From 1960 to 2000, manufacturing share of GDP has averaged around 24.6% (Author’s calculation based on World Bank databank figures). However, from 2000 to 2009, this share went on a rapid decline, raising concern on the future of manufacturing in the Philippines. Fortunately, in the past four years, we seen faster growth in manufacturing sector. But what’s the impact of this renewed growth to manufacturing’s share of the economy? Is it significant enough to reverse the declining trend of the previous decade?
First allow me to point out that the sector has always been growing, thru the decades, as we’ve pointed out in previous posts. So, “decline” is a tricky word when describing the manufacturing sector. But what is factual is that manufacturing’s share of GDP has been declining for some time…until recently.
The table below shows that manufacturing’s share of GDP has rapidly declined from 24.47% in 2000 to a low of 21.47% in 2009. A huge 3 percentage point drop in one decade. It was due to a combination of rapid growth of the services sector and the relatively slow growth of the manufacturing sector. However, the trend has reversed in 2010, and by the third quarter of 2014 it had reached 23.16% of GDP.
The next table is a familiar one to our readers. This table shows a comparison of the growth rate of the manufacturing versus the services sector. The latest GDP numbers in Q3-2014 extends the lead of the manufacturing sector over services in terms of growth rate to seven consecutive quarters.
Not to be misunderstood, I am not hoping for a slow down of the services sector! But I am advocating a catch-up for the manufacturing sector so that we have a more balanced and robust economy, that can provide a wider range of employment opportunities to Filipinos. We need both engines of growth. Three would even be better, with the agricultural sector.
Growth is not mutually exclusive, it doesn’t have to be. In fact, researchers have pointed out that manufacturing can drive a further expansion of the services sector due to manufacturing’s high multiplier effect.
While the increase in manufacturing share of GDP is encouraging, this ratio is still far from what we desire, and still far from reaching our true potential. The new Philippine Manufacturing Roadmap crafted by the government and the various industry sectors provided a challenging and bold vision for manufacturing to reach 30% of GDP. It’s a vision that goes beyond our historical performance. But it is a vision that can free us from economic underperformance that has plagued us for decades.
Manufacturing Subsectors by technology classification
The manufacturing sector is highly diverse, composed of a wide range of subsectors. These subsectors can be groups into three technology groups: low, medium and high. Below is the gross value added of each of these subsectors at the end of 2013, grouped by technology level. Food manufactures is still by far the largest manufacturing subsector, followed by radio, tv and communication equipment and apparatus, which we know better as electronics and semi-conductor, and third is the chemical and chemical products sub-sector.
Low-tech sectors are generally less capital-intensive and more labor and/or resource intensive. While medium and high technology sectors are generally more capital-intensive and less reliant on labor cost and/or resources. Note the word “generally” since the products within this subsectors can have very varied characteristics in terms on capital and labor requirements.
Low technology subsectors has less entry-barriers, require less skills, and provide huge employment opportunities, but subject to strong competition from lower cost countries specially when they’re highly globalized with low trade barrier, like garments and footwear. Higher technology subsectors require higher skilled labor, and more sophisticated use of technology and capital.
By classifying the sub-sectors intro these three technology groups, it becomes easier to understand their needs, allowing us to identify targeted interventions that will enable them to be competitive. For instance, low-technology sub-sectors would require the availability of low labor cost migrating from the basic sector, whereas high-technology would need innovative talent and skills upgrading. This classification also allows us to understand where to direct our human resources, which is to higher value sub-sectors, which will raise the total productivity of the manufacturing sector in the long-term.
Shifting to higher technology levels
As countries progress and climb up the value chain, you see a consistent reduction in share of low tech secttors, for instance food manufactures, and an increase in the medium to high-tech subsectors. See from the charts below taken from UNIDO 2103 Industrial Development Report, how South Korea evolved from 1963 to 1998, reducing their share of their low tech sector in favor of their high-tech sector. Compared to Kenya that hardly changed their structure through out the same period.
