The Philippine New Industrial

Policy for More Competitive

Regional EconomiesRafaelita M. Aldaba

Industry Development Group

Apo View Hotel, Davao City

4 December 2014

4 December 2014 Apo View Hotel, Davao City

Outline of Presentation

Objective: PH new industrial policy

1. Why the Need for Structural Change

2. PH New Industrial Policy

3. Framework/Cluster-based Approach:

competition-innovation-productivity

4. Transforming Region 11: manufacturing

as engine of growth

5. Roadmaps for Building Competitive

Regional Economies

Part 1. Structural Change & industry

upgrading inclusive growth

Services cannot provide all the needed jobs

800K new entrants/year

3M unemployed ; 7.3M underemployed

Transform & upgrade manufacturing

3

Value Added Employment

average growth average share average share

80s 90s 20s 80s 90s 20s 80s 90s 20s

GDP 1.7 3.0 4.7 100 100 100 100 100 100

AGRI 1.1 1.8 3.0 23.9 20.8 18.9 49.6 43.2 36.1

IND 0.3 3.0 4.2 38.0 34.1 33.1 14.5 16.0 15.1

MFG 0.9 2.5 4.1 26.3 24.3 23.7 9.9 10.0 9.1

SER 3.3 3.6 5.8 40.4 42.4 48.0 35.9 40.9 48.8

Industry Challenges:

Horizontal

4

Major Area Main Issues & Constraints

Infrastructure

& Logistics

• High cost & unpredictability of power

• High cost of domestic shipping

• High cost of logistics

Governance

& Regulation

• Smuggling, corruption,

bureaucracy/red tape

• Lack of streamlining/automation of

business procedures /Lack of

transparency

• Permits issued by LGUs, national

agencies (DENR’s ECC, BI visa, BFAD

regulations, BIR registration)

• 60-40% Foreign Equity Rule

• Weak competition & regulation

Industry Challenges: Vertical

Area Main Issues & Constraints

Supply/value

chain gaps

• Absence of raw materials (upstream);

weak parts & components sector (mid-

stream); downstream

SME • Access to finance, technology

upgrade, inability to comply with

product standard regulations

HRD • Lack of skilled workers, engineers,

need for trainings

Innovation • Industry-academe linkages new

product development, R&D facilities

5

Growth Opportunities

• PH growth rate: 6.8 (‘12), 7.2% (’13, 2nd to China 7.7%)

• H1 (’14): PRC 7.45%, MAL: 6.3%, PH 6%, INO 3.8%, TH -0.1%

• Q3 (‘14): PRC 7.3%, MAL 5.6, PH 5.3% INO 5.01%, TH 0.6%

• PH: ASIA’S NEW ECONOMIC TIGER

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP Growth

PH

TH

INO

VN

PRC

MAL

Manufacturing Resurgence

• Industry growth: 7.3% (‘12); 9.3% (’13, highest)

• Manufacturing resurgence: 5.4% (‘12); 10.3% (‘13); 8.8% (H1’14); 7.2%Q3

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

in %

Year

Manufacturing Growth

PH

TH

INO

VN

PRC

WHAT MAKES PH DIFFERENTMarket Opportunities

• Growing market & middle class: demographic sweet spot

Labor

• Young, English speaking, highly trainable workforce

• Moderate wage increases

Operating Environment

• Strong macroeconomic fundamentals

• Political stability, business/consumer confidence

Policy Focus

• New Industrial Policy & a more pro-active Government

• PEZA rules & regulations, BOI Incentives & investor care

Improved competitiveness ranking (World Economic Forum)

• Rank #52 in 2014-15 from rank #59

Part 2. Strategic Industrial Policy

Improving competitiveness & productivity Growth oriented action to upgrade industries

Remove obstacles to growthInvestments

Deepen participation in regional production networks

More pro active Government:

coordination/facilitation

Government not proximate cause of growth, but private

sector, investment & entrepreneurship

Create environment to strengthen industries,

ensure they are not disadvantaged by international

competitors

Cluster-based industrial strategy to build strong

& competitive regional economies

Clusters: inter-firm cooperation & agglomeration

Roadmap for Structural TransformationVision: globally competitive manufacturing

-Rebuild capacity existing industries, strengthen emerging industries, maintain competitiveness of comparative advantage industries

-Participate as

hubs in regional

& global

production

networks for

auto,

electronics,

machinery,

garments, food

-Shift to high value

added activities,

investments in

upstream

industries

-Link & integrate

industries

-SMEs & large

enterprises

10

Phase I

2014-2017

Phase II

2018-2021

Phase III

2022-2025

Strategic Actions

11

30% value added; 15%

employment

Horizontal measures

Coordination mechanism

Vertical measures

• Close supply chain gaps

• Expand domestic market

& exports

• HRD & skills

• SME development

• Technology upgrading,

innovation, green

growth

• Investment promotion

• Power, smuggling, logistics & infrastructure

• Competitive exchange rate

open trade regime, sustainable macro policies, sound tax policies &administration, efficient bureaucracy, secure property rights,institutions that promote adaptive research & patent regime, access tofinance & technology for SMEs

