• The three-level economy

    Ben D. Kritz

    Ben D. Kritz

    In an enlightening column last week (“What went wrong? No national industrialization!” February 13), Dr. Giovanni Tapang took up the topic of why, to the surprise of no one except President Benigno Aquino 3rd, a recent Social Weather Stations survey indicated the unemployment rate of the Philippines is closer to 25 percent rather than the innocuous-sounding 7.1 percent reported by the government at the end of January. The problem, in Tapang’s view, is that there are no national-scale goals to build the country’s industrial base. Given that the services sector is a weak jobs creator compared to manufacturing and agriculture, and given that privatization and liberalization tends to encourage investment in services—the implication here is that investment from external sources is by nature exploitative—the Aquino administration has greatly expanded the problem that now mystifies it with its aggressive policy to shed government management and responsibility for economic activity.

    Some of the participants in my own discussion were critical of Tapang’s thesis, because the recommendations he put forth when taken all together amount to something very much like a centralized, command economy. While details and specific actions are debatable—I certainly don’t agree with all of them, either—Tapang is absolutely on the right track with his broader perspective. The Philippine economy is unsustainably overbalanced in favor of consumption rather than production, and the country’s policymakers have spent every one of the 936 days of the current administration’s term demonstrating that they have absolutely no understanding of the difference between the two, and why the latter is far more important than the other.

    When Tapang described what he calls “a program of national industrialization,” what he was really describing was an example of the “three-tiered” or “three-level” economy. The first level is the broadest and provides the foundation for the entire economy, and we can refer to it as the “resource development” level. At this level, resources are created; this includes not only material resources—minerals, gas and oil that can be harvested from the Earth, and agricultural products—but also human resources, and together with these, all of the things that are required for creation, collection and deployment of the resources. That includes transportation infrastructure to efficiently move goods and people; effective institutions of governance, regulation and management; human development systems such as education and health care; human support structures such as housing (housing, not real estate), public safety and emergency response, and waste and environmental management; basic utility infrastructure (electricity, water and fuel); and a basic communications infrastructure.

    The second level is the “production” level. This is the level at which the ores mined from the ground are turned into metals and then made into cars, washing machines, and cell phones; where raw farm and aquaculture products are prepared and distributed to markets, or turned into other food products; and where other raw materials are made into finished products. In most properly developing modern economies, this middle level generally accounts for the largest proportion of the country’s total employment.

    The third level is the one we call “services,” and while it is legitimately a very large part of the economy in terms of output, in an established economy it still should be proportionally the smallest in terms of labor and capital input. Services include everything from retail, restaurants, tourism facilities and entertainment to the more sober sectors of banking and finance, and business process outsourcing.

    The boundaries between the three levels are not sharp lines, and the paths between the resources at the first level to their end-product consumption and value-added activities in the third are often convoluted and discontinuous. Nevertheless, for the economy to be sustainable and grow continuously in real terms, a higher level of the economy cannot be supported by a weak foundation. That is what the Philippines has attempted to do for many years, and why it will eventually fail if it does not, as Tapang suggests, adopt a more fundamental approach.

    The effort—which is here described for the benefit of the next administration, this one having demonstrated long before now that it is a hopelessly lost cause—should be entirely focused on the first “resource development” level. The biggest problem the country faces, and has grappled with for a very long time, is that for a vast majority of the population their full productive efforts—whether they are employed in the conventional sense or not—are not sufficient to provide for their families’ basic needs. Areas where immediate and significant reductions in costs to consumers need to be made are electricity rates, costs of fuel, transportation costs, and costs for health care and even basic education.

    These problems may have solutions that do not require cutting the private sector out of these sectors, but it is abundantly clear that liberalizing the power and petroleum industries to the extent the Electric Power Industry Reform Act (Epira) and Oil Deregulation Law did resulted in exactly the opposite of the intended effects. In the context of the country’s experience with those bad decisions, that makes the current administration’s drive to reduce its responsibility for education and public health—already insufficiently met by spending about half of what is considered an acceptable global standard for those two areas—look completely asinine. Beyond taking basic steps to improve conditions for its human capital—which also rightly includes things like developing an effective disaster management program under a dedicated agency, and doing something about the country’s appalling solid waste management problem—the government should also commit itself to developing sane agricultural and mineral extraction policies, which are at present haphazard and poorly managed in the former case and completely absent in the latter.

    As with the suggestions made by Tapang last week, any detailed recommendations are subject to debate, but in a sense that only highlights the biggest failure in the country’s economic management: The relevant debate has not happened up to now, is not being sought by the country’s leadership, and is not welcomed when the attempt is made to offer it anyway. If the country can find a way to eliminate that sort of closed-mindedness from its economic policy planning, that will be a big step forward.



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