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This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Trade and Structural Change in Pacific Asia Volume Author/Editor: Colin I. Bradford, Jr. and William H. Branson, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-07025-5 Volume URL: http://www.nber.org/books/brad87-1 Publication Date: 1987 Chapter Title: Manufactured Exports and Industrialization: Trade Patterns and Trends of the Philippines Chapter Author: Florian Alburo Chapter URL: http://www.nber.org/chapters/c6933 Chapter pages in book: (p. 485 - 514) 16 Manufactured Exports and Industrialization: Trade Patterns and Trends of the Philippines Florian A. Alburo 16.1 Introduction This paper examines (1) the recent Philippine experience in trade and industrial development, including changes and adjustments arising from economicdisturbances, and (2) the prospects for future economic growth in terms ofpresent discernible trends. First, present contextual scenarios through which industrial development may be interpreted. The second section reviews the historical background of trade and industrialization. In the third section, industrial growth in the seventies will be further expounded upon, especially the role of manufactured exports in the process. A fourth section develops the notion of struc- tural change and its evidence. The prospects of the changes in the pattern of trade and industrialization, especially in terms of long-term sustainability, are considered in the fifth section. Industrial growth may be stimulated in large part by the vigor of the internal markets, whose buoyancy in turn springs from productivity increases. Excess labor from agriculture, foreign exchange earnings from traditional export markets, and relatively low internal terms of trade allow the industrial sector to proceed unhampered in its devel- opment, acquiring economies and efficiencies in response to eventual internationalcompetition. Trade in thispicture takes on a morepassive Florian A. Alburo is associate prof economics, Universof the Philippines, Diliman, Quezon City, Philippines. This paper was writwhile visiting with the Overseas DevelopmentWash-cil, ington,D.C., in82-83 asan Asian Visiting Scholarunder aHenry A. Luce Foundation Fellowship.Revisionswere maat the Institute of Southeast Asian Studies, Singapore, preparation and revisof this paper as well as to Professor Romeotista fore comments on an earlier draft. 485 486 FlorianA. Alburo role, feeding the industrial process, which in turn is determined by industry-agriculture interactions. During the early stages of this de- velopment scenario one outcome is the emergence of a system pro- tecting industrialformation. Later, sUacient markets must evolve within the economy to prop up industries and propel them toward greater economies. In this context, trade is essentially supportive of the industrialization process and not adirect stimulant ofit. Viaproductivityimprovements in agricultureandexport products (inpart from technologicalbreakthroughs) trade provides the exchange resourcesfor pursuingindustrial growth. This scenario, crudely summarized here, is not of course unfamiliar to students of development. It is often associated with the doctrines espoused by Prebisch (1959)and Nurkse (1953).’ In contrast to this scenario is an industrial growth that is “outward- looking” or “export-led,” and is exemplified by experiences in a num- ber of developing countries but most prominently in East Asian coun- tries. In this context, trade is a determinantf the industrializationpro- cess. The growth and strength of industry are paced by the degree to which international trading of industrial products takes place in open systems. The country’s resource endowmentsdictate the directions of comparative advantage and thus industrial change itself. Resource al- location inindustry and associated factorrewardsrespond to (ina small- country assumption) trade signals. Indeed, trade takes an active role. Within the tradition of international trade theory, this scenario does not necessarily imply the delegation of developing countries to the status of primary producers and exporters. Dynamic comparative ad- vantages, the mobility of resources, and improvements in technology contribute to the development of an industrial base. The extent to which developing countries take either route in their development processes is perhaps constrained by their initial resource endowments. Quite naturally small city-states are quicker to look to- ward external trade to fuel growth than large economies which have a bigger domestic base to exhaust. There is no direct evidence that these scenarios are completely ad- equate for describing the basis for industrialization. Most of the as- sertions are in fact ad hoc rationalizations for a variety of policy ini- tiatives rather than descriptions arising outfa systematic, neat schema for industrial drive. Baldwin (1975, 67) indirectly alludes to how the “inward-looking” path influences policy in the Philippines. 16.2 Philippine Industrialization:A HistoricalReview There is an array of studies on Philippine industrial development, most treating the subject with sufficient depth and rigor. A postwar 487 Trade Patternsand Trends of the Philippines analysis of trade and industry was undertaken by Power and Sicat (1971). Industry analyses were performed by Sicat (1968)and William- son and Sicat (1968)that were mainly concerned with tracing sources of growth. Baldwin (1975) investigated industrial development within a framework of trade regimes characterized by control and liberali- zation of international transactions. The World Bank (1976, 1980)and the International Labor Office (1974) have addressed industrial per- spectives in a policy context. Bautista et al. (1979)have documented the process of industrial promotion policies in the Philippines. All these studies contain data and analytical tracks that are exhaus- tive and sufficiently disaggregated to allow specific explanations of industrial growth and specific descriptions of policy implications. Al- though the studies are somewhat dated in the sense of the period cov- ered, it is noteworthy that an analytical series can be constructed with respect to industrialization in the postwar era. For example, the Power and Sicat volume explores the process during the sixties. Baldwin discusses the period up to 1971. Bautista et al. document the experi- ences of the midseventies. 