the economy according to prope - pids admin | content ... · “leapfrogging” from the...

Vol. XII No. 1 JANUARY-FEBRUARY 1994 ISSN 0115 - 9097

Editor's Notes

Once again, the "light at the end of the tunnel" flickered,bringing fresh hopes for the country’s economy. The goodnews is, the economy’s growth track has gone up, whichmay signal better times ahead for the Filipinos (see relatedstory) .

? Meanwhile , consumer welfare, as the report on page 9 asserts,underl ines government's plan to open up retai l trade to foreigninvestment. A study on this sector notes the efficiency gains for theeconomy in addition to consumer gains. So where's the problem here?One side of the coin argues for the welfare of the domestic retail tradesector. But can the smaller retailers with less capital survive the keenc o m p e t i t i o n ?

Lastly, the government’s vision of development continues to gainprominence and sink into everybody’s consciousness with the continuousreference by no less than President Fidel Ramos himself. In this issue, weseek to clarify some more the principles behind this vision by featuring thearticle of Dr. Serafin Talisayon. As the title itself reveals, the developmentstrategy goes beyond the year 2000 by exploring ways to “leapfrog” ortake shortcuts toward development via technologies, human resourcesand innovation. Dr. Talisayon, a scientist by academic training, iscurrently Assistant Secretary at the National Security Council. As towhether the Philippines can take “shortcuts” to development, his articleaffirms that a great possibility exists (special feature on page 2).

With these encouraging notes, this issue comes out with much hopethat the Philippines, almost, is ready for economic take-off.

The EconomyAccording to PROPE

Manufacturing industries will surely provide most of the fuel that willrun the economy toward the country’s vision of “Philippines 2000!” Studiesfocused on this sector, therefore, will indispensably provide key informationon how to maximize their efficiency. Thus, we place much importance andurgency in providing a continuing story on the latest and key findings of theDevelopment Incentives Assessment (DIA) Project (see page 7).

Yet, it may be too early to say that deliverance from the cyclicalstagnation is at hand. As the PROPE study team headed by Dr. V. BruceJ. Tolentino, PIDS Research Fellow, prescribes, ten economic imperativeswill spell out whether that flicker will open up into a full horizon of sunlightthat will nurture the blooming of a robust economy. Despite the dampeningeffect of the detailed analysis by Dr. Rosario Manasan, another PIDSResearch Fellow, of the government’s fiscal difficulties, high hopes continueto prevail as the PIDS study affirms that conditions do look good.

What's Inside

Special FeatureSpecial Feature

4Toward a "Leapfrogging"Strategy for the Philip-pines 22

Research/Seminar UpdatesResearch/Seminar Updates

4Manufacturing IndustriesRevisited 77

4Consumer Welfare: Core ofRetail Trade Liberaliza-tion 99

New BooksNew Books 66

he growth track of the Philip-pine economy is higher this year than inpast years, owing largely to effectivenation governance. This assessmentcame from the PIDS Review and Out-look of the Philippine Economy(PROPE) for 1993-1994, which was pre-sented in a seminar late last year as partof the Institute’s yearly assessment ofthe economy. The study team led byDr. V. Bruce J. Tolentino, PIDS Re-search Fellow, reviewed the nation’sperformance in economic governance

TT

F To page 11

and probed the effectiveness of the eco-nomic policies implemented during thepast year. To cap its assessment, PROPEalso presents an outlook for the yearahead and recommends 10 imperativesfor the economic recovery of the coun-try.

THE PAST YEAR

PROPE reported modest accelera-tion in economic growth in the Ramos

DEVELOPMENT RESEARCH NEWS 2 January-February 1994

CC


S P E C I A L F E A T U R E

Toward a "Leapfrogging" Strategyfor the Philippines

SERAFIN D. TALISAYON

*

WHAT IS A “POST-INDUSTRIAL” ECONOMY?

olin Clark, an Australianeconomist, observed that nationaleconomies generally grow accord-ing to a sequential pattern: pri-mary (agricultural) production—> secondary (industrial) produc-tion —> tertiary (services) pro-duction1. The proportion of thelabor force shifts from the pri-mary sector to the secondary sec-tor, and then to the tertiary sector.

Daniel Bell2, an American soci-ologist, observed that economic devel-opment of industrialized countries gen-erally follow this pattern: agriculture—> pre-industrial —> industrial —>mass consumption. He predicted thatthe growing importance of informationand technology---or “knowledge” ingeneral---will lead to a “post-indus-trial” stage characterized by the pri-macy of high-technology services, es-pecially R&D to create new knowledge.Scientists and experts, or people whoprocess, possess or generate useful in-formation, will wield more power in a“post-industrial” society, a term in-vented by Bell.

"Knowledge," as shown in the fol-lowing table, is used here in a genericand economic sense. The term is ge-neric because it is defined here to em-brace many forms of raw or processedinformation. It is also used in the eco-nomic sense because it is viewed bothas a factor of production and as a prod-

uct, and as such, can be bought andsold in a market.

Alvin Toffler,3 a popular Ameri-can writer, expounded these ideas fur-ther by observingthat human civili-zation experiencedthree major revo-lutionary changesor “waves”: (a) theagricultural revo-lution 30,000 years

man’s capacity to handle informa-tion. He also believes that the tran-sition between two “waves,” in-cluding the present shift to the“Third Wave,” is accompanied byradical changes in power relations---“power shifts”---among indi-viduals and nations.

