Accelerating Inclusive Growth and Competitiveness through the AEC: Focus on the Manufacturing Sector

Josef T. Yap 21 October 2013

Background

Lack of Economic Transformation

1980 1990 2000 2006 2011China 43.9 36.5 40.4 32.9 32.2Indonesia 13.5 23.0 27.7 27.5 24.3Malaysia 21.6 22.7 29.9 28.8 24.6Philippines 27.7 26.8 24.5 23.6 21.1Thailand 21.5 24.9 33.6 35.0 29.9Viet Nam 16.1 12.3 18.6 21.2 19.4Source: UN Statistics Division [http://unstats.un.org/unsd/dnlList.asp; accessed, 6 October 2013]

Share of Manufacturing in GDP (%)

Main Outcome: Poverty Situation in PH is dismal

Population in Poverty (in percent)1/

Proportion of Population

Below $1.25 (PPP) a Day2/

Gini Coefficient3/

PRC 4.2 (2008) 11.8 (2009) 0.425 (2005)Indonesia 12.0 (2012) 16.2 (2011) 0.381 (2011)Malaysia 1.7 (2012) 0.0 (2009) 0.462 (2009)Philippines 26.5 (2009) 18.4 (2009) 0.430 (2009)Thailand 13.2 (2011) 0.4 (2010) 0.394 (2010)Viet Nam 20.7 (2010) 16.8 (2008) 0.356 (2008)Sources/Notes:1/ World Bank, WorldDevelopment Indicators accessed 6 October 20132/ Asian Development Bank, Statistical Database System accessed 6 October 20133/ http://www.adb.org/sites/default/files/pub/2013/ki2013.pdf accessed 6 October 2013

Poverty and Inequality in East Asia

Role of Regional Production Networks

Regional Economic Integration

Regional Production Networks

Manufacturing Sector

FDI

Regional Integration Anchored on Regional Production Networks

Structure of Regional Production and Distribution Networks

Region 1990 1995 2000 2005 2008 2009 2010

Japan 5.2 13.6 22.0 34.3 45.0 37.1 47.9

China 5.6 19.2 28.9 85.2 118.6 115.7 161.9

ASEAN 4 15.8 47.5 54.6 67.9 82.7 69.6 95.9

S.Korea+Taipei,China

13.2 31.8 41.7 59.2 74.0 64.2 86.1

Value of Intermediate Goods Imports of Individual East Asian Countries and Regions from East Asia as a Whole (Billions of U.S.

Dollars)

0

40

80

120

160

200

84 86 88 90 92 94 96 98 00 02 04 06 08 10

Intermediate Goods Exports from East Asia as a Whole to Individual Countries or Regions.

Bil

lion

s of

US D

olla

rs

China

ASEAN

South Korea& Taipei,China

Japan

Note: ASEAN includes Malaysia, the Philippines, Singapore, and Thailand.Source: CEPII-CHELEM Database

Source: W. Thorbecke “Exchange Rates and Trade in East Asia”

Source: Cheewatrakoolpong, Sabhasri, and Bunditwattanawong (2013)

…Largely through FDI

1990 2000 2010 2012Indonesia 8,732 25,060 154,158 205,656Malaysia 10,318 52,747 101,510 132,400Philippines 4,528 18,156 26,319 31,027Singapore 30,468 110,570 461,417 682,396Thailand 8,242 29,915 137,191 159,125Viet Nam 1,650 20,596 65,348 72,530China 20,691 193,348 587,817 832,882Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics), accessed on 6 October 2013

FDI Inward Stock (million US$), ASEAN and ChinaFDI inward stock (million US$)

PH export performance has lagged behind that of other EA economies

1995 2000 2005 2012Japan 441,538 479,323 595,697 798,937Korea 125,058 172,268 284,419 547,870Indonesia 45,418 62,124 85,660 190,032Taipei, China 111,405 151,458 198,168 300,533Philippines 17,447 38,078 41,255 51,995Malaysia 73,865 98,229 141,595 227,334Thailand 56,444 69,152 110,360 228,141China 148,780 249,203 761,953 2,048,900Hongkong 173,753 201,855 289,325 442,775Viet Nam 5,449 14,483 32,447 114,573Source: ADB Key Indicators for Asia and the Pacific 2013

Export of Goods and Services (in million US dollars)

Main argument: A more dynamic manufacturing sector would have provided more higher-paying jobs to the

less-educated workforce, thereby making poverty reduction faster and economic growth more inclusive.

