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Vol. XII

No. 1

JANUARY-FEBRUARY

What's Inside Special Feature 4Toward a "Leapfrogging" Strategy for the Philippines 2 Research/Seminar Updates 4Manufacturing Industries Revisited 7 4Consumer Welfare: Core of Retail Trade Liberalization 9 New Books

6

1994

ISSN

0115 - 9097

The Economy According to PROPE

T

he growth track of the Philippine economy is higher this year than in past years, owing largely to effective nation governance. This assessment came from the PIDS Review and Outlook of the Philippine Economy (PROPE) for 1993-1994, which was presented in a seminar late last year as part of the Institute’s yearly assessment of the economy. The study team led by Dr. V. Bruce J. Tolentino, PIDS Research Fellow, reviewed the nation’s performance in economic governance

and probed the effectiveness of the economic policies implemented during the past year. To cap its assessment, PROPE also presents an outlook for the year ahead and recommends 10 imperatives for the economic recovery of the country.

THE PAST YEAR PROPE reported modest acceleration in economic growth in the Ramos

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Editor's Notes

?

Once again, the "light at the end of the tunnel" flickered, bringing fresh hopes for the country’s economy. The good news is, the economy’s growth track has gone up, which may signal better times ahead for the Filipinos (see related story).

Yet, it may be too early to say that deliverance from the cyclical stagnation is at hand. As the PROPE study team headed by Dr. V. Bruce J. Tolentino, PIDS Research Fellow, prescribes, ten economic imperatives will spell out whether that flicker will open up into a full horizon of sunlight that will nurture the blooming of a robust economy. Despite the dampening effect of the detailed analysis by Dr. Rosario Manasan, another PIDS Research Fellow, of the government’s fiscal difficulties, high hopes continue to prevail as the PIDS study affirms that conditions do look good. Manufacturing industries will surely provide most of the fuel that will run the economy toward the country’s vision of “Philippines 2000!” Studies focused on this sector, therefore, will indispensably provide key information on how to maximize their efficiency. Thus, we place much importance and urgency in providing a continuing story on the latest and key findings of the Development Incentives Assessment (DIA) Project (see page 7).

Meanwhile, consumer welfare, as the report on page 9 asserts, underlines government's plan to open up retail trade to foreign investment. A study on this sector notes the efficiency gains for the economy in addition to consumer gains. So where's the problem here? One side of the coin argues for the welfare of the domestic retail trade sector. But can the smaller retailers with less capital survive the keen competition? Lastly, the government’s vision of development continues to gain prominence and sink into everybody’s consciousness with the continuous reference by no less than President Fidel Ramos himself. In this issue, we seek to clarify some more the principles behind this vision by featuring the article of Dr. Serafin Talisayon. As the title itself reveals, the development strategy goes beyond the year 2000 by exploring ways to “leapfrog” or take shortcuts toward development via technologies, human resources and innovation. Dr. Talisayon, a scientist by academic training, is currently Assistant Secretary at the National Security Council. As to whether the Philippines can take “shortcuts” to development, his article affirms that a great possibility exists (special feature on page 2). With these encouraging notes, this issue comes out with much hope that the Philippines, almost, is ready for economic take-off.


SPECIAL FEATURE

DEVELOPMENT RESEARCH NEWS

2

January-February 1994

Toward a "Leapfrogging" Strategy for the Philippines *

SERAFIN D. TALISAYON * *

WHAT IS A “POSTINDUSTRIAL” ECONOMY?

C

man’s capacity to handle information. He also believes that the tranolin Clark, an Australian = science sition between two “waves,” inscience + = technology economist, observed that national cluding the present shift to the all of the above = KNOWLEDGE economies generally grow accord“Third Wave,” is accompanied by knowledge + ethical framework = wisdom ing to a sequential pattern: priradical changes in power relations ___________ mary (agricultural) production * ---“power shifts”---among indiPhysically, information is any non-random pattern, measured —> secondary (industrial) produclogarithmically as extent of departure from randomness (bits); viduals and nations. behaviorally, information is any non-random pattern associated tion —> tertiary (services) proEach of the three revolutions with a meaning. duction 1 . The proportion of the arose from a major technological ** For example, sounds from a running automobile engine are labor force shifts from the pribreakthrough that radically alters "data" or "signals" to an automotive technician but "noise" to a mary sector to the secondary seclayman. man's capacity to change the tor, and then to the tertiary sector. world around him and results in Daniel Bell 2 , an American socimajor social changes as seen below. uct, and as such, can be bought and ologist, observed that economic develInformation is the essential elesold in a market. 3 opment of industrialized countries genment in four “sunrise” industries of the Alvin Toffler, a popular Amerierally follow this pattern: agriculture 21st century: computers (processing of can writer, expounded these ideas fur—> pre-industrial —> industrial —> ther by observing Agricultural Industrial Information mass consumption. He predicted that that human civiliRevolution Revolution Revolution the growing importance of information zation experienced ------> ------> and technology---or “knowledge” in power shift power shift three major revogeneral---will lead to a “post-induslutionary changes Altered human produce food use energy handle trial” stage characterized by the prior “waves”: (a) the capacity to: information macy of high-technology services, esagricultural revoFactor intensity: land, labor energy, information, labor pecially R&D to create new knowledge. lution 30,000 years Scientists and experts, or people who ago, which altered Key technoseed/seedling steam programmable process, possess or generate useful in- man’s capacity to logies preparation engine computer formation, will wield more power in a produce food; (b) Associated domestication assembly telephone “post-industrial” society, a term in- the industrial revotechnologies: irrigation line optic cable lution nearly 300 vented by Bell. Key resources: land, water, fossil fuels knowledge, "Knowledge," as shown in the fol- years ago, which property/access "meta-information" lowing table, is used here in a generic altered man’s carights and economic sense. The term is ge- pacity to use enSocial dynamics: nomads---> labor versus---> n e t w o r k i n g , neric because it is defined here to em- ergy; and (c) the insettlers capital; global village brace many forms of raw or processed formation revoluworkplace information. It is also used in the eco- tion started about vs home nomic sense because it is viewed both 30 years ago, which Power holder: landlord---> capitalist---> R&D scientist as a factor of production and as a prod- is rapidly altering information * + data +