Each of the three revolutionsarose from a major technologicalbreakthrough that radically altersman's capacity to change theworld around him and results in

major social changes as seen below.Information is the essential ele-

ment in four “sunrise” industries of the21st century: computers (processing of

ago, which alteredman’s capacity toproduce food; (b)the industrial revo-lution nearly 300years ago, whichaltered man’s ca-pacity to use en-ergy; and (c) the in-formation revolu-tion started about30 years ago, whichis rapidly altering

Agricultural Industrial Information

Revolut ion Revolut ion Revolut ion------> ------>

power shift power shift

Altered human produce food use energy hand lecapacity to: informat ion

Factor intensity: land, labor energy, information, labor

Key techno- seed/seedl ing s team programmablelogies preparat ion engine computer

Assoc iated domest icat ion assemb ly te lephonetechnologies: irrigation l ine optic cable

Key resources: land, water, fossil fuels knowledge,property/access "meta-information"r ights

Social dynamics: nomads-- -> labor versus---> network ing,sett lers capital; global village

workplacevs home

Power holder: landlord---> capital ist---> R&D scientist

information * + interest of observer ** = datadata + theoretical/conceptual

framework = sciencescience + utility to many users = technologyall of the above = K N O W L E D G E

knowledge + ethical framework = wisdom___________

*Physically, information is any non-random pattern, measuredlogarithmically as extent of departure from randomness (bits);behaviorally, information is any non-random pattern associatedwith a meaning.

**For example, sounds from a running automobile engine are"data" or "signals" to an automotive technician but "noise" to alayman.

* *

*Paper presented during the workshop on "Strengthening Knowledge Industries/Infrastructures in the Philippines," DAP ConferenceCenter, Tagaytay City, 6-7 November 1993.

**Assistant Secretary, National Security Council.



information), telecommunications(transmission of information), robotics(revolving around the use of informa-tion for control and automatic action),biotechnology (revolving around ge-netic information), and their combina-tions. This is the starting point of co-gent arguments as to why countrieswhich fail to recognize the importanceof information resources and informa-tion technologies (IT) would most likelybe unable to successfully compete inthe next century.

cal, health, helping and allied profes-s ions.

SOME IDEAS FOR APHILIPPINE LEAPFROGGINGS T R A T E G Y

n Use knowledge-intensive tertiary

technologies to enhance the efficiencyof our huge agricultural/primary sec-tor. R&D in such new technologies willfind a big and ready domestic marketand will increase the competitivenessof our agricultural exports.

Examples :

w Computer programs to pin-

point most suitable crops to aparticular soil such as the CropMicro-Decision Program de-veloped by the National Eco-nomic and Development Au-thority (NEDA) IPDP, and elec-tronic networks to quickly in-form farmers and cooperativesabout prices of commoditieselsewhere in the Philippinesand abroad;

w Ecotourism to add higher

value-added services on top ofagricultural production;

w Cloning of desirable crop vari-

eties for rapid mass produc-tion of seedlings; and

w Genetic engineering to develop

micro-organisms with usefulproperties such as single-cellprotein (SCP), or which canbiosynthesize high value-added products such as drugs,metabolites and quasi-hor-m o n e s .

In the long run, cooperatives orcommunity-based biotechnologies arethe keys to raising farm productivities,farmer empowerment, and domesticas well as global competitiveness.

n Develop a home-based IT serv-ices sector with worldwide clientele, 5

or “earn dollars while staying at home.”Developments in IT and telecom-

munications technology offer tremen-

IS “LEAPFROGGING”FEASIBLE?

The issue therefore is: can a ThirdWorld country such as the Philippines,which is in a hurry to develop andcompete globally, take “shortcuts” by“leapfrogging” from the agriculturalstage to the post-industrial stage? Inother words, is the theoretical sequencementioned earlier inevitable or unal-terable?

The answer is yes, leapfrogging isfeasible and desirable for four reasons.

First, the type of industrializationseen in Europe and the US in the mid-20th century was made possible bythree conditions that no longer occurtoday and may never occur again: (a)cheap energy, (b) large captive colonialmarkets, and (c) higher absorptive ca-pacities of relatively unpolluted envi-ronments. This means that industrialapproaches more appropriate in the21st century would have to possessdifferent characteristics; they wouldtend to be: (a) less energy-intensive andusers of renewable energy resources,and (b) environment-friendly and lessmaterials-intensive (recycling or mini-aturization).

Second, in the same fashion thatindustries can be structured to rein-force and increase efficiencies in agri-culture, so, too, can information tech-nologies be made to reinforce and in-crease efficiencies in industry and of


course also in agriculture. Informationtechnologies have become essential toany type of industrialization, includingagro-industrialization in the Philippinecase .

Third, historical experience showsthat “catching up” takes less and lesstime, and that latecomer countries withcorrect policies grew faster than coun-tries which had industrialized earlier.From 1780 during the industrial revo-lution, it took Great Britain 58 years todouble its real per capita income, whilethe United States took 47 years from1839. Starting from the Meiji Restora-tion Period, Japan doubled its incomein 34 years (The Economist, 15 October1993, p. 80). Later, South Korea tookonly 11 years from 1966 and Thailand,only about a decade from 1982. Thedouble-digit rates of growth of China’ssouthern coastal provinces in the lastfew years would be doubling their percapita income in only half a decade.