Strategic Actions

12

Sector Action

Copper Institutional mechanism to fully integrate the

industry

Furniture Supply hubs for raw & natural materials

Tool & die Access to raw materials, equipment, & software

Paper Fiber raw material base, develop massive tree

plantations, commercial agro forestry with virgin

wood pulp production

Iron & steel Full integration of industry upstream-mining

Close Supply/Value Chain Gaps

• Complex product, 30,000+ parts & components, different

production processes: large multiplier effect

• Auto investments: foundation for broad-based industrial growth

• Integration into global production networks

Basic Industries

Parts & Components Manufacturing

Vehicle Manufacturing

Auto Supporting Industries

3rd Tier Supplier

(Raw

Materials)

2nd & 1st Tier Supplier(Intermediate & semi-

finished)

Mining

Iron & Steel

Petrochemicals

Textile

Machinery & Equipment, Dies & Moulds, Metal Stamping, Die Casting,

Machining

Rubber

Chemicals

Expand domestic market export platform

Type Sectors

Design, tool making, prototyping,

molding, die casting

Auto parts, Tool & Die

Chemical engineering, Materials

Engineering

Chemical, Rubber,

Plastics

Supervisory, managerial, productivity Furniture

Foundry technology, Metallurgical,

Mechanical, Industrial, Metal casting

Engineering

Metal casting

Die design, Tool & Die Engineering Tool & Die

Vocational trainings (TESDA) Iron & steel, Furniture

14

HRD & Skills Trainings

COOPERATION WITH TESDA, CHED IS CRUCIALDOLE: labor policies to facilitate movement from low

productivity to high productivity jobs

Comprehensive National Industry Strategy

MANUFACTURING SERVICES

AGRICULTURE

FISHING,

FORESTRY

MINING

INTERNAL FACTORS: government policies &programs, institutions,

infrastructure, macro & political stability, rule of law, peace & order

EXTERNAL FACTORS: globalization, regional/bilateral/multilateral trading

arrangements, global & regional production networks

GOAL: globally competitive industries with strong

domestic & global linkages

Cluster-based industrial strategy to build strong &

competitive regional economies

International factors

Part 3. Competition, Innovation, & Productivity Nexus

AGRIC’RE

FISHING

FORESTRY

MINING

SERVICES

CONSTRUC

TION

• Industrial Policies

• Demand & Production

• Managerial, technical, financial • Human

resources• Market

orientation• Raw material

sources• Customers• Foreign equity

Growth &

Employ-ment

Competition

Innovation

Productivity

MANUFACTURING

Domestic factors

What makes a cluster competitive?

Porter’s Framework for Competitive Advantage

Context for Firm Strategy

& Rivalry

Demand Conditions

Related &Supporting Industries

Factor

(Input)

Conditions

1. Investment &

constant

upgrading

2.Competition

among local

firms

Adapted from: Porter, M. E. (2000).

- Natural, human and capital resources

- Physical, administrative, information, scientific and technological infrastructure

• Local customers wl

high product & quality

specifications

• Production meets

needs of existing &

new customers

• Production in

specialized segments

that can be exported

• Natural, human and

capital resources

• Physical,

administrative,

information, scientific

and technological

infrastructure

• Firms in a cluster

are mutually

competitive and

cooperative

• Drives FIRM

PRODUCTIVITY,

COMPETITION &

INNOVATION

STAN SHIH’S SMILE CURVE

• Opportunities for upgrading & diversification in both

upstream & downstream in goods & services

• Strategic positioning in the GVC: process, product,

functional

HIGHER

VALUE ADDED

LOWER

MANUFACTURE

MARKETINGBRANDING

DESIGN DISTRIBUTION

TIME

SALES, AFTER SERVICECONCEPT, R&D

Steps in Roadmap formulation

STEP 1: What are the existing & future growth potentials of

the industry in both domestic and export markets?

• Identify dynamically growing tradable industries; not picking

winners, self-discovery by firms

STEP 2: See if private sector is already in these industries;

are there existing or nascent activities? if none, seek FDI

STEP 3:What are the obstacles preventing firms from

upgrading quality of their products? new firms from

coming in?