16.2.1 Postwar Protection and Development Philippine industrialization is usually described as a cumulative rec- ord of controls, protection, exchange overvaluation, and distorted do- mestic policies. In the immediate postwar period a combination of an early boom, institutional constraints, subsequent trade deficits, trade controls, and biased monetary and fiscal policies created the setting for a protective system conducive to consumer goods industries and finishing stages of production and biased against export industries. One outcome was a continuing drain on exchange resources and reserves and a penalty on export development. Because of a limited domestic market, the need to arrive at more realistic exchange regimes, and the desire for correcting export biases, the country began to plan a gradual process of decontrol in the late fifties and implemented a four-phase program in April 1960. The fea- tures included (a) an increasing proportion of exports to be exchanged at market rates (beginningwith one-quarter of export earnings of tra- ditional exports and ending with 100%in 1962), (b) free mobility of capital, and (c) a “free market” determination of exchange rates. The gradual dismantling of controls such as import licenses, deposit margins, and import bans did not happen without tradeoff. With an industrial base fashioned by the trade protection of the fifties, it was expected that industries would demand support to continuetheir growth. Thus while decontrol was taking place and exchange rates approaching market signals(and thus benefiting exporters),the country’s tariff struc- ture retained the essential pattern of protection encouraged in the im- 488 FlorianA. Alburo mediate postwar era.2 Monetary policies were likewise geared to the promotion of new and necessary industries and did not differ signifi- cantly from those used during the control peri~d.~ Despite the ap- pearance of removing exchange and physical controls to trade, decon- trol was thus more nominal than real. The protective structure remained the same even after complete decontrol in 1965. The seventies is thought to be the time when a drift, if not a real shift, is visible in the industrial path of the phi lip pine^.^Indeed, the hypothesis is advanced that during this period the country took its first steps away from an inward-looking drive to an outward-looking drive in terms of (a) the absolute values and shares of manufactured exports in aggregate trade,(b) the expansion of industries more consistent with the country’s resource endowments, (c) the absorption of more em- ployment in industry than ever before, and (6)the broad incidence of benefits through factors shares. 16.2.2 Some Causes and Consequences Table 16.1 shows the average yearly growth rates of the Philippine GNP and selected sectors from 1946to 1980, divided into quinquen- niums (except the first period), and from 1980 to 1982, on a more preliminary basis. By most accounts, the performance of the economy during the immediate postwar reconstruction was an aberration, a “catching up” of lost prewar capacity. What would be more useful to look at is the three-decade period 1950-80. While it is interesting to include consideration of the more recent years, it would seem that the prolonged recession in the West probably had its full effect after 1980 and would tend to distort the picture. Where data for 1981and 1982 are available, they are included in the appropriate tables. The controls of the fiftiescreatedan economicenvironmentfavorable to full-scale import substitution as consumer industries profited from liberal inflows of capital goods imports and the high domestic price of finished products engendered by the system. Thus the types of man- ufacturing industries began to proliferate in the fifties, from a concen- tration on food, beverages, and tobacco in 1948to such industries as textiles, paper and paper products, chemical and chemical products, nonmetallic mineral products, and machinery. (See table 16.2 for the distribution of value added in manufacturing.) The balance-of-payments problems that plagued the country toward the end of the sixties necessitated another round of adjustment, cul- minating in the floating of the exchange rate and currency depreciation of nearly 50% in 1970. Bautista (1980) has adequately analyzed the consequences of the floating exchange rates in terms of balance of payments and its major components, domestic economic activities and trade flows and direction^.^ Table 16.1 Average AnnualGrowth Rates ofGNP and Net Domestic Product of Selected Sectors (in percentages at constant 1972prices) 1946-50a 1950-55 1955-50 1960-65 1965-70 1970-75 1975-80b 1980-82b Agriculture 12.4 7.0 2.9 4.8 3.5 3.8 5.4 3.6 Manufacturing 50.5 12.1 7.7 4.5 6.1 6.0 7.0 2.9 Services 16.9 9.0 5.0 4.5 4.8 4.8 5.3 3.0 GNP 19.9 1.7 4.9 5.6 4.8 6.5 6.2 3.2 Sources: Baldwin 1975, 3, for 1946-50; National Economic and Development Authority, 1983 Philippine Statistical Yearbook. aRates at 1955prices. bGrossvalue added except GNP. 490 Florian A. Alburo Table 16.2 Distribution of Value Added by Industry (percentages) Industry 1948 1956 1960 1965 1970 1975 1980 1982 Food, 60.6 43.8 41.2 40.1 41.8 40.0 43.9 44.6 Beverages, Tobacco Textiles 2.6 3.7 4.6 4.7 5.9 5.6 4.5 4.3 Footwear, 6.6 5.1 3.0 7.0 3.8 3.6 4.4 5.0 wearing apparel Wood and cork 9.7 5.0 4.0 4.6 4.2 2.8 2.9 2.9 products Furnitureand 1.8 1.3 1.4 0.9 0.7 0.4 0.6 0.6 fixtures Paper, paper 0.0 1.7 2.3 2.1 2.9 2.9 0.8 0.7 products Publishing, 3.7 3.1 3.2 4.1 2.2 2.7 1.4 1.5 printing Leather, leather 0.0 0.2 0.3 0.3 0.2 0.2 0.3 0.3 products Rubber 0.6 0.9 3.2 2.9 1.4 1.6 1.3 1.3 products Chemicals, 2.9 9.9 10.0 9.1 7.9 13.1 16.1 14.4 chern. products Nonmetallic 2.1 4.7 3.7 4.4 4.2 3.6 2.5 2.3 mineral prod. Basic metals, 1.9 4.7 8.0 8.5 7.4 6.0 8.2 8.0 metal products Machinery 0.5 2.1 4.2 4.8 4.5 3.8 8.1 9.2 Transport 1.0 2.2 2.2 2.8 4.2 5.1 3.8 3.6 equip. Misc. 5.7 11.2 8.2 5.2 8.7 8.7 1.1 1.3 manufactures Total 100 I00 100 100 100 100 100 100 Sourccss: Bautista et al. 1979 for 1948-65; National Economic Development Authority, 1983 Philippine Statistical Yearbook. Overall, there seems to be a convincing argument that industriali- zation in the Philippines was fashioned in the fifties and sixties to be inward looking, an import substitution strategy. The system of protec- tion and tariff structurecreated thepattern of manufacturingindustries. There is further evidence that even, in 1974,the structure had perhaps remained the same (Tan 1979). What this means in terms of results is widely known andappreciated. Industries are invariably capital using and labor saving. Capital-labor ratio indices increased over 20% in the sixties. The share of labor in manufacturing to total employment increased by only 4.4% over much of the same period (with the share virtually remaining constant at 12%). 