International Academy for Global Business & Trade IAGBT ·...

International Academy for Global Business & TradeInternational Academy for Global Business & TradeIAGBTIAGBT

Journal of Global Business & Trade2007. 10, Vol. 3, No. 2, pp. 1-14.

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. Introduction

Supply chain management (SCM) is defined by Krajewski,et.al.(2007) as “developing

a strategy to organize, control, and motivate the resources involved in the flow of services

and materials within the network of services, material and information flows that link a

firm’s customer relationship, order fulfillment and supplier relationship processes to those

of its suppliers and customers.” Much has been said about the advantages of SCM primar-

ily from the vantage point of large companies in the manufacturing and agricultural sectors.

Such businesses have embraced the concept in order to continuously search for ways to

build competitive advantage and in response to the trend towards globalized markets.

However, few research studies have focused on SCM as it applies to small and medium

agri-based enterprises particularly in the Philippine setting. Past literature suggests that

SCM concepts in these enterprises may not be applicable due to weaknesses inherent in

their operations and general environment.

AFFA et. al. (2002) as cited by Woods in 2004 identified six key principles of suc-

cessful SCM in recent studies of supply chains in Australia as follows: (1) a customer/con-

sumer focus; (2) chain results in value creation and sharing among all its members; (3) as-

certaining that the product fits the customers’ specifications; (4) effective logistics and dis-

tribution; (5) participation of all chain members in an information and communication strat-

egy; and (6) promoting effective relationships that provide leverage and shared ownership.

While predominantly Western countries immediately pursued and practiced the SCM

concept in the 1990s, Philippine-based enterprises particularly the multinational firms and

Jeanette Angeline B. Madamba

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some large-scale companies started showing interest in SCM only a few years ago.

Philippine agri-based SMEs, specifically the micro and small enterprises are not familiar at

all with the SCM concept. A cursory look at their supply chains shows that traditional

tie-ups or linkages which have persisted through the years remain to this day and these en-

trepreneurs are not inclined to change the status quo and therefore leave their comfort

zones. So many agri-based SMEs have closed shop when production surplus cannot be

sold, when sudden hikes in production, operating and marketing expenses result to negative

profit or when working capital dries up. Previously production-driven SMEs, however,

seem to have started recognizing the importance of being market-oriented such that for the

most part, production only commences when a customer places an order for a product.

Nevertheless, the applicability of the SCM concept in such enterprises must be explored

because small and medium enterprises (SMEs) serve as the backbone of the Philippine

economy, representing 99.6% of all registered companies.

This paper attempts to ferret out causes of common critical issues relative to SCM

which these enterprises face as well as to suggest possible solutions to provide policy-

makers and other stakeholders with insights so that these issues may be addressed. A third

objective of this paper is to discuss the applicability of the SCM concept as this relates to

specific supply chain issues plaguing selected enterprises engaged in carabeef and dairy

milk production, charcoal-making and coconut vodka processing (locally known as lamba-

nog) in Laguna, a Philippine province south of Manila.

. Methodology

This paper is exploratory in nature and is based on primary and secondary data from

most recent unpublished special problem reports. Such qualitative and quantitative data

were originally gathered through key informant interviews and with the use of structured

questionnaires administered to 51 dairy carabao raisers and 25 carabeef wholesalers who

were identified through the snowball sampling technique based initially on a list provided

by the Philippine Carabao Center. Respondents for the charcoal-making and coconut vodka

industries were likewise identified through snowball sampling as follows: 66 charcoal pro-

ducers, 78 charcoal-buying households, 38 charcoal traders, 143 charcoal-buying business

Supply Chain Issues of Selected Agri-Based Small And Medium Enterprises In Laguna (Philippines)

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establishments and 7 coconut vodka processors. Data from such special problem reports

were collated, summarized or sorted as these relate to the three major supply chain nodes

(supply node, production/processing node and distribution node). These were then analyzed

to identify common issues of such agri-related SMEs. Causal factors that led to these is-

sues were then generated through brainstorming to come up with causal tables. Causal

identification for each supply chain node provided the basis for coming up with possible

solutions to the common problem(s) found in carabeef and dairy milk production, char-

coal-making and coconut vodka processing. For the third objective, the applicability of the

SCM concept was determined by comparing the findings from these studies with the

Australian experience with respect to the AFFA-identified six key principles for successful

SCM.

. Profile of Laguna

The Province of Laguna, which covers a total land area of 1,769.7 square kilometers,

is situated south of Manila and is bounded on the north by Laguna de Bay and the prov-

ince of Rizal, on the northeast by the Sierra Madre Mountain Range, on the east by

Quezon Province, on the south by Batangas and on the west by Cavite.

Laguna’s proximity to Metro Manila makes it a strategic site for domestic and interna-

tional business inasmuch as the Ninoy Aquino International Airport is a 1 ½-hour drive

from the Calamba industrial estates and the Manila International Seaport is two hours away

by land. The industrial estates that have mushroomed in key Laguna towns such as Binan,

Sta. Rosa and Calamba are home to many industrial and agro-industrial companies that ac-

count for about one-fourth of total Philippine exports. Moreover, Laguna is within commut-

ing distance from Makati City, the country’s primary business and financial hub. In addi-

tion, it is accessible to the agricultural provinces of Batangas and Quezon as well as the

resource-rich provinces of Marinduque, Mindoro, Palawan and Romblon through the

Batangas and Quezon ports. The completion of the Batangas port also enhances this strate-

gic location.

As of the year 2000, Laguna, which is comprised of 28 municipalities and two cities,

had approximately 1.96 million inhabitants. Population growth rate is estimated at 4.08


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percent. Since the 1980’s, an overall downtrend in crop production was evident due to a

huge drop in sugarcane production and more recently, due to devastation wrought by super

typhoons. Crop farming (such as coconut) continues to dominate the agricultural landscape.

Other crops planted or cultured include rice, vegetables, fruits (such as rambutan and lan-

zones), orchids and ornamental plants. Backyard farms where livestock and poultry are

raised such as carabaos, swine, chickens, ducks, geese and turkeys are maintained. For

those living along Laguna de Bay, tilapia culture is a means of livelihood. Though quanti-

tative data is lacking in terms of the extent of agri-based SMEs in Laguna, various ag-

ri-based micro-scale, small and medium enterprises prevail such as those engaged in mak-

ing buko or coconut pie (Los Banos), lambanog or coconut vodka (Liliw), white cheese

from carabao’s milk (Sta. Cruz), rice cake or puto Binan (Binan) among others.

. Overview of Selected Enterprises in Laguna

4.1. Carabeef Wholesaling/Retailing and Dairy Carabao Industry

Demand for carabeef in Laguna has been on the uptrend (averaging 4.14% per annum

from 1998-2005) while the available supply of carabeef which initially increased by

20.93% started to exhibit a decreasing trend towards the end of 2003. Nevertheless, the

surplus was still double that of Laguna’s requirement. Much of Laguna’s surplus of car-

abeef was consumed outside of the province. With carabeef cheaper than beef, it is a pop-

ular meat added by meat processors to corned beef.

In the dairy carabao industry, no available historical data was available. However,

based on the recent information gathered from the respondents, all dairy milk produced

was purchased by consumers and white cheese processors from Sta. Cruz, Laguna. In fact,

the dairy caracow herd in Laguna is insufficient to meet all demand requirements of car-

abao milk processors.

Carabeef wholesalers were predominantly male, with the ages of 25-35 years, married

and high school graduates. Majority were retailers of other meat cuts in addition to

carabeef. Carabeef was sold in public markets usually on weekends. Carabaos for slaughter

were sourced from the auction market in Batangas or from viajeros or traders from


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Quezon, Bicol and as far north as the Ilocos region.

Dairy carabao raisers had a similar personal profile to that of carabeef wholesalers.

They were fairly recent entrants into dairy carabao raising with less than five years’ expe-

rience in dairy carabao raising as this was only an additional source of income for them.

Their main occupation was still crop farming, usually rice.

4.2. Charcoal Industry

The charcoal industry in Laguna can be described as akin to pure competition as there

are many sellers and buyers. Many of the enterprises operate on a micro-scale level or are

backyard producers concentrated in the forested and distant towns of the province and had

a low degree of product differentiation. Most micro-scale charcoal producers made the tra-

ditional wood or coconut shell lump charcoal which they sold to the domestic market.

Only a handful had small or medium-scale operations. Two small-scale firms made

charcoal briquettes for the domestic market while the medium-scale firms also sold to the

domestic market and were exporters of either granulated charcoal from rice hull or coconut

shell granulated charcoal.

Demand and supply information are practically non-existent. However, the previous

study indicated that demand for charcoal came from households and commercial and in-

dustrial establishments utilizing such charcoal essentially as fuel. It appears that current

supply exceeds the demand of business establishments probably due to the abundance of

wood from trees felled by last year’s super typhoon but supply of wood can become crit-

ical when the excess supply from felled trees gets exhausted. Export demand from Korea

and Japan has reportedly been increasing.

Fifty-eight (58%) of the charcoal producers were within the ages of 36-55 years.

About one-half were male and married with one-third of these entrepreneurs having fin-

ished high school. Majority (84%) of such charcoal producers considered charcoal pro-

duction as merely a means of livelihood during the off-farm season after serving as farm

laborers during crop planting and harvesting seasons. In addition, they had other sources of

income such as engaging in dairy farming or livestock raising.


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4.3. Coconut Vodka (Lambanog) Processing Industry

Coconut vodka processing/distilling enterprises in Liliw, Laguna were family busi-

nesses all operating on a micro-scale level. These enterprises were operated in mostly

leased coconut farms where the coconut sap (tuba) needed for production were directly

sourced. After a serious pest infestation in 2002, new players have started to venture in the

lambanog processing business though majority of the distillers have been in the lambanog

business for over 20 years.

Processors/distillery owner-operators were at least 40 years old, married and most of

them did not finish high school. Except for one distillery owner-operator, most learned co-

conut vodka processing from their elders. Over half of the respondents had other sources

of income such as vegetable farming, piggery, sari-sari store operations or fresh/ whole nut

retailing.

Approximately 70% of lambanog products were sold within Liliw, about 23% were

sold within Laguna and the remaining 3% were sold to Rizal, a nearby province. Buyers

go to the houses of distillery operators and purchase the products from them. Containers

are provided by buyers who purchase directly from the processing sites. While products

made are primarily pure lambanog, distillery operators, upon request by customers, make

flavored lambanog such as coffee-flavored wine, tea-flavored wine, lambanog soaked with

apple peeling or prune-soaked lambanog.

. Issues in Supply Chain Management

Problems pointed out by carabeef producers, dairy carabao raisers, charcoal en-

trepreneurs and coconut vodka processors in Laguna can be categorized as follows:

5.1. Problems in the Supply Node

According to Punto (2007), carabeef sellers at times found no available carabao for

slaughter which means they did not get to sell carabeef on certain days. The lack of a sta-

ble supply of carabao for slaughter had ripple effects downstream which means during un-

planned moments, there were times when consumers were not be able to find carabeef


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when desired.

Dorado (2007) pointed out the scarcity of raw materials for charcoal-making as a ma-

jor problem of backyard producers. Coconut shells were hard to find because farmers

planted lesser coconut trees, not to mention the fact that coconut shells were either proc-

essed into coconut shell flour or exported to other Asian countries. In addition, the lump

charcoal producers had difficulties sourcing wood from any tree species inasmuch as the

Department of Environment and Natural Resources (DENR) had imposed a logging ban.

Likewise, Agapay (2007) cited the lack of coconut sap for lambanog production par-

ticularly during the rainy season. When it rained, rain water mixed with toddy on the re-

ceptacles of coconut inflorescences thus causing a reduction in the yield of tuba which in

turn reduced the amount of lambanog produced.

5.2. Problems in the Production/Processing Node

Animal stress during transportation resulted in lower weight and therefore reduced

profit. Unfair or low calculations of carabao weight brought about by the practice called

tasahan where the carabao seller estimates the weight of the carabao instead of actually

weighing the carabao was another issue that usually had negative implications on

profitability. Before being sold, carabaos were also forced to drink water to add to the esti-

mated weight. Furthermore, processing losses (loss of parts of the slaughtered carabao)

were reported such that carabeef sellers end up losing more money. Delay in slaughtering

brought about by tardiness on the part of personnel also caused a loss in the opportunity to

sell during peak hours (usually 4-6 a.m.).

With respect to dairy carabao raisers, lower milk yield due to environmental stress and

the inability by milking personnel to collect the expected volume of milk were

experienced. The latter case happened when the milking personnel got drunk the night be-

fore milking. In addition, carabaos to be milked sometimes were hard to restrain resulting

in limited milk production. (Punto, 2007)

In charcoal making enterprises, low recovery of charcoal, lack of information on mod-

ern production techniques, heavy rains and typhoons (which slow down the charcoaling

process), outdated charcoal briquetting equipment and lack of capital for upgrading of fa-

cilities and inadequate working capital were identified as problems. Moreover, difficulty in


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attracting workers because of the perceived low wage rate and hazards on the job as well

as low labor productivity caused by poor worker attitude, difficulty in adapting to mecha-

nized methods of production and inferior working conditions were enumerated as concerns

that must be addressed. (Dorado, 2007)

Absenteeism of toddy gatherers is also an issue in the case of lambanog making.

Moreover, injuries in the farm occur when bamboo structures set up for the toddy gatherers

to perch on are damaged or become slippery due to torrential rains. (Agapay, 2007).

5.3. Problems in the Distribution Node

Decreasing demand for carabeef according to Punto (2007) was cited as an important

issue. Carabeef sellers noted that the volume of carabeef purchased has been going down

as price-conscious consumers shift to cheaper substitutes in view of the lower purchasing

power of the peso.

For the distribution node of charcoal enterprises, Dorado (2007) pinpointed the follow-

ing problems: poor roads and infrastructure facilities, lack of transport facilities and funds

for marketing, the presence of numerous intermediaries, low product awareness and

acceptability.

Stiff competition offered by chemically produced alcoholic beverages such as gin, beer

and vodka, not to mention lambanog produced in nearby towns or provinces (e.g. Quezon)

was a major concern of lambanog processors. Moreover, distillery operators complained

about the poor collection rate of buyers purchasing products on credit (Agapay, 2007).

. Causal Analysis of Problems Raised by Agri-Based Smes

Causal tables (as shown in Tables 1-5) in the succeeding section detail the possible

immediate and root causes of major issues mentioned by Laguna-based small and me-

dium-scale entrepreneurs.


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Table 1: Possible causes of lack of /unstable raw material supply (SUPPLY NODE)

Table 2: Possible causes of low productivity (PRODUCTION/PROCESSING NODE)


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Table 3: Possible causes of distribution difficulties (DISTRIBUTION NODE)

Table 4: Possible causes of shifts in customer purchasing behavior or market

demand (DISTRIBUTION NODE)


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Table 5: Possible causes of poor collection of accounts receivables from buyers


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. Summary of Findings

Across the supply chains of three diverse agri-based micro, small and medium-scale

enterprises in Laguna, it can be inferred that common critical issues in all supply chain no-

des were brought to light such as critical shortages in raw material supply (supply node),

low production yields (production/processing node) as well as shifts in market buying be-

havior and high marketing costs (distribution node). This highlighted the non-competitive

nature of agri-based SMEs in Laguna. Causal analysis appeared to suggest that such crit-

ical supply chain issues were essentially caused by the absence of a supply chain infra-

structure, awareness and mindset as well as sustained government support. Such micro,

small and medium-scale entrepreneurs did not act like supply chain players aiming for suc-

cessful supply chain performance. They had weak links with their suppliers and customers

as well as their own personnel and consequently appeared to be very vulnerable to changes

within their respective supply chains.

The applicability of the SCM concept at the present time (as defined by AFFA and

cited by Woods) appears to be in question in the Philippine setting as far as agri-based

SMEs are concerned inasmuch as though there is an awareness for the customer, this is

not taken upstream in terms of value creation and sharing. Agribusiness entrepreneurs are

saddled with a lot of inefficiencies in the chain. Another thing is the absence of accurate

and timely information across the chain. Communication is very limited among chain

players. This is evident in the fact that a carabeef seller, for example, will not know the

ultimate origin of the carabao he bought for slaughter. In addition, traditional relationships

among some chain participants may not necessarily be effective and such relational ties

may be fragmented or short-lived depending on the prevailing economic environment.

Overall, these findings seemed to point to a need for such SMEs to work together within

their respective industries to identify, implement and monitor strategies to address their

common supply chain issues. Furthermore, the government should assist such industries in

terms of infrastructure development and making initiatives towards stabilizing the business

environment. It should also most particularly concentrate on partnering such SMEs with es-

tablished companies in the same industries if such enterprises were to survive and become

competitive.


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References

Agapay, Hannah Aesa S.(2007). Status, Problems and Strategic Directions for the

Lambanog Processing Industry in Liliw, Laguna. Unpublished Special Problem

Report. University of the Philippines Los Banos, 116.

Dorado, Lailanie C.(2007). Status, Problems and Prospects of Charcoal Making Enterprises

in Laguna. Unpublished Special Problem Report. University of the Philippines Los

Banos, 245.

Dy, Rolando T.(2005). Closing the Productivity Gap in Agribusiness. A paper presented

during the conference entitled Policies to Strengthen Productivity in the Philippines.

sponsored by the Asia-Europe Meeting (ASEM) Trust Fund, Asian Institute of

Management Policy Center, Foreign Investment Advisory Service, Philippine

Institute of Development Studies and the World Bank, 27-28.

Goh, Mark(2002). Issues Facing Asian SMEs and Their Supply Chains. Asian Cases on

Supply Chain Management for SMEs. Tokyo, Japan: Asian Productivity Organiza-

tion, 34-49.

Krajewski, Lee J., Larry P. Ritzman and Manoj K. Malhotra(2007). Operations Manage-

ment: Processes and Value Chains, 8th ed. Upper Saddle River, New Jersey:

Pearson Education, Inc., 370-417.

Punto, Franz Lenin R.(2007). Status, Problems and Strategic Directions for the Carabao

Industry in Laguna. Unpublished Special Problem Report. University of the Phi-

lippines Los Banos, 174.

Sayo, Antonio(2002). Country Paper: PHILIPPINES (1). Asian Cases on Supply Chain

Management for SMEs. Tokyo, Japan: Asian Productivity Organization, 108-121.

Singgih, Shinta and Elizabeth J. Woods(2004). Banana Supply Chains in Indonesia and

Australia: Effects of Culture on Supply Chains. Agriproduct Supply-Chain

Management in Developing Countries. Edited by G.I. Johnson and P.J. Hofman.

ACIAR Proceedings No. 119e.

Suaze, Gian Lou R.(2007). Study on Macos Meat Products: Focus on Supply Chain

Management System. Unpublished Special Problem Report. University of the

Philippines Los Banos, 164.

Woods, Elizabeth J.(2004). Supply-Chain Management: Understanding the Concept and Its


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Implications in Developing Countries. Agriproduct Supply-Chain Management in

Developing Countries. Edited by G.I. Johnson and P.J. Hofman. ACIAR Proceed-

ings No. 119e.

http://www.manilatimes.net/national/2007/apr/18/yehey/business/20070418bus4.html


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As the international prices of energy resources keep rising, some countries are trying toadjust their overseas energy strategies in order to gain more benefits. The present paper,titled competition and cooperation in the energy strategy game, viewing from China’sstandpoint, analyzes the case of dynamic game with incomplete information under theHarsanyi transformation based on KMRW reputation model. Taking the China-Japan,China-India energy game cases for instance, we find that the cooperative action could bethe best strategy for both China and India according to our model, while the overseasenergy strategy which is taken by Japan nowadays will do harm to its economic recoveryand prosperity in the long run. According to the payoff expression, the adjustment ofeach country’s energy strategy inclines to be diversified in the energy constitution. Andthe GDP and the economic growth rate are the keys to payoff maximization; furthermore,it can also help to abate the petroleum-dependency by the way of developing the capa-bility of R&D or raising the energy efficiency for deepening the exploration of new sub-stitute energy.

Key words: energy and petroleum dynamic game with incomplete information competition cooperation

I. Introduction

It is that energy supply is vital to countries’ development, especially for those devel-

oping countries that are experiencing an economic boost, energy is particularly important.

Nowadays petroleum still occupies a core part of a country’s energy constitution, so the

constantly increasing international price of petroleum as well as other factors make it nec-

essary for some countries to adjust their energy strategy. The present paper will analyze

the issue from China’s standpoint, and compare Japan with India in their adjustments of

overseas energy strategy on the side of contesting with China. Of course, we will explain

the reasons by the game model we established.

Xiao Wen Zhou Minghai

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About this issue, we have found the domestic literature largely is considered about the

influence of high petroleum price in the state’s economy, and discusses the relative meas-

ures on the base of national energy security. Such a point of view can be found in China’s

energy strategy conception written by the research project team of China’s overall develop-

ment strategy and policy in energy. They thought there were three main factors which

were of great importance to China’s petroleum security, including the situation of domestic

resources and reserves of petroleum as well as the output, the demand for import, whether

the world supply and the change of price of petroleum could be matched the world

demand. Besides, other literature well described the cases of competition and cooperation

in the contest of achieving the exploration right of overseas energy resources between

China and India, or China and Japan.

Shu xianlin (2004) analyzed the oil-pipe-battle between China and Japan with Russia

from the perspective of games, and he pointed out that both parties should avoid the case

of zero-sum game which results from confrontation and exclusion; instead, they should try

to perform the cooperative strategy in the condition of non-zero-sum game. But he did not

give the general explanation on the base of games. Yang wenwu (2006), however, used the

coward-game model to explain the China-India competition in the pursuit of achieving the

overseas energy exploration right. He pointed out that cooperation should be the best

choice for those two countries in this kind of games, but he didn’t figure out the payoff

function furthermore.

Robert gibbons (1996) offered an introduction to game theory for applied economics,1)

which included the elaboration of perfect Bayesian equilibrium in dynamic games with in-

complete information. And we will develop it to apply to the cases of China-Japan and

China-India energy games.

George-Marios Angeletos (2004) developed the information dynamic and equilibrium

multiplicity in global games of regime change which was on the base of allowing agents

to take actions in multiple periods and accumulate information over time. 2)And that is

what we have been cultivated a lot and have been applied to this paper.

Competition and Cooperation in the International Energy Strategy Game

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. Model

In this paper, we use the approach of the Harsanyi transformation on the base of

KMRW reputation model to consider the China-Japan, China-India energy strategy games.

So here is the model of dynamic game with incomplete information.

2.1. Assumptions

There are only two players, player1 and player2, and player2 might be one of two

types: conservative or radical.

And the player knows what type he is, yet not clear about that of the counterpart.

Considering the situation of two rounds, the player2 can get the prior belief q whichrepresents the probability of player1’s type from the action of last round.

In each round, two players are both rational, and they both make strategy in the pur-

pose of maximizing their payoffs.

The world’s energy resources and reserves are limited and scarce, and the elasticity of

petroleum-substitution of each country is decided by his domestic energy resource situation

and his science-technology level.

2.2. Model3)

In the payoff expression, we assume that 22 0D , 011DM , which

means if player1 happens to be a conservative type, he would like to take cooperative ac-

tion rather than deterrent one, while he would choose to join the auction for the exclusive

benefitM . We also define q as the prior belief that player1 is conservative type, so the

probability of being radical type for him is q1 . In the first round, only player1 takes ac-

tion when player2 sends the message that he will cooperate with the third country in the

energy area, but in the second round player2 would select certain action based on the ac-

tion of player1 acted in the last round. The payoff of each player is composed of two parts

(originated from round1 and round2), represents the discount factor. In this model the

radical player1 always takes the deterrent action in the first round, while the conservative


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one would like to perform cooperatively while not ruling out the conservation of taking de-

terrent action to make player2 believe he should be the radical type, in which case player2

would quit the bid, and player1 would gain the exclusive benefit to increase the profit in

the second round.

Now we hypothesize China is player2, and Japan or India is player1. The expression

of prior beliefs q is ),,,()()()()(sGhGDPqq

, where:

GDP gross domestic product;

h the growth rate of GDP ;

G the total number of players taking the cooperative action till the last game;

s the extent of petroleum-substitution in the domestic energy constitution;

The expression s is),()()(gTss

, where T represents the complex science and tech-

nology level of one country, measured in terms of the energy efficiency. And the parame-

ter g means the extent of other energy resources in one country. Thus, the expression q

could be also written as:

),,,,()()()()()(gTGhGDPqq

, where:


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T , g Exogenous variables

GDP , h ,G Endogenous variables.

The payoff expression can be also demonstrated by the payoff function. Assume is

the proportion of the part which one player has gained to the whole bid, and 10 ;

p means the final bid of price, and)()(

pp; 0p represents the price of bid in case

there were no games; 1p is the highest price that both the two players could accept when

player1 takes deterrent action while player2 takes the insistent action. Thus, 10 ppp .

As to both players, the higher the energy efficiency T is, the less the cost of bid would

be, and the bigger the profit they would gain. We also let T =the consumption of energy /

GDP . So the payoff function can be written as LbaF nn , where 0 , 0L ,

2,1n . When player1 is the conservative type, the parameternmeets the condition 1n ,

likewise, when player1 is in the radical position, we will have 2n . Furthermore, we

can describe as),()()(

T, and

))(,()()()(

pGDPLL, and the expression L can

even be simplified as),(

)()(GDPLL

. Assume one set of probable expressions as

T , GDPL ln , so the payoff function can be rewritten as

GDPbTaF nn ln , where 0, nn ba . And of course the final outcome is

in correspondence with the relationship which the payoff expression showed.

2.3. Equilibrium

According to the facts, the equilibrium of this game should be the pooling

equilibrium. Whatever the type of player1 is, he will also take the deterrent action, and

player2 will modify his inference constantly with what he has observed. Here ( deter|

radical q)

If player1 is the conservative one, he would lose the profit 11D , and therefore, in


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order to compensate the loss, he has to maximize the probability of player2 choosing to

quit in the second round. Thus the expected payoff of player2 in the second round must be

no more than zero, that is 0)1( 22 qqD . If this is fulfilled, then when player2 has

observed the deterrent action from player1, which means q , he will quit the bid, sim-

ilarly, when he has observed player1 taking the cooperation action ( 1), he will insist.

So the equilibrant payoff of conservative player1 is M1 , and when he chooses the

cooperation strategy the payoff would be 11 DD . Thus whether there will be a pooling

equilibrium or not will depend on whether the relationship 0)1( 22 qqD is met.

. Data and Inspection

Based on q ’s expression, we can compare the probabilities of conservative type be-

tween Japan and India. The comparison is possible because all the variables exceptG in

the expression),,,,()()()()()(gTGhGDPqq

can be directly obtained as shown in appendix

tables, and the parameter G can be known by statistics, and it is that ji GG , while i

represents India, j represents Japan.We can also calculate Japan’s average energy efficiency for the period from 1997 to

2001 using the data of Table3, and that was 5.76 PPP$ per kg of oil equivalent, which

was 1.31 times as much as that of India, 1.56 times as much as that of China. And

China’s corresponding figure is even lower than that of the world (4.08 PPP$ per kg of oil

equivalent). Although annual GDP growth rate of China and India are obviously larger

than that of Japan, Japan’s size of GDP is still bigger than that of its counterparts. The da-

ta shows that, in 2004 / 2005, the size of Japan’s GDP was 2.82 times / 2.10 times as

much as that of China, moreover, in 2001 / 2002, corresponding figure for Japan’s was

8.73 times/7.83times as much as that of India (see appendix Table1). Table2 demonstrates

the situation of energy resources and reserves for those three countries. Obviously, Japan is

deficient in energy but its consumption per person is fairly large, and although India has


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similar coal reserve, the petroleum and natural gas resources are not as much as coal

reserve.

Thus empirically, the figure q for Japan and India as the player1 meets the relation-

ship ji qq in the case of player2, China sends the message that she would cooperate

with the third country in the energy area. So, although Japan or India would take deterrent

action to deter China to bid successfully, the probability of India being conservative type is

bigger than that of Japan. Viewing from China’s standpoint, the best strategy profile in the

China-India energy game is (cooperate, insist). When player1 is Japan, however the insist-

ent action might be improper for China. Actually, the empirical facts have already verified

this conclusion. Recalling the history of China-India energy game, the relationship between

two countries seems to be changing from competition to cooperation, India’s DOE

(department of energy) minister has publicly stated several times that the competition be-

tween China and India in the overseas energy strategy only led the third parties to gain

more profit, so China and India should take the action of cooperation to decrease the cost

of bid. 4) In contrast, during the course of China-Japan energy game beginning from the

conflict over installing petroleum pipes from Russia, China is always in the disadvantage

position on most occasions, and sometimes even has to quit the bid, which suffers

severely.

Let us compare the figures of payoff expression for those three countries. Because

GDPbTaF nn ln , and ji TT , ji GDPGDP , even India and Japan

seem to be the same type of player and even take the same action under the same con-

dition, the figure F meets the condition ji FF , thus the loss of India would be larger

than that of Japan.

. Conclusions

1. The cooperation action should be the best strategy profile in the oversea energy

strategy games for both China and India. The probability of player1’s type expression and


- 22 -

the payoff expression show that, India, being conservative type, has higher probability, so

if both parties choose cooperation action, that will maximize each payoff function. So we

argue that the best strategy profile is (cooperate, insist) and those two countries should co-

operate in the energy area.

2. Japan has all inclination to be radical player, according to the model, and the de-

terrent action is the only choice in most situations. But, because Japanese companies have

many plants and joint ventures in China, deterring China’s overseas energy auction would

raise China’s cost of energy consumption, then finally reduce the profits of those

Sino-Japan or sole foreign owned firms, and even might have negative influence in the

Japanese economic recovery and prosperity indirectly. So, from the perspective of long run,

we also argue that the action which is undertaken by Japan in the energy game has been

going against its economic development.

3. According to the payoff expression, the adjustment of each country’s energy strat-

egy trends to be multiplication on the energy constitution. And the GDP and the economic

growth rate are the keys to payoff, maximization, as well as the exogenous variableT .

According to the equation),()()(gTss

, developing the capability of R&D or raising the

energy efficiency can help to abate the petroleum-dependency while deepening the explora-

tion of new substitute energy. This is shown in Japan’s 2006 national energy strategy plan-

ning, which places great emphases on reducing the proportion of petroleum in the State’s

energy constitution. But as far as China and India are concerned, since the figure g is com-paratively bigger than that of Japan, which means the resource and reserve of coal is abun-

dant, taking good advantage of domestic energy resource scientifically also can make the

energy constitution tend to be diversified. And fortunately, this is highly consistent with

China’s energy strategy adjustment, but it is still vital to the increase of science and tech-

nology investment in a long run.

References

Robert gibbons. An Introduction to applicable game theory. NBER technical working paper,

No.199.


- 23 -

George-Marios Angeletos, Christian Hellwig, Alessandro Pavan. Information Dynamics and

Equilibrium Multiplicity in Global Games of Regime Change. NBER working pa-

per, No.11017.

Menzie D. Chinn, Michael LeBlanc, Olivier Coibion. The Predictive Content of Energy

Futures: An Update on Petroleum, Natural Gas, Heating Oil and Gasoline. NBER

working paper, No.11033.

Paul L. Joskow. U.S. Energy Policy during the 1990s. NBER working paper, No.8454.

Gibbons. The Primary Game Theory(1999). translated by Gao Feng. China publishing

house of society and science.

Xiao Tiaojun(2004). Game Theory and its Application, the publishing house of Shang Hai

San Lian bookshop, 208-281.

Zhang WEiyin(1996). The Game Theory and the Information Economics, Shang Hai San

Lian bookshop and Shang Hai people’s publishing house.

Shu Xianlin(2004). The Cooperation Existed in Sino-Japan Petroleum Game and

Competition. the Northeast Asia Forum, (1), 77-81.

Shen Jianfeng(2006). The Game of U.S.-Russia Petroleum Pipes Issue. The Research of

World Economy, (5), 75-80.

Lu Erpo(2005). The Research of Predict Model of China’s Energy Demand. Statistics and

Decision, (10), 29-31.

Geng Lihua(2005). India’s Diplomatic Strategy and its Game with Related Countries. The

Present Asia-Pacific Area, (9), 35-40.

Lin Boqiang(2001). The Econometrics Analysis of China’s Energy Demand. the Statistics

Research, (10), 34-38.


- 24 -

Appendix

Table1: GDP(100 million USD)and the Growth Rate of GDP(%)

Source: World Bank Database of world development index, IMF World Economic Outlook Database

Table2: Energy Efficiency

Source: World Bank Database.

Table3: Energy Resources and Reserves (10000 tons, 2000 )

Source: United Nations Energy Statistics Yearbook 2000.


- 25 -

The paper attempts to shed light on ways to improve the implementation of group-basedcredit program by looking at the factors that affect delinquency. The explanatory varia-bles are loan size, degree of credit rationing, group size, relationship among membersand number of dependents. Delinquency is the dependent variable. It was tested using theProbit method. The data came from a survey of participants of the “Lingap saKababaihan” program of the Lipa Public Bank. The results showed that the number ofdependents, the relationship among members and the size of loan significantly affectdelinquency. Groups with lower number of dependents, closer social ties and higher loansize have a higher probability of not being delinquent. These findings maybe used to im-prove the implementation of group lending programs.

I. Introduction

For developing countries such as the Philippines, access to financial services is a key

in empowering the poor. However, the stringent requirements of financial institutions pre-

vented some people from obtaining loans. Thus, microfinance institutions substitute formal

financial institutions in serving the poor since they are perceived to be high-risk and high

cost clients. They do not have track record in banking and do not have collateralizable as-

sets (Patalinghug 2006). Some rural banks who participated in government subsidized credit

programs collapsed. The target beneficiaries did not get credit subsidy and the government

was left with huge unpaid loans (Llanto 2003). This has some serious implications.

According to Lamberte and Manlagnit (2003), households who do not have access to finan-

cial intermediaries tend to have a higher poverty incidence than those who have access.

Normito R. Zapata Jr.

- 26 -

The absence of a physical collateral caused severe problem for both the borrower and

lender. Borrowers with no assets to be offered as collateral were left with very little access

to financial services from the formal financial system. On the other hand, the lenders find

it hard to enforce repayment in the absence of physical collateral. To mitigate this con-

straint, several collateral substitutes were introduced. These include direct monitoring, regu-

lar repayment schedules, and the use of non-refinancing threats (de Aghion and Morduch

2000). But one of the most popular forms of repayment enforcement mechanism is the use

of social collateral through joint liability. Group-based lending emerged as a response to

the need for “institutional innovation that combines prudent and sustainable banking princi-

ples with effective screening and monitoring strategies that are not based on physical col-

lateral”. This mechanism “employs group responsibility and peer monitoring as the core

principles guiding financial transactions” (Sharma and Zeller 1996).

It was claimed that group-based lending results in repayment rates that are higher than

the traditional physical collateral-based lending. In the Philippines, several financial in-

stitutions adapted social collateral as a substitute to physical collateral. However, as ex-

pected, repayment performance is not uniformly high for all groups. Hence this mechanism

can be further refined by identifying individual and group factors that will affect repayment

rates. This study aims to shed light on ways to improve the conduct of this innovation.

This paper will examine the repayment records of groups involved in the “Lingap sa

Kababihan Program” of the Lipa Public Bank.

The next section presents a review of literature. Then the model framework is in-

troduced in section 3. The econometric estimation method and the source of data are dis-

cussed in section 4. The results and conclusion are presented in sections 5 and 6

respectively.

. Review of Related Literature

The mitigation of problems created by adverse selection problem is one of the many

advantages of group lending. It allows lower interest rates and raises social welfare. It does

so by exploiting the ability of neighbors to enforce contracts and monitor each other

(Morduch 1999).

Repaymment Performance of Group-Based Credit in the Philippines

- 27 -

An interesting issue on repayment was presented by Bond and Rai (2002). The paper

emphasized that even if a borrower has sufficient funds, a lender may simply have a hard

time enforcing the repayment clause of the loan contract. This problem was usually being

addressed through the use of physical collateral. However some microfinance institutions

use social sanctions and credit denial as collateral substitutes.

Information asymmetry is another major problem that microfinance institutions must

mitigate. Proper screening, monitoring and enforcement of repayment are usually im-

plemented by banks. However, through group-lending programs, these activities are trans-

ferred to the group members themselves. Higher repayment rates are achieved since it was

argued that groups can perform these tasks better than banks (Stiglitz 1990). Groups can

also use social sanctions or seize the physical collateral of the defaulter.

Sharma and Zeller (1996) identified five basic reasons why group-based credit has

been performing well compared to the traditional physical collateral based credit program.

First, group-based credit programs usually targets a well-defined set of clients. Second, so-

cial collateral through joint liability replaces physical collateral. Third, further credit is de-

nied if there are outstanding arrears for any one of the members. Fourth, training activities

such as shopkeeping, crafts production and entrepreneurial skill development supplement

the lending activities. Finally, the group is required to maintain an emergency fund for

household and other emergencies. Clearly, group-lending have provided an alternative to

the traditional individual lending program.

Natarajan (2004) also showed that joint liability results to higher repayment rates es-

pecially if the borrowers could not offer any physical collateral. A model that was pre-

sented shows that “self-selection of peer groups is possible even with group members hav-

ing no a priori information about others.” It is achieved through signaling mechanism of

non-monetary side payments. Groups that are self-selected perform better than groups that

are selected by the bank itself.

On the other hand, the collateral effect of group-lending was analyzed by Andersen

and Nina (2000). A model with two types of entrepreneurs (i.e. high risk and low risk)

and a competitive banking system was used to assess the collateral effect. The paper

showed that group-lending program results in a pooling equilibrium, where all en-

trepreneurs are served at considerably lower interest rates. Hence, group lending increases

overall welfare in a setting where individuals cannot offer collateral.


- 28 -

Sharma and Zeller (1996) analyzed the repayment rates of three group-based credit

programs in Bangladesh. A total of 128 groups belonging to the programs of Association

for Social Advancement (ASA), the Bangladesh Rural Advancement Committee (BRAC),

and the Rangpur Dinajpur Rural Service (RDRS) were surveyed. The determinants that

were used include group size, size of loans, degree of loan rationing, enterprise mix within

groups, demographic characteristics, social ties and status, and occurrence of idiosyncratic

shocks. The TOBIT maximum likelihood method was used to analyze the data. The study

showed that once the right institutional structures are in place, there need not be any major

conflict between prudent financial management and lending asset to the poor. It is also ap-

parent that group-lending is especially good in relatively remote communities and even in

communities with high poverty incidence. The paper suggested that group formation should

be endogenous to members themselves and less subject to external rules. The results also

showed that delinquency increases with loan size. Hence, it was recommended that a grad-

uated lending policy should be implemented. This means that group credit line is increased

upon satisfactory repayment performance.

Even if there are overwhelming literatures that supports the use of group-based credit,

it should be noted that group lending does not guarantee higher repayment rates at all

times. Several studies challenged the validity of the argument that group-lending programs

performs relatively well. Kono (2006) conducted field experiments in the city of Ho Chi

Minh in Vietnam. Eleven different types of repayment game with dynamic incentives were

implemented in the said location. The objective is to capture the role of joint liability,

monitoring, cross reporting, social sanctions, communication and group formation in bor-

rower’s repayment behavior. Kono “challenged the validity of the argument that joint li-

ability contracts are better incentive schemes insofar as the discouraged borrowers from de-

faulting strategically and achieve higher repayment rates than individual lending contracts.

The result of the study showed that joint liability contracts cause serious free-riding prob-

lems, inducing strategic default and lowering repayment rates. Mutual insurance among

borrowers was also not induced by this scheme. Borrowers who had been “helped or had

repaid a little in the previous round were more likely to default strategically and repay a

little again in the current round and those who paid large amounts were always the same

individuals.”

Armendariz de Aghion and Morduch (2000) enumerated four possible costs of group


- 29 -

lending. First, there are complaints that attending group meetings and monitoring group

members are too costly. Second, loan terms are limited to what the group feels that it can

jointly guarantee. As a result, members with growing businesses may feel that group con-

tract bogs everyone down. Third, there can be collusion against the bank. Fourth, group

lending can be costly to implement which makes full recovery of costs more difficult.

Group lending was argued to be just one part of a set of overlapping mechanisms used to

induce higher repayment rates. As a consequence, other programs that do not employ

group-lending were also introduced. The study noted that new programs in Russia and

Eastern Europe used individual-based credit. This program requires borrowers to put-up

collateral or finds a third-party guarantor. The banks also use novel means to collect in-

formation and to create incentives for timely loan repayment.

Several models have been presented to explain the mechanism behind group lending.

There are also field experiments that challenge the validity of the arguments that are in fa-

vor of joint liability. However there are limited studies that dealt with the identification of

group characteristics which will help explain why some groups perform well and others do

not. In the Philippines, no studies have been conducted yet that analyzes the determinants

group repayment performance.

. Economic Model

This paper attempts to determine how loan terms and some group characteristics affect

delinquency. Delinquency is the failure to meet financial obligation at the date when repay-

ment is promised. Hence, the dependent variable that will be used for this study is delin-

quency (DEL). DEL = 0 implies complete repayment on time and DEL = 1 means

delinquency. The function is shown below:

DEL = f( L, G)

where L is a vector of loan characteristics and G is a vector of group characteristics. In

this function, the vector of loan characteristics includes loan size and degree of rationing.

On the other hand, the group characteristics include group size, relationship among mem-


- 30 -

bers and number of dependents.

Loan size affects the probability that a member of a group will default. The penalty

cost of larger loans will be higher. The members of the group may even force the de-

faulter to surrender some of its assets. Hence, it is expected that the size of the loan will

have a negative relationship with delinquency.

Credit rationing occurs when the demand for loan is higher than supply. Since interest

rate changes the behavior of the borrower, there is an incentive to ration credit rather than

increase interest rate. In this study, the degree of rationing is computed as the difference

between the actual value of the loan received and the value of the loan applied for by the

group, expressed as a percent of the total loan amount. If the group wants to project a

good image on the bank in order to obtain larger loan in the future, it may increase its ef-

fort to reduce delinquency. However, if rationing is too serious, they may opt for a default

since long-term relationship with the bank is not desirable.

Another important variable is the size of the group. Monitoring and enforcing will be

more costly as the size of the group increases. Thus, it is expected that this variable will

have a positive relationship with delinquency. Larger groups will be more likely to become

delinquent.

Relationship among group members is expected to have a negative relationship with

delinquency. It is measured as the proportion of the group that is related to each other.

Social sanction will be more serious if group members are related to each other.

Finally, the mean number of dependents refers to the number of unproductive in-

dividuals in a household. Households with higher number of dependents may use the fund

for unproductive purposes such as food and some emergencies. Thus, this variable is ex-

pected to have a positive relationship with delinquency.

