Wednesday, August 01, 2007

China is no model for the Philippines

‘THE Philippines should emulate China by posting a 9.5-percent growth continuously for 25 years. Maybe then, it would become a First World country,” said an official from the Asian Development Bank (ADB) at the presentation of the results of the 2005 Purchasing-Power Parity Preliminary Report.

That ADB official is right about the need for a sustained high growth rate to achieve progress in the Philippines. What he didn’t tell us is that we can’t emulate the strategy of China in achieving our development goals.

China, or even India, for that matter, is a unique experience that could never be replicated by anyone else. The Philippines should evolve its own strategy.

But surely, we need an investment-driven growth strategy à la China. In the last several years, China has been growing at 10 percent to 11 percent, courtesy of about $60-billion to $70- billion worth of annual foreign direct investments. These dollars are channeled to manufacturers using cheap labor and repressed laborers.

And lately, China is trying to go up the value chain by attracting high-tech operations by multinationals, as well as by overseas Chinese.

It would be hard to follow the China route. For one, we don’t have an authoritarian form of government that could impose a Chinese-style “political stability.” We have already rejected that route when we toppled Marcos in February 1986, spurned the continuing offer for a “dictatorship of the proletariat” by the local communists, and resisted the siren songs of Gringo Honasan when he still had dark hair and youthful energy for military coups.

And more basically, we no longer have the cheap labor to dangle to multinationals—thanks to long years of minimum-wage legislations and a more progressive regulatory framework in industrial relations.

China has enough of these investments within her shores. Lately, there is an increasing trend toward “innovation offshoring,” or the internationalization of product research and development (R&D) by multinational corporations (MNCs). In reality, most of what the MNCs are doing in these R&D centers is more of “development” rather than high-end research.

The R&D centers are intended largely to tailor-fit existing products and technologies for the local Chinese market. It means that those investments are intended to take advantage of the huge Chinese market.

We don’t have such a huge market to attract those innovation-type investments. That explains why we can’t seem to attract the level of investments the way that our neighbors are getting.
You probably wonder why Vietnam, Laos and even Cambodia are registering 7-percent growth rates or higher these days. It’s because of their advantage in labor arbitrage, or the tendency for jobs to move in areas where labor is inexpensive.

MNCs are there for that reason—cheap labor. And why is India, or at least an urban-based segment of its economy, booming? It’s because—just like China—it has a huge domestic market (1.3 billion Indians), a growing middle class and millions of engineers that MNCs could tap for having innovation-type operations. On both counts, labor arbitrage and market size, the Philippines doesn’t have those advantages.

So what’s the best model for the Philippines? We may have to get back to the old model: Japan. Why Japan? Because it has a low population base and yet, was able to grow fast and become First World in just a few decades.

Its open secrets are three things: education, education and education. According to Nobel laureate Amartya Sen, this is the same secret being followed by the tiger economies of South Korea, Taiwan and Singapore—and look where they are now.

When society produces lots of scientists and talents, it would be easy to generate products, services and intellectual properties that entrepreneurs could sell to the rest of the world—and whose competitive advantage depends less on labor cost and more on knowledge content and other intangibles (like branding).

There is a gold mine of Filipino scientific talent in the Philippines and abroad, doing great and innovative products, but their operations are hard to scale up to make a difference because we don’t produce hundreds of thousands of engineers or scientists at the scale that China and India are churning out each year.

Investing in education, especially in primary, is a long-term social investment. However, while reforming education, we could actually hasten progress by just tweaking existing economic policies.

We seem to be so happy to know that we increasingly have Korean and Chinese visitors in the hundreds of thousands. And yet, that’s miniscule, considering that Thailand and Malaysia are attracting millions of them each year. Why? It’s because they have more flights from those countries, an argument that bolsters the need to open our skies to ensure more flights coming from the rest of the world, even as reciprocity remains a relevant issue also.

Corollarily, we also need to open our seas and our ports to more participants to foster competition and lower charges. That would be a big boost to producers of farm products in Mindoro, as well as the islands of the Visayas and Mindanao.

