Development in an Era of Open Trade: Of Paper Boats and Sinking Economies

The Case of the Philippines Atty. Wigberto E. Tañada

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Edsa Shangri-La Hotel, Mandaluyong City GO-NGO Forum on Financing for Development

12 October 2001

Let me go to the heart of the issue: Is openness to international trade the magic formula that will lift the sinking Philippine economy from the mire? Or is it just a mere paper boat that will keep the economy afloat only in rosy promises and presidential speeches?

For some decades now, our government has looked at international trade as the

solution to our development problems. Since the 1980s, successive administrations have pursued a series of unilateral trade liberalization programs covering every sector of the economy from manufacturing, services and agriculture. To say, however, that our government independently pursued these programs would be utterly false. These programs were actually loan conditionalities imposed by the International Monetary Fund and the World Bank.

The country’s commitments to the opening of Philippine trade can also be seen in our

membership in international trade groupings. The Philippines is party to the ASEAN Free Trade Agreement (AFTA) and the Asia-Pacific Economic Cooperation (APEC) at the regional level. At the global level, we are one of the proud founding countries of the World Trade Organization. The result - an economy in shambles

Has trade liberalization benefited the country?

A serious study of the performance of the Philippine economy in the decades past would reveal a less than desired outcome of trade liberalization.

At the macro level, we find that:

We have become an import dependent country as reflected by the trade deficits we had

since the 1980s

In the agricultural sector, since the country’s accession to the WTO, we have become a net agricultural importer. In comparison, countries such as Thailand, Indonesia, and Malaysia are net agricultural exporters. One reason why our neighbors have left us behind is the declining productivity in Filipino farms. Growth in the agricultural gross value added in the Philippines is one of the lowest in ASEAN.

The share of agriculture in GDP has steadily declined from 24.6% in 1985 to 20% in

1999. In terms of employment generation, from 1999 to 2000, agriculture lost more than 2

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million jobs. In the manufacturing sector, electronics has become the country’s biggest export

earner. However, contributions of other products in total export earnings have declined. Share of garments sector and other manufactured goods in total exports have deteriorated in the nineties.

Trade reforms have not led to robust growth rates in manufacturing. Its share in the country’s GDP remained constant at 24-25% from 1985 to 1999. As a result, not many jobs are being created in the sector.

What I have given you is a general picture of our economy. Beyond this, we must also look at how specific industries have fared. 1. In the cement industry, from a market share of 1.4% in 1988, imports have grabbed 21.2%

of the market as of July 2001. 2. The footwear industry has been hit by massive importation endangering the livelihood of

14,000 people. 3. The Philippine steel industry, the foundation of industrialization, has collapsed displacing

more than a thousand workers. 4. The local flour sack industry has been adversely affected by surge of imports from

Indonesia. Demand for local flour sacks has dropped by 50% resulting into closure of two shops and the lay off of 1,200 workers.

5. From 1998-2000, tire imports from Thailand rose to 39%. Unable to cope, one manufacturer shot down operations leaving 700 workers unemployed.

6. From a combined market share of 1%, imported brands of automotive batteries now control 16% of the market. Consequently, domestic manufacturers are now retrenching hundreds of workers.

7. From 1993-1998, corn imports swelled by close to 500 times. Competition with imports threatens the livelihood of close to half a million corn farmers in Mindanao and a total of 1.2 million corn farmers for the entire country.

It will probably take a whole day before I can finish telling you these sad stories. So I

will have to stop here. The Problem with trade liberalization

What went wrong? Why didn’t the magic of trade liberalization work? Economic technocrats argue that the 1997 Asian Financial Crisis and the El Niño

phenomenon could explain the poor performance of the agricultural and manufacturing sectors. But this is partly true and would only apply to the second half of the 1990s. We cannot conveniently ignore the fact that we have been unable to produce robust growth rates in employment and production since the eighties even with the implementation of trade reforms.

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Our problems go much deeper. First, our local industries remain internationally uncompetitive. This is partly a

result of government’s failure to deliver infrastructure and policy support needed by the agriculture and manufacturing sectors.

Indeed, Filipino industries have the responsibility to develop their competitiveness to

be able to survive under a liberalized trading environment. But the fact is they cannot do it alone. Government still has an important role to play. Unfortunately, governmental support has proven to be inadequate.

In the case of Philippine agriculture, it continues to deteriorate as a result of a long

history of neglect. The sector continues to face bottlenecks to productivity such as poor irrigation facilities, lack of farm to market roads and post-harvest facilities, to mention a few. Many of the promised safety nets – programs that were supposed to help farmers overcome the negative consequences of liberalized trade – have not been delivered.