. Methodology and Data

The Probit method was used to test the hypothesized determinants. This method was

chosen since the dependent variables are binary variables that take zero-one value. Since

the probability that an event will occur is non-linear, the usual least squares estimation

method is not appropriate. The Linear Probability Model (LPM) is characterized by hetero-


- 31 -

skedastic errors - variance of the error term varies among observations. Another problem

with the LPM is that it yields unrealistic values of probability (i.e. less than zero or more

than 1), because it assumes linearity between the explanatory variables and the probability.

On the other hand, the Probit model constrain the probability to the (0,1) interval. It also

assumes that the probability that an event will occur is non-linear.

The following equation was used to estimate the probability of delinquency among the

groups.

Prob(DEL) = F(LNSIZE, RATION, RELATION, GRPSIZE, DEPEND)

where:

A survey was conducted among the participants of the “Lingap sa Kababaihan” pro-

gram of the Lipa Public Bank. The said program provides microfinance services to groups

of females in the province of Batangas. The sampling was done by dividing the population

into strata: Lipa, San Jose, Bauan, Batangas City, Taal, Alitagtag, Sta. Teresita, Cuenca,

Lemery, Calaca, Balayan, Rosario, San Luis and San Pascual. A total of 44 groups were

interviewed. The descriptive statistics of the sample is shown in table 1.

Table 1. Descriptive statistics of the whole sample


- 32 -

. Results and Discussion

The results of the Probit estimate is shown in table 2. The mean number of depend-

ents has a significant and positive relationship with delinquency. As expected, an increase

in the number of dependents will increase the probability of delinquency. The money bor-

rowed by the group is usually utilized for consumption and emergency purposes. Hence,

funds become unproductive resulting to a lower repayment rate.

Table 2. Determinants of delinquency in loan repayment

* significant at the 1% level** significant at the 5% level*** significant at the 10% level

On the other hand, the relationship among group members has a significant and neg-

ative relationship with delinquency. As discussed earlier, the variable is measured as the

proportion of group members that are related to each other (e.g. siblings, cousins, children,

etc.) Groups with members that are related to each other have a higher repayment

performance. This is due to the pressure exerted by the social tie present among relatives.

The social sanction imposed by co-members is more serious. The feeling of guilt for being

delinquent is greater if members are related. The Filipino culture of having close family

ties is a reflected in this instance.

The size of the loan is significant at the 10% level. The negative relationship of this

variable with delinquency is consistent with the expectation. Because of the presence of

joint liability, the social sanction that will be imposed by the group is greater if loan size

is larger.

The Probit estimate showed that group size is not significant. It seems joint liability

as a repayment enforcement mechanism works regardless of the number of members in a


- 33 -

group. The cost of monitoring for large groups is not considerably higher compared to

smaller groups. The degree of credit rationing is also not significant. The descriptive sta-

tistics in table 1 shows that the participants in the program did not experience any serious

case of credit rationing.

It is apparent that the major factors that affect repayment performance is the purpose

of the money obtained from the loan, the degree of social ties in a group and the size of

loan.

. Conclusion

It is clear that social ties in a group exert a strong motivation among members to re-

pay the loan. This supports the conjecture that social collateral, as opposed to physical col-

lateral, can effectively enforce repayment. Furthermore, failure to use the fund to augment

the productive capacity of the borrower increases the probability of being delinquent. The

rate of delinquency tends to be lower if loan size is large enough to improve productivity.

It also strengthens the role of joint liability in enforcing repayment.

These findings have some policy implications. Group-based microfinance programs can

improve repayment performance by properly screening the members of the group. The rela-

tionship among members maybe used as a tool in rationing credit. It is also important to

ensure that funds are being used for productive purposes. The financial institution should

send agents to ensure that the borrowers’ enterprises are doing well. Monitoring of fund

utilization among members can also be implemented. Though delinquency decreases as

loan size increases, graduated lending policy should still be implemented. As recommended

by Sharma and Zeller (1996), loan size should be increased only after a satisfactory repay-

ment of outstanding loan.

This paper focused on the loan and group characteristics that may help identify the

determinants of repayment performance among groups in a group-based credit program.

However, it failed to challenge the validity of the argument that group credit are better

monitoring scheme to discourage strategic default of borrowers. The paper also did not

consider the costs associated with the implementation of group lending. These issues may

help further refine group-based credit programs. Future research may focus on this subject.


- 34 -

. Acknowledgement

The author is grateful to Mr. Darius Mendoza for the use of his survey data.

. References

Andersen, L. and O. Nina(2000). Micro-Credit and Group Lending: The Collateral Effect.

Bond, P. and A. Rai(2002). Collateral Substitutes in Microfinance.

Armendariz de Aghion, B. and J. Morduch(2005). Microfinance Beyond Group Lending.

Economics of Transition, 8(2), 401-420.

Danao, R.A.(2002). Introduction to Statistics and Econometrics, University of the Philip-

pines Press, Quezon City.

Gujarati, D.(2003). Basic Econometrics, 4th ed, McGraw-Hill, New York.

Kono, H.(2006). Is Group Lending A Good Enforcement Scheme for Achiveing High

Repayment Rates?: Evidence from Field Experiments in Vietnam. Institute of

Developing Economies Discussion Paper No. 61, Japan.

Lamberte, M.B. and M.C.V. Manlagnit(2003). Household Poverty: Addressing the Core of

Microfinance. PIDS Policy Notes No. 2003-15.

Llanto, G.M.(2003). A Microfinance Promise: To Provide the Poor Access to Finance

Services. PIDS Policy Notes No. 2003-06.

Morduch, J.(1999). The Microfinance Promise. Journal of Economic Literature, 37,

1569-1614.

Natarajan, K.(2004). Can Group Lending Overcome Adverse Selection Problems? SOAS,

University of London.

Patalinghug, E.E.(2006). The Microfinance Promise: The Philippine Experience. UPCBA

Professorial Chair Paper.

Sharma, M. and M. Zeller(1996). Repayment Performance in group-Based Credit Programs

in Bangladesh: An Empirical Analysis. Food Consumption and Nutrition Division

Discussion Paper No. 15. Washinton.

Stiglitz, J.(1990). Peer Monitoring and Credit Markets. World Bank Economic Review,

4(3), 351-366


- 35 -

I. Introduction

The significance of official development assistance (ODA) to the Philippine gov-

ernment's development objectives and sustained economic growth has been well docu-

mented in the economic literature. ODA is crucial in facilitating economic development by

easing the constraints on public funds available for necessary public investments (Camacho

and Cuevas, 2004). Development investment such as road infrastructure, health, and educa-

tion among others, are priority outlays that cannot rely on the already scarce domes-

tically-generated financing especially in an economy that is plagued with chronic fiscal

deficits. ODA provides an alternative to commercial borrowings which most developing

countries prefer because the former provides lower interest rates and longer “concessional”

payment terms. Also, ODA provides a source of funding for projects with high social ben-

efits but are unattractive to private capital due to low private returns.

According to the ODA Act of 1996 (RA 8182) ODA are soft loans or grants with the

following criteria (ODA Primer):

1. It should be administered with the objective of promoting sustainable social and

economic development of the Philippines;

2. It should be contracted with the government of countries with whom the Philippines

has diplomatic relations, trade relations and other multilateral agencies and in-

stitutions;

3. There are no available financial instruments in the capital market; and

4. Each ODA loan should contain a grant element of 25% and the weighted grant ele-

Niño Alejandro Q. Manalo Agham C. Cuevas

- 36 -

ment of all ODA at anytime shall not be less than 40%.

According to the National Economic Development Authority-Project Monitoring Staff

(NEDA-PMS), total foreign loans disbursed for public projects amounted to US$652.2 mil-

lion for the first half of 2006, representing a 24.2 percent increase from US$525.1 million

in the same period in 2005. Of the total amount, the Japan Bank for International

Cooperation (JBIC) accounted for US$418.2 million or almost 64 percent of the total,

World Bank-assisted projects amounted to US$56.5 million, and US$139.3 million by other

funding sources, composed of China, Germany, Belgium, Austria, and other OECD coun-

tries including Korea.

The paper seeks to highlight the official development assistance of Korea to the

Philippines as one aspect of the continually strengthening bilateral relationship between the

two countries. In 2004, Korea was the Philippines’ ninth largest trading partner and is

among its 10 largest export markets. Investments by Korea in the energy sector made it

the second-largest source of foreign direct investments. The Philippines is in turn Korea’s

third largest tourist destination, marked by approximately 370,000 tourist arrivals in 2004.

The study will be significant since the Philippine government is hoping to work with

Korea on a broader developmental front, embodied by the Philippines’ efforts to meet the

United Nations’ (UN) Millenium Development Goals (MDG) of:

eradicating extreme poverty and hunger

achieving universal primary education

promoting gender equality and empowering women

reducing child mortality

improving maternal health

combating HIV/AIDS, malaria, and other diseases

ensuring environmental sustainability

developing a global partnership for development

Cooperation with a country like Korea, which has undergone a dramatic transformation

from one of the poorest countries to the 11th largest economy in the world in a little over

40 years, can be beneficial as the Philippines can derive lessons from the Korean

experience.

South Korea-Philippines Economic Cooperation

- 37 -

The rest of the paper is structured as follows. The next section details the background

by which Korea has transformed its role as an ODA-recipient to an ODA-donor country.

Section III presents and analyzes the trends of Korea’s ODA in the Philippines. Section IV

provides some policy issues and challenges while Section V concludes.

. History of Economic Cooperation in Korea: From ODA-Recipientto Emerging ODA-Donor

Official development assistance is crucially important in facilitating the process of eco-

nomic development by enlarging the pool of capital available for investment especially in

those countries which have the right policy environment but lack the infrastructure and ca-

pabilities necessary to mobilize sufficient domestic resources and to attract private capital

flows (World Bank, 2002; US-CBO, 1997). ODA cushions the constraints on public funds

available for necessary public investments. Aid draws in private investment, rather than

crowding it out. Countries must therefore cultivate a good investment climate in an atmos-

phere in which the private sector flourishes to invest in order to generate employment and

enhance efficiency and factor productivity. In a World Bank (2002) study it was found out

that “each dollar of assistance provided through the Bank’s concessional lending arm, the

International Development Association (IDA), leads to nearly two dollars of additional pri-

vate investment, including 60 cents of additional foreign direct investment.”

Korea in 1996 became the 29th member of the Organization for Economic Cooperation

and Development (OECD). During that time it was the world’s 11th largest economy with

a per capita Gross National Product (GNP) of US$10,548. This marked a sharp turnaround

from around 40 years ago when Korea, devastated in the aftermath of the Korean War

(1950-53), was one of the poorest countries in the world with a per capita income of

US$67 in 1953. The experience that the country went through has many Koreans believing

that it can assist other developing countries in various stages of development, especially

when it comes to development assistance (Kim, 2003).

Foreign aid provided the impetus with which the Korean economy was able to get

back on track. Although most aid was provided in the supply of commodities such as food,

clothing, medicine, and raw materials, foreign aid was practically the only source of capital


- 38 -

during the reconstruction period of 1953-1960. In the 1960s foreign assistance began to

play a major role in Korea’s economic and social development, as a major source of capi-

tal and investment and as a means to improve industrial technology (KOICA, 2007). Major

donors during the period were the International Development Association (IDA), the United

Nations Development Programme (UNDP), the World Bank (WB), the Asian Development

Bank (ADB), and bilateral agencies such as the United States Agency for International

Development (USAID) and the Overseas Economic Cooperation Fund (OECF) of Japan.

Korea’s donorship can be traced back to the 1960s when it provided technical training,

under the sponsorship of USAID, to staff from developing countries. Table 1 details the

major activities of Korean ODA provision, grouped according to 10-year periods. One of

the most significant cooperation programs that Korea has developed is the International

Development Exchange Program (IDEP) started in 1982. It provides training courses which

highlights Korea’s experiences of rapid and successful development to government officials

and policymakers in developing countries. As the demand for Korea’s technical training

programs grew, Korea established the Economic Development Cooperation Fund (EDCF)

managed by the Export-Import Bank of Korea (EXIM Bank) in 1987 and subsequently the

Korea International Cooperation Agency (KOICA) in 1991 as institutions to facilitate and

systematize the provision of development cooperation (KOICA, 2007). The EXIM Bank,

under the control of the Ministry of Finance and Economy (MOFE), is responsible for con-

cessional loans for developing countries’ development projects while KOICA manages

grant aid and technical cooperation programs under the supervision of the Ministry of

Foreign Affairs and Trade (MOFAT).

Korea still has numerous challenges to face as an emerging ODA-donor. Unlike the

more established donor countries, the Korean government has no existing legislation which

defines Korea’s aid philosophy or policies. Little public interest is generated by Korea’s

relatively small amount of ODA provision such that establishing an aid philosophy is not a

priority. Also, the quantity of aid shelled out by Korea is quite low by Development

Action Committee (DAC) standards. In 2001, the average ODA/Gross National Income

(GNI) ratio of the DAC members of OECD was 0.22% while that of Korea’s was 0.063%.

In money terms, Korea’s US$265 million ODA for that year was only above that of

Greece, Luxembourg, and New Zealand among the DAC-member countries (Kim, 2003).


- 39 -

Table 1. Chronology of Korean ODA Provision, 1960s to 2000s

PERIOD YEAR ACTIVITIES'63 Training program under the sponsorship of USAID'65 Training program funded by the Korean government'67 Dispatch of Experts Program funded by the Korean government

Training program with the cooperation of the UN and other international organizations

'68 Dispatch of Medical Experts Program'69 Technology transfer project funded by the Korean government '72 Dispatch of Taekwondo Instructors Program'75 Invitation of Technical Trainees Program'77 Aid in Kind'81 Research Cooperation Program'82 International Development Exchange Program (IDEP)'83 Invitational training for construction workers'84 Technical cooperation in the construction sector'87 Establishment of Economic Development Cooperation Fund (EDCF)'88 Grant services for communications technology in developing countries'89 Dispatch of KOVs Program'90 First dispatch of KOVs'91 Korea International Cooperation Agency (KOICA) established'95 NGO Support Program'99 International Cooperation Training Center (ICTC, Seoul)'00 Special Training Program for ASEAN'01 Extension of Cooperation Program for the IT sector'02 Special Assistance Program to Afghanistan'03 Special Assistance Program to Iraq'05 Reconstruction Program for regions affected by the 2004 Tsunami disaster

2000s

1960s

1970s

1980s

1990s

Source: adopted from KOICA website

. Trends of Korea’s Official Development Assistance to the Philippines

Table 2 shows that total bilateral aid grants of Korea has been increasing throughout

the period 1991 to 2005. From $US15.8 million in 1991, Korea has shelled out almost 12

times that amount of aid in 2005, pegged at $US184 million. The only decline in Korea’s

ODA grants was in 1998 at the onset of the Asian financial crisis, when ODA disburse-

ments declined by 31.2 percent from the previous year. Asian countries have had the lion’

share of Korea’s ODA disbursement as depicted in Figure 1. It has increased from


- 40 -

US$4.8M (30.26 percent) in 1991 to about US$68.3M representing 37.1 percent of the to-

tal in 2005. The nominal amount and share for Asia would have been much higher had it

not been for the discrepancy for the last three years wherein Korea’s ODA to the Middle

East suddenly ballooned to a sizable amount which eventually surpassed that of Asia’s.

This is attributed to the post-war reconstruction work done in Iraq, which attracted 36.17,

37.4, and 40.09 percent of Korea’s aid for 2003, 2004, and 2005, respectively. Looking at

aid to other regions such as Africa, Latin America and Oceania, aid has increased in nomi-

nal terms although their shares have declined significantly over the years, suggesting that

Korea has prioritized administering aid to countries which are geographically close and cul-

turally similar.

Table 2. Total Amount of Korean Bilateral ODA, 1991-2005

YEAR DISBURSEMENT1991 15,742,452.691992 17,558,748.091993 20,171,241.581994 26,491,335.161995 34,205,453.171996 38,653,266.961997 42,090,606.711998 29,005,882.811999 29,248,247.562000 36,515,698.272001 39,394,067.502002 52,481,541.732003 112,149,957.162004 160,656,358.282005 184,143,592.53

Source: KOICA

Yul (2004) notes that particularly in the Association of Southeast Asian Nations

(ASEAN), Korea has maintained close economic and diplomatic relationships with the 10

ASEAN member-countries. Strengthening development cooperation with ASEAN as a top

priority has resulted in a large share of Korea’s ODA being directed to the region, pegged

at around 25 percent of the total. Cumulatively, from 1987-2003, ASEAN has had the larg-

est cumulative amount of Korea’s ODA at around $670 million. As presented in Table 3,

the Philippines has consistently ranked among the top 10 recipients of Korea’s assistance.

Korea’s project loans through EDCF loans and KOICA grants benefit agriculture, infra-


- 41 -

structure, and social services such as education and training and health care (Annex 1).

0% 20% 40% 60% 80% 100%

1991

1993

1995

1997

1999

2001

2003

2005

Asia Middle East Africa Latin America Oceania Others

Source: KOICA

Figure 1. Geographical Distribution of Korea Bilateral ODA rants뭩 쟃

Table 3. Ten Largest Recipients Countries of Korea Bilateral ODA Grants,뭩

2000-2005

RANK COUNTRY AMOUNT SHARE COUNTRY AMOUNT SHARE COUNTRY AMOUNT SHARE

1 China 5,902,765.55 16.17 Viet Nam 4,814,107.55 12.22 Afghanistan 4,777,230.26 9.12 Viet Nam 4,863,895.80 13.32 Pakistan 4,321,830.19 10.97 Viet Nam 4,705,653.60 8.973 Philippines 2,223,433.10 6.09 Philippines 3,038,374.95 7.71 Indonesia 2,769,634.90 5.284 Indonesia 1,984,197.46 5.43 Uzbekistan 2,325,325.71 5.9 China 2,397,016.01 4.575 S. Africa 1,878,804.73 5.15 Mongolia 2,128,157.35 5.4 Egypt 1,852,274.69 3.536 Peru 1,802,232.03 4.94 Indonesia 1,938,899.02 4.92 Philippines 1,811,107.74 3.457 Mongolia 1,684,264.95 4.61 China 1,672,063.09 4.24 Cambodia 1,764,852.97 3.368 Kazakhstan 1,193,404.38 3.27 Nepal 1,140,414.29 2.89 Nepal 1,638,367.75 3.129 Nepal 1,141,468.05 3.13 Cambodia 1,056,062.44 2.68 Myanmar 1,574,401.36 3

10 Sri Lanka 742,999.99 2.03 Sri Lanka 1,054,083.87 2.68 Laos 1,418,992.34 2.7Sub-total 23,417,466.02 64.13 Sub-total 23,489,318.46 59.63 Sub-total 24,709,531.62 47.08

2000 2001 2002


- 42 -

RANK COUNTRY AMOUNT SHARE COUNTRY AMOUNT SHARE COUNTRY AMOUNT SHARE

1 Iraq 40,567,159.73 36.17 Iraq 60,083,951.57 37.4 Iraq 73,828,848.53 40.092 Afghanistan 21,092,934.19 18.81 Afghanistan 17,378,294.76 10.82 Sri Lanka 12,277,887.71 6.673 Philippines 5,963,878.17 5.32 Viet Nam 9,789,171.09 6.09 Indonesia 9,305,138.17 5.054 Viet Nam 3,514,605.58 3.13 Indonesia 6,544,813.74 4.07 Viet Nam 9,289,567.97 5.045 China 2,846,899.48 2.54 Philippines 6,365,514.64 3.96 Cambodia 5,813,200.33 3.166 Indonesia 2,613,278.81 2.33 Palestine 3,671,658.42 2.29 Philippines 5,059,066.50 2.757 Cambodia 2,340,721.22 2.09 China 3,458,183.09 2.15 Egypt 4,063,719.09 2.218 Peru 2,077,043.04 1.85 Laos 3,378,883.57 2.1 Myanmar 3,407,368.30 1.859 Laos 2,028,348.92 1.81 Cambodia 3,340,968.44 2.08 Afghanistan 3,312,957.97 1.8

10 Mongolia 1,736,147.61 1.55 Peru 2,957,395.35 1.84 Ukraine 3,158,140.02 1.72Sub-total 84,781,016.75 75.6 Sub-total 116,968,834.66 72.81 Sub-total 129,515,894.59 70.33

2003 2004 2005

Source: KOICA

Thus, Korea’s development assistance to the Philippines is in line with the Arroyo ad-

ministration’s foremost priority of poverty reduction outlined in the 2004-2010 mid-term

development plan. ODA is a crucial instrument in enhancing human capital and productive

and export capabilities (UNESCAP, 2005). The Philippines depends on ODA as a major

source of external financing for these expenditures. The country is the 7th largest recipient

of ODA in Asia, capturing US$737 million or 5 percent in 2003 (Table 4). Table 5 shows

that disbursement of Korean ODA grants to the Philippines has generally been increasing

for the period 1991 to 2005, with the biggest increases were during 2000 and 2003 when

Korean aid disbursement more than quadrupled from the previous year. During this time,

Korea invited 1,054 Filipino trainees to Korea, financed six development research projects,

and dispatched 16 Korean experts and 140 Korean volunteers to the Philippines (Statement

of Korea, 2006). Allocation of the US$25.42 million total for the period included the:

1. Friendship Medical Center in Cavite (US$3.8 million)

2. Vocational Training Center in Davao (US$5.23 million)

3. IT Training Center in Quezon City and Bulacan (US$5.0 million)

4. Modern Integrated Rice Processing and Milling Complex in Aurora (US$2.3 mil-

lion)

5. Leyte Landslide Assistance ($US1.0 million); and

6. other material and emergency rescue assistances.


- 43 -

Annex 1. ODA Terms and Conditions of Loans/Grants by Funding Source

MATURITY PERIOD GRACE PERIOD OTHER CHARGESJapan Bank for International Cooperation (JBIC) - Yen Loan Package

Project loans (i) strengthening of the economic structure for sustainable growth; (ii) mitigation of disparities (poverty alleviation and mitigation of regional disparities); (iii) environmental conservation and disaster management; and (iv) human resource development

0.5-1.5% 15-40 5 to 10 none

- Special Term for Economic Partnership (STEP)

Project loans Limited to projects promoting the development of: (i) bridges and tunnels; (ii) airports; (iii) oil/gas transmission and storage facilities; (iv) public info system/ broadcasting/ communications; (v) power stations/ transmission and distribution lines; (v

0.40% 40 12 none

Grants - capital assistance projects: provision of equipment and materials necessary for the construction of hospitals, schools, water supply, and other major equipment (e.g. medical)- commodity assistance: provision of fertilizers, pesticides/insecticides, agricultural machinery- technical assistance: conducts of FS/MP, provision of training, dispatch of experts and limited provision of equipment

Korea Economic Development Cooperation Fund (EDCF)

Project loans irrigation, agricultural development, water supply & sewerage, power, SME development, communication, infrastructure, transportation, education, health, environment

2-2.5% 30 5 0.1% service charge on total disbursement

1. Project aid2. Development study3. Dispatch of experts4. Invitation of trainees5. Dispatch of Korean volunteers

Korea International Cooperation Agency (KOICA)

infrastructure support in the areas of transportation irrigation, water resources, and telecommunications, pre-investment studies in the areas of public working irrigation, agricultural development, water supply, and sewerage

TERMS OF ASSISTANCE (yrs.)FUNDING SOURCE FORMS OF ASSISTANCE DONOR THRUSTS/AREAS OF ASSISTANCE INTEREST RATE (%)

(i) strengthening of the economic structure for sustainable growth; (ii) mitigation of disparities (poverty alleviation and mitigation of regional disparities); (iii) environmental conservation and disaster management; and (iv) human resource development

Japan International Cooperation Agency (JICA)

Source: NEDA Public Investment Staff, 2004


- 44 -

Table 4. Major Net ODA Recipients in Asia, 2003 (in millions US$)

RECIPIENT AMOUNT PERCENTAGE OF ALL ASIAN ECONOMIES

Viet Nam 1,769 12Indonesia 1,743 12Afghanistan 1,533 10Bangladesh 1,393 9China 1,325 9Russian Federation 1,255 8Pakistan 1,068 7India 942 6Philippines 737 5Sri Lanka 672 4Others 2,685 18TOTAL 15,122 100

Source: OECD

Table 5. Korea Grant ODA Disbursement Allocated to the Philippines,뭩

1991-2005

YEAR DISBURSEMENT($)% OF

KOREAN ODA1991 462,522.53 2.941992 687,702.37 3.921993 929,969.34 4.611994 759,055.28 2.871995 914,257.29 2.671996 850,361.07 2.201997 654,931.22 1.561998 509,261.17 1.761999 539,387.56 1.842000 2,223,433.10 6.092001 3,038,374.95 7.712002 1,811,107.74 3.452003 5,963,878.17 5.322004 6,365,514.64 3.962005 5,059,066.50 2.75

Source: KOICA

Focus on Mindanao as one of the poorest regions in the Philippines is one of

KOICA’s special thrusts. For instance, the Korea-Philippines vocational training center

project in Davao, at a cost of US$5 million, is expected to train approximately 420 en-

gineers a year in areas such as agricultural mechanics, automobile maintenance, and food


- 45 -

processing. Korea also provided technical training for curriculum development and manage-

ment to people from the center and also sent an advisor to each department to facilitate

the development of a vocational training system. This is in line with the plans of the

Technical Education and Skills Development Authority (TESDA) to further develop the

center into the largest vocational training center in Mindanao which would invite engineers

from neighboring countries (KOICA website, 2006).

Another project developed through Korean ODA is the construction of schools in

mountain regions of Bukidnon, Misamis Oriental, and Agusan del Norte, cofinanced by

KOICA with a local NGO called Join Together Society (JTS). The construction of these

schools motivated local residents’ participation in the project. Also, the Philippine KOICA

Fellows Association, Inc. (PHILKOFA), which is an association of former KOICA trainees,

volunteers for community projects in the areas of health, education, and environmental

protection. Their members share their knowledge of Korea’s development assistance with

the local people, offering public services and encouraging local participation. PHILKOFA

also carries out public relations activities (e.g. publications and newsletters) and gives feed-

back on training programs to KOICA (KOICA website, 2006).

National Economic Development Authority (NEDA) data showed around 15 percent of

total ODA inflows to the Philippines are grants with no obligation for repayment, with the

remaining 85 percent as ODA loans. Although figures are lacking for Korean ODA loans

for the target period under study, a listing of projects financed by Korean loans follows the

same pattern. Korean ODA loans worth US$100 million are focused on infrastructure

building such as railway, airport, and road improvement (Gapan-San Fernando-Olongapo

road expansion) (Statement of Korea, 2006). An article in the Manila Times in 2005 re-

ported the funding of infrastructure projects amounting to some US$450 million on the

heels of Korean President Roh’s state visit in that year to the Philippines, which includes:

a 200 megawatt, state-of-the-art, coal fired power plant in Cebu (US$200 million);

rehabilitation of the 60-kilometer Southrail from Caloocan to Alabang (US$100 mil-

lion);

an airport in Cagayan de Oro (US$100 million); and

rehabilitation of the Gapan-San Fernando-Olongapo road (US$50 million).

However, Korea’s ODA comprises only a small percentage of total ODA received by


- 46 -

the Philippines. Japan through the JBIC is still the Philippines’ largest source of develop-

ment assistance followed by the Asian Development Bank (Figure 2). Korean aid is lump-

ed together in the “others” category, suggesting the potential for a stronger aid relationship

between Korea and the Philippines to be realized in the future.

Source: adapted from NEDA Public Investment Staff, 2003

Figure 2. ODA Commitment to the Philippines by Source, 1992-1999

. Policy Issues and Challenges

ODA has both direct and indirect effects on poverty reduction and income distribution:

the former through support projects and programs aimed specifically at the poor, and the

latter through the promotion of long-term economic growth (Fei and Ranis, 1968; Dacy,

1975; Barry, 1988; US-CBO, 1997; World Bank, 2002). Its poverty-reducing impact has in-

creased in the past decade due to improved design and allocation; for instance by investing

in poor people with the inputs necessary for them to contribute to and participate in the

process of economic transformation, such as education and health, and by giving them ac-

cess to credit and other support infrastructure and services. Poor people are empowered

when their choices are enlarged and when they are given the potentials to shape their own

lives (US-CBO, 1997; World Bank, 2002). Another channel through which aid might foster

growth is technical assistance and technology transfer. That type of aid promotes growth

not by accumulating greater resources but by making existing resources more efficient and


- 47 -

effective. Technical assistance programs may also include educating and training govern-

ment officials who play a large role in creating the policy environment in using foreign

aid. All of these have led the UN High Level Panel on Financing in 2001 to recommend

that industrial countries to target ODA provision equal to 0.7% of their GNP.

Hence, to fully realize the benefits of Korean ODA, issues on ODA efficiency and ab-

sorptive capacity, untying of loans, harmonization of goals and sectoral/geographical prior-

ities and local government units’ (LGUs) and NGOs’ participation must be addressed,

among others (Kim, 2003; UNESCAP, 2005, OECD, 2006). UNESCAP (2005) has noted

that the share of social infrastructure and services in total ODA has risen at the expense of

the economic infrastructure and production sectors. However, poverty reduction should have

a healthy balance on social sector support such as education, health, and medical care and

improvements in the economic infrastructure to foster economic growth (MOFA, 2004).

On the donor side, consideration must be given to the fact that there is also a strong

and growing demand for more comprehensive and well-targeted assistance in the area of

capability building and capacity development. There have been severe problems of coordi-

nation and fragmentation and discontinuity not only among projects and the permanent line

agencies but also between donors (Camacho and Cuevas, 2004). There is a growing gen-

eral sense that technical cooperation does not work well, that as presently practiced it is

ineffective. It lacks positive impact on capacity building and institutional development.

Thus, there are instances when ODA loans and technical assistance programs and projects

ignore pressing needs and therefore yield counter-productive results. Here lies the issue on

"ownership" of development projects when loans and grants are tied to conditions.

Technical cooperation, often based on outside expertise, has frequently involved costly

overheads, limited local ownership and paid insufficient regard to the macroeconomic

environment. There is a tendency to introduce new technology that raises the costs of pub-

lic services. At the same time there is disregard for existing structures and local practices

that should have been adopted, rather than supplanted (Camacho and Cuevas, 2004).

Especially for the case of Korea, its desire for a DAC membership demands not just

an expansion of the amount of aid but a more effective and efficient administration of de-

velopment assistance. Adoption of a “country programming approach” will determine the

priority of sectors, regions, and issues of Korean ODA programs, and even facilitate the

guidelines for deciding interventions which address the needs of the recipient (Kim, 2003).


- 48 -

Strengthening cooperation between EXIM Bank and KOICA should be done for example,

through information-sharing or joint project identification, formulation, and evaluation. Yet

probably the most important factor is that of garnering public support for Korea’s aid

administration. Questioning as to why ODA should be provided to developing countries de-

spite Korea’s own problems of poverty and unemployment is what Kim (2003) terms as

“ODA-developing country mentality” and lessens support for aid issues and participation in

aid activities. Korea’s public should thus be made to realize that Korea has advanced to a

point where it should do something for other countries, as it has gone through the same

struggles and experiences that these countries are currently facing.

The donor’s side, though, is just one half of the solution to the equation. Empirical

evidence also argues that the performance of development assistance also heavily depends

on the recipient’s design of economic policies and the way it governs its economy. If the

policy environment is not conducive to growth aid is ineffective and less likely to contrib-

ute to sustainable development (Arkadie, 1990). Assistance is most effective only after

countries have made substantial progress in reforming their policies and institutions; the re-

cipient country should be the primary driver of their own reforms and institutional

development. Development scholars opine that "in terms of growth prospects and perform-

ance, no amount of foreign assistance can substitute for a developing country's internal pol-

icies and incentives for increasing output and improving the efficiency of resource alloca-

tion (US-CBO, 1997; World Bank, 1998; 2002)." Soesastro (2004) emphasizes that foreign

aid should merely be supplementary to the recipient country’s efforts.

Thus for the Philippines, maximization of Korean ODA benefits can be done by:

Enhancing coordination among various national and local government agencies and

community and non-governmental organizations in terms of ODA projects and pro-

gram implementation;

Strengthening of government's monitoring and evaluation system and develop capaci-

ties to actively carry out results monitoring and evaluation (RME) as well as focus

on the sustainability of completed projects;

Strengthening the participation of various stakeholders, implementers and recipients

of ODA projects and programs and ensuring accountability and transparency among

them; and

Appointing project implementation officers (PIOs) in each implementing agency to


- 49 -

ensure timely \implementation of projects in the field. The Investment Coordination

Committee (ICC) shall take a more proactive role by convening a Project Action

Group that will interface with the PIOs to move forward desired actions.

. Conclusions

Philippine-Korean bilateral relations have been steadily growing stronger the past few

decades. Korean Official Development Assistance has also been growing and has had sig-

nificant impacts in Philippine development. Indeed, Korea has gone a long way from being

an ODA recipient four decades ago to an emerging donor country at present. Korea has

emerged as a dominant player in the development of many Asian nations. Such a role can

further be enhanced through the continued rethinking and reevaluation of the philosophy

behind its Official Development Assistance and the impact it has in the propagation of the

Korean development experience. Similarly, the Philippines should cite key lessons from the

Korean experience essential for the country to properly utilize the assistance it receives.

This would enable it to shore up its domestic financing and eventually reduce its depend-

ence on foreign aid.

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Today, there exists an acute necessity of objective research into human conflicts in inves-tigations in the sphere of management, industry, in different fields of social life, etc. Notmany people managed to approximate to the understanding of laws, which control behav-iour and relationship of individual people and groups. Creation of efficient collectiveswithout conflict relationship remains a vital issue in sociology, psychology, management.Foresight of the results of the social, military, industrial and other types of conflicts is ofexceptional importance for social needs, and what is more, for psychology, as the scienceof human behaviour and for management as the science of control over people, re-sources, markets, etc. The aims of research into conflict are also very important, becauseconflict is a suitable object for cognition of human inner world (mentality, perception)and creation of effective communication.

I. Introduction

The essence of the conflict, the strategy of its control, methods of solving the conflict

situations-the list of problems, connected with conflict , which is under investigation in the

context of different theories and technologies, is very big.

Contingency approach, being the most developed in management, allows many scien-

tists to examine conflict from the different points of view and systematically. Russian con-

flictology remains behind the foreign one, especially in the sphere of qualitative analysis of

conflict situations and development of methods of solving the conflicts.

Such an opportunity appeared within the framework of context approach developed by

The School of Science of A.A. Verbitski. The use of such category as context allows in-

vestigating the psychological reality deeper, including conflict itself, types and structure of

individuals, who take part in the conflicts, methods and means of its investigation.

Shcherbakova O. I.

- 54 -

A.A. Verbitski considers context as «the system of human external and internal factors

and conditions of human behavior and activity, which influence the peculiarities of percep-

tion, understanding and transformation of the concrete situation and determine the sense

and the meaning of this situation as a single whole and its components» [2]. He also in-

dicates that it possible to single out external and internal contexts. The author understands

the external conflict as a system of objective, social, cultural, spatio-temporal and other

characteristics of the situation, action, deed. The internal context is the system of unique

human psychophysiological, psychological and personal peculiarities and conditions, aims,

relations, knowledge, experience.

A.A. Verbitski and T.D. Dubovitskaya hold the opinion that context can make inhibit-

ing or activating impact on productive mentations, hinder or, on the contrary, assist in

origination of the conflict situation [3].

. Experimental

194 probationers, from which 102 people were the students of 4, 5 courses of man-

agement from REA named after G.V. Plekhanov and the faculty of economies from

MGTU «MAMI»,92 people-representatives of small-scale business, took part in the inves-

tigation of conflict, based on context approach..

The probationers were tested for self-concept of conflict with the help of context

analysis. The results showed that there are conflicting personalities, people who are re-

sistant to conflicts and people, who avoid conflicts. There results don’t contradict the in-

vestigations of American scientist R. Bremson. But from this author’s point of view the

quantity of the 1st group can content 6-10% [1], as regards the results of testing the

Russian students and businessmen, they significantly vary from the cited scientific results.

For instance, the quantity of conflicting personalities 4 times exceeds the data of R.

Bremson (39,2 %). At the same time the rest of the probationers formed 2 groups re-

sistant to conflicts (41,3 %) and avoiding conflicts (19,5 %). It significant to point out,

that one of the most important factors, forming the attitude of people to the conditions of

their life, tends to de economic context. Therefore, the findings demonstrate the influence

of economic, national context on formation of personality’s typology.

The Use of Context Approach in Control over Conflicts in Management Activity

- 55 -

Table 1.Types of context and its effect on behaviour of a person in conflict

Shcherbakova O. I.

- 56 -


- 57 -

The conducted context analysis also showed that activation and inhibition of menta-

tions and its impact on origination of conflict may occur to a variable extent. It can be

divided into 3 groups: the effect of average extent, profound effect, extreme effect or

«terror of the context».

The use of context approach allowed analyzing the pattern of influence of indicated

types of contexts on behavioral responses of probationers and professionally important

(personal) qualities of conflicting personalities, personalities resistant to conflicts and avoid-

ing conflicts.

The results are given in the Table 1.

Therefore, the investigation shows than conflicting personalities may have an excessive

activation of internal conflict or its terror, which heads to inhibition of analysis of external

context.

Conflict resistant personalities may probably have a strong positive activation of in-

ternal context that allows them to activate positive sides of internal conflict, this helps to

analyze external context more efficiently, to gain better understanding and not to lose pres-

ence of mind in the conflict situation.

Conflict avoiding personalities can have excessive inhibition of internal context, which

leads to activation of external conflict and inhibition of activity of a person, who chooses

avoiding type of behaviour.


The use of context also allowed revealing different context in conflicts: external-mic-

rosocium, administrative-and-industrial, educational; and internal-gender, age-specific, con-

text of self-concept.

The impact of administrative-and-industrial context on the office workers: heads of de-

partments are the most conflicting personalities (59,1%), general managers follow them

(37,1 %), assistants of managers (25,8 %) and managers (23,8 %) are the next. The inves-

tigation also showed that concrete functional obligations, discharged by different specialists,

assist the actualizations of such a difficult professionally important personal quality as be-

haviour in conflict situation. The revealed levels of conflict must serve as a criterion for

Shcherbakova O. I.

- 58 -

permissibility for the corresponding position.

The investigation also revealed the influence of age-specific context on the levels of

conflict (the probationers were divided into 5 groups with 5-year age interval: 20-25;

26-31; 32-37; 38-43; 44-49 etc.). The investigation showed that people aged 26-31 are the

mast conflicting personalities, and people aged 44-49 are the least conflicting, this means

that such a professionally important quality as behaviour in conflict situation , as well as

intellect, is forming during life, reaching the stages of general frontal progress and regress

of functions, discovered by B.G. Ananiev. We also noticed the inverse dependence of rela-

tively avoiding conflicts behavior. During life it increases, reaching maximum at the age

group of 44-49 and etc. (36,6%).

What is more, it is also essential to take into consideration the psychological mecha-

nism of formation and development of the conflict, based on theory of exchange (G.

Homans), equity theory (J.S.Adams) and expectancy theory (V.Vroom).We suppose that

this psychological mechanism is common for all age crisises, the differences are in the ref-

erence point (origin datum), which represents the «equivalent» people, who are given a

comparative assessment of their position and achievements.

When making a comparison, a person considers that his labour inputs are bigger and

achievements are smaller than someone’s, who is equivalent to him; he decreases intensity

of his labour inputs.

This theory should be amplified with the fact that understanding of injustice cannot

but cause negative emotions and feeling. Moreover, such feelings as dissatisfaction and of-

fence do not only accumulate with time, but also transform into aggression under the

mechanism of burnout.

The formation of particular levels of conflict begins in the first 20-25 age group, by

the age of 26-31 people accumulate a large amount of unrealized wishes and needs and si-

multaneously increase the levels of pretensions in competitive struggle. 48,5% of proba-

tioners, instead of bending every effort to achieve settled aims, accumulate irritation and

offence at surrounding people, which transform into aggression, accentuating the conflicting

personality.

At the age of 32-37 the level of conflict decreases by 18,5%. This is connected with

stabilization of life and labour activity. The next 38-43 age group consists of people, who

don’t want to submit to their fading after having gained authority and achieved something


- 59 -

in life and 38,4% belong to conflicting personalities.

In the 44-49 age group the level of conflict decreases by 18,2%. People, getting old,

are becoming wiser and are beginning to realize that conflict does not refer to effective

way of communication and to take care of their health.

During the process of context analysis we managed to reveal the types of conflicting

students according to their results in studies. They were divided into 3 groups:

- students with excellent results average mark = 5,0

- students with good results average mark = 4,0-4,9

- students with satisfactory results average mark = 3,0-3,9 ,

as results in studies are not only the external criterion of efficiency of psychological activ-

ity control, but also indicate that this control is realized by different systems of pro-

fessionally important (personal) qualities or various levels of their formation. Conflict

avoidance or resistance refers to these qualities.

The results of conducted analysis:

students with excellent and good results have similar division into conflicting person-

alities, personalities who avoid and resist conflicts (37,5; 15,5; 47,0 % - for excellent stu-

dent). 1/3 of students with excellent and good results are conflicting personalities, about

1/2 avoids conflicts. There are from 11,8 to 15 % of personalities who resist conflicts.

students with satisfactory results have a high rate of conflicting personalities (66,7 %)

and 33,3 % of personalities, who avoid conflicts.

Probably, it is connected with conflicts among people, who cannot work at full poten-

tial for some reasons (lowered intellectual faculties, poor volitional mechanisms) and blame

the surrounding people, i.e. they have an external focus of control. This occurs along with

such traits of personality as diffidence, anxiety, jealousy and aggressivity. The absence of

personalities, resistant to conflicts among the students with satisfactory results is not

occasional. To become conflict resistant, a person should have adequate self-concept, emo-

tional stability and other positive professionally important personal qualities, which are not

well developed; moreover the presence of constant internal conflict doesn’t assist their

actualization.

Gender differences are investigated in works of Russian and foreign followers (Elise

Igly, A. Feingold, Sh. Markus, Sandra Bem, Shon Bern, I.S. Kon, A.G. Chirikova, E.P.

Shcherbakova O. I.

- 60 -

Ilyin). The investigation of such a professionally important personal quality as behaviour in

conflict situation in gender context is insufficient. We made an attempt to investigate the

influence of gender context taking to consideration administrative-and-industrial and

age-specific contexts. For students and office workers the conflict of the 6th level is practi-

cally at the same rate (4,0% - men; 3,9 % - women). In the group of the 5th level there

are more conflicting men, that women (students: 1,8 times more, office workers: 1,6 times

more). This quantity confirms A.G. Chirikova’s point of view that men tend to trust their

opinion, then to make a compromise. Considering age-specific and gender contexts, we can

notice that in the 20-25 age group of students there are 1,5 times less conflicting men,

than women. What is more, there are 2,5 times less men, avoiding conflicts than women.

