Strengthening the Philippines Social Capacity for Trade and Investment

Transcription

1 Strengthening the Philippines Social Capacity for Trade and Investment Eric C. Batalla, PhD Associate Professor De La Salle University 24 th COE Seminar IDEC Hiroshima University 14 February 26 Objectives Determine opportunities for strengthening the Philippines social capacity for expanded trade and investment Review certain historical and contemporary economic conditions of the Philippines Examine Japan s role in and impact on historical Philippine trade and economic conditions Discuss empirical relationships, particulary the effects of ODA, FDI, and trade on productivity, savings, and income Provide recommendations for international cooperation policy (trade, ODA, and FDI)

2 Framework and Methodology Use of the Actor-Factor Matrix framework (Matsuoka et al) and Historical Analysis Determine trends as well as strengths and weaknesses of actors within each broad factor Based on statistics and existing studies, provide a sample of historical and benchmark indicators of strengths and weaknesses in 1) policy, 2) human resource & organization, as well as 3) knowledge, information and technology. Actor-Factor Matrix in SCA Framework (Matsuoka et al, 25) Sector Policy & Measure Human Resources and Organization Knowledge, Information, & Technology Government Firms Citizens G:F G:C F:C

3 Presentation Outline Brief introduction to relevant features of Philippine economic structure and performance Review of trade capacity and performance Economic relations between Japan and the Philippines An Introduction Structure and Performance

4 Brief introduction of the Philippines 7,1 islands lying between the South China Sea in the west and the Pacific Ocean in the east A former colony of Spain and the United States; 24 GDP of US$86 billion Current population of over 81 million, of mixed races but predominantly of Malay-Indonesian- Polynesian stock Economic Trends since 195 A low middle-income economy (per capita GNI of US$1,8) Moderate economic growth averaging 4.4% a year Population growth averaging 2.7 a year Based on rule of 7, per capita income would double in 41 years (assuming constant growth rates in income and population) => not acceptable

5 Some Structural Changes in the Economy Shift of concentration of GVA and employment away from the primary sector Increase in skilled labor Foreign trade has also shifted away from the primary sector to assembled goods, intermediate inputs, and light manufacturing. High share of foreign trade to GDP Overseas labor remittances relieving foreign exchange and liquidity problems (more than US$1 billion in 25) Production Structure Gross Value Added Shares Period Agriculture Industry Manufacturing Services Source: Table 2, Coraroton (24)

6 Employment Structure Employment Share Quality of Labor (%) Period Agriculture Industry Manufacturing Services Unskilled Skilled Source: Table 3, Coraroton (24) Shares of Principal Exports of the Philippines, by commodity, Commodity Group Consumer Manufactures (garments, houseware, etc) Food and Food Preparations (sugar) Resource-Based Products (coconut, timber, minerals, etc.) Industrial Manufactures (electronics, machinery) Total Share of Principal Exports Total Exports Sources: Annual Report of the Insular Collector of Customs (1928, 1938); Baldwin (1975), Lamberte et al (1989), NSO, BETP

7 7% Ratio of Exports and Imports to GDP, % Exports: GDP Ratio Imports: GDP ratio 5% 4% 3% 2% 1% % Number of Deployed Workers and Amount of Remittances Number of Deployed Workers Amount of Remittances (in million US$) 1,, 9 9, Number of Deployed Amount Remitted (million US$) 8 8, 7 7, 6 6, 5, 4, 5 4 3, 3 2, 2 1,

8 Structural and Persistent Problems Chronic fiscal deficits Chronic trade deficits Large debt-service outlays Large informal sector, 94% of total private employment of 31.6 million (Batalla, 25) Slow capital formation Fiscal Surplus/Deficit as % of GDP, % 1% % % -2% -3% -4% -5% -6%

9 Million Pesos National Government Debt Service Payments, , 14% 6, Total NG Debt Service Payments NG Debt Service as % of GDP 12% 5, 1% 4, 8% 3, 6% 2, 4% 1, 2% % billion pesos Capital Formation,

10 Trade Capacity Support Development and Performance Policy history, outcomes, perennial challenges Trade Capacity Support Development Historical background of government policy and administration with respect to trade and investment Use of the Actor-Factor matrix