Our manufacturing industries remain internationally uncompetitive due to higher

expenditures for raw materials, energy and labor. Productivity in the sector has also been declining due to dependence on outdated technology. Our national expenditure for research and development, especially in the areas of engineering and technology, continues to be miniscule. While we could use foreign direct investment to acquire technology, this has not contributed to augmentation of technology used in the manufacturing sector due to the absence of a coherent national strategy to ensure effective technology transfer.

The problem with the country's dependence on low-value added electronics exports is demonstrated by the fact that its contribution to GDP for the entire nineties was only between 1-2%. Yes we get billions of dollars from selling these electronic goods in the international

Another problem is human resource development. The increasing importance of

technology in the emerging economy has not been matched by parallel increase in the number of skilled workers. According to a recent study conducted by the Congressional Commission on Labor or LABORCOM, the country continues to have a low skilled manpower base.

The second factor is the country's dependence on low-value added products for its

export earnings

Government would always boast that poor performance of other export products has been more than compensated for by very high growth rates in exports of technology products specifically electronics. But hold the happy thought. There is a big problem with the country’s dependence on electronic products for its export earnings.

These commodities have low value added. Their import content is very high. One

study confirms that for electronic products such as semiconductors and simple circuit products, local content is just 20% and 25% respectively. This means that the primary domestic input is just labor.

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market. However, we also spend a huge percentage of our earnings to buy raw materials that will enable us to manufacture the same electronic goods. In the end, what we have is a very small net dollar earnings. It is not difficult therefore to understand why any increase in the export of these products will not really contribute much to the country’s growth.

It is truly unfortunate that unlike our NIC neighbors such as Taiwan and South Korea,

the Philippines did not have a clear plan that would have enabled its industries to ‘graduate’ from being mere suppliers of parts and components to actual producers of higher end technology products.

The third factor has to do with management of exchange rate. The de facto policy of currency control up to the second half of the 1990s resulted into

an artificially strong peso that made imports cheap. This resulted in a surge in imports hurting domestic import-competing firms. Because of cheap imports, Philippine exporters relied more on imported inputs. The result is low value added in the country’s exportable goods.

The fourth factor is the little importance given to trade defense measures

Laws on anti-dumping, countervailing measures, and safeguards measure were enacted four to five years after we entered the WTO. Within that period and even until now, we have no trade remedies to implement that will effectively protect local industries from unfair trade practices such as dumping and price undercutting. As a matter of fact, just three weeks ago, the implementation of the Safeguards Measure Act has been effectively put on hold because of an injunction issued by a lower court.

The fifth factor is the policy of blind trade liberalization itself. While programs to modernize and enhance competitiveness of local industries remain

insufficient, government is still zealously implementing unilateral trade liberalization programs and thus expose local producers to international competition. For your information, our government is unilaterally reducing our tariff rates much faster than what it promised to do in the WTO. Our commitment in the WTO was a minimum reduction of 33% to be implemented within ten years - from 1995-2004. But because we are in so much of a hurry to open our economy, we already unilaterally reduced our average tariffs for agricultural and manufactured goods by 52% and 49% respectively by the year 2000. By 2004, we even plan to set uniform tariff rate of 0-5% - this without getting any concession from other countries. This is truly unbelievable.

The sixth factor is the global trade environment.

The GATT-WTO Agreements were supposed to have ushered in freer trade and a level playing field to enable developing countries to successfully compete in the international market. The WTO agreements generally required reduction in trade distorting policies such as high border protection and subsidies.

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The country’s accession to the WTO was precisely premised on such projected benefits. Slowly, however, many problems have emerged.

One, developed countries continue to protect their markets by applying higher tariffs

on products of export interest to developing countries. Also, markets in industrialized countries are restricted through the use of non-tariff barriers such as anti-dumping measures, health and safety standards etc. The most glaring example here is the trade dispute between the Philippines and Australia.

Two, subsidies in developed countries also continue to be high. In 1998, for instance, domestic support in OECD countries amounted to US$363 billion. Developing countries can hardly provide the same level of subsidies to its agricultural stakeholders. The Philippines, in fact, can only provide less than $50 million as support to its farm producers. This is highly iniquitous. This means that our agricultural products are competing against highly subsidized products of rich countries.

Nationalist prescription

So what do we need to do now?

The Philippine government failed to seriously consider how the policy of trade liberalization interacts with national policies on human resource development, research and development, FDI and technology transfer, foreign exchange management, and competitiveness enhancement measures. It seems the expectation was that once trade liberalization was adopted and implemented, the supposed benefits would automatically accrue without substantive changes occurring in other policy sectors. Unfortunately, embracing global trade would not instantly lead to growth. We must first do our homework.

In this connection, the recent policy pronouncements of President Gloria Arroyo, as

reflected in her State of the Nation Address, hold some promise. She committed to modernize the agricultural sector and help local industries.

However, a cursory look at the new policies of the Arroyo administration reveals that

they are no different from those made by previous administrations. My only hope is that, unlike our past political leaders, the incumbent president will actually deliver on her promises.