The investigation among office workers showed different results. In the same age group

there are 1,7 times less conflicting men, than women. But there are no women, who avoid

conflicts. In 26-31 age group the number of conflicting men and women is practically

similar. In 32-37 age group the number of conflicting men of the 5th level stays the same,

there appears 16,7% of conflicting personalities of the 6th level and decreases the number

of personalities, who avoid conflicts. Speaking about women, in this age group there are

12,5% of conflicting personalities of the 6th level, but there are practically no conflicting

personalities of the 5th level and the number of persons who avoid conflicts increases.

In 38-43 age group the number of conflicting men increases up to 62,5% and avoiding

conflict up to 87,5%. There are no conflicting women in this age group, but the number of

personalities, who avoid conflicts increases up to 75%.

Finally, in the 44-49 age group the number of conflicting men decreases. There are no

conflicting women in this group, but the number of personalities, who avoid conflicts in-

creases up to 50%.

Discussing the reasons of different age-specific dynamics of conflicts among men and

women, we suppose that men in 20-25 age group are conflicting because of the force and

will to defend their status and interests even in the aggressive way. Peak of the quantity of

conflicting women is reached in 26-31 age group, after this period it is replaced by con-

flict resistance and conflict avoidance. Firstly it is connected with the fact that it’s more

difficult for women to go up the career ladder because of the men’s prejudices. Secondly,

they have to protect themselves against sexual compulsion. The peak of quantity of con-

flicting men in 38-43 age group coincides with the peak of psychophysiological and psy-


- 61 -

chological abilities. Decrease of the quantity of conflicting men is noticed in the 44-49 age

group, which is later than for women. Women achieve particular financial position and

family happiness by the age of 32-37, that’s why the number of conflicting personalities

does not increase and the number of conflict resistant is growing.

Therefore, we can conclude that men are longer age-specific conflicting personalities

then women.

. Conclusion

Presented material of experimental investigation allows the managers of organizations

and companies of any levels to control people; students, who are preparing to become

competent managers, to master the technology of context education and gain knowledge,

skills and abilities not only in economic-organizing and legal matters of management, but

also in special parts of psychological knowledge (control conflicts). This investigation can

resolve not only educational problems but also a number of particular real-world problems:

- to select right people into groups, departments, companies taking into consideration

microsocium gender and age-specific contexts

- to estimate correspondence of managers to their position

- to master the technology of context education of students and managers.

References

[Books: e. g.] [1] R. Bremson Communication with difficult people. - Kiev, 1991.

[Books: e. g.] [2] A.A. Verbitski New educational paradigm and context education. - Moscow,

1999.

[Books: e. g.] [3] A.A. Verbitski, T.D. Dubovitskaya Contexts of educational content. -

Moscow, 2003.


- 63 -

The Agreement on Agriculture necessitated that trade barriers for agricultural productsof GATT-WTO member countries be minimized. This paper reviewed the effect of this in-ternational trade agreement on Philippine agriculture, particularly on the import, export(where applicable) and domestic production of white potato, garlic, onion, cabbage, ba-nana and pineapple. It also determined the price competitiveness of the aforementionedcommodities in the world market. Trend analysis, price comparison and comparison ofmeans were used as analytical tools. The period prior to 1995 was designated as thepre-WTO phase while 1995 to the more recent years were considered the post-WTOphase. Results showed that industries for onion, garlic, cabbage and potato declined dueto the imposition of trade liberalization. Importation of these products surpassed the in-creases in export volume. Locally produced vegetables of these type could not competewith imported ones in terms of price and to some extent, quality, as in the case ofpotato. Large supply coupled with lower prices of the imported commodities pushed downdomestic production of the vegetables.Banana, on the other hand, remained highly competitive in the world market as it hasbeen prior to the WTO-AOA. Pineapple exports also continued to increase although at amuch lower level than the quantities of banana export.

I. Introduction

The decision to liberalize Philippine agricultural trade was a step that required serious

deliberation among Filipino policy makers. It was a move that could put at risk the coun-

Alessandro A. Manilay

- 64 -

try’s agricultural sector which, in terms of employment, provides income sources to about

50% of the labor force. This was the dilemma faced by Filipino policy makers and stake-

holders while negotiations in agricultural trade transpired under the GATT-Uruguay Round

from 1986 to 1994. Details on how the negotiations prospered were limited but by 1994

the Philippines finally acceded to the trade agreements.

After more than ten years since agricultural trade was liberalized, the question on how

the Philippines fared under such policy continues to be a topic of interest. This paper at-

tempts to provide an overview of the WTO- Agreement on Agriculture as well as de-

termine its impact on the trade of the Philippine fruit and vegetable industries.

. The WTO and the Agreement on Agriculture

The Agreement on Agriculture (AOA) is one of the accords under the GATT-Uruguay

Round. The AOA seeks to attain a market-oriented international trade for agricultural prod-

ucts through the gradual reduction of quantitative import restrictions (QR), subsidies, im-

port tariffs and non-tariff barriers. It also requires all member countries to remove an-

ti-trade biases of sanitary and phytosanitary import standards by adopting scientific and in-

ternationally-accepted criteria.

The World Trade Organization (WTO), on the other hand, came into being in January

1995 (Mangabat, 1998). It is the body responsible for the implementation of the trade

agreements formulated under GATT and acts as the venue for “trade negotiations, settling

trade disputes, reviewing national trade policies, assisting developing countries in trade pol-

icy issues through technical assistance and training programs, and cooperating with other

international organizations”(San Juan, 2002).

There were divergent opinions regarding the possible effects of the WTO-AOA on

Philippine agriculture. Supporters of the WTO-AOA identified several benefits that can be

generated by liberalizing agricultural trade. The removal of trade-distorting policies will not

only raise international commodity prices, but would also lead to an increase in the export

earnings of domestic producers (Clarete, 2005) of such products thereby improving the bal-

ance of trade through the increase in export earnings (Bello, 2003). Food security is like-

wise expected to improve through the reduction of supply variability, allowing for lower

The Impact of the World Trade Organization (WTO)- Agreement on Agriculture (AOA) on theTrade and Domestic Production of Selected Fruits and Vegetables in the Philippines

- 65 -

domestic food prices, and increasing choices for consumer products (Ohga, 2006). Further-

more, the AOA could encourage the production of high value added (HVA) crops such

as coffee, cacao, spices, root crops, fruits and vegetables because the AOA could open

larger opportunities for these commodities in the world market which was forecasted to

translate to the creation of about 500,000 new jobs in agriculture (Watkins, 1995; Pascual

and Glipo, 2002).

On the other hand, opposing groups believed that with the WTO-AOA, the agriculture

sector would be exposed to economic risks when trade policies aimed at protecting the sec-

tor are fully relaxed. Among these risks is the possibility of decline in agricultural exports

and domestic production because of the lack of price competitiveness in the global market

(Ohga, 2006). The increase in volume of imported fruits and vegetables in the Philippine

market could push down prices of domestically grown products which would adversely af-

fect the income of local farmers (Clarete, 2005).

It took more than a year to make Philippine agricultural trade policies consistent with

the stipulations of the GATT-WTO. A major breakthrough was the ratification of Republic

Act 8178 otherwise known as the Agricultural Tariffication Act in March 1996 (Clarete,

2005). The law called for the complete tariffication of quantitative restrictions for agricul-

tural imports such as potatoes, cabbages, onions and garlic. Table 1 shows the schedule of

tariff rates that replaced the QRs on fruits and vegetables.

Table 1. Philippine commitments to the WTO-Agreement on Agriculture on fruits

and vegetables.

Commodity Rate of Duty (%) Initial Final Qty (MT) Tariff Qty (MT) Tariff1995 1995 2004 1995 (%) 2004 (%)

Banana 50 70 50 NC NCMango 50 50 40 NC NCPotato 30 50 - 100 40 465 1,520Garlic 30 100 40 NC NCOnion 30 50 - 100 40 1,610 30 2,683 40

Cabbage 30 100 40 2,105.52 30 3,509.20 40

Current Bound Rate (%)

Source: Mangabat, Minda, 1998.NC: No commitment


- 66 -

Republic Act 8178 also provided for the “establishment of the agricultural minimum

access volume (MAV) and the creation of an Agricultural Competitiveness Enhancement

Fund (ACEF) for the development of agricultural infrastructure” (Mangabat, 1998). The

MAV specifies the agricultural products that can be imported with lower tariff rates

(in-quota rates). Any volume of imports in excess of the MAV will be charged a duty

higher than the tariff rate (out-quota rate). Among the fruits and vegetables that previously

had quantitative restrictions, only potato was included in the list of commodities that were

assigned an MAV. Table 2 presents the schedule of Philippine commitment to the MAV

for potato. The AOA provision for the elimination of export and import subsidies, how-

ever, did not apply to the Philippines because the country had no export subsidies prior to

WTO while import subsidies for fertilizers, certified seeds and planting materials, as well

as price subsidies, were all below the maximum level of 10% of the value of total

production.

Table 2. Minimum access volume for potato, Philippines, 1995-2005

1-JanDescription Unit 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Potatoes MT 465 965 1,035 1,105 1,175 1,245 1,315 1,385 1,455 1,520 760fresh or chilled

Source: Dept. of Agriculture, cited by Mangabat, Minda, 1998.

To safeguard the interest of Filipino farmers as far as the effects of opening up agri-

culture to world competition, Gonzales (2003) claimed that the government enacted appro-

priate legislations to provide tariff reductions on inputs and to protect against import surg-

es, dumping and damage to local industries, as well as budgetary support to improve agri-

cultural infrastructure (eg., roads, bridges, irrigation).

. Impact of WTO-AOA on Philippine Agriculture

The state of Philippine agriculture after policy changes have been implemented in

compliance with the provisions of the WTO-AOA appears to have worsened according to

various critics of the agreement. There seems to be a consensus that the AOA did more


- 67 -

damage than benefit Philippine agriculture. Bello (2003), in his paper entitled “Multilateral

Punishment: The Philippines in the WTO, 1995-2003” stated that, “not only had the prom-

ised benefits of AOA membership failed to materialize, but Philippine agriculture was in

the throes of crisis”. His conclusions were based on his analysis of the country’s balance

of trade, export earnings and employment in agriculture. He noted that the Philippine agri-

cultural trade deficit increased as a result of the WTO membership. While the country reg-

istered an agricultural trade surplus of USD 292 million in 1993, deficits amounting to

USD 764 million and USD 794 million were incurred in 1997 and 2002, respectively

(Bello, 2003). He linked the trade imbalance to the massive importation of agricultural

products with the value of imports almost doubling from USD 1.6 billion in 1993 to USD

3.1 billion in 1997 and USD 2.7 billion in 2000. The value of agricultural exports, on the

other hand, did not improve significantly with a slight increase from USD 1.9 billion in

1993 to USD 2.3 billion in 1997, and then declined to USD 1.9 billion in 2000 (Bello,

2003). He also reported that, instead of creating 500,000 jobs annually, employment in ag-

riculture actually dropped from 11.29 million people in 1994 to 10.85 million in 2001.

Mangabat (1998) in her paper entitled “Effects of Trade Liberalization on Agriculture

in the Philippines: Institutional and Structural Aspects,” similarly observed that the coun-

try’s balance of trade was still negative even after the implementation of RA 8178 in

1996. She also noted that by 1997, the value of agricultural imports drastically increased

and exceeded the value of exports resulting in a trade imbalance of USD 764 million. She

concluded that this situation was exacerbated by import liberalization under the GATT-

WTO.

More recent statistical data from the Bureau of Agricultural Statistics (BAS) show that

the trade deficit further increased to USD 1,284.43 billion by 2005. During the year, the

value of total agricultural import was almost USD 4.0 billion while export was recorded to

be USD 2.7 billion. In general, agricultural exports actually improved considering that ex-

port earnings were lower prior to 2005, ie., USD 2.2 billion in 1998 and USD 2.3 billion

in 2003. However, the improvement in export performance during these years did not im-

prove the country’s balance of trade because agricultural imports exceeded export values.

Moreover, employment in agriculture between 2003 to 2006 grew at a slow rate of 1.46%

per year.

Gonzales (2003) in his study entitled “WTO Agreement on Agriculture: The


- 68 -

Implementation Experience-Developing Country Case Studies”, reported that there was

“generally a decline in global competitiveness among sensitive Philippine agribusiness

products” as a result of the WTO-AOA trade liberalization. Using the resource cost ratio,

he compared the pre-AOA (1994) and post-AOA (1999) periods for sensitive products such

as rice, corn, beef cattle, hogs, broiler and eggs. His findings revealed that the decline in

cost competitiveness was “due to the general ‘unpreparedness’ of Philippine agriculture to

face global competition”. The agricultural sector is characterized by small land holdings,

limited access to modern technology and the lack of infrastructure support. Furthermore, he

argued that expansion in volume was not a problem for traditional exports within pre-

viously established markets. It was penetrating new markets within the WTO membership

for new products which proved to be difficult. Gonzales (2003) identified high tariff rates

and non-tariff barriers (e.g., sanitary and phytosanitary standards) as the main reasons for

the non-expansion of agricultural export products among WTO countries.

Clarete (2005) clarified that the anticipated improvement in export earnings did not

materialize because of high transaction costs and not due to the inability to access markets

in developed countries. He explained that producers who are not able to compete with im-

ported commodities could not easily move out of their current business activities and invest

resources in export-oriented production. He added that the jobs lost due to freer trade are

unlikely to be fully replaced with new ones in export-oriented activities because of the

transaction costs involved. He defined transaction costs as costs associated with the transfer

of assets from one business activity to a new one as well as the costs involved in the mar-

keting of a product. The latter type covers costs related to infrastructure, including roads

and bridges, sea and airports, communications, banking facilities, and other common serv-

ices, which, when taken together, define the capability of a group of producers to take ad-

vantage of known market opportunities. High transaction costs serve as a disincentive to

participation in any market exchange or render new business entrants less price competitive

against those whose transaction costs are lower.

. Overview of the Philippine Fruit and Vegetable Industries

While the foregoing section showed the general state of the country’s agricultural sec-


- 69 -

tor after the implementation of trade policies consistent with the WTO-AOA, it is the con-

dition of the fruit and vegetable industries that is of interest in this study. The following

sections discuss the impact of the WTO-AOA on the production and international trade of

selected vegetables and fruits.

4.1. The Vegetable Industry

The Philippines produces about 43 major types and 253 lesser known species of vege-

tables (Aquino, 2006). They may be classified as highland and lowland vegetables.

Highland or semi-temperate vegetables are grown in mountainous areas. Examples of high-

land vegetables are cabbage, potato, cauliflower, carrots, asparagus, lettuce, and broccoli.

Lowland vegetables include eggplant, tomato, onion, garlic, green peas, mongo beans,

chick peas and ampalaya (bitter gourd), to name a few. Around 70% of the country’s sup-

ply of semi-temperate vegetable crops are produced in the Cordillera Autonomous Region

(CAR), particularly in Benguet and Mt. Province. The region is considered as the vegetable

belt of the country (Tauli-Corpuz, Sidchogan-Batani and Maza, 2006). The Ilocos Region

has the largest production area for eggplant (4,987 ha), onions (4,961 ha), tomato (3,901

ha) and garlic (3,786 ha). In comparison, Central Luzon cultivates 3,527 hectares of land

for onions (Aquino, 2006).

Among the vegetables grown in the country, onions and shallots, potatoes, asparagus,

green peas, tomatoes, cabbage, banana blossoms, eggplants, carrots, mongo beans, lettuce,

cabbage and chick peas are exported to other countries. BAS and NSO data showed that

shallots was a consistent leader in terms of export volume from 1996 2000. In 2005,

the volume of onion exports went down to 376.4 MT which represents an 83% decline

from the 2004 export of 2.2 thousand MT. This was due to the reduction of procurement

by Indonesia and Singapore (BAS). The country also exported 51 MT of carrots in 2004 to

Malaysia as well as 40 MT and 12 MT of lettuce in 2004 and 2005, respectively. There

are on-going negotiations for market access to China for carrots, cabbage, potato, broccoli,

cauliflower, and lettuce (Deomampo and delos Reyes, 2006). Japan and the two earlier

mentioned countries were being eyed for broccoli and cauliflower while Taiwan and

Hongkong as potential foreign markets for cabbage (FAOSTAT, 2005).

The Philippines imports several kinds of fresh or chilled vegetables such as tomatoes,


- 70 -

onions, garlic, cabbage, cauliflower and broccoli, Brussels sprouts, lettuce, carrots and cu-

cumber to augment domestic supply. China is the country’s main supplier of vegetable

imports. In 2002, China accounted for 82% of the total volume of imports. Other sources

are Hongkong, India, Netherlands and Australia (Macabasco, 2002).

4.2. The Fruit Industry

Philippine fruit production increased during the period 2000-2004 in terms of area har-

vested and volume (Deomampo and delos Reyes, 2006). The area for fruit farming grew

by an average of 3.83% annually. From 546,948 hectares in 2000, land used for fruit pro-

duction increased to 651,541 ha in 2004. Volume of production, on the other hand, ex-

hibited an average annual growth rate of 4.7%, ie, from 6.8 million MT in 2000 to 8.4

million MT in 2004.

The Philippines is a net exporter of fruits, specifically banana, mango and pineapple

(Macabasco, 1993). These are sold as fresh and processed products mostly to the United

States, Japan, the Middle East and Europe. Banana and pineapple including pineapple prod-

ucts are consistently included in the top ranking list of exported agricultural commodities

(Mangabat 1998). Thus, a significant amount of foreign exchange is generated through the

export of these products.

. Effect of WTO-AOA on Selected Fruits and Vegetables

The effect of WTO-AOA on selected fruits and vegetables was measured using trend

analysis and price comparison. The trend analysis was applied to determine annual in-

creases or decreases in production volume as well as export and import quantities. The pe-

riod prior to 1995 was designated as the pre-WTO phase while 1995-2004 (or 2005 when

data are available) was considered as the post-WTO phase. The geometric growth rate

method was used to measure the rate of change for the two identified phases. The sample

means for each phase were also computed. A t-test was used to statistically determine the

significant difference in the mean levels of the variables under the pre- and post-WTO

periods.


- 71 -

Due to limited data, the level of competitiveness of selected agricultural prices was

measured using the price comparison approach. This approach compared the export and im-

port parity prices with domestic wholesale prices at a given foreign exchange level. The

export parity price was obtained by expressing the Free on Board (FOB) value of the prod-

uct into the local currency (Philippine peso), less port costs and storage and transport costs.

The import parity price, on the other hand, is the Cost-Insurance-Freight (CIF) value con-

verted into the local currency including tariff rates as well as transport, storage and han-

dling costs at the Manila port (Malabayabas, 2002).

A particular agricultural product can compete in the export market if the export parity

price is greater than the domestic wholesale price. On the other hand, locally grown agri-

cultural products can compete with imported goods of similar quality if the import parity

price is higher than the domestic wholesale price.

. Trend Analysis

6.1. Potato

Potatoes are tuber crops containing high amounts of carbohydrates, potassium, iron,

protein, fiber, phosphorous, and vitamins B1, B6 and C (Bernardino, 2001). In 2006, the

provinces of Benguet and Mt. Province within the Cordillera Autonomous Region (CAR)

contributed around 27% and 45%, respectively, to the total increase in production of pota-

toes over the previous year in the country. The other relatively large producers are Davao

del Sur and Bukidnon.

The Philippines exports processed potato (e.g., chips, strings, strips) mostly to the

United States of America and the United Arab Emirates. In terms of imports, the country

also buys a variety of potato products from prepared or preserved potatoes to fresh or chil-

led, and ready-to-eat products such as chips, strings and strips. The USA is the major sup-

plier of imported potatoes (Bureau of Agricultural Statistics).

Import Volume:

The Philippines is a net importer of potatoes (Bernardino, 2001). Potato importation


- 72 -

significantly increased from an average of 3,750 MT (1985-1994) to 35,015 MT (1995-

1999, 2004-2006) (Fig.1 and Table 3). Malabayabas (2002) attributed the increase in potato

imports to the increasing demand for potatoes among institutional markets such as hotels,

restaurants, fastfood chains and food processors. Locally grown potatoes do not meet the

quality standards set by these institutions. In 2004, the actual import volume was 59,065

MT. By 2006, quantity has increased to 62,599 MT, a 6.8% increase over the previous

year’s 58,603 MT.

Fig. 1. Import, Export and Production Volume , White Potato, 1985-2006

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Year

Met

ric

Tons

Production (MT) Export (MT) Import (MT)

Export Volume

The Philippines exports cooked or uncooked potatoes in water, frozen potatoes, and

several forms of processed potato such as potato chips, strings, strips, as well as flour and

potato starch. There was a considerable decline in potato export volume in 2005-2006 in

comparison to the export performance in previous years (Fig. 1 and Table 3). Exports in

2004 reached 364.2 MT while the 2000 figure was 407 MT. According to BAS, the dra-

matic drop in export volume was due to the discontinued shipment of cooked/uncooked po-

tatoes in water and frozen potatoes.


- 73 -

Annual Production:

Potato production in the Philippines declined significantly in 1995 until 2006, the

post-WTO phase (Fig 1 and Table 3). While the pre-WTO average production was 90,454

MT, the post-WTO production average decreased by 20.6% to 71,793 MT.

In terms of growth rate, the volume of production for potato was increasing at the

pace of 20.88% per year before the WTO era. This declined to negative 4.82% per year

during the post-WTO phase.

Table 3. Production, export and import volume, white potato, Philippines,

1985-2006

YearQuantity Growth Rate Quantity Growth Rate Quantity Growth Rate

(MT) % (MT) % (MT) %1985 47,000 58.771986 52,000 10.64 0 42.46 -27.751987 57,000 9.62 0.94 100.00 164.75 288.011988 62,000 8.77 0.00 314.51 90.901989 34,680 -44.06 0.00 870.09 176.651990 58,290 68.08 0.00 7,528.14 765.211991 149,537 156.54 9.64 100.00 1,191.80 -84.171992 155,611 4.06 491.12 4994.61 1,942.20 62.961993 140,998 -9.39 3.47 -99.29 10,562.26 443.831994 147,425 4.56 676.07 19383.29 14,824.55 40.351995 85,302 -42.14 177.83 -73.70 17,232.76 16.241996 84,946 -0.42 8.48 -95.23 17,999.45 4.451997 88,907 4.66 400.85 4627.00 25,264.51 40.361998 64,567 -27.38 482.00 20.24 18,618.36 -26.311999 63,584 -1.52 125.00 -74.07 20,741.26 11.402000 63,524 -0.09 407.00 225.60 -100.002001 66,016 3.92 -100.00 0.002002 67,540 2.31 0.00 0.002003 68,050 0.76 0.00 0.002004 69,456 2.07 364.20 100.00 59,065.00 100.002005 70,160 1.01 42.30 -88.39 58,603.00 -0.782006 69,461 -1.00 73.70 74.23 62,599.00 6.82

AverageAll years 80,275 6.86 233.04 2,238.02 16,717 1001994 & earlier years(Pre-WTO) (A) 90,454 20.88 236.25 4,895.72 3,750 1761995 & recent years

(Post-WTO) (B) 71,793 -4.82 231.26 512.86 35,015 7Difference (B-A) -18,661 -25.70 -4.99 31,265.46% increase/decrease -20.63 -123.07 -2.11 833.76

Exports ImportsProduction

2006-Preliminary a: Average of 1995-1999 onlySources: Doctor, 2006 and BAS


- 74 -

6.2. Garlic

Garlic is a kind of spice grown as an annual from bulbs called cloves (Malabayabas,

2002). It is a good source of calcium and potassium while its leaves contain Vitamins A

and C. It is also being used as a raw material for the production of certain drugs, pesti-

cides and antibiotics.

Import volume

Garlic imports increased considerably during the post-WTO phase (Fig. 2 and Table

4). Prior to WTO (1985-1994), the average quantity of imported garlic was estimated to be

235 MT. This increased to an average of 16,296 MT during the period 1995-2005. It

should be noted that garlic import was already increasing at the rate of 53% per year dur-

ing the pre-WTO phase. The growth pace, however, escalated during the post-WTO period

at the rate of 82% per year.

Export volume

Exports also increased during the post-WTO phase, particularly between 2002 to 2005

(Fig. 2 and Table 4). While the average export volume prior to WTO was computed to be

only 8.26 MT, this considerably increased to an average of 2,106 MT for the period

1995-2005. The rate of increase in the volume of exports during the said period was also

high at a value equal to 1,325% per year. In contrast, exports declined at a rate of 49.3%

per year prior to the WTO period.


- 75 -

Fig. 2. Import, Export and Production Volume, Garlic, Philippines, 1985-2005

0

10,000

20,000

30,000

40,000

50,000

60,000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Year

Met

ric T

ons

Production (MT) Imports (MT) Exports (MT)

Annual production

Garlic production in the Philippines did not exhibit a declining trend over the period

1985 to 2005 (Fig. 2 and Table 4). Instead, annual production volume fluctuated while

maintaining an almost horizontal path for the past twenty years. The average growth rate

was computed at 1.47% per year. No significant difference was observed between the

pre-and post-WTO-phases, ie., 1.89% and 1.14%, respectively. The highest garlic pro-

duction was recorded in 1997 at 20,180 MT while the lowest production level was experi-

enced in 1999.


- 76 -

Table 4. Import, export and production volume, garlic, Philippines, 1985-2005Table 4. Import, export and production volume, garlic, Philippines, 1985-2005


(MT) (%) (MT) (%) (MT) (%)1985 14,960 23.991986 15,490 3.54 38.38 59.981987 15,530 0.26 9.19 119.96 212.561988 14,140 -8.95 0.18 -98.04 153.35 27.831989 17,200 21.64 0.09 -50.00 160.52 4.681990 17,850 3.78 0.09 0.00 182.26 13.541991 12,430 -30.36 289.76 58.981992 11,770 -5.31 10.00 271.35 -6.351993 12,310 4.59 471.83 73.881994 15,730 27.78 30.00 640.77 35.811995 17,230 9.54 2.40 -92.00 766.37 19.601996 18,890 9.63 250.00 10316.67 1,519.56 98.281997 20,180 6.83 3.60 -98.56 6,254.74 311.621998 12,760 -36.77 46.99 1205.28 13,500.80 115.851999 9,340 -26.80 25.23 -46.31 19,069.60 41.252000 13,690 46.57 5,110.00 -73.202001 15,310 11.83 590.00 7,600.00 48.732002 16,300 6.47 4,050.00 586.44 16,970.00 123.292003 15,520 -4.79 4,590.00 13.33 47,620.00 180.612004 15,000 -3.35 5,100.00 11.11 21,220.00 -55.442005 14,000 -6.67 6,400.00 25.49 39,620.00 86.71

AverageAll years 15,030 1.47 1,319.24 981.12 8,648 69

1994 & earlier years(Pre-WTO) (A) 14,741 1.89 8.26 -49.35 235 53

1995 & recent years(Post-WTO) (B) 15,293 1.14 2,105.82 1,324.61 16,296 82

Difference (B-A) 552 -0.75 2,097.56 1,373.95 16,060.33 28.14% increase/decrease 3.74 -39.73 25,399.36 -2,784.26 6,827.88 52.66

Export ImportProduction

Sources: Malabayabas (2002) and FAOSTAT

6.3. Cabbage

In the vegetable industry, cabbage ranked fourth in terms of volume of production in

2003 (Bureau of Agricultural Statistics). The CAR produced around 73% of total cabbage

production (Deomampo and delos Reyes, 2006). Cabbage is included in the list of sensitive

agricultural products. In 1996, its tariff rate was 30% which was way below the GATT ini-

tial bound rate of 100% (Adriano, 1996).

Import Volume

Import of cabbages showed a very erratic trend when data between 1990 -2005 were


- 77 -

reviewed (Fig. 3 and Table 5). However, in general, the average post-WTO import volume

(131.26 MT) was found to be significantly higher than the pre-WTO level (22.81MT). This

was a result of the large importations in 1999 (250 MT) and 2005 (820 MT).

Fig.3. Import, Export and Production Volume, Cabbage, Philippines, 1990-2005

0

50,000

100,000

150,000

200,000

1990

1992

1994

1996

1998

2000

2002

2004

Year

Met

ric to

ns


Export Volume

The export volume of cabbages was relatively smaller and less frequent than its

importation. Cabbages were only exported six times in a span of 15 years (1990-2005) at

an average of 26.25 MT (Fig. 3 and Table 5). The largest export volume was attained in

2005 at 230 MT. The data also revealed that for a period of 4 years since 1998, the coun-

try did not export cabbages.

Annual Production

The national cabbage production considerably decreased after 1995 (Fig. 3 and Table

5). Between 1985 and 1994, the average production volume was 102,463 MT. On the other

hand, the 1995-2005 annual average reached only 94,871 MT representing a 7.4% decline

in production.

The average growth rate of cabbage production before 1995 was 16.21% per year.

During the WTO regime, the growth rate went down to negative 4.10% per year.


- 78 -

Deomampo and delos Reyes (2006) made a similar observation that the trend in cab-

bage production from 1992 to 2003 followed a declining pattern due to a decrease in land

area devoted to cabbage production and a continuously low yield.

Table 5. Import, export and production volume, cabbage, Philippines,

1990-2005

Table 5. Import, export and production volume, cabbage, Philippines, 1990-2005Year

Quantity Growth Rate Quantity Growth Rate Quantity Growth Rate(MT) (%) (MT) (%) (MT) (%)

1990 117,200 0.00 0.151991 170,900 45.82 10.00 100.00 0.00 -100.001992 150,800 -11.76 0.00 -100.00 80.72 100.001993 155,000 2.79 70.00 100.00 10.00 -87.611994 151,300 -2.39 70.00 0.00 0.37 -96.301995 129,989 -14.09 0.00 -100.00 10.00 2602.701996 98,072 -24.55 0.00 0.00 10.00 0.001997 95,859 -2.26 30.00 100.00 0.00 -100.001998 87,500 -8.72 0.00 -100.00 10.00 100.001999 87,470 -0.03 0.00 0.00 250.00 2,400.002000 87,580 0.13 0.00 0.00 10.00 -96.002001 89,542 2.24 0.00 0.00 40.00 300.002002 91,368 2.04 10.00 100.00 69.42 73.552003 91,982 0.67 0.00 -100.00 83.21 19.862004 92,782 0.87 0.00 0.00 10.00 -87.982005 91,439 -1.45 230.00 100.00 820.00 8,100.00

AverageAll years 111,799 -0.71 26.25 6.67 87.74 875

1994 & earlier years(Pre-WTO) (A) 149,040 8.61 30.00 25.00 22.81 -46

1995 & recent years(Post-WTO) (B) 94,871 -4.10 24.55 0.00 131.26 1,210

Difference (B-A) -54,169 -12.72 -5.45 -25.00 108.45 1,256.17% increase/decrease -36.35 -147.65 -18.18 -100.00 475.46 -2,732.12


Sources: FAOSTAT and Doctor (2006)

6.4. Onion

Onions produced in the Philippines come in three varieties, ie., red creole (red onion),

yellow granex (white onion), and multiplier onion (Filipino onion) (Malabayabas, 2002).

The province of Ilocos Norte was the top producer of onion in 2005 (July-December) hav-

ing contributed 50% to the country’s total production. Other major producing provinces are


- 79 -

Ilocos Sur, Pangasinan and Nueva Ecija. Total harvest from the four provinces accounted

for 99% of total onion production in the country (BAS, 2005).

Import Volume

The volume of onion imports exhibited an increasing trend from 1990 to 2005 (Fig. 4

and Table 6). Onion import volume grew at a faster rate (186.15%) during the post-WTO

phase (1995-2005). Growth rate during the pre-WTO regime was only 25.36% per year.

The average import volumes before and after accession to the WTO were 242. 38 MT and

12,106 MT, respectively. The 2005 import quantity of 40,670 MT was the largest volume

recorded over the 16-year period. Fresh or chilled onions occupied the largest share of the

country’s total import.

Export Volume

Figure 4 and Table 6 also shows the country’s export performance for onions. Total

exports generally exceeded total imports from 1990 to 2005. The average volume of export

was computed to be 20,462 MT. On the other hand, the average import volume during the

same period was only 8,399 MT. Exports grew at 31.64 % per year during the post-WTO

phase. This rate was higher than the export performance during the pre-WTO period

(11.5% per year). The BAS reported that there was a sharp decrease in export in 2005 due

Fig. 4. Import, Export and Production Volume, Onion, Philippines, 1990-2005

020,00040,00060,00080,000

100,000120,000

1990

1992

1994

1996

1998

2000

2002

2004

Year

Met

ric T

ons



- 80 -

to the huge reduction in volume of fresh or chilled shallots shipped to Indonesia and

Singapore.

Production Volume

Onion production from 1985 to 2005 showed a fluctuating but increasing trend repre-

senting a growth rate of 2.83% per year (Fig. 4 and Table 6). The average production dur-

ing the pre-WTO phase was 62,240 MT while the production during the post-WTO period

was 86,805 MT. However, the annual increase in production volume was faster (5.5%)

during the period from 1985 to 1994 when compared to the post-WTO phase (0.90%).

Table 6. Import, export and production volume, Onion*, Philippines, 1990-2005


(MT) (%) (MT) (%) (MT) (%)1990 69,180 15,020 1761991 67,300 -2.72 13,990 -6.86 196 11.431992 63,430 -5.75 14,130 1.00 193 -1.531993 66,460 4.78 24,510 73.46 210 8.811994 76,600 15.26 22,030 -10.12 437 108.101995 88,427 15.44 33,280 51.07 666 52.401996 83,322 -5.77 27,370 -17.76 1,380 107.211997 85,383 2.47 29,480 7.71 810 -41.301998 86,978 1.87 17,580 -40.37 11,410 1308.641999 84,967 -2.31 6,560 -62.68 16,530 44.872000 84,216 -0.88 14,870 126.68 10,250 -37.992001 82,606 -1.91 5,620 -62.21 17,930 74.932002 96,358 16.65 27,510 389.50 6,750 -62.352003 93,842 -2.61 32,920 19.67 19,680 191.562004 86,741 -7.57 28,190 -14.37 7,090 -63.972005 82,019 -5.44 14,330 -49.17 40,670 473.62

AverageAll years 81,114.31 1.43 20,461.88 27.04 8,398.62 135.90

1994 & earlier years(Pre-WTO) (A) 68,594.00 2.89 17,936.00 14.37 242.38 31.70

1995 & recent years(Post-WTO) (B) 86,805.36 0.90 21,610.00 31.64 12,106.00 186.15

Difference (B-A) 18,211.36 -1.99 3,674.00 17.27 11,863.62 154.45% increase/decrease 26.55 -68.79 20.48 120.18 4,894.64 487.21


Sources: FAOSTAT and BAS* inculdes shallots


- 81 -

6.5. Banana

Banana is considered as one of the important fruit crops in the Philippines. In 2005,

the BAS reported that the banana sector accounted for 10.63% of the value of total crop

production in the country (PhP 43, 520.8 million). Mindanao, particularly the Davao

Region, is the largest producer of banana. During the same year (2005), Mindanao pro-

duced almost 77% of the total domestic output. The popular varieties grown in the country

are Cavendish, Saba, Lakatan, Latundan and Bungulan. Cavendish is mainly grown for the

export market (Corpus, 2001). As an export winner, its share of the world trade for ba-

nanas was 11.05% in 2004 (BAS, 2006). Japan is the largest market for fresh.

Fig. 5. Import, Export and Production Volume, Banana, Philippines, 1990-2004

01,000,0002,000,0003,000,0004,000,0005,000,0006,000,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Year

MT

Production Mt Export Mt Import Mt

Philippine banana capturing more than 60% of total export. The other markets for this

product are Saudi Arabia, Korea and United Arab Emirates (DA-AMAS, no date). Fresh

bananas accounted for 98.6% of the aggregate export volume of the country in 2003. The

Philippines also exports banana chips, banana sauce (catsup) and banana flour, meal and

powder. The markets for these products are the US, Japan, UK, Hongkong, Canada, and

the United Arab Emirates. Taiwan and Germany were included as additional markets for


- 82 -

banana particularly banana crackers and chips.

Table 7. Import, export and production volume, Banana, Philippines, 1985-2004


(MT) (%) (MT) (%) (MT) (%)1985 3,127,100 839,7791986 3,192,600 2.09 955,414 13.771987 3,157,400 -1.10 1,013,248 6.051988 3,067,300 -2.85 1,153,500 13.841989 3,190,300 4.01 1,155,200 0.151990 2,913,000 -8.69 1,213,400 5.04 9501991 2,950,800 1.30 1,270,500 4.71 930 -2.111992 3,005,210 1.84 1,153,600 -9.20 1,080 16.131993 3,068,990 2.12 1,149,600 -0.35 1,240 14.811994 3,283,460 6.99 1,337,345 16.33 1,400 12.901995 3,499,100 6.57 1,619,674 21.11 1,160 -17.141996 3,311,800 -5.35 1,617,675 -0.12 1,260 8.621997 3,773,800 13.95 1,708,582 5.62 1,510 19.841998 3,492,600 -7.45 1,855,382 8.59 1,160 -23.181999 4,570,640 30.87 1,797,343 -3.13 1,760 51.722000 4,929,570 7.85 1619674 -9.89 1950 10.802001 5,059,360 2.63 1,617,675 -0.12 2,920 49.742002 5,274,286 4.25 1,708,582 5.62 2,590 -11.302003 5,368,977 1.80 1,855,382 8.59 3,750 44.792004 5,631,200 4.88 1,797,300 -3.13 1,260 -66.40

AverageAll years 3,793,374.65 3.46 1,421,942.75 4.39 1,661.33 7.80

1994 & earlier years(Pre-WTO) (A) 3,095,616.00 0.63 1,124,158.60 5.59 1,120.00 10.44

1995 & recent years(Post-WTO) (B) 4,008,852.87 4.24 1,554,780.93 3.31 1,932.00 6.75

Difference (B-A) 913,236.87 3.60 430,622.33 -2.28 812.00 -3.69% increase/decrease 29.50 567.97 38.31 -40.80 72.50 -35.33


Sources: Corpuz, J.P. 2001, Bas and FAOSTAT

Export Volume

Banana exports increased at the rate of 4.4% from 1985 to 2004 (Fig. 5 and Table 7).

The average annual export volume for the whole period was 1.42 million MT. Comparing

the pre- and post-WTO years revealed that the average export quantity prior to WTO was

1.12 million MT while export volume after WTO was 1.55 million MT. This represents a

38.3% improvement in average export volume. However, the rate of increase in volume

was slightly faster (5.6% per year) during the pre-WTO period when compared to the


- 83 -

post-WTO phase which grew at a slower rate of 3.3% per year.

Production Volume

Banana production exhibited a slow growth of only 2.25% per year from 1980 to

2005 (Fig. 5 and Table 7). Within the period, a 1.1% per year decline could be observed

during the pre-WTO phase (1980-1994) where the average yearly production was computed

to be 3.17 million MT. Annual production improved in 1995 until 2005 where the average

yearly output increased to 4.65 million MT. The growth rate for the period was 7.16% per

year. The decline in production in 1990 was a result of a strong typhoon that destroyed

around 800 hectares of banana plantations in Tagum, Davao del Norte. The Visayas was

also badly hit by typhoon two months later (Corpuz, 2001). The industry, however, took a

turnaround from 1999 to 2005 with total production increasing to almost 6.3 MT by the

end of the period.

6.6. Pineapple

According to the Bureau of Agricultural Statistics (2006) the Philippines produced

1.79 million MT of pineapple in 2005. About 87% of the total production came from

Mindanao where large plantations of pineapple are located. Large production areas are

found in Northern Mindanao and the SOCCSKSARGEN Region. Fresh and processed pine-

apple products are being exported by the country which serve as its major source of for-

eign exchange earnings. In 2004, the country exported 527.56 thousand MT of pineapple

and pineapple products which represented almost 15% of the world’s pineapple export

volume. Pineapple exports consist of fresh fruits and other processed products, such as syr-

up, juice, concentrates, canned pineapple, and dried pineapple.

Export Volume and Value

Export volume of pineapple grew at a rate of 1.31% per year from 1990 to 2005 (Fig.

6 and Table 8). From 1.07 million MT in 1990, export quantity increased to 1.85 million

MT by 2004, the highest level ever reached within the given period. However, noticeable

reductions in export volume occurred in 1997, 1998 and 2005. The decline in exports was

attributed to the reduction of the quantity purchased by the country’s major trade partners


- 84 -

like Japan, Canada, Germany, Netherlands and Hong Kong (Table 17). The 1990-1994 per-

formance was better in terms of the rate of increase in quantity exported (3.25% per year).

In contrast, the growth rate from 1995 to 2005 was almost insignificant at 0.60% per year.

For the period 2004 to 2006, pineapple ranked third in the country’s top ten agricul-

tural exports. Quantity of pineapple and processed products exported increased from 527,

560 MT in 2004 to 536,720 MT in 2005 and 683,650 MT in 2006, respectively. This is

equivalent to a growth rate of 15.64% between the 2004-2005 export volume and 8.44%

for the 2005-2006 trading (Recide, 2007).

Fig. 6. Import, Export and Production Volume, Pineapple, Philippines, 1990-2005

0

500,000

1,000,000

1,500,000

2,000,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Production (MT) Export Mt Import Mt

Import Volume

Pineapple imports to the Philippines are in the form of processed or canned products

(Fig. 6 and Table 8). An average of 312 MT were imported by the country from 1999-

1994 (pre-WTO phase). The import volume, however, increased to an average of 890 MT

from 1995-2004 (post-WTO phase).

Production Volume

Pineapple production demonstrated an increasing pattern from 1985 to 2005 (Fig. 6


- 85 -

and Table 8). During the pre-WTO years, the average production volume was 1.2 million

MT. The lowest quantity harvested was recorded in 1985 at 1.03 million MT while the

highest production level was in 1994 at 1.33 million MT. During the years following WTO

membership (1995-2005), pineapple production continued to increase at the rate of 3.1%

per year. During this period, the average volume produced was 1.61 million MT. The high-

est recorded harvest was 1.79 million MT in 2005 while the lowest production (1.44 mil-

lion MT) occurred in 1995.