491 Trade Patterns and Trends of the Philippines Repercussions from the trade problems were not conducive for in- dustrialgrowth either. Export prices (in U.S. dollar values) were fairly stable in the sixties and erratic in the seventies, while import prices (in U.S. dollar values) continued their upward climb throughout the two decades (see table 16.3). Consequently the terms of trade deteri- orated. This had profound effects on overall growth but more so on the industrial sector in the sense of marginal ability to generate foreign exchange and broadening of internal markets. Moreover, consumer price indices exhibited wildfluctuations. Therecent 1981and 1982data show declines in export prices similar to the midseventies, which, with a sharp increase in input prices in 1980 and 1981, reflect continued terms of trade deterioration. While the increase in consumer price index was less in 1982,the most recent (1983)economic crisis will undoubt- edly lead to an escalated index. Manufacturing development therefore suffered from the type of pro- cess that the Philippines experienced in the sixties for at least three Table 16.3 Percentage Change in Philippine Export, Import, and Consumer Price Indices Importa Consumer Exporta ~ 1960 - 1.46 2.22 4.66 1961 - 8.00 1.45 1.27 1962 - 1.07 1.85 5.65 I963 5.31 6.72 5.74 1964 -0.81 0.79 8.24 1965 1.73 1.69 2.42 1966 0.90 1.66 5.40 1967 1.78 2.27 6.41 1968 6.23 9.11 2.41 1.91 1969 0.37 1.81 1970 1.46 3.66 14.00 1971 - 4.95 2.14 15.06 1972 -5.30 4.71 10.01 1973 45.90 28.80 14.00 1974 66.07 64.29 33.51 1975 - 20.43 3.78 8.15 - 1.09 6.20 1976 - 12.45 1977 1.48 11.05 7.90 1978 13.08 1.95 7.60 1979 21.94 9.89 18.80 1980 4.15 32.76 17.83 1981 -2.19 11.15 n.a. 1982 - 16.04 - 9.78’ 10.25 Sources: Bautista 1980 for1960-76; Central Bank ofthe Philippines, Statistical Bulletin 1981 (1981); National Economic and Development Authority, 1983 Philippine Statistical Yearbook. aBased on U.S. dollar values. bAverage offirst three quarters 1982. 492 Florian A. Alburo reasons. First, the manufacturing sector was insulated from interna- tional competitiveness by protection and could not profit from the exuberance of export prices on the one hand nor avoid the sting of rising import prices (which directly affected it via intensity of input use) on the other. Second, the transmission of import prices into the movements of the consumer prices meant real incomes were deterio- rating. In fact real wages of unskilled labor in industrial establishments in metropolitan Manila fell by 13.8%between 1959and 1964(though recovering by 13.2%between 1964 and 1970)and by 53.7%between 1970and 1974.Finally, the broad-based potential of import substitution hinged on the spread of internal markets. On the basis of income dis- tribution, it appears that this potential was not realized in the sixties and early seventies. 16.2.3 From Inward- to Outward-Looking Industrialization Table 16.4 presents the changing composition of Philippine exports in the two decades 1960-80. A striking change is noticeable between 1970and 1980,when nontraditional manufactured exports increased in share from 8.3% to 36.4% of the total.6 The marked distributional change reflects a more outward-looking path of industrialdevelopment. Even though traditional exports are still a dominant share, the fact that nontraditionalmanufactures implyprocessing would seem to augur well for industrial development. An examination of table 16.5, which breaks down nontraditional manufactured exports into specific com- modities, indicates that for many products the seventies (especially after 1975)was the time for breaking out into world markets. The trend remained strong in the face of serious disturbances occasioned by the oil shocks of 1973and 1979,the recessions in the majortrading partners, and the competition from other newly industrializing countries. Whether or not the redirectionis significant willin part be determined by the net effect of positive and negative influences. The former in- cludes active promotion policies that favor export growth, while the latter encompasses the constraints imposed by past developments. Table 16.4 Philippine Exports(percentage share) Sector ~~ 1960 1970 1980 Traditional primary 49.3 40.0 7.8 Traditional manufactured 48.4 49.8 47.2 Nontraditional primary - 1.1 8.0 Nontraditional manufactured 1.2 8.3 36.4 Reexports 1.1 0.8 0.6 Total 100.0 100.0 100.0 Source: National Census and Statistics OfficForeign Trade Statisticsvarious years. Table16.5 Philippine Exportsof Nontraditional Manufactures(inmillionsof U.S. dollars) 1970 1971 1972 1973 1974 1975 1976 1977 I978 1979 1980 1981 1982 Electrical & electronic 0.3 0.4 11.3 27.1 47.3 85.0 124.3 253.4 412.5 671.0 837.7 1,ooo.l equip. & components Garments 36.2 35.7 38.8 58.0 94.0 107.0 184.7 249.7 326.3 404.2 500.0 616.5 539.3 Handicrafts 6.5 9.2 12.9 27.4 46.0 78.2 94.9 84.1 100.1 133.6 154.3 133.7 121.6 Chemicals 5.4 7.0 6.3 10.6 15.9 22.1 27.0 54.1 59.9 112.8 94.9 106.7 96.8 Food products & beverages 8.2 9.0 11.2 15.0 17.5 14.7 28.7 43.7 46.8 57.0 170.4 309.9 214.5 Furniture & parts 1.1 1.2 1.5 3.3 6.1 5.2 9.8 21.7 26.6 54.9 77.2 87.4 71.6 Footwear 1.1 0.9 1.2 2.1 3.7 3.0 5.0 10.2 32.2 50.3 67.1 73.1 62.0 Machinery & trans. equip. 