interest of observer ** theoretical/conceptual framework utility to many users

=

data

*Paper presented during the workshop on "Strengthening Knowledge Industries/Infrastructures in the Philippines," DAP Conference Center, Tagaytay City, 6-7 November 1993. **Assistant Secretary, National Security Council.

DEVELOPMENT RESEARCH NEWS

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January-February

1994


SPECIAL FEATURE

DEVELOPMENT RESEARCH NEWS

information), telecommunications (transmission of information), robotics (revolving around the use of information for control and automatic action), biotechnology (revolving around genetic information), and their combinations. This is the starting point of cogent arguments as to why countries which fail to recognize the importance of information resources and information technologies (IT) would most likely be unable to successfully compete in the next century.

IS “LEAPFROGGING” FEASIBLE? The issue therefore is: can a Third World country such as the Philippines, which is in a hurry to develop and compete globally, take “shortcuts” by “leapfrogging” from the agricultural stage to the post-industrial stage? In other words, is the theoretical sequence mentioned earlier inevitable or unalterable? The answer is yes, leapfrogging is feasible and desirable for four reasons. First , the type of industrialization seen in Europe and the US in the mid20th century was made possible by three conditions that no longer occur today and may never occur again: (a) cheap energy, (b) large captive colonial markets, and (c) higher absorptive capacities of relatively unpolluted environments. This means that industrial approaches more appropriate in the 21st century would have to possess different characteristics; they would tend to be: (a) less energy-intensive and users of renewable energy resources, and (b) environment-friendly and less materials-intensive (recycling or miniaturization). Second , in the same fashion that industries can be structured to reinforce and increase efficiencies in agriculture, so, too, can information technologies be made to reinforce and increase efficiencies in industry and of DEVELOPMENT RESEARCH NEWS

3

course also in agriculture. Information technologies have become essential to any type of industrialization, including agro-industrialization in the Philippine case. Third , historical experience shows that “catching up” takes less and less time, and that latecomer countries with correct policies grew faster than countries which had industrialized earlier. From 1780 during the industrial revolution, it took Great Britain 58 years to double its real per capita income, while the United States took 47 years from 1839. Starting from the Meiji Restoration Period, Japan doubled its income in 34 years ( The Economist , 15 October 1993, p. 80). Later, South Korea took only 11 years from 1966 and Thailand, only about a decade from 1982. The double-digit rates of growth of China’s southern coastal provinces in the last few years would be doubling their per capita income in only half a decade. Fourth , the industrial or secondary sector is the most energy-intensive while the services or tertiary sector is the most human resources-intensive. 4 The Philippines, a net energy importer and a net services exporter, must necessarily seek its competitiveness more in the tertiary sector and less in the secondary sector. Manufacturing had been a weakness of the Philippine economy for decades. Therefore, a key to global competitiveness for the Philippines in the next century is to identify human resources- and knowledge-intensive subsectors in the tertiary sector, such as: (a) computer software rather than computer hardware in the high-growth IT industries, and (b) medi-

"...a key to global competitiveness for the Philippines in the next century is to identify human resources- and knowledge-intensive subsectors in the tertiary sector..."

3

January-February 1994

cal, health, helping and allied professions.

