Accelerating Inclusive Growth and Competitiveness through the AEC: Focus on the Manufacturing Sector

Josef T. Yap 15 November 2013

Background

Lack of Economic Transformation

1980 1990 2000 2006 2011China 43.9 36.5 40.4 32.9 32.2Indonesia 13.5 23.0 27.7 27.5 24.3Malaysia 21.6 22.7 29.9 28.8 24.6Philippines 27.7 26.8 24.5 23.6 21.1Thailand 21.5 24.9 33.6 35.0 29.9Viet Nam 16.1 12.3 18.6 21.2 19.4Source: UN Statistics Division [http://unstats.un.org/unsd/dnlList.asp; accessed, 6 October 2013]

Share of Manufacturing in GDP (%)

Comparing Per Capita GDP

1960 1980 1984 2012Hongkong, China 2,968 10,325 12,696 32,742Indonesia 201 556 646 1,732Korea, Republic of 1,154 4,270 5,498 21,562Malaysia 813 2,318 2,713 6,765Philippines 692 1,109 1,005 1,501Singapore 2,251 9,645 11,951 33,989Thailand 321 882 1,018 3,353Source: World Bank's World Development Indicators, accessed on 7 October 2013

Table 1: Per Capita GDP (in constant 2005 USD)

Note: 1960 data are in constant 2000 prices and were accessed on 15 August 2012

Main Outcome: Poverty Situation in PH is dismal

Role of Regional Production Networks

Structure of Regional Production and Distribution Networks

Regional Economic Integration

Regional Production Networks

Manufacturing Sector

FDI

Regional Integration Anchored on Regional Production Networks

Region 1990 1995 2000 2005 2008 2009 2010

Japan 5.2 13.6 22.0 34.3 45.0 37.1 47.9

China 5.6 19.2 28.9 85.2 118.6 115.7 161.9

ASEAN 4 15.8 47.5 54.6 67.9 82.7 69.6 95.9 S.Korea+Taipei,Ch

ina 13.2 31.8 41.7 59.2 74.0 64.2 86.1

Value of Intermediate Goods Imports of Individual East Asian Countries and Regions from East Asia as a Whole (Billions of U.S.

Dollars)

0

40

80

120

160

200

84 86 88 90 92 94 96 98 00 02 04 06 08 10

Intermediate Goods Exports from East Asia as a Whole to Individual Countries or Regions.

Billi

ons o

f US

Dolla

rs

China

ASEAN

South Korea& Taipei,China

Japan

Note: ASEAN includes Malaysia, the Philippines, Singapore, and Thailand.Source: CEPII-CHELEM Database

Source: W. Thorbecke “Exchange Rates and Trade in East Asia”

Source: Cheewatrakoolpong, Sabhasri, and Bunditwattanawong (2013)

…Largely through FDI

1990 2000 2010 2012Indonesia 8,732 25,060 154,158 205,656Malaysia 10,318 52,747 101,510 132,400Philippines 4,528 18,156 26,319 31,027Singapore 30,468 110,570 461,417 682,396Thailand 8,242 29,915 137,191 159,125Viet Nam 1,650 20,596 65,348 72,530China 20,691 193,348 587,817 832,882Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics), accessed on 6 October 2013

FDI Inward Stock (million US$), ASEAN and ChinaFDI inward stock (million US$)

PH export performance has lagged behind that of other EA economies

1995 2000 2005 2012Japan 441,538 479,323 595,697 798,937Korea 125,058 172,268 284,419 547,870Indonesia 45,418 62,124 85,660 190,032Taipei, China 111,405 151,458 198,168 300,533Philippines 17,447 38,078 41,255 51,995Malaysia 73,865 98,229 141,595 227,334Thailand 56,444 69,152 110,360 228,141China 148,780 249,203 761,953 2,048,900Hongkong 173,753 201,855 289,325 442,775Viet Nam 5,449 14,483 32,447 114,573Source: ADB Key Indicators for Asia and the Pacific 2013

Export of Goods and Services (in million US dollars)

a. FDI vs. GVC participation

b. GVC participation growth vs. GDP per capita growth

Main argument: A more dynamic manufacturing sector would have provided more higher-paying jobs to the

less-educated workforce, thereby making poverty reduction faster and economic growth more inclusive.

Policy Options for Inclusive Growth

• AEC is an opportunity to attract more FDI• AEC will generate regional public goods,

especially in infrastructure• Comprehensive Roadmap for Industry:

address horizontal and vertical constraints, coordination failure

• Emphasis on facilitating involvement of SMEs in regional production networks

Opportunities & constraints

• 6.6% 2012; 7.6% H1; economic outlook remains positive; a new growth area, capitalize on this to attract FDI

• To sustain high growth, take advantage of market opportunities from a bigger market AEC 2015 transform & upgrade manufacturing

Strengths Weaknesses• Good macroeconomic environment• Political stability: “Daang Matuwid”• Young, trainable, English speaking

workers• Export zones’ legal framework,

incentives

• Power cost• Inadequate infrastructure• Governance: smuggling• Weak industry

competitiveness

Opportunities Threats• Calamities in Thailand & Japan

disrupted supply chain driving investors to seek alternative locations

• Rising labor cost in China & increasing tension between Japan & China

• ASEAN, FTAs: market of over 600 million; regional production networks

• Strong peso• Global uncertainty,

economic slowdown in the developed world

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Potential Growth areas: Nearby

Source: Usui, N. 2012. Taking the Right road to Inclusive Growth. ADB. Manila.

