THE Asian Development Bank economists have been debating on how can the Philippines and other developing Asian countries get out of the so-called middle-income trap. This is defined as a situation where the country is unable to break out of its “developing” status, so that it can join the elite group of “developed countries”, like the US, Japan and the Western European countries. Number-wise, a middle-income country is classified by the World Bank as one that has attained a per-capita GDP that oscillates roughly from $1,000 to $12,000.
According to Arangkada Philippines 2010 of the Joint Foreign Chambers, the Philippines was classified by the World Bank as a “lower-middle-income” country as far back as 1975. That was 42 years ago!
Earlier, in 1957, the World Bank noted the Philippines’s industrial growth was rapid and ranked second only to Japan in Asia. The World Bank then wrote:
“…the Philippines has achieved a rapid rate of economic growth in the postwar period [since 1949]. Production has continued to grow at an annual rate of 7 percent, despite the disrupting effects of the Huk movement, which dampened economic activity until 1952…. By comparison with most underdeveloped countries, the basic economic position of the Philippines is favorable. It has a generous endowment of arable land, forest resources, minerals and normal potential. Through a comparatively high level of expenditure on education, transport, communications and industrial plant over the past 50 years, the Philippines has achieved a position in the Far East second only to Japan, both in respect to its level of literacy and to per capita production capacity.
“…the prospects of the Philippine economy for sustained long-term growth are good.”
And yet, in the succeeding decades, or from the 1970s onward, the Philippines was left behind by its neighbors, specifically by the original four Asian “tigers”: Hong Kong, Singapore, South Korea and Taiwan. Later, new Asian tigers came—Malaysia and China. Today, economic observers are asking: will Vietnam, with its growing industrial might, also leave the Philippines behind?
Why then has the Philippines got stuck in middle-income trap for more than four decades? Why is it unable to achieve full industrial transformation in order to become a high-income developed country as what Japan and the above-named Asian tigers have accomplished? There are many reasons for this “frozen” development—historical, political, economic and even cultural.
However, for this column, there are at least three major economic explanations: first, the poor industrial visioning under various administrations, from the Marcos regime onward; second, the underdevelopment and coordination incoherence in the institutions needed for industrial growth, e.g., research and development, skills development in support of industrial upgrading and so on; and third, the weak government handling of the so-called structural adjustment policy conditionalities imposed by the International Monetary Fund-World Bank group.
On industrial visioning and industrial strategizing, this column wrote (February 8) that the “Filipino first” policy was never tried. A nationalistic Congress passed in 1969 Joint Resolution 2, entitled “Magna Carta of Social Justice and Economic Freedom”. This Resolution, which was shepherded by Speaker Jose B. Laurel, sought for the fuller industrialization of the country as envisioned by nationalists, like Sen. Claro M. Recto. The idea was to curb the nation’s dependence on imported industrial raw materials and increase the country’s capacity not only to assemble semifinished goods, but also create basic and intermediate products. The martial-law government of Ferdinand E. Marcos set aside this Resolution and instead embraced the program proposed by a rising group of Western-educated liberal economists: labor-intensive export-oriented industrialization, or Lieo. But looking back, there should have been a twinning of the two programs just like what Japan did after World War II: sustained promotion of integrated industrialization at home and sustained promotion of export industries, both backed by a healthy dose of government protection.
On the development of institutions and the strengthening of policy coordination among agencies in support of industrialization, one easily sees the problem in the limited role that the Department of Science and Technology played in the development of the two leading export industries that grew on the back of the Lieo program: garments and electronics. The first, garments, expanded without utilizing local fibers or textiles; later, the excess imported raw materials of the export-led garments industry found their way in the domestic market and contributed to the demise of the local textile industry. As to electronics, the Philippines was unable to climb the assembly ladder—meaning going up to the higher levels of testing and assembly work all the way to the production of finished electronic-based products—as what Taiwan and South Korea have done. Up to now, the aggregate value of Philippine electronic exports are just a fraction of the electronic exports of tiny Singapore, simply because the latter is engaged in higher assembly and testing of electronic products. In short, the program of innovation was missing in the way these industries were promoted. Filipino scientists, such as Dr. Cesar Saloma and Dr. Ted Mendoza, have been bewailing the very low level of Philippine gross expenditure on research and development (GERD) as a percentage of the GDP. Singapore’s GERD is over 2 percent, while that of the Philippines is a woeful 0.3 percent.
As to the government handling of the policy conditionalities imposed by the IMF-World Bank group in exchange for the series of structural adjustment loans (SALs) in the 1980s to 2000s, the Philippine experience was abominable. These SALs uniformly call for the liberalization, deregulation and privatization of the economy based on the general idea that a freer economy is liberating for all. The reality, however, is that, in a very uneven and assymetrical domestic and global economy, trade liberalization measures should be done in a calibrated way. This is why it took China and Vietnam, in joining the World Trade Organization, one and a half decades of negotiation to implement tariff reduction for thousands of tariff lines. The reason: they had to inform and prepare the unprepared for trade liberalization. In the case of the Philippines, the liberalization was done virtually wholesale, by sector or subsector. This is why many local producers were caught with their pants down because they were neither informed or consulted on the schedule and scale of the liberalization measures. The Federation of Philippine Industries has a fairly long list of domestic industries that suffered as a result of the foregoing.
So can the Philippines get out of the middle-income trap? Can the government this time be more resolute in scaling up and diversifying industrialization?