Best bets for inclusive growth (Philippines Daily Inquirer)

AN ENCOURAGING sign of fundamental improvement in our economy is the increasingly strong contribution of the industry sector, particularly manufacturing, to the economy’s growth relative to its performance since 1990 to 2010. Socioeconomic Planning Secretary Arsenio Balisacan now often cites data highlighting this positive development, which suggests that the growth in the economy is becoming more inclusive, or broader in participation and resulting benefits.

Why so? Manufacturing, especially when based on locally available inputs and raw materials, is among the best sectoral drivers of inclusive growth. This means that the benefits of growth in the sector are spread widely within the domestic economy. There are two characteristics we must look for in a sector or industry for it to be an inclusive growth driver. First, it must employ a lot of workers (i.e., requires more labor to produce a given level of output), hence generates more jobs. Second, it must have strong and wide linkages to other domestic industries, either as suppliers of its inputs (backward linkages), or as users of its products for their own production activities (forward linkages).

The latter condition doesn’t hold, for example, for electronics, our top export commodity. Our number one import also happens to be electronics, which are the inputs into our electronics exports that have virtually no domestic content. There is a thin slice of domestic value added embodied in our top export product, limited to assembly labor. Hence, our economy’s benefits from a growing electronics industry boil down to the wages paid to its workers, and the indirect effects on other industries benefited by the consumer spending of those workers. One cannot belittle, nonetheless, the thousands of jobs created by our growing electronics industries.

Identifying industries and sectors that satisfy the above two criteria can be done using the Input-Output Table of the Philippine economy produced by the Philippine Statistics Authority. The table shows in matrix form how each industry in the Philippines relates to all other industries as users of their products and as suppliers of their inputs, apart from usage of labor and capital. Three sectors emerge as clear inclusive growth drivers: agriculture/agribusiness, tourism and its allied industries, and manufacturing. Not surprisingly, the Philippine Development Plan puts special focus on these sectors as objects of government policy and program support.

Agriculture/agribusiness has remained a sore spot and unable to play its role in driving inclusive growth, as it continues to be weighed down by age-old problems. I have written much on the challenges confronting this crucial sector, and have long come to the conclusion that our failures therein are for the most part institutional, rather than technological, in nature. Our agricultural bureaucracy has long needed a drastic and fundamental makeover; not even an excellent agriculture secretary can make much difference until and unless the institution undergoes major surgery. There has been no lack of sound recommendations for institutional reform in the sector. What I see lacking is the willingness to listen, including heeding clear lessons from our neighbors, and the political will to implement them. It’s only when solid science and sound economics prevail over politics and ulterior motives in defining the structure, directions and actions of our agriculture bureaucracy (including local governments) that we will finally see the sector bring inclusive growth to our rural communities.

Tourism, meanwhile, has made major strides in recent years, but still performs well below full potential. Getting in the way is a combination of policy, political and natural impediments. The policy hurdles include persisting restrictions in civil aviation borne out of protectionism and infrastructure shortcomings, with the latter having been used as a convenient excuse for the former. This may have contributed to the seeming lack of urgency in pursuing necessary infrastructure improvements, especially in our primary airport. Political hurdles are both internal and external in nature. Long-standing political conflict in Mindanao has given the entire country a misplaced image as a risky tour destination, as do frequent natural disasters. Meanwhile, diplomatic tensions with China and their crackdown on government officials’ gambling activities have dramatically curtailed tourist visits from China, otherwise the biggest tourist sending country in the region.

Manufacturing has been a positive driver in recent years, growing faster than the overall economy, a departure from its sluggish 3-percent average annual growth over many years. It helps that China’s labor costs are rapidly escalating. Demand for food manufactures, our largest manufacturing subsector, will further pick up as average incomes rise even as population grows. We have a strong edge in light manufactures where design is key, such as high-end garments, furniture and housewares. Here, our asset is our designers, known to be better attuned than their Asian counterparts to Western tastes, owing to our colonial history. In heavy manufactures, we have already become the fourth largest shipbuilding country in the world, while a new focused government support program will further boost the now fast-growing auto industry.

The sectoral route to more inclusive growth is clear. We just need to stay the course in manufacturing, work even harder in support of tourism, and find the right bearings in agriculture.