Fourth, the industrial or second-ary sector is the most energy-intensivewhile the services or tertiary sector isthe most human resources-intensive.4

The Philippines, a net energy importerand a net services exporter, must nec-essarily seek its competitiveness morein the tertiary sector and less in thesecondary sector. Manufacturing hadbeen a weakness of the Philippineeconomy for decades. Therefore, a keyto global competitiveness for the Phil-ippines in the next century is to identifyhuman resources- and knowledge-in-tensive subsectors in the tertiary sec-tor, such as: (a) computer softwarerather than computer hardware in thehigh-growth IT industries, and (b) medi-

"...a key to global competi-tiveness for the Philippinesin the next century is to iden-tify human resources- andk n o w l e d g e - i n t e n s i v esubsectors in the tertiarysector.. ."




dous possibilities of integrating ourprofessional/ technical workforce withthe advanced technology-based serv-ice industries abroad. This is a manu-facturing or service production modal-ity not available to industrial countriesearlier in the 20th century.

In much the same way as variouscomponents of manufactured goods arenow being produced in various loca-tions all over the world, depending onrelative prices of factors of production,various components of service output(such as data entry for airline reserva-tions, ticket processing, building databases, engineering design, and others)

can be sourced from various locations.The output can be consolidated on real-time basis because of advanced tele-communications technology.

Opportunities exist or are emerg-ing in many IT service areas which canseek distant sub-contracting arrange-ments with foreign firms:

w IT-related: software develop-ment, data entry and data basemaintenance, computer engi-neering and systems architec-ture design, computer-aideddesign, video-voice interface,and digitization of maps;

w Professional services: account-

ing, auditing, actuarial, gen-eral consulting; engineering/architectural design; editing,translation and technical lit-erature; arts- related services:

animation, film-making;

w Specialized repairs;

w Scientific services: bio-technol-

ogy: development of new vari-

eties of crops, and statisticalservices.

Urban cooperatives and small andmedium enterprises (SMEs) should beencouraged to engage in IT-related serv-ices. For example, US data encoderscan command about $10/hour, whileFilipino data encoders are happy witha monthly salary of P10,000/month —approximately a 4:1 labor cost advan-tage. The distance factor is not impor-tant; air freight of documents is theonly transport cost. IT cooperatives tiedto an aggressive marketing firm wouldenable Filipino data encoders with onlya high school education and vocationaltraining to earn much more than

"Leapfrogging is basi-cally taking shortcuts bycopying, adopting and im-proving upon technologiesthat others had earlier de-ve loped"

P10,000/month. From data-encoding,the SMEs or urban cooperatives cangraduate to higher value-added serv-ices such as indexing and abstracting,digitization of maps and GIS services,advanced graphics/animation, and soforth. When domestic telecommuni-cations and airline services in majorurban centers are well-developed, ur-ban IT-services cooperatives there cancontribute in stemming migration to

Metro Manila and Metro Cebu.

Stage Example

Stage A: ability to use A customer buys an imported productwith a manual that he can follow.

(Transitional Stage AB:ability to repair andfabricate spare parts)

Stage B: ability to An entrepreneur enters into a jointproduce venture with a foreign partner who

brings in a factory and teaches Filipinoworkers how to make the product.

(Transitional Stage BC:ability to redesign, retro-fit or reverse-engineer)

Stage C: ability to A Filipino expert undertakes post-innovate or design graduate work in an R&D agency

abroad, returns home and sets up asimilar agency at home. A Filipino balikbayan from "SiliconValley" brings home his savings andknow-how and sets up his own IT firmthat competes successfully in globalmarkets.

n Leapfrogging is basically takingshortcuts by copying, adopting andimproving upon technologies that oth-ers had earlier developed.

Transnational technology trans-fer can result in one of the three stagesof ability on the part of the receiver oftechnology, namely: (a) ability to use,(b) ability to produce, and (c) ability toinnovate/design. Leapfrogging re-quires a distinctly different type of tech-nology transfer, the third type whichresults in ability to innovate or designas shown below.

Leapfrogging will not happenwith the first and second kind of tech-nology transfer; only a catching up(where the Philippines will always bebehind) will happen in the second kind;and neither leapfrogging nor catchingup will happen with the first kind.

Some steps in this direction are:

w Select high-technology areas

where the Philippines can leap-frog into. It may not be realisticnor desirable to aim to catch upwith the West or Japan in cer-tain “hard” technologies. Thequantity and quality of our fac-

tor endowmentsmake it feasible forthe Philippines toaim for develop-ing competitivestrength in a fewselected “high-tech” niches, nota-bly biotechnology,computer soft-ware and applica-tion-oriented mi-c r o p r o c e s s o r s ,maritime techno-logies, maricul-ture/aquacultureand non-conven-tional energy tech-nologies.

w I d e n t i f y

sources: coun-tries, institutionsin those countries,and experts there-




n Copying/adopting technologyfrom abroad must be complementedby innovation at home.

in who are leading in those high-technology areas.

w Implement Stage C technol-

ogy transfer: send Filipino ex-perts for training in those identi-fied high-tech institutions, enterinto research subcontracting ar-rangements with those institu-tions, attract researchers andprofessors (such as Filipinosabroad who represented past“brain drains” and who nowpossess most valuable experi-ences and insights in forefrontindustrial or IT sectors) in thoseinstitutions to retire or migrateto set up globally competitiveenterprises in the Philippines.

A developingeconomy with a sub-stantial labor force(49%) in the tertiarysector like that of thePhilippines and aimingtowards the post-in-dustrial stage can welladopt a strategy of ex-cellence in interna-tional service trade.Based on an analysis ofunique strengths of theFilipino character andof the natural and hu-man resource mixes ofthe Filipino economy,the proposal ofRamirez et al. is to con-solidate these strengthsinto a few areas and toweave them aroundtwo key infrastructures(see Figure 1):w A “social brain,” anetwork of think tanksand R&D institutionsthat will generate newknowledge and chartoptimum nationalstrategies coupled witha new culture and work

ethic of innovation, high-qual-ity decisionmaking, and prod-uct excellence; and

w A market-driven R&D mega-fund that will provide a quan-tum jump in financing for gen-eration of new knowledge, ap-proaching 1-2 percent of GNP,by shifting fund source fromacademic-driven governmentresearch grants to market-driven private R&D contracts.