Table 8. Import, export and production volume, Pineapple, Philippines,

1990-2005


(MT) (%) (MT) (%) (MT) (%)1990 1,155,800 1,070,270 401991 1,117,100 -3.35 1,169,950 9.31 20 -50.001992 1,135,200 1.62 1,111,430 -5.00 660 3,200.001993 1,287,400 13.41 1,098,640 -1.15 830 25.761994 1,331,500 3.43 1,206,620 9.83 10 -98.801995 1,442,800 8.36 1,167,030 -3.28 60 500.001996 1,542,200 6.89 1,385,960 18.76 650 983.331997 1,638,000 6.21 1,088,290 -21.48 10 -98.461998 1,489,000 -9.10 991,380 -8.90 2,000 19,900.001999 1,518,500 1.98 1,042,310 5.14 880 -56.002000 1,559,560 2.70 1,198,800 15.01 1,530 73.862001 1,617,910 3.74 1,266,990 5.69 1,310 -14.382002 1,639,160 1.31 1,851,120 46.10 1,610 22.902003 1,697,960 3.59 1,050,780 -43.24 740 -54.042004 1,759,290 3.61 1,111,580 5.79 110 -85.142005 1,787,600 1.61 967,080 -13.00

AverageAll years 1,482,436.25 3.07 1,173,639.38 1.31 697.33 1,732.07

1994 & earlier years(Pre-WTO) (A) 1,205,400.00 3.78 1,131,382.00 3.25 312.00 769.24

1995 & recent years(Post-WTO) (B) 1,608,361.82 2.81 1,192,847.27 0.60 890.00 2,117.21

Difference (B-A) 402,961.82 -0.97 61,465.27 -2.65 578.00 1,347.97% increase/decrease 33.43 -25.58 5.43 -81.55 185.26 175.23

Production Exports Imports

Sources: Regalado, J.S. 2001, BAS and FAOSTAT


- 86 -

. Price Comparison

7.1. Potato

Import Competitiveness

The competitiveness of the domestic price of locally grown potato against the price of

imported potato was measured by Doctor (2006) by comparing the import parity price and

the domestic wholesale price (Table 9). She found that the import parity price of potato

was consistently higher than the domestic wholesale price during the pre-WTO period. This

shows that prices of locally produced potato were highly competitive against the imported

potato because the latter was more expensive than the former given a comparable quality.

However, the condition changed after 1995, particularly from 2000 to 2004. Import prices

Table 9. Import parity price and domestic wholesale price, potato, Philippines,

1990-2004

Import Parity Domestic Wholesale ImportYear Price Price Competitiveness

(Pm) (Pd)1991 121.39 11.85 Competitive1992 144.15 13.28 Competitive1993 114.70 11.67 Competitive1994 319.91 13.55 Competitive1995 38.27 12.75 Competitive1996 294.30 16.11 Competitive1997 45.56 15.02 Competitive1998 62.47 20.31 Competitive1999 27.46 23.87 Competitive2000 19.80 22.45 Not competitive2001 27.16 25.57 Competitive2002 18.57 21.40 Not competitive2003 17.27 21.32 Not competitive2004 2.43 27.03 Not competitive

AveragePre-WTO 175.04 12.59

Post-WTOa 17.05 23.55

a Values of 2000-2004 onlySource: Doctor, 2006.


- 87 -

remained lower than domestic wholesale prices. This situation, coupled with the influx of

potato imports particularly potato fries as a result of the increasing number of fast food

chains could be a factor contributing to the decline in the local production of potato as

earlier noted. The high incidence of bacterial blight in many major potato producing areas

in Benguet and Bukidnon in the early and mid-2000s also substantially reduced the na-

tional potato production.

7.2. Garlic


Malabayabas (2002) measured the competitiveness of the domestic wholesale price of

garlic against the import parity price for the year 2001. She concluded that the locally pro-

duced garlic was not competitive with imported fresh/chilled garlic given that the whole-

sale price at that time was PhP 98.22/kg while the estimated import parity price was

cheaper at Php 56.28/kg (Table 10).

Export Competitiveness

Malabayabas (2002) also determined the attractiveness of exporting garlic by compar-

ing its domestic wholesale price and the export parity price in 2001 (Table 10). Similarly,

she concluded that Philippine garlic was not competitive in the export market because the

export parity price (Php 30.69/kg) was lesser than the domestic wholesale price (Php

98.22/kg).


Doctor (2006) compared the price competitiveness of locally produced cabbage against

imported ones. Domestic prices weakened against the import parity price starting in 1999

until 2004 (Table 11). The average price of imported cabbage within the period was com-

puted to be PhP 7.05/kg while the average domestic price was PhP 14.88/kg.


- 88 -

Table 10. Competitiveness of wholesale price against export and import parity

price, garlic, Philippines, 2001.

Item Price Item PriceFOB (US$/kg), Singapore 0.90 CIF (US$/kg) 0.83 Multiplied by Forex rate 44.19 Multiplied by Forex rate 44.19CIF Manila (PhP/kg) 39.77 CIF Manila (PhP/kg) 36.55 Minus Plus tariff rate (%) 40.00 Port handling and other fees (7%) 1.99 Tariff amount 14.62 Freight and local transport 1.91 Port handling and margins 5.12 Packaging cost 1.21 Trade margin (10%) 3.98

Export parity price (PhP/kg) 30.69 Import parity price (PhP/kg) 56.28Domestic wholesale price (PhP/kg) 98.22 Domestic wholesale price (PhP/kg) 98.22

Export competitiveness Not competitive Import competitiveness Not competitive

Source: Malabayabas (2002)

7.3. Cabbages

Table 11. Import parity price and domestic wholesale price of cabbage,

Philippines, 1990-2004Table 11. Import parity price and domestic wholesale price of cabbage, Philippines, 1990-200

Import Parity Domestic Wholesale ImportYear Price Price Competitiveness

(Pm) (Pd)1990 17.15 12.30 Competitive1991 11.251992 5.33 11.45 Not competitive1993 5.79 9.07 Not competitive1994 13.19 10.22 Competitive1995 58.37 10.96 Competitive1996 63.91 11.76 Competitive1997 12.011998 33.99 18.93 Competitive1999 5.44 15.08 Not competitive2000 13.90 14.58 Not competitive2001 6.41 13.03 Not competitive2002 7.44 16.06 Not competitive2003 5.22 14.76 Not competitive2004 3.88 15.82 Not competitive

AveragePre-WTO 8.29 10.86

Post-WTOa 7.37 14.85a Values of 2000-2004 only

a Values of 2000-2004 onlySource: Doctor, 2006


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7.4. Onion


Analysis of the import competitiveness of onion revealed that the domestic wholesale

price of onion was relatively higher than the import parity price implying that locally pro-

duced onions cannot compete with the imported onions (Table 12). Import parity price was

computed to be PhP 15.58/kg while the Manila wholesale price was PhP 17.08/kg

(Malabayabas, 2002).


Exporting onions to Japan is attractive because the export parity price (Php25.41/kg) is

higher than the domestic wholesale price (PhP 17.08) (Table 12). This represents a 50%

price difference. According to Malabayabas (2002), the price competitiveness of Philippine

onion in Japan is due to its sweet taste and juiciness.

Table 12. Competitiveness of domestic wholesale price versus import & export

parity price, onion, Philippines, 2001Table 12. Competitiveness of domestic wholesale price versus import & export parity price, onion, Philippines, 2

Item Price Item PriceFOB (US$/kg), China 0.21 FOB (US$/kg), Japan 0.79 Plus Freight and Insurance 0.03 Multiplied by Forex rate 44.19CIF (US$/kg) 0.24 CIF Manila (PhP/kg) 34.91 Multiplied by Forex rate 44.19 MinusCIF Manila (PhP/kg) 10.61 Port handling and other fees (7%) 2.43 Plus tariff rate (%) 40.00 Freight and local transport 2.25 Tariff amount 4.24 Packaging cost 1.34 Port handling and margins 0.73 Trade margin (10%) 3.48Equals Import parity price (PhP/kg) 15.58 Export parity price (PhP/kg) 25.41Domestic wholesale price (PhP/kg)a 17.08 Domestic wholesale price (PhP/kg) a 17.08

Import Competitivenessb Not competitive Export competitivenessb Competitive

Source: Malabayabas (2002)a Based on average Metro Manila wholesale prices in 2000b Competitiveness exists if domestic wholesale price is lesser than the import parity price


- 90 -

7.5. Banana


Export prices

Using FAO statistics, Corpuz (2001) presented a comparison of the export prices of

fresh bananas of the Philippines against other leading export countries (i. e., Ecuador,

Costa Rica, Colombia) before and after the WTO (Table 13). The Philippines’ selling price

remained the most competitive among the other sellers. In 1994, the average price of the

three Latin American countries was US$ 286.67/MT. On the other hand, the Philippines

sold its bananas at US$ 180/MT. In 1998, the average price of the other leading exporters

was US$ 280/MT while the FOB price of the Philippine product was US$ 220/MT. This

advantage was attained because of cost efficiency and higher yield per hectare, among oth-

er factors.

Table 13. Comparison of the export prices of fresh bananas by major

exporting countries before and after WTO, (FOB, US$/MT) (FOB, US$/MT)

Year Ecuador Costa Rica Colombia Ave. of 3 Latin PhilippinesAmerican Countries

1994 270.00 300.00 290.00 286.67 180.00

1998 250.00 290.00 300.00 280.00 220.00

Source: FAOSTAT as cited by Corpuz, Jay Paul.

Producer prices of the Philippines and Ecuador

A comparison of the farm gate prices from 2000 to 2003 between the Philippines and

Ecuador is presented in Table 14. Except for the year 2000, the Philippines’ farm gate pri-

ces remained lower than the prices in Ecuador. For the 4-year period, the average farm

gate price of banana in the Philippines was US$ 25.30/MT while Ecuador’s price was US$

127.26/MT.


- 91 -

Table 14. Producer price, banana, Philippines and Ecuador, 2000-2003

Year DifferencePhilippines Ecuador

2000 90.74 50.02 40.722001 82.36 146.00 -63.642002 87.59 160.00 -72.412003 93.54 153.00 -59.46

Average 25.30 127.26 -38.70

Producer Price (US$/MT)

Source: FAOSTAT

7.6. Pineapple


Domestic wholesale price versus export parity price to Japan

Regalado (2001) determined the attractiveness of exporting Philippine pineapple to

Japan by comparing the export parity price and the domestic wholesale price from 1985 to

1999 (Table 15). Throughout this period, the export parity price remained lower than the

domestic wholesale price of pineapple which means that this commodity was not com-

petitive in the export market.

Producer price, Philippines and Thailand

It is more expensive to produce pineapple in the Philippines than in Thailand (Table

16). The latter is the leading exporter of pineapple in the world. Except for 2002, the farm

gate price of pineapple in the Philippines consistently exceeded Thailand’s price by an

average of US$ 71.31/MT.


- 92 -

Table 15. Export parity price & domestic wholesale price, fresh pineapple

exports to Japan, Philippines, 1985-1999

Year FOB Price Exchange Rate Export Parity Price Wholesale Price Price Competitiveness(US$/kg) (PhP/$) (PhP/kg) (PhP/kg)

1985 0.121 18.59 2.25 3.77 Not competitive1986 0.129 20.36 2.63 4.51 Not competitive1987 0.145 20.56 2.98 5.56 Not competitive1988 0.152 21.07 3.20 7.30 Not competitive1989 0.158 21.70 3.43 6.96 Not competitive1990 0.156 24.20 3.78 6.87 Not competitive1991 0.158 27.52 4.35 8.31 Not competitive1992 0.149 25.31 3.77 9.42 Not competitive1993 0.149 26.73 3.98 9.57 Not competitive1994 0.150 26.27 3.94 11.47 Not competitive1995 0.151 25.61 3.87 11.53 Not competitive1996 0.168 26.22 4.40 14.80 Not competitive1997 0.186 29.21 5.43 14.62 Not competitive1998 0.176 40.90 7.20 18.26 Not competitive1999 0.179 39.10 7.00 20.48 Not competitive

AveragePre-WTO 3.431 7.374 Not competitivePost-WTO 5.580 15.938 Not competitive

Source: Regalado (2001)

Table 16. Producer price, pineapple, Philippines and Thailand, 1991-2002

Year DifferencePhilippines Thailand

1991 169.22 102.68 66.541992 168.54 77.95 90.591993 153.76 45.42 108.341994 176.02 57.26 118.761995 138.05 68.79 69.261996 177.37 112.85 64.521997 210.72 106.17 104.551998 170.20 126.69 43.511999 157.84 63.47 94.372000 131.70 49.36 82.342001 105.70 45.46 60.242002 91.47 98.93 -7.462003 127.67 96.18 31.49

Average 152.17 80.86 71.31Pre-WTO 166.89 70.83 96.06Post-WTO 145.64 85.32 60.31

Producer Price (US$/MT)

Source: FAOSTAT


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. Summary

8.1. Trend analysis:

Export Volume

Consistent with the expected effects of WTO-AOA, the trend analysis revealed that

the export volume of selected vegetables increased during the post-WTO phase (Table 17).

The increase in the level of garlic export was most impressive from an average of 8 MT

(pre-WTO phase) to 2,106 MT (post-WTO phase). Export of onion and cabbage also im-

proved after 1995 although at a lower rate of 20.5% and 80.0%, respectively, over the ex-

port performance prior to the WTO period. In the case of potato, the 2% decrease in ex-

port was not statistically significant (a = 10%, t = 0.352). Hence, gross potato export was

not affected either way by trade liberalization.

Export volume of banana and pineapple continued increasing even after the im-

plementation of the WTO-AOA. (Table 18). Banana export increased at a larger magnitude

(38.3%) in comparison to pineapple export which expanded by 5.4%.

Table 17. Summary of trend analysis, export & import of vegetables, Philippines,

pre and post-WTO phases

Commodity Pre-WTO Post-WTO Net Effect % Increase Pre-WTO Post-WTO Net Effect % Increase(MT) (MT) Decrease (MT) (MT) Decrease

Potato 236 231 Ns a -2.11 3,750 35,015 Increase 833.76

Garlic 8 2,106 Increase 25,399.36 235 16,296 Increase 6,827.88

Onion 17,936 21,610 Increase 20.48 242 12,106 Increase 4,894.64

Cabbage 50 90 Increase 80.00 23 131 Increase 475.46

Ave. Volume of Exports Ave. Volume of Imports

a No significant difference at a=0.1, t-test.

Import Volume

Import volume of the selected vegetables increased at highly significant levels in con-

trast to their export performance (Table17). With the exception of onion, the Philippines


- 94 -

remained a net importer of potato, garlic and cabbage. Philippine importation of banana

and pineapple also increased during the post-WTO phase although at a smaller quantity

than the country’s exports (Table 18).

Table 18. Summary of trend analysis, export & import of fruits, Philippines,

pre-and post-WTO phases

Commodity Pre-WTO Post-WTO Net Effect % Increase Pre-WTO Post-WTO Net Effect % Increase Decrease Decrease

Banana 1,124,159 1,554,781 Increase 38.31 1,120 1,932 Increase 72.50

Pineapple 1,131,382 1,192,847 Increase 5.43 312 890 Increase 185.26


Production Volume

Trade liberalization had varied effects on the volume of production of the selected

vegetables (Table 19). Trend analysis revealed that the post-WTO average of potato and

cabbage production decreased by 20.6% and 7.4%, respectively, when compared to their

average production before the WTO phase. This may be attributed to the rise in potato and

cabbage imports within the same period. The average national production of onion, on the

other hand, increased by 39.5% during the post-WTO phase. While import of onions into

the Philippines increased, export volume also increased. This contributed to the increase in

the domestic production of onion. Garlic production also increased albeit at a statistically

insignificant level (a = 10%, t = 0.498garlic).

Volume of production of banana and pineapple increased during the post-WTO period

(Table 19). The increase in banana production was more pronounced than the rise in pine-

apple production. National production for both commodities continued to increase as ex-

ports increased.


- 95 -

Table 19. Summary of trend analysis, vegetable & fruit production, Philippines,

pre & post-WTO phases

Vegetable Pre-WTO Post-WTO Net Effect % Increase Fruit Pre-WTO Post-WTO Net Effect % Increase(MT) (MT) Decrease (MT) (MT) Decrease

Potato 90,454 71,793 Decrease -20.63 Banana 3,171,511 4,653,946 Increase 46.74

Garlic 14,741 15,293 Nsa 3.74 Pineapple 1,199,340 1,608,362 Increase 34.10

Onion 62,240 86,805 Increase 39.47

Cabbage 102,463 94,871 Nsa -7.41

Ave. Volume of Production Ave. Volume of Production


8.2. Price Comparison:


The domestic wholesale prices of potato, onion and cabbage were not competitive with

the import parity price during the post- WTO period, i. e., domestic prices were higher

than the prices of the imported substitutes. This made the imported products more attrac-

tive to consumers (Table 20). Before the WTO, the domestic price of potato was still low-

er than the imported ones. No data on the import competitiveness for garlic were obtained.

Similarly, analysis of the import competitiveness of banana and pineapple was not

conducted. Banana import was almost nil but imported canned pineapple from Thailand

abound in groceries and supermarkets in the country. The inability to evaluate the import

competitiveness of pineapple is one of the limitations of the study.


Domestic wholesale price of garlic was higher than the export parity price which

made garlic less competitive in exporting the product (Table 20). In this condition, traders

would be more willing to market the goods locally instead of dealing with the export

market. Onion price, on the other hand, was competitive in the export market. No data

were available for potato and cabbage.


- 96 -

Table 20. Summary of trend analysis, export & import, vegetables & fruits,

Philippines, pre and post-WTO phases pre and post-WTO phases

Commodity Pre-WTO Post-WTO Net Effect % Increase Pre-WTO Post-WTO Net Effect % Increase

(MT) (MT) Decrease (MT) (MT) Decrease

Potato 236 231 Nsa -2.11 3,750 35,015 Increase 833.76

Garlic 8 2,106 Increase 25,399.36 235 16,296 Increase 6,827.88

Onion 17,936 21,610 Increase 20.48 242 12,106 Increase 4,894.64

Cabbage 50 90 Increase 80.00 23 131 Increase 475.46

Banana 1,124,159 1,554,781 Increase 38.31 1,120 1,932 Increase 72.50

Pineapple 1,131,382 1,192,847 Nsa 5.43 312 890 Increase 185.26



Similarly, the domestic wholesale price of pineapple was not competitive in relation to

the export parity price paid by Japan. This was observed during the pre- and post-WTO

years.

The price of Philippine banana export is highly competitive to the export prices of ba-

nana in Ecuador, Costa Rica and Colombia. In 1998, the FOB price in the Philippines was

US$ 220/MT while Ecuador’s price was US$ 250/MT, the lowest among the Latin

American exporters.

. Conclusions and Recommendations

The Philippine industries for onion, garlic, cabbage and potato declined due to the im-

position of trade policies to comply with the WTO-AOA. Importation of these products

surpassed the increases in export volume. Locally produced vegetables of these type could

not compete with imported ones in terms of price and to some extent, quality, as in the

case of potato. Large supply coupled with lower prices of the imported commodities push-

ed down domestic production of the vegetables included in this study.


- 97 -

Banana, on the other hand, remained highly competitive in the world market as it has

been prior to the WTO-AOA. The pineapple exports also continued to increase although at

a much lower level than the quantities of banana export. The domestic wholesale price of

pineapple was lower than its export parity price if sold to Japan.

The vegetable industry is more negatively affected by the WTO-AOA than the fruit

industry. This happened because prior to the WTO-AOA, the health of the vegetable in-

dustry was already ominous. Profitability as well as production and marketing efficiency

have been low. This condition is due to high farm input costs, high marketing costs be-

cause of inefficient market support systems, and limited access to loans, among others.

With the surge of cheaper and better quality imported vegetables in the domestic market,

the vegetable industry naturally was unable to compete. Immediate action among policy

makers is, therefore, required to reverse the negative effect of the WTO-AOA on the vege-

table industry. It should be temporarily protected from international market competitors and

given time to “re-energize”. A follow-up of the initiatives of the Department of Agriculture

(DA) in 2002 to address the problems of the vegetable industry merit attention. The DA at

that time ordered the implementation of Republic Act No. 8800, also known as the

Safeguard Measures Act, which empowers the country to limit the import of commodities

in cases of dumping and uncontrolled importation (Aquino, 2004). The continuing influx of

imported vegetables indicate that RA No. 8800 is not being strictly implemented.

Furthermore, there should be intensified efforts by the Bureau of Customs in coordination

with the Bureau of Plant Industry to tighten inspection procedures and import permit issu-

ance to curb out smuggling. Quarantine inspection of imported fruits and vegetables should

be mandatory and should comply with the sanitary and phytosanitary requirements. The

DA also planned to undertake farmers training programs to improve production and to

strengthen marketing tie-ups by linking directly with end-users and institutional buyers.

Clarete (2005) has identified the need to reduce transaction costs to improve com-

petitiveness in the international market. Part of the problem is high transport costs due to

an inefficient road network. The length of roads and bridges increased over the years, in

particular farm-to-market roads (Mangabat, 1998 and Tubale, 2007). However, these are

mainly dirt roads which keep transport costs at high levels. The government has to view

road construction in the perspective of lowering marketing cost of domestic products. In

addition, there is a need to develop marketing support facilities such as cold chains and


- 98 -

packing houses to lessen postharvest losses.

The provision of more reliable and relevant market information is another way of re-

ducing marketing cost. Farmers and agri-entrepreneurs need timely and reliable information

on market prices in order to make sound decisions and earn higher profits. The government

must assist the private sector in strengthening information gathering, analysis and dissem-

ination to support agricultural marketing.

Research and development and the application of improved technology aimed at in-

creasing yield should be continuously pursued and made available to producers especially

for high value crops like fruits and vegetables. Improved productivity translates to lower

production cost per unit and to better price competitiveness both in the domestic and inter-

national markets.

References

Adriano, Fermin, ed., New Policy Updates, various volumes, Foundation for Rural Insti-

tutions, Economics and Development, Inc., Laguna, Philippines.

Agribusiness FactBook, 1991-1992 as cited by Corpuz, J.P (2001).

Aquino, Marlowe(2006). Industry Situationer: Vegetables for Health. AVRDC, Taiwan

Aquino, Carlos(2004). The Philippine Vegetable Industry Almost Comatose, Focus on the

Global South. Quezon City, Philippines.

BAS(2005). Situationer on Onions, Department of Agriculture. Philippines.

BAS(2006). Selected Statistics on Agriculture. Table 40.

Bello, Walden(2003). Multilateral Punishment: the Philippines in the WTO, 1995-2003,

Focus on the Global South-Philippine Program, Quezon City. Philippines.

Bernardino, Rosalie B.(2001). September, Rooting for Potato, Food and Agribusiness

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Laguna. Philippines.

Bureau of Agricultural Statistics, Department of Agriculture, Quezon City, Philippines.

Clarete, Ramon L.(2005). Philippines: Ex-Post Effects of Trade Liberalization in the


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Philippines. paper.

presented at the conference on Adjusting to Trade Reforms: What are the Major Challen-

ges for Developing Countries?, organized by Trade Analysis Branch, United

Nations Conference on Trade and Development, Geneva, Switzerland.

Corpuz, Jay Paul(2001). The Impact of GATT/WTO on Banana and Mango Exports,

Philippines, Unpublished thesis, College of Economics and Management, University

of the Philippines Los Banos, Laguna, Philippines.

DA-Agribusiness and Marketing Assistance Service, Banana Industry Situationer Report,

Department of Agriculture, Manila, Philippines.

Deomampo, Narciso R. and delos Reyes, Julieta A.(2006). Assessment of the Fruits and

Vegetables Industry for Further Trade Liberalization In Line With the Finalization

of the DOHA Development Agenda, Paper prepared for the Universal Access to

Competitiveness and Trade. Philippine Chamber of Commerce and Industry, Makati

City.

Doctor, Jenyn(2006). The Effects of WTO on Selected Vegetables in the Philippines,

Unpublished thesis. College of Economics and Management, University of the

Philippines Los Banos, Laguna, Philippines

FAOSTAT, FAO Statistical Database.

Gonzales, Leonardo A.(2003). WTO Agreement on Agriculture: The Implementation Expe-

rience-Developing Country Case Studies (Philippines), FAO, Rome.

Llorito, Dave(1997). High Hopes for High Value Crops, New Policy Updates, Vol. 5, No.

4, Foundation for Rural Institutions, Economics and Development, Inc., Laguna,

Philippines.

Macabasco, Ditas(2002). A Closer Look at Philippine Vegetable Imports, Agri-Food Trade

Service. Canada, retrieved May 7, 2007 from www.ats.agr.gc.ca/asean/e3475.htm.

Malabayabas, Arlene Julia B.(2002). Impact of Trade Liberalization on the Philippine

Garlic, Onion, and Potato Industries. Unpublished Master of Science in Agricultural

Economics thesis, University of the Philippines Los Banos, Laguna, Philippines.

Mangabat, Minda C.(1998). Effects of Trade Liberalization on Agriculture in the

Philippines: Institutional and Structural Aspects. Working Paper Series, CGPRT

Center, Bogor, Indonesia.

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submitted to the Secretary of Agriculture. Bureau of Agricultural Statistics.

National Statistics Office, Quezon City, Philippines

Ohga, Keiji(2006). Asian Agriculture in Globalism, in Proceedings of the JSPS Asian

Science Seminar on Development Strategy for Sustainable Food System. Nihon

University, Fujisawa, Japan.

Pascual, Francisco and Glipo, Arze(2002). WTO and Philippine Agriculture. Development

Forum, No. 1, Series 2002, p. 5, cited by Bello, Walden (2003).

Regalado, June S.(2001). Impact of GATT/WTO on the Philippine Pineapple Industry.

Unpublished thesis, College of Economics and Management, University of the

Philippines Los Banos, Laguna, Philippines.

Tauli-Corpuz, Victoria, Sidchogan-Batani, Ruth and Maza, Jim(2006). The Impact of

Globalisation and Liberalisation on Agriculture and Small Farmers in Developing

Countries: The Case of the Philippines. Third World Network.

Tubale, Ma. Ciefrel C.(2007). Chicken Market Integration in the Context of Developments

in Information and Communication Technology (ICT) and Transportation Infras-

tructure. Philippines, 1995-2005, Unpublished thesis, University of the Philippines

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Sex segregation is the predisposition for men and women to be employed in different oc-cupations from each other. Occupational and sectoral sex segregation narrows the poolof talent, professional, and skilled workers that employers can choose from, which meansthat not everyone’s skills are being utilized to the full. Labor distribution therefore can-not achieve allocative efficiency with segregation. The distribution of male and femaleworkers across seventeen sectors and ten occupations were evaluated and classified as ei-ther “men’s” or “women’s” sector/occupation. This was conducted to make a preliminaryoverview of the extent of worker segregation in the labor market. The segregation wasfurther validated by estimating different segregation indices such as the index of segrega-tion (D), the sex ratio index (S), the Moir-Selby Smith index (MSS), and the standardizedor Karmel and MacLachlan (IP). The study determined that for 2001-2005, the segrega-tion of male and female workers are low to moderately across different broad economicsectors and occupational classifications. An attempt to explore and answer some criticalquestions about the nature, causes, and persistence of segregation in the Philippine labormarket was also made by this study.

I. Introduction

In 2006, researchers from Harvard University, the London Business School, and the

World Economic Forum came up with the Global Gender Gap Index (GGGI) that measures

divergence between men and women in the areas of economic participation, economic op-

portunity, educational attainment, health and survival, and political participation. With a to-

tal of 115 economies evaluated, the Philippines ranked sixth and the only Asian country

among the top ten nations that made significant inroads in eliminating inequality between

men and women. It is worth noting from the GGGI that the Philippines outperformed

many known globally competitive economies like Switzerland, Japan, Singapore, United

Rodger M. Valientes

- 102 -

States, and the Netherlands in bridging gender gap.

Much of the success of the Philippines was obtained in the areas of educational attain-

ment, health and survival. In terms of educational attainment, the country obtained one of

the highest female-to-male ratios of literacy rate (1.00) and participation/enrollment rates in

the primary (1.02), secondary (1.20), and tertiary (1.28) levels of education. In the area of

health and survival, the Philippines again bested the rest of the 114 nations included in the

evaluation in terms of having the highest ratio of female-to-male child survival rate (0.95)

and healthy life expectancy (1.08). These figures sendsa strong message about the univer-

sality and equality of access to education and health services of both men and women in

the country, to some extent, even giving preferentiality to women.

While the aforementioned figures suggest that human capital investment (education and

health) on men and women in the country is becoming relatively gender-blind, the scores

on economic participation and opportunity proved that the labor market remained rigid,

possibly sex discriminating and non-egalitarian. To date, labor force participation of women

is only 55% while for the men, it is about 83%. Suggesting that the workforce of the

Philippine labor market is still dominated by men. In areas where men and women are em-

ployed on a similar work, women receive wages that are about 30% less than what their

male counterparts are getting. While in general, the average purchasing power parity

(PPP$) of employed men ($5,409) in the Philippinesis almost 68% higher than that of the

women ($3,213). These indicators of inequality in income streams raise questions on the

extent and seriousness of labor policies and gender programs that attempt to strike a bal-

ance in providing economic opportunities.

. Research Methodology

2.1. Analytical Framework

The analytical framework for this study is being summarized in Figure 1. The figure

shows the possible causes and consequences of sex segregation in the workplace. Given

that the labor force is an aggregation of both male and female workers, their relative ac-

cess, decision to participate, and consequently be employed in market activities is being in-

Sectoral and Occupational Sex Segregation in the Philippine Labor Market, 2001-2005.

- 103 -

fluenced by several factors.

In the study of Anker, Malkas and Korten (2003), the authors pointed out that the

general root causes of occupational sex segregation are social, economic, cultural and his-

torical that may consequently determine both the extent and patterns of occupational

segregation. These factors may concern (i) the social norms and stereotypical perceptions

regarding men and women (ii) family life, family responsibilities, and work life; (iii) edu-

cation and vocational training; (iv) taxation and social security; (v) structure of the labor

market; and (vi) discrimination at entry and in work.

The neoclassical economic theory of Gary Becker generally explainearning and em-

ployment opportunity differences among individual workers in terms of differences in their

human capital endowments and worker job preferences (Buchelle, 1974). In other words,

wage and opportunity differentials between men and women take place simply because

workers are heterogeneous. Workers with varying skills and capacity to work lead to a

conclusion that men and women workers are not perfect substitutes in the production

processes.

All other things equal, individual preference over specific type of job or characteristics

of a job throws in another source of worker heterogeneity. The theory of compensating

wage differential contends that workers attempt to select occupation or sectors that max-

imize their utility, which is not necessarily associated with maximum compensation. The

worker’s utility derived from being employed in a given occupation can be thought of to

be a function of preference over working conditions, job stress, job content, circumstances

of employment, risk of injury, educational requirements, and other characteristics of jobs

that make them more or less desirable. In addition, the neoclassical theory stemming from

Becker (1957) is based on the notion that prejudice and preference are expressed as dis-

criminatory taste on the part of the workers. A group of workers (e.g. male workers) has a

‘taste" for discriminating against another group (e.g. female workers) and that this taste is

a factor in their utility functions. As a utility maximizing worker, the incentive to discrim-

inate is at bay.

Rodger M. Valientes

- 104 -

Figure 1. Causes and consequences of labor market sex segregation

Worker participation is also influenced by the presence of jobs and employers that

have heterogeneous skills requirements, offer varying risks, labor costs considerations, and

employer preference over the sex of their potential employee. An egalitarian employer

would look at equal workers to be perfect substitutes. Men and women workers with the

same qualifications have the same probability of being hired by an egalitarian employer.

The neoclassical analysis of discrimination however does not look at employers as egali-

tarian, but as agents of discrimination. Becker (1957) considered employers to have taste

for discrimination in the sense that their utility is adversely affected by the employment

the group being discriminated against.

In addition, employer’s preference over the sex of its current or potential employees

can also be justified by the statistical theory of discrimination forwarded by Phelps (1972),

Arrow (1973), Aigner and Cain (1977). The premise of this theory is that firms have lim-

ited information about the level of human capital of job applicants. This gives them an in-

centive to use easily observable characteristics such as race or sex to infer the expected

productivity of applicants, especially if such characteristics are correlated with productivity.


- 105 -

According to the proponents of the theory, the productivity signals of one group of work-

ers are noisier than the noise of the other group, and hence the employers would rely less

on the signal and more on average group characteristics for inference of actual

productivity. The consequence is a more able female worker earns less than a male worker

of similar productivity, and female workers with productivity lower than average earn more

than comparable male workers. In the study of Blau (1972), it is a widely held belief

among employers that women have higher average rates of absenteeism and voluntary labor

turnover than male workers. These make some employers unwilling to either hire women

or invest in firm specific training for women for fear of losing their investment. Similar

observations was also concluded by Clayton and Crosby (1992) where employers tend to

have negative images of women as a group, and tend to associate them with inferior edu-

cation, lack of job skills, and unreliable job performance.

The statistical bias in favor of male workers on the other hand can be justified by the

studyof Kreps (1971). According to Kreps, men are being accorded with merits by employ-

ers because on the average, they will not withdraw for marriage and childbearing; that men

can give more time and effort to their job because they do not have domestic re-

sponsibilities; that they are more useful because of their greater mobility; that they need

more money to support their family. The threat of discontinuity in a woman’s work life is

in fact, according to Kreps, the greatest single barrier to higher wages for women.

Market imperfection is also a factor that determines worker participation and the ulti-

mate accession to the labor market. The lack of access to information about available jobs,

wage rate distribution, and adjustment period of the labor market to demand and supply

shocks prevent workers from making optimal decision to participate in the labor market or

invest in human capital forming activities.

According to Albert and Carbrillo (2002) the labor market behaves like an Akerlof

market or market for lemons, the main effect being a small number of women in the mar-

ket with a high level of human capital. Given the imperfect information employers have

about their prospective employees, they useaverage group productivity as a proxy for in-

dividual productivity when offering jobs and salaries to specific people. The most pro-

ductive women, therefore, will receive lower wages than men, the alternative being a high-

er rate of unemployment. The rate ofreturn of their investment in human capital may be so

low that it will create significant incentives to reduce these investments. So employers

Rodger M. Valientes

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would then have an even stronger argument for not offering high positions and hiring

women.

Institutions also matter in determining an equitable distribution of employment. Blau

(1972) pointed out that with the traditional relation of men and women within the family

unit, market occupations tend to be distributed in the same manner.As such, the segrega-

tion of workers and the resultant division of labor into groups preserves the basic charac-

teristics that govern the relationship between men and women in the family.

2.2. Analytical Tools

Previous studies on worker segregation used indicators or indices of inequality. The

most common indicators of segregation are the Index of Segregation (or the Duncan and

Duncan’s D), the Sex Ratio Index (S), and the Moir-Selby Smith Index. Table 1 shows the

general parameters used to estimate the indices. Note that the indices categorized occupa-

tions as either "men" or "women" occupation. "Male" or mN occupations are those oc-

cupations where the percentage share of male workers is higher than the male composition

in the labor force for a given period and likewise for the "Female" fN occupations. If

there was no sex segregation then the share of women in female workplaces would match

the share of females in male workplaces and a zero index value would be obtained.


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Table 1. Basic sex segregation table

Men Women Marginal Total

“Male” occupations mM mF m m mM F N

“Female” occupations fM fF f f fM F N

Marginal Total m fM M M m fF F F N

Where:

mM - number of men in male occupations

fM - number of men in female

occupations M - total number of male workers

mF - number of women in male

occupations

fF - number of women in female

occupations F - total number of female workers

mN - total number of workers in male

occupations

fN - total number of workers in female

occupations

N - total number of workers in the labor force

Adapted from Harisson (2002).

2.2.1. The Duncan and Duncan’s Index of Segregation (D)

The Duncan and Duncan (1955) index, which is the most commonly used index of

segregation, measures the dissimilarity between two distributions. The index of segregation

is calculated as12 i iM M F F where iM M is the percentage of all male

workers employed in occupation or sector i and iF F is the percentage of all female

workers employed in occupation or sector i . The D index gives the percentage of women

(or men) that would have to change jobs for the occupational and sectoral distribution tobr-

ing about a perfect correspondence between the sex ratio within each occupation, sector,

and increase the overall rate of female labor force participation. It has a minimum value of

zero (no segregation when the mix of men and women in each occupation is the same as

the overall gender composition of the workforce) and a maximum value of one (complete

segregation when each occupation is completely male or completely female). It follows that

that as the value of D rises so the degree of gender segregation increases.

Rodger M. Valientes

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2.2.2. The Sex Ratio Index

The Sex-Ratio Index (S), is a given by the equation:1/ f fS F N F F M F .

The S index shows that as the degree of difference between the female share in female oc-

cupations and female share in male workplaces rises then the index value increases. The

inverse of the female share of employment to total employment provides a weight for the

difference between the ‘female’ and ‘male’ female shares.

2.2.3. The Moir-Selby Smith Index

The Moir-Selby Smith (1979) index or the Women’s employment index is given by

the expression: i

mff iW N N F F . The W index gives the sum of the absolute

difference between the proportion of women in occupation i and the proportion of total

workers in the occupation. This provides a measure of the proportion of the female work-

force which would need to shift workplaces and occupation so that the resulting dis-

tribution of workers is the same as the total workforce.

2.2.4. The standardized or Karmel and MacLachlan (IP)

The standardized or Karmel and MacLachlan (IP) is based on the understanding that

segregation means a different distribution of women and men across the occupational cate-

gories, and the more equal the distribution over occupations for women and men, the less

the segregation. The IP index takes, however, account of differences in the female and

male share of employment The IP-index can be interpreted as the proportion of the work-

force (persons in employment) which would need to change jobs in order to remove segre-

gation - considering the female and male shares of occupations. The formula for the stand-

ardized or Karmel and MacLachlan index is: 1/ 1 / * / *i iiIP N M N M M N F .

These indexes are related and are all dependent on the sectoral and occupational struc-

ture of the economy. None of these indices provides however an entirely satisfactory meth-

od of measuring sex segregation over time. This is in part because changes in the dis-

tribution of women and men across sectors and occupations are unlikely to happen in a

context of either the occupational structure remaining stable or the female share of the la-


- 109 -

bor force remaining constant (Emerek, Figueiredo, et. al. 2003).

2.2.5. The Data

The analysis of occupational and sectoral segregation was based on the broad job clas-

sification scheme and sectoral aggregation of occupation being used in the Labor Force

Survey (LFS) of the Department of Labor and Employment (DOLE) and the National

Statistics Office (NSO).

. Results And Discussions

In the seminal work of Harbison (1973), he forwarded a contention that any country,

which is unable to develop its workforce and utilize them effectively in the national econo-

my, would beunable to develop anything else. Improvements in the quality and quantity of

participating economically active population of the labor force and consequently be an em-

ployed workforce are imperative. While quantity and quality improvements directly reflects

the nation’s capability to invest in human capital development and its ability to provide

employment and income streams to its domestic workers, access and distribution of oppor-

tunities across players in the labor market seemed to have fallen short of what is equitable.

3.1. Overview of the Philippine Labor Force

The United Nations (UN) ranked the Philippinesas the eleventh most populated coun-

try in world with about 85 million people and expected to reach 141 million by 2040.

Intuition from the population size is that the country has more current and even potential

supply of economically active individuals.

Table 2 shows the current distribution of economically active population The pro-

portion of the population aged 15 years old and above.. From 1998 onwards, this group

has been expanding by 2 to 3 percent per annum, while maintaining an almost one-to-one

correspondence between potential male and female labor forceWhen a person is working or

actively seeks work, her or she is, by definition is in the labor force. . As of 2005, over

54 million economically active Filipinos are distributed more or less equally between male

Rodger M. Valientes

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and female. One can make an expectation that if the labor market is gender-blind, potential

male and female workers can be assigned with equal probability to become part of the la-

bor force or to be employed, ceteris paribus.

Labor force participation from 1998 to 2005 never exceeded 68% since 1998. This

roughly means that for every year, about 15 to 19 million economically active individuals

bow out of the labor force and approximately 75% of them are women. Even with the ap-

parent equality in the number of economically active individuals, the participation ratesThe

proportion of economically active population that either has a job or looking for one. Thus,

the participation rate is an important measure of people’s willingness to work outside the

home. of females in the labor force remains lower than that of the male s. Throughout the

study period, about 50% of economically active women joined the labor force and this is

approximately 30 percentage points lower than the participation rates of men.

While this disparity has been a historical trend in the Philippines, it nonetheless con-

firms that worker’s willingness to work outside the home is more pronounced in men than

in women. The trend ascribes to the paradigm of a typical Asian household where men are

the "breadwinners"and are supposed to take aggressive economic and market roles relative

to women, while the latter focus on household production. The socio-cultural norms, val-

ues, and institutions that ascribe differential roles to men and women members of the

household and in the economy can provide an overarching justification for the historical

difference in participation rates.

From 1998 to 2005, overall employment rates pegged at 89%, which is the same aver-

age employment rate for both male and female workers. The high employmentrate of wom-

en (at par with men) according to Ehrenberg and Smith (1987), can be considered as one

of the most revolutionary changes taking place in the labor market, as women customarily

absorb a bigger share of the unemployment rate. To a certain extent, the rates suggest

equality of employment (and unemployment) opportunity and probability assigned to male

and female participants by the labor market. Yet, that is not to say that such "equality" al-

so exists in the sectoral and occupational distribution of workers. Circumstantial evidences

for this claim are presented in the succeeding discussions.


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Table 2. Economically active population, labor force, and employment status

of Philippine workers by sex (in thousand except the rates), 1998-2005

Category 1998 1999 2000 2001 2002 2003 2004 2005

Economically Active 44,995 46,321 47,640 48,929 50,344 51,793 53,144 54,388

MALE 22,284 23,042 23,716 24,396 25,108 25,799 26,485 27,111

FEMALE 22,711 23,278 23,924 24,532 25,237 25,994 26,660 27,277 Labor Force 29,673 30,759 30,911 32,807 33,936 34,570 35,863 35,381

MALE 18,533 19,105 19,306 20,097 20,601 21,216 22,204 21,797

FEMALE 11,140 11,654 11,605 12,710 13,335 13,354 13,660 13,584 Total Employed

26,631 27,742 27,453 29,156 30,062 30,635 31,613 32,313

MALE 16,714 17,253 17,193 17,923 18,306 18,873 19,646 19,910

FEMALE 9,917 10,489 10,259 11,232 11,756 11,762 11,968 12,403 Total Unemployed

3,043 3,017 3,459 3,653 3,874 3,936 4,249 3,068

MALE 1,819 1,852 2,113 2,174 2,295 2,343 2,558 1,888

FEMALE 1,223 1,165 1,346 1,478 1,579 1,592 1,692 1,181 LF Participation Rate (%)

65.9 66.4 64.9 67.1 67.4 66.7 67.5 65.1

MALE 83.2 82.9 81.4 82.4 82.0 82.2 83.8 80.4

FEMALE 49.1 50.1 48.5 51.8 52.8 51.4 51.2 49.8 Employment Rate (%)

89.7 90.2 88.8 88.9 88.6 88.6 88.1 91.3

MALE 90.2 90.3 89.1 89.2 88.9 89.0 88.5 91.3

FEMALE 89.0 90.0 88.4 88.4 88.2 88.1 87.6 91.3 Unemployment Rate (Rate) 10.3 9.8 11.2 11.1 11.4 11.4 11.8 8.7

MALE 9.8 9.7 10.9 10.8 11.1 11.0 11.5 8.7

FEMALE 11.0 10.0 11.6 11.6 11.8 11.9 12.4 8.7

Source: National Statistics Office, Labor Force Survey

3.1.1. The Distribution of Workers

The Philippine labor force surveys categorized workers by major industry/sector and

by occupation, based on the Philippine Standard Occupational Classification (PSOC). The

extent of sex segregation of the labor market was conducted at this level of disaggregation

It is important to note that measures of segregation are sensitive to sectoral and occu-

Rodger M. Valientes

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pational classification used. Indices are in direct relation to the disaggregation of the data

used in the calculation.

