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The Political Economy of Inclusive Growth

Industy and Agriculture. Painting by Federico Dominguez

Industy and Agriculture. Painting by Federico Dominguez

Just days ago, the Social Weather Stations (SWS) survey found out that the number of unemployed Filipinos increased in the last quarter of 2013 to a dismaying 12.1 million. The unemployment rate rose to 27.5 percent as 2.5 million Filipinos joined the ranks of the unemployed between September and December of last year. Coupled with a poverty rate of 25.2 percent, these dismal statistics does not coincide with the country’s second-highest growth rate of 7.2 percent in Asia, only after economic giant China. Malacanang was quick to respond and reframed the issue as a consequence of the havoc that Typhoon Yolanda wrecked in key regions of the country. The Aquino administration simply cannot spin its way to escape the fact that consistent relatively high growth in the past four years has not been ‘inclusive’ or felt by the majority of Filipinos. It must be noted, however, that the lag in poverty reduction in the Philippines cannot be blamed in the current administration alone; the global political economy has played the most significant role in shaping the structure of the Philippine state and economy today. In the face of high growth and wide-scale poverty and unemployment, an understanding of both the present and the past is crucial if solutions will ever be found.

This essay explores the past and present political economy of development in the Philippines, arguing that the resilient continuity of past foreign policy has hampered development in the country today. The first part of the essay will examine the service-led growth of the Philippines and its implications for inclusive growth. The second part will situate the Philippines in the larger political economy of Southeast Asia as shaped by U.S. strategic and economic interest. The goal of this essay is not to propose solutions to achieve the ever-elusive inclusive growth, but to give a better understanding of the present and past factors that continue to hamper inclusive growth and development in the Philippines.

Deconstructing the 7.2 percent growth

            In a press conference announcing the annual performance of the Philippine economy in 2013, National Economic and Development Authority (NEDA) secretary-general Arsenio Balisacan reported that the driver of economic growth from the supply side has been the services sector, contributing 3.6 percentage points to the real Gross Domestic Product (GDP). He adds, “The 6.5 percent expansion of the services sector was driven largely by the strong demand for communications, land and air transportation, and storage and services incidental to transport.” Data shows that from 1980-2009, the services sector has contributed an enormous 66.6 percent to GDP growth while industry contributes only 26.3 percent. In other Southeast Asian countries, there has been more or less equal contributions from both industry and services. Is there something dangerously wrong with the Philippines’ disproportionately service-led growth?

In a paper published in 2012 entitled Taking the Right Road to Inclusive Growth, the Asian Development Bank provides the answer. Traditionally, industrialisation has been considered as the main driver in economic growth at the early stages of development. In a nutshell, such a development structure provides a high labour engagement and productivity in the economy. A robust and productive manufacturing sector is able to absorb labor from low productive sectors like agriculture. This increases job opportunities available to numerous workers, giving them adequate incomes enough to lift themselves out of poverty.  Successful Asian countries have followed the industrialization growth pattern, giving rise to what is admired all around the world today as the Asian Tigers.

A service-led growth model is unconventional. The consumption of services is only possible when people reach a certain level of income that is way above the subsistence level. A service-oriented economic structure can thus be achieved in advanced stages of development. The Philippines, as the statistics aforementioned prove, has bypassed manufacturing for services as the main driver of economic growth in the past thirty years. Such a development strategy, however, has impactful implications on inclusive growth.

The services sector of the Philippines has been primarily steered by the rapidly growing business process outsourcing (BPO). Growing at double-digit rates, the Philippines is now the third largest BPO destination after India and Canada. The continuously increasing export of services has led to 34.5 percent employment in the BPO industry. On the surface, the BPO industry may appear to be highly beneficial. However, a second look will show that it actually only employs about 1.2 percent of the total labour force in the country. This is largely due to the high qualification standards of BPO labour demand. In a country where the poorest labourers received only have primary or secondary education, a minimum qualification of a college degree will simply not match. A service-led growth that is dependent on global demands and standards cannot reduce poverty in a country where the necessary labour skills are not present.

To exacerbate the situation, the labour productivity growth within the service industry in the Philippines has been underperforming. Inclusive growth requires not only high employment, but mainly productive employment. Further, the services sector has the lowest intersectoral link; it cannot induce higher growth in other sectors. Comparatively, India is also a service structured economy. The service sector contributes to about 61 percent of its GDP growth in the past 30 years, highly similar to the Philippines. What sets India apart from the Philippines is that it coupled its service-led growth with an increase in productivity. However, even in India, slow poverty reduction is still evident. The high-skilled labour demand of the service sector will simply not provide enough job opportunities for a large number of Filipino labourers with little to no skills.

