• The Philippine ‘labor surplus’ story

    Crossroads (Toward Philippine Economic and Social Progress) by Gerardo P. Sicat
    (The Philippine Star) August 7, 2013

    As discussed in last week’s column, the impressive economic growth of East Asian countries like Japan, China, South Korea, Taiwan, Hong Kong and the three ASEAN countries of Thailand, Singapore, and Indonesia could be explained by the labor surplus model of growth. The phrase “labor surplus” is merely descriptive and has no disapproving or judgmental significance.

    The Philippine story of growth can also be approached using the “labor surplus” model. Official statistics report that around seven to eight percent of the labor force is unemployed. There is however a high degree of underemployment. Around 25 percent of the total labor force suffers from unemployment and underemployment.

    What is worse is that unemployment and underemployment affect the younger members of the labor force by a bigger margin. The “informal sector” of the economy has enlarged to absorb all forms of underemployment.

    “The Philippine growth story.” Unlike the typical East Asian narrative, the Philippine experience is unique: the labor surplus has remained a permanent feature of the economic landscape since independence.

    Yet, the Philippine growth story is not one of failure. It is not a success like that of our neighbors either. It is a long-standing story of sustained “labor surplus.”

    The permanent presence of high unemployment and underemployment and the modest growth of per capita GDP has been a feature of the record because of economic policies that reduced the labor absorption of new growth. It also features a high incidence of income inequality in the economy. All these outcomes form a vicious circle that has to be broken.

    The turning point of broadly shared rising incomes when surplus labor is exhausted – a feature associated with inclusive growth – is never reached since the labor surplus is large.

    “Unique factors that prolonged the labor surplus.” The confluence of several unique factors has made labor surplus a running feature of the Philippine story.

    (a) High population growth. Population growth has remained high in the country. The inter-censal rate of growth of population is 2.18 per cent per year between 1970 to 1990. The level of population is the basis of the labor force.

    Other countries in the region have reduced their population growth through their own state programs. Their high growth rates also accelerated the “demographic transition,” a natural consequence of development when parents reduce their family size as they become richer, more educated and diverse in their wants.

    The passage of the RH law last year promises to give the government a handle on dealing with population issues. The effect of such a law however will not be felt until after one decade from now.

    (b) Misguided economic nationalism. The nationalism of the 1930s was given expression in the restrictive economic provisions of the Constitution of 1935. These made the country adopt laws that followed the spirit of those provisions and which even extended them over other economic domains.

    Hence, we got even more misguided policies that restricted the country’s economic achievements. This encouraged a dependence on state action for many types of economic protection against foreign competition. When the Constitution was rewritten after the EDSA revolution in 1987, the provisions became more expanded in coverage rather than being more limited.

    (c) A long process of import substitution and economic protection. An outcome of the Constitutional restrictions has been to inculcate a mindset of protection in the philosophy of developing the economy. The industrialization process was left hostage to this mindset. Philippine industrial enterprises became highly domestic market-oriented. Big basic industries were anchored on high protection and large state support rather than geared toward supporting the growth of an economy that was exposed to competitive pressures.

    Long after our neighbors had shifted their policies that enabled them to face competition in foreign markets, Philippine industries were still looking mainly inward, trying to develop a limited domestic market. This policy fostered hostility to the entry of foreign direct investments in critical industries. On the other hand, the local industries created were heavily dependent on protection and government credit support.

    The import substitution industrialization which essentially got financed from the earnings of a vibrant export agricultural sector eventually led to the eclipse of agriculture industries at the expense of import substituting industries.

    This prolonged protectionist outlook made the country lag far behind neighbors that learned how to adapt their economies to the consumption needs of foreign markets, the industrial economies of the US and Europe and other countries.

    (d) On the wage front, the premature adoption of high standards of labor policies. The Bell economic mission in 1952 that recommended the adoption of a high minimum wage rate out of line with local market realities set the trend toward the adoption of labor standards that were out of line with promoting employment in many industries.

    In no small measure did this labor market policy move the country and domestic industry away from labor-intensive economic ventures. The promotion of industries that take advantage of the nation’s economic opportunities based on its abundant labor would have caused a rapid development of the garments and textiles sector as an export industry.

    But here, the confluence of high protection of the textile industry and other highly labor-using industries and the high wage policy arising from the high labor standards killed all the possibilities to exploit this line of work.

    These were the initial industries that propelled the export oriented economies of all the East Asian economies in their early stages of growth. In our country, however, all these opportunities were snuffed out because of the confluence of the protection mentality and the interventionist approach in labor policy.

    (e) Other factors. There are those who would assign a heavy weight to other factors. Some would ascribe them to leadership factors, to episodes of military coups and adventurism, to corruption, to cronyism, to the high cost of electricity, to inadequate infrastructure and to many other issues that could be the subject of long debate.

    Certainly, some of these factors give a special twist to the Philippine story. In my view, however, their factors that I have cited can further explain these other factors that others allude to.

    Misguided economic nationalism gave rise to rent-seeking, corruption, cronyism, and uncompetitive behavior dependent on state patronage. The long period of import substitution and protection has promoted further rent-seeking behavior and had corrupted the process of industrialization precisely because it was based on patronage.

    All these outcomes are inherently linked to the restrictive provisions of the Constitution. The high minimum wage policy has elevated the unemployment problem by simply killing off from the Philippine economy many highly productive employment creating ventures.

    (Next week, Some qualifications to the Philippine growth story).

    My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/