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Why we fail in our quest for export industrialization

By: Fernando Fajardo - CDN Digital | January 29,2020 - 07:26 AM

Achieving a higher level of development is closely intertwined with the industrialization of an economy, Cypher and Diets said in their book, The Process of Economic Development.

Their data in the 1970s up to the 1990’s would show, for example, that regions in the world with higher proportion of labor engaged in industry have faster economic growth and higher level of human development than those with lower proportion of their labor engaged in industry.

The question therefore, as Syrquin said in his 1988 article, Patterns of Structural Change, is not so much whether industrialization is necessary for development but only when and in what manner it will take place.

With the exception of Britain, the first in the world to industrialize in the 18th century, and Japan, the first in Asia to industrialize in the second half of the 19th century, almost all the other nations that industrialized after the last war began with easy import substitution industrialization (ISI). Going into easy ISI involves the domestic manufacturing of some, if not all, of the non-durable consumer goods currently being imported for domestic consumption.

We went into ISI after the last war. By the 1970’s, ISI allowed our manufacturing industry to account for about 20 percent of our GDP. Unfortunately, this share has not gone up much until today.

When we add the shares of mining and quarrying, construction, and utilities (electricity gas, and water), the total share of output coming from the industry sector is just about 30 percent of our GDP. Our more developed neighbors have more.

The reason for this was our failure to move fast to the next stage of industrialization. This is to move into export industrialization, like what South Korea, Taiwan, Singapore, and Hong Kong did where the value of their exports now comprise a large proportion of their gross domestic product.

Why export industrialization and why did we fail to achieve it?

Export industrialization is needed because there is limit to how import-substituting industries can grow. The limit is the size of the domestic market measured in terms of the size of our domestic population and our income. Once the limit is reached, further industrial expansion would now require the country to go, either into consumer goods export and industrial deepening through production of non-durable consumer goods, including production of intermediate goods, which serves as inputs to other production activities, and basic capital goods or the tools, equipment, and machineries used in the production or processing of other goods.

Such industrial deepening also implies further import substitution and for export, once we reach the level of production efficiency and quality that would allow us to compete globally.

We failed in these endeavors for a number of reason. One is due to the fact that ISI requires the government to protect our import substituting industries through tariff to make competing imported products expensive when sold locally and to give them incentives to reduce their production costs by way of government directed loans at favorable rates, tax exemption, and priority in the allocation of scarce foreign exchange for their imports.

The trouble with government protection and incentives is that they tend to last longer than necessary. Accordingly, up to seven or ten years may be needed for some industries to find their way to achieve a certain level of efficiency and quality in their products. As such, the government should give a clear deadline when these protection and incentives start to be gradually reduced and completely stopped.

Unfortunately, these deadline may not be given at all or when given are extended for many years. This happens when business and government people get cozy in their relationships for their own mutual benefits especially in our political setting where many politicians serve not the common good but their own self-interest. Look how they cling to their positions.

With the given protection and incentives becoming longer to be removed or extended indefinitely, there is now less interest on the part of the industrialists to become more efficient and competitive in price and quality. Under such a situation going into export will not be interesting to our local producers given the high returns they enjoy with government protection and incentives.

As a matter of policy, in fact, Frank Golay in his 1960s book, The Philippines: Public Policy and National Economic Development, said that Philippine industrialization policy attaches little or no priority in manufacturing for exports.

This to me, along with the reluctance of foreign investors to come to the Philippines during the period of Martial Law and even up to now for various reasons, are the reasons why, unlike our more developed neighbors, we failed to enlarge our export and left behind in our quest for industrialization.

Based on government data, I find that labor productivity in agriculture sector is just a third of the national average, service sector just a little higher than the national average, and industry twice the national average and the service sector.

Due to scarcity of jobs in industries, our rural folks who come to the city to find better life find work mostly in the service sector. That helps a little to increase our GDP. However, and again like our more developed neighbors, our GDP could have been much bigger had they been employed in industry that produce almost twice per worker than the service sector.

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