Table 3 below shows the 17 major economic sectors and major occupational classi-

fication where male and female workers are distributed.

Table 3. Major sectoral and occupational classification adapted for the study

MAJOR SECTOR MAJOR OCCUPATION

1. Agriculture, Hunting and Forestry

2. Fishing

3. Mining and Quarrying

4. Manufacturing

5. Electricity, Gas and Water

6. Construction

7. Wholesale and Retail, Repair of Motor Vehicles, Motorcycles & Personal Household Goods

8. Hotel and Restaurants

9. Transport, Storage and Communication

10. Financial Intermediation

11. Real Estate, Renting and Business Activities

12. Public Administration & Defense, Compulsory Social Security

13. Education

14. Health & Social Work

15. Other Community, Social & Personal Service Activities

16. Private Household With Employed Persons

17. Extraterritorial Organizations & Bodies

1. Officials of Government and Special Interest-Organizations, Corporate Executives, Managers, Managing Proprietors and Supervisors

2. Professionals

3. Technicians and Associate Professionals

4. Clerks

5. Service Workers and Shop and Market Sales Workers

6. Farmers, Forestry Workers and Fishermen

7. Trade and Related Workers

8. Plant and Machine Operators and Assemblers

9. Laborers and Unskilled Workers

10. Special Occupations

Source: National Statistics Office, Labor Force Survey

These sectors and occupations were again categorized as "male" or "female" sector/oc-

cupation using Beller’s (1982) method. Beller assumed that if men and women have the

same preferences and resources, and if occupational choices are freely chosen, the expected

proportion of female workers in each occupation/sector would be equal to their proportion

in the labor force. Hence, if the average share of employment of females in a given sector


- 113 -

or occupation is greater than or equal to their historical labor force participation rate

(approximately 49% for 2001-2005 LFS), the sector or occupation is considered as

"women’s", otherwise it is a "men’s" sector or occupation.

3.1.2. Sectoral Distribution of Workers

Men’s Sector

Beller’s (1982) method allowed for the classification of 9 out of 17 major economic

sectors as "men’s" stronghold in the labor market. Five of them as "strictly" men’s sector,

specifically the construction, transportation and communication, fishing, mining and quarry-

ing, and the electricity, gas, and water industries (Figure 2). Men’s mean share of employ-

ment in these sectors far exceeded their historical participation rate of 82%. In fact, from

2001-2005, 95% of the employed workers in these five sectors are men and the share of

women is almost constant in all sectors except in the transportation and communication in-

dustry where some occurrence of inter-temporal increases ranging from 6 to 12 percent.

The apparent under representation of women in the strictly men’s sector suggests the pres-

ence of a crowding out phenomenon, most notably in the construction industry. Male and

female workers are not perfect substitute labor and are generally non-competing in terms of

employment opportunities in these sectors. Employers in strictly men’s sectors, though the

years, might have developed preference on male builders, drivers, miners, fishers, and utili-

ty workers over female. This observable fact can be an impetus for women to hold back

their decision to seek employment opportunities in the strictly men’s sectors.

The "moderately" men’s sectors include the manufacturing, public administration and

defense, real estate, renting, and business activities, and the agriculture and forestry

industries. In 2001-2005, about 73 percent of total employments in these industries are

men. Although the average employment share of men is lower than their historical LFPR

(82%), the average share of women (27%) is even much lower; therefore the afore-

mentioned sectors are still men’s. Crowding out of women workers is still apparent, al-

though the increasing share of women workers suggests growing competition between male

and female for employment and income opportunities within these industries.

Rodger M. Valientes

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Construction

Transport, Storage andCommunications

Fishing

Mining and Quarrying

Electricity, Gas and Water

Agriculture and Forestry

Real Estate, Renting and BusinessActivities

Public Administration and Defense

Manufacturing

Female Male

Source of Basic Data: National Statistics Office, Labor Force Survey, various years.

Figure 2. Relative participation rates of male and female workers in "Men뭩

Sectors", 2001-2005.

Women’s Sector

In Figure 3, eight major economic sectors are regarded as women’s sector as their

average participation rates exceeds 49%. Female dominance is apparent in the private

household employment, education, and health and social services industries where their

share to employment pegged at 77%. It is interesting to note that activities within these in-

dustries closely resemble traditional household production activities like child rearing and

parenting; which are customarily accorded to women. Hence, the "strictly" women’s sectors

can be regarded as the labor market extension of their comparative advantage and relative

efficiency in household production. While these industries are strictly women’s, the crowd-

ing out of male workers is seemingly less robust than the degree females are being crowd-

ed out from the strictly male sectors, suggesting that the labor market is less rigid when it

comes to employing males in women strongholds.


- 115 -

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Wholesale and Retail Trade

Community, Social and PersonalActivities

Extra-Territorial Organizations

Hotels and Restaurants

Financial Intermediation

Health and Social Work

Education

Private Households with EmployedPersons

Female Male


Figure 3. Relative participation rates of male and female workers in "Women뭩

Sectors", 2001-2005.

The labor market becomes even more relaxed in allowing entry of men in moderately

women’s sectors like in financial intermediation, hotel and restaurant, extra-territorial or-

ganization, community and social works, and wholesale and retail industries. While the

average participation rate of women in these industries is a little over 50%, the relative

success of male workers in seizing a portion of employment opportunities from women is

evident. In fact, mean participation rate of male workers, which is about 46%, is almost

comparable to the historical LFPR of women. Women therefore faces strong competitive

pressure from male workers as these industries increasingly consider them as near perfect

substitute labor.

3.1.3. Occupational Distribution of Workers

The distribution of workers among the different and broadly classified occupations

across the 17 major economic sectors reflects the second level of labor market segregation.

Different occupations are being offered within a given industry and workers are either vol-

untarily or involuntarily sorted to the occupation which indicates worker preference over a

Rodger M. Valientes

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certain type of occupation or the industry preference on who should be employed in a giv-

en occupation. Note that occupational distribution is also reflective of human capital differ-

ences of male and female workers participating in the labor force and in a given industry.

Men’s Occupations

Out of the ten major occupation categories of the Philippine labor market, 5 occupa-

tions turn out to be dominated by male workers (Figure 4). Strictly men’s occupations are

the plant and machine operators and assemblers, special occupations (e.g. military and po-

lice personnel), and farmers, forestry workers, and fishers.

From 2001-2005, approximately 88% of total employment in these occupations were

held by men. The share of women workers in the strictly men’s occupations has been fair-

ly constant at 12% of the total employment and majority of them are in agriculture, for-

estry, and fishery based occupations. Under representation of women may owe to the fact

that the nature of work in these occupations is generally more strenuous and normatively

appropriate for the male physique.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Plant and Machine Operators andAssemblers

Special Occupations

Farmers, Forestry Workers andFishermen

Trade and Related Workers

Laborers and Unskilled Workers

Female Male


Figure 4. Relative participation rates of male and female workers in "Men뭩

Occupation", 2001-2005.


- 117 -

Moderately men’s occupations are the laborers and unskilled workers and the trade

and related workers. Men held about 64% of the total occupations and its distribution is

rather leaning towards the former. Intuitively, this proportion suggests that there are more

men with relatively low human capital than women who are part of the employed labor

force.

Women’s Occupation

Relative to men’s occupation, women’s occupation delineated for this study offers an

interesting result (Figure 5). Except for the clerks and service and market sales workers,

the human capital requirements for professional, government and special organization offi-

cials, corporate executives, managers, managing proprietors, supervisors, and technicians

and associate professionals are presumably high relative to the occupations dominated by

men; and these occupations are dominated by women.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Technicians and AssociateProfessionals

Service Workers and Shop andMarket Sales Workers

Officials of Government and SpecialInterest-Organizations, CorporateExecutives, Managers, Managing

Proprietors and Supervisors

Clerks

Professionals

Female Male


Figure 5. Relative participation rates of male and female workers in "Women뭩

Occupation", 2001-2005.

In addition, an inference can be also made that the human capital of women workers

Rodger M. Valientes

- 118 -

who bowed out of the labor force is inferior relative to the women who opted to be em-

ployed and compete with the men for employment.

According to the study of Anker (1998), women are very much underrepresented in

the administrative and managerial major group in all theregions around the world. The

Philippine labor market is an obvious exception. It is interesting to note that managerial

occupations, professionals, and government officials are important occupational groups as

they tend to be the major decision-makers in the economy, the extent of female dominance

in these activities can be looked as a proxy for the increasing women's position in society

and the labor market. Looking at the details, strictly women’s occupations are clerks, pro-

fessionals, government and special organization officials, corporate executives, managers,

managing proprietors, supervisors, and technicians and associate professionals where men

were not able to match their historical LFPR. In the professional occupations, women are

obvious runaway winners, with almost 40 percent employment differential.

Moderately women’s occupations are the sales and service workers and the technicians

and associate professionals. The relatively high proportion of men employed in these occu-

pations, particularly in the sales and service occupation suggests that male workers are be-

coming less averse in taking in customarily women’s job. In the moderately women’s oc-

cupations, men and women workers are perceptibly competing with each other as the share

of women is only slightly higher than the participation rates of male workers.

3.2. Labor Market Segregation

The sectoral and occupational distribution of male and female workers presented above

provides a priori expectation as well as conclusion the labor market is segregated across

industries and across occupations. To validate the presence of unecen distribution of work-

ers by sex, several indices estimated to measure segregation. These indices are the Duncan

and Duncan Index of Segregation (D), the Sex-Ratio Index (SR), the Moir-Selby Smith

Index (MSS), and the Karmel and MacLachlan Index (IP).

3.2.1. Sectoral Segregation

Sectoral segregation is a labor market condition where the workforce of a particular

industry or sector is mostly made up of one particular sex. The indices presented in Table


- 119 -

4 reflect the extent of sectoral sex segregation.

Duncan and Duncan’s segregation index (D) shows disparity in the distribution of

male and female workers across 17 major industries from 2001 to 2005. The annual D

demonstrated that on the average, male and female workers distribution are about 37% dis-

similar from each other. Except for the 2005 D, segregation has been marginally increasing

by about 1 to 2 percent per annum, symptomatic of a worsening disparity in the

distribution. In fact, the study of Jacobs and Suet (1992) reported that in the 1960s, 1970s,

and 1980s, sectoral segregation index of the Philippineswere 0.257, 0.302, and 0.251 re-

spectively and these Ds are all below the Ds estimated for this study. Male and female

workers now are more segregated across different sectors than they were four decades ago.

Table 4. Sectoral sex segregation indices, Philippines, 2001-2005

Indicators 2001 2002 2003 2004 2005 Mean

Index of Segregation (D) 0.368 0.372 0.376 0.382 0.372 0.374

Sex-Ratio Index (SR) 0.396 0.397 0.400 0.403 0.392 0.397

Moir-Selby Smith Index (MSS), 0.453 0.452 0.463 0.475 0.458 0.461

Karmel MacLachlan Index (IP) 0.174 0.177 0.178 0.180 0.176 0.177

As such, more men and/or women (37% of the total employment) would have to

move from one industry to another to make the distribution at par with each other and

consequently reduce, if not eliminate segregation. This is about requiring roughly 5.5 mil-

lion male workers in the "men’s sectors" to move into the "women’s sector" or about 2.2

million women in the "women’s sector" venturing into the "men’s sector" if only sin-

gle-sex movement is allowed.

The Sex-Ratio Index (SR), measures the extent in which the share of male and female

workers in "women’s sector" differs from each other. From Table 4, the mean share of

male and female workers to total women’s sector is 39.7% different from each other, and

this level of disparity in distribution hardly changed during the study period implying that

net movements of male and female workers to and from the different women’s sectors is

almost nil. It also leads to a conclusion that the labor market remained segregated.

The same conclusion is also being offered by the Moir-Selby Smith (MSS) or the

Rodger M. Valientes

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Women’s Employment Index. A MSS mean index of 0.461 insinuates that the distribution

of female workers across different economic sectors differfrom the total workforce dis-

tribution by 46.1%. Startling as it may seem, 46.1% is the average proportion of workers

that would need to move so that the distribution of women matches that of the labor force,

or simply to remove segregation. Although the MSS index marginally changed by more or

less 0.01 to 0.02 unit per annum, it accords with the earlier contention that the labor mar-

ket remains segregated by keeping the distribution of female workers different from the

overall labor force distribution.

Consistent with earlier indices, the Karmel and Maclachlan Index (IP) also suggest

presence of segregation. On the average and holding overall sectoral distribution of workers

constant, about 17.7% of the workforce, both male and female workers would need to

change sectors or industries in order to remove segregation. The proportion being required

by IP, like the other indices, has been near constant through the years.

3.2.2. Occupational Segregation

Occupational segregation looks at the distribution of female and male workers verti-

cally, across different occupations. The magnitude of occupational segregation is presented

in Table 5. All four indices pointed to the conclusion that from 2001-2005, male and fe-

male workers were and have remained segregated by occupation. The severity of this

though, is less than the extent of sectoral segregation of male and female workers during

the same period.

Table 5. Occupational sex segregation indices, Philippines, 2001-2005.

Indicators 2001 2002 2003 2004 2005 Mean

Index of Segregation (D) 0.264 0.265 0.270 0.264 0.261 0.260

Sex-Ratio Index (SR) 0.295 0.290 0.303 0.283 0.281 0.285

Moir-Selby Smith Index (MSS), 0.325 0.326 0.335 0.328 0.321 0.321

Karmel MacLachlan Index (IP) 0.125 0.125 0.127 0.124 0.124 0.123

The distribution of male and female workers across different major occupation catego-

ries is on the average 26% dissimilar. Index of segregation (D) for the entire period is


- 121 -

marginally changing more or less by 0.01 to 1% implying that there were hardly any

movements of workers across different occupations within an industry. This level of segre-

gation requires about 3.7 million male workers to move into female occupations or about

1.4 million females to male occupations annually to remove disparity in the distribution.

Within women’s occupations, the distribution of male and female workers is about

28.5% different fromeach other, as reflected by the mean SR ratio. This ratio also hardly

changed also from 2001-2005, insinuating that although male and female workers are

growing in absolute terms in women’s occupation, their distribution remained rigid. On the

hand, the MSS for the study period is about 32.1%. Female distribution across occupation

remained divergent from the overall workforce distribution.

The same inclination is being offered by the IP index, as it requires on the average,

the movement of about 12.3% of male and female workers annually to remove disparity in

the distribution or to remove segregation. Similar to other segregation indices, the IP is al-

so near constant for the study period.

3.3. Implications of Sex Segregation

This study confirms that the extent of sex segregation in the Philippine labor market

is relatively low to moderate and was fairly stable from 2001 to 2005. Although the level

of segregation is not severe, it still suggests the presence of a dual labor market that en-

ables the explanation of having pay or wage differentials between male and female

workers. The causes of wage gap between sexes across sectors and occupations are com-

plex and to some extent reflect the current and historical preferences of workers and

employers. Bayard, Neumark, et. al. (1999) forwarded in their study that a sizeable frac-

tion, about one-quarter to one half of the sex gap in wage is being accounted for by the

segregation of workers.

Given the estimated segregation indices and its apparent tendency to be constant and

persistent through the years, it follows that the wage differentials can also persist. If it is

persistent, the question is who among the male and female workers will receive the draw-

backs of sex segregation. While workers are being segregated by sex, one would rationally

expect that the members of the underrepresented group would be accorded with a lower

wage relative to the dominant sex in the group. The Philippines labor market scenario

Rodger M. Valientes

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somehow proves otherwise.

3.3.1. Real Wage, Labor Time, and Sectoral Segregation

Table 6 shows the average hourly real wage ratios of male and female workers for

2002-2005. These ratios were derived from the average daily wage rates of male and fe-

male workers across sectors or industry obtained from the LFS. From the table, the glaring

difference from the usual expectations on wage ratios can be seen. In the men’s sector, ex-

cept for the manufacturing sector, hourly wage rates received by female workers are gen-

erally higher than what their male counterparts obtain, especially in the strictly male sector

like the transportation, storage, and communication where female workers are being com-

pensated about 40% higher than the male workers. In general, female real hourly wage

rates are about 21% higher. In the women’s sector from Table 6, another evident differ-

ence from the expectation can be seen. It is in these sectors where women dominance in

wage rates is being expected, but the ratio shows that wage differentials seem to have

trimmed down and in fact, some sectors accorded male workers with wages that is about

22 to 85% higher than that of the females. While there are still some women sectors

where wage rates of females exceeds the males, the difference is only about 5% as com-

pared with the wage dominance of males that is on the average, about 32%.

Table 6. Average real hourly wage rate ratios by sector, 2002-2005


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* Strictly men’s sector** Strictly women’s sectorSource of Basic Data: National Statistics Office, Labor Force Survey

Overall, compensation received by females is about 11% higher than the males. This

can be attributed to the fact that there are more sectors where female wage rates are higher

than sectors where male wages are superior. It is worth highlighting this peculiar ob-

servation that when it is the time for a group of workers to dominate the sector in terms

of their participation rate, their wages seemed to succumb to the wages received by those

who are rather segregated from the sector.

One can also make an intuition and to some extent presume that the women who are

able to participate in the men’s sector are most likely highly skilled or relatively more pro-

ductive than the male workers as the labor market accorded them with higher wages. The

same intuition also is true for the male workers who were able to squeeze themselves into

the female sectors. Extending such intuition further, the low to moderate sectoral segrega-

tion suggests that a particular sector has singled out from the underrepresented group the

workers who will be receiving low wages (that is the relatively unskilled or those with low

human capital).

3.3.2. Real Wage, Labor Time, and Occupational Segregation

The ratios of the real hourly occupational wage rates of male and female workers are

shown in Table 7. In both men’s and women’s occupations, the wage ratios are generally

greater than one, symptomatic of higher average wage for the male workers. The differ-

entials however becomes are even more pronounced in the women’s occupations.

Moderately men’s occupations places higher premium (18 to 22%) on male than fe-

Rodger M. Valientes

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male labor inputs and considering the special occupations category, the mean premium ris-

es to about 36%. This wage advantage however peters out on the average to 4.3% as the

occupations become strictly men’s occupation. Discounting the special occupations, male

workers become the wage disadvantaged group as the market crowds out the under-

represented women in strictly men’s turf.

In the women’s occupations, it appears that their overrepresentation also did not pro-

vide wage advantage for women. Male workers are outperforming them in terms of com-

pensation received. Except for technicians and associate professionals where female work-

ers have the ostensible yet marginal wage advantage, the rest of the occupations compen-

sated a male worker that is about 20% more than the female wage. For the service work-

ers, shop and market sales workers, male wage advantage can be as high as 50%. Female

workers appear to be the wage disadvantaged group as the occupations market crowds out

the underrepresented men in strictly women’s occupations.

In the general, the presumption about the sectoral segregation and skills of the segre-

gated group can also be adapted for the occupational segregation. The women who are able

to participate specially in the strictly men’s occupation are more or less highly skilled, pro-

ductive, and endowed with high human capital than the male workers as the labor market

accorded them with higher wages. On the other hand, the male workers who where able to

participate in the women’s sector are certainly more skilled, productive, and with relatively

high human capital than their female counterparts.

Table 7. Average real hourly wage rate ratios by occupation, 2002-2005.


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* Strictly men’s occupation** Strictly women’s occupationSource of Basic Data: National Statistics Office, Labor Force Survey

3.3.3. Some Remarks on Sex Segregation

This section attempts to answer some of the questions that were encountered in the

course of evaluating the extent of segregation in the Philippine labor market. These at-

tempts were deduced from the circumstantial evidences disclosed by the statistical trends,

the indicators used and inferences made from previous studies.

3.3.4. Is it labor market discrimination?

The ILO Convention on Discrimination (Employment and Occupation) 1958 (No. 111)

considered sex segregation as a form of discrimination. ILO recognized it as one of the

most insidious aspects of gender inequality in the labor market, since it is generally ac-

companied by lower pay and worse working conditions of the underrepresented group in a

given occupation. The under-representation of male and female workers in a particular sec-

tor or occupation suggests that there are barriers to men and women to freely embark on,

and remain onparticular career paths. The barriers can be the discriminatory component of

sex segregation. This study however cannot provide sufficient evidence to the existence of

these barriers to entry nor able to showcase that segregation is a consequence of

discrimination.

However, the economics of discrimination insinuates that when a particular group of

worker is being discriminated, the group will be subjected to either or combination of em-

ployment, job, and wage discrimination. While the data cannot support the first two types,

wage discrimination seemed to be ruled out by the data. Wage discrimination exists when

Rodger M. Valientes

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a group of worker is paid less than the overly represented group for being in the same sec-

tor or doing the same occupation. More technically, wage discrimination exists when the

wage differentials are based on consideration other than productivity and human capital dif-

ferentials (Smith, 1994; McConnell, Brue, and Macpherson, 2003).

While the productivity differentials of the workers were not verified, there is a reason

to believe that an underrepresented group may not be able to participate or will not be pre-

ferred by an employer in an already overly represented sector/occupation if not for pro-

ductivity differentials. A rational employer will always prefer a lower waged worker (the

overly represented) over the high waged one (underrepresented) if the labor productivity is

just at par or inferior.

The wage ratios showcased that the underrepresented group commands a wage advant-

age over the overly represented group. This is by all means, not indicative of wage dis-

crimination accorded to females in the men’s sectors/occupations and to males in the wom-

en’s sectors/occupations.

3.3.5. What explains the occurrence sex segregation?

Institutional factors might probably explain the occurrence of sex segregation. Institu-

tional factor such as socio-cultural norms generally constrain women in numerous ways.

Filipinos attached the traditional role of women as good wives and mothers and it pre-

cludes many women from remaining in the labor market. Parents’ attitudein favor of sex

differentiated socialization is another example of stereotypical perceptions regarding the

sexes. "Men should go out to work and women should take care of the home" type of

thinking often leads to fewer educational opportunities for daughters and stereotypical

choices of the field of study (Anker, Malkas and Korten, 2003).

Blau (1972) pointed out that the division of labor on the basis of sex appears to be a

universal characteristic of every society. The Philippine society is also suspect of this

characteristic. The traditional roles accorded by the society to male and female workers are

extensions of the roles assigned to male and female members in a household. For example,

sectors and occupations that would require the high marginal exertion of efforts (e.g. con-

struction, mining, plant operators and assemblers) would normatively be assigned to male

workers while those occupations and sectors requiring low marginal exertion of efforts as-


- 127 -

signed to women. The same is true for the heavy household activities like house repair, car

overhauling, and family driving among others are being handed over to male members

while relatively light activities like cooking, care for the family, and childrearing to the fe-

male members. As such, the sexes are not competing groups but rather complements. This

distinction of tasks and role are deeply embedded in Filipino traditions and customs and

this might probably be responsible for restricting the employment opportunities of the seg-

regated group. Roles and activities in the households as well as in the economy are norma-

tively judged by the society. What is an appropriate industry or occupation for a given

group (e.g. females) becomes the appropriating mechanism that the labor market apparently

accedes to.

Blau (1972) also mentioned that there is a compelling reason to expect that firms and

employers will follow the socially prevalent attitudes as to what constitutes appropriate

male or female tasks. In fact, violation of the social norms may impose direct and psychic

costs to them consequently negating any incentives to veering away from the social

practice.

3.3.6. Will sex segregation persist?

According to Anker, Malkas andKorten (2003), sex segregation is one of the most en-

during aspects of labor market around the world. With this, there is a reason to believe

that segregation, although low to moderate, in the Philippine labor market will also exhibit

the same characteristic. The following arguments might provide an explanation to the reser-

vations about its persistence.

Oppenheimer (1970) forwarded an argument that under the pressure of an insufficiency

in supply of the preferred workers, employers will be forced to abandon restrictions on em-

ployment of the least preferred group. With the high unemployment and underemployment

rates of male and female workers in the Philippines and considering the historically huge

proportion of the economically active population that is not part of the labor force, the em-

ployers might not probably wanting of the preferred group. The sufficiency in supply of la-

bor (e.g. male workers) faced by the employers, effectively reduce any incentive to relax

restrictions and preference over a particular group of workers. Unless the Philippine labor

market becomes tight (low unemployment and high labor force participation rates), the in-

Rodger M. Valientes

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centive to segregate will not be eliminated.

In addition, the wage ratios gives an insinuation that the sex segregations across sec-

tors and occupations have actually benefited the segregated group. The group’s partic-

ipation rate in a given sector/occupation may have negatively influenced the average real

hourly wage accorded to them by the market. Holding all other factors constant and as-

suming homogenous workers, the "shortage" in the supply of the segregated group may

have forced their wages to rise and/or the "surplus"of the non-segregated group depresses

their market value. In terms of efficiency wage principle ( L Lw MRP MR xMP ) and

in a perfectly competitive labor market setting, the oversupply of labor hours may have

provided for the diminishing marginal productivity of labor to occur, forcing their wages to

fall. Profit maximizing firms may probably look at this as a signal as to who are the

workers to hire or employ, and such signal directs them to employ or cast preference over

the low cost-overrepresented workers. This consequently creates the pressure and almost

self-perpetuating incentive to segregate workers further.

Anker, Malkas and Korten (2003) further noted that sex segregation across generations

of workers may be reinforced. The study of Korupp, Sanders and Ganzeboom, (2002) as

cited by the authors found out that the extent to which the mother and father’s jobs and

occupations influence the status and occupations of their children’s occupation at first entry

into the labor market. In other words, one can expect that "like begets like", the mother’s

occupation is related to her daughter’s occupation, and in the same way, the father’s occu-

pation is related to his son’s occupations

3.3.7. What are the possible policies needed to reduce sex segregation?

Sectoral and occupational sex segregation in the Philippine labor market is being

thought out to be a consequence of several interacting factors that lead to the disparity in

the participation of economically active people in the labor market; distribution of worker;

and the wage and status differentials. Occupationalsex segregation must always be seen in

the context of these general labor market conditions because isolated attempts to combat it

cannot produce meaningful and lasting results. If, for instance, more girls choose or pre-

ferred to study the natural sciences, but considerable workplace segregation with regard to

career possibilities continues and does not receive simultaneous attention, results are likely


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to be partial at best.

To create an egalitarian society and a gender-blind labor market when it comes to

economic opportunities for both male and female workers, the following are suggested in-

tervention areas:

(1) Female labor force participation rates (LFPR) consistently lags behind the male

LFPR. Women under representation might be due to the fact that employed female workers

are relatively few compared with the number of employed male workers from the very

start. Policies that could trigger increased participation of female workers not just into the

traditional women’s industry and occupations but also into men’s turfs. This strategy how-

ever requires some necessary conditions to succeed. Female workers would need to acquire

comparative levels of investments in human capital forming activities if they are to com-

pete effectively with male workers. The same is true for male workers who would want to

be integrated into industries and occupations where they are seemingly underrepresented.

Equality in access to nutrition/health services, schools, universities, as well as in trainings

needs is imperative.

(2) Occupational segregation is foreshadowed by the educational experience of boys

and girls. Subject or degree selection is being determined by gender stereo-typical influen-

ces, and these in turn determine the kind of career paths embarked on following school.

Accordingly, if pools of talent for some occupations are influenced from a young age, this

can in turn restrict the opportunities for young men and women to fulfill their potential-

when they eventually join the labor force. Equality of access to human capital investments

should not only be confined with the economically active population but it should tran-

scend to all age group.

(3) Increasing presence of female workers in the labor market and more so in men’s

turf calls for the buyers of labor services to modify certain personnel practices, such as re-

trenchment procedures, seniority systems, required qualifications, and job training. The ex-

tent of worker segregation verified in this study presupposes the presence of restrictive em-

ployment policies or reflective of the employers subjective preference over the sex of their

workers. Providing incentives such as parental leave schemes, reduced working hours, dis-

tance working arrangements, flexible working arrangements might encourage female work-

ers to participate in the paid labor market.

(4) It has been suggested that the concentration of women in certain occupations re-

Rodger M. Valientes

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flect their own preferences, which in turn consistent with traditional women's domestic

roles or with the socialization process that predisposes them toward certain kinds of work

or industry. While it might be difficult, a policy option that would support a behavioral

change towards equitably distributing workers across occupations and sectors. Options that

can induce the society to abandon traditional and customary views about the social and

economic role of household members must be explored and actively pursued.

(5) To getthings moving, one should view segregation beyond the customary notion of

gender discrimination but rather view reduction of sex segregation as a strategy to max-

imize potential in the workplace and in the economy. In the period where globalization and

competitiveness determines the rule of the game, the need to find mechanisms to raise la-

bor productivity. Not necessarily driving down labor costs but raising skill and providing

environments which are more conducive for people, regardless of sex, to participate in the

labor market at their most productive skill level. Again, flexible working, training and

workplace culture all have a role to play here

. Summary And Conclusion

This paper has been concerned with exploring the extent of occupational and sectoral

segregation of male and female workers in the Philippine labor market. Employment by

sex in the seventeen sectors and ten occupations from 2001-2005 were reviewed by study.

The sectors and occupations were classified into "men’s" and "women’s" sectors/occupa-

tions by comparing the LFPR of male and female workers with their respective employ-

ment rates in the sector/occupation.

Of the 17 sectors, 9 were considered to be "men’s"stronghold, five of which are strict-

ly men’s sector, specifically the construction, transportation and communication, fishing,

mining and quarrying, and the electricity, gas, and water industries. The rest of industries

are "women’s"sector, where female dominance becomes more apparent in private household

employment, education, and health and social services industries. Note that this division of

workers by industry is consistent with the expectations that sectors requiring higher mar-

ginal effort exertions will be dominated by male workers while the industries that closely

resemble traditional household production activities are dominated by female workers.


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In terms of occupational distribution, 5 broad occupational categories each were de-

lineated to be "men’s" and "women’s" occupations. Male occupations are the following: the

laborers and unskilled workers; trade and related workers; farmers, forestry workers and

fishermen; special occupations; and plant and machine operators and assemblers. Regarded

female occupations are technicians and associate professionals; service workers, shop and

market sales workers; government officials and corporate executives, managers, proprietors

and supervisors; clerks, and professional occupations.

The seemingly slanted distribution of workers across different occupations and in-

dustries wasfurther verified by the estimation of different segregation indices. Extent of

segregation across sectors and occupations was estimated using the Duncan and Duncan

Index of Segregation (D), the Sex-Ratio Index (SR), the Moir-Selby Smith Index (MSS),

and the Karmel and MacLachlan Index (IP). The indicators yielded estimates that suggest

that the Philippine labor market is low to moderately segregated.

Although sex segregation was deemed low to moderate, all of the indices hardly

changed from 2001to 2005. This suggests that for the five year period, the distribution of

workers by sex across different sectors and occupations in the labor market marginally

changed. The proportion of labor force that needs to change sector or occupation to bring

the distribution of men and women workers at par with each other remained constant

throughout the study period. This is indicative of the apparent rigidity of the Philippine la-

bor market when it comes to mobility of workers.

The implications of a segregated labor market were also explored by the study, espe-

cially on hourly real wage differentials. A consistent observation is that as sectors and oc-

cupations becomes less sex segregated or as the distribution of male and female workers is

becoming at par, the disparity in their real wages tends to diminish. Highest wage differ-

entials are present in the sectors or occupations that are overrepresented by a particular

group of worker. The hourly real wage differential however deviates from the expectation

that the members of unrepresented group are the recipient of the low wages.

The study proceeded with an attempt to answer some questions like are the trends

suggestive of discrimination?, what explains its occurrence?, will it persist?, and what are

the entry points for policy to correct it?.

For the first question, ILO reported that sex segregation in a form of discrimination

against the underrepresented group of workers. The wage ratios however proved that the

Rodger M. Valientes

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same group receives higher real hourly wage rates. This is not indicative of wage discrim-

ination in the strictest sense. The occurrence of sex segregation, if not for discrimination,

can be explained by some institutional factors such as socio-cultural norms that constrain

employment; parents’ attitudes in favor of sex differentiated socialization; and the perpetu-

ation of the household division of labor to the labor market.

Sex segregation is being expected to be a mainstay in the Philippine labor market

landscape. The high unemployment rate and proportion of the economically active workers

out of the labor force provide an insinuation that the employers might not probably want-

ing of the preferred group. The apparent sufficiency in the supply of preferred workers

faced by the employers reduces any incentive to relax restrictions and preference over a

particular group of workers. What is even more compelling reason to justify the persistence

of sex segregation is that a rational firm would always prefer low cost workers which

characterized the overrepresented group of workers. It appears that with sex segregation,

firms and underrepresented group are made better off.

To create an egalitarian or sex-blind labor market, increasing the participation of wom-

en into the labor force. Women are historically being outnumbered by male workers in

both the labor force and in the total employed. Alongside with encouraging participation of

women, investment in human capital forming activities is imperative to make them, to say

the least, competitive or at par with the overrepresented group.

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Korea stands to benefit substantially from the Korea-US free trade agreement. The imme-diate benefits include recovered credibility with trading partners, decreased reliance onthe Chinese market, and increased security cooperation with the US. However, oppositionto the FTA has been highly vocal. Arguments for and against the FTA are rational fromthe perspective of their advocates. The nature of trade is not gaining foreign currencyfrom exports but rather consuming imports that are relatively cheap or goods and serv-ices rarely supplied domestically. Therefore the ultimate goal of the FTA should be themaximization of consumer welfare. Measures to enforce industry competitiveness shouldbe followed to maintain the constant welfare of consumers. In that sense, the KORUSFTA will likely exert a favorable influence on the Korean economy. Therefore, this paperattempts to analyze the effects of the KORUS FTA on Korean consumer welfare in thegoods market and to survey its effects on the service market.

Key words: FTA, KORUS, Consumer welfare, Tariff, Price elasticity

I. Introduction

The Free Trade Agreement between Korea and the United States (hereafter KORUS

FTA) can be an opportunity for launching Korea to the complete liberalization of the

economy. Although the Korean economy has kept trying to liberalize since the 1980's,

there are lots of aspects of protectionism even in the WTO era. The reason is that since

the Doha Round of WTO has been stalemated for a long time, Korea, facing a lot of in-

ternal problems, has no incentives to liberalize by it.

The government was acknowledged, however, that the trade trend has changed from

international approach to a regional approach. Since competing countries make efforts for

Park, Ho Yong

- 136 -

preferential bilateral FTAs, the Korean government reacted on commercial relations. The

Korea-Chile FTA, effective in 2004, was the first FTA for Korea, and was relatively late

compared with competing countries. Account of being outstripped by other countries, Korea

has performed commercial negotiations according to a synchronized strategy of FTAs with

many countries.

Thanks to the strategy, Korea has made FTAs with several countries within a short

period, such as with Singapore, ASEAN, EFTA and US.

Of the FTA negotiations, the KORUS FTA was the most contentious. The immediate

benefits of the KORUS FTA include recovered credibility with trading partners, decreased

reliance on the Chinese market, and increased security cooperation with the US. However,

opposition to the FTA continues to be highly vocal. Detractors claim that the KORUS

FTA will damage agriculture, exacerbate income inequality, and infringe on national

sovereignty. An arguments of FTA have rational from their own perspective.

Their common rationality is focused on advancing of industrial interests. This is not

the main purpose of the FTA. The nature of trade is not gaining foreign currency from ex-

ports but rather consuming imports that are relatively cheap or goods and services rarely

supplied domestically. Therefore the primary aim of an FTA should be directed on the

maximization of consumer welfare. Measures to enforce industrial competitiveness should

be followed as a way of maintaining consumer welfare. In that sense, the KORUS FTA

exerts a favorable influence on the Korean economy. The liberalization brought about by

the FTA may promote restructuring, accelerate the process of deregulation, enforce com-

petitive policy, and improve national security on the Korean peninsula.

This paper attempts to analyze the effects of the KORUS FTA on Korean consumer

welfare in the goods market and to survey its long run effects on the service market.

1.1. Background

A Free Trade Agreement promotes a more competitive market among producers and

reinforces the consumer's role as a judge in the market by expanding the opportunity to

choose goods and services. Thus, it is acknowledged that the KORUS FTA provides not

only a widened commodity market but also the momentum to reform competitive markets

by strengthening consumer sovereignty in Korea. It is also acknowledged that the consumer

A Study of the Effects of the KOREA-US FTA on Consumer Welfare

- 137 -

is not always better off even with an FTA in effect, because some, but not all, markets for

goods and services are favorably changed for consumers. Whether or not the changed mar-

ket favors consumers depends on the contents of the agreement.

For example, it is certain that the markets for agricultural goods such as beef change

favorably in price, but do not goods like the medical supplies under free trade covered by

intellectual property rights. Generally, domestic goods at a comparative disadvantage tend

to become cheaper while goods at a comparative advantage become more expensive. Even

disadvantaged goods, such as generic medicines which are produced domestically before an

agreement, can be more expensive after an FTA, because they are listed on the royalty.

Thus there is no guarantee that consumer welfare, as a whole, shall be better off after the

KORUS FTA. We need, therefore, to analyze the changes in welfare by empirical study

that estimates the economic gains from the KORUS FTA.

1.2. Methodology

To estimate the effects to consumer welfare, we study the analysis of surplus method

using price elasticity in a partial equilibrium. The main reason for adopting the elasticity

approach is that we do not have enough data to estimate demand and supply in the com-

modity markets. The elasticity approach requires a lot of assumptions, however, such as

linear equations near equilibrium or in short-run competitive markets, which are unsuitable

for analyzing the effects of FTA. This limits to the study is and acknowledged problem in

the suggestions for future directions.

Changes in welfare caused by the FTA are estimated using the comparative static

method comparing the state before and after FTA. In order to perform this, it is necessa-

rily assumed that the demand and supply curves are linear near the equilibrium and the

system is satisfied with relatively strict 'ceteris paribus'. The effect of an FTA, in general,

can be realized in the long term because modern FTAs deal not only with the abolition of

import duties but with the complete nullification of trade barriers including foreign invest-

ment promotions, which require a long time to adjust.

There is also, a limit to studying the effects on the changes in welfare due to the real-

ization of income growth and consumption substitution in the long run. The dynamic effect

of an FTA can be followed by replenishing data and new methods later, but not in this

Park, Ho Yong

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paper.

The estimates are made with a classification of industrial commodities. This helps

study specific market and the arguments which took on value as the crucial issues during

the FTA negotiation. The study of specific industries is important because even when the

FTA is settled, there will be lots of problems to solve before full liberalization is in effect.

For instance, the rice tariff in Korea as well as the textile tariff in the US is extended for

ten years. The KORUS FTA is not supposed to be the goal but one step in the process to-

wards full liberalization. Structural reform is inevitable in Korea as part of the process to-

wards the goal of the FTA. This is why we study specific industries.

1.3. The estimate method of the price elasticities

The changes in welfare can be calculated by using the triangle theory of the tariff.

Figure 1 presents the increase in consumer surplus areas A through D after removing

tariffs. If we estimate the slope of the demand curve in the neighborhood around F and G,

we can simply calibrate the areas according to the changes in welfare by removing tariffs.

The slope of demand can be calculated by the using the formula; × , where

b is a slope of import demand curve and is price elasticities at F or G. Since Q* and

P* can be obtained in the time series data as the equilibrium values, the problem can be

solved by estimation on the value of of the commodities.

In order to estimate the price elasticity of import demand, we employ the following

equations;

Non-durables : Durables :

There are a few assumptions needed to validate this estimation method. It is assumed

that the demand equations are linear near the equilibrium and there are no substitutes in

the category of the specific commodities. The parameters and can be esti-

mated by simple least squares. The results show that the estimates of the commodities of

'fishery products, appliances, clothing and beds, culture and recreation, and vehicles are not

significant in the 0.05 level. The other estimates of price elasticities are significant in the


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0.05 level. We acknowledge that the insignificant estimates cannot be used for reliable

elasticities to calculate the changes in consumer surplus. We will use this estimate as the

second best choice, since we have no proper estimates at this moment. The method of the

estimation is open to question for further studies.

<Figure 1> The Estimation of price elasticity for the specific commodity

Table 1. The results of price elasticities on demand

β β

Park, Ho Yong

- 140 -

Note : The estimation used the time series data(1985~2005) aggregated for the specific commodity.The mark of * denotes that the estimates are not significant in the significant level 0.05

. The Implications of Liberalization with Respect to Consumer Welfare

A market opening such as an FTA gives an opportunity to expand markets in com-

paratively advantaged industries, but is a critical moment of structural reform in dis-

advantaged industries. The pros and cons of an FTA depend on each industry's

competitiveness. Consumers, as a whole, gain from trade in the market because of the vari-

ety of goods and services. In the long run, when industries are successfully reformed to

produce more, the consumer can enjoy greater increases in real purchasing power.

Even with FTA it would be possible for the general welfare to be lowered when in-

dustry fails to adapt to liberalization and where the economy suffers due to inequality in

income distribution. The role of government is, therefore, crucial in the process of negotia-

tion and preparation for the regime of liberalization under an FTA. The process is a kind

of maximization problem solving under constraints. The constraints are basically to accept

the international system of the division of industry, which means Korea can not maintain

every industry. The role of government is to choose industries with the maximum econom-

ic potential that will contributes the most to consumer welfare.

The Korean economy has grown with an export-oriented strategy because of a lack of

natural resources. In order to earn income overseas, Korea needs foreign currency to import

resources which were used to produce added value. This has been necessarily followed by

mercantilist policies such as the restraint of imports of final goods and services, and the

encouragement of exports which have been given preferential support. This commercial


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policy of supporting firms leads to an uncompetitive domestic market unfavorable to the

consumers. As a result, consumer welfare has been beyond the interest of government.

Tariff rates for final consumption goods have been relatively high. They have been low for

the materials and intermediates that are most used for exports. The effective tariff rate

(2005) for imports for final consumption was 3.3 times as high as the average effective

tariff rate.

Table 2. Trend of tariff rate(unit : %)

Note 1 : Consumption Weighted Effective Tariff Rate(CWT) is the average value of the effective rate for importconsumption goods of weighted by CPI.

2 : The Average tariff rate is calculated by the rate of annual tariff revenue after subtracting duty returnsdivided by the total amount of imports.

The Korean market might not have been competitive until the mid 1980s when Korea

tried to begin trade liberalization. The direct effect of liberalization was found in the mar-

ket price due to the lowering of the tariff. Thus, lowering the tariff helps lessen the burden

on household budgets. The result of a correlation of the tariff rate with the CPI from 1985

to 2005 shows that economic liberalization decreases household expenditures.