Still, the basic question is, how long will it take before these policies improve the

competitiveness of our industries? We have already opened our doors to foreign competition and yet it is only now that we are intensifying efforts to develop our local industries. In essence, we went to war without an army. We sent paper boats to fight battleships. It is no wonder our economy is sinking.

Let me however qualify that I am not against trade liberalization per se. What I object

to is mindless and blind trade liberalization as a framework for our country’s development. What I am against are the reckless and callous decisions by government to expose local industries to international competition without providing them needed support to become

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competitive. What I oppose is a global trading system that largely benefits developed countries and further marginalizes developing ones.

Clearly, there is a need to reexamine the current policy of blind liberalization. We

have to act now. What is at stake is our national interest. Together with you, I urge our government to implement the following nationalist actions immediately: 1. Institute a moratorium on unilateral moves to reduce tariffs. Government must reconsider

its plan to reduce tariffs within the range of 0-5% by 2004 as this is a unilateral decision and not a commitment under the WTO.

2. Ensure that the necessary safety nets are in place and required budget is allocated and fully utilized. Government also has to review existing safety net programs and audit their funds.

3. Uphold and fully utilize other GATT- consistent trade defense measures. We must work for the reversal of the injunction against the Safeguards Act.

4. Rethink loan conditionalities. The Asian Development Bank has recently made the release of US$175 million Grains Development Program Loan contingent upon the lifting of import restriction on rice.

5. Ensure meaningful participation of stakeholders in trade policy formulation. Specifically, ensure participation of civil society, business and labor in in-country preparations for the upcoming WTO Ministerial Conference in Qatar.

In the medium- to long-term we must aim for the following: 1. Selective liberalization through imposition of limited and time-bound protection for local

industries. 2. Focus national research and development efforts in the production of high technology and

high value goods 3. Diversify exports and identify and explore other export markets 4. Develop a coherent national policy on technology transfer 5. Control smuggling 6. Invest more in education to develop technology-capable human resource 7. Modernize agriculture based on programs that are anchored on asset reform and food

security 8. Develop local capital and intermediate goods industries

Action at the national level, however, will not suffice. Without a doubt, there is a

serious problem in the global governance of trade. Many of the trade rules under the WTO work only for the interests of developed countries. And yet two-thirds of its membership come from developing countries. Action at the global level must be directed toward reforming the WTO and addressing the imbalances in the trade agreements. The Philippine government must support the following initiatives:

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1. Oppose launching of a new global trade round under the WTO. The country must make no new commitments and oppose raising of new issues in the November 2001 WTO ministerial conference in Qatar

2. Push for fair trade in the WTO including opening markets in developed countries for products of export interests to developing countries and substantial reduction if not total elimination of domestic and export subsidies.

3. Demand expansion of special and differential treatment for developing countries to give them greater flexibility in pursuing food security and poverty reduction programs.

4. Review implementation of the WTO agreements to ascertain their impact on least developed and developing countries

Developing countries should further work to achieve the following:

1. Address and correct the imbalances in the WTO agreements 2. Reform the WTO and make its decision-making rules more democratic. In Conclusion

The issues mentioned here, the recommendations propounded are not new. Many of these points have already been said.

What is puzzling is that our government consistently refuses to listen! Technocrats from government argue that the problems we are facing right now in the

economic front are adjustment problems; and that accordingly, in the long run, industries will adjust to the new competitive trade environment as resources flow to more efficient sectors, or as industries find comparative advantage, thus leading to accelerated growth.

However, while we wait for the benefits to materialize, employment and income are

contracting, and poverty remains a huge problem. How long can we afford to wait before government heeds our calls? The argument is encapsulated in the words of a prominent 20th

Kung kayang patakbuhin ng Filipino ang mga barko sa daigdig, ang mga oil rigs sa Middle East, ang mga ospital sa Amerika at Europa, ang mga eletronic factories sa Malaysia at Singapore, kaya nating itaas sa mas mataas na antas ng kaunlaran ang ating ekonomiya at

century economist and I quote – “In the long run, we are all dead.”

Of course we shall not allow this to happen. We in civil society, together with partners

from industry, agriculture and labor sectors will not just sit and watch our industries die and our farmers and laborers suffer. We will persistently knock on government’s door and demand that we, the Filipino people, have a democratic right not only to be heard, but more importantly, to actively participate in the making of decisions that will affect our lives.

I know that in the future, in our lifetime I hope, we shall get our act together as a

nation and as a people and all unite behind a clear national vision of development that will enable us to catch up and even excel in the globalized world.

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lipunan. Maliwanag na may sapat tayong talino at talento. Kailangan lang talaga na magkaisa

sa isang makabansang pananaw at pambansang tunguhin. Maraming salamat!