Crossroads (Toward Philippine economic and social progress)
Philippine Star, 8 January 2014

 

There is much talk about manufacturing resurgence in the country. The strengthening of the industrial sector is desirable in order to reverse the relative decline of industry to total output, a development observed over the last two decades.

Roadmaps for industry. Domestic industrialization incentives, through the Board of Investment (BOI), will need major rethinking. Competition within the domestic market needs to become a central element of the industrial framework.

I comment on two aspects of economic policy directions within the industrial sector. The first refers to Board of Investment policies concerning the promotion of industry. The second is on the new proposals regarding the setting up of domestic and export enterprise zones in relatively poor regions of the country.

The switch of BOI policies is with reference to the need to move away from protection in the domestic market in favor of more inclusive participation of foreign direct investments. This is essential for domestic market expansion and for raising new industrial capacity.

The concept of domestic market has changed. In the context of the ASEAN Free Trade Area, the domestic market is no longer the Philippine market alone. It is the wider ASEAN Free Trade Area composed of 11 countries!

Such a move will expand the domestic market for industrial goods produced at home. It will also raise the competitiveness of Philippine industry within ASEAN and the international economy. Much of this can be done within the framework of current legislation.

With respect to the plan to set up domestic and export enterprise zones, rethinking of labor market policies for specific industrial zones is all important if we are to employ the country’s army of unemployed. The reasonable premise is that jobs for poor and unemployed workers are better than the state of joblessness.

Such reforms, however, would call for revising the relevant labor laws only for the class of industrial zones to be created. Thus, labor laws for whole country will continue to be in place.

Reorienting domestic incentives for industry. The progression of ASEAN into a free trade area has major consequences on the future direction of industry among member countries. For the Philippine case, it is imperative that industry change its course. This will increase the country’s benefits from ASEAN as an economic grouping.

Our presence in ASEAN requires that our industries participate competitively and share in the benefits of the free trade area. A weak presence will mean minimal gains from ASEAN for the country. Thus, efforts to strengthen Philippine based industrial firms must take place.

BOI incentives continue to be insular in nature. Essentially, they are designed mainly to award expansions and capacity to Filipino-controlled firms. Industrial policy requires inclusiveness in participation in the domestic sector. The “domestic” market is no longer essentially Philippine but one that includes all other ASEAN member countries.

Thus, the pattern of industrial promotion needs to include foreign direct investors to locate in the Philippines. Foreign investments located in other ASEAN country bases have as much freedom to enter the Philippine market for goods, so why not reverse policies and be more open to FDIs to locate within the country.

Otherwise, using the mechanism of the ASEAN Free Trade Area, FDIs located in other ASEAN countries will export to the Philippine market. We will become mere importers of goods from other ASEAN countries.

The highly protective framework of policies requires this dismantling if we are to make strong gains as an ASEAN partner. Despite the fact that the restrictive provisions of the Constitution apply only to three critical industries, the programs of BOI follow in spirit the restrictive grants of privileges to a few foreign direct investments, mainly in in so-called pioneer industries.

The limited presence of foreign manufacturers in the domestic market is in stark contrast with their larger presence in Thailand, Malaysia, Indonesia, and Vietnam. They are reaping greater gains from ASEAN membership compared to us. This is because we have not reformed our insular approach to industrial protection and our false sense of economic nationalism.

Domestic/Export Enterprise Zones (D/EEZs).  An important part of the roadmaps being prepared by the Department of Trade and Industry are those related to the concept of domestic/export enterprise zones. These are designed to create new industrial zones where standardized factory sites and specific incentives related to more flexible hiring systems for labor will be made possible.

These industrial zones will be located in selected poor regions where a large supply of labor for industry (including agricultural processing) is available. Envisioned primarily to attract enterprises with high requirements for labor, they will attempt to target labor-intensive factories, notably in food processing, in garments and textiles, in many types of manufacturing for highly needed consumption items for the home, including home furnishing.

The zones being proposed are similar in nature to my proposal for “labor employment zones.” I look upon such zones as potential new centers for industrial and employment growth. They will also become new centers for industrial employment where the workers enjoy some degree of wage stability, the prospects of growth of incomes and wages along the path of productivity growth. These are what we expect to get from labor policies.

The major difference I notice is that I place greater importance to the exemption of locator enterprises from some of the most inflexible aspects of Philippine labor policies. My proposals center on freedom from the minimum wage setting processes so that the zones can work without interruption from disruptive and unexpected changes in government-initiated wage policies.

The dependence of wage setting on productivity mechanisms provides some guarantee that good workers get improving pay. Moreover, the nature of wage contracts need not be based on minimum pay but on piece rate contracts. In a lot of labor-intensive operations, piece rate contracts are much more appropriate.

Difficult reforms will lead to big rewards. The industrial reforms suggested here require difficult reforms. Only when our leaders have a high mind to push for difficult reforms is it possible to move the country forward for the greater good.

Halfway reforms almost always fail to achieve the important objectives. Sticking to the suggested path of deep reforms in policy requires leadership. Is it absent in our case?