The relative size of the Philippine high-technology sector which includes electronics, semi-conductor and chemicals is encouraging. Growing our machinery and transport sector should accelerate our growth as well as diversify our high-tech sector. There is of course, a lot of value in expanding our medium technology sector which represents key industries that enable us to integrate the various subsectors. These medium technology sectors are easier to develop compared to high-tech sectors, and can provide employment for our low-skilled labor that maybe not find opportunities in the low-tech sector due to competition from lower cost countries.
This is why we have more than 20 sectoral roadmaps today. Each sector has a role to play in our economy. The more sectors we participate in, the more opportunities we provide to our investors, both foreign and local, to our entrepreneurs and to our workers.
Growth of the manufacturing subsectors
Finally, let’s take a look at the growth of each of these sub-sectors in the last three years, from 2010-2013.
Furnitures and fixtures is the fastest growing sector, averaging 57% in the last 3 years, followed by chemical and chemical products at 39% per annum, and wearing apparel who seems to be making a come back at 11% per annum. One needs to take into account the actual size of these sub-sectors to put the growth into context. So while food manufactures is the largest, it a low growth industry. Chemicals has both scale and high growth. Furnitures and wearing are relatively smaller industries, but are gaining ground.
Radio, TV, communication equipment and apparatus (electronic and semi-con) has experience low but still positive growth the last few years. Interestingly, transport equipment has seen a contraction in the last three years, in spite rapid growth in motor vehicle sales. Hopefully, this translates to the expansion of the local production of motor vehicles in the next few years.
I hope this short note helps us understand the value of classifying manufacturing sub-sectors by technology level, and how they contribute to the overall growth of the manufacturing industry.
A Manufacturing policy brief entitled Manufacturing: Creating Millions of Better Jobs, authored by Bobby Batungbacal and John Forbes of the American Chamber of Commerce, was presented during a press conference last Dec 5, 2013, at the Elks Club, Corinthian Plaza, Makati City. Here are the highlights of the brief:
The overall objective of reforming the manufacturing sector is to achieve a paradigm shift, breaking out of the cycle of low or no growth in manufacturing employment and moving up the scale of higher-value manufacturing, while also reviving labor-intensive manufacturing to take advantage of the country’s demographic dividend.
• Create an average of 500,000 new jobs a year in manufacturing beginning in 2015 for a total of 4 million by 2022.
• Attain 30% of GDP share of manufacturing by 2022.
• Shift 4 million unemployed and underemployed workers to productive manufacturing sectors.
• With a multiplier effect of 3 indirect jobs per new manufacturing job, 16 million
Filipinos will benefit.
• Create incentives to revive labor-intensive manufacturing by encouraging firms to locate in D/EEZs in less-developed regions with abundant low-cost labor and logistical connections to export ports.
• Make production costs competitive with Cambodia, Indonesia, and Vietnam through
temporary incentives for manufacturing firms who locate in D/EEZs.
• Local officials should agree not to interfere in D/EEZs.
• Upgrade/diversify high-value manufacturing where the Philippines is competitive.
The Manufacturing policy brief was sponsored by twenty local and foreign business groups, namely: American Chamber of Commerce of the Philippines (AmCham), Australian New Zealand Chamber of Commerce of the Philippines (AnzCham), Canadian Chamber of Commerce of the Philippines (CanCham), Chamber of Furniture Industries of the Philippines (CFIP), Confederation of Garment Exporters of the Philippines (CONGEP), European Chamber of Commerce of the Philippines (ECCP), Employers Confederation of the Philippines (ECOP), Foreign Buyers Association of the Philippines (FOBAP), Garment Business Association of the Philippines (GBAP), Japanese Chamber of Commerce and Industry of the Philippines (JCCIPI), Korean Chamber of Commerce Philippines (KCCP), Management Association of the Philippines (MAP), Philippine Association of Paint Manufacturers (PAPM), Philippine Chamber of Commerce and Industry of the Philippines (PCCI), Philippine Exporters Confederation (PhilExport), Philippine Oleochemical Manufacturers Association of the Philippines (POMA), Philippine Plastics Industry Association (PPIA), Semiconductors and Electronics Industries of the Philippines (SEIPI), and Samahan sa Pilipinas ng mga Industriyang Kimika (SPIK).
