Wednesday, April 18, 2007

Another RP ‘record’ (sigh)

DO you know why the annual 5-percent to 6-percent growth of the Philippine economy in the last four years is not generating enough jobs or touching people’s lives? Do you know why, despite all the gains the country has achieved through fiscal reforms, more and more people are saying they are poorer than ever?

Part of the answer to these questions probably lies in the recent survey done by the UPS Asia Business Monitor, saying that the small and medium enterprises (SMEs) in the Philippines are the “least competitive” in Asia. Least competitive is actually a polite word for “laggards.” The survey did not mention the reason for SMEs’ lack of competitiveness vis-à-vis its counterparts in Asia, but we could hazard an educated guess.

First, companies, especially SMEs, can only thrive in an atmosphere of growth. Of all the countries in Asia, the country’s “decent growth” of 5 percent to 6 percent is actually just a recent phenomenon that started in 2003, owing to the recent surge in remittances, the recovery of electronics and the rise in outsourcing.

More people, losing faith in the economy’s capability to fulfill their dreams for a better life, are leaving and sending more money home. Depressed wages for office workers have attracted foreigners to set up call centers. Voila!—the economy grew sans government direction. The government, all these years, has largely been so preoccupied with addressing the budget deficit that it completely ignored growth-oriented measures.

Second, the nature of the country’s recent growth, while encouraging from a job-creation point of view, simply highlights the entrepôt nature of the country’s economy.

The classic example here is the electronics and semiconductors industry, which depend highly on imported raw materials. Don’t get us wrong, we are all happy with the way the electronics industry is growing and hiring hundreds of thousands of workers, and therefore supporting the growth of certain ancillary support services industry like logistics. What we are saying is that electronics and semiconductors are not the type of industries that nurture local manufacturing SMEs through forward and backward linkages.

The third reason has something to do with the globalization of the Philippine labor market. Again, we are saying that giving workers all the options to work anywhere they want is a very good policy. We have been doing that the last 30 years now.

But it bears noting that if there are companies that are hit the hardest from the continuing diaspora of talents in the Asia-Pacific region, these are the SMEs. Since most of them could probably not pay higher-salary rates for skilled workers compared to their counterparts in big business, they are the ones who are likely to be abandoned by their skilled staff in favor of jobs among multinationals here or abroad.

That trend is fine really, if only the schools are producing enough knowledge workers. Given the current circumstances, SMEs are the ones that are finding it hard to find talents or retain them.

And fourth, SMEs are the most vulnerable to government neglect and stupid government policy. They are the ones whose costs easily bloat when roads are not passable or when raw materials are protected by high tariff walls; or worse, when red tape and extortion stand in the way of efficient transactions with the government.

They usually have limited working capital and, hence, have limited options when the banks find them “not bankable” enough. They are the ones who lose money when the market ignores their products for lack of granular knowledge of their markets and the latest lifestyle trends, simply because the government has not supported their research and development efforts. They are the ones who suffer and lose contracts when bureaucrats demand bribes or make their business difficult simply because most of them do not have political clout.

All these constraints are unfortunate considering that, according to oft-cited estimates, close to 90 percent of the country’s work force are employed in SMEs. If the government is serious about addressing poverty, the SMEs hold the key. Most of them are using labor-intensive operations and giving them the much-needed boost would surely go a long way in addressing joblessness.

Given all these constraints, is there really anything that the government could do to improve their competitiveness? A lot, actually.

First, the government has to get on with progrowth strategies and it would help a lot if politics in the country is stable. Remember that “super-regions” initiative that the government promised in the last State of the Nation Address? A lot of the projects mentioned in that strategy dealt with infrastructure development that should help SMEs. But so far, the government has nothing to show for that initiative.

In the first two months of the year, the government expenditure on infrastructure rose only by 2 percent, according to newspaper reports this week. If one considers inflation trends, that figure suggests that government expenditure on infrastructure is actually lower than last year’s figure.

We don’t deny the fact that some government agencies do have projects for SMEs. A press release this week from the Department of Industry said that the department and the Development Bank of the Philippines have just signed a memorandum of agreement for a P15-billion loan facility for SMEs.

But all these initiatives would really not be effective if the government cannot provide a good environment for business, in general. How many loan programs in the past came to naught because of unfavorable policy environment? There are just too many to mention them here. Ultimately, enhancing the growth of SMEs really depends on the overall economic and political context in the country.

In fact, direct government actions sometimes simply falter because they are often done with political considerations in mind. For instance, that press release about the P15-billion SME loan program came on election season, inviting suspicion of the timing and observations that the government is trying to do so little and so late.
One hopes this just isn’t the case. (Note: prepared as an editorial piece for the BusinessMirror, 19 April 2007)

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