IN FOCUS: ‘PH economy growth narrow, shallow, hollow…but getting better; MSMEs need to step up’

screen-shot-2016-12-06-at-9-37-31-amThe growth of the Philippine economy is narrow, shallow and hollow but is getting better, and the micro, small and medium enterprises or MSMEs must step up.  This practically summed up the message of former National Economic and Development Authority (NEDA) director-general, and current Ateneo de Manila economics professor Dr. Cielito F. Habito during the symposium organized by UP ISSI last 24 November 2016 in celebration of its 50th founding anniversary.

As in his previous presentations Dr. Habito summarized into short statements the important points he wanted to be highlighted in his topic “MSMEs and the Philippine Economy: Inclusive Growth and Development”:

Inclusive growth and development has been a compelling need

Dr. Habito began his presentation by describing the economy that the country has had for so many years and it has been characterized as “narrow, shallow and hollow”.  This has made the Philippines experience what is called a “non-inclusive growth”, as its economy is driven by only a few high-growth sectors, mainly finance and real estate, and by a few geographic areas such as the National Capital Region and its surrounding areas Region III and Region IV-A.

The Philippine economic growth is likewise shallow, as the bulk of exports from low domestic value-added sectors have little linkage to the rest of the economy.  He cited the case of the local electronics industry, which produces the country’s top exported products and is also the source of the country’s top imported products.  This means that it was only labor that was added to the product and the industry is not linked to other industries.  Thus, while the industry is growing, only a few are benefiting from it.

Lastly, economic growth is hollow, as it is characterized by “jobless growth”.  That is, jobs do not grow as fast as the output of the economy.  According to Dr. Habito the most glaring illustration of this occurred in 2013, when the growth rate of the country’s gross domestic product or GDP was 7.3 percent while the employment growth rate was only 0.17 percent.  This means that the growth of the economy has failed to produce a commensurate number of jobs.

Amid these bad news, however, Dr. Habito was happy to report the good news about the Philippine economy.  First, the quality of economic growth has been improving, he said.  Referring to the data provided to him by former NEDA director-general and now chair of the Philippine Competition Commission Arsenio M. Balisacan, Dr. Habito showed the demand and supply sides of the economy.  He was happy to note that spending for investment is on the rise unlike before, when it was consumption that was growing on the demand side.  On the other hand, the manufacturing industry is contributing more to economic development unlike before, when it was the service sector that was leading the growth of the economy on the supply or production side.

Second, unemployment in the country is down “at a record low of 5.4 percent even as [overseas Filipino workers] deployment and remittances are slowing”, he said.  And last, poverty incidence has dropped from 26 to 21 percent, “making more ambitious poverty reduction targets feasible”, he added.

Agri, tourism and manufacturing most inclusive sectoral growth drivers

Asked by the Asian Development Bank in 2010 to do a study on what is needed for inclusive growth, Dr. Habito said that one approach was to determine which sectors generate many jobs and are therefore labor-intensive, and which ones have “a lot of linkages with other domestic industries” or those whose majority of raw materials or intermediate products are not imported.

These linkages are called the backward and forward linkages.  Backward linkage means the firm or enterprise buys inputs from the domestic market while forward linkage means that firm or enterprise sells these inputs to other industries in the domestic market as their own inputs.

Unsurprisingly, after analyzing these backward and forward linkages of the Philippine economy, three industries emerged as the most inclusive growth drivers: agriculture, tourism and manufacturing.

Out of the three, only agriculture failed to show an impressive performance for the past four years unlike tourism and manufacturing, which surpassed even the country’s GDP.  Dr. Habito attributed the good performance of the tourism industry to the following factors: domestic tourism surge, the “more fun” campaign of the Department of Tourism, the country’s “more open skies” policy, the presence of a cruise circuit within the Association of Southeast Asian Nations or ASEAN in which the Philippines is part of, huge gaming industry investments, medical tourism and retirement estates, and airport upgrading through private-public partnerships.

Meanwhile, Dr. Habito reported an increased growth for the manufacturing sector, which from 2004 to 2009 registered only 3 percent per year but is now growing to almost 8 percent per year—faster than the country’s GDP.  This is what the DTI or the Department of Trade and Industry called “a resurgence of the manufacturing industry”, according to Dr. Habito.