It was a result of a series of focus group discussions with a wide range of manufacturers, industry representatives, leading economists, government leaders, export zone developer, labor experts and consultants. The brief will be submitted to government agencies and each member of Congress. To view or download the brief, go to the Arangkada website.
In my opinion, inclusive growth means that economic growth reaches all sectors and their constituents, not just the leading ones. Inclusive growth means decent jobs for the great majority, it means jobs for the less educated, with fewer resources and fewer choices. This brings into mind the manufacturing sector which has the highest potential to provide long-term inclusive employment to a country with persistently high unemployment and underemployment.
In the previous decade, manufacturing employment growth has plateaued, in spite of its moderate growth. This maybe due to job losses in less competitive industries, as well as increasing productivity and automation in competitive sectors, due to the transfer of labor from to the services sector, ant the transfer from formal sector to the informal sector.
Based on data from Bureau of Labor & Employment Statistics and the National Statistics Office, manufacturing employment only grew an annual average of 0.7% in the last 10 years (2002 to 2012), while manufacturing value added grew by approx 4%(at constant 2000 prices, NSCB National Accounts).
By dissecting these data, we look at the employment at the manufacturing subsectors level to understand which sub-sectors contribute the most employment, as well as which sub-sectors are gaining or losing workers. Food and beverage is the largest sub-sector and the biggest employer, followed by wearing apparel, manufacture of wood and wood products, radio, tv, communication equipment (electronic and semiconductor), textile and fabricated metals. (Note: Data from NSO, for 2012 included only Q1 to Q3).
I’m eager to see the numbers for Q-4 2012 and the first two quarters of 2013, to understand if the growth in the manufacturing output translated to employment in the sector. Recall that manufacturing grew by 9.5% and 10.3% in the last two quarters.
What I learned from this analysis is that the biggest employers in the manufacturing sector are those thought to be “uncompetitive”, belong to the old economy (except for electronics and semiconductors), if not forgotten altogether. In fact, we have yet to see industry roadmaps coming from these sectors. Have they been overlooked? Who would have thought that we still have 400 thousand workers in the garment industry? Or 300 thousand in wood manufacture and wood products? Or over 150 thousand in textiles.
If we want inclusive growth, we need to focus on areas with the greatest impact to employment, and that is in the labor-intensive manufacturing sub-sectors. The question is, are these labor intensive industries viable and sustainable in the Philippines. I think recent trends in regional labor costs suggest that is it. More on it on our future posts…
Last June 25, 2012, I was invited to be a reactor to Dr. Fernando Albada’s work entitled “A Framework for Promoting Decent Work by Integrating Employment in Industrial Policies”, organized by the Institute of Labour Studies, supported by the International Labour Organization (ILO) and the Department of Labor and Employment (DOLE).
The paper explained the impact of previous industrial policies (from 1950 to present) to employment in the Philippines, the success and failure of these policies to grow the industrial sector and employment, the present and future labour challenges and more importantly provided a framework to integrated employment into industrial and sectoral policies.
In my opinion, DOLE is the third government department that supports a renewed focus on industry and industrial policy, the others would be the DTI and the DOST.
One could feel the enthusiasm of the representative of the different labour groups as they expressed support for industry planning, as a long-delayed approach to inclusive economic growth. I sense their guarded optimism as the DTI announced that they are now working with no less than 40 sectoral roads maps.
For my part, I explained how valuable Dr. Aldaba’s work is for industry associations currently working on their respective roadmaps. I shared my experience in ongoing Philippine Chemical Masterplan and my perception on the development of other sectoral road maps that I’ve been involved with, and how we in industry look forward to the integration of these sectoral plans into a comprehensive industry strategy for the Philippines.
His statement from a PDI news article dated May 7, 2012.
“In general, a well-run country in the middle of the fastest-growing region of the world should be able to take advantage of that,” said Sachs, who was in town for the Asian Development Bank annual meeting.
