Introspective
Business World, 2 March 2015

 

Government policy has until now implicitly assumed that a good part of inclusive growth can be achieved mainly by promoting manufacturing. This follows from two inferences that are sensible on the face of it. First, beating poverty is indeed about moving people from low- to higher-productivity jobs — and manufacturing is certainly home to some of the economy’s high productivity occupations. Second, the Philippines failed to catch the wave of export-oriented industrialization that lifted many dragon-boats in the 1980s and 1990s, leaving an obvious gap in the country’s industrial structure, where manufacturing is underrepresented for an economy of this size. So surely there is a chance to make up? Perhaps even belatedly replicate the experience of the NIEs?

Recent trends seem encouraging at first glance. There is renewed interest in the country as an investment destination; manufacturing growth has been robust; and some important foreign investments have entered the country (yes, including that indirectly famous Mitsubishi plant). This has led some quarters to even proclaim a “manufacturing renaissance”.

But take a slightly longer view of the matter and things look a lot less dramatic. Manufacturing’s share in GDP has barely risen — from 22.2% in 2010 to 23.2% in 2014. On the other hand, the employment share of manufacturing actually stagnated at 8.4% in the last five years, which is even lower than the 10% employment share a decade ago. But what about the high manufacturing growth we hear about? Doesn’t that matter?

Math is cruel. For the share of manufacturing to grow, it must grow faster than the total itself. So, suppose the economy was growing at 7% and we wanted to raise the output share of manufacturing by just one percentage point from 23 to 24% in one year. Manufacturing would then have to grow by almost 12% in that year — which has never happened. Manufacturing value-added grew by an average of only 8% in the last five years, with no sign of accelerating.

Even crueler algebra applies to employment. Total employment currently grows at 2.8% annually (about a million new workers added per year). To raise its share in employment from by just one percentage point — from 8.4 to 9.4% — manufacturing would have to expand employment by 15% a year, i.e., add 5.6 million workers — an absurd proposition, since that would mean shrinking employment in the rest of the economy.

In last December’s issue of the Philippine Review of Economics, Jeffrey Williamson and I ask whether the Philippines can still follow the old and well-worn path of the first- and second-tier NIEs. Our answer — after reviewing a series of unfortunate events in recent Philippine economic history — is that it is highly unlikely. With the large and irreversible current-account surpluses piled up by overseas workers’ remittances and the still-increasing revenues from the service-industry BPOs, there is no obvious way to engineer a sustained currency undervaluation the way the Koreans, Taiwanese, and Chinese did. And given the country’s now-higher living standards and enhanced labor protection (relative to, say, some South Asian or African countries), there is little room to compete in the lowest-wage and least-skilled categories (e.g., garments and textiles). Finally technology is also changing, with the appearance of robotics and digital technology (e.g., 3-D printing and customization), making low-cost labor less crucial in production. The latter, spurred on additionally by tax breaks or penalties, has even induced the “on-shoring” of some manufacturing jobs back to the United States.

Turns out we weren’t alone in our worries. A recent paper by the Princeton economist Dani Rodrik (who should probably get the Nobel at some point) documents a global trend showing that the manufacturing surge in developing countries is petering out much earlier than it used to — he calls it “premature deindustrialization” (though my colleague Raul Fabella coined the earlier term “development progeria”). Mr. Rodrik cites technology and globalization as reasons. He suspects that manufacturing technology is now trending towards saving in unskilled and semi-skilled labor and a greater use of skilled labor, the greatest decline being in the use of unskilled labor. The problem, of course, is that manufacturing technology tends to be global in nature, adopted and diffused notably by multinational enterprises and their affiliates. (Which also explains why manufacturing productivity is “converging” globally — another trend found independently by Messrs. Rodrik and Williamson.) Trade liberalization abets this by letting in the trend of cheaper manufactures, turning the terms of trade against the manufacturing industry.

As a practical matter, however, what this implies is a smaller likelihood that manufacturing will assume the same development importance as it did in the past. Mr. Rodrik predicts that manufacturing shares of output and employment will begin to decline at lower levels of income (around one-third to one half less) than they did before 1990. It will be more difficult for manufacturing output to reach the 30-35% shares that Japan, China, Malaysia, or even Thailand displayed in the 1990s. Today, for example, Indonesia, with a slightly higher income per capita than us, still has a manufacturing share of only 24% of GDP. Brazil and Mexico, both richer than the Philippines, all have shares below 20%. If Mr. Rodrik is right, the share of manufacturing in employment is also likely to peak earlier and well below the 18% China achieved in the 1990s. Indeed rising manufacturing productivity means employment will grow more slowly than output, so that manufacturing’s share in output rises even as its share in employment falls or stagnates, a pattern already found in the Philippines.

Make no mistake: we should still try to clear obstacles to get as much manufacturing as we can, e.g., improve infrastructure and logistics, cut the red tape, keep labor markets flexible, and at least keep the peso from rising too far. It should be clear, however, that manufacturing itself cannot play the key role in providing the jobs that can lift large numbers of people out of poverty. Numbers simply don’t add up. With new manufacturing jobs increasingly requiring more skills, most poor people will have less and less of a chance to enter them, for the same reason the BPOs don’t make too big a dent on poverty. Rather than burden a sector with unrealistic hopes and inflating it through unwarranted subsidies and other incentives to fulfill those hopes — it is more prudent to spend on the education and training that will allow people to adapt to whichever sector emerges to employ them. Not the Renaissance, which sought to recreate a classical past; rather the Enlightenment, which looked toward the future.