It is observed that the prices of commodities banned previously from import according

to the policy of diversification of export markets, came down after trade liberalization.

These include communication products, etc. These commodities helped lessen the burden

on the household budget. Commodities still protected such as beef and some foodstuffs

still remained at such a high and increasing price that they were a heavy burden for

households.

Figure (2) shows the relation between the budget burden of households and reduction

of the tariff rate. The horizontal axis measures the reduction of the tariff rate and the verti-

cal axis measures the household budget burden.

It is observed that agricultural goods and tobacco, that had relatively small tariff re-

ductions, caused a high budget burden, but automobiles and coffee products, that saw a

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significantly lowered tariff rate, lessened the burden on the budget. Empirical results show

that, though the reduction of tariffs does not result in much increase in the quantity of im-

ports, it affects the prices significantly due to the ripple effect through price mechanisms.

This can be interpreted as leading the markets of related industries to be more competitive.

As a result, price levels in related industries are forced down.

Figure 2. Correlation between household budget burden and tariff reduction1)

Note that market liberalization is not always expected to lessen the household burdens

by bringing prices down. Market opening may be regarded as nothing but a necessary con-

dition for the optimization of consumer welfare. It should be supplemented by certain suffi-

cient conditions. To optimize welfare in the market, it should follow that domestic markets

be competitive, guaranteed by institutional arrangements such as, barrier-free entry and exit,

and a system of consumer information in order to consume rationally and safely in the

market.


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In other words, Market opening is necessary condition and the sufficient conditions are

the institutional arrangements needed to be competitive in the goods and services markets.

This recognition can empirically be confirmed by the tariff policy of the past 20

years. The weighted rate of tariff and CPI were calculated for 332 consumer goods. The

weighted average of tariff rate of the consumer goods decreased 2.8 times by 2005 from

the base year 1985. The CPI corresponding to the items is calculated at a 144.9% increase

on average in the same period.

Specifically, the tariff rate of the liberalized items such as general manufactural goods

is estimated at decreasing as many as 6.2 times with a 128.8% increase in the CPI.

Protected items such as agricultural goods and certain clothing are estimated to have in-

creased 180.2% on average. An interesting result is that uncompetitive items such as in

monopolistic or oligopolistic industries are estimated as increasing 163.6% on average,

even when the corresponding tariff rate decreased as many as 4.9 times as on average

from the base year. The results represent that liberalization of an economy does bring pri-

ces down, but the effects cannot reach the desired level of welfare without institutional

preparation for a competitive market.

Table 3. Tariff reduction and Household Budget burden by market property(unit : times by base year level(1985))

Note : The liberalization items are the goods of 8% and below of nominal tariff rate.The protection items are the goods of 13% and above of nominal tariff rate and the goods for quota.The price of wheat flour of monopoly and oligopoly items is increased as much as 321.5%.

. An Estimation of the Changes in Welfare due to the KORUS FTA

3.1. Total effect on consumer welfare of removing tariffs

Removing tariffs affects the interests of producers and consumers. The effects on the

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producers is different in different industries according to the degree of correlation with

overseas counterparts. The general public knows that the export-oriented industries will be

better off, but import-substitution industries will be worse off under the FTA regime, due

to the lowered earning rate of import substitution industries. This is true from the produc-

er's point of view, in that imports undermine the domestic market. However, it is not true

from the consumer's point of view. When earning rate is lowered, the consumer is better

off because most of the lost earning in these industries is transferred to consumers, not to

foreign suppliers.

By analogy it can be inferred that import-substitution industries have enjoyed higher

prices than world prices. It can be presumed that the difference between the higher domes-

tic price and the world price would benefit producers. The benefits generated by that dif-

ference come at the sacrifice of consumer welfare.

Thus, the argument that the KORUS FTA should be prohibited because it undermines

some firms' earning rate is irrational. Such vulnerable firms should exit as a part of re-

structuring since they have been indebted to consumer sacrifice for their position.

From this point of view, the transferred surplus from producer to consumer after the

FTA should not be regarded as a concession of producers but what consumers should en-

joy in the global market. In addition, government tariff revenue should restored from the

dead weight loss of trade barriers to be part of consumer welfare and trade created by the

FTA.

Tariff revenue contributes directly to consumer welfare, though not in such large

amounts. The amount is estimated at 142.5 billion won at most, which was 16.0% of US

imports in 2005.

Table 4. Changes in Consumer Surplus from Giving up Tariff Revenue

Note: The estimates are calculated from 265 USA consumer imports in 2005.1USD 1,013Won (market average exchange rate at the end of 2005)

The majority of the increase in consumer welfare can be calibrated from derivative in-


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come, such as producer surplus transferred and restored dead weight loss due to price re-

ductions under the FTA regime. The amounts of increase in economic gain for all urban

households are estimated at about 11.770 trillion won from the base year 2005. The esti-

mated amounts reach 15.8% of total expenditures for all imports with tariffs levied.

In sum, the FTA effects on consumer welfare can be revenue effects, redistribution ef-

fects, and trade creation.

Table 5. Changes in Consumer Surplus after KORUS FTAunit: %, (billion Won)

Note 1: The data are consumer goods from the USA levied import duties. The total of the data is 78.7514 trillionwon, which is estimated at 23.6% of the total consumption of all urban households in 2005.

2: The estimated number of all urban households is 14,505,245, which is calculated by the whole number ofhouseholds estimated by the Korean National Statistical Office minus the number of agricultural households.

3: It is assumed that domestic and US-produced consumer goods are perfectly substitutable.

These results are limited to the confines of the partial equilibrium approach, which ex-

clude the effects of other trade barriers such as quarantines and non-tariff barriers. In addi-

tion, the estimates are calibrated under the assumption that the Korean market is

competitive. The changes in welfare of trade provisions are not always positive, because if

certain trade provisions are inserted in an FTA, such as the regulation of intellectual prop-

erty rights for medicines, the market price will be higher than at present.

Therefore, whether or not welfare is improved depends on the institutional efforts to

make competitive markets and on the adaptability of each agency to the new

circumstances.

3.2. The Effects of Removing Tariffs on Specific Commodities

Fifteen specific commodities were aggregated as similar to all of the 332 commodities

imported from the US. In Table 6, the criterion for judging the size of the effect is defined

as a ratio (equal to the total effects divided by consumption expenditures) that is in-

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terpreted as a discount ratio for the expenditures. In the case of agriculture, for example,

we would pay 6771+382.1 before the FTA, but only 6771 after the FTA. Thus it is con-

cluded that the effect of the FTA on agriculture is an improvement of as much as 5.6%.

Even greater effects are shown in livestock and dairy, fruit and vegetables, and vehicles,

among all commodities that show relatively large effects.

The last column of Table 6 shows an interesting estimate to the gross effect of con-

sumer surplus on the specific commodity, defined as "the effects of FTA / Tariff revenue."

This means that the government gains tariff revenue under the tariff policy, but it gains a

consumer surplus as great as the total effects under the policy with the FTA. This looks

absurd in some sense, because the gross effects include the loss of part of the producer

surplus due to the FTA. However, if we think of the goal of the policy as reaching the

maximum level of consumer welfare, the gross effects of the consumer surplus can be used

as a measure of welfare change. This gross effect is shown in fisheries, furniture and ve-

hicles, and is relatively large. On the other hand, beverages, oranges, and coffee show a

relatively small gross effect.

Table 6. The Effects of Removing Tariffs by Specific Commodity(unit : billion won, %)


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Table 7. The Effects of Removing Tariffs by Specific Commodity(unit : billion won, times)

3.3. Effects of FTA on the service sector

It is not easy to estimate consumer welfare of services quantitatively. The quantitative

aspects of service trade used to be reported in the statistics of balance of payment. Even

though service import such as traveling, education and hospitalization abroad raises con-

sumer welfare directly, it has been regarded as outflow of nation wealth in Korea. In fact,

if we define that foreign currency is nation wealth like mercantilism, service import must

be a cause of outflow of wealth.

Now it is convinced that the eventual goal of trade is not to export but to enjoy the

goods and services imported that are relatively cheap or are not able to supply

domestically. In this sense, import services such as studying abroad and traveling overseas

can be regarded as a way of improving welfare and investing human capital.

Therefore, if we define service imports as a way of improving consumer welfare, it is

possible to analyze them quantitatively. That is, if we consume import services such as

studying abroad, then domestic resources saved can be used in other industries that may

have a comparative advantage.

Park, Ho Yong

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Table 8. Import and Export Services(unit : million USD)

Note : ( ) denotes year on year change (%)Source : Statistics of import and export services, 2007.1, Ministry of Commerce, Industry and Energy

Table 9. Import and Export Services in 2005(unit : Billion won)

Let us summarize the effects of the KORUS FTA on service sectors. The broadcast

industry is expected to be affected seriously due to the decreased broadcast quota. The film

and animated film quotas are expected to reduced to 20% from 25%, and to 30% from

35%, respectively. Thus, the reduction in income is expected to be as much as 20% and

14%, respectively. The reduction in income from the industry is expected to average about

3.7 billion won annually from 2008 to 2022.

However, this reduction in income does not necessarily mean a decrease in consumer

welfare. Consumers can enjoy as many foreign broadcasts as domestic production loses. If

the contents are valuable, they can provide the momentum to reform the domestic industry

to raise productivity.

The present oligopolistic market for communications services will become more com-

petitive after the FTA because of foreign entries. As a result, improvement in the variety

and quality of services is expected.

It is expected that sales will grow annually by 0.1% which contributes 0.01% to GDP

growth, also that foreign direct investment will be raised by 0.6% annually with technical


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developments. This surely leads to improved consumer welfare.

Table 10. Decrease in Annual Average Income due to the broadcast quota

reduction(unit : million won)

Note : The discount rate is 3% for calibrating real value. A.F denotes animations.Source : Analysis of the Economic Effects of the KORUS FTA, National Assembly Special Committee on the

KORUS FTA, 2007. 4. 30

Table 11. The Effect of the KORUS FTA on Communication Services(unit : %, 100 million won)

Note: Income Increase = Production Increase × Ratio of Communication Value Added (43.7%).Source: Analysis of Economic Effects of the KORUS FTA , National Assembly Special Committee on the

KORUS FTA, 2007. 4. 30

Table 12. Decrease in Income Caused by Extension of the Protection Period for

Intellectual Property Rights (real)(unit: million won)

Note: It is expected that the statistical significance is low because the numbers of related firms is small.Source: Analysis of Economic Effects on KORUS FTA , National Assembly Special Committee on the KORUS

FTA, 2007. 4. 30

Park, Ho Yong

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The effect of intellectual property rights is analyzed under the assumption that 20

years is added to the payment period. This prolongation results in an annual average in-

come reduction and price increase of 7.1 billion won from 2008 to 2027. The expected

price increase will undermine consumer welfare.

In the analysis of health & medical service industry, there are two divergent

viewpoints. One is the effect of a decrease in imported medicine prices due to removing

tariffs. The other is the effect of extended intellectual property rights likely to increase the

price of medicine. By removing the tariff, the prices of imported medicine and medicine

intermediates are expected to lessen household and medical insurance budgets. The rate of

decrease is estimated at 4% of 2005 price level.

Extended intellectual property rights are, however, expected to lead to greater con-

sumption of original medicines and to prevent the production of generic medicines. As a

result, consumers will be burdened for a long time with medicine expenditures. This causes

not only a lower level of welfare but also a decrease in production and employment of the

generic medicine industry.

Table 13. The Effect on the Medical Industry of the KORUS FTA

Note : IPR denotes 'intellectual property rights'.Source : Analysis of Economic effects on KORUS FTA , National Assembly Special Committee on the KORUS

FTA, 2007. 4. 30


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. Policy Measures for Improving Welfare under the FTA

4.1. Proliferation of Competitive Policies

consumers in the integrated marketplace. Korea has had a competitive market in consumer

goods since 1996 when the distribution market was legitimately liberalized. From that time,

foreign discount stores began to enter the domestic market. This contributed to an increase

in welfare due to the lower prices offered. Nonetheless, there are still price differences be-

tween the Korean and US markets.

Table 14. Price Differences between Korea and US

Note: Same commodities were surveyed by brand and specification.Source: Unpublished Report (2007.4) Korea Consumer Agency

In order to achieve the ultimate goal of the FTA, it is necessary that policy measures

be provided for the competitive market. To do this, several suggestions are:

(1) Promoting specialization of small firms and retail distribution.

(2) Developing business practices of large distribution firms.

(3) Enforcing supervision of illegal and unfair competition.

(4) Effective policy for the proliferation of FTAs by promoting competition.

(5) Supervising of monopolistic imports and enhancing parallel imports.

Park, Ho Yong

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4.2. Institutional Provisions for Consumer Safety in the Marketplace

The more the market is globalized, the more consumers are in the face of danger in

the consumption process. The government should provide institutional measures for the

safety of consumers. Several suggestions are:

(1) Consumer safety information exchange among countries.

(2) Enforcing a quarantine system for agricultural goods.

(3) Notifying and spreading consumer information to help in choosing alternatives,

such as listing the origin of products and listing GMO foodstuffs.

4.3. Provisions for Consumer Compensation for Losses

Generally, the method for settling consumer losses or consumer disputes differs be-

tween countries. The Korean system is public-oriented as the local government and the

Korea Consumer Agency addresses such business. The US system is more private-oriented

with groups like the Better Business Bureau (BBB) helping resolve consumer complaints

and promoting ethics in business. Some suggestions are:

(1) Provide effective methods for the cross-border consumer complaints and compensa-

tion for losses.

(2) Provide a cooperative system for Consumer Dispute Settlement.

. Conclusion and Future Directions

This paper contain some arguments might be vague. In the near future, it should be

rearranged for clarity. Is the purpose of the draft only to find out whether or not Korean

consumers benefit? If they do, how much do they enjoy? In order to get the answer, we

have to start empirical study to estimate the level of welfare.

It is acknowledged that there are many difficulties and shortcomings in estimates. The

methodology of import price elasticities, for example, has many weak points, such as parti-

al equilibrium, in the very short-run. The FTA should be fundamentally analyzed in the


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long run because the effects of an FTA appear after at least five years.

As empirical study is always confined to data, we are also faced with a lack of data

for analysis of the effects of the FTA. That is why the method of elasticity approach was

adopted, in that the changes in surplus can barely be calculated without an estimation of

the supply and demand curves. Therefore, the future directions of the study is unam-

biguous. We should find a way of studying to do away with the assumption of short-run

analysis as well as to provide data to estimate long-run demand and supply curves.

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agency, Policy Analysis 07-03.

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Implications, Seoul, KDI Press.


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This paper looked into the experience of the Philippines on trade liberalization and in-dustrialization covering the period 1981 to 2002. Since the first tariff reform program in1980, there has been continuing trade liberalization in the country as can be seen fromthe declining nominal tariff rates and effective protection rates for the manufacturing sec-tor over the years. Correspondingly, the economy has been found to be moving awayfrom dependency on agriculture, towards the non-agriculture sector-services and industry.This is evident on the declining share of agriculture in the economy in terms of employ-ment, output and exports.

Key words: industrialization, trade liberalization, structural transformation

I. Introduction

Industrialization is desired by most developing nations including the Philippines.

Following the experiences of advanced western countries, transition from a predom-

inantly-agriculture into an industry-based economy is deemed necessary to achieve overall

economic growth and development. In the Philippines, various policies have been im-

plemented to develop the country’s domestic industrial sector, but the most controversial

and still highly debated is trade liberalization.

Having witnessed the failure of the protectionist policies implemented in the 1950s to

1970s, it is important to revisit the performance and transformation of the Philippine econ-

omy after more than two decades of pursuing a liberal policy on international trade. With

this in mind, this paper aims to provide an historical overview of the trade liberalization

policy of the Philippines, and assess the structural transformation of the economy covering

the period 1980 to 2002. Although descriptive at best, the discussion hopes to provide an

Jaimie Kim E. Bayani

- 156 -

insight as to whether trade-related strategies that aim to promote industrialization in the

country, specifically the tariff reforms, are consistent with the increasing contribution of the

non-agricultural sectors to the output and performance of the economy.

. Historical Account of Trade Policies in the Philippines

In the 1950s, a protectionist policy was adopted by the Philippines under the import

substitution industrialization framework. The strategy was originally meant to address the

balance of payment crisis in 1949, but evolved to become the primary instrument to pursue

industrialization in the country (Power and Sicat, 1971). In particular, protection was ac-

corded to new industries through various regulations. Importation of final products was re-

stricted through foreign exchange regulation, but importation of inputs such as capital

goods, intermediate goods and raw materials were supported and encouraged. For a while,

this stimulated the sudden expansion of the manufacturing sector, specifically those con-

cerned with the processing and finishing of imported semi-manufactures directed for sale in

the domestic market (Balassa, 1971).

This policy was then followed by “decontrol and devaluation” in the 1960s. Import

controls were abolished for majority of the commodities, while the Philippine peso was de-

valued by almost 100% from Php2.00 to Php3.90 to a dollar. However, a highly protective

tariff scheme replaced import controls, which failed to correct the biases and distortions in

the domestic market (Power and Sicat, 1971). In 1970, a shift towards a more out-

ward-oriented policy was made through the enactment of the Export Incentives Act.

Through this legislation, the government offered fiscal incentives and financial and infra-

structure support to selected export producers, which benefited mostly large capital-in-

tensive enterprises. Incentives were in the form of tax exemptions, development of export

processing zones, marketing assistance and financial assistance. During this period, how-

ever, no reforms were undertaken to directly address the problem of high tariffs, which

was plaguing the export sector of the country.

Realizing the constraint that a protectionist policy imposes in the economy, the

Philippines embarked on trade policy reforms starting in the 1980s, with the aim of im-

proving the competitiveness of the country’s domestic industrial sector. Since then, four

Trade Liberalization and Industrialization in the Philippines (1981-2002)

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major policies effecting the liberalization of trade in the Philippines have been initiated.

These include the country’s accession to the World Trade Organization, participation in the

ASEAN Trading Bloc, adoption of a floating exchange rate policy, and the implementation

of the Tariff Reform Program (WTO, 1999). This paper focuses on the initiatives con-

nected with the latter.

The Tariff Reform Program (TRP) was primarily undertaken to correct market in-

efficiencies and distortions arising from the highly protective tariff structures evident during

the ISI period. All in all, four tariff reform programs have been carried out from 1980 to

2002. The focus of the First Tariff Reform Program (1981 to 1985) was the removal and

the reduction of tariffs which were deemed as excessive and irrelevant. It was the intent of

TRP-I to strengthen inter-industry and inter-sectoral linkages in the economy (Philippine

Tariff Commission).

In 1991, the second tariff reform program was carried out through the issuance of

Executive Order No (EO) 470. The EO covered 80% of the Tariff and Customs Code.

Through this reform, the number of lines in the Harmonized Customs Classification Code

(HCCC) was reduced from 6,193 tariff lines to 5,561 tariff lines, therefore simplifying cus-

toms administration. The tariff restructuring also reduced the bias against agriculture rela-

tive to manufacturing by reducing effective protection rates for manufacturing industries

which where heavily protected during the ISI regime (Philippine Tariff Commission).

E.O. 470 was eventually overtaken by the promulgation of the Third Tariff Reform

Program with the issuance of Executive Order 189 in 1994. The aim of TRP-III was to

further liberalize external trade by reducing the level and spread of tariff rates toward a

uniform level of protection across all sectors. Major issuances during this period include 1)

EO 264, which set the uniform tariff rate of 5% by 2004, 2) E.O. 288 which set in place

the tariff reductions on non-sensitive agricultural products that were not covered by quanti-

tative restrictions, 3) EO 313 which provided for an interim tariff protection to sensitive

agricultural products, and 4) EO 461 which provided a tariff of 3% for imported crude oil

and refined petroleum products (Philippine Tariff Commission).

After reviewing the impact of the pace of tariff reductions on the competitiveness of

the domestic industries, the fourth Tariff Reform Program was initiated in 1999. TRP IV

sought to smoothen the pace of tariff reduction set during the third TRP. This was im-

plemented through E.O 465, which provided for the recalibration of tariffs from the pre-


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vious 3%, 10%, 20%, and 30% to 5%, 7%, 10%, 15%, 20%, 25%, and 30%, allowing for

greater flexibility. The industries which benefited from this recalibration are: copper, fertil-

izer, motor vehicle parts and components, iron and steel products, jewelry, electronics, ce-

ramics, marble products, marine products, processed foods, petrochemical and oleochemical

products, leather goods, footwear, lumber, particle board, fiberboard, veneer and plywood,

textiles and garments, basketwork, seaweeds and carageenan, holiday décor, furniture and

fresh fruits. Eventually, EO 486 was promulgated to allow for the recalibration of tariff

schedules for products not covered by EO 465. Afterwards, E.O. 334 was issued to provide

a tariff schedule for all products covering the period 2001 to 2004. By 2004, tariff band

was targeted to be within 0-5% except for a limited range of sensitive agricultural products

including rice and corn (Philippine Tariff Commission).

. Theoretical Framework

The main justification for the adoption of import substitution industrialization in the

Philippines lies on the infant industry argument. The theory suggests that developing

economies have a potential comparative advantage in manufacturing, but cannot initially

compete with the well-established manufacturing sector in the developed countries because

of the existence of market failures (e.g. imperfect capital markets). Thus, some form of

protection is necessary to allow domestic industries to flourish and strengthen until it is

able to compete in the international market. However, empirical studies have shown that

protectionist polices do not ensure the sustained growth and performance of the economy.

For instance, Balassa (1971) examined the structure of protection of 7 developing

countries which includes the Philippines, Mexico, Brazil, Malaya, Pakistan, Chile, and

Norway after the World War II period. He found out that the countries which adopted high

protection rates initially experienced rapid expansion of manufacturing during the easy

stage of import substitution (when imports of nondurable consumer goods are replaced by

domestic production) but growth and expansion of the manufacturing sector slacked during

the difficult stage (non-durable consumer goods and inputs). As a result, economic growth

slowed down as a result of both the slowdown in the production and exports of primary

commodities and manufactured goods.


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The study conducted by Power and Sicat (1971) had the same conclusion as Balassa’s.

In the early period of import substitution industrialization in the Philippines, the manu-

facturing sector led the growth of the economy. However, in the latter stage, the manu-

facturing sector started to lag behind, with growth falling below 5% in the 1960s from the

high growth of 12% it has experienced during the 50s. The primary reason for this, they

cited, was because it became difficult for the domestic industries to establish backward

linkages and integrate with intermediate and capital markets.

Another study by Balassa (1981) analyzed the experiences of 11 semi-industrial devel-

oping economies on the implementation of various development strategies (including trade

policies) and its impact on the resource allocation, international trade and economic

growth. The countries were classified into four groups. The first group consisted of

far-eastern countries which shied away from employing policies that promote bias against

exports and primary activities. The second group includes Latin American countries which

pursued the elimination/reduction of existing biases against exports and adopted export

incentives. The third group consist Israel and Yugoslavia, countries which initially em-

ployed export development policies but failed to sustain and continue their programs.

Lastly, the fourth group includes India and Chile, countries which followed policies of im-

port substitution and entailed a considerable degree of bias against exports. It was found

out that the first group had the best export performance, while the second group experi-

enced substantial improvements in export performance upon implementation of reforms. On

the other hand, the third group experienced decline in export performance, while the fourth

group had the poorest performance among all the countries.

Because of strong empirical evidence, trade optimist theories have replaced protection-

ist policies as a tool to promote industrialization in developing countries. In particular,

these theories contend that economies that pursue protective policies will not only cause

fragmentation of production internationally, but will also cause the fragmentation of their

domestic industries thereby hindering the attainment of economies of scale. This fragmenta-

tion is caused by the artificial profits generated due to protection, which provides artificial

incentive causing the entry of too many firms. Opening up domestic industries to interna-

tional competition, on the other hand, promotes efficiency and directs resources to its most

productive use (that is, where the country has comparative advantage), thereby maximizing

national welfare and national income (Krugman and Obstfeld, 2001).


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Balassa (1981) identified the major costs of protection into two categories: the static

cost of protection and the dynamic cost of protection. Under the “static cost of protection”,

it is argued that distortions in the relative prices of inputs and outputs as a result of pro-

tection, lead to inefficiencies in resource allocation. Thus, inter-industry and intra-industry

specialization following comparative advantage is not realized and the economy is not able

to maximize its welfare. The “dynamic cost of protection” contends that there are econom-

ic costs in the form of opportunity foregone in lost productivity improvements. This is re-

alized in two forms: first, since protection creates bias towards the domestic market and

the size of the domestic market is relatively small, employment of large-scale production

methods is therefore not feasible; second, technical change is hindered by the lack of com-

petition, therefore lowering productivity levels and outputs. Without competition, protected

firms become complacent in adapting cost efficient technologies and best practices.

Other arguments for free trade are the vent for surplus theory (Myint, 1958) and the

wage differential theory (Singer, 1970). Myint argued that free trade relaxes the constraint

of small market size, so that the otherwise idle resources, if there were no free trade, can

be put to productive uses. Singer, on the other hand, attributed the increasing dualism in

the economy to protectionist policies. The theory asserts that as a result of protection,

higher profits in the manufacturing sector increases discrepancy between wages offered by

the manufacturing sector vis-à-vis the agriculture sector. As such, potential expansion in

employment in the manufacturing sector will not be realized.

Japan’s experience supports the argument for free trade. The country’s experience in

trade liberalization in the 1960s showed that the country’s average annual growth rates of

imports, exports, investments, savings, employment and income have grown significantly

with the reduction of protection during this period (Ho, 1972). In addition, empirical inves-

tigations conducted in the Philippines also show that trade liberalization improves effi-

ciency and results to better resource allocation (Tan, 1997; Pineda, 1996).

. Analytical Framework

Industrialization is the transition of the economy from heavy dependence on agri-

culture towards the modern secondary sector, manufacturing or industry. Theories suggest


- 161 -

that there is a link between trade liberalization and industrialization. Trade openness allows

the entry of competition from the international market, thus acting as a stimulus for the

domestic economy to move towards the production of where it has comparative advantage.

This in turn, will result to higher productivity and consequently higher output for the in-

dustry sector thereby increasing its contribution to the total output of the economy, as well

as increasing share in the total employment of the country.

Along this line of argument, this study examined whether the reduction in nominal

tariff and effective protection rates over time coincided with the structural transformation in

the Philippine economy. The paper delved only on the analysis of trends and patterns, such

that the analysis is limited in so far as establishing causal links and relationships. The vari-

ables used for explaining the trend in trade liberalization are the average nominal tariff and

effective protection rates. The indicators used for the structural transformation of the econ-

omy are the composition of output, employment, export, and imports. Specifically, the

trends of the following variables were examined covering the period 1981 to 2002:

a. Percentage change in average nominal tariff.

b. Percentage change in the gross value added (GVA) of agriculture, manufacturing

and services.

c. Change in the share of agriculture vis-à-vis manufacturing and services to the total

GDP of the Philippines.

d. Percentage change in the employment levels of the agriculture, manufacturing and

the service sector.

e. Change in the share of agriculture, manufacturing and service sector to total

employment.

f. Change in the share of agriculture vis-à-vis manufacturing in total exports.

g. Percentage change in the imports of capital and raw materials/intermediate goods.

. Methodology and Data Sources

Secondary data was utilized for this paper. Data on Gross Value Added (GVA), em-

ployment, exports, and imports were sourced from the Philippine Statistical Yearbook pub-

lished by the National Statistics Office, while time-series data on average nominal tariff


- 162 -

per sector was obtained from the Philippine Tariff Commission. Information about effective

protection rates was referred from existing studies conducted by Power and Sicat and the

Philippine Tariff Commission.

The study covers the period 1981 to 2001 coinciding with the implementation of the

four Tariff Reform Programs. Analysis is subdivided into TRP I covering the period

1981-1990, TRP II covering the period 1991-1994, TRP III covering the period 1995-1998,

and TRP IV covering the period 1999-2001. Simple analysis of trends was conducted, sup-

plemented by graphs and charts and correlation analysis.


6.1. Protection Structure

The extent of trade liberalization in the country can be derived from changes in the

nominal tariff and the effective protection rates. The time series analysis conducted in this

paper, however, covers only nominal tariffs even though it is recognized that effective pro-

tection rate is a more comprehensive indicator of liberalization. Nonetheless, nominal tariffs

can provide an indicative picture of the direction of trade policy in the country.

Figure 1 shows the trend in the overall nominal tariff, as well as that for agriculture

and manufactures separately. A declining trend in the nominal tariff for both sectors is ob-

served, while the nominal protection to manufactures is consistently lower than for

agriculture. Pre-TRP nominal tariffs averaged about 64% for agriculture and 40% for man-

ufactures, but by the end of the first TRP, nominal tariffs have declined to 35% and 27%,

for agriculture and manufactures, respectively. In the second TRP, nominal tariffs were re-

duced more abruptly for manufactures as compared to agricultural products. Specifically, by

the end of TRP II, nominal tariffs fell to 33% for agriculture, and 18% for manufactures.

During the third TRP, tariffs were further reduced to 19% for agricultural products and

10% for manufactures. And finally, by 2002 in the fourth TRP, agriculture nominal tariff

was reduced to 12%, while that for manufactures was cut to 5%.

Based on effective protection rates, it was found out that the manufacturing sector is

actually more protected than the agriculture sector from the first to the third tariff reform


- 163 -

program, but the trend reversed during the fourth TRP. Prior the tariff reform, in 1965, ef-

fective protection rate was estimated to be 17% for agriculture, while manufactures had an

EPR of 51% (Power and Sicat, 1971). During TRP I, the average EPR for agricultural

products declined to only 3%, while that for manufactures declined to 36%. By 2001, dur-

ing TRP IV, agriculture’s effective protection was increased to about 16%, while the man-

ufacturing sector was further liberalized with the average EPR declining to about 14%

(Philippine Tariff Commission).

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

PRE-TRP TRP I TRP II TRP III TRP IV

Agriculture Manufactures Overall

Figure 1. Average Nominal Tariff (by Trade Regime and by Sector)

6.2. Performance of the Non-Agricultural Sectors

Because of the reduction in tariffs, the domestic economy is more open to foreign

competition which is expected to entail improvement and correction of both production and

consumption distortions. Such liberalization will direct productive resources to where the

country has comparative advantage, therefore resulting to specialization, increased pro-

ductivity, and consequently higher output for the economy. Results of the simple correla-


- 164 -

tion analysis supports this hypothesis, showing a strong negative linear relationship between

nominal tariff and the gross value added of the industry sector, and the non-agricultural

sectors combined (industry and services) (Table 1).

Table 1. Correlation Analysis between Nominal Tariffs and Real GVA in the

Non-Agricultural Sectors

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 45.00

Average Nominal Tariff in Manufactures

GVA

in In

dust

ry S

ecto

r (Ph

p M

)

Figure 2. Scatter plot diagram of Nominal Tariff vis-? vis Real GVA in Industry

Looking at the trends in the real gross value added in the different sectors can provide a

good glimpse of the performance of the economy as it moves from protection towards trade

liberalization. One gleaming realization from this analysis is the fact that expansion in the


- 165 -

economy was attributed to the growth in the services sector, more than the growth in the in-

dustrial sector. However, such growth in the services sector is usually expected from an econ-

omy that is moving from a traditional agrarian society to a more modern and industrial one.

From 1980 to 2002, the Real Gross Value Added (GVA) of the industry sector has

been undergoing periods of boom and busts, although a generally increasing trend can be

observed from the data. In contrast, the GVA of the agriculture sector has been steadily in-

creasing although at lower rates, while the service sector has been achieving growth sur-

passing both agriculture and industry. In fact, by the mid-period of TRP I, the service sec-

tor has already overtaken the industry sector in terms of real GVA. Looking closely at the

trends per tariff reform program, the following observations were made:

0

100,000

200,000

300,000

400,000

500,000

600,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Pre-TRP

TRP I TRP II TRP III TRP IV

Agriculture Industry Services

Figure 3. Gross Value Added at Constant 1985 Prices, in million pesos

(1980-2002)

The growth of the industry sector has been very volatile throughout the four tariff re-

form programs. In TRP I, growth in the real GVA fluctuated within the range of -15% to

8%, while during TRP II growth was in between -3% to 6%. In TRP III, the minimum

was -2% and the maximum growth was 7%, and lastly during TRP IV, the growth range

was from 1% to 7%. Although it is expected that trade liberalization will entail an im-


- 166 -

provement in productivity and therefore an increase in output of the industry sector, it can

not be denied that political dimensions and other external factors had a very large effect on

industry sector’s performance. A case in point is the political crisis in the mid-1980s and

the Asian Financial Crisis in 1998, which also coincided with the contraction of the real

GVA of the industry sector. The growth of the services sector, on the other hand, has been

robust averaging 3.3% per year during the first TRP, 2.2% during the second TRP, 5.1%

in the third TRP and 4.5% during the fourth TRP.

6.3. Structural Transformation of the Philippine Economy

To assess the status of industrialization or structural transformation, it is important to

analyze the contributions or shares of the different sectors to total output over time.

Historically, the contribution of the agriculture sector has always been lower than the other

sectors of the economy in terms of GVA. Over the years, it is observed that the share of

agriculture to total output has been declining from about 24% in 1980 to only about 20% in

2002. It is quite surprising that the share of the industry sector is also declining which may

be attributed to the very vibrant growth in the service sector over the years. Nonetheless, it

is important to note that the contribution of non-agriculture sector to real GDP increased to

80%, leaving the share of the agriculture sector to only about 20 % in 2002.

Another revealing indicator of structural transformation is the change in the employ-

ment composition of the country. Figure 4 shows that the share of employment in agri-

culture has been steadily declining through the years, from 50% in 1980 to about 36% in

2002. The industry sector’s share has been fairly constant, while the service sector is again

absorbing bulk of the total labor force over time (from 39% during the culmination of the

TRP to about 50% by the end of TRP IV). Growth in the agriculture sector’s employment

is erratic, with periods of improvements and decline. The industry sector is steadily in-

creasing but in modest amounts, while the service sector is at the forefront in terms of

growth, eventually overtaking the agriculture sector in total employment by mid-1990s.

In the past, agriculture provided the major contribution to the total employment of the

country. The industry sector is looked upon as the main channel to which excess labor

from agriculture may be absorbed. The underlying principle is that comparative advantage

and specialization can give way to the expansion of efficient industries. As a consequence,


- 167 -

more jobs can be made available to meet the increasing requirements of production.

However, data shows that the service sector has overshadowed the industry sector in this

aspect. One explanation is that expansion in the industry sector was hindered by political

and economic crises, in spite of trade policy reforms. Thus the sector’s capability to gen-

erate new jobs has also been limited. Another possible reason is that even if desired ex-

pansion occurred in some sub-sectors of the industry, it may have been the case that do-

mestic firms may have opted to employ labor saving technologies to be able to maintain

its competitive position in the world market.

Looking closely, on the employment trends per trade regime, we have the following

observations:

During TRP I, annual employment of the agriculture sector was 9.7 million (M), while

the non-agriculture sector had an average annual employment of 2.9 M and 7.4M for in-

dustry and service sector, respectively. Average growth was highest for service (5.18% per

year) followed by industry (3.02%), while the lowest was for the agriculture sector at 2%.

By the end of TRP I, agriculture share to total employment already decreased to 47%.

0%10%20%30%40%50%60%70%80%90%

100%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Pre-TRP



Figure 4. Percentage Share of Agriculture, Industry and Services to the Real GDP

of the Philippines


- 168 -

0%10%20%30%40%50%60%70%80%90%

100%19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

02

Pre-TRP



Figure 5. Employment share of Agriculture, Industry and Services

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Pre-TRP



Figure 6. Total Employment of Agriculture, Industry and Services, in ? 00


- 169 -

During the second TRP, annual employment of agriculture sector increased to about

10.9 M, while the industry sector and service sector increased to 3.9 M and 9.4 M,

respectively. Compared with the first TRP, the highest rate of change was greatest for the

service sector at 33%, followed by industry at 31%, and last by agriculture at 12%.

Agriculture contribution vis-à-vis industry and services declined to 45%.

During TRP III, agriculture employment was 11.3M per year, while the industry and

service sectors’ employment averaged 4.4 M and 11.6M, respectively. Again, the service

sector led the growth in employment, followed by industry and last by agriculture. The

corresponding decline in the percentage share of the agriculture sector to total employment

from the second TRP was about 3%.

During TRP IV, average annual employment in the agriculture sector decreased to

11.2 M, while industry employment increased to 4.6M, and the service sector increased to

13.9 M. The percentage share of the agriculture sector to total employment declined to

38% by 2001.

Apart from the structural transformation in output and employment, analyzing the

trend in export composition can give insight as to the resulting competitiveness of the

Philippines brought about by liberalization. For agriculture, export value has been stagnant

at around US$ 1.6B, while the manufacturing sector displayed an increasing trend from on-

ly US$3.4B in 1981 to as much as US$29B in 2001. From 1980-2001, average growth of

agriculture export was -1% per year, while exports from the industry sector grew at a rate

of 12% per year. The percentage contribution of agriculture sector to total exports declined

to as low as 5% per year during the fourth Tariff Reform Program, while manufactures in-

creased to 95%. Per tariff reform program, the export performance of the country is as fol-

lows:

During TRP I, average annual export of the agricultural sector was US$1.6B, while

the industry sector exported an average of US$4.3 B per year. Average growth of export

was -7% for agriculture, while industry exports increased at an average rate of 8% per

year. The share of agriculture to total exports was roughly 29% per year during the period.

During the second TRP, average annual export of the agriculture sector declined to

US$1.5B, while average export of industry sector expanded to about US$9.5B per year.

The percentage change from the last TRP was -4.11% for agriculture and 116% for

industry. The percentage share of agriculture declined to only 15%, while industry in


- 170 -

0%10%20%30%40%50%60%70%80%90%

100%19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

01


Agriculture Industry

Figure 7. Contribution of Agriculture and Industry to Total Philippine Exports

05,000

10,00015,00020,00025,00030,00035,00040,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001


Agriculture Industry

Figure 8. Philippine Exports by Major Commodity Groups, in US$ million

creased to 85%. During the third TRP, the export performance of the agriculture sector im-

proved slightly to US$1.9B per year. However, the industry sector more than doubled its


- 171 -

performance with an average export of US$20.6B per year such that the contribution of in-

dustry to total exports reached 91%. During the period covered by TRP IV, agriculture ex-

port again declined to US$1.6B, while the industry sector increased to US$32.1B per year.

During this period, relative share of agriculture further declined to 5% while industry share

grew to 95%

Trends in the importation of capital and raw materials also yield an interesting de-

piction of the level of activity in the manufacturing sector. Annual import of capital goods

showed an increasing trend since 1980, from US$1.9B to about US$12.2B in 2000. Trends

in raw materials and intermediate inputs importation, on the other hand, were erratic but

also followed an increasing trend. Average growth of imports was 12% per year for capital

goods and 9% per year for raw materials and intermediate goods. During TRP I, average

annual imports was US$B1.5B and US$4.8B per year for capital goods and raw materi-

als/intermediate goods, respectively. Importation increased during TRP II reaching US$4.9B

for capital goods, and US$ 9.5B for raw materials/intermediate goods. During TRP III,

average annual import further increased to US$11.3B for capital goods, and US$15.8B for

raw materials. During TRP IV, imports increased for capital goods at US$12B per year,

while average importation of raw materials/intermediate goods decreased to about

US$15.5B per annum.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

TRP I TRP II TRP III TRPIV

Total Capital Goods Raw Materials & Intermediate Goods

Figure 9. Imports of Capital Goods, Raw Materials and Intermediate Goods, in

US$ million


- 172 -

. Summary and Conclusion

After implementing protectionist policies for more than two decades, the Philippines

underwent trade liberalization with the goal of attaining economic development and

industrialization. For the industry sector, average nominal tariffs as well as the effective

protection rates have been found to be declining over the years. This indicates that trade is

indeed continuously being liberalized in the country.

Trade theories suggest that opening up domestic firms to foreign competition will re-

sult to the efficient allocation of scarce resources, thereby resulting to specialization, attain-

ment of economies of scale and expansion of output. This outward oriented policy vies on

the export sector to lead the growth of the economy. Along this line of reasoning, it is ex-

pected that the reduction of effective protection rates will coincide with the expansion and

growth of the industry sector as well as the increase in the industry’s exports. This is tar-

geted to be the engine of industrialization in the economy. As a result, the economy’s de-

pendence on agriculture will decline while expanding the contribution of non-agricultural

sectors in the economy.

The performance of the industry sector has been erratic but follows a generally in-

creasing trend while the country is undergoing tariff reforms. Specifically, reduction of tar-

iff levels and effective protection rates coincided with an increase in real GVA and em-

ployment of the industry sector. This is further validated by the increasing imports of capi-

tal goods and raw materials over the years. However, there were also periods of con-

traction which can be attributed to external factors, such as the political crisis in the 1980s

and the Asian Financial crisis in the 1990s. One can conclude from this observation that

trade liberalization is a necessary but not a sufficient condition for growth and expansion

in the industrial sector of the economy. Improvement in the export performance of the in-

dustry sector, on the other hand, was the most substantial indicator verifying the hypothesis

that opening up to foreign competition will entail a shift towards industries where the

country has comparative advantage. The tariff reform program has significantly reduced the

bias against export-oriented industries, therefore providing an environment for which the

export sector was allowed to flourish. This is especially crucial since most of the countries

that attained high economic growths and were successful in their industrialization policies

had high rates of growth in the export sector.


- 173 -

This study also examined the structural transformation of the Philippine economy.

Data shows that economic activities have been shifting from agriculture to the non-agri-

culture sectors over time. From the beginning of the first tariff reform until the fourth tar-

iff reform, the contribution of agriculture to the real GDP of the economy decreased from

24% in 1980 to 20% in 2002. Bulk of the shift was towards the service sector, while the

contribution of the industry sector has been slightly declining over time. The employment

composition also supports this findings, from a total employment share of 52% in 1980, la-

bor employed in agriculture declined to only 36% of the total employed labor force by

2002. Industry share was fairly constant at 15%, while the service sector absorbed bulk of

the labor force from 30% in 1980 to 50% in 2002. In terms of export, starting with almost

equal shares in 1980, industry has then consistently outperformed agriculture capturing 95%

of total exports by 2002.

From the findings above, one can conclude that trade liberalization is consistent with

the improving performance of the non-agricultural sectors from 1980 to 2002. Moreover,

structural transformation is evident with the increasing share of the non-agriculture sectors

on the GDP, total employment and exports of the country. This transformation, however, is

directed towards the service sector of the economy.

References

Balassa, Bela and Associates(1982). Development Strategies in Semi-Industrial Economies.

John Hopkins University Press, London.

