whythephilippinesisnot(yet)$...
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Why the Philippines is not (yet) in a middle-‐income trap
And why we should worry nonetheless
9 June 2016
Emmanuel S. de Dios, UPSE For the EMIT Project
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1. The idea of it
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Middle-‐income trap
Original issue: Why do some economies grow rapidly for a Jme but then stagnate long aLer without graduaJng into high-‐income economies? Hypothesis: [Such economies are] “unable to compete with either low-‐wage economies or highly skilled advanced economies” [Kharas and Kohli 2011]
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El demonio de las comparaciones
0
10000
20000
30000
40000
50000
60000 19
50
1952
19
54
1956
19
58
1960
19
62
1964
19
66
1968
19
70
1972
19
74
1976
19
78
1980
19
82
1984
19
86
1988
19
90
1992
19
94
1996
19
98
2000
20
02
2004
20
06
2008
20
10
Rea
l GD
P pe
r ca
pita
, Con
stra
nt 2
005
PPP
US$
Chile
Estonia
Greece
Hong Kong
Ireland
Japan
Korea
Latvia
Lithuania
Philippines
Portugal
Singapore
Taiwan
Thailand
Uruguay
Source: Zander, Tulder, Pelkmans-‐Balaoing [2016]
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The usual explana=on
• Rapid growth: “catch-‐up” using known technology and low wages to export to developed countries;
• Employment expands, wages rise, iniJal advantage eroded; also diminishing returns to using borrowing technology.
• UlJmately a slowdown: lose advantage to other countries.
• Indicated change: shiL to more knowledge-‐intensive industries.
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The usual prescrip=on
Measures at the macro-‐economic/macro-‐development level • investment in physical infrastructure • higher educaJon and R&D • foreign direct investment (source of technology) • Involvement in regional trade and producJon networks
• diversificaJon of trade and output
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Algebra: how long will it take? • Temporal criterion: Jme to traverse middle-‐income category
LMI to HMI UMI to HI LMI to HI
GNI per capita (2012 $ PPP)
$1,045-‐ $4,125
$4,125-‐ $12,615
$1,045-‐ $12,746
Heuvelen [2015] 22-‐28 yrs 16-‐22 yrs 44 yrs
Implied growth rate 5-‐6% 5-‐7% 6%
Felipe [2012] 28 yrs 14 yrs 42 yrs
Implied growth rate 5% 8% 6%
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Structural criterion?
• From experience, those who transited saw “peak manufacturing” at 25% or more of labour force.
• Now fewer countries able to achieve this: now peak at 13-‐16%. – Rodrik [2015]: “premature deindustrialisaJon” – Fabella [201“development progeria” [Fabella ]
• What does it represent? PossibiliJes: – general labour skills; technological levels of firms; middle class consumpJon; middle class poliJcs
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Premature deindustrialisa=on?
Source: hjp://rodrik.typepad.com/dani_rodriks_weblog/2013/10/on-‐premature-‐deindustrializaJon.html
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Structural criterion?
* *
*
*
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2. How does all this apply?
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South Korea
APEC Membership WTO Accession
Asian Crisis | APT+3 Initiated
Dot-com bubble
Global Financial Crisis
-100
0
100
200
300
400
500
600
0
5,000
10,000
15,000
20,000
25,000
Bln
cur
rent
US$
GD
P pe
r ca
pita
(199
0 in
t. G
K$)
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Chile
APEC Membership
WTO Accession
Associate Member Mercosur
Dot-com bubble
China - Chile FTA
Global Financial Crisis
Coup
Democratic elections
-150
-100
-50
0
50
100
150
200
250
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000 19
50
1952
19
54
1956
19
58
1960
19
62
1964
19
66
1968
19
70
1972
19
74
1976
19
78
1980
19
82
1984
19
86
1988
19
90
1992
19
94
1996
19
98
2000
20
02
2004
20
06
2008
20
10
2012
Bln
cur
rent
US$
GD
P pe
r ca
pita
(199
0 in
t. G
K$)
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Thailand
ASEAN member APEC member
ACD
Asian Crisis
Dot-com bubble
Global Financial Crisis
-150
-100
-50
0
50
100
150
200
250
300
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Bln
cur
rent
US$
GD
P pe
r ca
pita
(199
0 in
t. G
K$)
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Philippines
ASEAN member
APEC member ACD
Asian Crisis
Dot-com bubble
Global Financial Crisis
-50
0
50
100
150
200
250
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Bln
cur
rent
US$
GD
P pe
r ca
pita
(199
0 in
t. G
K$)
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Just algebra: how long will it take?
