With the Covid-19 pandemic, global de-industrialization is now happening.
The virus has flattened the demand for a galaxy of industrial products being produced and traded worldwide. Estimates on the collapsing global market demand vary. But a good indicator of the sharp decline in the demand is the paralysis that has hit the aviation, shipping and the logistics industries that bring goods from factories around the world to supermarkets everywhere. Another supreme indicator is the failure of Opec to stop the steep fall of oil prices to zero or near zero or, in some cases, even below zero.
Industrial protectionism is also back. Emblematic of this is the recent decision by Roberto Azevedo, Director General of the World Trade Organization, to resign one year before the end of his second term. He is a frustrated man. The WTO has failed to forge a global agreement on the so-called Doha Development Agenda after two decades of negotiations (2000-2020). Instead of helping the WTO cement a multi-lateral trading arrangement, President Donald J. Trump has been subverting the WTO operations by continuously blocking the appointment of judges in the WTO’s appellate body for dispute settlement.
Of course, there are other indications of the growing irrelevance of the WTO. A number of countries have been violating routinely some of the WTO rules such as the imposition of tariff and non-tariff barriers in crisis periods in order to protect their priority home industries. As Justin Yifu Lin, former Chief Economist of the World Bank, puts it, all the developed countries subscribe, openly or silently, to the ideology of Industrial Policy, which is translated into a program of nurturing and protecting national industries deemed critical to a country’s development (or in the words of the American policy-makers in 2008-2010 global financial crisis, “too big to fail”).
A victim of global industrial flattening is Factory Asia. More and more jobs associated or linked to Factory Asia through a byzantine system of global value chains (GVCs) are being downsized. Of course, the US-China trade war, which had rattled Factory Asia in the last three years, has become even more virulent with the onset of the Covid-19 pandemic. Trump has openly asked American outsourcers to bring back industries and jobs in America, and has threatened with sanctions those who refuse to abide with this policy. Trump’s protectionism is mimicked by other countries such as India, which dropped out of the so-called Regional Comprehensive Economic Partnership Agreement (RCEP), supposedly the world’s largest free trade agreement, because India, said Prime Minister Narendra Modi, cannot afford to sacrifice the interests of its farmers and industrial producers.
Job losses under a faltering GVC-Factory Asia are likely to multiply as more and more industrial producers are likely to intensify the application of robotics, artificial intelligence and other job-saving devices. Even in the service industries such as retailing, the Fourth Industrial Revolution is being felt or seen, for example, in the employment of robot cashiers, robot waiters, robot cleaners, robot guards, and so on.
So, given the above de-industrialization reality in Covid times, what happens then to the efforts of those seeking to revive Philippine industrialization? Remember the country was second only to Japan in Asia in the industrialization process in the 1960s, per World Bank assessment. But somehow, the country’s industrialization was upended by the questionable neoliberal policies imposed by the Iternational Monetary Fund-World Bank in the 1970s, 1980s, 1990s and 2000s. And yet, the Philippines has managed to post high gross domestic product growth since 2000, due mainly to the two legs of the economy—remittances by a growing army of overseas Filipino workers (OFW) and earnings by IT-ICT-savvy call center-BPO workers and executives. With the Covid-19 pandemic, these two legs are crumbling and no longer reliable.
So, is there hope for the revival of Philippine manufacturing?
The answer is surprisingly yes. In the government’s Bayanihan program, there are proposals to develop the capacity of the Philippines to produce the needed testing materials, PPEs, masks, ventilators and other health paraphernalia. The UP Genome Center has demonstrated the world-class talents of its scientists by producing Filipino testing materials for the virus. The Department of Trade and Industry (DTI) also affirmed the readiness of local producers to manufacture and assemble various health materials. In South Korea, its success in containing the spread of the virus lies in its ability to produce rapidly and massively the needed testing materials, masks, and other supporting health instruments.
It seems that one problem of the Philippines in the local production of health paraphernalia is the attitude of some Department of Health officers, who are so focused on the importation, not domestic production or fabrication, of these materials. Even the good efforts of Marikina Mayor Marcelino Teodoro to build a testing facility was subjected by the DOH to time-consuming bureaucratic inspections instead of facilitating a productive DOH-LGU partnership to make the testing facility work for the public as quickly as possible.
The DTI’s perspective, once so focused on an imaginary limitless global market, is also reported to be being tweaked toward the domestic market. A population of 110 million is a huge market. It is a good base to launch/build/rebuild old and new industries. Look how China, India and Indonesia are all growing based on the strength of their large domestic markets.
In relation to the foregoing, the DTI has revived an old program—Buy Philippine Made, which is paired with the program targeting the youth and professionals to go entrepreneurial and digital.
Going domestic by producing locally and buying locally should be fully supported not only because this policy had been neglected/denigrated in the past (with the old export-or-perish thesis) but also because this is the only way we can reduce the yawning trade deficits given the crisis in the export market. In the past, Philippine trade deficits had been offset by the country’s receipts from OFW remittances and call center/BPO earnings. With these two legs crumbling, the uncorrected trade deficits can lead to horrendous economic collapse of the country similar to what happened in 1983-1986.
The challenge to DTI, however, is how to transform its go-domestic policy into a program of rapid and broad industrialization. The Covid-19 pandemic provides the justification to go domestic and develop local industries that can churn out a whole range of products needed by the people to survive and for the economy to grow.
There are some low-lying fruits that can be harvested aside from the health and food-processing industries. On the heavy industry category, we have the integrated steel complex of Iligan. The National Steel was in the black in the 1980s and 1990s (until it went under when it was privatized). This steel firm can be rehabilitated, for after all, the market is there—the “Build, Build, Build” program of the government, which requires so much tons of steel for the roads, railways, subways, ports, airports and other BBB infra projects being built. As it is, the country has become a major importer of steel and cement, both of which can be produced fully at home.
Another easy target should be the ship-building industry. The flattened or bankrupt Hanjin ship building can be revived and transformed into a naval-commercial ship-building complex, per studies by no less than the Philippine Navy and the UP Center for Integrative Development Studies. The ship-building industry can be supplemented by programs promoting small-boat-building industry to fill in demands for faster and efficient interisland trade/transport facilities.
At the mid-stream and downstream levels, the Philippines should have no problem. In the 1950s-1970s, it is in these areas where the country excelled. Building industries at these levels should be aided by the mobilization of the talents of Filipino engineers and production technicians who have been managing the industrial, petroleum and other similar facilities of other countries. What the DTI can do is list the country’s top imports and identify which among these products can be produced at home, with initial assistance from the government. The DOST can be a partner of DTI in this undertaking.
Of course, going domestic does not mean giving up the export market. Yes, those excelling in the export market deserve continuing support. The government, through long decades of export-oriented industrial policy promotion, has been doing this through the five decades of export-oriented industrial (EOI) policy.
But why is Neda proposing a tax law called CREATE, for the purpose of attracting new FDIs through the lowering of corporate tax on FDIs? Is this urgent and necessary? Are the PEZA-based FDIs not already receiving generous fiscal incentives? If the idea is to promote FDIs engaged in domestic business, will this lead to rapid industrialization or unproductive investment speculation? And assuming that such incentives do attract FDIs, is it not true that jobs that can be created by such investments are likely to see light only two or three years from now because FDI investments today do not translate immediately into productive undertakings tomorrow? Hence, the question: how urgent and necessary is CREATE?
Why not focus on putting all government hands on deck in support of rapid industrialization led by forward-looking industrialists, scientists and professionals?