Policy Options for Inclusive Growth

• AEC is an opportunity to attract more FDI• AEC will generate regional public goods,

especially in infrastructure• Comprehensive Roadmap for Industry:

address horizontal and vertical constraints, coordination failure

• Emphasis on facilitating involvement of SMEs in regional production networks

Opportunities & constraints

• 6.6% 2012; 7.6% H1; economic outlook remains positive; a new growth area, capitalize on this to attract FDI

• To sustain high growth, take advantage of market opportunities from a bigger market AEC 2015 transform & upgrade manufacturing

Strengths Weaknesses

• Good macroeconomic environment• Political stability: “Daang Matuwid”• Young, trainable, English speaking

workers• Export zones’ legal framework,

incentives

• Power cost• Inadequate infrastructure• Governance: smuggling• Weak industry

competitiveness

Opportunities Threats

• Calamities in Thailand & Japan disrupted supply chain driving investors to seek alternative locations

• Rising labor cost in China & increasing tension between Japan & China

• ASEAN, FTAs: market of over 600 million; regional production networks

• Strong peso• Global uncertainty,

economic slowdown in the developed world

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• Classics: maintain long term competitiveness• Emerging Champions: need to build on these products

Classics (RCAs remain high)

Forest copper ores & copper

Raw materials

fuel wood, wood charcoal

Cereal, etc

Unmanufactured tobacco & vegetable textile fibers

Labor-intensive

Knitted men, boys, women, girls’ clothing; other textile apparel

Capital-intensive

tulle, lace, embroidery

Machinery

electric distribution equipment, nes; radio broadcast receiver; transistors, valves

Chemicals

alcohol, phenol

Classics, Emerging ChampionsEmerging Champions (low to hi)

Raw materials

scrap ferrous waste

Animal prods.

milk & cream

Cereals, etc

Manufactured tobacco

Machinery electric power machinery, parts; electric machinery apparatus nes; parts for tractors & motor vehicles

Labor-int. glass

Chemicals metal salts, inorganic acid

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Disappearances, marginalsDisappearances (high to

low)Marginals (RCAs remain low)

Raw materials

Stone, sand, gravel; non-ferrous waste, scrap

Forest Pulp & paper*

Forest veneers, plywood Cereals cereal prep’ns*, edible prod.*

Tropical agri

sugars, molasses, cocoa, natural rubber

Capital-intensive

furskins, tanned, dressed

Animal fish, animal veg. fats, oils, nes

Machinery

ship, boat, float structures* cycles, motorcycles; aircraft, associated equipment; medical instruments; arms & ammunitions

Labor intensive

pottery, furniture, cushions, clothing accessories, fabric

Cereals animal feed stuff Chemicals

soap, cleaners, polish, etc

• Disappearances: declining competitiveness, move up the value chain, product/technology ladder to more sophisticated products

• Marginals: observe & let them grow to become exporter16

Potential Growth areas: Nearby

Source: Usui, N. 2012. Taking the Right road to Inclusive Growth. ADB. Manila.

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• Can be developed with relative ease, can utilize existing capabilities (inputs, institutional/infrastructure, skills, technology) embedded in the current export structure

Criteria Leamer Nearby: Detailed Commodity Group (SITC 4 digit)

Highest level sophisticationHighest spillover effect

Machinery

Complete digital processing machines; watches; photographic cameras; TV, radio-broadcasting, transmitters; clocks; electrical line telephonic; portable radio receivers; microphones; calculating, accounting machines; sewing machines; domestic electromechanical appliances & parts

Capital Fabrics, woven of continuous synthetic textile materials

Labor Precious jewelry; porcelain or china house ware; pianos

Animal Fish, dried, smoked; fish fillets frozen

Agriculture

Refined sugar

Cereal Flours & meals, of meat , fish

Highest labor intensity

Labor Synthetic or reconstructed precious or semi-precious stones; pianos; pens; small wares & toilet articles; precious jewelry; porcelain

Capital Knitted not elastic nor rubberized of fibers other than synthetic; Fabrics, woven of continuous synthetic textile materials

Machinery

Clocks; watches; photographic cameras; sewing machines

Potential growth areas: Middle

Source: Usui, N. 2012. Taking the Right road to Inclusive Growth. ADB. Manila.

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• Can be developed with some difficulties, not all required capabilities are in the country

Criteria Leamer Middle: Detailed Commodity Group (SITC 4 digit)

Highest level sophistication

Chemicals

hormones, natural, or reproduced by synthesis; other nitrogen-function compounds; modified natural resins; oxygen function amino compounds; epoxide resins; regenerated cellulose; salts of metallic acids

Metal angles, shapes, sections & sheet filing of iron or steel

Labor orthopedic appliances, heating aids; safety glass

Machinery

metal forming machine-tool; nonmechanical or electrical instruments; aircraft of unladen weight from 2000kg to 15000kg

Highest spillover effect

Machinery

cocks, valves for pipes boiler shells; air pumps, vacuum pumps & air or gas compressors; other articles of rubber; other non-electric parts & accessories of machinery, nes

Chemicals

phenoplasts; aminoplasts

Capital felts, articles of felt; coated or impregnated textile fabrics & products; bonded fiber fabrics

Highest labor intensity

Raw materials

slag, scaling, dross & similar waste; other natural abrasives; seeds, fruits, spores, nes for planting

Forest fiber building board of wood or other vegetable material

Potential growth: far-away

Source: Usui, N. 2012. Taking the Right road to Inclusive Growth. ADB. Manila.