11 Actor-Factor Matrix:Trade and Investment (Matsuoka et al, 25) Sector Policy & Measure Human Resources and Organization Knowledge, Information, & Technology Government Firms Citizens G:F G:C F:C Some Instruments of Trade Protection, Foreign Exchange Control Import Quotas Import Bans High Tariffs Export Taxes

12 Trade Policy Regimes Period of high restriction, (some temporary relaxing during the period, e.g., exchange controls, import quotas) Liberalization Period (1981-present) Tariff reform program (TRP I) Import Liberalization program E.O. 47 (TRP II) 1992 Foreign Exchange Deregulation 1996-present, TRP III and IV (E.O. 264, et al) 2 Retail Trade Liberalization Act Trade Liberalization Tariff Reform Program I reduction of tariff band from 1%-1% to 1%-5% Import Liberalization program lifting of import licensing requirements and import bans E.O 47 (July 1991) further reduction of tariffs within 3% and 3% range TRP III and IV- reduction of tariff band to 3%-1% range and %-5% range (except for sensitive agri products).

13 Investment Policy Regimes Investment Incentives Act of Omnibus Investment Code (BP391) 1987 Omnibus Investment Code (EO226) 1991 Foreign Investment Act Up to 1% foreign equity except those placed under Negative List 1998 Foreign Investments List Reduced items in Negative List Other Policies 197 Export Incentives Act Fiscal incentives for exporters 1992 Export Development Act 1994 Financial Liberalization

14 Fiscal Incentives for exporters Tax and duty exemptions for capital equipment, raw materials and supplies, organizational licenses Tax deductions of labor training expenses, organizational and operating expenses Tax credits on supplies and materials and domestic capital equipment Tax holidays for 6 years for pioneer industries, 4 years for non-pioneer industries, and 3 years for expansion firms. Special 5% tax on gross income in lieu of national and local taxes Others in 1987 OIC Human Resources and Organization Assistance to Exporters by DTI and attached agencies Trade fairs and expos (CITEM) Finance (DBP, LBP, etc.) Information (One-stop centers, EXPONET, DTI Tradeline, etc.) Training (4 including PTTC.) Production (various) Fiscal incentives administration by DTI particularly BOI and PEZA

15 Knowledge and Technology Online information on trade and investment and other government matters (trade statistics, policies and procedures, organization, market profiles, product profiles, etc.) Various training programs (e.g., PTTC) Capacity Development Systems and Effects The 198s saw the development of a system for trade capacity development Trade Performance in 199s suggests that the system worked Effects of Change in Policy and Administration Change in the slope of Philippine trade performance Increase share to GDP

16 Long-term Trend in Trade, Million US$ 8, 7, Total Value of Philippine Trade and Exports, Exports Total Foreign Trade 6, Tariff Reform III 5, 4, 3, Primary Commodities Export Dependence 2, Structural Adjustment Start of Trade Liberalization 1, Start of Protection Era In Million US$ FOB 45, 4, Value of P hilippine Exports and Imports, Expor ts Impor ts 35, 3, 25, 2, 15, 1, 5, r 24

17 Revealed Comparative Advantages (RCA) Before as producer of certain agricultural and resource-based commodities Later as subcontractor of garments and electronic products Then, as assembler of industrial goods, particularly electronic components and consumer electronics Specialization Index (Intracen)

18 Constraints to Trade and Investment Salazar et al (1986) Lamberte et al (23) study World Bank study on Doing Business in 25 Salazar et al (1986) May-October 1984 survey reveals SME availment of fiscal incentives from NACIDA and BOI 3% of 23 respondents availed of fiscal incentives; 65% availed of financial assistance from informal and formal sources Among other findings, availment of fiscal incentives is 1) characterized by red tape and 2) costly. Access to short-term loans is relatively easier than long-term borrowings

19 Expenses incurred Entrepreneurs incurred an average of P1,883 when they applied for NACIDA or BOI incentives. The figure seems high because the maximum amount charged as NACIDA registration fee is P3 only. Expenses incurred for project study preparation made up the bulk of total average expenditure. Salazar et al (1986:136) Willingness to avail of Incentives in the Future (Salazar et al, 1986) The majority (59%) gave positive responses provided that: Red tape in applying for incentives is eliminated Respondents will learn of the promulgation of useful incentives Incentives will assure them of market prospects Incentives will serve agro-industries Incentives will provide real cost reduction in the firm s operation

