transforming the philippine economy · 2/28/2012 · is about the transformation of the economy...

29/02/2012

1

Transforming the Philippine Economy

Industrial Upgrading and Diversification

Norio Usui

Senior Country Economist Philippines Country Office, Asian Development Bank

ADB-AFD-JICA Joint Forum “Taking the Right Road to Inclusive Growth”

28 February 2012

Presentation

Issues: A missing link between growth and development, long-term development puzzle, and vulnerability to external shocks

Approach: Analyzing the structural transformation and its implications on inclusive growth – Economy-wide productivity

– Product upgrading and diversification

Findings: – Lagged growth is rooted in productivity growth deficit due to sluggish

industrialization

– Limited job opportunities resulted in slow poverty reduction

– Growing services provide jobs, but it cannot be a magic trick

Recommendations: – “Waking on two legs”

– Targeted public sector interventions:

• Product identification

• Public and private dialogues

GDP growth in the past 5 decades (annual average, %)

4.9

5.9

1.7

2.9

4.8

0

1

2

3

4

5

6

7

1960s 1970s 1980s 1990s 2000s

Solid growth over the 2000s

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2

Weak labor market indicators

7.0

19.3

-

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Unemployment Underemployment

Series break % Poverty incidence (%)

33.1

24.9 26.4 26.5

28.3

20.1 21.1 20.9

0

10

20

30

40

1991 2003 2006 2009

by Population by Families

Persistent poverty

Growth and investment paradox

21.6

18.3

20.3

17

18

19

20

21

22

2000 2002 2004 2006 2008 2010

88.0

12.3

55.4

44.0

85.7

51.0

2.0

45.0

11.5

38.0

0

20

40

60

80

100

Indonesia 1984-2007

Malaysia 1984–2009

Philippines 1985–2006

Thailand 1980–2004

Viet Nam 1993–2008

Base year Comparison year

Chronic problems even in the regional context

Slow poverty reduction (headcount ratio at $2 a day PPP, % of population)

High unemployment (% of total labor force)

Stagnant investment (gross fixed capital formation, % of GDP)

0

2

4

6

8

10

12

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Indonesia

Malaysia

Philippines

Thailand

Vietnam

10

20

30

40

50

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Indonesia

Malaysia

Philippines

Thailand

Viet Nam

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Recent development: sharp drop of export How about your neighbors?

Total exports (3 month moving average, % change, year-on-year)

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

INO THA MAL PHI

Long-term growth puzzle

Real GDP per capita 1960 (constant 2000 $)

Real GDP per capita 1960 – 2010 (constant 2000 $)

Once upon a time……. After five decades…….

105 145

201

1,154

813

692

321

0

200

400

600

800

1,000

1,200

1,400

PR

C

Ind

ia

Ind

on

esia

Kore

a, R

ep.

Mal

aysi

a

Ph

ilip

pin

es

Thai

lan

d

0

1,000

2,000

3,000

4,000

5,000

6,000

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

China India Indonesia

Malaysia Philippines Thailand

Vietnam

5.6

6.5

4.0

6.5

4.6

6.2

3.8

4.6

-1.9

-2.5 -2.5

-1.9

-1.4

-2.2 -2.1

-1.0

3.7 4.0

1.5

4.6

3.6

3.9

1.8

3.6

-4

-2

0

2

4

6

8

INO MAL PHI THA INO MAL PHI THA

GDP (constant 2000 US$) Population Per capita GDP

GDP per capita growth (%, annual average)

1960 - 2008 1990 - 2008

Was it because of high population growth? Growth and Structural Change

The two sides of a coin

Growth

is not just more of the same

“A growth miracle sustained for a period of decades...must involve the continual introduction of new goods, not merely continual learning on a fixed set of goods”

(Robert Lucas)

Structural

Change

is about the transformation of the economy by:

transferring resources from less productive activities to more productive ones

1. Diversifying production 2. Upgrading production 3. Increasing labor

productivity

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4

0

2,500

5,000

7,500

10,000

12,500

0

1,500

3,000

4,500

6,000

7,500

1980 1985 1990 1995 2000 2005

Indonesia Philippines Thailand

Malaysia Viet Nam

Economy-wide labor productivity 1980-2009

Constant 2000 $ Annual average growth rate, %

MAL (RHS)

THA

INO

PHI

VIE

2.5 2.7

0.3

3.6

4.4

2.2

3.4

1.1

3.6

5.7

3.4

2.1

1.8

2.5

4.8

0

1

2

3

4

5

6

Indonesia Malaysia Philippines Thailand Viet Nam

1980-2009 1990-2000 2000-2009

Which sector is more productive in your economy?

