Harnessing Science and Technology: Reviving the Philippine Manufacturing Sector By Arsenio M. Balisacan Socioeconomic Planning Secretary and Director-General, NEDA
35th Annual Scientific Meeting,
National Academy of Science and Technology
Manila Hotel, Manila
10 July 2013
First of all, I would like to thank the National Academy of Science and Technology for inviting me to give the keynote address to its 35th Annual Scientific Meeting. I would also like to congratulate this year’s awardees. We are glad to see that the NAST is taking this opportunity to deepen the discussion on the role that science and technology can play in reviving the Philippine industries, particularly the manufacturing sector.
My presentation begins with an overview of the country’s recent socioeconomic performance. It then proceeds to elaborate on the development imperatives for the second half of the Aquino administration. It moves on to specifically addressing the challenges for S&T and industry. It ends with concluding remarks on the way forward.
Our economy has grown remarkably over the past couple of years. This is particularly impressive given that much of the rest of world are either in crisis or slowly recovering from crisis.
From the start, we have emphasized the crucial role that industry, particularly manufacturing, plays in development. This is why we are very encouraged to see the latest data on the performance of the Philippine economy. Not only did we have a very good growth of 7.8 percent for the first quarter of 2013 after a better than expected full year growth of 6.8 percent in 2012; industry also led the pace of economic expansion, growing at 10.9 percent, with manufacturing, the sector’s biggest component, growing at an impressive rate of 9.7 percent despite the 8.4 percent drop in our goods exports. The main contributors to the strong growth were manufactures of food, household appliances, communication equipment and apparatus, chemical products, basic metals, machinery and other equipment, and transport equipment. The next highest contributor to industry’s growth is construction, whose 32.5 percent strong growth indicates a good positioning towards an industry-led economy.
However, about 62 percent of the country’s domestic output is concentrated in three regions in Luzon, namely Metro Manila, CALABARZON, and Central Luzon.
The huge disparity in development between the regions is also reflected in high income inequality. Inequality in incomes and opportunities can weaken the power of economic growth as a key strategic vehicle for eliminating acute poverty. Rising inequality can also undermine political and social stability, which is a necessary condition for sustainable development and prosperity.
Poverty remains high—and has not changed much in recent years. Based on the official poverty lines, the proportion of the population deemed poor decreased only slightly from 28.8 percent in 2006 to 27.9 percent in 2012.
The big challenge, therefore, is ensuring that the growth process is inclusive. By this, we mean that a lot more are able to participate in the growth process, but all benefit from the growth, particularly the poor. Clearly, more needs to be done.
For the past three years of this administration, we have been working to promote rapid, sustainable and inclusive growth. We have learned useful lessons along the way. Among these are:
First, good governance has proven to be an effective platform upon which development strategies should be implemented.
Second, macroeconomic—fiscal, financial, external—and political stability fuels positive expectations that lead to growth.
Third, economic growth is necessary but not sufficient for poverty reduction.
Fourth, growth strategies need to have geographic and sectoral dimensions to ensure inclusivity.
And fifth, disasters, both natural and man-made, can negate the gains and even push back development.
With these lessons in mind, we are currently updating the Philippine Development Plan 2011-2016 to identify gaps and refine our strategies so that we can achieve our development targets.
The updated Plan is grounded on three basic principles. First, government plays a catalytic role, that is, government provides enabling conditions for the private sector to invest in productive sectors of the economy. Second, government advances equity goal by broadening access to opportunities through connectivity and human development. And third, the strategies and actions to achieve inclusive growth are doable within the Plan period, especially in the second half of this administration.
We are not giving up on the twin goals of rapidly increasing employment opportunities to substantially reduce the stock of unemployed persons and significantly reducing poverty to come as close as possible to our Millennium Development Goal (MDG) commitment.
The industry sector, particularly manufacturing, has a crucial role to play in helping us achieve rapid and inclusive growth. But we need to reverse its stagnation and decline. The Philippines had relatively high manufacturing-to-GDP ratio in the 1980s but since then other Asian countries have outpaced the country. From about 39 percent of GDP in the 1980s, Philippine industry fell to 33 percent in 2010-2012. This is a sharp contrast to Thailand, whose industry-to GDP ratio peaked 44 percent in 2010-2012 from 30 percent in the 1980s. National Scientist Raul Fabella calls our malady a “development progeria”.
Employment levels in manufacturing have declined over the past two decades, which reflects the anemic state of Philippine industry. As of the April 2013 round of the Labor Force Survey (LFS), about 53 percent of the employed are in services, 31 percent in agriculture, and 16 percent in industry. Manufacturing accounted for only about 8 percent of the total employed. There is strong evidence in the literature that links a thriving manufacturing sector with poverty reduction.
However, even assuming an annual growth of seven percent or higher, manufacturing can only absorb a small proportion of less-educated workers and as such complementing policies and programs that will boost productivity in agriculture, where a lot of the poor are, need to be implemented as well. And I am pleased to recognize the efforts of the group of Academician Emil Javier for coming up with such a program for agriculture.
