Taking the Right Road to Inclusive Growth. Norio Usui

      © 2012 Asian Development Bank

      All rights reserved. Published in 2012.

      Printed in the Philippines.

      ISBN 978-92-9092-618-4 (Print), 978-92-9092-619-1 (PDF)

      Publication Stock No. RPT124495

      Cataloging-In-Publication Data

      Asian Development Bank.

      Taking the right road to inclusive growth: Industrial upgrading and diversification in the Philippines.

      Mandaluyong City, Philippines: Asian Development Bank, 2012.

      1. Inclusive growth. 2. Industrial diversification. 3. Philippines. I. Asian Development Bank.

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      Cover photo of the Palawan North Road funded by ADB’s 6th Road Project was taken by Rita Festin.

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       Acknowledgments

      This report is prepared by Norio Usui, senior country economist, Philippines Country Office, Southeast Asia Department, Asian Development Bank (ADB), with Amador Foronda and Albert Kirby Tardeo, consultants, under Technical Assistance (TA 7654) on the Structural Transformation Study of the Philippines. The author appreciates comments and suggestions received from reviewers: Joven Balbosa (Southeast Asia Department, ADB), Joao Pedro Farinha (Central and West Asia Department, ADB), and Utsav Kumar (Southeast Asia Department, ADB). Key findings of the report were presented in several workshops and seminars such as the Philippine Economic Society’s annual meeting (November 2010), ADB and the Philippine Institute of Development Studies joint forum (September 2011), the Philippine Manufacturers and Producers Summit (November 2011), Development talks in Department of Trade and Industry (January 2012) and ADB, Agence Française de Développement, Japan International Cooperation Agency joint forum (February 2012). The author acknowledges comments and suggestions from the participants. The findings, interpretations, and views expressed are entirely those of the author, and do not necessarily represent the views of the Asian Development Bank, its executive directors, or the countries they represent. The author can be reached at [email protected].

       Executive Summary

      The primary objective of this report is to discuss key policy challenges that need to be addressed if the Philippines is to embark on sustainable and inclusive growth. We take the view that the main reason behind the Philippines’ lagging growth performance and development outcomes in the regional context lies in a sluggish transformation of the economy—in particular stagnant industrialization—in the past decades. The Philippine economy’s chronic problems of high unemployment, slow poverty reduction, and low investment, are reflections of the sluggish industrialization. In the past decades, the Philippine economy has been led by services, and it has been further shifting toward services with the rapidly growing business process outsourcing (BPO). Nevertheless, sole development of the services sector is not sufficient to address the development challenges and lead to inclusive growth.

      We thus propose more targeted public sector support, which focuses on specific industries and products, for industrial upgrading and diversification. This report shows a new methodology of choosing products for the targeted public sector support, and recommends effective dialogue between the public and private sector to identify constraints specific to the target products, and develop adequate solutions. The Philippines’ biggest need is to develop stronger industrial base to enable the economy to “walk on two legs” of industry and modern services, to create productive job opportunities for the growing working-age population.

      The Philippine economy has shown solid growth performance over the 2000s. The country, however, has not yet succeeded in translating this into inclusive growth, one that can benefit the entire population. Despite opportunities created by the economic growth in the period, many people remain poor and unemployed, and investments in the country are still below the regional standard. Identifying and connecting that missing link between economic growth and poverty reduction is the Philippine economy’s enormous challenge. The Philippines was an early leader, with a relatively advanced manufacturing sector and well-developed human capital in the 1950s and 1960s. Despite these favorable initial conditions and being located in growing East Asia, the country failed to achieve the high growth that other countries in the region achieved over the last few decades. Over the last 5 decades, gross domestic product (GDP) per capita dropped from being one of the top in the region to almost the bottom. The country has had the slowest rate of poverty reduction in the past decades, despite its relatively low levels of absolute poverty in early days. What has gone wrong?

      The country went through a process of deindustrialization from the early 1980s, and urban growth wholly relied on the services sector. Thus, instead of continuing the industrial upgrading process that most of its neighbors underwent, the Philippines’ industrialization stagnated. The country transformed itself into a service-based economy, and the recent boom in the BPO sector has accelerated this process. Services have contributed to over 60% of total GDP growth over the past 3 decades—the highest in the region. In fact, the services sector in the Philippines contributes over half of the country’s total output and employment. Given the dominance of services in the economy, what are the implications of the service-led growth to the country’s long-term growth and development potential? Is there a connection between the decade-long growth pattern and the high unemployment, widespread poverty, and low investment? Can the new phenomenon of rapidly growing BPOs change the nature of such nexus, and help address those chronic problems of development and benefit the population?

      To answer these critical questions, this paper analyzes structural change in production and employment patterns of the Philippine economy in the past decades, and examines its implications on the country’s long-term growth and development outcomes. The paper focuses on the impact of structural transformation on employment growth and economy-wide