IN the last two years, industry and manufacturing have been the growth drivers of the Philippine economy (See Table). This is in contrast with the previous years where the services sector led the expansion of the economy. Colleagues from the Economics department call this trend a “manufacturing resurgence” as we see the sector managing to grow at very high levels of 7 percent to 10 percent coming from lower rates in the past years. But what has triggered this recent recovery in industry and manufacturing?
Was it the implementation of an active industrial policy? More recently, the government has embarked on engaging the private sector in terms of identifying constraints in key sectors and industries of the economy. Then, it has worked jointly with industry leaders towards the resolution of some of these obstacles. The Department of Trade and Industry (DTI) spearheaded the formulation of various industrial roadmaps to catalyze expansion in these key sectors. This kind of collaboration has heightened expectations of private businesses in the industry and manufacturing sectors of a more conducive environment for their plans of growth and development.
Industrial policy in the more recent past became taboo among policy makers as multi-lateral institutions and mainstream economists frowned upon government’s intervention in selecting strategic industries and sectors to bolster the development of the economy. “The Washington Consensus,” the dominant paradigm then, advocated that free markets should determine which sectors would flourish and grow amidst global and local competition. But the result in many developing countries was not desirable—de-industrialization as many manufacturing sectors became uncompetitive and unattractive to domestic and foreign investors.
But after the global financial crisis of 2008, the increasing relevance of industrial policy was “acknowledged by economists and political leaders from all sides of the political spectrum” according to Joseph Stiglitz and Justin Lin in a newly-published book Industrial Policy Revolution I. Both economists, former vice-presidents for research of the World Bank, are now advocates of a new industrial policy towards the structural transformation of many developing economies. The new industrial policy transcends “picking winners” but addresses constraints, coordination failure and externalities confronting the manufacturing sector.
In the Philippines from 2012, it was Norio Usui of the Asian Development Bank, Rafaelita Aldaba of the Philippine Institute for Development Studies and DTI’s Adrian Cristobal Jr. who spearheaded the promotion of industrial policy to reenergize the manufacturing sector and diversify the country’s drivers of economic growth. Of course, even before this renewal, Filipino economists like Manuel Montes of the South Center, nongovernment think tanks (e.g. Action for Economic Reforms) and trade unions were already pushing for industrial policy as an important strategy for genuine development of the country as early as the 1990s.
But why was industrial policy avoided in the past by government policy makers? This is due to the recurring pitfalls in the strategy like wrong choice of sectors to support, vulnerabilities to rent seeking and lobbying from vested interest groups and the inability to withdraw support for failed projects and thereby wasting precious government resources.
However, other prominent economists held opposite views. For example, Montes saw industrial policy as the application of selective government intervention to favor certain sectors so that their expansion benefits the productivity of the economy as a whole through multiple spillover effects.
Dani Rodrik, meanwhile, viewed industrial policy as a strategic collaboration between the private sector and the government with the aim of identifying where the most significant obstacles (e.g. information constraints, economies of scale, coordination failure) to economic restructuring lie and the type of interventions most likely to remove them. For Stiglitz and Lin, industrial policy generates positive externalities and social rewards e.g. knowledge creation and technological upgrading.
The DTI recently declared that the automobile industry is at “the heart of the various industrial roadmaps” since the sector is characterized by having multiple linkages with the rest of the economy. Government support to this sector has been wanting for many years. But, currently, the DTI has formulated a strategy for strengthening the industry. This is the reason why President Aquino gave importance to the inauguration of the Mitsubishi plant.
In any case, many in the private sector have been eagerly awaiting the executive order spelling out government’s industrial policy on the automotive sector as this signals whether this administration is serious or not in pursuing industrial upgrading and structural transformation. Hopefully, this executive order will be out soon and will thus confirm government’s commitment to implement genuine industrial policy and to sustain the resurgence of the manufacturing sector.
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Fernando T. Aldaba is a professor of Economics and a Senior Fellow of Eagle Watch, Ateneo de Manila University’s macroeconomic forecasting unit.