20 Reasons for refusal to avail of incentives in the future (Salazar et al 1986) Forty-one per cent expressed refusal to avail of incentives for the following reasons: They do not want to get involved with government agencies because this entails more cost than benefits Availment would require too much red tape Government is not capable of helping SMEs considering its present predicament. Others Sources of SME Financing Sources of Investment/Year Own Investment Own savings Inheritance Profit re-investment Borrowings Formal sources Informal sources Subsequent investments No % to total (23) Source: Melito Salazar et al (1986), "Financial factors and small and medium enterprise development in the Philippines," in Kenneth James and Narongchai Akrasanee, Small and Medium Business Improvement in the ASEAN Region--Financial Factors, Singapore: ISEAS, p Initial investments No % to total (23)

21 Borrowers and Non-Borrowers by Source Respondents Number % Borrowers Formal Informal Combination Non-Borrowers Source: Salazar et al 1986: 123 Sources of Additional Cash Respondents Number % From Banks From Relatives From Friends From Money-Lenders Customer Advances Assignment of receivables Source: Salazar et al 125

22 Some Opportunities Opportunities to improve the delivery of government fiscal incentives Opportunities for long-term financial assistance to SMEs Benchmarking using World Bank study (25) Doing Business in 25 Survey conducted in January 24 Starting a Business, Registering Property, Protecting Investors, Closing a Business, Getting Credit, Hiring and Firing workers

23 Starting a Business (January 24) Country Number of procedures Time (days) Cost (% of income per capita) Minimum capital (% of income per capita) Indonesia Japan South Korea Malaysia Philippines Singapore Thailand United States Vietnam Source: World Bank, Doing Business in 25, pp Hiring and Firing Workers Country Difficulty of hiring index ( 1) Rigidity of Hours index ( 1) Difficulty of firing index ( 1) Rigidity of employment index ( 1) Firing Costs (weeks) Indonesia Japan South Korea Malaysia Philippines Singapore 4 Thailand United States Vietnam Source: World Bank, Doing Business in 25, pp 9-91

24 Registering Property Country Number of procedures Time (days) Cost (% of property value) Indonesia Japan South Korea Malaysia Philippines Singapore Thailand United States Vietnam Source: World Bank, Doing Business in 25, pp.93-4 Getting Credit Country Cost to create collateral (% of income per capita) Legal rights index ( 1) Credit information index ( 6) Public registry coverage (per 1, adults) Private bureau coverage (per 1, adults) Indonesia Japan South Korea Malaysia Philippines Singapore Thailand United States Vietnam Source: World Bank, Doing Business in 25, pp-93-4.

25 Investor Protection and Contract Enforcement Country Indonesia Japan South Korea Malaysia Philippines Singapore Thailand United States Vietnam Protecting Investors Disclosure Index ( 7) Enforcing Contracts Number of Time Cost procedures (days) (% of debt) Source: World Bank, Doing Business in 25, pp Lamberte et al (23) Major barrier to investment is cost of doing business (p. 14) Second highest cost of electricity in the region High transportation costs due to inefficiency and monopolies Poor infrastructure (low tax revenues + large portion of government budget to debt service; BOT impact is limited) Bureaucratic red tape and widespread corruption Peace and order as a stumbling block to investment in some parts of the country

26 Summary of Findings for Government Support Costly transactions: need to provide the physical infrastructural support as well as reduced costs of transactions with government Need for better policies and procedures in supporting business Also, need to tap large pool of manpower for entrepreneurship and labor Need for better knowledge and technology Need for more efficient, meritocratic, and professional personnel in government Summary of Findings for Business Sector Diversification of export commodities Need to improve business effectiveness of other industries aside from electronics and IT (e.g., food and resource-based manufactures) Need to diversify modern industries and invest in physical infrastructure to reduce costs of inputs Greater access to cheap credit for SMEs, perhaps through a more liberal financial system Improve working conditions and productivity incentives