SOME IDEAS FOR A PHILIPPINE LEAPFROGGING STRATEGY

n

Use knowledge-intensive tertiary

technologies to enhance the efficiency of our huge agricultural/primary sector. R&D in such new technologies will find a big and ready domestic market and will increase the competitiveness of our agricultural exports. Examples:

w

Computer

programs

to

pin-

point most suitable crops to a particular soil such as the Crop Micro-Decision Program developed by the National Economic and Development Authority (NEDA) IPDP, and electronic networks to quickly inform farmers and cooperatives about prices of commodities elsewhere in the Philippines and abroad;

w

Ecotourism

to

add

higher

value-added services on top of agricultural production;

w

Cloning of desirable crop varieties for rapid mass production of seedlings; and

w

Genetic engineering to develop

micro-organisms with useful properties such as single-cell protein (SCP), or which can biosynthesize high valueadded products such as drugs, metabolites and quasi-hormones. In the long run, cooperatives or community-based biotechnologies are the keys to raising farm productivities, farmer empowerment, and domestic as well as global competitiveness.

n Develop a home-based IT services sector with worldwide clientele , 5 or “earn dollars while staying at home.” Developments in IT and telecommunications technology offer tremenJanuary-February 1994


SPECIAL FEATURE

DEVELOPMENT RESEARCH NEWS

dous possibilities of integrating our professional/ technical workforce with the advanced technology-based service industries abroad. This is a manufacturing or service production modality not available to industrial countries earlier in the 20th century. In much the same way as various components of manufactured goods are now being produced in various locations all over the world, depending on relative prices of factors of production, various components of service output (such as data entry for airline reservations, ticket processing, building data bases, engineering design, and others)

"Leapfrogging is basically taking shortcuts by copying, adopting and improving upon technologies that others had earlier developed"

can be sourced from various locations. The output can be consolidated on realtime basis because of advanced telecommunications technology. Opportunities exist or are emerging in many IT service areas which can seek distant sub-contracting arrangements with foreign firms: w IT-related: software development, data entry and data base maintenance, computer engineering and systems architecture design, computer-aided design, video-voice interface, and digitization of maps;

w

Professional services: accounting, auditing, actuarial, general consulting; engineering/ architectural design; editing, translation and technical literature; arts- related services: animation,

w w

4

eties of crops, and statistical services. Urban cooperatives and small and medium enterprises (SMEs) should be encouraged to engage in IT-related services. For example, US data encoders can command about $10/hour, while Filipino data encoders are happy with a monthly salary of P10,000/month — approximately a 4:1 labor cost advantage. The distance factor is not important; air freight of documents is the only transport cost. IT cooperatives tied to an aggressive marketing firm would enable Filipino data encoders with only a high school education and vocational training to earn much more than P10,000/month. From data-encoding, the SMEs or urban cooperatives can graduate to higher value-added services such as indexing and abstracting, digitization of maps and GIS services, advanced graphics/animation, and so forth. When domestic telecommunications and airline services in major urban centers are well-developed, urban IT-services cooperatives there can contribute in stemming migration to Metro Manila and Metro Cebu.

Stage Stage A: ability to use (Transitional Stage AB: ability to repair and fabricate spare parts) Stage B: ability to produce

(Transitional Stage BC: ability to redesign, retrofit or reverse-engineer) Stage C: ability to innovate or design

Specialized repairs; Scientific services: bio-technology: development of new vari-

DEVELOPMENT RESEARCH NEWS

n

Leapfrogging is basically taking shortcuts by copying, adopting and improving upon technologies that others had earlier developed. Transnational technology transfer can result in one of the three stages of ability on the part of the receiver of technology, namely: (a) ability to use, (b) ability to produce, and (c) ability to innovate/design. Leapfrogging requires a distinctly different type of technology transfer, the third type which results in ability to innovate or design as shown below. Leapfrogging will not happen with the first and second kind of technology transfer; only a catching up (where the Philippines will always be behind) will happen in the second kind; and neither leapfrogging nor catching up will happen with the first kind. Some steps in this direction are:

w

Select

4

high-technology

areas

where the Philippines can leapfrog into. It may not be realistic nor desirable to aim to catch up with the West or Japan in certain “hard” technologies. The quantity and quality of our factor endowments make it feasible for the Philippines to Example aim for developA customer buys an imported product ing competitive with a manual that he can follow. strength in a few selected “hightech” niches, notably biotechnology, An entrepreneur enters into a joint computer softventure with a foreign partner who ware and applicabrings in a factory and teaches Filipino tion-oriented miworkers how to make the product. croprocessors, maritime technologies, mariculture/aquaculture A Filipino expert undertakes postand non-convengraduate work in an R&D agency tional energy techabroad, returns home and sets up a nologies. similar agency at home. A Filipino balikbayan from "Silicon Valley" brings home his savings and know-how and sets up his own IT firm that competes successfully in global markets.

film-making;

January-February 1994

w

I d e n t i f y

sources : countries, institutions in those countries, and experts thereJanuary-February

1994


SPECIAL FEATURE

DEVELOPMENT RESEARCH NEWS

5

in who are leading in those hightechnology areas.

w

Implement Stage C

technol-

ogy transfer : send Filipino experts for training in those identified high-tech institutions, enter into research subcontracting arrangements with those institutions, attract researchers and professors (such as Filipinos abroad who represented past “brain drains” and who now possess most valuable experiences and insights in forefront industrial or IT sectors) in those institutions to retire or migrate to set up globally competitive enterprises in the Philippines.

n

Copying/adopting technology from abroad must be complemented by innovation at home .