STEP 4:Take action to remove constraints

• Horizontal: protection of property rights, business &

investment environment, industrial clusters, eco zones

• Vertical: tax incentives for a limited time, direct credits,

access to raw materials & capital equipment

• Coordination mechanisms: RDCs

Part 4.Transforming Region 11

• Vision: rising global frontier, agri-industrialization with strong industry & services (RDP Region XI 2010-2016)

• Industry Clustering Strategy: investments, exports, jobs

• Horizontal Measures: infrastructure & logistics support, incentives, marketing, financing, R&D, other government support to strengthen industry clusters

INDUSTRY STRUCTURE (% SHARE to GRDP) 2011 2012 2013

AGRIC, HUNTING, FORESTRY, FISHING 19.2 18.0 15.5

INDUSTRY

Manufacturing

28.6

17.6

29.2

18.7

31.7

20.1

SERVICES 52.2 52.9 52.8

GRDP growth rate 7.4 (6.8) 6.8 (7.2)

6.2% (6.7) unemployment rate; 20.2% (18.3) underemployment (Jul 2014)

Priority Industry Clusters• 17 Industry

clusters

• 11 Roadmaps:

abaca, banana,

bangus, cacao,

coconut, durian,

mango,

seaweeds, ICT,

mining,

renewable

energy

• State of industry,

opportunities,

constraints,

value chain

mapping

Competitiveness Indicator

• Competitive Products: Revealed Comparative Advantage >1

Products ‘91-’95 ‘96-’00 ‘01-’05 ‘06-’10 2011

FRUIT, VEGETABLE JUICES 4.00 1.38 1.68 1.75 3.00

SUGARS,MOLASSES,HONEY 4.63 1.37 0.86 0.93 3.57

SUGAR CONFECTIONERY 1.50 0.77 0.86 1.45 2.46

NICKEL ORES,CONCTR,MATTE 6.55 2.87 2.27 7.74 16.23

FRUIT,NUTS EXCL.OIL NUTS 7.12 2.56 2.75 2.86 5.67

FRUIT,PRESERVED,PREPARED 12.04 4.19 4.07 4.55 7.22

FISH PREP’D, PRESERVED NES 8.28 2.36 1.93 3.41 4.83

VEGETABLE TEXTILE FIBRES 24.28 9.24 3.68 6.60 7.56

COFFEE,COFFEE SUBSTITUTE 0.30 0.04 0.08 0.04 0.02

COCOA 2.56 0.54 0.21 0.07 0.14

VENEERS, PLYWOOD, ETC 1.10 0.15 0.12 0.16 0.31

WOOD MANUFACTURES, NES 6.62 2.15 1.45 9.51 27.08

NATURAL RUBBER, ETC 1.30 0.73 0.81 0.67 0.86

RICE 0.23 0.00 0.00 0.02 0.04

Agribusiness Cluster

Seeds Nurseries

Fertilizer, insecticides, herbicides

Farm Equipment

Storage Facilities

Irrigation Technology

Clusters of Other Agricultural Products

Clusters of Buyer/Consumer

Industries

State Government & Donor Agencies

Educational, Research & Trade Operations

Growers

Crop processing equipment

Processors

Transportation

Packaging Services

Public Relations Advertising

Specialized Publication

Financial Services

Source: World Bank Group. (2009)

• producers, agribusinesses, & institutions

• interconnect & build value networks when addressing common

challenges & pursuing common opportunities

Most Binding Constraints to UpgradingGrowing Processing

Cacao Lack of postharvest facilities, lack of

quality of planting materials, supply

gap, lack of FMR, limited GAP

Lack of supply of beans &

cacao preparations, weak

linkage (bean & grinding)

Coconut Limited access to quality planting

material, high input costs, old

technologies in harvesting

Low productivity, lack of

technology in processing

Durian High input cost, inadequate post

harvest, poor harvesting, packaging

technology, handling; diseases

High cost of investment in

processing equipment

Mango Limited access to planting

materials, limited number of

nursery operators, high cost of

inputs, absence of post harvest

facilities, poor implementation GAP

Insufficient supply of

mangoes, VHT facility

underutilized, lack of research

on high value added

processed products

Seaweed High cost of inputs, lack of post

harvest facilities at the farmers’

level, absence of testing labs,

presence of diseases

Insufficient supply of dried

seaweeds

Part 5. Regional Industry Roadmaps For

Structural Transformation

• Industrial policy to upgrade industry

• Private sector: ownership of the roadmaps, leadership

• Government: facilitator & coordinator

Remove binding constraints to competitiveness

o Physical infrastructure

o Administrative infrastructure: trade facilitation, FTAs

o S&T infrastructure

o Supply/value chain gaps: collective action

o HRD & skills trainings

Get mix of incentives right (farmers/processors)

Support for SMEs’ inclusion in clusters

Cluster upgrading & moving up the value chain

• Implementation Plan, close coordination

We cannot leapfrog industrialization, we need to

upgrade & transform our industries.

With or without AEC, we need to pursue a new industrial

policy to make our industries competitive and create an

environment conducive to private sector development.

This could lead to more investments, & more & better

jobs, sustainable & inclusive growth.

THANK YOU!

4 December 2014 Apo View Hotel, Davao City