27 Required improvements in government support for investment Reduce number of procedures, time, and costs incurred starting a business registering property Reduction in number of procedures, time, and cost incurred in enforcing contracts=>government and legal system Improve flexibility of working hours for workers=>labor laws and firm operations Reduce difficulty and costs of firing=>labor laws and administration In the business sector Need for more credit information agencies Banking system should lower costs of creating collateral when getting credit=>improvements in financial system Manufacturing and other companies should improve working conditions, including flexibility of working hours

28 Economic Relations between Japan and the Philippines Trade, FDI, ODA, productivity Philippine Exports to and Imports from Japan, , In Million US$ Exports Imports 7,5 5, 2, Sources: Annual Report of the Insular Collector of Customs, various issues from 199 to 1938; U.S. Department of Commerce and Labor, 197. The Commercial Philippines in 196, Washington: GPO, January. UNCTAD, Handbook of Statistics 25,

29 Share of Japan in Philippine Trade, % 4% 35% 3% 25% 2% 15% 1% 5% % Total Exports Total Imports US$ million 9 Amounts of Japanese FDI in the Philippines, Source: JETRO

30 Where J-FDI went Manufacturing share of J-FDI : 54.42% (Austria & Medalla, 1996) : 76.44% (Austria & Medalla, 1996) : 68% (based on MOF data) : 73% (based on MOF data) 2-4: 78% (based on MOF data) 1. Manufacturing and Non-manufacturing shares of J-FDI Flows in the Philippines, Non-Manuf act uring Tot al Manuf act uring Tot al

31 Japan s FDI in ASEAN-4, Cumulative Total Amounts in US$ millions Country Indonesia 8,389 15,499 4,61 28,124 Malaysia 1,11 7,249 2,25 1,499 Philippines 868 3,786 3,197 7,814 Thailand 728 1,983 6,375 18,69 Source: JETRO; MOF Japanese ODA to the Philippines In 199s, the Philippines as among top five recipients of J-ODA (OECD data). 51% of Total 21 ODA to Philippines comes from Japan (Embassy of Japan). Cumulative Grants : $3.5B Cumulative Loans, : $6.2B

32 9 Million $ J-ODA Disbursements By Type, Grants Loans Source: DAC Mapalad (2) study on J-ODA, Philippine savings and economy Savings not discouraged by ODA, i.e., ODA is not a substitute for savings in the Philippines where there are savings and foreign exchange gaps. Positive relationship between ODA and income growth, though impact is very small for the Philippines Still little impact on employment, poverty and income distribution

33 Comparison of the Impact of Japan's ODA in Selected Southeast Asian Countries (as percentage of actual values) Country Indonesia Malaysia Thailand Philippines Real Income Employment Note: For Indonesia, Malaysia, and Thailand, IDCJ, 1995 for ; for the Philippines, Mapalad Exports Imports Source: Table 9 of Mapalad, 2, p. 21 as cited in Tecson, 21, p.38. Amounts and Shares of ODA to ASEAN Recipient Country Indonesia Malaysia Philippines Thailand Total ASEAN 4 (Net Disbursements, Current US$ million) ODA from ODA from Japan Share of Japan All Donors Total ODA 16, , % 1, , % 9, , % 6, , % 33, , % Source: DAC

34 Trade, FDI, and Productivity Based on Coraroton (24), total factor productivity (TFP) from is determined by FDI, trade, manufacturing GVA share to GDP, and R & D. Price changes are not statistically significant Implication: business capacity for trade and investments may depend on productivity. However, productivity is also based on trade/demand conditions, investments, and other factors. Other opportunities: tariff reduction International Trade Center (Intracen- UNCTAD) identifies export potentials for the Philippines US is no. 1 trading partner Japan is no. 2

