Not too late for manufacturing

(Part II)

The brightest prospects for manufacturing growth in the Philippines are offered by recent developments in the East Asian region. Dr. L. U explained these developments as follows.” “The ascendancy of China in the 1990s, with its vast market and cheap labor, had drawn investments away from the Philippines (and other countries), inspiring the oft-repeated metaphor then of a “giant sucking sound’ as China diverted foreign direct investments to itself and became the world’s factory. Even of the investment crumbs left for the picking, the Philippines was losing our sorely to its neighbors because of its lack of competitiveness as an investment destination. Relatively higher labor and power costs, together with inferior infrastructure, political and policy instability were often singled out in the past by investors as deterrents.” Things have dramatically changed over the last five years or so. Rapid rise in labor costs and political friction with Japan, South Korea and Taiwan have led to what the Taiwanese President calls the “Southbound” or “Look South” policy, i.e. the migration of investments away from China to Southeast Asia.

We must remember, though, that we have to compete with our traditional ASEAN rivals like Indonesia, Malaysia and Thailand. In addition there are the new kids on the block such as Vietnam, Myanmar, Cambodia and Laos who are also eager to host foreign investments. Some of these countries have lower labor costs. Our competitive advantage is our relatively better educated and English-speaking work force. It is important for us to continue investing in our human capital, our young and growing work force, to keep it competitive. The introduction of K to 12 in our basic education and the significant increases in the percentages of the government annual budget devoted to social services (education and health) under the Duterte Administration augur well for our ability to attract more investments in manufacturing from our Northeast Asian neighbors. Also to be lauded is the decision of the present Government to significantly increase investments in infrastructures to more than 7 percent of GDP by 2022. Together with a more abundant and less expensive energy supply, more and better quality transport infrastructures will improve our competitiveness in manufactures since these will reduce cost of logistics and doing business in the Philippines. As Dr. L. U commented: “While the manufacturing will take place outside of Metro Manila and urban areas, the raw materials and finished goods must contend with the traffic to make way in and out of the country’s ports and airports. And, of course, foreign investors will likely have to contend with the traffic as they reside and work in offices in the urban areas. This is not to mention that for our own Filipino businessmen and workers, the traffic congestion is already taking a toll on our productivity.”

It would also help if we consider the impact on manufacturing growth of the planned comprehensive tax reform program now being studied at the Senate after the Lower House has passed its own version. The first package of the program passed in the House of Representatives as House Bill 5636 would eventually remove the value-added tax (VAT) exemption currently provided to local suppliers of export-oriented companies most of which are located in our export processing zones. Many of these suppliers are small and medium-scale manufacturers and could easily be replaced by imports that the PEZA-based enterprises would find more economical without the VAT exemption. The estimated value of production of these suppliers is about 200 billion pesos, not an insignificant amount. This possible loss would be a retrogression in the common objective of the competing ASEAN economies to achieve deeper integration into global value chains (GVC).

As the CLSA Special Report commented, the top three economies in manufacturing in the ASEAN— Malaysia, Thailand and Vietnam—face intense competition. However, they will not be competing directly against each other. Vietnam’s strength is its greater appeal to Foreign Direct Investments because of it less restrictive policies. The disappointment, however, has been minimal spill-over to skills development and SME integration in GVCs. Malaysia and Thailand cannot match Vietnam’s cost advantage and must seek other avenues for raising competitiveness. Thailand is banking on a grand vision for a mega special economic zone (SEZ) through which it hopes to lure FDIs for development of high technology, the socalled “new age” industries. Malaysia wants to be another Korea by moving to higher value-added production. The trick here is to foster higher innovation and technology advance. The Philippines has a lot of catching up to do. We cannot afford to introduce counterproductive measures like the removal of tax incentives in the PEZA zones just at the moment when competition is heating up in attracting manufacturing operations from China. We also have to make sure that what President Duterte promised in his first State of the Nation Address of removing the restrictive provisions against FDIs in our Constitution is finally passed by the Philippine Congress.

It is not too late for Philippine manufacturing to do its job: to significantly add to both exports and production for the domestic market while improving the productivity of both labor and capital in the economy. We cannot remain as a service-oriented economy. It will take time for our agricultural sector to contribute significantly to productivity gains because of decades of neglect and unenlightened policies. To matters worse for agriculture, the leadership in our agrarian reform sector is still obsessed with fragmenting land ownership which has been proved to be anti-poor. We should, therefore, raise the contribution of manufacturing to GDP to levels closer to 30 percent as contrasted with the present low 20s. Let us take advantage of the Build! Build! Build! mantra to finally create the environment for a big leap also in manufacturing which will definitely benefit from much improved infrastructures.

For comments, my email address is bernardo.villegas@uap.asia.