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP.

Niceto “Nick” S. Poblador is a member of the MAP Shared Prosperity Committee and a retired professor of Economics and Management at UP Diliman.

map@map.org.ph

nspoblador@gmail.com