Infrastructure development is crucial. Since Congress can hardly include big-ticket projects in the annual budget, the only way we could finance these huge projects is through private money. Our experiences in build-operate-transfer projects have not been good because of corruption during the bidding.

The only way to address this is by legislating a “transparency in governance” or a “freedom of access to information” law that would allow every citizen in this country access to all documents and contracts being proposed by the bureaucracy for signing with local or foreign providers and vendors. We had all those infrastructure-related scandals (e.g. PEA-Amari, Naia Terminal 3, and lately, the national broadband network) because of this utter lack of transparency.

These reforms could be done right away if only the country’s political leadership has the guts to do so. And the impact, in terms of propping up economic growth, would be immediate.

Hello, Malacañang. Hello, Congress. (Note: Originally drafted as editorial for BusinessMirror, August 2 2007)


H.C. Tan said...

uh-huh, it is not easy to emulate what China, India or Japan has achieved. I think Malaysia's status is just about the same as in Phillipines.

manuelbuencamino said...


Hello BM colleague. I didn't even know you had a blog until MLQ's show.

Anyway, what I don't understand about japan is how it was able to grow despite it's lack of transperency (alam mo naman kung gaano kalalim ang ties ng Yakuza with big business and government) and the fact that its economy, during its growth phase , was controlled by a few giant conglomerates. Those are anathema to the free market driven growth, di ba?

So my question is, could Japan have worked, failed, or worked better if those realities didn't exist?

Dave Llorito said...

hi ms tan: how should i call you? your comment makes me curious. i thought malaysia is way too advance than the philippines.

Dave Llorito said...

Hello MB: yeah, the zaibatsu and those conglomerates are signifant features of the japanese society and economy. that's true. that seems to negate the idea about "free markets". one thing i didnt mention explicitly in the article is that the japanese, and then the rest of the economic tigers that copied japan, exported their products in the world market. the discipline of the global market place, the competitive pressures, forced them to be competitive and innovative. with their highly educated workforce, they were able to develop, and are still developing, products, business processes, services and intellectual properties that transformed their economies. so, the element of market competition is still there. of course, some sectors of their economies, like their servicews, especially the banking and finance sector were outdated. in the 80s, the property bubble caused a recesssion in which they only recovered lately, but japan was already a highly developed economy when that happened.

Urbano dela Cruz said...

I would agree that education is a key component but the investment in human capital must be part of a framework of endogenous growth.

There is, though, a disconnect between your jump from saying the priority is education and your call for more transparency in government (not that I am against it).

The three models you cite -Japan, Korea, Taiwan -were hardly models of open democracy throughout their growth years. (The LDP is only now losing its grip on Japanese politics.)

(c.f this discussion between economists K. Daron Acemoglu and Ed Glaeser on the relationship between education and democracy. -dialogue in full from the WSJ econoblog here.)

What is clear though is that both Japan and China have a embraced urbanization as key to their (effective) growth strategies. A concept that somehow we haven't yet embraced. (Take a look at this gapminder chart of how urbanization is related to per capita income.)

There is a spatial component to economic growth which we have conveniently ignored. Metropolitan economies are the drivers of national growth and by themselves, represent the lion's share of most country GDPs. As important as agriculture is, if we want rapid growth, then we have to manage (and leverage) our urban growth.

Dave Llorito said...

mr de la cruz: the relationship between urbanization and incomes is almost axiomatic given that higher forms of economic activities is usually associated with structural transformation, ie movement of economic activities from agriculture to industry to services. and these transformation certainly has spatial implications as well.

indeed, its important to have "endogenous growth" if by endogenous you mean greater, higher growth in the agriculture and industry sectors whether or not these countries are producing for the local or global markets or both. but participation in the global market place is certainly important not only to generate forex and boost reserve, but also to expose producers to the discipline of trade, making them more innovative in their products, processes, services, and intellectual properties.