Tuesday, February 21, 2006

Myth No.4: Philippine economy is completely open and globalized

We often hear those refrains from the Left about the openness of the Philippine economy to foreign competition and its supposed negative impact on local enterprises. Well, the truth is that it’s really the lack of competition that has been constraining the growth of small and medium enterprises and that because of our reverses in implementing trade reforms. That I found out from the recent presentation from one of the top notch economists from the Philippine Institute for Development Studies. Read on.

As a result of major reverses in trade reforms, the lack of strong competition in the Philippines is discouraging the growth of new businesses and small and medium enterprises (SMEs) in the country, an economist from Philippine Institute for Development Studies said.

“The more than 20 years of trade liberalization in the manufacturing sector has not resulted in any significant increase in competition, preventing the economy from reaping the benefits of freer trade,” said economist Rafaelita Aldaba, in her recent presentation at the PIDS.

Aldaba explained that competition is one of the major channels through which trade liberalization affects the economy.

“Competition is important in fostering innovation and technology adoption which leads to increases in competitiveness, productivity, and growth that could have large consequences for poverty and inequality reduction in the Philippines,” she explained.

A culture of competition is characterized by the efficient allocation of resources and production processes, competition among firms in both price and quality, innovation of new products, and consumers being able to benefit from the resulting efficiency. However, evidence shows—Aldadba said—that most of these characteristics are absent, indicating that competition in the country has remained weak.

Since the early 1980s, the Philippines has implemented market-oriented reforms that were intended to stimulate competition, induce firm efficiency, and introduce technological change through new investment.

Aldaba noted that the last twenty years of trade liberalization considerably reduced high rates of effective protection in the country. Nevertheless, she observed that the protection structure of industries continues to be uneven, with some sectors receiving relatively higher levels of protection than others. Petrochemicals, float glass, and steel are prominent examples of raw materials receiving higher duties than their finished products.

“Our trade liberalization process has been reversed many times in the past due to the intense lobbying by strong interest groups for higher protection; hence, a policy of selective protection emerged causing tremendous distortions in our trade and economic structure. Tariffs have been changed on an ad hoc basis without taking efficiency considerations into account,” Aldaba noted. “The protection that emerges, however, becomes incompatible with the country’s stated development objectives and continues to provide incentives for more lobbying activities,” she added.

Continuous distortions in tariff in the country, Aldaba said, have given way to favoring highly protected sectors like agriculture and manufacturing importables as against exportable goods, thereby leading to a decline in competitiveness. As an example, she cites the cost of sugar as being brought about by a 65% tariff that continues to affect the competitiveness of the country’s fruit processing sector.

“Our experience shows that trade liberalization, while necessary, is not a sufficient condition to promote competition, it is also important that firms change their behavior and adjust to the new market environment,” Aldaba said.

Other factors that enhance competition, Aldaba claims, include both physical and institutional infrastructures like the state of transport and communications, framework of laws and regulations, effectiveness of the financial system in matching investment resources with entrepreneurial opportunities, as well as information available to consumers.

“Business firms will not venture into the unknown and uncertain unless the government program for implementing policy reforms is credible; policy reversals, delays in timetable, lack of infrastructure and inconsistent decision-making can undermine the success of entrepreneurship that could be had from the government’s liberalization policy,” Aldaba concluded.

Related links

1. Despite globalization, it’s still difficult to do business in the Philippines

2. Demystifying the World Trade Organization

3. Cutting red tape means hitting several birds with one stone


taoharu said...

"... it’s really the lack of competition that has been constraining the growth of small and medium enterprises ..."

I find this hard to follow. I can understand it better if the statement above was rewritten as follows:

"... it's really the lack of competitiveness that has been constraining the growth of small and medium enterprises... "

I don't think there's lack of competition in the small and medium ententerprises level... Lack of "competitiveness",yes.

Competitiveness. It's another term for efficiency. Yes, we our SMEs are less efficient because of higher energy cost, higher capital cost, slowpoke government bureaucracy, etc.

Dave Llorito said...

thanks for this point. the term lack of competition there is really related to the failure to implement trade reforms. supposedly, when the government implemented the tariff reform program since the mid-80s to the present, the idea there is to generate a more competitive environment for business. but most of those tariff reduction programs were reversed. the prime example there is sugar which enjoy 65 percent protective tariff while the users (primarily food industries including confectioneries, liqour, beverages, pastry, cakes, preserved fruits and nuts, processed meat, among others enjoy tariff lower tariffs. there are more examples but its too long to write them here.

but you are right, lack of competitiveness is also part of the big picture which could be attributed to a lot of factors.

taoharu said...

In a globalized economy, nations tend to specialize. The Philippines cannot be competitive in every industry. It should not try to. The Philippines should do more of the things it is good at and sell them competitively. For products it cannot make competitively, just import them.

Dave Llorito said...

that's a valid observation. and where are strength? services, some sections of agribusiness, electronics. these are just few examples.

Ely said...

lately, outsourced services such as call centers and technology outsourcing are a source of strength for the Philippines. Support services for such industries would greatly help.


Dave Llorito said...

yes, that proves outsourcing is one of our strength. but there should be more coz people that get jobs in these industries are the skilled ones. seems like we need to boost our competitiveness in agribusiness, eg, pineapples, bananas, asparagus, rubber, among others to spread the benefits of growth to the rural areas.