1.1 2.1 2.1 3.4 5.5 9.5 16.1 26.1 36.9 47.3 46.5 51.3 50.6 Textile yarn, fabrics & 2.8 5.3 3.5 17.3 7.2 8.7 15.1 12.4 23.6 31.4 49.3 43.3 38.9 related prod. Builders’ woodwork & 4.0 5.7 7.7 17.2 24.8 16.9 15.5 13.8 20.7 31.4 23.8 38.8 30.9 other wood manuf. excl. plywood, veneer & lumber Nonmetallic mineral 3.0 11.0 10.0 25.2 36.4 32.2 28.1 38.6 42.2 30.3 58.9 47.3 39.5 manuf., particularly cement Cordage, cable, ropes & 1.9 2.1 3.1 4.6 9.7 7.6 10.3 12.4 12.5 16.8 18.5 20.5 55.8 twines Other 24.4 20.2 19.9 36.8 43.3 30.1 53.5 78.2 95.0 137.1 175.00 205.5 139.1 Total exp. of nontrad. -6.7 109.7 -18.6 -232.2 __7.2 -82.5 -73.7 -69.3 1,076.2 1,519.6 2,106.9 2,571.7 2,460.7 manuf. - - - - - Total exports -1,142 1,136 -,106 -,837 -,752 -,294 -,574 -,151 -,425 4,601 -,788 -,722 -,020 Source: National Economic and Development Authority, 1983 Philippine Statistical Yearbook. 494 Florian A. Alburo Somefactors prevent a detailed technical assessment of the redirec- tion hypothesis. One is lack of recent transactions data for a compre- hensive input-output analysis. The 1974input-output data would ob- viously be inadequate to captureany profound changes associated with structural adjustments after the 1974oil crisis.’ Another is paucity of information on technical characteristics of firms in the manufactured exports industries. The classification of table 16.5 is fairly recent. Fi- nally, a number of policy changes (e.g., tariff reforms) reinforcing the outward-looking trend were implemented only recently. Nevertheless, the following sections attempt to pursue the argument. 16.3 Tradeand IndustrialGrowthin the Seventies Manufacturing increased its share of gross domestic product from 23.2%in 1970to 25.3%in 1980.The increase in share of2.1%is matched only by the 3.9% increase in the share of construction in GDP over the same period, whereas most of the other sectors show declining shares. But even more important was the increase in the share of manufactures in total exports between 1970and 1980. Manufacturing is often characterized as dualistic. Large factories- fairly productive, capital-intensive, and possessing up-to-date tech- nologies-coexist with small, household-type, unorganized production units. Each subsector provides critical components of the aggregate manufacturingpicture. The World Bank (1980),forexample, estimated that the small- and medium-sized firms employ almost 80% of labor but provide only 25% of value added. For a time, large-scale estab- lishments were relied upon to create additional output, and the unor- ganized sector was depended upon to absorb additional employment. It seems, however, that a reverse pattern has emerged in the sev- enties. Large establishments (with more than twenty workers) em- ployed 24.5% of labor in manufacturing in 1971. The proportion in- creased to 32% in 1976,the latest year for which data are consistent. In terms of value added, the same group accounted for 94.5% in 1971 but only about 56% in 1976. More interesting perhaps than these static figures are the rates of growth of employment and value added in thesector during the decade. They reveal changes that help explain the overallperformance of man- ufacturing. Table 16.6 shows the rates of growth for both employment and value added for all of manufacturing, establishments with 20 or more workers, and those with less. The last has been calculated as a residual and must be viewed with the usual caution when dealing with indirect figures. The annual average growth rate of manufacturing employment was 3.9% in 1968-76, falling to 3.1% during 1971-76 after peaking at 5.2% 495 Trade Patterns and Trends of the Philippines Table 16.6 Manufacturing ValueAdded and Employment Annual Average Growth Rates (percentages) Employment 1968-76 1968-71 1971-76 Total 3.9 5.2 3.1 Establishments with more than twenty workers 6.2 2.1 8.7 Establishments with less than twenty workers 3.0 6.3 1.0 Value added (currentprices) Total n.a. n.a. 24.0 Establishments with more than twenty workers n.a. n.a. 12.0 Establishments with less than twenty workers n.a. n.a. 17Sa Sources: National CensusandStatisticsOffice, Annual Survey ofEstablishments, various years; National Economic and Development Authority, 1983 Philippine Statistical Yearbook. Notes: Labor force data are based on October 1968, November 1971, and August 1976 surveys. n.a.= not available. a1971-74. in 1968-71. When broken down intothe two subsectors, it is clear that large establishments experienced a high employment growth rate com- pared with the unorganized sector (8.7% versus 1.0% in 1971-76). Because of the absolute weight of thelatter sector, however, the average growth rate was in fact lower. In terms of value added, establishments with less than twenty workers had a slightly higher growth rate than large-scale firms. Of course, these differences are not revealed when looking at the aggregate behavior of manufacturing in the seventies. The reduction in labor absorptionbetween the late sixtiesand the middle seventies masks the vigor of employment growth among large establishments and the stagnation of the small firms. This reversal in the pattern of employment and value added between the late sixties and the seventies implies a decline in labor productivity during the period at least for the organized factory level sector. The data come from surveys covering large establishments, i.e., employing twenty or more workers. Between 1960and 1970,value added per employee grew at an annual average rate of 3.4% in real terms.