DEVELOPMENT RESEARCH NEWS

w

A developing economy with a substantial labor force (49%) in the tertiary sector like that of the Philippines and aiming towards the post-industrial stage can well adopt a strategy of excellence in international service trade. Based on an analysis of unique strengths of the Filipino character and of the natural and human resource mixes of the Filipino economy, the proposal of Ramirez et al. is to consolidate these strengths into a few areas and to weave them around two key infrastructures (see Figure 1): w A “social brain,” a network of think tanks and R&D institutions that will generate new knowledge and chart optimum national strategies coupled with a new culture and work ethic of innovation, high-quality decisionmaking, and product excellence; and A market-driven R&D megafund that will provide a quantum jump in financing for generation of new knowledge, approaching 1-2 percent of GNP, by shifting fund source from academic-driven government research grants to marketdriven private R&D contracts.

Knowledge industries can touch both urban and rural areas. Of the clusters of competitive strengths identified in Figure 1, the upper three clusters are “soft,” people-oriented niches more appropriate to rural areas, while the bottom two clusters are “hard,” technology-oriented niches more appropriate to urban areas. 5

January-February 1994

n

Adopt an IT services industry development game plan. A plan must be formulated and implemented so that the Philippines can move deliberately up the “flying geese” hierarchy in the Asia-Pacific (see Figure 2 for an example). The development paths outlined in the figure show the importance of prior developments: w A good telecommunications infrastructure is an absolute necessity; w A government network can spur development of information banking and services, together with an electronic data interchange (EDI). For example, computerization of the Bureau of Customs is a prerequisite to the development of a trade-oriented EDI. In general, because of sheer size of government expenditures, deliberate increase in appropriations for IT hardware and software acquisition by government agencies can provide a single ready and sizable domestic market to pump-prime IT industries. Computerization in government also achieves other objectives: higher productivity despite streamlining and reduction of work force, reduction of graft-prone bureaucratic procedures, and faster coordination horizontally and vertically within the bureaucracy. w An INTERNET node to inexpensively link Filipino knowledge workers to information sources and their counterparts abroad is also essential. w A Philippine communications satellite creates tremendous opportunities for the private and public sectors. Not only will it provide an alternative telecommunications backbone especially in cases of emergency when land-based channels are disrupted, but can also provide a new medium for disJanuary-February 1994


SPECIAL FEATURE

DEVELOPMENT RESEARCH NEWS

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January-February 1994

[3] Toffler, Alvin, The Third Wave. New York: Bantam Books, 1981. _______, Powershift. New York: Bantam Books, 1990. [4] The relative factor intensities of the sectors:

Primary Sector

Secondary Sector

Factor intensity:

land labor

energy materials

Examples:

f a r m i n g , construction, fishing, m a n u f a c t u r i n g mining

Tertiary Sector information labor education, banking

[5] Ramirez, Mina, Serafin Talisayon and Edgardo Espiritu, "The Philippines as a Knowledge Center in the Asia-Pacific." Occasional Monograph No. 5. Malate: Asian Social Institute, October 1993.

tance education, entertainment, and beaming livelihood programs down to the barangay level. National unity can be enhanced by Filipino educational, cultural and entertainment TV programs beamed to all islands and to Filipinos abroad (Middle East or US west coast, depending on longitudinal position of the satellite), and by live televised conversations between the President and farmers/fisherfolk using portable personal earth stations (PES) from any remote barangay. The Philippines' own satellite can also be an important national symbol of its entry into the 21st cent u r y . drn

NOTES [1] Observe the percentage of labor

NEW BOOKS Percent of labor force in 1986-1989 Country

Agriculture Industry Service

Developed: USA Australia Canada New Zealand

2.8 5.3 3.4 10.0

18.4 16.4 19.4 20.1

78.8 78.3 77.2 69.9

NICs: Hongkong Singapore Japan South Korea

0.9 0.5 7.1 17.8

27.7 29.0 23.7 26.7

71.4 70.5 69.2 55.5

ASEAN: PHILIPPINES Malaysia Indonesia Thailand

41.5 41.6 54.4 69.8

9.5 19.1 8.0 5.9

49.0 39.3 37.6 24.3

Others: Bangladesh Myanmar Vietnam Cambodia Laos P. New Guinea China

56.5 63.9 67.5 74.4 75.7 76.3 73.7

9.8 9.1 11.8 6.7 7.1 10.2 13.6

33.7 27.0 20.7 18.9 17.2 13.5 12.7

force in various Asia-Pacific countries (from World Development Report, World Bank 1992). Philippine employment mix is heavy on agriculture and especially on services as seen in the following:

DEVELOPMENT RESEARCH NEWS

[2] Bell, Daniel, Industrial Society. 1973.

The Coming of Post-

New York: Basic Books,

6

Modern Rice Technology and Income Distribution in Asia Edited by Cristina C. David and Keijiro Otsuka The book is a collaborative work of noted economists in seven Asian countries in an effort to develop a comprehensive understanding of the impact of technological change. This volume looks at seven Asian countries with widely diverse production environments and agrarian and policy structures. It examines not only the direct effects of technology on productivity, factor use and income but also its indirect effects through labor, land, and commodity market adjustments. This 475-page book is published by Lynne Rienner Publishers (Boulder and London) and International Rice Research Institute (Manila).