In 2011, the Department of Trade and Industry (DTI) commissioned the Philippine Institute of Development Studies (PIDS) to come up with a Comprehensive National Industrial Strategy (CNIS). The CNIS is to be based on industry subsector roadmaps submitted by industry associations to DTI. DTI also asked PIDS to integrate roadmaps related to manufacturing into a manufacturing industry roadmap (MIR). Dr. Rafaelita Aldaba of PIDS is the lead person for the MIR.
This draft MIR was presented at the University of the Philippines last May. Among other things, the report indicates that the Philippine manufacturing faces a number of constraints, both cross-cutting and sector-specific. Common constraints include the high cost of power and domestic shipping, as well as issues in governance and regulation. Meanwhile, sector-specific constraints include lack of domestic raw material suppliers, and lack of highly skilled workers.
Notwithstanding the recent high-growth-low-poverty-reduction experience in the Philippines, we are aware that, globally, rapid economic growth is necessary to reduce poverty and promote inclusion. Evidence shows that the substantial poverty reduction that was achieved in developing countries in the past two decades was due mainly to rapid economic growth and structural transformation in these countries, particularly in Asia. The structural transformation usually involved the massive movement of labor from low productivity areas in agriculture to high-productivity areas in industry, particularly manufacturing. Where agriculture grew rapidly as structural transformation proceeded, the pressure for food prices (and wages) to rise remained muted, thereby further facilitating industrialization and the generation of high-quality employment opportunities.
Globally, the rapid economic growth contributed nearly two-thirds of the observed poverty reduction in the developing world. Roughly, based on World Bank data, a 1% increase in GDP per capita reduces poverty by 1.7%.
To sustain our rapid growth, we need to transform the structure of our economy from one that is largely consumption-driven, fuelled by remittances, to one that is increasingly investment-led and employment-oriented. Given the favorable macroeconomic fundamentals, especially the fiscal space, and high business confidence, we have the opportunity to accelerate the implementation of development programs that will shift the economy to a higher growth trajectory.
The industry sector has great potential to boost inclusive growth. For instance, the results of the April 2013 Labor Force Survey showed that while employment in agriculture fell by about 624,000 workers, employment in the industry sector grew by 3.8 percent or 224,000 workers from April 2012 to April 2013.
The quality of employment in the industry sector also improved, with the number of persons working 40 hours and over per week increasing to about 79 percent in April 2013, from 64 percent in April 2012. This trend is also reflected in the increasing percentage of wage and salary workers, which rose to about 58 percent in April 2013 from 56 percent in April 2012. The wage and salary worker category is often seen as an indicator of the quality of employment. So when that category is rising in relative terms, it suggests that the quality of employment in the country is also improving.
Our drive to revitalize the Philippine industries, particularly manufacturing, is closely related to our strategy to massively generate quality employment, especially for low-skilled workers.
The following are the draft recommendations of the Manufacturing Industry Roadmap compiled by the PIDS:
In the short run (2014-2017), policies should focus on strengthening and rebuilding existing capacity of industries especially those with strong potentials to generate employment; addressing missing gaps; and creating linkages and spill-over effects in sectors such as automotive, electronics, food, garments, motorcycle, shipbuilding, chemicals, and allied or support industries.
In the medium run (2018-2021), and as domestic capacities are utilized, efforts in the initial stage should lead to expansion and new investments especially in the upstream, immediate or core sectors such as parts and components industries. By linking manufacturing with agriculture, construction, and services, supply chain gaps will be addressed and forward and backward linkages will be strengthened. As these efforts continue, the objective of having a globally competitivemanufacturing sector will be achieved.
Broadly, the measures and strategies that are needed to promote inclusion are also the ones needed to increase the country’s long-term competitiveness. For example, investing in human capital development, especially in health and education, will also enable us to develop a larger pool of potential S&T and R&D talents. Improving access to transportation, energy, communications, and financing will enable closer interconnections between companies, suppliers, and industry sectors, thus increasing efficiency, reducing barriers to entry, and creating greater opportunities for innovation in products and processes. Maintaining macroeconomic stability and a good business environment will help attract investments, thus creating employment opportunities and enabling more Filipinos to contribute to growth.
Inclusive growth does not come by chance. It requires deliberate policies that expand opportunities for remunerative employment and human development. It also demands development in the periphery through integration of the lagging areas or regions of the country with the fast-growing, leading areas or regions. Large-scale targeted programs also need to be in place to directly assist those who are unable to participate in the growth process. Scientific and technological innovations can also promote inclusiveness, not only by promoting rapid growth, but through its direct benefits in improving quality of life, food security, and environmental protection. Reviving Philippine industries requires addressing a number of constraints to development and competitiveness. The World Economic Forum (WEF) defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country, which in turn, influence its income levels, returns to