Knowledge industries can touchboth urban and rural areas. Of the clus-ters of competitive strengths identifiedin Figure 1, the upper three clusters are“soft,” people-oriented niches more ap-propriate to rural areas, while the bot-tom two clusters are “hard,” technol-ogy-oriented niches more appropriateto urban areas.

n Adopt an IT services industrydevelopment game plan.

A plan must be formulated andimplemented so that the Philippinescan move deliberately up the “flyinggeese” hierarchy in the Asia-Pacific (seeFigure 2 for an example). The develop-ment paths outlined in the figure showthe importance of prior developments:

w A good telecommunications in-frastructure is an absolute ne-cessity;

w A government network canspur development of informa-tion banking and services, to-gether with an electronic datainterchange (EDI). For exam-ple, computerization of the Bu-reau of Customs is a prerequi-site to the development of atrade-oriented EDI. In gen-eral, because of sheer size ofgovernment expenditures, de-liberate increase in appropria-tions for IT hardware and soft-ware acquisition by govern-ment agencies can provide asingle ready and sizable do-mestic market to pump-primeIT industries. Computerizationin government also achievesother objectives: higher pro-ductivity despite streamliningand reduction of work force,reduction of graft-prone bu-reaucratic procedures, andfaster coordination horizon-tally and vertically within thebureaucracy.

w An INTERNET node to inex-pensively link Filipino knowl-edge workers to informationsources and their counterpartsabroad is also essential.

w A Philippine communicationssatellite creates tremendousopportunities for the privateand public sectors. Not onlywill it provide an alternativetelecommunications backboneespecially in cases of emer-gency when land-based chan-nels are disrupted, but can alsoprovide a new medium for dis-




tance education, entertain-ment, and beaming livelihoodprograms down to thebarangay level. National unitycan be enhanced by Filipinoeducational, cultural and en-tertainment TV programsbeamed to all islands and toFilipinos abroad (Middle Eastor US west coast, dependingon longitudinal position of thesatellite), and by live televisedconversations between thePresident and farmers/fisher-folk using portable personalearth stations (PES) from anyremote barangay. The Philip-pines' own satellite can also bean important national symbolof its entry into the 21st cen-tury.

[3] Toffler, Alvin, The Third Wave.

New York: Bantam Books, 1981.

_______, Powershift. New York:

Bantam Books, 1990.

[4] The relative factor intensities of

the sectors:

[5] Ramirez, Mina, Serafin Talisayon

and Edgardo Espiritu, "The Philippines as a

Knowledge Center in the Asia-Pacific."

Occasional Monograph No. 5. Malate: Asian

Social Institute, October 1993.

Modern Rice Technology andIncome Distribution in Asia

Edited by Cristina C. David and KeijiroO t s u k a

The book is a collaborative work of notedeconomists in seven Asian countries in an effort todevelop a comprehensive understanding of the im-pact of technological change.

This volume looks at seven Asian countrieswith widely diverse production environments andagrarian and policy structures. It examines notonly the direct effects of technology on productiv-ity, factor use and income but also its indirecteffects through labor, land, and commodity marketadjustments. This 475-page book is published byLynne Rienner Publishers (Boulder and London)and International Rice Research Institute (Ma-ni la) .

drn

[1] Observe the percentage of labor

force in various Asia-Pacific countries (from

World Development Report, World Bank

1992). Philippine employment mix is heavy

on agriculture and especially on services as

seen in the following:

N O T E S

[2] Bell, Daniel, The Coming of Post-Industrial Society. New York: Basic Books,

1 9 7 3 .

Pr imary Secondary Tert iary Sector Sector Sector

Factor land energy informat ionintensity: labor mater ia ls labor

Examples : farming, construct ion, educat ion,f ishing, manufactur ing bankingmining

NEW BOOKS

The book is composed of a selected set ofreadings aimed to serve as a supplement to anintermediate textbook. It provides more advancedstudents with seminal articles in many areas ofinternational trade, from theory to agriculturaltrade issues to international trade problems inAsia. This 708-page book is published by WinrockInternational Institute for AgriculturalDeve lopment .

Readings in International TradeTheory, Policy and Development

Edited by Ponciano S. Intal, Jr. andGerald C. Nelson

Percent of labor force in 1986-1989

Agriculture Industry ServiceCountry

Developed :U S A 2.8 18.4 78.8Austral ia 5.3 16.4 78.3Canada 3.4 19.4 77.2New Zealand 10.0 20.1 69.9

NICs :Hongkong 0.9 27.7 71.4Singapore 0.5 29.0 70.5Japan 7.1 23.7 69.2South Korea 17.8 26.7 55.5

ASEAN :PHILIPPINES 41.5 9.5 49.0Malaysia 41.6 19.1 39.3Indonesia 54.4 8.0 37.6Thailand 69.8 5.9 24.3

Others :Bangladesh 56.5 9.8 33.7Myanmar 63.9 9.1 27.0Vietnam 67.5 11.8 20.7Cambodia 74.4 6.7 18.9Laos 75.7 7.1 17.2P. New Guinea 76.3 10.2 13.5China 73.7 13.6 12.7


In DIA Studies

ManufacturingIndustries Revisited

(Last issue, we featured four industry studies -- motorcycle and parts, appliances,shipbuilding/repair and boatbuilding, and agricultural machinery which are part of theDevelopment Incentives Assessment (DIA) Research Project. The DIA micro studiesanalyze the performance and competitiveness of eight strategic industries, and thefactors and policies affecting them. In this issue, we feature the remaining four industrystudies -- packaging, synthetic resins and plastics, meat and dairy processing, and textilesand garments. - Ed.)

