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The inadequacy of Philippine import substitution industrialization

By: Fernando Fajardo - CDN Digital | January 22,2020 - 07:14 AM

Last week, we saw how the first industrial revolution changed the level of development of the different nations of the world from being almost equal and constant in thousands of years to one where some countries managed to propel to faster and higher of development. This came when England and some countries in mainland Europe, including North America and then Japan later on, stole a march on the rest of the world with huge gains in output coming in a relatively short period through industrialization.

Now we see more countries catching up but many are still left behind like the Philippines and other non-industrialized countries in Asia.

It should be noted, however, that after Japan in the second half of the 19th century, it was not only after the Second World War or more than half of the century that that the so-called four newly industrializing economies (NIEs) in Asia (South Korea, Taiwan, Singapore, and Hong Kong) came next to join the developed industrial world.

Why was the Philippines left behind when it was one of the first former colony to become free right after the last world war?

In their book, The Process of Development, James Cypher and James Dietz pointed the need for industrialization as a structural means to accelerate the pace of economic growth and development. They also pointed out that the nature of the structural transformation from primary production to secondary and to tertiary production is part of the process of economic growth and development and that the structural changes, which easy import substitution industrialization (ISI) can help to initiate, is the first stage of industrialization.

I also wrote last week that according to Yoshihara Kunio during the second half of the nineteenth century, while other developing counties remained dormant, the Philippines under Spain received the first impetus to modernize but that unlike Japan, which began industrialization around this time, the early phase of Philippine development was confined mainly to the export and processing of agriculture products in great demand in the West.

According to Kunio, the lack of progress outside the processing of agriculture products was appalling because not only sophisticated machines but also even simple manufactured goods were imported, the reason why after independence, the Philippine government went straight into import substitution industrialization or ISI that Cypher and Dietz mentioned above.

As cited by Kunio, the immediate result of the Philippine’s foray in ISI was for the value added in manufacturing to increase by 12 percent per annum in the first five years of the 1950s. Growth dropped to 7 percent per annum in the following years but since this was still higher that the rest of the economy, the share of manufacturing in the total output of the country continued to rise, reaching about 20 percent by the early 1970s.

Unfortunately, since then and up to now the same level of manufacturing share remains more or less at the same level. This shows that, while not necessarily a failure, the ISI was not enough to propel the Philippine to faster and higher level of development.

The four NIEs also went into ISI at first, but not long after that they also followed it up with export industrialization to overcome the limits of the domestic market for their manufacturing output and to earn the necessary foreign exchange needed for growing imports arising out of the need for raw materials of their expanding export industries and other needs of their prospering population.

Philippine export industrialization indeed began also immediately prior and after Martial Law under Marcos. He pushed export industrialization with the export incentives act and by creating export processing zones, first in Bataan and then in Cebu, Baguio, and Cavite later on. In Mindanao, Marcos also created the 3,000-hectare PHIVIDEC Industrial Estate located in Misamis Oriental (PIE-MO). I personally witnessed the PIE-MO being established while I was still at NEDA Region X based in Cagayan de Oro in Misamis Oriental where I also conducted a study on its impact five years later.

Despite the presence of the export processing zones and industrial estates, however, foreign investors, which came in droves to Asia and other emerging countries in the world, were somewhat reluctant to come the Philippines, what with the Martial Law and the troubles caused by the Communists insurgents in many parts of the country and the Muslim separatists in Mindanao.

Anyway, the Philippines, being dependent on the import of oil was also hit big by the first oil crisis 1973, followed by the slowing down of the sugar and coconut products exports later. These, together with the growing foreign debt to be serviced exposed the weakness of the Philippine economy in contrast to the four NIEs and or even Thailand and Malaysia.

Aggravating the Philippine problem was the inability of the industrial projects undertaken by the cronies of the President to prosper because of reported corruption and lack of proven business ability of the cronies other than being loyal to the president who gave them favors.

Such was the poor state of development of the Philippines under Marcos, which ended with the collapse of the economy in his last two years in 1984 and 1985 when the Philippine GDP went down by more than 7 percent per annum or by 15 percent more or less in two years.

What is next then? How will the Philippines find its way to faster and higher level of economic growth and development? I will continue this series next week.

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