The current service-led growth model of the Philippines begets an important question—what hampered the country’s industrialization phase?

The Political Economy of Development in the Philippines

             The development pattern in Asia differs largely from that of the west. For one, Asia never saw an independent capitalist class separating itself from the state to lead economic development. The presence of strong colonial powers stunted the rise of the western-like bourgeoisie; for hundreds of years, most of the economic activity of countries in Asia, including the Philippines, remained to be centered on agriculture. Bringing it closer to home, development in the Southeast Asian region only began recently while already in the face of the global economic order that western states were not in context of. Further, development in the region was mainly brought about by United States’ strategic military interests against communism at the height of the Cold War.

During that time, the U.S. needed to assert its presence in the Asian region because the close proximity threat that communist states China and the Soviet Union posed. If communism will prevail in the entire Asian region, the liberal world order of the U.S. would have been in serious jeopardy. As a solution, the U.S. strategy was to ensure the economic development of Asian states as a counter attack to the pro-poor appeal of communism; the less poor people are, the less the appeal of communism.  The U.S. allied with its then recently-independent former colony of Japan. To raise Japan to a viable superpower ally, it needed to be economically rebuilt. Losing the communist state of China as a trade partner for Japan, the U.S. triangulated trade instead with the Southeast Asian region. Southeast Asian states were made to play the role of a subsistence market; Japan imported raw materials from Southeast Asia and exported manufactured goods back to them for consumption.

From a purely economic perspective, the injection of Japanese capital or foreign direct investments (FDI) into Southeast Asia provided the necessary boost that pushed most of Southeast Asian countries’ industrialisation phase. The Philippines, however, had an overvalued currency at this crucial point in time; thus being unattractive for Japanese capital to be invested in the country. This lag in FDI still continues to be a crucial factor today as to why the Philippines is constantly behind its neighbours. The Philippines is actually being surpassed by communist states like Vietnam five-folds in attracting FDI. Because of such low investment to GDP ratio, industrialisation and manufacturing in the Philippines never really took root and continues to be a lag in inclusive growth today.

From a wider perspective of political economy, of all Southeast Asian states, it was the Philippines that had a strong Spanish-American colonial legacy. During the Spanish colonial period, families who cooperated with the Spanish colonisers in their divide and rule strategy lorded over fellow Filipinos with vast amounts of land or haciendas granted to them. These haciendas were incomparable in terms of size to that of any other Southeast Asian country. American colonial policy further exacerbated this by giving the landed oligarchs institutional access to the state apparatus. Colonial policies are the origins of the Philippines’ unique case of political dynastic rule today. As previously mentioned, an independent capitalist class never emerged in Asia. In Taiwan, South Korea, and Hong Kong, for example, it was a development from above model wherein the state fostered capitalism from above. The communist threats these states were in close proximity to, namely China and North Korea, forced the U.S. to adopt policies that were suitable to economic development—manufacturing-led growth. In contrast to the Philippines, the relatively weak communist threat never induced U.S. policy to push for development in the country. Instead, it was of the American interest to keep the Philippines centered on agriculture to supply the American agricultural needs. Further, given that the agricultural sector is controlled by landed oligarchs who were also politicians and statesmen, it was but logical for them to keep an economic structure where they benefited from; thus, they resisted any form of industrialisation from above that was characteristic of successfully-developed Asian states.

Conclusion

In conclusion, I am convinced that the value of the social sciences is not in its ability to offer practical solutions to problems, but in providing the very explanatory frameworks in which we problematise the world. The practical solutions are already obvious; improve manufacturing, provide better technical education, enact genuine land reform, etc. However, taking a step back to view the problem from a larger political economy perspective will show the key roles of international actors and their policies in hampering growth, more so an inclusive growth, in the Philippines. While practical solutions may be enough at the national level, a stronger form of accountability against the exploitative powers of advanced states must be institutionalised in the global political order. It is the only way that growth, in the global scale, will ever be inclusive.

Bibliography

Abrami, Regina, and Richard F. Doner. 2008. “Southeast Asia and the political economy of development.” In Southeast Asia in political science, by Erik Martinez Kuhonta, Dan Slater and Tuong Vu, 227-251. Stanford: Stanford University Press.

Bello, Walden. 2009. The Anti-Development State. Pasig City: Anvil Publishing, Inc.

McCoy, Alfred W. 2009. An Anarchy of Families: State and Family in the Philippines. Madison City: University of Wisconsin Press.

Usui, Norio. 2012. Taking the right road to inclusive growth: industrial upgrading and diversification in the Philippines. Ortigas City: Asian Development Bank.

About the Author

Kristoffer Li is a political science major at the University of the Philippines-Diliman.

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