* From 1970to 1976the rate declined to 1.1%per year. There was a further decline by 1977in absolute terms. One notes sharp declines especially in 1977for all industries, but with particular severity in textiles, leather products, rubber, chemicals, non- metallic mineral manufacturers, basicmetals, electrical machinery, and transport equipment. Falling value added per worker is in part associated with a falling capital-workerratio, and both may reflect a transitional change in tech- nology. The amount of new investment per worker fell between 1970 496 Florian A. Alburo and 1977,mirroring the general reduction in capital in newly registered business organizations in 1970-80 and a sustained reduction in paid- in capital per organization-despite a threefold increase in the number of new organizations between the sixties (an increase of 4.6% per year) and the seventies (an increase of 14.1% per year).9 It is difficult to examine this more thoroughly because of data constraints. Nevertheless, a number of factors suggest the fluid state of manu- facturing development in the seventies, a period of significant adjust- ments. First, the evidence seems to point to the growing importance of the formal sector in terms of employment generation andthe growing importance (though less pronounced) of the informal, or household, sector in terms of value added. By all indications a diffusion process may have taken place toward medium-scale industries more consistent with relevant factor proportions. Second, the industrial structure has broadened, reflected in the changes in the distribution of value added during the decade. Indeed, combined with growth of the industries producing manufactured exports, industrial growth appears also to have deepened. Third, capital-labor ratios, both average and incremental, declined across the entire manufacturing sector. This is not surprising given the ability of the industrial structure to respond to differential factor pricing. What is worth noting is that during the decade, the floating of the peso, the flexible policies that did not liberally shelter industry, and the incentives promoting manufactured exports allowed a smoother industrial adjustment. How much of the industrial growth and change in the seventies was triggered by manufactured exports or vice versa is hard to untangle. Where the growth of manufactured exports is exogenous, it obviously induced industrial responses that partly shaped the structure in the seventies. Where the macroeconomic and trade policies appropriately accommodated this growth they also partly shaped the structure. These policies, however, simply corrected the distortions of the earlier inward- looking decade. In short, trade has had a significant role in shaping the industrial patterns of the seventies. 16.4 StructuralChange: Searchfor Evidence A loose interpretation of structural change is followed here. More specifically, the notion is investigated in terms of output and input. On the output side, patterns of manufactured exports are analyzed relative to other sectors or to aggregate trade. On the input side, various tech- nical characteristics such as factor proportions, productivity, value added are considered as clues to understanding changes. Table 16.7 recasts table 16.5 in constant terms.1° Although exports were beginning to pick up in the early seventies, it was not until after 1974that more than one-half ofthe thirteen sectors Table16.7 PhilippineExportos f Nontraditional Manufactures(in millions of U.S. dollars) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Electrical & electronic - 0.3 0.4 7.7 11.2 24.5 50.4 72.6 130.8 174.6 272.8 348.2 495.1 equip. & components Garments 32.6 33.8 38.8 39.7 38.8 55.5 109.4 145.8 168.5 171.1 203.2 256.2 267.0 Handicrafts 5.9 8.7 12.9 18.8 19.0 40.6 49.1 56.2 51.7 56.6 62.7 55.6 60.2 Chemicals 4.9 6.6 6.3 7.3 6.6 11.5 16.0 31.6 30.9 47.8 38.6 44.3 47.9 Food products & beverages 7.4 8.5 11.2 10.3 7.2 7.6 17.0 25.5 24.2 24.1 69.3 128.8 106.2 Furniture & parts 1.0 1.1 1.5 2.3 2.5 2.7 5.8 12.7 13.7 23.2 31.4 36.3 35.4 Footwear 1.0 0.8 1.2 1.4 1.5 1.6 3.0 5.9 16.6 21.3 27.3 30.4 30.7 Machinery &trans. equip. 0.9 2.0 2.1 2.3 2.3 4.9 9.5 15.2 19.0 20.0 18.9 21.3 25.0 Textile yam, fabrics& 2.5 5.0 3.5 11.9 3.0 4.5 9.0 7.2 12.2 13.3 20.0 18.0 19.2 related prod. Builders’ woodwork & 3.6 5.4 7.7 11.8 10.2 8.8 9.2 8.1 10.7 13.3 9.7 16.1 15.3 other wood manuf. excl. plywood, veneer & lumber Nonmetallic mineral 2.7 10.4 10.0 17.3 15.0 16.7 16.6 22.5 21.8 12.8 23.9 19.6 19.5 manuf., particularly cement Cordage, cable, ropes & 1.7 2.0 3.1 3.1 4.0 3.9 6.2 7.2 6.4 7.1 7.5 8.5 27.6 twines Other 22.8 19.1 19.9 25.2 17.9 15.6 31.7 45.7 49.0 58.0 71.1 85.4 68.9 Total exp. of nontrad 85.1 -101.8 -115.9 -55.4 -135.2 -194.1 -340.0 -49.1 -55.5 -43.2 856.4 -,068.9 1,218.2 manuf. Total exports -,028.0 -,075.8 -,106.0 -,259.0 -,135.8 1,189.8 -,524.9 -,839.5 1,768.2 -,948.0 2,353.0 2,378.0 2,485.0 Source: National Economic and Development Authority, 1983 Philippine Statistical Yearbook. 498 FlorianA. Alburo covered in table 16.7 experienced peak growth rates. Moreover, fur- niture and footwear began tobe exported at significantly greater rates. Onecandetect seriousconcentration on certain commoditiesfrom 1971 to 1980. In 1971three product groups (garments, nonmetallic mineral manufactures, handicrafts) constituted half of the earnings, while in 1975and 1980half of export earnings were from only two groups (gar- ments and handicrafts in 1975and electrical equipment and garments in 1980).Despite the strong emergence of electronic equipment exports in 1974 and 1975, it was in 1979 and 1980 that their dominance was felt. In 1980 electronic equipment and garments exports composed 20.2% of total exports. The growing share of these exports in total trade in a sense relieves the burden placed on the country’s principal exports. Yet it can be seen that, even for the nontraditional manufactured exports, a similar excessive reliance is placed on only two or three commodity groups. It has been estimated from the 1974input-output tables that 14.2% of manufacturing outputisexported, including traditionalmanufactures (World Bank 1980). Another way to measure the importance of man- ufactured exports is to examine the fraction of these exports to the total manufacturing value added and trace its pattern over time. The Central Bank of the Philippines regularly reports yearly exports of manufactured products classified chiefly by materials. By using this data source it is possible to trace manufactured exports over a longer time horizon than that in tables 16.5 and 16.7. In the aggregate these two sources are not directly comparable. In 1960 the proportion of these exports to the value added in the manufacturing sector of 1.5%, growing to 4.5%in 1965and with a slight rise to 4.7%in 1970.By 1975 the proportion increased to 8.0%and by 1980to about 13%.The cor- responding proportion of manufactures to