MSMEs must contribute more

The former NEDA chief continued his discourse by highlighting the MSMEs’ contribution the country’s overall economic growth.  He said that their share is smaller in the Philippines compared to those in other countries in the ASEAN region.

Philippine MSMEs’ contribution to employment is also low compared to most of their counterparts in the region.

“We have a long way to go if we want to make our MSME sector really contribute to a more inclusive growth and development,” Dr. Habito said.

Why have MSMEs not contributed enough in the Philippines?  Dr. Habito mentioned four obstacles that hinder growth for the country’s MSMEs: low number of MSMEs availing of financing and credit, lack of technology access through research and development and testing laboratories for quality standards, lack of access to imported inputs or raw materials, and lack of access to markets due to poor infrastructure and lack of value chain linkages.

He also cited some “real-life stories” of small entrepreneurs that illustrate the plight of small businesses: one was the questionable requirements being demanded by some local government units for small businesses, and another was the seeming individualism or “kanya-kanya” mentality of the business owners themselves.

Traditional barriers to wider MSME growth call for creative new approaches

Related to the obstacles that hinder the growth of the MSME sector, Dr. Habito enumerated some creative new approaches that would remove the traditional barriers to wider MSME growth, and these were what he called the “critical interventions” to MSME development.

The first critical intervention is to expand MSME access to finance or financial inclusion.  This can be achieved through: credit surety fund, credit information system, stock exchange for SMEs, SME credit and guarantee, microfinance and SME bank.

The second critical intervention that Dr. Habito mentioned was to expand MSMEs’ access to technology, and this is achieved through: public R&D, the Small Enterprise Technology Upgrading Program or SETUP of the Department of Science and Technology, shared service facilities of DTI and equipment loans.

The last critical intervention Dr. Habito mentioned was to foster MSME clustering and promote inclusive value chains, improve access to raw materials and markets, and provide an enabling environment for MSMEs’ “internationalization”.

Meanwhile, MSMEs must also do their homework if they want to be part of this internationalization, he said.  Specifically, they need to strengthen and professionalize financial and overall business management, study opportunities in the ASEAN Economic Community and the requisites for availing of these opportunities, and shun the “kanya-kanya” attitude and instead embrace clustering and “coopetition” or collaboration among competitors.

MSME development must start with the young

Lastly, Dr. Habito emphasized the need for the youth to embrace entrepreneurship.  He said that he had long observed that our schools seem to be “geared towards preparing our children to work for somebody else and eventually earn a wage rather than to create jobs and to create wealth”.

“If the orientation of our youth is more of entrepreneurship rather than mere employment,” he added, “then we would probably have a much lower unemployment rate, given the 5.4 percent unemployment [rate] which is still high compared to our neighbors.”

The problem is, surveys taken in the past ten or so years show that the common ambition of the students is to work for somebody else—especially for a multinational company—and, worse, to work overseas rather than here in the country, according to Dr. Habito.

He further emphasized that entrepreneurship is something that can be taught even in kindergarten and “is not just for economics and management majors”.   Entrepreneurship values can be taught in the primary school while the skills can be taught in high school and up, he said.

He concluded his presentation by highlighting the fact that by 2050 the working age population of the Philippines will dominate the “elderly and the very young” or the dependent part of the population”.  “This is called the demographic sweet spot,” he said.

The other fact, however, is that 33.5 percent or one out of three children aged less than five years old are stunted and hence permanently impaired from reaching full brain and physical development.  Another 7 percent are wasted or underweight but this occurrence is reversible if the children are brought to a feeding program.

Dr. Habito compared the demographic profile of the Philippines with those of Japan and Thailand.  The majority of the Japanese population are currently between 35 and 70 years old, while Thailand is currently enjoying its own demographic sweet spot, as the majority of its population are in the working age.  The population of the Philippines, on the other hand, is young, as more infants and children dominate the base of its population.

But by 2050, the picture will be different: Japan and Thailand will have more dependent elderly than their working population while the Philippines will have less elderly and more working age people.  Dr. Habito warned, though, that since one-third of the working age population could be ill-equipped because of their stunted growth, they might just be relegated to menial jobs so that instead of being the demographic sweet spot the country was hoping for, they might just be “the demographic time bomb”.

“[The challenge is to] feed our youngest children,” he said.  “The first 1,000 days of a child is the most critical in his or her life.  That’s why we need to do something special for those young children and the nursing mothers who are feeding them.”

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