For inclusive growth, walk on two legs

The country is presently characterized by slow and exclusive growth, where whatever little progress being achieved goes only to the rich or better-off segment of our society. Up to a fourth of the country’s labor force is either unemployed or underemployed. Not surprisingly, about a fourth of our people still live in poverty, majority in the rural areas or regions far from the more developed Metro Manila or National Capital Region.

In last week’s forum on Expanding Development to the Local Level at the University of San Carlos, Dr. Joseph Yap, president of the Philippine Institute of Development Studies (PIDS), a government think-thank, lamented the fact that up to now the country has not achieved significant transformation from the low-income agriculture sector to the high-paying industry sector. Instead, most of our rural workers coming from the low-paying rural-agricultural sector had shifted mainly to the service sector, which pays a little more to labor than agriculture but has not grown fast enough to absorb many of the surplus workers from the rural areas, hence the persistently high unemployment and underemployment rates and widespread poverty.

In the second half of this presentation, Dr. Yap cited a March 2011 Asian Development Bank economics paper, “Transforming the Philippine Economy: Walking on Two Legs,” written by Norio Usui, which analyzes the long-term growth of the Philippine economy. In a decomposition of aggregate productivity growth in the Philippines, the paper shows that unlike other countries in the region, both productivity growth in an individual sector and sectoral reallocation of labor did not make significant contributions to economy-wide productivity growth. If ever, minor growth in the aggregate productivity came from the labor shift from agriculture to services, whose productivity, although higher than in agriculture, has stagnated. In the paper, Usui said that this is a sharp contrast with other countries where economywide productivity increased through continual improvement of sector productivity and labor shift toward high-productivity sectors.

Usui also said that the evolution of the Philippines’ product space shows that, despite the increasing level of sophistication of the country’s export basket, the process of industrial diversification has stagnated over the years and that although the Philippines was successful in attracting foreign direct investment to the electronics industry, this has not translated into a deepening of industrial capabilities. Indeed, the Philippine economy, according to Usui, has accumulated capabilities to jump to more skill- and research-intensive segments of electronics and more sophisticated products such as machinery and chemicals. However, Usui said that incentives to utilize the productive capabilities for diversifying the production structure toward more sophisticated goods have been weakened by several impediments such as persistent underprovision of basic infrastructure and poor business and investment climate.

In summing up, Usui said that the root cause of the Philippines’ poor growth performance is a chronic productivity growth deficit due to stagnant industrialization, in particular slow product diversification and that the chronic problems of the economy—high unemployment, slow poverty reduction and stagnant investment—are reflections of this stagnant industrialization.

Usui emphasized that the Philippines’ biggest need is employment opportunities for the growing working-age population because the services-led growth in the Philippines has not created adequate jobs. Thus, over the years, the country has continued to suffer the highest unemployment (and underemployment) rates in the region.

Since the early 2000s, according to Usui, the BPO industry has mushroomed and the country has become the third largest global BPO destination. However, the BPO industry still employs less than 1 percent of the total labor force, and its labor demand is biased toward relatively skilled workers. Therefore, given the large amount of underutilized unskilled labor and the prospect of a further increasing labor force in the country, it is difficult to expect the BPO industry to be a savior for the Philippine economy, Usui added.

Usui said that in the near term, the Philippines’ services-led growth can be sustained, thanks to strong consumption backed by remittance inflows and the booming BPO industry but he also added that a strong growth of manufacturing is still necessary to deal with the country’s long-term development challenges of job creation and poverty reduction. He warned that without dynamic industrial development, the country will continue to suffer from the long-standing problems of high employment, slow poverty reduction, and stagnant investment.

His recommendation is for the Philippines to “walk on two legs,” both industry and services, to pave the way for a higher, sustained, and more inclusive growth. A first step forward is to push reforms to address the long-standing challenges such as underprovision of basic infrastructure and weak investment and business environment, to ensure that the economy can walk on two legs. Usui observed that the business community has been seriously hindered by cumbersome business procedures and overregulation, weak contract enforcement and property rights and rigid labor market regulations. Concrete actions to improve the country’s business and investment climate are urgent.

There you are. Let’s walk on two legs lest we fall.