totalexportsis 8.3%in 1970, 16.3% in 1975, and 36.4%in 1980(49%in 1982). Thus the proportion of manufactures to totalexports was growing faster than the proportion of manufacturing output being exported. These figures seem to suggest that changes in the structure of the manufacturing sector would be slower than changes in the structure of exports. Table 16.8illustrates the annual growth rates of exports for selected manufacturing sectors from 1960to 1980.The annual growth rates are in general relatively high across most of these industries and over the twenty-year time period. This is nota surprising finding, however, given the fact that especially in the sixties manufactured exports were ab- solutely low. The low absolutebase would therefore imply high growth rates.For example, in the early sixties footwearexportswere less U.S. $100thousand; exports of leather manufactures, paper and paper prod- ucts, and nonmetallic mineral manufactures were minimal. What is significant in the table is the growth rate for some of the industries 499 Trade Patterns and Trends of the Philippines Table 16.8 AnnualGrowth Rates of Selected Manufactured Exports (percentagesp Industry 1960-65 1965-70 1970-75 1975-80 Foodb 2.4 6.6 24.9 11.0 Textile yarn 7.6 2.3 32.3 27.7 Footwear 32.5 87.4 23.6 86.1 Clothing 58.9 -9.8 236.8 53.3 Wood and cork 23.2 23.2 7.1 25.6 Furniture and fixtures 2.8 28.8 29.4 71.7 Paper and paper products 67.0c 90.9 16.4 -1.1 Rubber products 53.9 19.2 33.3 -5.1 Chemicalsd - 0.4 21.6 32.3 80.7 Nonmetallic mineral manufactures 14.9e 89.6 57.6 12.2 Metal products 82.3' 41.3 26.9 40.9 Machinery, except electrical -2.7 88.2 30.5 38.2 Electrical machinery - 201.5g 243.5 87.1 Transport equipment 74.1 30.7 86.3 68.7 Misc. manufactured goods Total manufactured articles 20.1 14.5 34.1 27.6 Source: Central Bank of the Philippines, Starisrical Bulletin (1978, 1980). aExport values in thousand U.S. dollars. bIncludesmeat, dairy products, and food processing. 1961-65. dIncludes crude chemicals, chemical products, and pharmaceuticals. e1960 -64. '1962-65. g1967- 70. producing nontraditional manufactured exports. Export growth accel- erated in the seventies for such products as furniture, chemicals, elec- trical machinery, and transport equipment. Structural change may also be examined using an approach taken by Lary (1968).Here industrial exports are classified according to factor proportions content and then traced in terms of changes over time. Products have either high or low capital intensities and high or low skill intensities as measures of labor content." Table 16.9 lists industries according to a four-way classification. This classification of the Philippine industrial exports is intuitively appeal- ing-garments, furniture, and footwear products, for example, require low capital and low labor skills, whereas the electronics industry, while of low capital intensity, needs highly skilledlabor. Nonmetallic mineral products use high capital inputs but not highly skilled labor when com- pared with chemicals.1Z The record of nontraditional manufactured exports for the seventies reveals that about 71% have been products requiring low capital and 500 Florian A. Alburo Table16.9 Classleation of ManufacturedExportb sy FactorIntensity Low Skill Intensity High Skill Intensity Low Capital Intensity Garments Electrical machinery and transport equipment Handicrafts Furniture Footwear Textile yam Builders’ woodwork Cordage High Capital Intensity Nonmetallic mineral manufactures Chemicals Food products Source: Lary 1968. Table16.10 Value andDistribution of NontraditionalManufacturedExports (in millions of 1972 U.S. dollars and percentages) Factor Content 1971 1975 1980 1982 Low capital-low skill 56.8 117.6 361.8 455.4 (67.4) (74.3) (80.6) (78.1) Low capital-high skill 2.0 4.9 18.9 25.0 (2.4) (3.1) (3.7) (4.3) High capital-low skill 18.9 24.3 93.2 54.9 (22.4) (15.3) (18.2) (9.4) High capital-high skill 6.6 11.5 38.6 47.9 (7.8) (7.3) (7.5) (8.2) Source: Tables 16.7 and 16.9. Note: Figures do not include nontraditional manufactured exports classified under Other in previous tables. low skill, 3%requiring low capital but high skill content, 18%requiring high capital and low skill, and the rest requiring high capital and high skill. Note, however, that exports of electricalproducts in the seventies are not necessarily comparable to similar exports in the sixties in terms of skill content. (The figures in table 16.10exclude the value of exports of electrical equipment and electronic components .) Changes in the factor intensity of exports occurred during the sev- enties (see table 16.10). At the start of the decade products with low capital and labor intensities composed more than two-thirds of new exports, with the other significant share composed of those with high capital but low skill intensities. During the decade the share of low- capital exports increased from 69.8% to 84.3% (dropping slight!y in 501 Trade Patterns and Trendsof the Philippines 1982). The share of products requiring high capital content decreased at the end of the decade (with the high-capital,low-skillproducts sharply decreasing andabout a constant share maintained by high-capital, high- skill products). The data suggest that there has been a trend toward exporting goods from less capital-intensive and more labor-intensive (both skilled and unskilled) industries. Low-capital- and high-skill- intensive exports had the highest growth rates (especially between 1971 and 1975). In summary, a search for structural changes associated with the recent growth of manufactured exports leads to several specific con- clusions. First, dataare available only for a relatively short period, and thus it is too early to determine whether the manufacturing sector has undergone a permanent adjustment (to new equilibria) in terms of out- put mix, factor proportions, productivity, and technology. The adjust- ments are too recent to allow a rigorous causal analysis of the surge of manufactured exports. On the other hand, the evidence explored here tends to suggest that the manufacturing sector experienced some structural change, though not highly visible, over the period of high growth of manufactured