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Monday, June 26, 2017 | MANILA, PHILIPPINES
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Date posted: Friday, December 11, 2015 | Manila, Philippines

Quo vadis, industrial policy?

A RECURRING QUESTION in the Philippines that crops up almost anytime anywhere is “Why has the Philippines not industrialized as much as its East Asian neighbors?” It is a valid question that opens up a plethora of valid and invalid explanations.

In a paper two years ago, former Philippine Institute for Development Studies economist and now Department of Trade and Industry (DTI) Assistant Secretary Rafaelita M. Aldaba summarized the Philippines’ recent industrial policy as shown in table 1.

It is a correct assessment, although it seems the import substitution industrialization (ISI) policy was a little more than two decades (1950-72), not three. There was a “decontrol” policy or removal of quantitative restrictions in 1962, and starting in the mid-’60s, a revival of manufacturing that, however, was not sustained.

Export orientation on a limited scale was initiated in the mid-’70s, coinciding with the world oil price shock in 1973 and the period of cheap foreign loans due to overflowing petro dollars. It also coincided with some political stability because of repression during the Martial Law regime.

There is a short but good literature on world and Philippine economic history from the late 1800s to the last decade written by Dr. Emmanuel S. de Dios of the University of the Philippines School of Economics and Dr. Jeffrey G. Williamson of Harvard University. It shows that in Asia, the Philippines was third to Japan and China to attain fast growth of 5% or more a century ago. It was not sustained though, in the two decades before World War Two.

The post-World War Two ISI period pushed annual growth rates of Japan, Taiwan and South Korea to double digits and the Philippines resumed its early century dynamism.

Messrs. De Dios and Williamson noted that “while the Philippines conformed to the industrial convergence pattern, it began to deviate sharply from the pack in the 1980s.”

The years between 1984 and 1991 was a “period of large-scale relocation to Southeast Asia of Japanese manufacturing industries in response to the yen revaluation following the Plaza-Louvre Accords. This wave of foreign direct investments (FDIs) benefited Malaysia, Thailand, and Indonesia and led to the buildup of a significant export-oriented manufacturing in those countries,” the two academics added.

The Philippines of course could not optimize its FDI harvest that period because its Constitution, ratified in 1986, does not welcome huge FDIs in many sectors of the economy.

Nonetheless, the government of then President Corazon C. Aquino in 1991 pursued a massive trade liberalization and official abandonment of protectionism when it reduced tariffs to a range of 3%-30%. The Ramos administration continued the liberalization process capped by the Philippines joining the World Trade Organization (WTO), and undertook a new wave of tariff reductions in his last year in office in 1998.

Trade liberalization in the ’90s was not just a Philippine or Asian phenomenon but a global one.

After many decades of trade negotiations and deadlocks at the United Nations Conference on Trade and Development, the WTO was formally created in 1994.

To summarize, the Philippines’ post-World War Two industrialization policy can be categorized into three major periods: (1) trade protectionism and import substitution from 1950-72; (2) limited liberalization and export promotion from 1973-90; and (3) accelerated trade liberalization from 1991 onwards, with “blips” of protectionism during the 1997-99 Asian financial turmoil, then in the 2008-2010 global financial crisis that started in the US.

Philippine membership in the ASEAN (Association of Southeast Asian Nations) Free Trade Area, Asia-Pacific Economic Cooperation, various bilateral FTAs and economic partnership agreements, emerging Regional Comprehensive Economic Partnership, and the lure of joining the Trans-Pacific Partnership, are important alliances to sustain trade and investment liberalization.

There are two important challenges for the Philippines to optimize its membership in those mega-trade alliances: (1) remove investment protectionism by abolishing the “reserved only for Filipinos” (or zero FDI) in some sectors, and 60-40 restrictions to FDIs in other sectors. And (2) relax services protectionism especially in the practice of profession, where foreign professionals are barred from practicing here while Filipino professionals are allowed in many other countries.

Mr. Oplas is the president of Minimal Government Thinkers, Inc., a Manila-based think tank advocating free market economics, and a fellow of the South East Asia Network for Development, a Kuala Lumpur-based regional center advocating free trade and free mobility of people in the region.

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