TT he preliminary findings of theindustry studies indicate that the do-mestic market after the trade policyreform was more conducive to compe-tition than before.

Protection, according to the tra-ditional argument, distorts output andfactor markets, leading to allocativeinefficiency. It also encourages the ex-istence of too many small firms whichcould not specialize adequately on cer-tain product lines, thus discouragingthem from adopting ‘best practice’ pro-duction techniques. Did trade liberali-zation enhance the efficiency of manu-facturing industries?

lel reduction in domestic resource cost-shadow exchange rate (DRC/SER) lev-els were also observed, indicating allo-cation efficiency gains and improvedcomparative advantage both for theindustry and for most of the subsectors.However, technical efficiency appearsto have generally declined during thisperiod.

The findings of the study showthat the mere threat of competition, notnecessarily actual competition (importpenetration rates even declined be-tween 1983 and 1988), appears to haveforced existing manufacturers to be-come more efficient and encouragedthe entry mainly of efficient firms.

ON SYNTHETIC RESINS ANDPLASTICS

As of 1991, there were 17 syn-thetic resin manufacturers producingpolyvinyl chloride, polysterene, acrylicresins, alkyd resins, adhesive resins,phthalic anhydride, and pellet resin,according to the study by Mr. CesarBanzon.

The production of polyvinyl chlo-ride cornered 54 percent of total annualproduction of resins, followed bypolysterene. The industry does notproduce the more in-demand thermo-plastic resins, namely, polyethylene andpolypropylene due to the high invest-ment needs and the absence of an inte-grated local petrochemical plant to sup-ply the raw material requirements.

of packaging products. Of these, 64percent belonged to the plastic-based,20 percent to the paper-based, and 13percent to the metal-based subsectors.

The industry employed a total of30,439 or 3.5 percent of the total manu-facturing in the same period. It alsoaccounted for 3.4 percent of total manu-facturing value of output. Exportsamounted to P681.3 million while im-ports were P672.6 million.

The policy reforms instituted since1981 lowered the level of protectionaccorded to the industry in terms oftariff and non-tariff barriers to impor-tation. The industry-level Effective Pro-tection Rate (EPR) declined by almost60 percent between 1983 and 1988.Subsector level EPRs likewise showedmarked reduction in protection. Paral- F To page 8

ON PACKAGING

Packaging is the totality of prod-ucts, services, and systems used to pre-serve, identify, transport, distribute,store, retail, and facilitate the directconsumption of goods.

The study by Ma. Cristina Medilofollows the scheme of classifying pack-aging products according to raw mate-rials used.

Based on this scheme, the packag-ing industry is seen to comprise fourmajor subsectors: glass-based, metal-based, paper-based, and plastic-based.

In 1988, 408 establishments, orfour percent of the manufacturing to-tal, were engaged in the manufacture


The products of the plasticprocessing industry, on the other hand,are divided into four: (1) plastic furni-ture; (2) plastic footwear; (3) plasticindustrial supplies ; and (4) other fabri-cated plastic products. While the resinindustry is oligopolistic in structure (afew large firms dominate the industry),the plastic processing industry is highlydispersed, meaning many firms com-pete evenly within the industry.

EPRs for both synthetic resins andplastics went down between 1983 and1988. Average tariff rates for syntheticresins dropped from 38 percent in 1981to 25 percent in 1985, and plastic process-ing, from 39 to 38 percent during the

Manufacturing Industries...(From page 7)

same period. However, the principaleffect of the trade reform was the majorsurge in imports. The rise in imports isexpected to provide a mechanismwherein local firms are pressured tobecome efficient. The competitive pres-sure could, in turn, force an industrial

The dairy processing sector, onthe other hand, consisted of 5 largefirms engaged in the manufacture ofprocessed milk with value added ofP208 million and 49 large firms in thenon-dairy products category with valueadded of P2.3 billion. In addition, there

restructuring whereby local producersdispose outdated operations, createnew products and embark on a searchfor new markets.

The study recommends greaterexport orientation for the synthetic resinand plastic processing sector for betterefficiency and profitability.

ON MEAT AND DAIRYPROCESSING

Food processing belongs to thatset of infant industries which hasachieved some degree of maturity andexport competitiveness. Its share manu-facturing value added has always beenthe highest, although this declined from44.7 percent in 1980 to 37.7 percent in1992. Its share in Gross Domestic Prod-uct has also fallen from 30.9 percent to9.5 percent in the same period. Thestudy by Ms. Loreli de Dios focuses onthe meat and dairy processing sectors.

Based on 1988 Census data, themeat processing sector, was composedof 70 large firms with value added ofP1,160 million and some 188 small firmswith value added of P8.4 million. Halfof the large firms were located in MetroManila; the rest were in SouthernTagalog, Bicol and Eastern Visayas.Meanwhile, most of the small firmswere in Central Luzon. F To page10

were 324 small firms with P113.7 mil-lion value added.

Despite the large involvement ofthe government in the food processingsector, mainly through the Departmentof Agriculture, the industry has devel-oped with the initiatives and ingenuityof the private sector.