exports. It is perhaps necessary to measure the changes more precisely than has been done here. Although the growth in the value of nontraditional manufactured exports during the decade is quite phenomenal, it is also true that is has been mostly concentrated among two or three product groups. Thus the influence on the manufacturing sector as a whole is probably shallow and not as widespread as it would be with a broader growth pattern. Third, the movement of manufactured exports has been consistent with an outward-looking industrial path. For one, while the types of exports have a wide range of factor content, it is apparent that most are from industries with low capital intensities. Foranother,the growth rates of the various exports appear to indicate a trend toward less capital-intensiveexports and more labor-intensiveones. And then, even in the manufacturing sector as a whole, this change is perceptible only beginning with the midseventies. Finally, these are aspects of change emanatingfrom the supply side. Demand factors, intraindustry and interindustry relations, and even institutional arrangements equally affect structure. Any assessment therefore of the prospects for sustained growth or continued structural change must take account of these larger perspectives. 16.5 Prospects An appropriate assessment of prospects will have to consider such important factors as product diversification and market penetration, 502 Florian A. Alburo competition from other developing countries,and trade barriers as well as the factors reviewed in the previous section (factor responsiveness, efficiency, and capacity). The share of developing-country imports in the apparent consump- tion of manufactured goods in industrial countries was barely 1%at the end of the sixties. In 1980the share was 3.4%. What is more, the growth rate of the shares was 7.2%per year, ranging from 1.4%going into Belgium to 11%into Australia. Even more interesting than this implied dynamism is the fact that the growth in the shares of imports from industrial countries was 3.6% per year (Hughes and Krueger 1982). Hughes and Krueger (1982)have argued that despite increases in the protective measures employed by the industrialized countries during the seventies, the developingcountries performed respectably. The fall in the penetration rate in the latter half of the seventies reflects the deepening recession more than the effect of protection. This penetra- tion success came about in part from product diversification and off- shore production, aided by the apparent ineffectiveness of growing protectionism. What is relevant to Philippine prospects are (a) the volume of the industrializedcountries’ imports in comparison with the degree of Phil- ippine trade intensity, (b) the direction of diversification(c)the rela- tive experiences of other (especially the Association of South East Asian Nations [ASEAN]) developing-country manufactured exports, and (4 the scale of expected protection in these markets. Traditional exports declined in importance between 1970and 1980. In addition, trade with the United States and Japan (which imported 81.1% of Philippine exports) significantly declined (to 53.7%). Com- mensurately, trade with the European Community, Australia and New Zealand, and the rest of Asia accelerated, taking up most of the slack left by the United Statesand Japan. In sum, aside from the continued strength of trade with traditional sources, the Philippines gained firmer ground in those countries with high growth in the shares of manufac- tured imports from developing countries. With the exception of basic metals, nonmetallic mineral products, and paper, the ASEAN group of countries had the highest growth rates of manufactured exports to industrial countries (see Table 16.11). One must, of course, single out Singapore as primarily the source of such rates, with some help from Malaysia in a number of industries. Yet the Philippines doesfare equally wellin anumber ofthe high-import-growth industries, e.g.,floor coverings, tapestries, footwear. What does this mean in terms of the prospects for exports of non- traditional manufactures? Much depends on the strength of the eco- nomic recovery in the industrial countries and the degree of protec- Table 16.11 ManufacturedExports of Developing Countries to IndustrialCountries by Origin and Product Groups Percentage Share of Exports from: All Developing Other Countries Southern Latin Developing ISIC (billionsof U.S. $) Europe Far East" America Countries (ASEANp 31 Food, beverages, and tobacco 1970 7.5 9.5 2.7 50.0 37.8 (8.0) 1980 27.6 8.4 4.4 49.1 38.1 (12.1) Growth rate: 1970-80 15.2 11.7 19.3 25.1 15.9 (20.1) 32 Textiles, wearing apparel, and leather industries 1970 3.4 19.7 41.8 7.7 30.7 (2.5) 1980 31.4 18.6 44.5 9.0 27.9 (5.4) 27.4 23.0 Growth rate: 1970-80 24.5 22.9 25.6 (36.3) 33 Manufacture of wood and wood products, including furniture 13.7 36.2 (22.5) 1970 0.8 20.3 29.9 1980 5.6 20.0 31.2 10.0 38.8 (31.3) Growth rate: 1970-80 21.1 20.1 22.4 16.2 22.1 (25.4) 34 Manufacture of paper and paper products: printing and publishing 1970 0.2 57.9 14.2 10.7 17.2 (2.9) 39.1 21.0 32.0 7.8 1980 1.6 (2.8) Growth rdte: 1970-80 26.4 21.7 32.6 39.7 16.0 (23.7) 35 Manufacture of chemicals and chemical, petroleum, coal, rubber, and plastic products 1970 3.6 10.4 10.9 54.4 24.2 (4.9) 1980 37.5 9.5 13.3 37.7 40.0 (10.4) 23.7 29.9 21.5 31.4 (33.9) Growth rate: 1970-80 25.8 (continued) Table 16.11 (continued) Percentage Share of Exports from: All Developing Other Countries Southern Latin Developing ISIC (billions ofU.S. $) Europe Far Easta America Countries (ASEAN)" 36 Manufacture of nonmetallic mineral products, except products of petroleum and coal 1970 0.1 50.2 17.0 27.5 5.3 (1.O) 1980 1.4 39.4 36.4 13.5 10.6 (2.3) Growth rate: 1970-80 27.9 23.8 40.2 20.2 48.0 (41.7) 37 Basic metal industries 1970 4.0 7.3 0.7 30.9 61.1 (7.4) 1980 15.1 16.2 8.2 32.9 42.7 (13.2) Growth rate: 1970-80 14.7 22.7 41.5 15.4 10.7 (22.0) 38 Manufacture of fabricated metal products, machinery, and equipment 1970 I.6 25.8 35.5 16.5 22.2 (4.1) 1980 28.5 22.9 43.7 14.9 18.5 (16.8) Growth rate: 1970-80 32.8 28.9 34.6 31.0 37.2 (48.5) 39 Miscellaneous manufacturing industries 0.5 4.5 85.2 3.3 6.9 1970 (8.1) 1980 3.1 4.7 79.7 4.5 11.1 (5.6) Growth rate: 1970-80 22.8 21.6 22.1 25.2 28.5 (32.2) 3 All manufactured products 1970 21.7 13.1 1.5.5 35.3 36.1 (6.6) 1980 151.9 15.2 25.7 27.1 32.0 (11.7) Growth rate: 1970-80 21.8 22.1 27.9 18.9 20.5 (28.7) ~~~~~ Source: Hughes and Krueger 1982, 26. "Thecategory Far East includes Korea, Taiwan, Hong Kong, and Singapore, and the category (ASEAN)includes Indonesia, Malaysia, Philippines, Thailand, and Singapore. Singapore is thus included in both groups. The other ASEAN countries are also included in Other Developing Countries. The ASEAN group is duplicative. 