and highlighted the urgent need for policies that will increase the capacity of pandemichit sectors and firms to create jobs for sustainable and inclusive growth, according to a
new United Nations (UN) Philippines study.
The pandemic has also revealed the vulnerabilities of sectors and firms that are
dependent on foreign trade and intermediates, said the study, as it called for political will
and collective action to implement necessary reforms.
The paper is a joint research project of the UN Philippines with the International Labour
Organization, United Nations Development Programme, and United Nations Industrial
Development Organization that was released earlier this month.
The report further said that policy decisions in the Philippines have not responded to
evolving challenges but rather have continued to produce weak industrial
competitiveness and lack of productive employment, which keeps investments and
demand for skills low.
“These feed the vicious cycle that makes industrial diversification, upgrading and deep
structural transformation increasingly difficult over time,” said the report.
It said intensifying the capacity of the Philippine economy to create productive
employment is now a matter of urgency, with a working-age population of around 75
million and around 600,000 net additional workers entering the labor force each year.
However, it also found that “developing countries such as the Philippines are particularly
handicapped by their weak institutions and their dependence on the continued
openness of the world economy for their own economic growth.”
The report went on to identify main trends that characterize the current state of the
Philippine industry and labor market.
One is the weakening competitiveness of Philippine manufacturing and the shrinking
number of exporting firms over the last two decades.
“The Philippines has also become more of a market of consumer goods rather than a
hub of manufacturing exports due to the combination of a liberal trading regime and a
large domestic market with increasing purchasing power boosted by the robust flow of
remittances. For Filipino firms, this entails behaving like exporters who must compete
with foreign businesses to survive in the domestic market,” the report said.
Another trend is the weakening integration of the Philippine industrial base through the
years, which constrains firms from domestically sourcing their inputs in the most costefficient manner.
“While agriculture has become a more important source of input for industry and
services, the role of these sectors for agriculture production has diminished. Based on
the extent of transactions within sectors, manufacturing seems to have also become
less integrated as indicated by the reduced intensity of sourcing within sub-sectors,” the
paper said.
The third trend is that while the Philippines has increased the sophistication of its
exports through its participation in global value chains (GVCs), it has languished in low
value-added segments of production. The country in general demonstrates a
comparative advantage in labor-intensive, and thus lower-value export goods, and a
comparative disadvantage in higher-value, capital-intensive imports.
Another finding is that industrial catch-up and diversification towards more complex
products is becoming increasingly difficult, slowing down the pace of economic
diversification.
The Philippines did diversify from 2003 to 2018 but this added just 3% to export
revenues, contributing $33 to the country’s income per capita in 2018. In comparison,
Vietnam added 48 new products and $1,015 to its per capita income, and 35% to total
exports during the same 15-year period.
“This suggests that while the Philippines has diversified, the volume of its new products
has not been big enough to substantially contribute to overall growth,” said the
research.
The last notable trend is that the Philippine labor market is characterized by stagnant
growth in real wages, persistent gender disparities, low employment growth and poor
quality of work.
The report said: “The COVID-19 crisis has exposed the weaknesses of economic,
health, social and political systems. In so doing, however, it has also presented
extraordinary opportunities to muster the political will and collective action towards
necessary fundamental reforms.”
It recommends putting at the top of the policy agenda measures that will increase
agricultural productivity and resilience, as well as address the vulnerability of millions of
the working poor, daily wage workers, youth and other vulnerable groups.
It further said that the COVID-19 economic stimulus package for local firms is a
potential catalyst for inclusive growth if proper focus is given to the recovery of small
and medium enterprises.
The stimulus package, it added, could have an even lasting impact on inclusive growth
if it is used to institutionalize reforms particularly in credit access, formalization,
digitization and innovation. It could also be used to incentivize industrial linkages and
the transition towards green technologies and products.
At the same time, the report described how other countries successfully implemented
industrial policies for catch-up industrial growth, largely by capacitating the domestic
industry.
“Invariably anchored on bold and long-terms targets to build domestic industrial base,
successful countries extended strict rules to induce GVCs or large companies to
integrate local firms in their input-sourcing strategies with complementary investment in
upskilling the workforce and supporting research institutes. Tax breaks and subsidies
are combined with pragmatic strategies to deliver necessary skills, finance and
infrastructure to producers and to build socio-political consensus. A COVID-19
economic package for local firms can take place under a fully coordinated industrial
package that contributes to long-lasting development impact.”
September 27, 2021