For the meat processing industry,trade policy has always been protec-tive. Liberalization has been shortlived,except for live animals, some poultryand fresh and canned beef. The re-moval of import restrictions may notharm the sector because of the naturalprotection afforded by the perishabil-ity and the lower domestic prices ofsome products. The most immediateneed is to reduce the costs of inputs byimproving the infrastructure and theoverall policy environment.

Trade policies have benefited theprocessed milk sector more in terms ofthe removal of quantitative restrictionsthan tariff adjustments. Government


Consumer Welfare:Core of Retail Trade Liberalization

The retail trade sector is charac-terized by numerous small shops con-veniently located in population centersas a result of keen competition. Compe-tition can be seen in discounts and bar-gain sales, diversification of productlines, up-to-date store designs andshowcases, and emphasis on productquality, among others. Competition re-sults in low pricing.

The trends in retailing are as fol-lows: (1) back-to-basic, no frills, smallshops; (2) warehouses and supermar-kets; (3) tie-ups with specialty stores;(4) one-stop shopping; (5) emphasis onproduct mix, image and concept mar-keting for maxi stores, while location-orientation for ministores; (6)professionalization of management; (7)use of contractual labor; (8) inventorysystem; (9) credit cards and point ofsales; and (10) house brands, amongothers .

petitiveness have prompted the gov-ernment to pronounce policies in sup-port of liberalization in trade and in-vestment. Such was the sentiment ofSamie Lim, President of the PhilippineRetailers Association, during the work-shop held to discuss the preliminaryfindings and recommendations of thestudy team commissioned by the Pri-vate Investment and Trade Opportuni-ties for the Philippines (PITO-P) to as-sess the impact of opening the retailtrade sector to foreign investment.

The members of the study teamare Dr. Epictetus Patalinghug, Dr.Ruperto Alonzo, Prof. Juan Lim , andDr. Ponciano Intal, Jr.

CUT TO COMPETE

PP ressures to attain global com- In terms of employment, the smallestablishments employed more thanhalf of the workers in the sector. Thenumber declined in 1988, but the trendremained. The Census of Establish-ments and Labor Household Surveyreveal the dominance of female work-ers in the sector. Also, most of the largeestablishments are located in MetroManila, Cebu or Davao.

RELEVANT LAWS

The Retail Trade NationalizationLaw of 1954 sought to protect Filipinoretailers from foreign dominance. Thelaw was amended in 1975 to providesome flexibility, but overall, the law isstill restrictive. Other restrictive lawsare the Rice and Corn Industry Law of1960 and the Anti-Dummy Law.

For the promotion of consumerwelfare, the Consumer Act of the Phil-ippines sets the conduct for businessand trade. The following groups alsosafeguard the interests of both retailersand consumers: (1) Retailers Council ofthe Philippines; (2) Council to CombatCounterfeiting and Piracy of Patents,Copyrights and Trademarks; (3) Phil-ippine Retailers Association; and (4)Drugstores Association of the Philip-pines.

There are also statutes and lawson foreign investment. Executive Or-der 226 or the Omnibus InvestmentCode of 1987 requires foreign investorsto register with the Board of Invest-ment before they can secure incentives.In June 1991, the Foreign InvestmentAct or Republic Act 7043 was passedwhich, in effect, liberalizes the entry of

RETAIL TRADE IN THEE C O N O M Y

The study says that from 1980-1992, the retail trade sector provided11.3 of the 14 percent contribution oftrade (retail and wholesale) to GrossDomestic Product (GDP), or 81 percentof trade to be precise. Such substantialshare was primarily driven by the 3.5percent increase in the personal con-sumption expenditures during the saidperiod. The biggest share was contrib-uted by supermarkets, sari-sari stores,and groceries.

Although there seems to be a trendfor megamalls these days, they do notdominate the sector. In 1992, they com-prised only 6 percent of the total pie.The rest was constituted by the follow-ing: single proprietorship, 50.2 percent;market vendors, 13.4 percent; and fam-ily-run neighborhood stores, 35.8 per-cent. The major categories of consumergoods from which the sector is classi-fied are (1) books, office/school sup-plies; (2) food, beverages and tobacco;(3) dry goods, textiles and apparels; (4)construction supplies; (5) office/house-hold furnishings; (6) transport; (7) medi-cal supplies; (8) gasoline; and (9) retailtrade articles not classified elsewheresuch as toys and jewelries.

The survey also reveals that smallenterprises (with less than 10 workersas defined by the National StatisticsOffice) dominated the sector in 1975and 1988. Small establishments con-tributed the biggest value-added in 1975,but were overtaken by the large estab-lishments in 1988. Food, beverages andtobacco contributed the biggest value-added in both small and large establish-ments . F To page 10

DEVELOPMENT RESEARCH NEWS 1 0 January-February 1994

Consumer Welfare...(From page 9)

foreign investment to the country butthe retail trade sector remains in thenegative list.

The Philippine Constitution re-stricts ownership of land to Filipinos.Recently, however, RA 7652 became alaw which allows foreign investors tolease land for a maximum of 75 years(50 years plus renewable for another 25years) .

HOW THEY FEEL

Based on the survey, the studyteam was able to identify various issuesand concerns of the retail trade sectorfrom the perspectives of government,local consumers, retailers and foreigninvestors.

For the government, the outstand-ing issues are foreign exchange genera-tion, employment generation, tax rev-enue generation, export promotion,professionalization of the retail tradesector, and tourism development.

"There are net efficiencygains for the economy if itliberalizes foreign invest-ment in the retail trade sec-tor. However, there's a fore-seen displacement of localretailers..."

For consumers, the issues are re-duction in commodity prices, widerarray of products, improved quality oflocal products, and better services.