Readings in International Trade Theory, Policy and Development Edited by Ponciano S. Intal, Jr. and Gerald C. Nelson The book is composed of a selected set of readings aimed to serve as a supplement to an intermediate textbook. It provides more advanced students with seminal articles in many areas of international trade, from theory to agricultural trade issues to international trade problems in Asia. This 708-page book is published by Winrock International Institute for Agricultural Development.

January-February

1994


DEVELOPMENT RESEARCH NEWS

7

In DIA Studies

Manufacturing Industries Revisited (Last issue, we featured four industry studies -- motorcycle and parts, appliances, shipbuilding/repair and boatbuilding, and agricultural machinery which are part of the Development Incentives Assessment (DIA) Research Project. The DIA micro studies analyze the performance and competitiveness of eight strategic industries, and the factors and policies affecting them. In this issue, we feature the remaining four industry studies -- packaging, synthetic resins and plastics, meat and dairy processing, and textiles and garments. - Ed.)

T

he preliminary findings of the industry studies indicate that the domestic market after the trade policy reform was more conducive to competition than before. Protection, according to the traditional argument, distorts output and factor markets, leading to allocative inefficiency. It also encourages the existence of too many small firms which could not specialize adequately on certain product lines, thus discouraging them from adopting ‘best practice’ production techniques. Did trade liberalization enhance the efficiency of manufacturing industries?

ON

PACKAGING

Packaging is the totality of products, services, and systems used to preserve, identify, transport, distribute, store, retail, and facilitate the direct consumption of goods. The study by Ma. Cristina Medilo follows the scheme of classifying packaging products according to raw materials used. Based on this scheme, the packaging industry is seen to comprise four major subsectors: glass-based, metalbased, paper-based, and plastic-based. In 1988, 408 establishments, or four percent of the manufacturing total, were engaged in the manufacture

of packaging products. Of these, 64 percent belonged to the plastic-based, 20 percent to the paper-based, and 13 percent to the metal-based subsectors. The industry employed a total of 30,439 or 3.5 percent of the total manufacturing in the same period. It also accounted for 3.4 percent of total manufacturing value of output. Exports amounted to P681.3 million while imports were P672.6 million. The policy reforms instituted since 1981 lowered the level of protection accorded to the industry in terms of tariff and non-tariff barriers to importation. The industry-level Effective Protection Rate (EPR) declined by almost 60 percent between 1983 and 1988. Subsector level EPRs likewise showed marked reduction in protection. Paral-

January-February 1994

lel reduction in domestic resource costshadow exchange rate (DRC/SER) levels were also observed, indicating allocation efficiency gains and improved comparative advantage both for the industry and for most of the subsectors. However, technical efficiency appears to have generally declined during this period. The findings of the study show that the mere threat of competition, not necessarily actual competition (import penetration rates even declined between 1983 and 1988), appears to have forced existing manufacturers to become more efficient and encouraged the entry mainly of efficient firms.

ON SYNTHETIC RESINS AND PLASTICS As of 1991, there were 17 synthetic resin manufacturers producing polyvinyl chloride, polysterene, acrylic resins, alkyd resins, adhesive resins, phthalic anhydride, and pellet resin, according to the study by Mr. Cesar Banzon. The production of polyvinyl chloride cornered 54 percent of total annual production of resins, followed by polysterene. The industry does not produce the more in-demand thermoplastic resins, namely, polyethylene and polypropylene due to the high investment needs and the absence of an integrated local petrochemical plant to supply the raw material requirements.

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January-February 1994

Manufacturing Industries... (From page 7)

restructuring whereby local producers dispose outdated operations, create new products and embark on a search for new markets. The study recommends greater export orientation for the synthetic resin and plastic processing sector for better efficiency and profitability.

The products of the plastic processing industry, on the other hand, are divided into four: (1) plastic furniture; (2) plastic footwear; (3) plastic industrial supplies ; and (4) other fabricated plastic products. While the resin industry is oligopolistic in structure (a few large firms dominate the industry), the plastic processing industry is highly dispersed, meaning many firms compete evenly within the industry. EPRs for both synthetic resins and plastics went down between 1983 and 1988. Average tariff rates for synthetic resins dropped from 38 percent in 1981 to 25 percent in 1985, and plastic processing, from 39 to 38 percent during the same period. However, the principal effect of the trade reform was the major surge in imports. The rise in imports is expected to provide a mechanism wherein local firms are pressured to become efficient. The competitive pressure could, in turn, force an industrial

ON MEAT AND DAIRY PROCESSING Food processing belongs to that set of infant industries which has achieved some degree of maturity and export competitiveness. Its share manufacturing value added has always been the highest, although this declined from 44.7 percent in 1980 to 37.7 percent in 1992. Its share in Gross Domestic Product has also fallen from 30.9 percent to 9.5 percent in the same period. The study by Ms. Loreli de Dios focuses on the meat and dairy processing sectors. Based on 1988 Census data, the meat processing sector, was composed of 70 large firms with value added of P1,160 million and some 188 small firms with value added of P8.4 million. Half of the large firms were located in Metro Manila; the rest were in Southern Tagalog, Bicol and Eastern Visayas. Meanwhile, most of the small firms were in Central Luzon.