35 Philippine Exports to the US Sector Current Exports share in PHL 's exports of sector, % Relative Trade Potential Tariff applied by importer, % TOTAL 8,879, % 3. Predicted = Current or low values Electrical and electronic equipment 5,2, % 4. Untapped trade potential to 5% Textiles, clothing and leather 2,51, % 1. Very strong current trade (above predicted) 1 to 15% Food, beverages and tobacco 57, % 1. Very strong current trade (above predicted) to 5% Other manufacturing 344, % 2. Strong current trade (above predicted) to 5% Precision instruments 224, % 3. Predicted = Current or low values to 5% Motor vehicles and other transport equipment 124, % 5. High untapped trade potential to 5% Wood and wood products 7, % 2. Strong current trade (above predicted) to 5% Non-metallic mineral products 61, % 3. Predicted = Current or low values to 5% Chemicals and chemical products 53, % 3. Predicted = Current or low values to 5% Machinery and equipment 52, % 4. Untapped trade potential to 5% Agriculture and hunting 49, % 3. Predicted = Current or low values to 5% Metal and metal products 48, % 4. Untapped trade potential to 5% Rubber and plastic products 34, % 4. Untapped trade potential to 5% Forestry and Fishing (products) 34, % 2. Strong current trade (above predicted) to 5% Publishing, printing and reproduction of recorded media 12, % 3. Predicted = Current or low values to 5% Philippine Exports to Japan Sector Current Exports share in PHL 's exports of sector, % Relative Trade Potential Tariff applied by importer, % TOTAL 5,874, % 1. Very strong current trade (above predicted) Electrical and electronic equipment 4,16,6 15.3% 1. Very strong current trade (above predicted) to 5% Agriculture and hunting 333, % 1. Very strong current trade (above predicted) to 5% Motor vehicles and other transport equipment 227, % 1. Very strong current trade (above predicted) to 5% Precision instruments 184, % 1. Very strong current trade (above predicted) to 5% Food, beverages and tobacco 174, % 4. Untapped trade potential 5 to 1% Mining and quarrying 154, % 3. Predicted = Current or low values 5 to 1% Wood and wood products 145,72 4.4% 2. Strong current trade (above predicted) to 5% Machinery and equipment 123, % 1. Very strong current trade (above predicted) to 5% Textiles, clothing and leather 118, % 3. Predicted = Current or low values 2 to 25% Rubber and plastic products 96, % 1. Very strong current trade (above predicted) to 5% Other manufacturing 73, % 2. Strong current trade (above predicted) to 5% Metal and metal products 67, % 2. Strong current trade (above predicted) to 5% Coke, petroleum products and nuclear fuel 52, % 3. Predicted = Current or low values > 5% Chemicals and chemical products 32, % 3. Predicted = Current or low values to 5% Recycling 29, % 3. Predicted = Current or low values to 5%

36 Implication of Intracen data Tariffs limit trade capacity (real and potential) Examine export commodities that are untapped or have weak trade values Derived premises to support international cooperation policy Recently, productivity and capacity for export trade depend much on exportoriented investments and trade conditions Increased investments and trade depend on costs of doing business (tariffs and duties included) as well as relative specializations

37 Increasing Phil. Trade Capacity with Japan: Opportunities for Int l Cooperation J-ODA support for increased FDI and trade Improvement in investment environment: physical infrastructure, peace and order-related technologies SME trade capacity development (production/technology, finance, market linkages, and information) Continue J-ODA support to strengthen host government support capacity in benchmarked areas Reduction of tariffs in garments, etc. Diversification of export-oriented investments e.g., 1) food beverage and tobacco and 2) textiles, clothing, leather possibly (through joint ventures with Phil. Firms) Other Options for Expanding Philippine Capacity Trade and Investment ODA interventions to formalize the large informal sector, e.g., policy, human resource and organization development, technology transfer and development. Forming direct business linkages between Japanese enterprises and Philippine SMEs

38 Concluding Remarks The Philippine capacity for trade is gradually expanding owing to: Trade and investment liberalization policy and administration Response of private sector to this policy However, owing to external challenges such as fierce competition with other countries and the still insufficiently addressed internal weaknesses, investments have been adversely affected. Strategic efforts to expand export trade Policy Question: Develop a new system or enhance existing one? ODA, FDI can greatly assist in expanding social capacity for trade and investments Study Limitations and Suggestions The preliminary study is based on extant data and indicators collected under time constraints There is an apparent need to disaggregate data to fully understand the system and capacity for trade. Surveys and more focused research may be needed to determine actor-factor conditions in specific industries.