0

2,000

4,000

6,000

8,000

10,000

12,000

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Agriculture Industry Service Manufacturing

Where did your labor move?

0

2,000

4,000

6,000

8,000

10,000

12,000

Agriculture Industry Services Manufacturing

0

2,000

4,000

6,000

8,000

10,000

12,000

Agriculture Industry Services Manufacturing

0

10

20

30

40

50

60

70

80

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

0

10

20

30

40

50

60

70

80

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Employment by sector

Labor productivity by sector

Decomposition of labor productivity growth 1980 – 2009

9.0 -2.2 -10.7

8.4

61.0

54.0

-3.8

90.9

37.2 62.8

24.9

76.7

-50

0

50

100

150

200

Indonesia Malaysia Philippines Thailand

Agriculture Industry Services

71.3

105.6

-1.8

77.8

35.8

9.0

12.2

98.2

-50

0

50

100

150

200

Indonesia Malaysia Philippines Thailand

Sectoral productivity growth

Structural transfromation

http://flagspot.net/images/t/th.gif

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Country

Capabilities

Products

“Lego” and Development Distance between products

Nearby

Far away

How products are linked each other?

Product 1

Product 2

Product 3

Can I jump to the distant tree?...No! But, I can jump to the near one.

Ricardo’s Metaphor Monkeys in a Forest

Firm

oil

fishing

agriculture tropical

garments

metallurgy

textiles

agriculture animal

machineries

fruits

cereals

vehicles

electronics

chemicals

mining

products forest

Product Space (Hidalgo et al. 2007)

Core-Periphery structure, with some ‘clusters’

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21

Where are the monkeys?

Denotes RCA≥1

(Hidalgo et al. 2007)

THA 1965

RCA≥1

THA 1975 THA 1985


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THA 1995 THA 2005

THA 2008 PHL 1965

RCA≥1

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PHL 1975 PHL 1985

PHL 1995 PHL 2005

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PHL 2008

Do you want to see PRC and India?

How many of your products have comparative advantage?

35

0

74

4

134

21

132

34

91

29

110

40

0

25

50

75

100

125

150

175

200

core core core core core core

1965 1975 1985 1995 2005 2008

51

2

84

9

159

12

183

46

179

63

186

70

0

25

50

75

100

125

150

175

200

core core core core core core

1965 1975 1985 1995 2005 2008

You have depended more on services

% Contribution to GDP Growth: 1980-2008

50.1 49.4

26.3

48.3

26.5

47.4

38.5 43.5

66.6

43.2

61.9

43.3

11.4 7.2 7.1 8.6 11.7 9.3

0

20

40

60

80

100

INO MAL PHI THA IND PRC

Industry Services Agriculture

Growing business process outsourcing A magic trick?

5,288

7,717

0

4

8

12

16

20

0

2,000

4,000

6,000

8,000

10,000

2004 2005 2006 2007 2008 2009

Contact Center

Transcription

Animation

Software Development

Other BPOs

% of total export of goods & services (RHS)

355,135

444,811

0.0

0.4

0.8

1.2

1.6

2.0

0

100,000

200,000

300,000

400,000

500,000

2004 2005 2006 2007 2008 2009

Contact Center

Transcription

Animation

Software Development

Other BPOs

% of total labor force (RHS)

Export (million $) Employment (persons)


29/02/2012

10

Assessment - Summing up -

• The past growth has been largely led by services

• Lagged growth is rooted in persistent productivity growth deficit due to stagnant industrialization, in particular lack of product diversification

• Limited job opportunities resulted in the slow poverty reduction

• The service-led growth did not require a relatively high investment

• Booming BPOs create jobs, but its impact is limited given the scale of utilized workforce, and its bias toward educated labor

• To join the growth club in the region and translate the growth into inclusive one, the country needs to “walk on two legs” both in industry and modern services

How can we help entrepreneurs jump to new products?

• Growth diagnostics, cross country regressions

• Resolving long-standing issues:

– Infrastructure

– Business and investment climate

• Horizontal interventions: Is that all?

