Quo vadis Department of Trade and Industry? Does the Department still view Philippine participation in the global value chain (GVC) manufacturing of multinationals (MNCs) central in the growth of the economy? Is this participation critical in ushering recovery in these difficult Covid times?
As a backgrounder, the DTI, in 2012, launched an Industrial Development Program (IDP) aimed at the revival and strengthening of Philippine manufacturing. Around 40 “industry road maps” were developed in 2012-2016 by the government and various industry associations. The IDP program was adopted by the Aquino administration in response to the criticism that the Philippines had become Asia’s industrial laggard because of policy neglect and weak infra support to manufacturing. Industrial Policy, with capitalized “I” and “P”, was abandoned by the government in the 1980s,1990s and 2000s.
A maverick ADB economist, Norio Usui, helped push the industrial revival program. He came up with a report, endorsed by the ADB leadership, documenting the de-industrializationthat happened in the country in those fateful decades of the 1980s-2000s (see Usui, Taking the Right Road to Inclusive Growth, 2012). These decades happened to be the decades when the IMF-World Bank reigned supreme in the management of the debt-ridden Philippine economy. The twins imposed on the country the neo-liberal structural adjustment program (SAP) that opened up the economy wholesale without any clear industrial development compass. Just liberalize this, liberalize that. In contrast, Usui sought a systemic upgrading of existing industrial facilities, especially the GVCs of the Japanese and other investors, so that the Philippines can produce higher value-adding parts, components and services.
Why the program encouraging more GVC investments and higher Philippine participation in the higher rungs of the GVC ladders? The quick explanation is that under the globalization processes, more and more goods and services are being traded worldwide between and among the subsidiaries of MNCs, including the supplier and outsourcing firms associated with these MNCs. In short, global trade has become intra- and inter-MNC trade, not simple trade between and among countries. Pascal Lamy, former DG of the World Trade Organization (WTO), christened the goods handled by the MNCs as goods “Made in the World.” For example, an iPhone can no longer be called a US product or a China-made one because certain designs, parts and processes that go in the making of the iPhone involve American, Chinese, German, Japanese, Korean and producers from other countries. The same applies to automotive, electronics, garments and so on. Intra- and inter-MNC trade is estimated to account for at least two-thirds of global trade.
Now back to the DTI. Under the Duterte administration, the Department continued the IDP program, with special focus on greater Philippine participation in the GVC system under a program labelled as the “Manufacturing Resurgence Program.” The USAID, under its STRIDE program for DTI, commissioned the Duke Global Value Chains Center to conduct value chain analyses in five sectors—electronics, automotive, aerospace, chemicals and paper. The triple objectives of the GVC analyses: strengthening entry in select GVCs, shift of Philippine GVC producers to higher level of value production, and improvement in production efficiency and technological innovation.
One outcome of the GVC analyses was the identification of “binding constraints” to FDI investments in GVC development, foremost of which were the weak infras in the country, specifically transport, power/electricity and communication. Other constraints cited were government red tape, especially in customs operations, and limited skills development.
By and large, the above constraints have remained. However, these have not stopped the DTI from marketing the Philippines as a GVC investment destination.
The results of this DTI campaign are unclear. Nonetheless, it appears that the country is still no match to other Asian countries in luring FDI, especially vis-à-vis Vietnam, which has succeeded in enticing new Asia-centered GVC investments, including those relocating from China. The DTI’s Comprehensive Automotive Resurgence Strategy (CARS), which seeks to duplicate Thai success in developing a car manufacturing hub supported by hundreds of car parts suppliers, is still years away in attaining the target volume of cars assembled locally (which would allow Toyota or Mitsubisihi to avail of fiscal incentives).
But there are two success stories: the wire harness manufacturing and the call center/BPO sector. However, their success is not due to the DTI campaign. The wire harness manufacturing was developed much earlier, in 2000s, by the MNCs who discovered the talents and skills of middle-level Filipino workers (high school graduates) in bundling together (manually) wires with different colors. As to the call center/BPO sector, the talents and skills of Filipino workers had been discovered by the offshoring companies as far back as the 1990s. The so-called “revealed comparative advantage” of the Philippines in these two success stories was a product of the skills-and-talent hunt conducted by the MNCs themselves.
So, if there are positive reports on the “resurgence” of Philippine manufacturing, these are accounted for mainly by the domestic-oriented manufacturing sub-sector, not the export-oriented GVC-related industrial production. Here, the DTI needs to be commended. The DTI’s calls—go local, buy local and go into business (among the youth)—are working. This validates the thesis that the population of 110 million represents a huge domestic market, a market which can easily support the operations of a dozen San Miguel. The domestic market can also be the platform in the development of a Filipino-led GVC system, as what Toyota has done for Japan and Samsung for Korea. GVCs carry the nationality of their home countries where they were developed.
The IDP of DTI, therefore, should give higher attention to the industrial possibilities of the domestic market. This market can pave the way for the deepening of the country’s industrial structure. As it is, the segments of manufacturing reported to be growing are mainly in light manufacturing such as the snacks industry. With the exception of the petrochem plant of the JG Summit, the Philippines cannot boast of any major mid-stream (intermediate products) and upstream (basic or foundation goods such as steel) industries.
The vision of an industrialized self-reliant Philippines with limited dependence on imports was the dream of Filipino leaders and industrialists in the post-war period. Can the DTI help them realize this dream?
With the Covid-19 pandemic, the answer can be either yes or no. The pandemic has flattened the economy. It has also flattened the GVC system around the world.
Ironically, Covid-19 has also flattened free-trade globalization. Instead, it has revived the spirit of industrial protectionism among the country’s trading partners in North America, Europe and Asia. The industrial protectionists are using the global backlash against China and China-made products in bringing back to their home countries businesses and jobs that their MNCs distributed around the world in the name of globalization. Economic nationalism is on the rise.
But is this not an opportunity for the Philippines to also create jobs at home by building up new industries that can produce all the essential goods needed by a quarantined population, e.g., health care materials, food packages, home products and various community needs? After all, this is what a number of developed and developing countries are now doing.
For a country that has stumbled very badly in its march towards full industrialization due to bad industrial policies in the past, the Covid-19 pandemic can turn out to be the surprise industrial savior for a de-industrialized Philippines.