The dairy processing sector, on the other hand, consisted of 5 large firms engaged in the manufacture of processed milk with value added of P208 million and 49 large firms in the non-dairy products category with value added of P2.3 billion. In addition, there were 324 small firms with P113.7 million value added. Despite the large involvement of the government in the food processing sector, mainly through the Department of Agriculture, the industry has developed with the initiatives and ingenuity of the private sector. For the meat processing industry, trade policy has always been protective. Liberalization has been shortlived, except for live animals, some poultry and fresh and canned beef. The removal of import restrictions may not harm the sector because of the natural protection afforded by the perishability and the lower domestic prices of some products. The most immediate need is to reduce the costs of inputs by improving the infrastructure and the overall policy environment. Trade policies have benefited the processed milk sector more in terms of the removal of quantitative restrictions than tariff adjustments. Government

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January-February 1994

Consumer Welfare: Core of Retail Trade Liberalization

P

ressures to attain global competitiveness have prompted the government to pronounce policies in support of liberalization in trade and investment. Such was the sentiment of Samie Lim, President of the Philippine Retailers Association, during the workshop held to discuss the preliminary findings and recommendations of the study team commissioned by the Private Investment and Trade Opportunities for the Philippines (PITO-P) to assess the impact of opening the retail trade sector to foreign investment. The members of the study team are Dr. Epictetus Patalinghug, Dr. Ruperto Alonzo, Prof. Juan Lim , and Dr. Ponciano Intal, Jr.

CUT TO COMPETE The retail trade sector is characterized by numerous small shops conveniently located in population centers as a result of keen competition. Competition can be seen in discounts and bargain sales, diversification of product lines, up-to-date store designs and showcases, and emphasis on product quality, among others. Competition results in low pricing. The trends in retailing are as follows: (1) back-to-basic, no frills, small shops; (2) warehouses and supermarkets; (3) tie-ups with specialty stores; (4) one-stop shopping; (5) emphasis on product mix, image and concept marketing for maxi stores, while locationorientation for ministores; (6) professionalization of management; (7) use of contractual labor; (8) inventory system; (9) credit cards and point of sales; and (10) house brands, among others.

RETAIL TRADE IN THE ECONOMY The study says that from 19801992, the retail trade sector provided 11.3 of the 14 percent contribution of trade (retail and wholesale) to Gross Domestic Product (GDP), or 81 percent of trade to be precise. Such substantial share was primarily driven by the 3.5 percent increase in the personal consumption expenditures during the said period. The biggest share was contributed by supermarkets, sari-sari stores, and groceries. Although there seems to be a trend for megamalls these days, they do not dominate the sector. In 1992, they comprised only 6 percent of the total pie. The rest was constituted by the following: single proprietorship, 50.2 percent; market vendors, 13.4 percent; and family-run neighborhood stores, 35.8 percent. The major categories of consumer goods from which the sector is classified are (1) books, office/school supplies; (2) food, beverages and tobacco; (3) dry goods, textiles and apparels; (4) construction supplies; (5) office/household furnishings; (6) transport; (7) medical supplies; (8) gasoline; and (9) retail trade articles not classified elsewhere such as toys and jewelries. The survey also reveals that small enterprises (with less than 10 workers as defined by the National Statistics Office) dominated the sector in 1975 and 1988. Small establishments contributed the biggest value-added in 1975, but were overtaken by the large establishments in 1988. Food, beverages and tobacco contributed the biggest valueadded in both small and large establishments.

In terms of employment, the small establishments employed more than half of the workers in the sector. The number declined in 1988, but the trend remained. The Census of Establishments and Labor Household Survey reveal the dominance of female workers in the sector. Also, most of the large establishments are located in Metro Manila, Cebu or Davao.

RELEVANT

LAWS

The Retail Trade Nationalization Law of 1954 sought to protect Filipino retailers from foreign dominance. The law was amended in 1975 to provide some flexibility, but overall, the law is still restrictive. Other restrictive laws are the Rice and Corn Industry Law of 1960 and the Anti-Dummy Law. For the promotion of consumer welfare, the Consumer Act of the Philippines sets the conduct for business and trade. The following groups also safeguard the interests of both retailers and consumers: (1) Retailers Council of the Philippines; (2) Council to Combat Counterfeiting and Piracy of Patents, Copyrights and Trademarks; (3) Philippine Retailers Association; and (4) Drugstores Association of the Philippines. There are also statutes and laws on foreign investment. Executive Order 226 or the Omnibus Investment Code of 1987 requires foreign investors to register with the Board of Investment before they can secure incentives. In June 1991, the Foreign Investment Act or Republic Act 7043 was passed which, in effect, liberalizes the entry of

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DEVELOPMENT RESEARCH NEWS

Consumer Welfare... (From page 9)

foreign investment to the country but the retail trade sector remains in the negative list. The Philippine Constitution restricts ownership of land to Filipinos. Recently, however, RA 7652 became a law which allows foreign investors to lease land for a maximum of 75 years (50 years plus renewable for another 25 years).

