UN study: COVID-19 reveals vulnerabilities of PH firms, need to capacitate industry

The COVID-19 crisis has severely disrupted the Philippine economy and labor market, and highlighted the urgent need for policies that will increase the capacity of pandemic-hit sectors and firms to create jobs for sustainable and inclusive growth, according to a new United Nations (UN) Philippines study.

The pandemic has also revealed the vulnerabilities of sectors and firms that are dependent on foreign trade and intermediates, said the study, as it called for political will and collective action to implement necessary reforms.

The paper is a joint research project of the UN Philippines with the International Labour Organization, United Nations Development Programme, and United Nations Industrial Development Organization that was released earlier this month.

The report further said that policy decisions in the Philippines have not responded to evolving challenges but rather have continued to produce weak industrial competitiveness and lack of productive employment, which keeps investments and demand for skills low.

“These feed the vicious cycle that makes industrial diversification, upgrading and deep structural transformation increasingly difficult over time,” said the report.

It said intensifying the capacity of the Philippine economy to create productive employment is now a matter of urgency, with a working-age population of around 75 million and around 600,000 net additional workers entering the labor force each year.

However, it also found that “developing countries such as the Philippines are particularly handicapped by their weak institutions and their dependence on the continued openness of the world economy for their own economic growth.”

The report went on to identify main trends that characterize the current state of the Philippine industry and labor market.

One is the weakening competitiveness of Philippine manufacturing and the shrinking number of exporting firms over the last two decades.

“The Philippines has also become more of a market of consumer goods rather than a hub of manufacturing exports due to the combination of a liberal trading regime and a large domestic market with increasing purchasing power boosted by the robust flow of remittances. For Filipino firms, this entails behaving like exporters who must compete with foreign businesses to survive in the domestic market,” the report said.

Another trend is the weakening integration of the Philippine industrial base through the years, which constrains firms from domestically sourcing their inputs in the most cost-efficient manner.

“While agriculture has become a more important source of input for industry and services, the role of these sectors for agriculture production has diminished. Based on the extent of transactions within sectors, manufacturing seems to have also become less integrated as indicated by the reduced intensity of sourcing within sub-sectors,” the paper said.

The third trend is that while the Philippines has increased the sophistication of its exports through its participation in global value chains (GVCs), it has languished in low value-added segments of production. The country in general demonstrates a comparative advantage in labor-intensive, and thus lower-value export goods, and a comparative disadvantage in higher-value, capital-intensive imports.

Another finding is that industrial catch-up and diversification towards more complex products is becoming increasingly difficult, slowing down the pace of economic diversification.

The Philippines did diversify from 2003 to 2018 but this added just 3% to export revenues, contributing $33 to the country’s income per capita in 2018. In comparison, Vietnam added 48 new products and $1,015 to its per capita income, and 35% to total exports during the same 15-year period.

“This suggests that while the Philippines has diversified, the volume of its new products has not been big enough to substantially contribute to overall growth,” said the research.

The last notable trend is that the Philippine labor market is characterized by stagnant growth in real wages, persistent gender disparities, low employment growth and poor quality of work.

The report said: “The COVID-19 crisis has exposed the weaknesses of economic, health, social and political systems. In so doing, however, it has also presented extraordinary opportunities to muster the political will and collective action towards necessary fundamental reforms.”

It recommends putting at the top of the policy agenda measures that will increase agricultural productivity and resilience, as well as address the vulnerability of millions of the working poor, daily wage workers, youth and other vulnerable groups.

It further said that the COVID-19 economic stimulus package for local firms is a potential catalyst for inclusive growth if proper focus is given to the recovery of small and medium enterprises.

The stimulus package, it added, could have an even lasting impact on inclusive growth if it is used to institutionalize reforms particularly in credit access, formalization, digitization and innovation. It could also be used to incentivize industrial linkages and the transition towards green technologies and products.

At the same time, the report described how other countries successfully implemented industrial policies for catch-up industrial growth, largely by capacitating the domestic industry.

“Invariably anchored on bold and long-terms targets to build domestic industrial base, successful countries extended strict rules to induce GVCs or large companies to integrate local firms in their input-sourcing strategies with complementary investment in upskilling the workforce and supporting research institutes. Tax breaks and subsidies are combined with pragmatic strategies to deliver necessary skills, finance and infrastructure to producers and to build socio-political consensus. A COVID-19 economic package for local firms can take place under a fully coordinated industrial package that contributes to long-lasting development impact.”

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