For retailers, the issues are height-ened price competitiveness, trade im-balance, adverse effects on small andmedium enterprises, shift in strategyfrom pricing to concept marketing,competition in funds market, and tech-nology transfer.

For foreign investors, the identi-fied issues are trade name and trade-mark protection, rationalization of tar-iffs, rationalization of value-added tax,land ownership, and unfair competi-tion posed by duty-free shops.

GAINS AND LOSSES

There’s no denying that the eco-nomic trend is toward liberalization.Industrial development will providefor the expansion of trade, both whole-

sale and retail. An increase in value-added will push industries to newheights. Consumer power will increase,

and people will be able to pay for awider array of quality products.

There are net efficiency gains forthe economy if it liberalizes foreigninvestment in the retail trade sector.There is increased taxation and posi-tive net consumer gains. However,there’s a foreseen displacement of localretailers, but only of the inefficient ones,according to the study. Ultimately, con-sumer welfare is served with the avail-ability of quality goods at right prices.M L S drn

Manufacturing Industries...(From page 8)

efforts to help smallhold dairy farmingare starting to pay off. The next stepwould be for government to facilitatethe link between these small firms andlarge-scale processors.

ON TEXTILES ANDG A R M E N T S

The textiles industry is one of theindustries developed and sheltered un-der heavy protection through a com-plex system of import restrictions, for-eign exchange controls, tariffs, subsi-

Dr. Myrna Austria, inher study, observes that ef-ficiency in the allocation ofresources for textiles andgarments has improvedwith the trade reform.However, garments con-tinued to be penalizedwhile textiles receivedfavored protection.

Textiles underwentindustrial restructuring

with the entry of new firms, mostlysmall ones. Labor and capitalproductivities improved while capital-labor ratios went down. It also achieveda certain degree of efficiency and com-petitiveness (relatively low DCR/SERratio), but export performance was stillwanting.

Garments have achieved com-parative advantage. However, muchstill needs to be done to sustain theindustry's performance. The increas-ing automation in other countries callsfor technolcogy upgrading, skills train-ing and research and development.Local firms should be encouraged toexpand exports to create linkages withthe rest of the economy, especially thatwith the textiles industry. MLS

dies and investment incen-tives. On the other hand,the garments industry isone of the less protectedindustries, yet it hasproven to be an efficientone .

drn


The Economy...(From page 1)

administration’s first year and a half inoffice. This achievement was attributedto the substantial level of political sta-bility that made for conducive imple-mentation of essential economic re-forms .

Other significant achievementsmade by the Ramos administrationwere in the: steps to deregulate foreignexchange transactions; creation of theBangko Sentral ng Pilipinas and thegreater liberalization of branching andbanking; initial attempts to reduce en-try barriers into major industries liketelecommunications; greater privatiza-tion of government corporations ashighlighted by the privatization of Phil-ippine Airlines (PAL); and intensifiedefforts to promote peace.

But can the economy’s currentpositive trend be accelerated and sus-tained?

PERSISTENT PROBLEMS

Numerous problems still plaguethe country, based on PROPE’s assess-ment. Major power shortages continueto hound the economy. Internationalcompetitiveness has not improved norhas trade significantly diversified acrosscommodities or trading partners. Andwhile economic growth has kept asluggish below 1 percent average overthe past decade, population growthcanters at the relatively high average of2.35 percent. Thus, poverty continuesto be widespread. Forty-one percent ofall Filipino families are poor, says theFamily Income Expenditure Survey(FIES) .

To jumpstart the Philippineeconomy, therefore, much more re-mains to be done.

FOCUS ON FISCALM A T T E R S

Among the economy’s recurrentmajor ills, PROPE pinpoints the scar-

city of fiscal resources as the most criti-cal constraint to attaining sustainableeconomic growth. A weak fiscal posi-tion limits the government’s optionsfor achieving economic recovery, sus-tainable development, and poverty al-leviation.

While slackening of fiscal andmonetary restraints can jumpstart theeconomy in the immediate term, thiscannot be relied upon in the long term.Ultimately, the government needs aprudent fiscal policy to improve rev-enue performance, reduce certain itemsin budget, and efficiently allocatespending.

In part II of the PROPE report, Dr.Rosario G. Manasan, PIDS ResearchFellow, analyzes the factors that broughtthe country to such magnitude of fiscalproblems and proposes to improve gov-

w Discontinuation of NFA subsidy.

Studies show that the NFA is inef-fective in stabilizing the prices ofpalay and rice, and that NFA sub-sidy reaches but a fraction of itspotential beneficiaries.

w Deregulation of petroleum prod-uct pricing. It is important that pricechanges are implemented in a moretimely manner, and that the rulesand processes in price changes aremade absolutely transparent.

w Increase of capital expenditure.Public sector infrastructure expendi-ture is a good predictor of economicgrowth. Also, capital expenditureshave a stronger effect on outputthan current expenditures. Thus,economic growth may be fosteredby reallocating public spending to-wards greater infrastructure invest-ments .

LEARNING FROM MEXICO

Mexico’s shift from fiscal deficitto fiscal surplus is an example the Phil-ippines can learn from. In reforms simi-lar to the PROPE’s recommendations,Mexico underwent major privatizationof government corporations. The pro-ceeds went to debt renegotiation andnew terms for debt payment. Mexico’stax system, likewise, underwent re-forms that included suppression of cer-tain impractical taxes and improve-ment in tax administration. These taxreforms resulted in a significant in-crease in the number of individual tax-payers. The increase is also much re-lated to the jailing of numerous taxevaders including some rather promi-nent personages. Finally, the Mexicanbureaucracy was streamlined and thesalaries of the remaining governmentemployees were substantially in-creased.