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"There are net efficiency gains for the economy if it liberalizes foreign investment in the retail trade sector. However, there's a foreseen displacement of local retailers..." sale and retail. An increase in valueadded will push industries to new heights. Consumer power will increase,

HOW THEY FEEL

Manufacturing Industries... (From page 8) efforts to help smallhold dairy farming are starting to pay off. The next step would be for government to facilitate the link between these small firms and large-scale processors.

ON TEXTILES AND GARMENTS

GAINS AND LOSSES There’s no denying that the economic trend is toward liberalization. Industrial development will provide for the expansion of trade, both whole-

and people will be able to pay for a wider array of quality products. There are net efficiency gains for the economy if it liberalizes foreign investment in the retail trade sector. There is increased taxation and positive net consumer gains. However, there’s a foreseen displacement of local retailers, but only of the inefficient ones, according to the study. Ultimately, consumer welfare is served with the availability of quality goods at right prices. M L S drn

dies and investment incentives. On the other hand, the garments industry is one of the less protected industries, yet it has proven to be an efficient one.

Based on the survey, the study team was able to identify various issues and concerns of the retail trade sector from the perspectives of government, local consumers, retailers and foreign investors. For the government, the outstanding issues are foreign exchange generation, employment generation, tax revenue generation, export promotion, professionalization of the retail trade sector, and tourism development. For consumers, the issues are reduction in commodity prices, wider array of products, improved quality of local products, and better services. For retailers, the issues are heightened price competitiveness, trade imbalance, adverse effects on small and medium enterprises, shift in strategy from pricing to concept marketing, competition in funds market, and technology transfer. For foreign investors, the identified issues are trade name and trademark protection, rationalization of tariffs, rationalization of value-added tax, land ownership, and unfair competition posed by duty-free shops.

January-February 1994

The textiles industry is one of the industries developed and sheltered under heavy protection through a complex system of import restrictions, foreign exchange controls, tariffs, subsi-

Dr. Myrna Austria, in her study, observes that efficiency in the allocation of resources for textiles and garments has improved with the trade reform. However, garments continued to be penalized while textiles received favored protection. Textiles underwent industrial restructuring with the entry of new firms, mostly small ones. Labor and capital productivities improved while capitallabor ratios went down. It also achieved a certain degree of efficiency and competitiveness (relatively low DCR/SER ratio), but export performance was still wanting. Garments have achieved comparative advantage. However, much still needs to be done to sustain the industry's performance. The increasing automation in other countries calls for technolcogy upgrading, skills training and research and development. Local firms should be encouraged to expand exports to create linkages with the rest of the economy, especially that with the textiles industry. MLS drn


DEVELOPMENT RESEARCH NEWS

The Economy... (From page 1) administration’s first year and a half in office. This achievement was attributed to the substantial level of political stability that made for conducive implementation of essential economic reforms. Other significant achievements made by the Ramos administration were in the: steps to deregulate foreign exchange transactions; creation of the Bangko Sentral ng Pilipinas and the greater liberalization of branching and banking; initial attempts to reduce entry barriers into major industries like telecommunications; greater privatization of government corporations as highlighted by the privatization of Philippine Airlines (PAL); and intensified efforts to promote peace. But can the economy’s current positive trend be accelerated and sustained?

PERSISTENT

PROBLEMS

Numerous problems still plague the country, based on PROPE’s assessment. Major power shortages continue to hound the economy. International competitiveness has not improved nor has trade significantly diversified across commodities or trading partners. And while economic growth has kept a sluggish below 1 percent average over the past decade, population growth canters at the relatively high average of 2.35 percent. Thus, poverty continues to be widespread. Forty-one percent of all Filipino families are poor, says the Family Income Expenditure Survey (FIES). To jumpstart the Philippine economy, therefore, much more remains to be done.

FOCUS ON FISCAL MATTERS Among the economy’s recurrent major ills, PROPE pinpoints the scar-

11

city of fiscal resources as the most critical constraint to attaining sustainable economic growth. A weak fiscal position limits the government’s options for achieving economic recovery, sustainable development, and poverty alleviation. While slackening of fiscal and monetary restraints can jumpstart the economy in the immediate term, this cannot be relied upon in the long term. Ultimately, the government needs a prudent fiscal policy to improve revenue performance, reduce certain items in budget, and efficiently allocate spending. In part II of the PROPE report, Dr. Rosario G. Manasan, PIDS Research Fellow, analyzes the factors that brought the country to such magnitude of fiscal problems and proposes to improve government revenue through the: w Elimination of tax evasion . Improving tax administration offers vast opportunity for eliminating tax evasion and collecting more revenues without imposing new taxes or raising tax rates. The amount of taxes evaded for 1991 alone is estimated to be P70 billion. PROPE suggests that the present tax administration system could be improved by solving the following: a too centralized system; weak systems and procedures; a low level of computerization; and the low compensation of tax collection personnel. w Implementation of user charges . User fees should be imposed both for their revenue potential and as a means to discourage wasteful consumption. The imposition of user fees is possible in government hospitals and other government facilities such as markets, slaughter houses, transport terminals, and roads.

w Discontinuation

January-February 1994

w Discontinuation

of

NFA

subsidy .