19• Need quite different capabilities that the country has not yet

developed

Criteria Leamer Far-away: Detailed Commodity Group (SITC 4 digit)

Highest level sophistication

Chemicals

amide-function compounds exc. urea; other organo-inorganic compounds; suphonamides, sultones

Forest printing paper & writing paper

Machinery

chassis fitted with engines for vehicles; furnace burners mechanical strokers etc & parts; other non-electrical machines & parts

Highest spillover effect

Machinery

electrical insulating equipment; furnace burners, mechanical stokers; harvesting & threshing machines; engines & motors; other parts & accessories of vehicles

Forest paper & paperboard coated impregnated in rolls sheets

Chemicals

aldehyde, ketone, & quinone-function compounds; inorganic esters, salts & derivatives; polyamides

Capital special products of textile materials

Highest labor intensity

Machinery

nuclear reactors & parts; bodies for vehicles; other parts & accessories for vehicles; railway track fixtures; parts nes of aircraft hdg 792, mechanically propelled railway, tramway, trolleys

Capital linoleum & similar floor covering, special products of textile material; central heating equipment

Constraints to GrowthMajor Area Main Issues & Constraints

Infrastructure & Logistics

High cost & unpredictability of powerHigh cost of domestic shipping

Governance & Regulation

Smuggling, corruption, bureaucracy & red tapeLack of streamlining/automation of business procedures

MSME development

Access to finance, technology, inability to comply with standards

Innovation Lack of innovation

HRD Lack of skilled workers

Supply chain gaps

Absence of upstream/downstream industries; weak parts & components sector high cost of raw materials

Domestic & export expansion

Lack of scale economies due to shrinking domestic base• Liberalization competition reduce firm survival

• Crucial factors in a liberalized & highly competitive market: productivity, export-orientation, foreign equity, firm size

• How to address challenges & take advantage of opportunities arising from AEC transform & upgrade manufacturing

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Roadmap for structural transformationVision: globally competitive manufacturing industry

-Rebuild capacity of existing industries, strengthen emerging industries, maintain competitiveness of comparative advantage industries

-Deepen participation in regional integration by serving as hubs in production networks for industries like auto, electronics, machinery, garments, food

-Shift to high value added activities,investments in upstream industries -Link & integrate industries--crucial industrial linkages bet. SMEs & LEs to set off a chain reaction of broad based industrial development

Phase I 2014-201

Phase II 2019-2023

Phase III 2024-2028

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Targets, Strategic actions, complementary measures

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30% value added; 15%

employment

Horizontal measures

Coordination

mechanism

Vertical measures

• Close supply chain gaps access to raw materials:

food furniture, garments integration mechanism:

copper, iron & steel, chemicals

• Expand domestic market & exports

automotive & shipping

• HRD• SME development• Technology upgrading,

innovation• Power, smuggling,

logistics & infrastructure

• Investment promotion• Competitive exchange

rate

open trade regime, sustainable macro policies, sound tax policies & administration, efficient bureaucracy, secure property rights

Industrial Upgrading & Transformation • CRITERIA for Industry Support

Strong potential to generate employment Address missing gaps & linkages & spill-over effects Level of product sophistication; Competitive market environment

• INDUSTRIES: Automotive, motorcycle, shipbuilding, chemicals & allied industries, electronics & electrical appliances, food/agri-business, garments, textiles, copper, pulp & paper, rubber, furniture, jewelry, iron & steel

• HORIZONTAL Programs to directly improve productivity Cluster-based intervention: increase supply of skilled workers,

encourage technology adoption, improve regulation & infrastructure

• HORIZONTAL Programs to address coordination failures Implementation of legislations; strict enforcement of product

quality standards; provide access to raw materials, intermediate inputs & common service facilities, R&D facilities; aggressive investment promotion & marketing to attract investment; trainings, business & academe linkages

• VERTICAL Program to attract investment in “middle” & “far-away” Temporary fiscal incentives to auto, ship-building, iron & steel

• COORDINATION MECHANISM Industry councils/institutes: Auto, chemicals, garments & textiles, electronics, food,

motorcycle, shipbuilding, iron & steel, copper, SME Institute

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Government CoordinationAgency Area

DOLE policies on hiring & firing; new, high productivity jobs

DOST innovation strategy, R&D, common facilities for product testing & certification, incubation

NEDA Philippine Development plan, policy coordination esp. coherent trade & industrial policies, exchange rate

DA Agriculture roadmaps

BOC smuggling, trade & customs facilitation

TESDA, DOLE, PRC training of workers, skilled workers needed (supply gap)

Tariff Commission tariff distortions, anti-dumping & safeguard measures

DOF, DBM budget, temporary incentive measures

BOI, PEZA, Clark, Subic

Investment promotion

DTI-MSMED, DOST MSME development

LGUs business permits & regulations (double taxation)

DOE energy plan, policy implementation (B5 biodiesel)

PPA, MARINA regulatory & port charges & domestic shipping, RA 9295

DENR environmental permits, plantations

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