Sec. Dominguez and rebooting the economy

Old timers like to talk about the good old days. It was 55 years ago when the Philippines was the second most advanced Asian country in terms of industrial sophistication, agricultural development and complexity in the services sector. We had one of the wealthiest societies in the region whose quality of life was better than most.

What happened next is a story of tragedy. During Marcos’ 21-year reign, the despot systematically broke down our industrial sector (our steel, auto and electronics industries, among others) by sequestering or nationalizing them; he broke down our progressive and equitable agriculture system by consolidating them into monopolies, controlled by his cronies; he retarded infrastructure development by prioritizing kickbacks over cost-efficiency and workability; he broke our financial system by amassing debts with abandon without viable projects to back it up; Worst of all, he destroyed our institutions by perpetuating a culture of corruption and patronage politics.

While our neighbors rallied in economic and social development in the ’80s and ’90s, the Philippines was saddled by having to rebuild its democracy, institutions and industries. Many mistakes were made along the way including the flawed local government code, the comprehensive agrarian reform law, EPIRA and the prohibitive economic laws of the Constitution. But mistakes are par for the course. Suffice it to say that Marcos set us back by 30 years. Much of our social ills today like poverty and corruption find their roots in Marcos’ reign of corrupt terror.

It was only in the 2010 that the country finally turned the corner. Through a policy of good governance, the Philippines posted an average of 6.3 percent GDP growth from 2010 to 2019. Only then did infrastructure modernize. Foreign debts became increasingly manageable and our financial position became stronger, thanks to fiscal prudence. Investors came and new industries began to flourish (BPO’s and Fintech). Labor productivity began to rise along with the overall competitiveness. The world began to notice and recognized the Philippines as a rising star. Three decades after Marcos’ ouster, the Philippines found its legs again.

In 2015, the NEDA outlined our national vision in a program called “AmBisyon Natin 2040.” The vision is to be an industrial economy with a middle class society and zero incidences of poverty by the year 2040. Per capita income must triple from some $4,000 today to $13,000.

To achieve our 20-year goal requires the economy to grow by 7 percent a year for two decades. If we fall short and grow by only 6 percent a year, we will only attain per capita income of $10,000.

Unfortunately, our economy is not structured in a way that allows 7 percent growth. This is due to a number of reasons, among them is that 25 percent of our population are still involved in subsistence agriculture which is the least productive sector of the economy; 23 percent are involved in low income services (domestic helpers, waiters, etc.), the second least productive sector; We have an economy driven by consumer demand and government spending, not by production; Our manufacturing base is dangerously thin and lacks sophistication; Our export of goods and services cannot support our imports.

The economy has already been growing above its potential growth (or capacity to grow) from 2013 to 2016 such that growth has been on a path of steady deceleration since 2016. The only way to reverse the trend is to restructure the economy. To keep it in its current structure will result in lackluster growth and a further widening of our current account deficit. The Philippines will be stuck as a middle income society.

What I appreciate about Finance Secretary Sonny Dominguez is that he maintains a pragmatic view of the economy and is aware that we need to restructure. Before the ECQ, I was told that Sec. Dominguez was already contemplating the parameters of our economic re-engineering. His foresight is remarkable and akin to the most astute world leaders.

Last week, chief economist of the Asian Development Bank, Jesús Felipe, addressed us at the Spanish Chamber of Commerce. Jesús is a good friend and renowned economist, author and thinker. In his talk, he provided the prescriptions for us to realize our national ambition.

Mr. Felipe’s prescribed four structural changes: The first is to migrate the millions of low income workers in the agricultural, hospitality and retail sectors to more sophisticated jobs in the manufacturing or technical services sector; The second is a natural offshoot of the first, which is to shift from being an economy driven on consumption and government spending to one that is led by production. The third is to diversify the economy from one that is a competent producer of approximately 500 products today to 2,000 products, like South Korea. The fourth is to climb the value chain where Philippine-made products become more technologically complex, unique and renowned for quality.

Mr. Felipe’s prescriptions point to rapid industrialization, which I am completely and absolutely in agreement with. I have written about this many times before. It is a necessity if we want to generate wealth.

From a specialist in electronics and BPOs, the Philippines must expand its range of expertise to pharmaceutical manufacturing, industrial machineries, aerospace parts, and the like. We must establish our industrial backbone in chemicals, iron and steel, artificial resins and plastic materials.

Conglomerates like Ayala and San Miguel must take the lead in our drive toward becoming a complex industrial economy since they have the capital and expertise to do so. Government must extend all the support possible. This is a tried and proven model exemplified by the zaibatsus in Japan and chaebols in Korea.

The process of industrialization is neither easy nor quick but must be done. A national policy of industrialization must be put in place and adopted by three presidents after President Duterte.

The overarching national policy toward industrialization should guide policy makers in the reforms it undertakes. If achieving the national policy requires tax reforms, amendments of the Constitution, amendments of CARL and EPIRA, then so be it. We must do whatever it takes to adopt new technologies, generate investments, increase productivity and improve work practices.

Only when the economy is complex enough to design, produce and export high quality goods will wages rise across the board. Only then will a restaurant waiter earn P60,000 a month.

After the wreckage of Marcos, the Philippines is finally in a place to make the great leap forward. Now that we are restarting the economy after the COVID crisis, the timing could not be better to reboot it toward a high growth path. Sec Dominguez’ plan is on point.