Part two of open letter to BOI
Which comes first: Industrial policy or trade policy?
In the recently concluded BOI-sponsored forum on “Leveraging Trade and Investment Policies to Implement a Modern Industrial Strategy” (December 9-10, 2021), the foregoing question was raised. The answer of our BOI officials is unequivocal: having a clear and coherent industrial policy takes precedence over trade policy. We fully agree with this policy stand of the BOI. The truth is that a country can only maximize gains from global trade if it has the capacity to produce goods that it can exchange in a mutually beneficial, value-adding and ascending manner.
The problem is that some economic planners, animated by their neo-liberal dogma, have adopted the opposite position, that is, for the country to grow, it should open up and eliminate all trade barriers. The assumption is that industrial—and agricultural—development would automatically follow any program of trade liberalization and economic deregulation. The Philippine industrial and agricultural debacle under the IMF-WB-guided liberalization-deregulation programs in the last 4-5 decades show the folly of such thinking.
Undoubtedly, there have been some gains for the country such as foreign investments in the semiconductor and auto parts assemblies, mostly in the low GVC production level. There were also some gains in the export-oriented garments production in the 1970s-1980s; these gains evaporated in the 1990s-2000s, with the GVC garments investors packing up, flying away and settling in cheaper production platforms such as Bangladesh and Cambodia.
However, the gains in the limited export sector have been offset by the general stagnation of domestic manufacturing. The latter has been overwhelmed by cheap industrial imports, especially the “ukay-ukay” and smuggled goods ranging from RTW clothes to appliances and cars of all shapes and makes. These imports have been flooding the whole archipelago in increasing intensity since the 1970s, resulting in the twin Philippine economic phenomena: de-industrialization and de-agricultural development.
And yet, the Philippines has managed to survive the hollowing out of the economy. It has become a consumption-led services-based economy without undergoing an industrial revolution and large-scale agricultural modernization. How is this possible? The answer is well-known: the remittances of over 10 million overseas Filipino workers, now estimated to be over $30 billion a year, are the nation’s life saver. Supplemented by the country’s earnings from the call center-BPO sector, the spending by OFW families explains the rapid growth of service industries such as education, transport, malling, tourism, etc. Thus, despite the widening national trade deficits, the country’s GDP growth rate has remained positive.
But it is patently obvious: an industry-less and agriculture-less consumption-led economy dependent on OFW spending is unequal and unsustainable. It also cannot create jobs for all, particularly for families with no OFW connections. Hence, the emergency of another phenomenon: the equally fast growth of the informal side of the services sector, as reflected in the galaxy of informal livelihoods around the country such as street vending, unregistered repair services, micro enterprises and so on.
Now back to the original question: trade policy or industrial/agricultural policy first?
The answer of the hundred or so farmers’ organizations petitioning the Senate to stop or postpone the ratification of Philippine membership in the Regional Comprehensive Economic Partnership (RCEP) free-trade agreement is unequivocal: strengthen first the national production capacity. Strengthen first the readiness of the farming sector to RCEP competition, especially competition from big agriculture-producing RCEP countries such as China, Thailand and Vietnam. Spell out and develop first the safety nets and readiness programs for Philippine agricultural producers.
Further, they ask: why can’t the Philippines emulate India? In 2019, India, a major producer of cheap industrial agricultural goods, withdrew from the RCEP negotiations. Prime Minister Narendra Modi gave a frank explanation for the withdrawal: India’s industrial and agricultural producers cannot compete with their Chinese counterparts, which enjoy State subsidies. Recently, India also junked three farm laws enacted by India in 2020 to open up India’s agricultural sector to the big traders and the world market. These laws are similar to the Philippine rice tariffication law of 2019, a law being blamed by the rice farmers for the collapse of domestic rice farming in the last two years.
The RCEP ratification issue facing the Senate is similar to the 1994 Senate debate on the ratification of Philippine WTO membership. Then, the slogan of the pro-WTO lobbyists was similar to the slogan being raised today by the pro-RCEP lobbyists: “The Philippines cannot afford to be left behind.” Then, the pro-WTO lobbyists came up with fantastic and imagined gains from early ratification: 500,000 new jobs a year in industry, 500,000 new jobs a year in agriculture, and general surge in industrial and agricultural production and exports. The exact opposite happened. Today or 25 years of Philippine membership in the WTO, both the industrial and agricultural sectors are a picture of stagnation.
Clearly, enough is enough. The Philippines should stop listening to a small group of neo-liberalizers who try to simplify the country’s development choices to a question of either open up or wilt. A more rigorous and exhaustive process of strategizing and re-strategizing growth and development is in order. Of course, trade policy is a critical and crucial component in the overall formulation of a sustainable development program for the country. But such a program requires a careful balancing (and re-balancing) of industrial and trade policies. This is why the visioning and crafting of “Industrial Policy” with a capital I and P becomes extremely important.
So, how exactly should industrial policy be crafted? How can the country go up the global industrial ladder? More in the next issue.
Dr. Rene E. Ofreneo is a Professor Emeritus of the University of the Philippines.
For comments, please write to reneofreneo@gmail.com.