F To page 12

THE YEARS AHEAD

Given the Philippines' problemsin power supply and the still relativelyslow pace of economic reforms, the

tax collection personnel.w Implementation of user charges.

User fees should be imposed bothfor their revenue potential and as ameans to discourage wasteful con-sumption. The imposition of userfees is possible in government hos-pitals and other government facili-ties such as markets, slaughterhouses, transport terminals, androads .

w Discontinuation of BOI incentives.

The fiscal cost of BOI incentives--equivalent to P10.8 billion in 1991--grew by five-fold in the last six years.Yet, these incentives did not coun-teract existing distortions, attractforeign investments or justify theircost .

ernment revenue through the:w Elimination of tax evasion. Improv-

ing tax administration offers vastopportunity for eliminating tax eva-sion and collecting more revenueswithout imposing new taxes or rais-ing tax rates. The amount of taxesevaded for 1991 alone is estimatedto be P70 billion. PROPE suggeststhat the present tax administrationsystem could be improved by solv-ing the following: a too centralizedsystem; weak systems and proce-dures; a low level of computeriza-tion; and the low compensation of


address all related correspondence and inquiriesto:

Research Information StaffPhilippine Institute for Development StudiesRoom 304, NEDA sa Makati Building,106 Amorsolo Street, Legaspi Village1229 Makati, Metro Manila, PhilippinesTelephone Numbers 8924059 and 8935705Telefax Number (632) 8161091

DEVELOPMENT RESEARCH NEWSis a bi-monthly publication of the PHILIPPINEINSTITUTE FOR DEVELOPMENT STUDIES(PIDS). It highlights the findings and recom-mendations of PIDS research projects andimportant policy issues discussed during PIDSseminars.

PIDS is a nonstock, nonprofit govern-ment research institution engaged in long-term,policy-oriented research. This publication is partof the Institute's program to disseminate informa-tion to promote the use of research findings.

The views and opinions published hereare those of the authors and do not necessarilyreflect those of the Institute. Inquiries regardingany of the studies contained in this publication, orany of the PIDS papers, as well as suggestions orcomments on the publication are welcome. Please

Re-entered as second class mail at the MakatiCentral Post Office on April 27, 1987. Annualsubscription rates are: P90.00 for private firms andindividuals; P80.00 for students, libraries, academicand research institutions; and US$16.00 for foreignsubscribers. All rates are inclusive of mailing andhandling costs. Prices may change without priornotice.

Editorial Board

Dr. Ponciano S. Intal, Jr.Pres ident

Dr. Mario B. LamberteVice-President

Ms. Jennifer P.T. LigutonDirector for Research Information

Mr. Mario C. FeranilDirector for Research

Ms. Andrea S. AgcaoiliDirector for Operations and Finance

Mr. Crescencio R. JovellanosDirector for Management Information

(on leave)

Atty. Roque A. SoriosoLegal Counsel

S t a f f

Jennifer P.T. LigutonEditor- in-Chief

Corazon P. DesuasidoIssue Editor

Odette M. Salcedo, Suzy Ann D. Taparanand Lezyl B. PonceContributing Editors

Valentina V. Tolentino and Anne P. CleofasExchange

Necita Z. Aquino, Delia S.Romero,Galicano A. Godes and Federico D. Ulzame

Circulation and Subscription

Jane C. AlcantaraLay-out Artist

Vol. XII No. 1 January-February 1994

TEN IMPERATIVES

economy's Gross Domestic Product(GDP) is foreseen to grow by only 1.4percent in 1993. This forecast is below

the rate of population growth, and assuch, per capita incomes will fall. By1994, however, the economy is expected

to make a recovery. It is seen to grow at4.2 percent and increase per capita in-come for the first time since 1990.

To accelerate economic growthbeyond the foreseen rates, the PROPEoffers ten imperatives (please see box).

The PROPE's proposals are butsome of the urgent solutions the coun-try must work on to achieve acceler-ated and sustained economic growth,and greater international competitive-ness. For a country that is serious aboutbecoming a true member of the fast-prospering Southeast Asian region, it istime for the people to take heed andwork toward that vision. LBP

The Economy...(From page 11)

PROPE gives ten imperatives to

accelerate economic growth beyond the

foreseen rates. The imperatives are to:

l Generate growth and employment

by adopting a growth-oriented pub-

lic investment spending program

particularly in rural activities and

productive infrastructure financed

through enhanced domestic re-

source mobilization and more ag-

gressive negotiations for debt relief,

additional official flows and more

flexible monetary policy.

l Reinforce and accelerate trade, in-

dustry and financial reforms.

l Improve tax collection and domes-

tic resource mobilization.

l Enhance the productivity of the ag-

ricultural and industrial sectors

through deregulation and invest-

ment in research, technology and

irr igat ion.

l Adopt an exchange rate that fully and

immediately reflects the greater demand

for foreign exchange as structural re-

forms are implemented and the

economy recovers.

l Deregulate entry and pricing in power

generation and distribution to achieve

efficiency and lower user fees.

l Implement within the shortest time pos-

sible a wide-ranging streamlining of the

government bureaucracy to improve

and focus services and reduce costs.

l Set and adhere to a clear and realistic set

of targets for agrarian reform, with pri-

ority on land ownership redistribution.

l Promote equitable access to and effi-

cient use of natural resources.

l Establish safety nets for the vulnerable

groups, reduce population growth and

improve systems for basic education

and primary health care.

drn

the economy according to prope - pids admin | content ... · “leapfrogging” from the...

Documents