Taking the Right Roadto Inclusive Growth

Industrial Upgrading and Sophistication in the Philippines

Norio Usui

Senior Country Economist, Philippines Country Office

The Wallace Business Forum2 August, 2012

What you need to know…

Presentation

I. Assessment

How can we assess the past growth and development pattern of the Philippine economy and its implications on inclusive growth?

II. Policy Options

What can we do to increase the potential growth rate to 7-8% and make growth more inclusive?

I. Assessment

GDP growth in the past 5 decades(annual average, %)

1960s 1970s 1980s 1990s 2000s0

1

2

3

4

5

6

7

4.9

5.9

1.7

2.9

4.8

Solid growth over the 2000s

Recent economic situationReturning to the potential growth rate?

PDP target: 7-8%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-4

-2

0

2

4

6

8

10

1.1

7.6

3.9

Potential growth (HP Filter) Actual growth

%

Let it be….

Let it be, let it beLet it be, let it beThere will be an answerLet it be

Let it be, let it beLet it be, let it beWhisper words of wisdomLet it be

A Policy Option

I don’t think so. Why?

Structural weaknesses

– Weak link between growth and development

– Rising growth and declining investment

– Limited diversification of exports

Long-term development puzzle

Growth and Structural Change The two sides of a coin

Growth

is not just more of the same

“A growth miracle sustained for a period of decades...must involve the continual introduction of new goods, not merely continual learning on a fixed set of goods”

(Robert Lucas)

Structural Change

is about the transformation of the economy by:

transferring resources from less productive activities to more productive ones

1. Diversifying production 2. Upgrading production3. Increasing labor productivity

INO MAL PHI THA0

20

40

60

80

100

50.1 49.4

26.3

48.3

38.5 43.5

66.6

43.2

11.4 7.2 7.1 8.6

Industry Services Agriculture

Your growth has depended more on services

% Contribution to GDP Growth: 1980-2008

0

1,500

3,000

4,500

6,000

7,500

0

2,500

5,000

7,500

10,000

12,500

Indonesia Philippines Thailand Malaysia Viet Nam

Economy-wide labor productivity1980-2009

Constant 2000 $

MAL(RHS)

THA

INO

PHI

VIE

Which sector is more productive in your economy?

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0

2,000

4,000

6,000

8,000

10,000

12,000

Agriculture Industry Service Manufacturing

Where did your labor move?

0

2,000

4,000

6,000

8,000

10,000

12,000

Agriculture Industry Services Manufacturing

0

2,000

4,000

6,000

8,000

10,000

12,000

Agriculture Industry Services Manufacturing

0

10

20

30

40

50

60

70

80

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

0

10

20

30

40

50

60

70

80

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Employment by sector

Labor productivity by sector

Decomposition of labor productivity growth1980 – 2009

Indonesia Malaysia Philippines Thailand-50

0

50

100

150

200

9.0-2.2 -10.7

8.4

61.054.0

-3.8

90.9

37.2 62.8

24.9

76.7

Agriculture Industry Services

Indonesia Malaysia Philippines Thailand-50

0

50

100

150

200

71.3

105.6

-1.8

77.8

35.8

9.0

12.2

98.2

Sectoral productivity growthStructural transfromation

Growing business process outsourcing

2004 2005 2006 2007 2008 20090

2,000

4,000

6,000

8,000

10,000

0

4

8

12

16

20

5,288

7,717

Contact Center

Transcription

Animation

Software Development

Other BPOs

% of total export of goods & services (RHS)

2004 2005 2006 2007 2008 20090

100,000

200,000

300,000

400,000

500,000

0.0

0.4

0.8

1.2

1.6

2.0

355,135

444,811

Contact Center Transcription

Animation Software Development

Other BPOs % of total labor force (RHS)

Export (million $) Employment (persons)

Further increasing population

0

10

20

30

40

50

60

70

80

90

100

26.0

94.9

23.7

38.7

Population, total Labor force, total

60s 70s 80s 90s 00s0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

3.15

2.872.73

2.29

1.89

2.70

2.26

Population Labor force

(million) (average annual %)

Country

Capabilities

Products

“Lego” and Development

Distance between products

Nearby

Far away

How products are linked each other?

Ricardo’s MetaphorMonkeys in a ForestCan I jump to the distant

tree?...No!But, I can jump to the near one.

oil

fishing

agriculturetropical

garments

metallurgy

textiles

agricultureanimal

machineries

fruits

cereals

vehicles

electronics

chemicals

mining

productsforest

Product Space(Hidalgo et al. 2007)

Core-Periphery structure, with some ‘clusters’

THA 1965

RCA≥1

THA 1975

THA 1985

THA 1995

THA 2005

THA 2008

PHL 1965

RCA≥1

PHL 1975

PHL 1985

PHL 1995

PHL 2005

PHL 2008

Assessment- Summing up -

• The past growth has been largely led by services• Lagged growth is rooted in persistent productivity growth

deficit due to stagnant industrialization, in particular lack of product diversification

• Limited job opportunities resulted in the slow poverty reduction

• The service-led growth did not require a relatively high investment

• Booming BPOs create jobs, but its impact is limited given the scale of utilized workforce, and its bias toward educated labor

• To join the growth club in the region and translate the growth into inclusive one, the country needs to “walk on two legs” both in industry and modern services