Balassa, Bela and Associates(1971). Structure of Protection in Developing Economies. John

Hopkins University Press, London.

Bautista, R. and G. Tecson(2003). International Dimensions. The Philippine Economy:

Development, Policies and Challenges. Ateneo de Manila University Press, Manila.

Hla, Myint(1958). The Classical Theory of International Trade and the Underdeveloped

Countries. The Economic Journal, June 1958.

Ho, Alfred K.(1972). Japan’s Trade Liberalization in the 1960s. Michigan.

Krugman, P. and M. Obstfeld(2000). International Economics, Theory and Policy. Addison-

Wesley Publishing Company.


- 174 -

Pineda, Virginia S.(1996). Effects of the Uniform 5% Tariff on the Manufacturing Sector.

National Tariff Commission, Philippines.

Power, J.H. and Gerardo P. Sicat(1971). The Philippines Industrialization and Trade

Policies. Oxford University Press, London.

Sicat, Gerardo(1983). Economics. Manila, Philippines.

Todaro, Michael(2000). Economic Development. New York University, New York.


- 175 -

Appendix 1. Average Nominal Tariff, Philippines (1970-2002)


- 176 -

Appendix 2. Gross Value Added at Constant 1985 Prices, Philippines (1980-2001)


- 177 -

Appendix 3. Employment Statistics, Philippines (1980-2001)


- 178 -

Appendix 4. Philippine Exports by Major Commodity Groups, (1980-2001)


- 179 -

Appendix 5. Imports of Capital Goods, Raw Materials and Intermediate Goods

Philippines (1980-2000)


- 181 -

A rising trend in financial conglomeration has been noted in the last decade. This hasimplications for both financial sector regulation and the corporate governance of the fi-nancial sector. Specifically, the emergence of financial conglomerates has raised the is-sues of consolidated supervision and the structure of the institution in charge of super-vising the financial conglomerates.

Key words: financial conglomerates, corporate governance, financial supervision

I. Introduction

In 1999, the United States passed a landmark legislation allowing bank affiliations

with all sorts of other financial organizations and vice versa. The Gramm-Leach-Bliley

Financial Modernization Act outlined a new framework for affiliations among commercial

banks, insurance companies and securities firms. Thus, it finally joined many countries in

allowing the operation of financial conglomerates. In Asia, financial conglomerates in-

creased from 10 in 1995 to 33 in 2000; with total assets reaching US$1,221 billion. The

growing linkages among the different segments of the financial sector, the trend towards

deregulation, reduced information costs from advancements in technology and globalization

are cited as the contributory factors (De Nicoló et al., 2003; IMF, 2004).

The paper will first define financial conglomerates, identifying and analyzing the fac-

tors that contributed to the creation of financial conglomerates among several Asian

countries. The principles of corporate governance will then be briefly presented before dis-

cussing the arguments for a new form of financial supervision.

Amelia L. Bello

- 182 -

. Financial Conglomeration1)

Financial services are traditionally classified into three major areas: banking, insurance

and securities (Milo, 2002). When the production or distribution of a financial service tra-

ditionally associated with any of the three major financial areas is carried out by a service

provider from another area, we have financial services integration or financial convergence.

Terms that connote financial convergence are bancassurance, universal banking and finan-

cial conglomerates (Skipper, 2000 as cited in Milo, 2002).

There are three alternative structures for commercial banks undertaking nontraditional

activities (Shull and White, 1998 as cited in Milo 2002). The first structure consolidates

within the same corporate unit as the bank the nontraditional activity. The second alter-

native structure, the holding company affiliate, has the bank placed in one subsidiary of the

holding company and the nontraditional activity in another subsidiary. The third structure,

the operating subsidiary involves a subsidiary of the bank performing nontraditional activ-

ities (See Figure 1.).

Figure 1. Alternative bank structures for delivering integrated financial services

A bank may be considered as a pure universal bank when it manufactures and distrib-

utes all financial services within a single corporate structure. 2) Thus, a universal bank is a

Financial Conglomeration and Integrated Supervision

- 183 -

financial conglomerate since firms under common control provide services in more than

one financial area. Bancassurance, on the other hand, is a marketing arrangement wherein

banks sell insurance products or insurance companies sell bank products.

. Reasons for Pursuing Financial Conglomeration3)

Financial convergence has been a defining feature of the financial landscape in many

countries. The factors that have contributed to this trend are as follows: regulatory arbi-

trage, the liberalization and deregulation of the financial sector, the greater use of engineer-

ing techniques and models, significant advances in information technology and tele-

communications, as well as changing consumer preferences.

The blurring of product lines as a result of financial innovation has led to financial

services integration.

Products such as life insurance combine elements of insurance and securities while el-

ements of investment and commercial banking may be found in the securitization of banks’

asset cash flows. Likewise, money market mutual funds offered by investment banking

firms can be considered demand deposit accounts. This trend towards product convergence

will drive and has driven commercial banks, securities firms and insurance companies to-

ward operational integration (Skipper, 2000 as cited by Milo, 2002).

The decision to consolidate may also be traced to the financial institution’s goal of

profit maximization. In turn, profit maximization can be effected by a host of factors, such

as economies of scale and scope, lower entry costs into new markets and increased market

size (Group of Ten, 2001). The desire for first-mover advantages coupled with the quest

for market power and supra-normal profits could drive firms towards conglomeration.

The production and consumption of financial services may also lead to economies of

scale and scope. (Saunders and Walter, 1994 as cited in Claessens, 2002). Elements com-

mon to the various financial products can give rise to cost advantages such as marketing

economies in the delivery of different services; gains from the concentration of risk man-

Amelia L. Bello

- 184 -

agement, administrative functions and integrated product development as well as better in-

formation access and sharing of information across different product groups. On the other

hand, economies of scope that may be derived from the consumption side include the po-

tential for lower search, information, monitoring and transaction cost; better deals because

of increased leverage and lower product prices in a more competitive environment

(Claessens, 2002).

Because of benefits arising from diversification, financial conglomerates may be more

stable than a specialized financial institution. Since profits from providing different finan-

cial services may not be very highly correlated, there may be diversification benefits from

allowing broader services (Kwan and Laderman, 1999 as cited by Claessens, 2002. An in-

tegrated financial institution is less affected by disintermediation (when firms bypass banks

and raise money directly from public markets) because the decline in the lending business

can be offset by an increase in the underwriting business and other non-interest (fee)

business.

A broader set of financial products allows for lower information and monitoring costs.

In addition, the information derived from managing a basic bank account can be used in

the supply of other financial services. Similarly, when a bank sells insurance products, it

gains information useful for its lending business. Empirical studies have confirmed that the

close bank-firm relationship associated with integrated banking can be an important source

of benefits to firms in terms of cost and availability of funding (Berger and Udell, 1995

and Vander Vennet, 2002 as cited in Claessens, 2002).

Environmental factors that may drive conglomeration include the following: improve-

ments in information technology, deregulation and globalization. Technological improve-

ments have lowered telecommunications and information costs and have enabled financial

intermediaries to offer a larger variety of products to a larger market over wider geo-

graphic areas. Innovations in self-delivery like ATMs, telephone-based transactions and

Web-enabled services through the internet have influenced consumer preferences. The re-

moval of regulatory barriers have allowed the increase in mergers and acquisition (M&A)

activities while globalization has encouraged financial service providers to merge with or

acquire local financial service providers to facilitate adaptation to local financial systems

and practices (Bank of Japan, 2005). Deregulation and liberalization policies have induced

greater competition and tighter profit margins, forcing banks and other financial inter-


- 185 -

mediaries to seek new business models and other sources of income.

Banking crises and the privatization of state-owned banks have also been identified as

contributory factors that have led to the increase in consolidation in the financial sector of

emerging markets (IMF, 2001). This is particularly evident in the Asian region where most

financial consolidations were led primarily by government banks.

Traditional barriers between financial sectors are disappearing in Asia, consistent with

worldwide trends. Reforms were undertaken in the region especially in the 1990s while

government-led consolidations assisted in blurring the boundaries between financial sectors.

In Thailand, banking licenses were offered by the government as an incentive for non-bank

financial institutions (NBFIs) to merge. The merger of Bank of the Philippine Islands and

Ayala Insurance is an excellent example of the full integration between a bank and in-

surance group. In Korea, a number of merchant banks have merged with commercial banks

while in Malaysia, major mergers included banks and NBFIs.

Palmer (2002) as cited by Milo (2002) believes that in Asia, there is significant scope

for convergence. Universal banking models incorporating commercial banking, insurance

and securities services already exist at the same time that the remaining restrictions on fi-

nancial conglomerates are seen to diminish. Bancassurance is also gaining ground. Banks

in Asia have been assigned a pivotal role in the development of the region’s capital

markets. Since they already play a major role in corporate bond markets either as insurers,

underwriters, investors or guarantors, commercial banks have been further encouraged to

foster corporate bond market development as well as engage in other nonbanking activities

like insurance underwriting.

During the 1997-1998 Asian financial crisis, bank mergers were encouraged to

strengthen capital adequacy ratios and financial viability of small banks, many of which

were family-owned. Thus, all over the region, banks with overlapping operations were

merged and injected with doses of public funds. Distressed financial institutions that were

unable to attract potential buyers transferred their non-performing loans (NPLs) to asset

management companies (AMCs) and/or received capital support. Considerable government

intervention in mergers and acquisitions (M&A) procedures were often required as such in-

terventions are deemed less expensive than taking non-viable banks into public ownership

(BIS, 2001). Also, the option to merge became attractive even to relatively healthy banks

because aside from government buy-outs of NPLs, it likewise offers the prospect of in-

Amelia L. Bello

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creasing market share.

In the Korean financial market, three types of domestic consolidations were observed.

Troubled banks were placed under government-led financial holding companies; provincial

banks were merged with national banks; and strong, viable banks were consolidated. The

Korean government proposed a plan in 2000 to establish financial holding companies to

serve as vehicles for additional bank mergers. A separate holding company umbrella would

enable weaker banks to share in information technology (IT), internet, and securities

ventures. In Indonesia, Bank Mandiri was established in 1999 to amalgate the four older

state-owned banks (Bank Dagang Negara (BDN), Bank Export-Import Indonesia (Exim),

Bank Bumi Dayak (BBD), and Bank Pembangunan Indonesia (Bapindo) that failed in

1998. In 2000, Danamon was created by the merging of eight (8) private banks that had

been taken over by the Indonesian Bank Restructuring Agency (IBRA). Government in-

volvement in financial conglomeration has been kept to a minimum in Thailand, where it

has intervened in one merger, but is supportive of private merger initiatives, especially

among non-bank finance companies. In the Philippines, better access to rediscount facilities

and temporary relief from some requirements, are just a few of the incentives being of-

fered to merging banks (BIS, 2001). On the other hand, in Malaysia, initial government ef-

forts to induce voluntary mergers failed. As a result, ten (10) anchor banks were chosen by

the central bank 1999 to lead consolidation efforts involving a large number of small in-

stitutions into large, financially viable groups. Danamodal, a government corporation, was

established and charged with recapitalizing banks and facilitating consolidation and ration-

alization in the banking system. In contrast, in the more mature financial markets in the re-

gion, such as Hong Kong, Singapore, and Japan, consolidation has primarily been mar-

ket-driven and is being factored in broader competitiveness issues.

. Principles of Corporate Governance

The trend towards financial integration has implications for financial sector regulation

and for the corporate governance of the financial sector. Corporate governance refers to the

full set of relationships between a company’s management, its board, its shareholders and

its other stakeholders, such as its employees and the community in which it is located. The


- 187 -

OECD, in fact, has an agreed set of “best practice” general principles; the principles were

issued originally in 1999 but were revised in 2003 through a process of extensive and open

consultations. The OECD principles represent a collective view of the most important core

elements of a good corporate governance framework. The principles can be summarized in

terms of four values: equitable treatment, responsibility, transparency and accountability

and cover six key areas of corporate governance:

ensuring the basis for an effective corporate governance framework

the rights of shareholders and key ownership functions

the equivalent treatment of shareholders

the role of stakeholders in corporate governance

disclosure and transparency

the responsibilities of the board

Skipper (2000) similarly notes that prudential and market conduct issues that arise

from financial services integration include transparency, contagion, regulatory arbitrage,

conflicts of interest, double and multiple gearing, fit and proper requirement, and un-

regulated group entities. Transparency has something to do with the availability of accu-

rate, complete, timely and relevant information about the financial group to regulators and

other interested parties. Thus, regulators should be familiar with the management, owner-

ship and legal structures to come up with a full assessment of both the risks faced by the

group as a whole and the risk posed by the groups’ non-regulated entities to the regulated

entities. In addition, agency problems can be expected with financial services integration.

Double or multiple gearing could lead to an overstatement of group capital. Contagion hap-

pens when one entity’s financial difficulties adversely affect the entire group’s financial

stability, which could trigger a market-wide contagion. Contagion may be due to in-

tra-group exposures like credit extensions or lines of credit between affiliates, cross-share-

holdings and intra-group guarantees and commitments. Contagion can also arise from pub-

lic perception. To minimize contagion, there should be adequate transparency and close co-

ordination among regulators.

Opportunities for regulatory arbitrage may be due to tax treatment, accounting stand-

ards, investment restrictions, capital adequacy requirements and other regulations that typi-

Amelia L. Bello

- 188 -

cally vary across different financial intermediaries. Moving towards consolidated financial

regulation could eliminate such differences. If not, regulators must fully cooperate with one

another to jointly identify instances of regulatory arbitrage and deal with them. For in-

stance, if a bank belongs to a group headed by a holding company, supervisors must take

into account the activities of the holding company and fellow subsidiaries of the bank.

Consolidated supervision means a comprehensive approach to banking supervision; the

strength of the whole group and all the risks that may affect the bank, regardless of wheth-

er the risks are carried in the books of the bank or related entities must be recognized

(MacDonald, 1998 as cited by Milo, 2002).

The Basle Committee on Banking Supervision has identified several principles that

may be considered necessary for effective banking supervision. One of these principles

state that banking supervisors must have the ability to supervise the group on a con-

solidated basis and must have the ability to coordinate with other authorities for super-

vising specific entities within the organization’s structure (BCBS 1997:32 and 35 as cited

in Milo, 2002).

In line with the above arguments, the international community has attempted to under-

stand the differences between prudential rules for different areas and narrow such

differences. The Joint Forum on Financial Conglomerates established in 1996 is composed

of the Basle Committee on Banking Supervision, the International Organization of

Securities Commissions (IOSCO) and the International Association of Insurance Supervisors

(IAIS). The Joint Forum has supported the development of core principles and the en-

hancement of risk-based supervision and capital requirements across the three areas. To

quote, “The Joint Forum has reviewed various means to facilitate the exchange of in-

formation between supervisors, enhance supervisory coordination (including the appointment

and role of a lead coordinator) and develop principles toward more effective supervision of

regulated firms within financial conglomerates (Joint Forum, 1997 as cited by Milo, 2002).

. Financial Supervision and Regulation

It is a given that financial convergence may be expected to continue. While the speed

and extent of the convergence is likely to be different for the countries, a common issue is


- 189 -

how regulators can best respond to financials services integration (Palmer, 2002 as cited by

Milo, 2002). The emergence of financial conglomerates adds two new dimensions to the

supervision and regulation of such entities. The first is the issue of consolidated super-

vision and the other refers to the structure of the institutions in charge of supervision. If fi-

nancial areas are integrating, should regulators do the same?

The traditional regulatory approach applied to the three major financial areas is the

“pillars” approach where each pillar is regulated by its own distinct regulator. A second

approach is the “conglomerate” approach with separate and distinct regulatory regimes for

the three areas even though liberalization and deregulation of lines of business and owner-

ship restrictions have allowed the formation of financial conglomerates. In the third ap-

proach, separate and distinct regulatory regimes for the parts of the conglomerates exist but

they are augmented with regulatory and supervisory practices that take into account the

conglomerate nature of the regulated institution (See Figure 2.).

Figure 2. The three different regulatory approaches

Amelia L. Bello

- 190 -

MacDonald (1998) cites that preconditions exist for the effective implementation of

consolidated supervision. These include the legal framework, independence of the super-

visory agency and commitment to the process. The components of consolidated supervision

are consolidation of accounts, quantitative consolidated supervision (includes prudential re-

quirements such as capital adequacy, large exposures and connected lending) and qual-

itative consolidated supervision (includes management and organizational structure,

group-wide business plans and strategies and consolidated internal controls and risk man-

agement). A high degree of coordination, cooperation and harmonization is thus very

important. Another challenge would be the need to move to functional rather than in-

dustry-specific supervision to minimize duplication of regulatory effort and resolve differ-

ences in regulatory frameworks.

There are two fundamentally different models of regulatory structure; the first is based

on institutional groups while the second is anchored on regulatory functions. The first is

what we are familiar with. Regulatory functions pertain to the underlying functions of reg-

ulation and address the various sources of market failure that may arise from anti-com-

petitive behavior, market misconduct, asymmetric information and systemic instability

(Carmichael, 2002 as cited in Milo, 2002).

In the purest form of the institutional model, a single regulator responsible for correct-

ing all four sources of market failure is assigned to each institutional group. For instance,

the central bank will supervise all the banks. In the purest form of the functional model,

correcting each of the four sources of market failure is assigned to a single regulator and

will be responsible for all institutions that are subject to that particular failure. While what

is observed in practice is a mixture of functional and institutional divisions, the global

trend towards financial conglomeration may mean a restructuring of regulatory agencies

along functional lines (Carmichael, 2002 as cited in Milo, 2002).


- 191 -

Table 1. Sources of market failure

Source: Milo, 2002 from Dammert, 2000.

Among the reasons cited for favoring a single regulator are: economies of scale since

unification may allow cost savings on the part of the regulator due to shared infrastructure,

administration and support systems; unification lowers the cost for the regulated units; uni-

fication enhances accountability, regulatory arbitrage is avoided, scarce supervisory re-

sources can be pooled, gray regulatory areas are avoided since there is only one regulator

and unification aids in international cooperation since there is but one contact point for all

regulatory issues (Reddy, 2001 as cited by Milo, 2002).

The arguments against a single regulator include: lack of clarity since regulators may

have different objectives, unification leads to the concentration of power which may run

counter to democratic policies, there may actually be diseconomies of scale since monopo-

listic organizations can be more rigid and bureaucratic and pooling of resources may not

produce the synergy since the focus of banks, securities and insurance supervisors are dif-

ferent (Reddy, 2001 as cited by Milo, 2002).

Among the ASEAN member countries, only in Singapore is the Central Bank

(Monetary Authority of Singapore) responsible for banks, securities firms and insurance

companies. In Korea and Japan, there is a single prudential regulator for all financial in-

stitutions and markets that is not the central bank while in Malaysia, banks and insurance

Amelia L. Bello

- 192 -

are combined within the same agency while securities firms are supervised by another

agency (Llewellyn, 2001 as cited by Milo, 2002).

5.1. Korea

Korea reformed the regulatory structure of its financial sector following the 1997

Asian crisis. The establishment of an integrated prudential regulator was part of the support

program that it negotiated with the IMF in 1997. The laws that were passed subsequently

strengthened the independence of the Bank of Korea, consolidated all financial sector su-

pervision and merged all deposit insurance protection agencies (Milo, 2002). Under an in-

stitutionally based system of financial regulation, Korea found it difficult to develop con-

sistent supervisory policies. This lack of unification is said to have led to widespread regu-

latory arbitrage and is seen as a major contributor to the spread of the Asian crisis to

Korea (Bain and Harper, 1999 as cited in Milo, 2002).

The Financial Supervisory Commission (FSC) and the Financial Supervisory Service

(FSS) were established in April 1998 and January 1999 respectively. The FSS was created

by merging four supervisory bodies: the Banking Supervisory Authority, the Securities

Supervisory Board, the Insurance Supervisory Board and the Non-bank Supervisory

Authority. It is charged with overseeing and supervising financial business entities while

the FSC is in charge of policy formulation for the financial market. As a wholly integrated

regulatory body, the FSC/FSS had broad policy and enforcement authority to implement

market reform and oversee activities (FSC/FSS, 2001 as cited in Milo, 2002).

5.2. Japan

In 1998, Japan established the Financial Supervisory Agency (FSA). It is separate

from the Ministry of Finance and the Bank of Japan. FSA is responsible for the super-

vision of all private financial institutions like banks, insurance companies and securities

firms. Before the establishment of the FSA, prudential supervision was integrated with the

Bank of Finance and part of the Ministry of Finance (Milo, 2002).


- 193 -

5.3. Indonesia

Indonesia created a new Central Bank Act in May 1999 that conferred upon the Bank

of Indonesia the status and position of an independent state institution. Banking supervision

functions were separated from the Central Bank and were to be carried out by an in-

dependent Financial Services Supervisory Institution to be established by December 2002.

Aside from the banking sector, it will also supervise companies in the other financial sec-

tors including insurance, pension funds and venture capital (Bapepam, 2000 as cited in

Milo, 2002). Indonesia’s pace of reform has not been as fast as that of Korea.

5.4. Thailand

Thailand has also drafted a new Bank of Thailand Act and a new Financial

Institutions Act. The first Act aims to strengthen the independence and accountability of

the Bank of Thailand and limits its objectives to maintaining price stability and safeguard-

ing the stability of the financial system. Unlike before when it used to share the responsi-

bility for supervising financial institutions with the Ministry of Finance, the new Act vests

the Bank of Thailand with the sole responsibility of doing so. It also gives the Bank the

power to supervise and monitor financial subsidiaries and conglomerates on a consolidated

basis and specifies steps for corrective action and exit procedures for unviable financial

institutions. The Act will eliminate discrepancies and redundancies between different laws

applicable to different types of financial institutions. It combines the Commercial Banking

Act, the Act on the Undertaking of Finance Business, Securities Business and Credit

Foncier Business and creates a uniform standard of supervision (BOT, 2001 as cited by

Milo, 2002).

5.5. Singapore

As previously stated, Singapore is the only ASEAN member country which has its

Central Bank as the sole supervising authority in charge of banks, securities firms and in-

surance companies. The Monetary Authority of Singapore was the first integrated super-

visor, acquiring its powers to regulate insurance companies in 1971 and securities firms in

1984. It continues to systematically review its supervisory and regulatory policies and build

Amelia L. Bello

- 194 -

expertise to better supervise both financial conglomerates and specialized firms. One of its

key initiatives is the move toward risk-based capital frameworks for life insurers and mem-

ber firms of the Singapore Exchange (Palmer, 2002 as cited by Milo, 2002).

5.6. Malaysia

Malaysia combines banking and insurance supervision within the same agency but has

securities firms supervised by a specialist agency. The Central Bank of Malaysia has com-

prehensive legal powers to regulate and supervise the financial sector. These legal powers

come from the Banking and Financial Institutions Act 1989, the 1994 revision of the

Central Bank of Malaysia Act and the Insurance Act 1996 as amended in 1999.

5.7. Philippines

The Philippines has not yet considered consolidating financial sector supervision,

whether partial or full (Milo, 2002). This may be due to the relatively fine performance of

its financial sector during the 1997 crisis, following the banking reforms that include sig-

nificant improvements in prudential regulation and supervision. In March 1998, the

Philippines entered into a two-year standby arrangement with the IMF but only as a pre-

cautionary measure. The Memorandum for Economic and Financial Policies suggested rais-

ing capital and encouraging consolidation, reducing bank risks by tightening provisioning

requirements and strengthening regulatory oversight (Milo, 2002).

. Final Note

The above tells us that the Asian countries have pursued their own recipe of financial

supervision. Financial services supervision has been adopted by the countries in their own

fashion and its application has been varied. This observation conforms with the general

conclusion that the organizational form of regulation should be adapted to the circum-

stances of individual countries. Differences in starting points, in industry structure and in

objectives are important factors to consider. In addition, Milo (2002) mentions that there

are two vital lessons that must be learned from the stories of the developed countries.


- 195 -

First, changing the structure of regulation cannot guarantee effective supervision and in-

tegrated regulation is not a solution to regulatory failure. Second, there is no single best

form of integrated regulatory agency.

References

Bain, E. and Harper, I.(1999). Integration of financial services: evidence from Australia.

Paper presented at the Bowles Symposium. Georgia State University. Atlanta,

December, 9-10.

Bank of Thailand(2001). Supervision Report 2000. Bank of Thailand, Bangkok.

Bapepam(2000). Indonesian Capital Market Blueprint 2000-2004. Capital Market Executive

Agency (Bapepam), Jakarta.

Basle Committee on Banking Supervision (BCBS)(1997). Core Principles for Effective

Banking Supervision. Bank for International Settlements, Basle.

BIS (Bank for International Settlements)(2001). The Banking Industry in the Emerging

Market Economies: Competition, Consolidation, and Systemic Stability. BIS

Papers, No.4. Basel, Switzerland.

Bank of Japan(2005). The Expansion of Corporate Groups in the Financial Service

Industry: Trends in Financial Conglomeration in Major Industrial Countries.

Berger, A.N., and G.F. Udell(1995). Relationship Lending and Lines of Credit in Small

Firm Finance. Journal of Business, 68, 351-381.

Carmichael, J.(2002). Experiences with integrated regulation. Paper presented at the

Finance Forum 2002: Aligning Financial Sector Knowledge and Operations. World

Bank Institute, Washington, D.C.

Claessens, S.(2002). Benefits and costs of integrated financial services provision in devel-

oping countries. Paper presented at the Joint Netherlands - U.S. Roundtable on

Financial Services Conglomerates. Washington, D.C., October 23-25.

Dammert, A.(2000). Supervision structure for developing countries. Financial Sector

Discussion Paper. World Bank, Washington, D.C.

De Nicoló, G., P. Bartholomew, J. Zaman, and M. Zephirin(2003). Bank consolidation, in-

ternationalization, and conglomeration: trends and implications for financial risk.

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IMF Working Paper WP/03/158.

East Asia Analytical Unit.(1999). Asia’s Financial Market: Capitalizing on Reform.

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Garcia, M., Bello, A. and Del Rosario, K.(2007). Trends in Financial Conglomeration in

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A Review of the Literature. Federal Reserve Bank of San Francisco Economic

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MacDonald, R.(1998). Consolidated Supervision of Banks. Handbooks in Central Banking,

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I. Introduction

Since China implemented reform and opening policy in 1978, its foreign trade has

been increasingly expanding. China now is running a growing trade surplus, especially with

the United States. In reaction to this phenomenon, some experts and political figures main-

tain that the Renminbi’s dollar peg system and its undervaluation are the major reasons be-

hind China’s trade surplus with the US. A prevailing view in the American economic and

political circles is that the appreciation of RMB against the US Dollar is needed for the re-

duction of US trade deficit with China (Gabberty, 2005).

Liu Xiaohui

- 200 -

Under the above mentioned background, this paper conducted an empirical analysis as

to the effect of RMB’s real exchange rate changes on Sino-US and Sino-Japan trade

balance. The reason why Japan and the US were chosen is that they both are very im-

portant trade partners to China. Japan is China’s largest import supplier, while the US is

China’s biggest export market. The conclusion drawn from the empirical analysis of this

paper is: RMB exchange rate changes have no definite influence on Sino-Japan trade bal-

ance; however, the appreciation of RMB will lead to the expanding of Sino-US trade

surplus.

The remaining part of this paper is organized as follows. The second part is a liter-

ature review of the theories and empirical analyses concerning the relationship between

trade balance and exchange rate. The third part gives an analysis to the present status of

Sino-Japan and Sino-US trade and China’s current exchange rate regime. The fourth part

presents an empirical analysis of the impact of RMB real exchange rate changes on

Sino-US and Sino-Japan trade balance. The fifth part is the conclusion.

. China’s foreign trade and its exchange rate system

2.1. The trend of China’s foreign trade

Since China launched reform and open door policy in 1978, its total foreign trade vol-

ume increased rapidly. Since the 1990s, except for a trade deficit of US$12.2 billion in

1993, China’s foreign trade has been in surplus, and the surplus has been growing at an

increasingly high speed. From 1990 to 2000, China’s trade surplus increased 1.77 times,

while from 2000 to 2006 China’s trade balance increased 6.37 times. Meanwhile, its total

foreign exchange reserve rose by 5.44 times from US$165.6 billion in 2000 to US$1066.3

billion in 2006. See Figure 1.

According to the statistics from the Ministry of Commerce of the People's Republic of

China, in 2006 the US was China’s largest export market and its sixth largest import

supplier. China’s export to the US accounted for 21% of its total export, more than its ex-

port to EU, Hongkong and Japan (See figure 2). Japan was China’s largest import source

and fourth largest export market. China’s import from Japan accounted for 14.6% of its to-

Exchange Rate Variability and Trade Balance

- 201 -

tal import, higher than its import from EU, South Korea and ASEAN countries. (See

Figure 3)

-50

0

50

100

150

200

1990

19911992

1993

19941995

19961997

1998

19992000

20012002

2003

20042005

2006

0

200

400

600

800

1000

1200

Trade Balance Foreinge Exchange Reserve

Figure 1. China trade balance and foreign exchange reserve뭩

(billions of US dollars)2)

the US21.0%

EU18.8%

HongkongSAR

South Korea4.6%

ASEAN7.4%

Japan9.5%

Taiwanprovince

2.1%

otherregions15.9%

India1.5%

Canada1.6%Russia

1.6%

Figure 2. China top ten export markets in 2006뭩

Liu Xiaohui

- 202 -

Japan14.6%

EU

11.4%

SouthKorea11.3%

Russia2.2%

SaudiArabia1.9%

Brazil1.6%

otherregions24.8%

Australia2.4%

ASEAN11.3%

Taiwanprovince11.0%

the US7.5%

Figure 3. China top ten import sources in 2006뭩

In 2006, of Japan’s exports to China, the two items that took the largest share are

electrical equipment and products (HS85; accounting for 25.5%) and mechanical equipment

(HS84; accounting for 20.4%). Of Japan’s imports from China, electrical equipment and

products (HS85) and mechanical equipment (HS84) accounted for the largest percentage.

Such a pattern of import and export trade shows that, to a great extent, there exists a verti-

cal international labor division and cooperation between China and Japan. In 2006, elec-

trical machinery products are not only the US’s No.1 export category to China but also its

largest import category from China.3)

2.2. Evolution of China’s exchange rate regime

In the early 1980s, China’s official exchange rate of Renminbi was extremely over-

valued, lower than 3 Yuan per US dollar.

From 1985 to 1990, China’s official exchange rate and market exchange rate

coexisted. According to the changes of the domestic prices, the Chinese government ad-

justed its official exchange rate substantially several times, from 2.30 Yuan per US Dollar

to 5.22 Yuan per US Dollar. From 1988 to 1993, due to the overheated economy and in-

flation, China’s demand for import increased dramatically, leading to an increasing demand

for foreign exchanges. Chinese Renminbi began to depreciate in the foreign exchange

market. In 1993, RMB’s market exchange rate was 11.20 Yuan per US Dollar. After that,

under the intervention of the central bank, up to the end of 1993 the market rate fell back


- 203 -

to 8.72 Yuan per US Dollar.4)

In 1994, the Chinese government cancelled its dual exchange rate system and the

Renminbi’s official exchange rate floated down from RMB5.80 per US Dollar in 1993 to

RMB8.70 per US Dollar in early 1994. In the following twelve years, the Chinese govern-

ment implemented such a RMB-USD peg system.

Since July 21, 2005, China began to adopt a managed floating exchange rate system

which is based on the market demand and supply and adjusted according to the values of

a basket of currencies. Renminbi’s exchange rate is no longer linked to the single US dol-

lar; a more flexible RMB exchange rate mechanism has come into being.5)

Table 2. VAR Residual Serial Correlation LM Tests

Table 3 Unrestricted Cointegration Rank Test

In general, from 1980 up to now, Chinese RMB’s nominal exchange rate rose con-

tinuously and RMB has been depreciating. Such a development trend appears to be of

some relevance to the changing trend of Sino-US trade balance, but of almost little rele-

vance to Sino-Japan trade balance. Please refer to Figure 4 and 5.

Liu Xiaohui

- 204 -

-20000

0

20000

40000

60000

80000

100000

120000

140000

160000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006 0

12345678910

Trade Balance Chinese Yuan per U.S Dollar

Figure 4. RMB nominal exchange rate against US Dollar (RMB/USD) and Sino-US뭩

trade balance (millions of US Dollars)

-30000

-25000

-20000

-15000

-10000

-5000

0

5000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

00.010.020.030.040.050.060.070.080.090.1

Trade Balance Chinese Yuan per Yen

Figure 5. RMB nominal exchange rate against Japanese Yen (RMB/Yen) and뭩

Sino-Japan trade balance (millions of US Dollars)


- 205 -

. Exchange rate changes and trade balance-Literature Review

From the perspective of economic theories, economists hold divisive views concerning

the effect of exchange rate changes on export.

Some economists think that short-term exchange rate fluctuations have no impact on

the trade volume, while long-term exchange rate fluctuations can stimulate export and na-

tional income growth (Friedman, 1953; Johnson, 1969). The trade balance elasticity model

proposed by Krueger shows that there exists a theoretical relationship between exchange

rate and trade balance. Himarios (1989) and Bahmani-Oskooee (2001) maintain that nomi-

nal exchange rate changes will affect real exchange rates, and thus have a direct impact on

trade balance. Therefore, by devaluating its currency, a country can increase the com-

petitive advantage of its exports, reduce its import of relatively expensive foreign products

and improve its trade balance. Many other economists believe there exists a “J-curve” ef-

fect, which means that short-term home currency devaluation will worsen a country’s trade

balance. This is because the prices of a country’s imports are denominated in a foreign

currency and those of its exports expressed in the home currency. Meanwhile, as economic

contracts are difficult to adjust in the short run, the effect of the home currency devalua-

tion on trade volume is slower than its effect on the prices of its traded products.

However, according to another view, due to the imperfectness of the market and the

high risks and costs of hedging activities, exchange rate fluctuations may have a reverse

relationship with export (Mundell, 2000; Krugman, 1989).

As to the effect of exchange rate changes on trade balance, economists have con-

ducted a lot of empirical analyses. Some empirical studies show that exchange rate changes

are an essential element for stimulating export growth (Abbott, et. al. 2001; Bailey et. al.

1986). Some other research findings reveal that exchange rate changes are clearly adversely

related to export (Saurer and Bohara, 2001; Bini-Smaghi, 1991). Still another research

study indicates that the role of exchange rate changes on export is not distinct, sometimes

positive and sometimes negative (Klaassen, 1999)

Under the above background, the empirical research findings concerning the effect of

RMB revaluation on trade balance can be divided into two categories.

According to one point of view, RMB evaluation can reduce China’s export but in-

crease its import and therefore reduce China’s trade balance. Dees (2001) holds that in the

Liu Xiaohui

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long term the appreciation of Renminbi will lower down its export. Compared with proc-

essing export products, export of general commodities are more sensitive to price changes.

However, in the short term, trade balance will not be influenced by the exchange rate and

is only related to the demand in the world market. Through an analysis of the latest data,

Yue and Hua (2002) drew the following conclusion: the evaluation of RMB’s real ex-

change rate will lead to the reduction of export; however, the total export is becoming in-

creasingly sensitive to prices. Thorbecke (2006) divided export into that of capital products,

intermediary products and finished products. He conducted an analysis by using the gravity

model and concluded that a 10% evaluation of RMB will reduce China’s export of finished

products by 13%; however, RMB revaluation will have no significant influence on China’s

import from the US.

The second view is exactly the opposite of the first view. Jin (2003) conducted an

empirical analysis on the relationship among China’s real exchange rate, real interest rate

and international balance of payments, and concluded that the real evaluation of RMB will

widen China’s international balance of payments. Cerra and Saxna (2003) also believe that

RMB evaluation will stimulate the increase of China’s export.

. Empirical analysis of the effect of exchange rate on trade balance

Although RMB’s nominal exchange rate does not fluctuate greatly as the Chinese gov-

ernment has been adopting a US Dollar peg exchange rate system, RMB’s real exchange

rate has been changing with the changes of the relative prices in different countries. By us-

ing the recent annual data between 1980 and 2006, this study analyzes the effect of

RMB’s real exchange rate changes on Sino-Japan and Sino-US trade balance.

Data concerning nominal exchange rates, price indices in Japan and the US, and GDP

stem from the International Financial Statistics of IMF; data of China’s consumer price in-

dex and GDP are derived from the Statistical Year Book of National Bureau of Statistics

of China; data about Sino-US and Sino-Japan trade balance are collected from IMF’s

Direction of Trade.

The following formula is used to calculate the effect of exchange rates on trade

balance.


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ln(X/M)= β0 +β1lnY +β2lnYF +β3lnRER+μ

In the above formula, ln(X/M) stands for trade balance expressed in logarithm, Y for

China’s GDP, and YF for GDP in a foreign country (the US or Japan). RER represents re-

al exchange rate, equal to (ER* CPIf)/ CPI), of which CPI is China’s consumer price in-

dex, CPIf is the foreign consumer price index, and ER the nominal exchange rate (direct

quotation method). is the parameter, is the random input. According to the traditionalβ μ

economic theories, the increase of a country’s GDP will lead to the increase of its import

and thus narrow its trade balance. The increase of foreign GDP will stimulate the foreign

country’s import from the home country and therefore will improve the home country’s

trade balance situation. In that case, the expected study result:β1 is negative, and β2 andβ3

are positive.

The analysis result shows that China’s GDP, Japan’s GDP and real exchange rates in-

fluence each other and the effect of RMB’s real exchange rate on Sino-Japan trade balance

is vague. However, RMB’s real exchange rate changes will have relatively significant in-

fluence on Sino-US trade balance.

In order to get the empirical results of impact of Chinese Yuan appreciation on

Sino-U.S. trade balance, we run the Augmented Dickey-Fuller (ADF) unit root tests for

each variable .According to AIC Criteria, the choice of lags is set to 3 to guarantee

non-residual autocorrelation. The results over the period 1980-2006 indicate that the four

variables are stationary at the first difference ( I (1) variables). Given the unit-root proper-

ties of the variables, we proceed implement the cointegration test procedures. The results

of the cointegration tests provide empirical support for the existence of a long-run co-

integrating relationship among all the variables. Finally, we get a cointegration equation as

follows.

LN(X/M) =-10.10072LNY+30.76347LNYF+7.890935LNRER

(5.10527) (15.9113) (1.47020)

The research conclusion suggests that the increase of China’s GDP will worsen China’

trade balance, while the increase of the US GDP will improve China’s trade balance

situation. Compared with GDP, real exchange rate changes will have less significant influ-

Liu Xiaohui

- 208 -

ence on Sino-US trade balance; the appreciation of RMB will decrease the Sino-US trade

balance.

. Conclusion

To sum up, through an empirical analysis of the relationship between real exchange

rate changes and trade balance, this paper maintains that the real exchange rate changes

will have a vague influence on Sino-Japan trade balance. The possible reason is: China and

Japan are highly interdependent in economy, which is a very important factor influencing

Sino-Japanese trade.

The empirical research findings of this paper also indicate that the real revaluation of

RMB will decrease Sino-US trade balance, however, the effect of the changes of real ex-

change rate on the trade balance is not significant. The possible reason behind this is: with

the deepening of international labor division and cooperation between China and the US,

the exports of Chinese enterprises to the US, especially those of foreign enterprises in

China that hold an important position in China’s foreign trade, are not price elastic; the

great domestic market demand in the US enables the RMB nominal appreciation and the

continuous Sino-US trade surplus to coexist. From this perspective, concerning the reasons

for the huge Sino-US trade balance, further empirical analysis can be conducted from the

aspects of the composition of China’s exports and the changes of the US market demand.

One of the policy implications for the above conclusion is: RMB revaluation is not an ef-

fective measure for reducing Sino-US trade surplus.

References

Abbott, A.(2001). Exchange Rate Variability and Trade. International Economics: Theories,

Themes and Debates. Essex, Peaqrson Education Ltd.

Bahmani-Oskooee, M.(2001). Nominal and Real Effective Exchange Rates of Middle

Eastern Countries and Their Trade Performance. Applied Economics, 33, 103-111.

Bailey, M.J., Tavlas, G..S. and Ulan, M.(1986). Exchange Rate Variablity and Trade


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Performance: Evidence for the Big Seven Industrial Countries. Weltwirtschaftliches

Archiv, 122(3), 466-477.

Bini-Smaghi, L.(1991). Exchange Rate Variability and Trade: Why is It so Difficult to

Find Any Relationship? Applied Economics, 23, 927-936.

Cerra, V. and Saxena, S.C.(2003). How Responsive is Chinese Export Supply to Market

Signals? China Economic Review, 14, 350-370.

Dees, S.(2001). The Real Exchange Rate and Types of Trade Heterogeneity of Trade

Behaviors in China. Discussion Paper, CEPII.

Friedman, M.(1953). The case for Flexible Exchange Rates. Essays in Positive Economics.

Chicago: University of Chicago Press.

Himarios, D.(1989). Do Devaluation Improve the Trade Balance? The Evidence Revisited.

Economic Inquiry, 143-167.

James W. Gabberty(2005). The Rising U.S. Trade Deficit with China and Why It Won’t

Go Away. International Business & Economics Research.

Jin, Z.(2003). The Dynamics of Real Interest Rates, Real Exchange Rates and the Balance

of Payments in China: 1980-2002. IMF Working Paper 03/67.

Klaassen, F.(1999). Why is It so Difficult to Find an Effect of Exchange Rate Risk on

Trade? Econometric Society World Congress 2000. University of Amsterdam.

Kreuger, A.D.(1983). Exchange rate determination. Cambridge: Cambridge University Press.

Krugman, P.(1989). Exchange Rate Instability. The Lionel Robbins Lectures. Cambridge,

MIT Press.

Mundell, R.A.(2000). Currency Areas, Exchange Rate Systems and International Monetary

Reform. Applied Economics, 3, 217-256.

Sauer C. and Bohara A.K.(2001). Exchange Rate Volatility and Exports: Regional

Differences between Developing and Industrialized Countries. Review of Interna-

tional Economics, February, 9(1), 133-152. Blackwell Publishers Ltd, Oxford, UK

and Boston, USA.

Thorbecke, W.(2006). The Effect of Exchange Rate Changes on Trade in East Asia. RIETI

Discussion Paper Series, 06-E-009.

Yue, C. and Hua, P.(2002). Does Comparative Advantage Explain Export Pattern in China?

China Economic Review, 13, 279-296.

Liu Xiaohui

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Appendix

Table 1. VAR Lag Order Selection Criteria

* indicates lag order selected by the criterion


- 211 -

With the upward trend in tourism worldwide, previous research has mainly dealt with thecontributions of the tourism sector to the economy or the microeconomic factors that fla-vor tourist destination choice. In this study, the relation of economic factors to the tour-ism potential of the ASEAN region is examined. Several macroeconomic indicators werefound to have significant relations to tourist arrivals. The coefficients generated by theformulated model provide further empirical evidence supporting programs suggested inearlier research. Fiscal policies in line with tourism expenditures, foreign exchange ratesand economic growth are implied as vital to encouraging ASEAN tourism demand.

