AFTER reading Ben Kritz's excellent column on August 30, I also read Alex Magno's column "Zombie" that Kritz referred to on the lamentable sugar industry in the Philippines as well as Magno's column on salt. I like that Magno clearly distinguished between the two situations which show a penetrating and flexible intellect at work.
I will not repeat their takes as they both analyze it very well but would rather add to the discussion by concentrating on another aspect. It is clear that as a country we are uncompetitive in frankly anything except it seems for exporting labor while having among the highest population growth globally and slowest economic growth in Asia for decades. Now what do we do about being uncompetitive in so many industries and businesses?
I agree with those who opine that government services are often abysmal, and the bureaucracy can be straight out of Franz Kafka's The Trial making us feel like Gregor Samsa in The Metamorphosis. I also agree that in many key industries and areas we are not just far from world-class, we are not even marginal but uncompetitive without the umbilical cord of subsidies or protection. Where I disagree is doing either of these two things as a result: Leave it to the private sector or even worse, let the industry die and replace it with imports. Not only is that condemning our overpopulated country to being reduced to an exporter of labor and providing labor in what few light manufacturing and assembly plants there are plus some business outsourcing and online marketing. Those strategies have already failed! Look at our last 40 years and see what that approach has borne. I have long thought the only reason we have not had major social upheaval since EDSA in 1986 is because the potential leaders of the movement are now OFWs, instead of unhappy and frustrated workers at home.
What have we seen in the last 40 years with the failures of both the last part of the first Marcos regime and many of the administrations since EDSA? Basically, with the economic legacy the 1980s left us in, guess what happened? We exited most of the few industries we had because of the loss of tariff protection and other reasons. Why did we lower tariff protection? Because we could not handle a premature equivalent of Brexit. So, we had to follow the pattern of lowering tariffs and barriers to remain a partner in mainstream trade and services. But we did little to adapt to that. The government had to lower or remove tariff protection that protected what scant industries and manufacturing base there was. We left it to the private sector to fend for themselves and we saw what happened. Not that it was just their fault. Some survived, but for too many companies, high utility costs, abysmal infrastructure, horrible bureaucracy and corruption, and a badly structured tax system were too much to overcome. Still, it would also be fair to say that many who could have adopted did not adjust fast and thoroughly enough to survive in a system that was free of either quotas (remember garments?) or tariff protection. Why were food manufacturers an exception? They always were competitive rather than coddled, and companies like Universal Robina, Monde Nissin, Century Pacific Food, San Miguel and RFM always had to compete not just with each other but with multinationals and imports.
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What puny manufacturing we had was replaced with imports, which further ate into what was left not just of that base, but even into other areas like agriculture. This exacerbated our lack of food security and without low prices to compensate. As pointed out, globally, sugar sells for about P22 a kilogram. Yet our sugar-producing country sells it domestically for anywhere between P50 to P100. Let's see how that affects our food manufacturers as well. Though many were wise enough to have their own sugar mills. With our 7,000 islands, we import 93 percent of our salt. We can list more products and staples.
Therefore, keep importing and import even more? How will we pay for that eventually if there is less and less employment in the Philippines as more companies exit while keeping our high population growth? Keep exporting people? Don't you think the law of diminishing returns will also apply to seeking overseas jobs? If available, don't you think the marginal jobs will get worse and harsher even if they exist? As we found out with food importation — it is like the provision in bank credit lines — subject to availability. Not to mention a big importer must often be a price taker rather than negotiator.
Our political and economic crisis of the 1980s did not help, but others like China and Vietnam had even bigger hurdles to overcome at the same time on their amazing march to industrialization, progress, and most of all, mass wealth creation for their people. What did they do that we did not? Let us start with what we did. We blindly followed the Washington Consensus that the best government was the least government, open our economy, and don't support major companies in difficulty. All well, but notice how the advocates of that did not follow it themselves when faced with an analogous situation in 2008. Yet, no change with most of our decision-makers. Was there a desperate need to stop coddling inefficient industries and companies that often produced substandard and overpriced goods? Of course. Did our neighbors do the same? Of course not.
First, they were not so naïve as to blindly follow the Washington Consensus but found their own ways, often with mistakes but with simple goals in mind. They made sure their utility and infrastructure were not just sufficient or better but priced to benefit manufacturing and economic development. When I brought international investors from the rest of Asia to invest in some power-generating companies in the Philippines in the 1990s, they were shocked that residential power rates were cheaper than industrial and commercial. In those countries, they had the lowest rates for manufacturing and industry, then commercial, with the highest for residential, with subsidies or relief given to those in need. I don't need to explain the logic.
They did open their economies, especially in areas where they were not expert or competitive. In areas where they had existing players who were under stress, they always made sure there was at least one local champion to keep from being completely beholden to foreign companies whose top priority was not them. In the aftermath of the 1997 crisis, most of Asia's cement companies were in extreme difficulty given the collapse in construction and infrastructure spending. Except for Northern Cement, which was sequestered at the time, all our cement plants were sold to foreign companies. Same thing in Indonesia. What did Thailand pragmatically do? They sold all, except the leader, Siam Cement, which the government supported. Guess who has lower cement prices than Indonesia and the Philippines? Then see what happened after. When the new owners ran into difficulties of their own, they sold or tried to sell their Asian assets, including those in the Philippines, and some skimped on upgrades and so on while they attended to bigger problems and opportunities in their core markets and had to ration capital. Still want to have all our key industries in the hands of owners who do not look at us as even a second-tier priority?
What else? They did not just give up on government services and leave it to the private sector. They worked to make government services better and coordinate better in helping the private sector. In Vietnam, for example, a client of mine bought a fish meal company which exported all its output. All he had to do was go to one government office and they took care of all approvals, licenses and permits, whether local, provincial, or national. It did not stop there as they provided continuing service and when a local mayor was harassing them, he asked for help. The office said we will take care of it. After a quick investigation they removed and arrested the mayor. Things are far from perfect in Vietnam. It is a tough place with very competitive people who are not pushovers if you muscle into their space, but this is an example of making government effective and accountable. Another example was another client of mine who built a critical toll road in Malaysia. The government wanted the toll to be cheap to enhance usage and promote the manufacturing hub and other priority areas the road was going to connect. The government did not have the budget to build it themselves. It was built and operated privately, but for the first few years, toll rates were subsidized to enhance usage. What did we do under President Aquino? Ask for an upfront premium to cover annual government spending which was much more than the cost of the road and right of way. The toll operator would get his return by building it into the toll rate over the concession period. So, making sure our expensive infrastructure stays that way for decades to deal with short-term funding needs. I understand the reason why this was done. I just don't agree with it.
What about zombies and non-existent industries? I have previously written about promoting sectors where we have a comparable advantage which includes integrated mining and tourism. See how Indonesia is benefiting from mining and processing nickel and copper, and Thailand from tourism. Yet what about other necessary sectors? Like agriculture for food security if we hope to feed our people with certainty and manufacturing basic inputs needed for supply chains if we hope to even have a chance to develop manufacturing? Look at what the rest of Asean and China did. They did not just leave it to the private sector or abandon industries and replace them with imports. They did not take the situation as a given but enacted laws, policies, and forced reforms and improvements in the players to get there. They addressed the challenges wholistically and comprehensively. Not our ad hoc lurching from crisis to crisis. They also give great priority and enhance the quality of education. They fully fund it as it treated an invaluable investment. They concentrate on math, sciences and engineering. With our education, we are discussing ROTC and whether to revert to bilingual instruction. It is way overdue to do what is necessary and difficult in so many areas.