The extent of Philippine participation in global value chains (GVCs) in the post-COVID-19 world will be determined by how effective the country is in addressing the many structural constraints to greater involvement, according to a new World Bank (WB) report.
The paper entitled “A New Dawn for Global Value Chain Participation in the Philippines” said GVC participation is important because it stimulates productivity growth through knowledge spillovers, access to a larger variety of imported inputs, economies of scale, and specialization in firms’ core activities.
The COVID-19 crisis, by disrupting trade flows and GVC configuration, provides the Philippines an opportunity to accelerate reforms that will ease trade constraints, foreign direct investment (FDI) constraints, labor market constraints, and other challenges that stall participation.
Among these trade impediments are trade costs in the Philippines, which are one of the highest in the Association of Southeast Asian Nations (ASEAN) and which make physical connectivity a major setback, observed the report.
The paper noted that technical barriers are the main trade constraints to standardizing processes and products in the Philippines, and constrain the country’s ability to integrate smoothly into GVCs. Citing 2020 WB statistics, the report said about 43 such trade measures are imposed by at least 18 agencies supervised by 12 departments. Export-related measures are imposed by 26 trade-related government agencies supervised by 10 departments.
The report also emphasized that implementing the Regional Comprehensive Economic Partnership (RCEP) would be a major move toward easing trade constraints such as technical barriers and non-tariff measures.
“The Department of Trade and Industry projects that the main benefit from the RCEP will come from better trade facilitation (one agreement and uniform rules to follow across countries) and estimates US$60 billion in additional exports by 2025,” the study said.
Meanwhile, the WB expressed concern over the highly restrictive FDI constraints in the Philippines that cause the country to lose out to other ASEAN countries in attracting investors despite its competitive advantages.
“Limitations on foreign ownership in many sectors constrain FDI in the Philippines; poor infrastructure, regulatory inconsistencies, and high energy costs are further disincentives to invest,” it said.
But even as the COVID-19 pandemic has caused FDI in the Philippines to plunge, the crisis also offers another chance to rethink the country’s GVC participation strategy.
Likewise, skills-related constraints put the Philippines at a disadvantage against its regional peers. Moreover, despite having a relatively well-educated labor force in the business services sector, the country’s backward GVC participation is lower than that of Malaysia, Thailand, and Vietnam.
But the COVID-19 has also created an opportunity to retool and re-skill workers, the report said. To upgrade the position of the service sector, it is important to develop higher skills and switch toward more advanced activities in the future so as to improve participation in GVCs.
To move up the value chain, a synchronized policy is needed to address the challenges in the Philippine labor market, especially in science, technology, engineering, and mathematics, the report continued.
The study also touched on other constraints, such as financial market gaps that thwart micro, small and medium enterprises’ (MSMEs) efforts to join GVCs. MSMEs require access to a range of financial products suitable to their stage of development. They need to have access to three types of financial products: cash flow-based financing, asset-based financing, and viability-based financing, said the document launched early this month.
At the same time, the Philippines faces two major infrastructure constraints to increased GVC participation: digital connectivity and physical connectivity. The need for trade infrastructure (reform customs, liberalization of transportation services, and investment in ports and roads) and advanced logistics services (investment in multimodal transportation infrastructure) is compounded by digital connectivity challenges (the liberalization of ICT services and investment in basic ICT as well as broadband infrastructure). These challenges call for sustained public and private investment in connectivity to enable seamless participation in GVCs.
The study also identified other hindrances to GVC participation including red tape, weak contract enforcement, widespread corruption, extremely complex business regulations, and legislative gaps, which could be addressed by enhancing transparency, predictability, and accountability.
The report said the pandemic presents the Philippines with a unique opportunity to align policies, the business climate, the pace of reform, and the institutional framework with future challenges, and urged the nation not to miss this rare chance.
“Policies are needed to reverse the Philippines’ missed opportunities and strengthen its position in key GVCs. Decisive policy action to ensure that investment is channeled into priority sustainable development sectors has never been so critical,” it said.
By understanding future GVC trends and drivers of change, the government can anticipate changes and respond to them by realigning existing policies or crafting new policies to maximize the benefits of GVC reconfiguration, the WB said.