Key words: tourism demand, macroeconomic indicators, fiscal policy

I. Introduction

In recent years, tourism has gained prominence as a major contributing sector to the

economies of the Asia-Pacific region. It is being considered the fastest-growing region for

international tourism as international visitors to the area have increased its global market

share since 1990. Specifically, mainland Southeast Asia has grown at a rate surpassing the

Asia-Pacific region as a whole as well as the worldwide pace.

Recognizing this trend, much research on tourism and the economy has mainly dealt

with the effects of the former on the latter, the rationale behind such a unidirectional ap-

proach being to provide justification for fiscal spending on tourism promotion. In terms of

the member countries of the Association of South East Asian Nations (ASEAN), the sig-

nificance of the influx of tourists from both within and outside these countries has been

studied for its many different economic impacts.

Less studied has been the relation of economic indicators to tourism potential.

Anna Floresca F. Abrina

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Tourism destination research has been mostly in line with the business side of this relation,

treating countries as products that need branding and promotion (see, for example,

Cromwell 2007) as well as focusing on destination attractiveness and images. The current

crop of studies relating socio-economic activity to the promotion of tourism has been in

terms of providing suggestions to improve the image of a country with the end of attract-

ing more tourists to a certain destination.

Demand theory posits that the quantity demanded of a commodity relies on its price,

the consumer’s income, and the tastes and preferences of the consumers. This last consid-

eration does seem to suggest that the branding of a country as a desirable destination is in-

deed essential. However, more important is to regard a country as a product and the tourist

population as the quantity demanded of that country to allow for the use of demand theory

as a springboard for a more general analysis of the factors affecting tourism volume. In

this context, tourist arrivals can be analyzed in relation to certain economic indicators that

may substitute as measures for factors other than those concerning the branding of a

country.

Following this line of thought, several researchers have tried to relate different key

macroeconomic indicators to the tourist volume. Some have analyzed the sensitivity of cer-

tain types of tourists to prices in their destination countries (see Algieri 2006; Divisekera

and Kulendran 2006; Kulendran and Divisekera 2007; Song et.al. 2003; Turner and Witt

2001; Vignuda 2006). Others have looked at the effect of the level of income in the coun-

try of origin as a factor determining the demand for a certain country as a tourist destina-

tion (see Algieri 2006; Divisekera and Kulendran 2006; Naudé and Saayman 2005).

Vignuda (2006), in a report on tourism potentials for people with disabilities, observed

that information and transport facilities were significant to the tourism experience.

Kulendran and Divisekera (2007) also found that marketing expenditure by the Australian

government significantly increased international tourism demand. Louca (2006) further dem-

onstrated a positive causality between tourism income to supply-side expenditures in

Cyprus. Moreover, results by Naudé and Saayman (2005) strongly suggest that tourism in-

frastructure is a key determinant of tourism in Africa.

In addition, exchange rates have been found to be significant in determining tourism

revenues in Russia (Algieri 2006) and Ireland (Hanly and Wade 2007). The same can be

said for the population or the composition of the population on the tourist volume in some

Relations Of Economic Indicators To Tourism Potential

- 213 -

other countries (see Hanly and Wade 2007; Nishaal and Guntur 2005; Chon et. al. 2004).

Furthermore, Sanford and Dong (2000) show a positive and significant relationship of tour-

ism to new foreign direct investment in the USA.

Since previous studies have failed to simultaneously include prices, incomes, fiscal ex-

penditure on tourism, exchange rates, population and foreign direct investment as determi-

nants of tourism demand or volume, this study provides an initial attempt at incorporating

all these variables in one model. Specifically, it intends to determine the strength or weak-

ness of the relations of these macroeconomic factors to the number of tourist arrivals in

Southeast Asian nations. Eventually, it suggests implications of these relations to fiscal pol-

icies or goals that may have some bearing on the tourism potentials of the ASEAN

nations.

. Methodology

The study uses panel data over the ten-year period from 1995 to 2004 from the ten

member countries of the Association of Southeast Asian Nations (ASEAN). Majority of the

data used here were acquired from the statistical appendices of the ASEAN statistical year-

books (ASEAN 2003, 2005) and the ASEAN Statistical Pocketbook (ASEAN 2006).

Additional data were gathered from the country tables published by the Asian Development

Bank (ADB 2006) and the International Monetary Fund (IMF 2005). The statistical analy-

ses were generated using the Sixth Edition of the WINKS Statistical Data Analysis (SDA)

Software (Cedar Hill, Texas: TexaSoft, 2007).

Owing to certain limitations encountered in the progress of this study, the method uti-

lized is an Ordinary Least Squares (OLS) regression of the volume of tourist arrivals on

several macroeconomic indicators in ASEAN countries. Moreover, no causation between

the dependent and independent variables was determined in this analysis since the purpose

was only to ascertain the strength of the relations among the variables in the direction

indicated.

The operational form of the equation used in the regression follows:

where: TV = number of tourists arrivals


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GDP = real per capita Gross Domestic Product (in USD)

TC = real transport and communication expenditures (in USD)

FDI = real foreign direct investment (in USD)

INF = average annual inflation rate (%)

FOREX = average annual foreign exchange rate (in USD)

POP= annual population

α = intercept

βi = coefficients of parameters, i = 1, 2, 3, 4, 5, 6

The number of tourist arrivals (TV) measures the total number of both domestic and

international tourists in a particular country for a specified year, used as a substitute for

the tourist demand for an individual destination for a specific period.

Real per capita Gross Domestic Product (GDP) substitutes for average individual in-

come in the destination country while levels of real foreign direct investment (FDI) are in-

cluded to examine whether the business tourism connected to foreign investors significantly

affects tourist volumes in destination countries. Real transport and communication ex-

penditures (TC) of the governments of specific countries try to quantify fiscal efforts to

promote tourism through improvements in tourism-related infrastructure.

Inflation rates (INF) and foreign exchange rates (FOREX), which may affect the cost

of travel, measure the effects of changes in travel prices. Results relating to the population

variable (POP) gauge how tourism can be influenced by increases in the domestic

population.

The double logarithmic form of the equation was used to provide elasticity measures

for the indicators. In these terms, percentage changes in the volume of tourist arrivals can

be measured as results of percentage changes in the levels of the macroeconomic

indicators.

Trends and growth rates of tourist volumes are presented in the first part of the fol-

lowing section. The succeeding portion presents the regression results of the analysis using

the equation discussed above.


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. Empirical Analysis

All ten (10) ASEAN nations have been promoting their tourism potential in the gen-

eral media and seem to have had success attracting additional visitors from year-to-year ac-

cording to official releases. The following figure shows the trend in tourist arrivals in these

countries over the period of 1995 2004.

Figure 1. Tourist Arrivals in ASEAN Countries, by country of destination, 1995-2004

Based on the figure, it is apparent that tourist arrivals in ASEAN countries have gen-

erally been on the rise in the past 10 years. Malaysia, Thailand and Singapore have con-

sistently topped the list in terms of tourist arrivals although slight drops in the numbers are

observable in the aftermath of the Asian financial crisis of 1997 and again in 2003.

On the average, these same three countries comprise the bulk of visitors to the

ASEAN region, accounting for almost 70% of the total number of tourist arrivals over the

period (Figure 2). As is also evident in the previous figure, with their small tourist volume,

Myanmar and Cambodia account for the smallest proportions in the region, together com-

prising only around 2% of the total arrivals.

In terms of growth rates, the ASEAN region as a whole has increased its annual tou-

rist arrivals by an average of 6.59% for the period of 1996-2004 (Figure 3). The highest

average growth rate was experienced by Myanmar followed by Cambodia. Singapore,

Indonesia and the Philippines displayed the slowest growth in tourist arrivals for the peri-


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od, at rates around 3% per year. In this context, it would be reasonable to assume that the

disparity among the pace of growth in tourist arrivals of these countries arises from the

large differences in their tourist bases.

Figure 2. Percentage of Total ASEAN Visitors, average by country of destination,

1995-2004.

Figure 3. Average Growth Rate of Tourist Arrivals, ASEAN and by country of

destination, 1996-2004.


- 217 -

Before going into the intricacies of the regression, let attention first be paid to some

other noteworthy figures for the ASEAN region. In terms of tourist arrivals, the annual

number of arrivals over the ten-year period considered in this study averages around

36,934,499 per year. In addition, as computed from existing literature, the average real per

capita GDP for the region in 2004 was 1,375 USD while average real annual transport and

communication expenditures amounted to 19,011,103,576 USD.

Moreover, almost half of the ten nations of the ASEAN have national currencies that

average an exchange rate valued at less than 0.01 USD. These are, from weakest to stron-

gest against the US Dollar, Vietnam followed by Indonesia, Cambodia and Lao PDR. The

Philippines and Thailand are only slightly stronger at less than 0.03 USD.

Given these trends for the ASEAN as a region, it has been the aim of economic and

business studies to emphasize the contribution of the tourism industry to the overall per-

formance of the economy. In the following section, the flipside of this relation is

considered. A regression was run to determine the significance of certain macroeconomic

factors on the tourism volume attracted by ASEAN nations.

3.1. Regression Results

Of the 100 observations generated by the paneling of 10 years of data from 10 na-

tions, thirty-four (34) were excluded due to the incompleteness or unspecifiability (that is,

the absence of natural logarithms for negative values) of the data. For the 66 remaining

observations, a correlation matrix was generated. Of the six independent variables, the FDI

variable proved to be highly and significantly correlated to several other variables and was

dropped from the analysis. This omission slightly improved the goodness-of-fit measure as

well as the significances of the model and the coefficient estimates of the individual

parameters.

All variables were initially transformed to their natural logarithms to make use of a

double logarithmic form of the regression equation presented in the previous section. This

particular form was used to estimate the effects of changes in the macroeconomic in-

dicators on changes in the number of tourist arrivals in ASEAN nations. The results of the

regression are presented in Table 1.


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Table 1. Regression Results of Double Logarithmic Form of Equation (1), 66

observations.

The model in general can be considered statistically significant based on the higher

than critical value F-stat and low p-value (significant at 1%) generated by the analysis of

variance results. Based on the adjusted R-squared, it can be said that around 73% of the

variations in changes in the number of tourist arrivals can be explained by the parameter

estimates.

Among the five included independent variables, the inflation rate and population varia-

bles did not exhibit a significant relation to tourist arrivals in the sample. Of the three re-

maining variables with p-values less than 0.05, all were significant at 1%. The results sug-

gest that the number of tourist arrivals in the ASEAN region may be significantly related

to these three macroeconomic indicators.

Both GDP and TC variables are positively related to the dependent variable. The re-

sults indicate that a 1% increase in real per capita GDP and a 1% increase in real trans-

port and communication expenditures would cause the number of tourist arrivals to in-

crease by 0.66% and 0.37%, respectively.

In terms of GDP as a proxy for the income variable, the positive relation its co-

efficient reflects is consistent with an assumption of tourism being a normal good rather

than a luxury item. In the context of this analysis, tourist arrivals may be expected to in-

crease when average incomes increase, probably due to a rise in domestic tourism.

In addition, assuming that the substitution of real transport and communication ex-


- 219 -

penditures for tourism expenditures of fiscal authorities holds water, the coefficient gen-

erated for the TC variable provides an estimate consistent with previous findings. This sug-

gests that infrastructure development is a key determinant to promoting the tourism poten-

tial of a destination country in the ASEAN region.

Only the measure of changes in the exchange rates displays a negative coefficient, im-

plying an inverse relation to the number of tourist arrivals. Since exchange rates are used

here to substitute for a price variable, this finding supports a priori expectations. Since in-

creases in the exchange rate of a destination country imply relatively higher costs of travel,

demand for tours to that particular locale would reasonably decrease.

3.2. Implications

From the results above, the directions of the relations of the macroeconomic indicators

to tourism demand reveal nothing new. However, the strength of these relations may add

some new information to the current stock of knowledge on the subject and can provide

several implications to fiscal policies or goals that may have some bearing on the tourism

potentials of the ASEAN nations.

Among the variables considered to be significant, real per capita GDP seems to ex-

ercise the largest effect on changes in the number of tourist arrivals in a destination coun-

try in the ASEAN region. As statistics would show, for 1995-2004, intra-ASEAN visitors

to the area accounted for an annual average of 41.4%, almost consistently increasing from

year to year (ASEAN 2005). In fact, the share of intra-ASEAN visitors in 2005 reached an

average proportion of 45.5% (ASEAN 2006).

These findings indicate that domestic tourism is a major contributor to the tourism de-

mand of countries in the area. With real annual per capita GDP and annual tourist arrivals

in the region averaging around 1,400 USD and 37 million, the empirical results generated

suggest that a 14 USD annual increase in real per capita income would translate to an in-

crease of almost 25,000 tourist arrivals in the region.

In terms of importance of effects, second only to per capita incomes is the transport

and communication expenditures of the individual governments. As a proxy variable for

fiscal expenditures on tourism infrastructure, this measure demonstrates itself as another

key determinant of tourism demand. As mentioned earlier, the central governments of the


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region combined have annually spent around 19 billion on this expenditure category. On a

per country basis, Myanmar leads average annual spending in this category followed by

Vietnam, Thailand and Malaysia, mostly countries exhibiting the highest tourist arrival

numbers or the fastest tourism growth.

Again, these are empirical results consistent with the findings of previous research,

which suggest that tourism infrastructure is a significant factor in determining tourism

demand. From the generated coefficient, it is implied that an increase in transport and

communication spending of one-tenth of a percent (0.1%), which translates to an increase

of 19 million USD for the region, may attract almost 14,000 additional visitors.

As the only parameter inversely related to tourist arrivals, the foreign exchange rate

follows expectations as it substitutes as a price variable for tourism demand. Since a stron-

ger domestic currency makes it relatively more expensive for international tourists to visit

a particular destination, it would be a reliable conclusion to make that tourism demand

would decrease.

The major implication here, aside from the presence of the recognized inverse relation

between tourism prices and quantities demanded, is that the strengthening of a domestic

currency against a foreign currency (particularly, say, the US dollar) has impacts on tour-

ism as well and not only on trade of goods and services, on which the usual debates tend

to concentrate. As the empirical results show, increasing the foreign exchange rate by 1%

may cause tourist arrivals to the region to decrease by around 67,000 on the average.

Thus, it is apparent what these results support in terms of fiscal policies and agenda.

Although earlier research does suggest that tourism as a sector contributes to economic

growth, causality also runs in the opposite direction. Improvements in the economic stand-

ing of a nation should not only be seen as a demanding responsibility of the government

to its citizens but better as a potential boon to its tourism sector. The increased incomes

that may result from economic growth may fuel more domestic tourist expenditures, the

recognition of such contribution reflected by the emergence of the concept of “holiday eco-

nomics”.

It has also been demonstrated that the development of transport and communication

infrastructure positively affects the tourism demand of a nation. Thus, infrastructure spend-

ing of governments must concentrate not only on developing market roads or irrigation

systems, for instance, but also on improving transport and communication systems that


- 221 -

would enhance the travel experience of its tourists. With Southeast Asia being recognized

as a potentially profitable haven for medical and eco-tourism, spending on making it easier,

more convenient and more pleasurable for tourists to seek medical aid or visit remote natu-

ral attractions would not be a wasteful investment.

Finally, as mentioned earlier, debates regarding the foreign exchange rate should take

into consideration not only the effects these may have on trade volumes or foreign debt.

Although these may be more immediate concerns with more easily perceivable results, de-

creased exports and lower repayments are not the only consequences of a stronger domes-

tic currency. Stronger currencies not only cause a loss of competitiveness in the trade of

goods but also in the tourism market. In this way, monetary authorities must balance these

conflicting agenda in pursuit of the appropriate level at which to set or influence the value

of the domestic currency.

. Conclusions

The Asia-Pacific region has exhibited impressive growth in tourism since the 1990s. In

the ASEAN region alone, tourist arrivals have consistently been increasing since 1995 with

an average annual growth rate of 6.59%. Because of this trend, previous research has

mainly dealt with the contributions of the tourism sector to the economy or with the mi-

croeconomic factors that flavor the choice of tourist destination. In this paper, the relation

of macroeconomic factors to the tourism potential of the ASEAN region is examined.

From this analysis, it is apparent that strong relations exist among several macro-

economic indicators and tourism in a country. Although the relationships demonstrated are

consistent with intuitive expectations and the findings of previous research, the coefficients

generated by the formulated model provide further empirical economic evidence supporting

programs that have been suggested in the past. Fiscal policies in line with the tourism ex-

penditures, foreign exchange rates and economic growth are vital to encouraging tourism

demand for one’s country, as suggested by these results.

For further research, it is suggested that better measures of the included variables be

collected or utilized. A more complete data set, say, with a decomposition of the pop-

ulation figures, would allow for more disaggregated parameters in the regression analysis


- 222 -

that may lead to results that are more robust as well as allow for a more in-depth analysis

of causality among the variables. It is also suggested to include variables that measure fis-

cal expenditures specific to tourism, such as those in terms of infrastructure development

and marketing, to determine the returns on these investments. Finally, tourist receipts or

tourist expenditures may be substituted to the number of tourist arrivals as a dependent

variable in the analysis to highlight not only the quantity of the tourism demand but also

the income that may be generated by these arrivals.

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I. Introduction

Financial literature has presented a strong emphasis on the relationship amongst inter-

national stock markets. The interest has increased considerably following the abolition of

foreign exchange controls in both mature and emerging markets, the technological develop-

ments in communications and trading systems, and the innovative financial products, such

as Country Funds and Depository Receipts.

In particular, the new remunerative emerging equity markets have attracted the atten-

tion of international fund managers as an opportunity for portfolio diversification and have

also intensified the curiosity of academics in exploring international market linkages.

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Recently, the growing economic importance of the Asian region has also attracted the at-

tention of academics. As these markets function in different cultural, institutional and regu-

latory circumstances than those of their Western counterparts, a substantial amount of re-

search is still required to contribute to a better understanding of many relevant issues.

The interdependence among the Asian stock markets will be more strengthened

through the influence of Japan and China in the 2000s1) than a decade ago in which Asian

markets were dominantly dependent upon US stock markets. However, the interrelationship

between US and Asian markets are expected to be stabilized overtime. Rather, Japan and

China stock markets will give more impact to other Asian markets. Japan and China are

expected to play a dominant role in the East Asia not only through their economic power

but also through their interdependence with other financial markets.

Japan has maintained for a long time a low interest rate to boost its economy in the

1990s and in the 2000s. This low interest rate policy and the recent freer money flows

have led many money managers to borrow yen with a low interest rate from Japan and to

invest the money in other Asian markets. This is called yen carry2) phenomenon. Thus, any

severe fluctuation of interest rate in Japan will cause the money managers to shift their as-

sets, which will in turn give impact to the other Asian stock markets.

On other hand, China stock market will give impact to the other Asian markets in the

other mechanism. In the 2000s China has become a main driving force in the region and

its relationship with other Asian countries has been significantly enlarged. Thus, shifts in

the macroeconomic polices in China such as foreign exchange rate and foreign investors'

access to its financial markets will give a impact not only to the China stock market but

also to the other Asian stock markets. However, due to the institutional barrier which in-

cludes governmental control over the foreign exchange rate, control over cross-border capi-

tal flows, and limits on foreign investors' access to the stock markets, the degree of market

integration with China has yet to be examined.

East Asian Stock Market Integration and Its Implications

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Many studies show that in the 1990s there was high correlation between US and

Asian stock markets. This was partly caused by the significant dependance of Asian coun-

tries upon US for their exports. Recently, this trend has been changed. In case of Korea, in

the 1990s the largest trading parter was US but in the 2000s China has replaced US for

Korea's largest trading partner. Thus, it is expected that the interrelationship between Korea

and US will be reduced overtime and that between Korea and China will increase. While

whether real economic interdependence of a certain country is reflected in the stock market

is still under debate3), it would be interesting to see how the stock market linkages change

over time in the region.

The earliest studies on international stock market linkages have focused on the identi-

fication of short-term benefits of international portfolio diversification. For example, Levy

and Saat (1970) and Solnik (1974) examined short term correlations of returns across na-

tional markets and pointed out the existence of substantial possibilities to diversify

internationally. More recently, Eun and Shim (1989), Hamao, et al. (1990), Longin and

Solnik (1995) exploited more sophisticated techniques to measure cross-country correla-

tions, and found evidence of significant linkages between stock markets around world.

Phylaktis and Ravazzolo (2004) examined stock market linkages of a group of Pacific-

Basin countries with US and Japan by estimating the multivariate cointegration model in

both the autoregressive and moving average forms over the period 1980-1998. They report

that while for the 1980s the relaxation of foreign ownership restrictions was not enough to

attract foreign investors' attention, the results of the 1990s show that the relaxation of the

restrictions have strengthened international market interrelations.

In our paper, we examine the change of integration, which is measured with correla-

tion coefficient and standard deviation of index return, of eleven East Asian stock markets

in the 2000s and compare them with US and European markets. Furthermore, we try to ex-

amine the degree of interrelations among China, Hongkong, and Taiwan which have very

strong interrelations in the real economic sector. This paper is structured as follows.

Section II explains the economic and financial integration in the East Asia. Section III pro-

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vides the data and results. The final section summarizes the main findings and offers some

concluding remarks.

. Economic and Financial Integration in Asia

2.1. Trade Integration in the East Asia

Over the last three decade East Asia economies have experienced a rapid integration.

Between 1975 and 2001, East Asia's share of global exports increased by more than three

fold (Ng and Yeats(2003)). During the same period, intra-region exports grew even faster.

The intra-region exports as a share of world exports rose from one percent in 1975 to six

percent in 2001. According to Baldwin (2006), the rapid integration was partly driven by

unilateral liberalization undertaken by countries in the region. Those countries liberalized

their economies in order to attract foreign direct investment (FDI). The regional integration

was also driven by the hollowing out phenomenon experienced by first Japan and later on

by Korea and Taiwan companies. That is, companies from those countries moved their pro-

duction facilities to countries in Ease and Southeast Asia, in which wages were lower, and

set up factories to use technology.

The 1990s saw East Asia becoming more integrated as trade barriers fell, trade in-

tensity and intra industry trade increased, and production networks formed. In the 2000s,

East Asia has had world class exports sectors and industries, and been emerged as the

global manufacturing supply chain. Three indicators show the important progresses of trade

integration (Sheng and Teng (2007)). First, this region has the largest increase in trade net-

working in the world as measured by trade connectivities-total trading partners for exports

and imports. Second, it has the largest trade openness as measured by total trade per GDP.

The degree of trade openness has also increasing and the importance of East Asia in total

world trade relationships has also grown significantly. Third, it has larger share of total

trade over world trade. In effect, the regional integration has been more intensified in the

2000s and will be progressed further by China's engagement in global trade. From the suc-

cessful accession to the WTO, China is interested in opening access to various economies'

markets while obtaining inputs for its industries. In the near future, China's willingness to


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engage in FTAs with East Asia, who do not want to be left behind in terms of access into

the Chinese market as well as those who do not want to lose its dominant position in the

region to China, will accelerate the integration of the region.

2.2. Regional Financial and Equity Market Integration

A significant features of Asian integration is that foreign trade integration has occurred

in advance of financial integration. Asian equity market's integration has been lagging far

behind the regional trade integration.4) Of the total global market capitalization of US$42

trillion in 2005, East Asia accounted for 16% (US$ 6.7 trillion). East Asia is still behind

Europe in terms of financial market integration. In particular, the capital markets have been

relatively shallow and contain significant barriers due to the following several reasons

(Sheng and Teng (2007)).

- Larger national differences in market practices, regulatory standards, laws and

processes.

- High transactions cost in many markets

- Barriers to foreign entry and regulatory conservatism towards financial innovation

- Conflict between national interest (protectionism) vs integration (openness)

East Asian financial and capital markets have the following three features. First, the

success in East Asian exports and high savings rate has created a high level of net foreign

asset position, which arose not only because of the current account surplus, but also con-

siderable inflows of foreign direct investment and foreign portfolio investment. Second, its

manufacturing prowess is not reflecting in the financial sector. Its markets remain bank

dominated.

Since the Asian financial crisis5), the banking system have improved their risk man-

agement but have concentrated on consumer lending rather than SME and corporate

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financing. The result is that the US and European investment banks, hedge funds and pri-

vate equity funds have dominated active investment banking and securities business.

Indeed, these Western financial intermediaries undertake the bulk of the cross border finan-

cial activities, whereas national banks6) have remained essentially domestic based.

Overall, the financial and equity markets in this region has been far lagged by foreign

trade integration. Yet, the trend of financial market integration is set upward. In effect, the

speed and magnitude of integration is left to be examined.

. Empirical Analysis of Financial Integration

3.1. Data and Methodology

The empirical analysis is conducted for eleven East Asian countries (China7),

Hongkong, Taiwan, Japan, Singapore, Philippine, Indonesia, Thailand, Malaysia Vietnam,

and Korea), US and three major European countries (England, Germany, and France). In

each case, national stock price indices are used to calculate the daily rate of returns. They

are: the Han Seng Index for Hongkong, TOPIX for Japan, KOSPI for Korea, the SES All

Singapore Index for Singapore, the Stock Exchange of Thailand (SET) Index for Thailand,

TSE for Taiwan, JKSE for Indonesia, KLSE for Malaysia, PSE All Shares Index (ALL)

for Philippine, the Vietnam8) Stock Index for Vietnam, SSE Stock Index for China, DJIA

for US, FTSE 100 for England, DAX 30 for Germany, CAC 40 for France.

The sample period covers from January 2000 to May 2007. The data consists of end

of the day observations of stock market index prices expressed in local currency. The data

were obtained form Daishin Securities, Co., We computed daily logarithm rates of return

from the price indices. We divided the whole sample period into two sub-periods to see

the change of market integration over time.

To see the interrelationship amongst the markets, we have calculate the correlation


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coefficients. This method is not sophisticated enough to see the long term relations or the

cause and effect of the relationship. However, the method enables us to see how much the

markets are integrated as long as the relationship is linear.

3.2. Results

3.2.1. East Asia Stock Markets

Table 1 shows that the average correlation coefficients of 11 East Asia stock markets

during the period of 2002 through 2007.5 is 0.283. This figure is relatively lower than that

reported in other empirical study for the period of the 1990s (Chai and Rhee(2005)). After

taking into account Vietnam stock market which has very low correlation and was not in-

cluded in their study, we have a consistent result with their findings. In the table 1, stock

markets with higher correlation coefficients are Singapore, Korea, Japan, and Hongkong,

0.395, 0.363, 0.342, and 0.337, respectively. This finding is consistent with the fact that

these four stock markets have long been opened to the foreign investors and thus are more

integrated than the other seven stock markets are. On other hand, stock markets with lower

correlation are China and Vietnam, 0.114 and 0.113, respectively. These two markets are

known to be difficult for foreign investors to access.9)

Table 1. The Correlation Coefficients of 11 East Asia Stock Markets for the

period of 2000-2007.5

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Table 2 shows the correlation coefficients of 11 stock markets during the period of

2000 through 2003. The average coefficient is 0.265 which is slightly lower than that of

the whole period. Stock markets with higher correlation coefficients are Singapore,

Hongkong, Korea, Thailand, and Japan. The coefficient of Thailand 0.314 is higher than

that of Japan, even though the difference is not statistically significantly different. On the

other hand, stock markets with lower correlation coefficients are China, Vietnam, 0.101

and 0.093, respectively. These two markets' low correlations indicate that these markets

have not been well integrated with other Asia markets.


period of 2000-2003

Table 3 shows that the correlation coefficients of the 11 stock markets for the period

of 2004-2007.5. Compared with the correlation coefficients for the period of 2000-2003,

the average of coefficients in 2004-2007.5 has increased by 0.088 to 0.353. This indicates

that the degree of integration among the 11 East Asia stock markets has been higher over

time. Singapore, Hongkong and Korea have a higher coefficients while other countries are

also experiencing higher correlation. China and Vietnam which were not well integrated in

the earlier period are following suit with higher coefficients.


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period of 2004-2007.5

Table 4 reports the difference of coefficients between the two sub-periods. Stock mar-

kets which have experienced a higher increase in the correlation are Taiwan, Indonesia,

and Japan, 0.152, 0.147, and 0.123, respectively. Other markets also show the increase in

their correlation with other markets.

Table 4. The Correlation Coefficients of 11 East Asia Stock Markets for the two

sub-periods

Table 5 shows the standard deviation of eleven East Asia stock markets for the two

sub-periods. Unlike the correlations which increased over time, standard deviations repre-

senting the volatility of the markets have decreased except for the Vietnam market. This

reduction of volatility could mean less risk to the investors who have to lose the diversifi-

cation effect due to the increased correlation over the two periods.

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Table 5. The Standard Deviation of 11 East Asia Stock Markets for the two

sub-periods

( ) refers to a negative figure

3.2.2 US vs 11 East Asia Stock Markets

Table 6 shows the correlation between US and 11 East Asia stock markets. The range

of the coefficient is between 0.85 (US vs Hongkong) and -0.11 (US vs China). Looking at

the difference of the correlations over the two sub-periods, there is only 0.033 increase,

which may indicates that the integration between US and 11 East Asia stock markets has

not been significantly changed over these periods.

Table 6. The Correlation Coefficients between US and 11 East Asia Stock

Markets for the two sub-periods

3.2.3. US and European Stock Markets

Table 7 and table 8 report the degree of correlation between US and three major

European Stock Markets for the two sub-periods. The average correlation coefficients is

0.734 which is a lot higher than that of 11 East Asia stock markets. This indicates that the

market integration among US and three Europe markets is higher than that found among

the 11 East Asia stock markets. However, it is found that there has been more increase in

the integration among the 11 East Asia markets than the Western stock markets.


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Table 7. The Correlation Coefficients between US, England, Germany, and

France for the period of 2000 through 2003.


France for the period of 2004 through 2007.5


France for the two sub-periods

3.2.4 Stock Markets of the Greater China Economy Area

Table 10 and 11 show the linkage amongst the stock markets for the Greater China

economic area which include China, Hongkong, and Taiwan. During the period of

2000-2003, the average correlation coefficients of the stock markets is 0.328 which is in-

creased to 0.507 in the period of 2004-2007.5. The change in the degree of linkage in-

dicates that overall stock markets in the zone has been more integrated, even though

China's A share index still has a meak correlation with Hongkong and Taiwan. Considering

the strong economic ties between China, Hongkong, and Taiwan, the weak linkage should

be considered to be abnormal.

Sok Tae Kim

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Table 10. The Correlation Coefficients between China' SSE, A, B indices,

Hongkong, and Taiwan for the period of 2000-2003

Table 11. The Correlation Coefficients between China' SSE, A, B indices,

Hongkong, and Taiwan for the period of 2000-2003

. Summary and Conclusion

In this paper, we have investigated the linkage and dynamic aspects amongst eleven

East Asia markets, along with US and three Europe stock markets. Our main objective was

to examine how these linkages are changed in the 2000s. Furthermore, we wanted to com-

pare the degree of integration between East Asia stock markets and their Western

counterparts.

We have examined these issues by looking at the correlation coefficients of the stock

markets using the daily index returns for the period of 2000-2007.5. Our findings are as

follows:

First, compared with their Western counterparts, eleven East Asian stock markets have

relatively low correlations with each other and their level of integration is not homoge-

neous with coefficients ranging from 0.395 in case of Singapore and 0.114 for Vietnam


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and China stock markets.

Second, when we compare the periods of 2000-2003 with 2004-2007.5, there is an in-

crease in the level of coefficients for all the stock markets investigated. This indicates that

there is a progress in the stock market integration. For the same periods, their Western

counterparts experienced little increase in their integration level.

Third, the increase of correlations amongst the eleven markets came with the reduction

of volatility which were measured with standard deviation. It is interesting to see that

while the increase of correlation renders a diversification and herding risk to the portfolio

managers, the reduction of volatility can offer a reduced risk to them.

Finally, looking at the Greater Chinese Economic zone which include the mainland

China(SSE Index, A, and B Indexes), Hongkong and Taiwan stock markets, we found very

meak linkages either between China and Hongkong, or between China and Taiwan stock

markets and found relatively a high linkages between Hongkong and Taiwan. The low

linkage, which do not reflect the strong economic ties among them, between China and

other two markets, may be caused by some institutional barriers.

The analysis in the paper of stock market linkages in the eleven East Asian stock

markets has indicated that international investors have opportunities for their portfolio di-

versification by investing in most of the markets that have low correlations. One the other

hand, however, the increase of the linkages amongst the markets may reduce the portfolio

effect which should include stocks with low correlations.

The East Asian stock markets, whose economies have been integrated significantly in

the 2000s, are expected to be more integrated as institutional barriers, such as limited mar-

ket access for foreign investors, and governmental intervention on exchange rate and cross

border financial flows, are being lifted.

This paper is preliminary in the sense that more in-depth investigation, such as co-

integration and causality tests to see what the linkages are and how they change over time,

has yet to be made in the future.

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Being a member of the World Trade Organization (WTO), there are a lot of opportunitiesfor Vietnamese trading companies but there are also equally troubles and difficulties.Among those troubles and difficulties are those concerning laws and politics.To be successful in a foreign market, a company cannot ignore political and legalfactors. Even the best business plans can go wrong as a result of unexpected politicaland legal influences. Failure to anticipate these factors can be the undoing of an other-wise successful trading company.In making decisions on whether to enter a foreign market, the company should concen-trate on three key areas: the political and legal circumstances of the home country; thoseof the host country; and the bilateral and multilateral agreements, treaties, and laws gov-erning relations between the two countries.Home country political and legal environments are concerned with policies, regulations,embargoes or trade sanctions, export controls and regulations on international businessbehaviour.Host country's political and legal environments deal with political risks and actions; legaldifferences and restraints and the influencing of politics and laws.Besides, international laws, international treaties and conventions must also be taken intoconsideration in doing international trade.

World economic integration has become so popular a trend that no country that wishes

to have a sustainable development stand outside this trend. However, integrating and going

internationally is not an easy job. Companies that wish to do so have to understand thor-

oughly the environments of foreign countries. Those environments are economic environ-

ment, political, legal environment, cultural environment, technology environment . of

which political and legal environment are of great concern.

What are the legal and political environment and what effects can it exert on interna-

tional trade?

Do Thi Loan

- 242 -

This paper is dealing with what a special care a company should take if they wish to

go internationally concerning political and legal environments in a foreign market.

Factors should take into consideration are as follows:

. HOME-COUNTRY POLITICAL AND LEGAL ENVIRONMENT

No international trading company can afford to ignore the policies and regulations of

its home country. Wherever a company is located, it will be affected by government poli-

cies and the legal system. Embargoes or trade sanctions, export controls and regulations on

international business behaviours, are the main governmental activities which are of con-

cern to international marketers.

1.1. Trade sanctions and embargoes

Trade sanctions and embargoes are used by governments to prevent a free flow of

trade in goods and services for adversarial and political, rather than strictly economic

purposes. Over the years, economic sanctions and embargoes have become a frequently

used foreign policy tool for many countries. Often, they have been imposed unilaterally in

the hope of changing a country's government or at least changing its policies. The US eco-

nomic embargo against Vietnam, that had been in place since 1975 and was lifted by

President Bill Clinton on February 3, 1994, had caused Vietnamese trading companies a

great many difficulties. Many countries were not allowed to import Vietnamese goods or

invest in Vietnam. To avoid problems with the United Stated, countries that wished to do

business with Vietnam or to import Vietnamese goods had to do so indirectly through a

third country or wait until the embargo was lifted.

1.2. Export controls

Many nations have export control systems to deny the acquisition of strategically im-

portant goods by adversaries. Justification for this are concerns about national security, for-

eign policy, short supply, or nuclear proliferation. Under the export control system, in or-

der for any export from a country to take place, the exporter must obtain an export license

The Impact of Political and Legal Environments on International Trade

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from the Department of Commerce. In the US, for example, the export control system is

based on the Export Administration Act and the Munitions Control Act. These laws control

all exports of goods and services from the US. The exporter must obtain a license from

the Department of Commerce, which administers the Export Administration Act. In

Vietnam, the Ministry of Trade is responsible for controlling all exports. Previously, li-

censes had to be obtained for each consignment. This regulation is now no longer in use,

but exporters of certain strategic goods must still obtain a license from the Ministry of

Trade of Việt Nam.

1.3. Regulations of international business behaviours

Home countries may implement special laws and regulations to ensure that the interna-

tional business behaviours of domestic firms is conducted within the legal, moral, and eth-

ical boundaries considered appropriate. The definition of appropriateness may vary from

country to country. Therefore, such regulations, their enforcement, and their impact on

firms can differ greatly among nations.

Areas in which governments regulate international business actions are boycotts, anti-

trust measures, bribery and corruption. These areas are conducted differently depending on

regulations, habits, practices and circumstances of doing business in each country. For ex-

ample, in many countries, payments or favours are a way of life, and "a greasing of the

wheels" is expected in return for government services. Bribes are paid and favours done

for foreign officials in order to gain contracts. But, in some countries paying bribes is con-

sidered a crime. For instance, many US firms complained about the Foreign Corruption

Practices Act passed in 1977, making it a crime for US firms to bribe a foreign official for

business' purposes. They explained that the Act hindered their efforts to compete interna-

tionally against companies from countries that have no such anti-bribery laws.

Governmental regulations often pose difficult and complex problems as they place in-

ternational marketers in the position of having to choose between home country regulations

and foreign business practices.

Do Thi Loan

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. Host-Country Political and Legal Environment

The host country's environment, both political and legal, affects international business

operations and export marketing activities considerably. A successful business person has to

understand thoroughly the country in which the firm do business, so that they can antici-

pate and plan for any changes that may occur. Factors to be taken into consideration in

studying political and legal environments include: political risks and actions, legal differ-

ences and restraints and the influencing of politics and laws.

2.1. Political actions and risks

Companies usually prefer to do business in a country with a stable and friendly

government. But it is not always easy to find such government. Companies must, therefore,

continually monitor the government, its policies, and its stability to determine the potential

for political change that could adversely affect their operations. Political risks can be very

high in countries that do not have a history of stability and consistency but very low in

countries that do have. However, in many countries, governments which have appeared sta-

ble, can be swept away by popular movements. There are three key political risks: owner-

ship risk, which exposes property and life; operating risk, which refers to interference with

the ongoing operations of a company; and transfer risk, which happens when funds are

shifted between countries.

Investors abroad should pay attention to changes in governmental policies concerning

expropriation or confiscation. Expropriation involves the transfer of a certain amount of

wealth and resources from foreign companies to the host country, usually with some com-

pensation However, the level of compensation is often unsatisfactory. For example, govern-

ments may offer compensation in the form of local, non-transferable currency or may base

compensation on the book value of the firm. Confiscation is similar to expropriation but

without compensation.

Exporters have to pay greater attention to government policy on exchange controls

which they levied against certain products or companies in order to reduce the importation

of goods considered unnecessary. Therefore, before entering a foreign market, companies

should see what goods are allowed to be imported and what are not. Host governments


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may also encounter a shortage of foreign currency, with the effect that they may impose

controls on the movement of capital in and out of the country. Such controls may make it

difficult for foreign companies to effect payment of export goods.

Exporters should also consider price controls imposed by a government on imported

products considered to be highly sensitive, from a political perspective, such as food and

healthcare.

Clearly, international marketers in general, and exporters in particular, must consider

carefully the political environment before making decisions on whether to enter a foreign

market or conduct business overseas.

2.2. Legal differences and restraints

Different countries apply different systems of laws and regulations which can often in-

fluence negatively marketing activities of export companies. Failure to understand these dif-

ferences may cause a company significant losses. This happened to a Rattan and Bamboo

Import and Export company in Da Nang, a central city of Vietnam, a few years ago. The

company exported a large consignment of bamboo and rattan to Australia. The Australian

Government has very strict laws for goods imported especially live and fresh products. It

stipulated that in order for bamboo and rattan goods to be imported into Australia they

must first be fumigated. Failure to understand this regulation cost the company millions of

dollars. The consignment was not accepted and was destroyed on the spot. The company

not only suffered from the loss of the shipment but also had to bear all expenses incurred

from destroying the consignment (it must be noted that these expenses were greater than

the total value of the consignment).

There are many other unhappy lessons suffered by many Vietnamese exporting compa-

nies that tried to enter a foreign market without knowing legal stipulations and regulations

in that country.

In the world today, there exist two major legal systems: common law and code law.

Common law is based mainly on tradition, precedents and customs and depends less on

written statues and codes. On the other hand, code law is based on a comprehensive set of

written statues. Host countries may adopt a number of laws that affect a company's ability

to market. There can be laws affecting the entry of goods, such as tariffs and quotas; laws

Do Thi Loan

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requiring export and import licensing; anti-dumping laws prohibiting cost sales of products;

laws protecting domestic young industries; contract laws etc...

To be a successful international business person one must be thoroughly aware of

these laws before entering a foreign market. One should also clearly stipulate when signing

the contract which laws to apply in case contradictions happen.

. The International Environment

Besides the laws and politics of both the home and the host countries, international

marketers must pay attention to the international political and legal environment. Relations

between countries can have a profound impact on companies trying to do business

internationally. The effect of politics is determined by both the bilateral political relations

between home and host countries and the multilateral agreements governing the relations

among groups of countries. Also, in addition to considering the home and host country's

laws, international marketers have to consider international laws, international treaties and

conventions. If there is a conflict between contracting parties, the best and the quickest

way to solve it will be to take it to the Board of Arbitration.

In order to do business successfully abroad, an international marketer must, among

many other factors, pay special attention to not only political and legal environment in the

home country, the political and legal environment in the host country, but also the laws

and agreements governing relationships among nations. They must anticipate changes and

develop strategies for coping with problems that can result from changes in the political

and legal environment. Whenever possible they must avoid being taken by surprise. The

best the international marketer can do is to be aware of political influences and laws and

adapt to them whenever and wherever possible.

Only when marketers doing business internationally are fully aware of political and le-

gal environment at home, abroad and international rules and regulations can they limit its

negative impacts on their business activities and be successful in international markets.


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Reference

E Jerome McCarthy, William D. Perreault, JR(1991). Essentials of marketing. fifth Edition.

IRWIN, USA.

Gelrald Albunm et al.(1995). International Marketing and Export Management. Addison-

Wesley publishing company, Inc.

Michael R. czinkota, Georgetown University(1995). International Marketing. Harcourt Brace

and company.

Phillip Kotler, Gary Armstrong(1991). Principles of marketing. Fifth edition, Prentice-Hall

International Editions.

Phillip R. Cateora, University of Colorado(1997). International Marketing, Irwin/Mcgraw-

Hill.

Sak Onkvisit & John J. Shaw(1990). international marketing analysis and strategy.

Macmillan Publishing Company, New York.

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