• Critical importance of focusing on product-specific constraints

• Public and private dialogue (joint diagnostic exercise)

High electricity price Is it a real headache for all?

Share of electricity cost in total production cost (including labor cost, depreciation, net tax)

1: Ave: 0.79

3: Ave: 4.63

2: Ave: 7.67

4: Ave: 0.27 5: Ave: 3.86 6: Ave: 0.57 7: Ave: 5.33 8: Ave: 2.42 9: Ave: 0.48 11: Ave: 0.99

10: Ave: 3.77

Manufacturing

Electronics…….have you fully exploited the opportunities?

RCA≥1

RCA<1

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Targeted Public Sector Support - Policymakers’ headaches -

Headache 1: Product identification (targeting)

Headache 2: Diagnostics of binding constraints for the targeted products

Are we “picking winners”?

• Picking winners in the old sense of the term is about protecting and subsidizing low productivity

• Many inputs that the government has to provide are sector and/or product-specific – ‘doomed to choose’

– Not about subsidizing low-productivity, but investing in higher productivity

– The product space gives additional information to inform that choice

How can we “choose”?

Key dimensions of product identification

Easiness to jump: Nearby? Middle? Far Away?

– Above average sophistication (direct effect)

– Opportunities for further structural change (spillover effects)

– Capacity to absorb labor (job creation)

– Others such as global demand growth

If your targets are far away…… foreign direct investment

42

51

18

71

43

0

10

20

30

40

50

60

70

80

Indonesia Malaysia Philippines Thailand Viet Nam

1970s

1980s

1990s

2000s

($ billion, cumulative)

29/02/2012

12

Public - Private Dialogues

Private

Inputs Information,

Incentives,

Resources

Public

Inputs

Exchange of Information & Shared Risks

• How to provide highly specific, high dimensional public inputs that are complements in private production?

• Private inputs: – Prices: information – Profit-motivated firms:

incentives – Capital markets: move

resources

• Public inputs: – No price: where to get the

information? – What are the incentives?

Political? – Even with incentives, how

would resources move?

In the absence of coordination, monkeys can only jump to trees that require inputs that are already present

Thank you

The findings, interpretations, and views expressed are entirely those of the author, and do not necessarily represent the views of the Asian Development Bank, its executive directors, or the countries they represent.

For further information, please contact: Norio Usui ([email protected])

Philippine Country Office, Asian Development Bank

Producing (& exporting) mango requires: • a certain type of soil • mechanized farming equipment • agribusinesses firms that know the market,

etc.,

but also “public goods” such as: • specific property rights • port infrastructure • road system • cold-storage facilities • phytosanitary regulations • market access agreements, etc.

Capabilities PRC 2008

mailto:[email protected]

29/02/2012

13

India 2008 How far unexploited products from your current export basket?

RCA≥1 RCA<1

Far Away Nearby

Where do you want to go?

Nearby Middle Far away

For example, if you want to choose “sophisticated products”

Export

value

(M US$)

7522 Complete digital data processing machines Machinery 28,109 3,403 1.347 0.327 164.24 0.74 24.76

8851 Watches, watch movements and case Machinery 25,310 6,014 2.982 0.656 89.72 0.201 8.07

8811 Photographic cameras, flashlight apparatus, parts, accessories, nes Machinery 17,702 5,488 2.042 0.912 16.37 0.034 -9.97

7643 Television, radio-broadcasting; transmitters, etc Machinery 16,537 8,103 1.193 0.644 447.26 1.116 12.12

8852 Clocks, clock movements and parts Machinery 15,040 7,273 2.982 0.624 15.13 0.037 2.23

6531 Fabrics, woven, of continuous synthetic textile materials Capital intensive 14,843 9,480 3.065 0.508 38.44 0.121 2.99

7641 Electrical line telephonic and telegraphic apparatus Machinery 14,713 8,346 1.193 0.16 20.84 0.238 -7.89

7622 Portable radio receivers Machinery 13,995 3,808 0.957 0.034 0.61 0.034 -1.67

0350 Fish, dried, salted or in brine; smoked fish Animal products 13,841 5,650 1.611 0.949 21.25 0.035 7.63

7642 Microphones; loud-speakers; audio-frequency electric amplifiers Machinery 13,583 7,997 0.957 0.635 49.25 0.121 7.19

7512 Calculating, accounting, cash registers, ticketing, etc, machines Machinery 13,485 8,199 0.383 0.031 0.72 0.036 2.96