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• Can be developed with relative ease, can utilize existing capabilities (inputs, institutional/infrastructure, skills, technology) embedded in the current export structure

Criteria Leamer Nearby: Detailed Commodity Group (SITC 4 digit)

Highest level sophisticationHighest spillover effect

Machinery

Complete digital processing machines; watches; photographic cameras; TV, radio-broadcasting, transmitters; clocks; electrical line telephonic; portable radio receivers; microphones; calculating, accounting machines; sewing machines; domestic electromechanical appliances & parts

Capital Fabrics, woven of continuous synthetic textile materialsLabor Precious jewelry; porcelain or china house ware; pianos

Animal Fish, dried, smoked; fish fillets frozenAgriculture

Refined sugar

Cereal Flours & meals, of meat , fishHighest labor intensity

Labor Synthetic or reconstructed precious or semi-precious stones; pianos; pens; small wares & toilet articles; precious jewelry; porcelain

Capital Knitted not elastic nor rubberized of fibers other than synthetic; Fabrics, woven of continuous synthetic textile materials

Machinery

Clocks; watches; photographic cameras; sewing machines

Constraints to GrowthMajor Area Main Issues & ConstraintsInfrastructure & Logistics

High cost & unpredictability of powerHigh cost of domestic shipping

Governance & Regulation

Smuggling, corruption, bureaucracy & red tapeLack of streamlining/automation of business procedures

MSME development

Access to finance, technology, inability to comply with standards

Innovation Lack of innovationHRD Lack of skilled workersSupply chain gaps

Absence of upstream/downstream industries; weak parts & components sector high cost of raw materials

Domestic & export expansion

Lack of scale economies due to shrinking domestic base• Liberalization competition reduce firm survival

• Crucial factors in a liberalized & highly competitive market: productivity, export-orientation, foreign equity, firm size

• How to address challenges & take advantage of opportunities arising from AEC transform & upgrade manufacturing

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Roadmap for structural transformationVision: globally competitive manufacturing industry

-Rebuild capacity of existing industries, strengthen emerging industries, maintain competitiveness of comparative advantage industries

-Deepen participation in regional integration by serving as hubs in production networks for industries like auto, electronics, machinery, garments, food

-Shift to high value added activities,investments in upstream industries -Link & integrate industries--crucial industrial linkages bet. SMEs & LEs to set off a chain reaction of broad based industrial development

Phase I 2014-201

Phase II 2019-2023

Phase III 2024-2028

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Targets, Strategic actions, complementary measures

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30% value added; 15%

employment

Horizontal measures

Coordination

mechanism

Vertical measures

• Close supply chain gaps access to raw materials:

food furniture, garments integration mechanism:

copper, iron & steel, chemicals

• Expand domestic market & exports

automotive & shipping

• HRD• SME development• Technology upgrading,

innovation• Power, smuggling,

logistics & infrastructure

• Investment promotion• Competitive exchange

rate

open trade regime, sustainable macro policies, sound tax policies & administration, efficient bureaucracy, secure property rights

Industrial Upgrading & Transformation • CRITERIA for Industry Support

Strong potential to generate employment Address missing gaps & linkages & spill-over effects Level of product sophistication; Competitive market environment

• INDUSTRIES: Automotive, motorcycle, shipbuilding, chemicals & allied industries, electronics & electrical appliances, food/agri-business, garments, textiles, copper, pulp & paper, rubber, furniture, jewelry, iron & steel

• HORIZONTAL Programs to directly improve productivity Cluster-based intervention: increase supply of skilled workers,

encourage technology adoption, improve regulation & infrastructure

• HORIZONTAL Programs to address coordination failures Implementation of legislations; strict enforcement of product

quality standards; provide access to raw materials, intermediate inputs & common service facilities, R&D facilities; aggressive investment promotion & marketing to attract investment; trainings, business & academe linkages

• VERTICAL Program to attract investment in “middle” & “far-away” Temporary fiscal incentives to auto, ship-building, iron & steel

• COORDINATION MECHANISM Industry councils/institutes: Auto, chemicals, garments & textiles, electronics, food,

motorcycle, shipbuilding, iron & steel, copper, SME Institute

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Step (2): Upgrading (more difficult but not impossible)

1. Upgrading in industry structure

Plugging into GVCs↓

Rising wages due to the absorption of surplus labor ↓

Necessity of upgrading and diversification in industry structure(otherwise you will be caught in the “middle-income trap”)

Upgrading in industry structure Resource and labor intensive industry → capital and technology intensive industry

Policy measures to upgrade industry structuree.g. More emphasis on tertiary education, Technological cluster development, promotion and attraction of FDI in R&D

2. Industry cluster development Attract more assemblers (FDI)→　More induced demand for parts and components (through the “backward linkage effects”)

Policy measures to support local SMEse.g. match-making, credit scheme, technology assistance, skills training, certification scheme

Policy measures to attract foreign supplierse.g. tax incentives, industrial estates for SMEs

3. Upgrading along GVCs I. Process upgradingII. Product upgradingIII. Functional upgradingIV. Chain upgrading

Government CoordinationAgency Area DOLE policies on hiring & firing; new, high

productivity jobs DOST innovation strategy, R&D, common facilities for

product testing & certification, incubation NEDA Philippine Development plan, policy

coordination esp. coherent trade & industrial policies, exchange rate

DA Agriculture roadmapsBOC smuggling, trade & customs facilitationTESDA, DOLE, PRC training of workers, skilled workers needed

(supply gap)Tariff Commission tariff distortions, anti-dumping & safeguard

measures DOF, DBM budget, temporary incentive measuresBOI, PEZA, Clark, Subic

Investment promotion

DTI-MSMED, DOST MSME developmentLGUs business permits & regulations (double taxation)DOE energy plan, policy implementation (B5

biodiesel)PPA, MARINA regulatory & port charges & domestic shipping,

RA 9295DENR environmental permits, plantations

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