What is ailing the Philippine economy?

(First of a series)

The one daily constant in the Philippines right now is that a lot of people disagree on a lot of things. Beyond the noise of quibbling, what should really bother us more is the fact that in trying to push the country’s fortunes forward it has gotten very difficult to answer the question "what are we missing?"

It would not be fair to suggest that recent events alone have brought upon our current problems. How we are today is more the cumulative sum of the strategies and policies that we have pursued over the last five decades. To be reminded that we were once the second dominant economic power in the region only goes to show how much ground we have lost. To realize that we are recurrently confronted with lethargic growth, persistent unemployment, high production costs and peso volatility raises a lot of question about our abilities.

Are we then inherently jinxed or basically inept?

The first is hard to believe. No matter what you may think, there is still a host of other economies that have had far less success than the Philippines. As for the second, that is statistically improbable and, quite simply, unacceptable. The answer does not have to necessarily has to be one or the other. Maybe we just have been looking at the problem for such a long time that we have unconsciously lost our perspective. While I can understand the policy frustration, perhaps the problems may be less unorthodox than we think.

Overlooking defining details

Take for example our approach toward industrial policy. We have long maintained a framework that would identify industries that could be drivers of growth. This is why we have continuously searched for the Holy Grail of industries that are critical. In the 50s, we referred to them as "new and necessary." By the ’60s and ’70s, they had become "pioneering and preferred." By the 80s, the buzz phrase was for "sunrise and sunset" industries. In the terminology of the 90s, they come by as "strategic" or those forming some key "cluster."

No matter how you name it, minus the trimmings, they do come out the same. What it at least suggests is having a policy of identified strategic drivers will not by itself be enough. By and large, we have a firm idea of which industries provide good stimuli for growth, either because they require the collective inputs from "upstream" industries or because they generate activity for "downstream" industries. These backward-forward linkages, synergies or value-chains – or however else we wish to call them – are well documented and yet there is much to be achieved. To make it work this time around, we need to find something new either in the design of the industrial policy or its execution.

Moving the issue forward, my impression is that one major problem with having a national bias toward specific industries is that the strategy assumes that the Philippine business landscape is contiguous and even. In reality, the Philippines is an archipelago where Aparri is distinct and distant from Zamboanga. One should certainly expect that what the Ilocanos can offer and what they need would be fundamentally different from those of the Cebuanos or those in Davao.

It is also important that we recognize that (1) there are real differences in the way regions are fundamentally endowed and (2) the factors of production are unevenly distributed within a region and across regions. Western Mindanao, for example, is inclined toward agriculture as Southern Tagalog is industrial while Central Visayas is largely a service sub-economy. Capital and technology tend to be Metro Manila-centric while labor is most intense outside the national capital region (NCR). These are how these regions are structured and these are how they operate.

In an ideal environment, this would have been a good basis for specialization, which in turn could have led to balanced cross-border trade. What we find instead from available information is that trade flows are highly concentrated between a few selected geographical units.

Commodities produced from three of the 16 regions – NCR, Central Visayas and Southern Mindanao – account for roughly half of total commodity production in the country. Commodity flows between these three regions alone account for about half of what they collectively produce. At a higher aggregate, it is remarkable to find more inter island trade (for example, Luzon to the Mindanao and the Visayas) than there is intra-island trade (i.e., Mindanao to Mindanao).