Invigorating manufacturing
It has been said that our economy “leapfrogged” from being agricultural to services-led, bypassing the industrialization stage that launched the takeoff in today’s rich economies. Some thought that to be a good thing, as the textbook economic development story sees a services-led economy as the “mature” stage of development that an industrialized economy “graduates” to, after having started out as agricultural. To them, “leapfrogging” was like accelerating a gifted child in school by skipping grade levels.
But gifted we were not; we were a laggard. I ended last week on how an overextended, inward-looking policy regime made us miss the boat of industrialization that our closest Asean peers, Malaysia, Thailand, and Indonesia, embarked on ahead of us. It meant shifting the past focus on import substitution toward export promotion, and producing well beyond what the limited domestic market can absorb. This allows economies of scale that lower costs, improve competitiveness, and reduce prices to the benefit of consumers. Meanwhile, the pressure of external competition impels constant innovation to keep improving productivity toward further reduction in costs, and upgrading quality to better respond to buyers’ needs.
We failed to keep in step with our neighbors on this path. It was only in the 1990s, when they already had a significant head start (and had already attracted the major global manufacturers), when we began the shift, and still with great hesitation. But the pressure was on. Southeast Asia and the world were forging ahead on the Asean Free Trade Agreement (Afta) and the World Trade Organization, which later enabled cross-border value chains that made intra-Asean and global trade grow exponentially. While we signed on to both, we continued to shield products from foreign competition. Having taken part in the Afta negotiations in 1991 to 1992, I cannot forget how our country was blamed and shamed for “dragging” negotiations and standing in the way of the prompt conclusion of the agreement. Our delegation was mandated to insist on various exemptions, waivers, and sensitive lists upon strong lobbies from affected parties (even as our chief negotiator, then Trade and Industry Undersecretary Lilia Bautista, and I shared a strong discomfort with this posture). And rather than phase these out, we held on to many of them for too long.
The rest is history. Unmistakable proof of our persistent inward-lookingness is our pathetic annual merchandise export earnings averaging a mere $75 billion in the last six years, while our Asean-6 peers made between $234 billion (Indonesia) and $439 billion (Singapore). Our 2024 combined merchandise and services exports-to-gross domestic product ratio of 25.8 percent is far below the average of 72 percent in the rest of Asean, even lower than Cambodia’s, Laos’, and Myanmar’s 70.2, 38.5, and 32.8 percent, respectively. On foreign direct investments, we’ve perennially trailed our Asean-6 peers over the years, attracting only $8.9 billion in 2024 while the others were in the double digits.
But hope springs eternal. Our manufacturing actually saw robust growth averaging 6.2 percent annually in 2010 to 2017, but slumped again since. Now, global disruptions from the Trump tariffs and the Ukraine and Iran wars could open new doors for Philippine manufacturing exports. For one, the new United States-led Pax Silica initiative that aims to redefine global value chains to support the artificial intelligence era has just added the Philippines to its 12 members so far, all significant economic partners of ours. Designating some 1,600 hectares in the Luzon Economic Corridor (mainly New Clark City) for investors, it promises to help us move higher up the value chain in information technology manufacturing, although not without perceived geopolitical security risks. We’ve also secured a vote of confidence from Japanese automaker Mitsubishi, which is investing P7 billion to manufacture hybrid electric vehicles in Laguna. Foreign demand is now surging for nontraditional agri-based products from ube (now called “the new matcha”), Hass avocado, and calamansi, where our primary challenge is in achieving enough scale. The fact that our exports grew by double digits last year, defying a global trade slowdown, tells me there are more export opportunities to tap out there.
Moving forward, our business leaders could make more missionary investments in agri-based manufacturing and directly help small farmers band together to provide reliable raw material supplies to achieve scale economies. Local officials must help and make it easy for investors to create jobs for their constituents, not demand a cut or up-front favors. Our national government agencies, especially regulators, must behave more like ushers, not faultfinding gatekeepers. Overall, I’d like to see more of our youth speak out and act to demand responsibility and accountability from those in power.
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cielito.habito@gmail.com