505 Trade Patterns and Trends ofthe Philippines tionism imposed. It may be true that the protective measures undertaken so far have not had a perceptible effect on export performance. Yet the time of approaching limits on exports may not be far away, espe- cially with a drag in growth and reluctance to open up markets. On the other hand, there is a danger that simultaneous export expansion may drive penetration ratios to some limit prompting the erection of strong barriers (Cline 1982). Also, while it may be expected that more restraints will be asked of countries for which penetration ratios are already high, it is likely that opportunities for increasing the shares of the Philippines will material- ize. Thus while the overall import limits are low, the distribution oc- casioned by selective protectionism will allow expansion of Philippine nontraditional exports. l3 In terms of the supply potential of the manufacturing sector, the previous section examined a number of parameters associated with changes in manufacturing output in general and manufactured exports in particular. In the finalanalysis the ultimate and critical question with respect to the supply side is whether the scale and composition of incremental output are consistent with the country’s factor endow- ments. It is not so much whether manufactures are absorbed in do- mestic or international markets as whether policies create perverse movements one way or the other. The partial and aggregate evidence seems to support the hypothesis that (a) the recent surge ofnontraditionalmanufactured exports is along the lines of the country’s comparative advantage, (b) the changes in product composition during the seventies favor the relatively greater use of the country’s abundant resources, (c)factor proportions used in the manufacturing sector have declined in capital intensities, and (4 emerging policies and programs have recognized past distortions and consequently either compensated for them or explicitly favored labor-using incentives. These trends and developments must be verified by firmer data than those presented here. In particular, input-output analysis is necessary to measure protection of industries, factor proportions, export inten- sity, and other behavior in order to substantiatethe notion of sustained structural change and adjustment. l4 On balance, however, the prospects for active participation in the growing international trade of industrial products appear encouraging. In the first place, opportunities for increasing market penetration in developed countries are available to the Philippines, given its relatively low share among developingnations. With continued diversification of trading partners (especially those countries where penetration growth rates have been high), the opportunities are even greater. In the second place, even in the face of rising protectionism the likely effect on the 506 Florian A. Alburo country’s exports will probably be less than on those that have gained substantial shares of markets. And with the preferences for bilateral trade negotiations, there would seem to be greater scope for marginal access.15In the third place, economic growth has been consistent with indigenous resource proportions. If development spreads faster in con- sonance with the recent past, the medium-term outlook will conform to directions mapped out by policy changes instituted as reactions to previous industrial growth. Finally, while the changes (and prospects) have not been without difficult problems, such as excessive product concentration and declines in value added, productivity, and new cap- ital investments in manufacturing, these problems may be minimized with appropriate policies (outlined below) so asto sustain further eco- nomic progress. The record and prospects can be captured in a rough way by looking at the role of Philippine manufactured exports vis-a-vis the rest of the developing countries. Table 16.12 shows the shares of the Philippines in the sixty-four leading commodity exports of developing countries at the three-digit SITC level for which the country’s share exceeds 0.05%. In more than half of the products in the table the country’s share was Table 16.12 Share of the Philippines in Leading Commodity Exports of Developing Countries (percentages) SITC 1970 1975 1980 512 Organic chemicals a a 3.90 631 Veneers, plywood 15.81 6.29 8.93 a 653 Textiles 0.57 657 Floor covering a 1.05b.c - 674 Iron and steel plates a a 3.01 719 Machinery, nonelectrical 0.02 0.69 a 729 Electrical machinery a a 1.10 732 Motor vehicles 1.05 831 Travel goods a a 0.67 841 Clothing 0.04 0.75 2.02 851 Footwear a a 2.0Sb a a 864 Watches and clocks 1.02 893 Plastic 0.87 894 Toys 0.07 0.77 1.05 899 Other manufactures 0.94 11.18 6.72b 931 Special transactions 0.37 18.12 22.43 Source: UNCTAD, Handbook of International Trade and Development Statistics (New York: United Nations), various issues. Note: SITC 0-4 not included. aValue less than 0.05%. bValue higher than Singapore’s share. c1978. 507 Trade Patternsand Trends of the Philippines insignificant. SITC 631 really belongs to the traditional exports in the sense that it is not included in table6.5. Clearly these shares (which account for 76%of exports of nontraditional manufactures) are small in comparison to other countries, particularly Singapore, Korea, Hong Kong, and Taiwan. There is substantial scope for further, if not ac- celerated gains. The dangers that may thwart these prospects must, however, be recognized and an
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