0344 Fish fillets, frozen Animal products 13,286 5,413 1.611 0.762 44.87 0.09 12.67

0612 Refined sugar etc Tropical Agruculture 12,595 7,539 0.647 0.008 0.33 0.063 12.59

8973 Precious jewellery, goldsmiths' or silversmiths' wares Labor intensive 12,091 6,952 2.982 0.188 38.39 0.321 13.69

6664 Porcelain or china house ware Labor intensive 11,998 10,039 2.829 0.573 9.57 0.027 7.93

8981 Pianos, other string musical instruments Labor intensive 11,293 6,961 8.981 0.028 0.21 0.011 5.56

0814 Flours and meals, of meat, fish,etc, unfit for human; greaves Cereals 11,284 4,220 1.022 0.152 3.25 0.031 6.67

7243 Sewing machines, furniture, needles etc, and parts thereof, nes Machinery 11,250 9,035 1.392 0.228 4.16 0.035 3.01

7757 Domestic electro-mechanical appliances; and parts thereof, nes Machinery 10,866 8,559 0.505 0.092 8.02 0.142 11.13

8952 Pens, pencils and, fountain pens Labor intensive 10,829 9,795 3.547 0.028 0.85 0.049 6.45

RCA

Share to

world

export

(%)

Annual

average

growth rate

(%, 2000-

2007)

SITC

Code"Nearby" Commodities

Leamer

ClassificationPRODY

Strategic

Value

Labor

Intensity

29/02/2012

14

Table 1.2: Ranked based on Strategic Value

Export

value

(M US$)





6674 Synthetic or reconstructed precious or semi-precious stones Labor intensive 10,643 8,688 16.177 0.070 0.20 0.004 3.05

7757 Domestic electro-mechanical appliances; and parts thereof, nes Machinery 10,866 8,559 0.505 0.092 8.02 0.142 11.13


8998 Small-wares and toilet articles, nes; sieves; tailors' dummies, etc Labor intensive 10,275 8,317 3.547 0.272 7.47 0.043 7.24

7512 Calculating, accounting, cash registers, ticketing, etc, machines Machinery 13,485 8,199 0.383 0.031 0.72 0.036 2.96



0612 Refined sugar etc Tropical Agruculture 12,595 7,539 0.647 0.008 0.33 0.063 12.59


6552 Knitted, not elastic nor rubberized, of fibres other than synthetic Capital intensive 10,446 7,267 4.594 0.142 11.15 0.125 14.25



1124 Distilled alcoholic beverages, nes Tropical Agruculture 10,808 6,214 0.473 0.170 18.91 0.172 10.77




RCA

Share to

world

export

(%)

Annual

average

growth rate

(%, 2000-

2007)

SITC


Leamer

ClassificationPRODY

Strategic

Value

Labor

Intensity

High opportunities for further structural change Table 1.3: Ranked based on Labor Intensity

Export

value

(M US$)

6674 Synthetic or reconstructed precious or semi-precious stones Labor intensive 10,643 8,688 16.177 0.070 0.20 0.004 3.05


6552 Knitted, not elastic nor rubberized, of fibres other than synthetic Capital intensive 10,446 7,267 4.594 0.142 11.15 0.125 14.25


8998 Small-wares and toilet articles, nes; sieves; tailors' dummies, etc Labor intensive 10,275 8,317 3.547 0.272 7.47 0.043 7.24








0344 Fish fillets, frozen Animal products 13,286 5,413 1.611 0.762 44.87 0.090 12.67


7522 Complete digital data processing machines Machinery 28,109 3,403 1.347 0.327 164.24 0.740 24.76



0814 Flours and meals, of meat, fish,etc, unfit for human; greaves Cereals 11,284 4,220 1.022 0.152 3.25 0.031 6.67


7622 Portable radio receivers Machinery 13,995 3,808 0.957 0.034 0.61 0.034 -1.67

RCA

Share to

world

export

(%)

Annual

average

growth rate

(%, 2000-

2007)

SITC


Leamer

ClassificationPRODY

Strategic

Value

Labor

Intensity

High labor absorption

transforming the philippine economy · 2/28/2012 · is about the transformation of the economy...

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