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Industrial Policy in Philippines

The Philippines is a newly industrialized economy whose exports are one of the key drivers of growth. Its GDP is 1.5 trillion pesos, which is the fourth largest in Southeast Asia. Philippines' GDP is accounted by 50% service sector, 33% industry sector and 17% agriculture sector.

Philippines' key economic activities are business process outsourcing (BPO), food processing, textiles and garments, and manufacturing of electronics. During the 2008-2009 recession, Philippines was one of the few countries with positive economic growth. Philippines exports continued to increase throughout 2010-2014. Although US and Japan are the main largest export markets, China, Hong Kong, Germany, Netherlands, France, South Korea, India and ASEAN are also slowly inching towards being key export markets.

Impact on Philippines' Economy from 1950s to 1990s

The Philippines adopted industrialization policy of import substitution when import and foreign exchange controls were imposed in response to a balance-of-payments (BOP) crisis in 1949. An over-valued currency, protective tariffs and quantitative import restriction were the main ways that import substitution was materialized. Further, in 1950s, the Philippines government established import substitution policies to control the manufacturing sector. This led to increase in Foreign Direct Investment in Philippines by United States. Philippines maintained its exchange rate with the US dollar to seek reconstruction assistance from the United Stated in terms of imports. Hence, the aid inflow from the United States offset the negative balance of trade in Philippines. Moreover, import restriction stimulated the manufacturing sector and import controls led to the substitution of domestic production for imports of textiles, paper and paper products, and nonmetallic mineral products. Manufacturing net Domestic product (NDP) grew at 12 % per annum and the GNP was growing at 7.7% per year. However, in the late 1950s, the GNP growth fell to 4.9% as the allocation of foreign exchange was feeding the corrupt leaders. Lastly, the exports didn't meet imports demanded as import demand outpaced exports, which disturbed the balance of payments.

Late 1960s, Philippines faced economic and political turmoil. Renewals of Balance of payments (BOP) difficulties lead to crisis in 1969. Economic growth remained sluggish, particularly in the manufacturing sector, and the country failed to develop significant new export industries as it was overwhelmingly dependent on commodities, coconut products, sugar, forest products, copper, and gold-for its export earning. To combat BOP difficulties, the government implemented Republic ACT 5186 and Export Incentives Act of 1970 to encourage foreign investment. Investments in pioneer industries were allowed to be 100% foreign-owned whereas; only 40% of non-pioneer industries were allowed to be foreign-owned. The ownership requirements were relaxed if foreign industries chose to engage in a pioneer activity/industry. Various fiscal incentives such as accelerated depreciation, tax exemption on imported capital equipment and exemption from all revenue taxes except income tax was offered. Furthermore, in 1970s, the government encouraged non-traditional exports to boost its development. However, this didn't result in what was expected. The growth of non-traditional exports lead to only few commodities like garments and semi-conductor devices becoming highly concentrated. On top of that, these non-traditional exports heavily relied on imported raw material inputs. Additionally, non-tariff barriers were implemented in the country to protect industries like textiles, basic metals, and fabrics. The devaluation of the peso (P3.90 to a dollar) and decrease in import controls, traditional exports of agriculture and mineral products resulted in manufacturing growth rate to decrease. Subsequently, there was an increase in product competition from abroad at the same time as import costs increased. After the promulgation of the renewed Export Incentives Act, the manufacturing recovered slightly. The manufacturing growth rate increased from 5.9% to 6.1% per year and the output growth in manufacturing hit peak in 1977. The Philippine export growth rate was also respectable as it was 8.6% per annum. However, the GNP remained 4.9%. The growth of agriculture decreased as well. During this period, the country's extern al indebtedness increased greatly as a result of the two oil price shocks and the heavy borrowing from the easily available recycled petrodollars. Government's effort to liberalize economy was largely unsuccessful because movements to reduce tariffs met stiff resistance from industrialists.

Due to the increase in the oil prices, the debt service burden increased, exports declined, and economic growth rate decreased in the Philippines in 1980s. During this period, Marcos, one of the most corrupt leaders in the world, became the president of Philippines. Under Marco's government, Philippines adopted trade liberalization program under a World Bank structural adjustment loan to consolidate the incentive measures to investment and exports. However, the result was disappointing. Exports did not increase substantially whereas the imports increase dramatically. The debt-service payments were increasing as well. The government embarked on a program that focused on removing tariff rates and quantitative restrictions over a period of 5 years. Hence, the Omnibus Investments code of 1981 was implemented. This basically accelerate the cheapening of capital and hence, depreciation accelerated. Philippine economy faced recession during this period as GNP grew at only about 1.8% and approximately 50% of the population lived below the poverty line. Unemployment was 8.3% and 12.3% in urban areas. Further, 470,000 Filipinos left the country to work abroad which led to increasing source of foreign exchange earning in late 1980s. After 1986, during which the military coup overthrew Marcos and Corazon Aquino became the new president, import liberalization program was resumed. The old code was simplified and amended. The amendments included simplified and progressive income taxes, revised investment incentives and imposed luxury taxes. However, none of these improvements lead to a considerable growth in the economy especially due to the BOP crisis. Lack of specialization and relatively small market led to higher production costs and lower quality especially in the textile sector. The domestic output provided more than 40 - 70 % of domestic supply in industries such as food, textiles, machinery etc. For instance, Philippine textile plants that were unspecialized were designed to serve the full range of domestic market demand. This lead to high production costs, low quality of products and higher fault rates. A lot of infant industries had to shut down.

Foreign Investment ACT was implemented in 1991 in order to allow the foreign equity participation to be 100% in a lot of sectors and be transparent about which foreign investments were allowed or restricted. It also helped decrease bureaucratic discretion such as the need to obtain prior government approval if the foreign equity participation was higher than 40%. Furthermore, the maximum tariff rate was reduced. The tariff tier ranged from 0% on raw materials to 50% for finished products. Due to this, external debt was brought to more manageable levels. GNP grew at a rate of 7.2% and GDP at 5.2%. However, these policies did not result in phenomenal economic growth either due to graft involved. Some agriculture tariffs were maintained at the maximum level permitted by World Trade Organization and hence, agriculture productivity remained low. The service sector grew during this period. By 1990, approximately 40% of the population works in the service sector. Services accounted for 44% of GNP. Further, the peso depreciated to P40.89 per U.S. dollar from its previous rate of P29.47 to a dollar and debt increased. The debt reached P2.1 trillion. Moreover, reduced cost of capital encouraged the substitution of capital for labor. Hence, by 1996, 5 million new workers joined the labor force in Philippines. In 2011, the export concentration index was 0.245 for Philippines, which means that there was very low concentration of exports. The share of manufactures was 21.04%. In conclusion, Philippines pursued industrial policy that encouraged import substitution rather than promoting exports that penalized the primary and agriculture sector and benefitted that manufacturing sector. Although many believe that diverting resources away from agriculture and toward import-substituting manufacturing discouraged investment in agriculture, which led to disastrous effect on productivity overall, Philippines actually had a head start in manufacturing compared to its neighbors. Yet, Philippines did not industrialize fully. The share of manufacturing to GDP has stagnated at around 25 percent since the 1960s. The share of manufacturing employment to total employment hardly rose above 10 percent. Asian Development Bank iterates that "Philippines "missed" a crucial step in the structural transformation process: the rise of manufacturing and the associated successful job creation in urban areas.

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