On the spillover effect, Sachs noted that soaring wage costs in China had basically reduced surplus labor from the countryside “from a flood to a trickle.” As China now had to upgrade its technological focus, Sachs said a lot of labor-intensive capital was moving to other countries.
“In general, China’s growth is a benefit for the Asian region because things will readjust so that there will be job creation in some sectors in the Philippines responding to either the Chinese market or replacing China in their markets and we see some of these happening now,” he said.
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Even before the first ADB delagate arrived for the 45th ADB Annual Conference in Manila, ADB officials have been talking to the media about their recommendation for inclusive growth: Walking on two legs of services and manufacturing.
This recommendation was clearly articulated during the Annual conference from May 2 to 4 in numerous speeches by no less than the ADB President Haruhiko Kuroda. In his opening speech he said:
“Widening the manufacturing base beyond electronics will create much-needed jobs, promote inclusive growth and help reduce the persistent poverty,” – Kuroda
“By fully exploiting its favorable demographics and strategic location in the heart of Asia, the Philippines can transform its economy to one of sustainable and inclusive growth that benefits all,” – Kuroda
Source: Philippine Star, May 2, 2012
Yesterday, I watched a video in the ABS-CBN website of ADB Vice President Stephen Groff being interviewed by ANC’s Coco Alcuaz. Stephen Groff stressed the strategic importance of manufacturing in the Philippines, and specifically the need for industry policy and planning. Please watch the video:
This reminds me of Dr. Norio Usui, ADB’s Senior Economist who started talking about the need for structural transformation for inclusive growth in our country. I had a chance to catch up with Dr. Usui in his presentation of the ADB’s 2012 Economic Outlook held at the AIM’s Global Distance Learning Center. It’s the fourth time I’ve listened to Dr. Usui and each time, the I learn something new and the message becomes clearer and clearer. According to Dr. Usui, our slow economic development vis-a-vis our neighbors can be traced to lack of structural transformation, which is to say that we failed to shift labor to higher productivity sectors of the economy. And the sectors with the highest productivity are industry and manufacturing….much higher than services and agriculture.
The good news is both government and private sector are listening. Last year, the DTI re-organized to form a the Industry Development and Trade Policy Group under Usec. Adrian Cristobal. After the 1st Philippine Manufacturers and Producers Summit by the FPI, industry associations started working with the BOI to create industry roadmaps as reported in our previous posts. And we’re not talking about a handful of large well known succesful organizations like SEIPI and CAMPI…..I’m talking about dozens of sectoral associations that never had an industry development dialogue with DTI before, sectors like chemical, paint, printing ink, plastic, oleochemical, adhesives, iron and steel, ceramic tiles, cement. It’s this growing list of manufacturing sectors that can bring structural transformation, needed diversification and industry upgrading to our economy.
Last Feb 28, 2012, I attended another forum that talked about importance of Industry and Manufacturing in the Philippines, this time, a joint forum by the Asian Development Bank, Agence Française de Développement and the Japan International Cooperation Agency, attended by an impressive list of speakers led by Sec. Cayetano W. Paderanga, Jr. of NEDA, Neeraj Jain, Country Director, Philippines, ADB, Takahiro Sasaki, Chief Representative, JICA Philippines, Le Cabellec Luc, Country Director, AFD Philippines, Norio Usui, Senior Country Economist, ADB, Adrian S. Cristobal, Jr., Undersecretary, DTI, Emmanuel de Dios, Professor, School of Economics, University of the Philippines, Toru Yoshida, Representative, JICA Philippines, Guillermo M. Luz, Private Sector Chairman, National Competitive Commission, Lilia B. De Lima, Director General, Philippine Economic Zone Authority.
Download the forum agenda: 28 Feb ADB AFD JICA Joint Forum Agenda
This is the sixth forum I’ve attended since the 1st Manufacturing Summit in November, that raised our awareness of the importance of manufacturing in the Philipines. I wish to share with you two key presentations from the ADB-AFD-JICA Forum, with permission for JICA, ADB and Nomura.