Studies show that the NFA is ineffective in stabilizing the prices of palay and rice, and that NFA subsidy reaches but a fraction of its potential beneficiaries. w Deregulation of petroleum product pricing. It is important that price changes are implemented in a more timely manner, and that the rules and processes in price changes are made absolutely transparent. w Increase of capital expenditure . Public sector infrastructure expenditure is a good predictor of economic growth. Also, capital expenditures have a stronger effect on output than current expenditures. Thus, economic growth may be fostered by reallocating public spending towards greater infrastructure investments.

LEARNING FROM MEXICO Mexico’s shift from fiscal deficit to fiscal surplus is an example the Philippines can learn from. In reforms similar to the PROPE’s recommendations, Mexico underwent major privatization of government corporations. The proceeds went to debt renegotiation and new terms for debt payment. Mexico’s tax system, likewise, underwent reforms that included suppression of certain impractical taxes and improvement in tax administration. These tax reforms resulted in a significant increase in the number of individual taxpayers. The increase is also much related to the jailing of numerous tax evaders including some rather prominent personages. Finally, the Mexican bureaucracy was streamlined and the salaries of the remaining government employees were substantially increased.

of BOI incentives .

The fiscal cost of BOI incentives-equivalent to P10.8 billion in 1991-grew by five-fold in the last six years. Yet, these incentives did not counteract existing distortions, attract foreign investments or justify their cost.

THE YEARS AHEAD Given the Philippines' problems in power supply and the still relatively slow pace of economic reforms, the

F To

page 12


DEVELOPMENT RESEARCH NEWS

12

DEVELOPMENT RESEARCH NEWS is a bi-monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars. PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions published here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments on the publication are welcome. Please

January-February 1994

address all related correspondence and inquiries to: Vol. XII No. 1

Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village 1229 Makati, Metro Manila, Philippines Telephone Numbers 8924059 and 8935705 Telefax Number (632) 8161091

January-February 1994

Editorial

Board

Dr. Ponciano S. Intal, Jr. President Dr. Mario B. Lamberte Vice-President

Re-entered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P90.00 for private firms and individuals; P80.00 for students, libraries, academic and research institutions; and US$16.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.

Ms. Jennifer P.T. Liguton Director for Research Information Mr. Mario C. Feranil Director for Research Ms. Andrea S. Agcaoili Director for Operations and Finance Mr. Crescencio R. Jovellanos Director for Management Information (on leave) Atty. Roque A. Sorioso Legal Counsel

The Economy...

Staff

(From page 11)

Jennifer P.T. Liguton Editor-in-Chief

TEN IMPERATIVES PROPE gives ten imperatives to accelerate economic growth beyond the foreseen rates. The imperatives are to:

l Generate

growth

and

employment

by adopting a growth-oriented public investment spending program particularly in rural activities and productive infrastructure financed through enhanced domestic resource mobilization and more aggressive negotiations for debt relief, additional official flows and more flexible monetary policy.

l Reinforce

and accelerate trade, in-

tic

tax collection and domes-

resource

l Enhance ricultural through

mobilization.

the productivity of the agand

industrial

deregulation

ment in research, irrigation.

and

sectors invest-

technology

an exchange rate that fully and

immediately reflects the greater demand for foreign exchange as structural reforms are implemented and the economy recovers.

l Deregulate

entry and pricing in power

generation and distribution to achieve efficiency and lower user fees.

l Implement

within the shortest time pos-

and

economy's Gross Domestic Product (GDP) is foreseen to grow by only 1.4 percent in 1993. This forecast is below

Odette M. Salcedo, Suzy Ann D. Taparan and Lezyl B. Ponce Contributing Editors Valentina V. Tolentino and Anne P. Cleofas Exchange Necita Z. Aquino, Delia S.Romero, Galicano A. Godes and Federico D. Ulzame Circulation and Subscription Jane C. Alcantara Lay-out Artist

sible a wide-ranging streamlining of the government bureaucracy to improve and focus services and reduce costs.

l Set

and adhere to a clear and realistic set

of targets for agrarian reform, with

dustry and financial reforms.

l Improve

l Adopt

Corazon P. Desuasido Issue Editor

pri-

ority on land ownership redistribution.

l Promote

equitable

access

to

and

effi-

cient use of natural resources.

l Establish

safety nets for the vulnerable

groups, reduce population growth and improve systems for basic education and primary health care.

the rate of population growth, and as such, per capita incomes will fall. By 1994, however, the economy is expected

to make a recovery. It is seen to grow at 4.2 percent and increase per capita income for the first time since 1990. To accelerate economic growth beyond the foreseen rates, the PROPE offers ten imperatives (please see box). The PROPE's proposals are but some of the urgent solutions the country must work on to achieve accelerated and sustained economic growth, and greater international competitiveness. For a country that is serious about becoming a true member of the fastprospering Southeast Asian region, it is time for the people to take heed and work toward that vision. LBP drn


The Economy According to PROPE