AT the center of the neo-liberal or Washington Consensus doctrine is the theory of comparative advantage. The theory asserts that countries perform best in the world market if they promote industries that are able to produce goods at a lower opportunity cost based on existing or natural endowments, e.g., technological prowess, capital stock, skills, land/mineral resources, cheap labor and so on. This theory is credited to 19th century economist David Ricardo, who wrote that under free trade conditions, countries prosper if they specialize on producing goods where they have such comparative advantage vis-à-vis other countries given such endowments.
The comparative advantage concept was the argument used by Neda in 1972 in pushing the Marcos regime, after the declaration of martial law, to change the orientation of industrial policy in favor of the “labor-intensive export-oriented” (LIEO) industrial strategy. Note the phrase “labor-intensive”! Accordingly, the Philippines’ comparative advantage was cheap surplus labor. But who would take advantage of this advantage? The FDIs. How? Open up the economy, establish export processing zones and provide incentives to FDIs willing to establish LIEO enterprises such as the assembly of electronics, garments, toys, rubber shoes and leather products meant for the export market.
The victims of this shift in industrial strategy were the domestic industries, which prospered in the 1950s-1960s, the decades of “import substitution” (ISI). These industries, supported by Central Bank Governor Miguel Cuaderno through the judicious rationing of foreign exchange needed to import machinery and industrial materials, were responsible in making the Philippines number 2 to Japan in industrial development in Asia in the early 1960s, per World Bank observation. And yet, Neda economists called (and still call) these ISI industries “inefficient” and “rent-seeking” because these industries were dependent on government protection (high tariffs and restrictions on competing imports).
Another victim of the Neda’s LIEO program was the “Magna Carta of Social Justice and Economic Freedom”, a blueprint for the full or integrated industrial development passed by Philippine Congress before the declaration of martial law. The intention of Speaker Jose Laurel and his nationalist economists (Emmanuel Yap and Alejandro Lichauco) was to deepen the industrial structure, that is, for the ISI industrial regime to spawn industries producing basic (upstream such as steel) and intermediate (mid-stream such as resins) products, not merely final consumer (downstream such as nails or plastics). The idea was to reduce imports and make the Philippines a true industrial power, as what Japan achieved in the 1960s, the Asian NICs (Singapore, South Korea and Taiwan) in the 1990s, and China at the turn of the millennium.
Does this mean that these Asian economic power houses abandoned the theory of comparative advantage on their way towards higher level of industrialization? No. But they did not fully subscribe to it. They used the comparative advantage theory only as needed and as part of a larger and comprehensive program to build up national capacities based on national interests. These countries, all export-oriented, are not doctrinaire neo-liberalizers.
In the case of China, she built special economic zones (SEZ) in the coastal provinces in the 1980s-1990s to entice FDIs to establish labor-intensive garments and electronics firms for export similar to the original Neda plan for the Philippines in the 1970s. But this SEZ program did not prevent China from maintaining price support and other assistance to domestic industry and agriculture, building up the technological base of the country by requiring FDIs to share knowledge, keeping the dominant and central role of the state-owned enterprises (SOEs) in the whole economy, actively promoting inter-regional and inter-provincial economic linkages and so on.
In 2002, the Japan Research Institute (JRI) compiled international trade data to show that China had comparative advantage in textiles, travel goods, footwear, toys, garments (outerwear, underwear), cutlery, radios, electrical appliances, radios, watches and so on. These are all labor-intensive low-technology products that China succeeded in flooding the world market. However, what is interesting is that the JRI also compiled a list of products where China allegedly had no advantage (called as “comparative disadvantage”). These include passenger cars, commercial vehicles, printing machinery, construction machinery, paper-making machinery, aircraft, internal combustion engines, agricultural machinery, tractors, motor vehicle parts, food processing machinery, machine tools, steam turbines and so on.
Today, the picture is vastly different. China has excelled in producing the products listed by JRI under the category “comparative disadvantage” by defying the so-called guidance of the comparative advantage theory. In fact, she pursued industrial growth with dizzying speed in other high-tech areas such as magnetic train levitation, robotization, 5G telecommunication and now space technology.
On the other hand, some industries listed by JRI under the category with “comparative advantage” are slowly being downgraded by the Chinese government, starting in the decade of 2000s. In Guangdong province, the center of SEZ operations in the 1980s-1990s, the garments and electronic assembly industries saw waves of labor conflicts in 2000s-2010s due to the closure or downsizing of some companies because the Chinese government is resolute in pushing Guangdong industries to get out of the labor-intensive low-technology development route.
The political economists Cheng Enfu and Ding Xiaoqin clarified that China’s opening to global trade and investment is guided solely by the principle that such opening is beneficial to both China and the world and that the optimization of linkages between industry and technology can be achieved. In short, trade policy is tailored to China’s national interests and national development priorities. They wrote that firms participating in China’s economic development are governed by “three controls”, namely “the Chinese side controls the shares, core technologies and technological standards, and brands.” At the same time, they warned that “it is important not to fall into traditional ‘comparative advantages traps.’”
Unfortunately, in the case of the Philippines, it remains trapped in Neda’s old and narrow industrial development framework based on an old and narrow reading of Ricardo’s “comparative advantage.” It still maintains a foreign investment promotion program that is aimless, through what Dr. Butch Montes described as “scattershot liberalization” (talk at the UP Asian Center, October 2017). Philippine industrial mal-development in the last five decades is proof that Neda’s old and narrow EOI development strategy is faulty and bad for the country.
And yet, in his last SONA, President Rodrigo Duterte still called for the further liberalization of the already liberalized foreign investment regime. He said this is an important economic stimulus. At a time when the flow of the world’s FDIs is grinding to a halt due to “global distancing” and rise of trade protectionism everywhere!
Fortunately, the UP academic community in Diliman saw the questionable character of this stimulus proposal. The community argued that what is needed to revive and sustain the economy is to build up national capability in industrial development, agricultural modernization, health control and so on. It is this national capability building that has been neglected by the government in the more than four decades of Neda’s adherence to the Washington Consensus doctrine.
In the meantime, China’s success in pursuing its Four Modernizations by ignoring the Washington Consensus doctrine and defying the comparative advantage has transformed it into an economic colossus. Today, many civil society organizations around the world are questioning if China has become another economic power with imperialist and hegemonic ambitions. This requires a totally separate discussion.
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