• Empirical quesJon: Suppose Philippine GNI grows at 5-‐7 percent indefinitely?
• Then the following trajectories result:
GNI growth 5 % 6% 7%
Cross LMI (years) 4.4 3.5 2.9
Cross HMI (years) 34.7 27.3 22.5
Total (years) 39.1 30.8 25.4
*Assumes annual populaJon growth rate of 1.3 percent.
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The past record
0
10
20
30
40
50
60
70
80
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
Growth (RHS)
GDP p.c. (LHS)
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Pasawáy Philippines’ “deviant behaviour” [de Dios and Williamson 2015] (deviaJon from the East Asian pajern): • Large current account surpluses from overseas remijances
and IT-‐BPM service exports • Saving exceeds investment • Low inward FDI and low home investment as well • Low goods export (manufactures and agriculture) • ConsumpJon trumps exports and investment • Services dominate output, employment, exports • Bi-‐modal economy: omijed industrialisaJon, premature
de-‐agriculturisaJon
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Employment shares (in %)
0
10
20
30
40
50
60
Agriculture Industry Services
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Saving and investment (as % of GDP)
0
10
20
30
40
50
60
Investment Saving
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Farm size
Source: MCC-‐CDT (2016)
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Rela=ve labour produc=vity in agriculture (%)
01020304050607080
PHL IDN MAL THA VNM
20002013
303132333435363738
2005 2007 2009 2011 2013 2015
Source: MCC-‐CDT (2016)
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What could go wrong?
• High chance of crossing into HMI : but can we stay there?
• Non-‐inclusive growth (lagging agriculture and low-‐producJvity services) can lead to social discontent.
• AutomaJon/roboJsaJon and onshoring trends can threaten IT-‐BPM; makes manufacturing entry difficult
• Dutch Disease renders all tradeables uncompeJJve
• PoliJcal and economic condiJons in OFW regions may change (e.g., falling oil prices).
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What can be done? • Complete unfinished business to extend growth momentum – link agriculture and SMEs with growing urban markets and chains of higher value-‐added
– promote manufacturing employment for inclusiveness – complete foundaJonal requirements of educaJon and basic infrastructure
• Pick up from MIT success stories – “exogenous” v. “endogenous: development paths (e.g., low v. high FDI dependence).
– though not completely relevant to deviant behaviour
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Successful pathway: Endogenous growth
Internal trajectory • Low/medium trade openness • Strong growth of trade • Net exporter • Medium/high GVC participation • Integration in high-tech GVCs with
medium/high DVA • Large share of domestically founded
lead firms in high-tech GVCs
• Inward FDI for integration in high value-added GVCs
• Outward FDI to enhance/maintain domestic activities
• Specialization/diversification/differentiation to upgrade in GVCs and create higher value-added
• Positive spillovers
• Investments in education, innovation and R&D
• Promotion of entrepreneurship
• Public-private cooperation
• Regulation of trade and FDI
Generic policy Target
Source: Zander, Tulder, Pelkmans-‐Balaoing [2016]
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Hub…. Hub trajectory • High trade openness • Medium/high growth of exports • Low/medium growth of imports • Net importer • Medium/high GVC participation • Integration in medium/high-tech
GVCs with low/medium DVA • Large share of foreign lead firms
• Inward FDI in sectors to serve the region
• Integration in regionally relevant GVCs
• Incentives to attract FDI in ‘strategic’ sectors
• Regional integration and reduction of trade barriers
Generic policy Target
Source: Zander, Tulder, Pelkmans-‐Balaoing [2016]
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Exogenous growth External trajectory • Low/medium trade openness • Low/medium growth of trade • Net importer • Low/medium GVC participation • Integration in low-tech GVCs with high
DVA • Large share of foreign lead firms active in
low/medium-tech GVCs
• Inward FDI in sectors to exploit natural resources and low value-added manufacturing
• Imports for domestic markets
• Liberalization of trade and FDI
• Incentives for inward FDI
Generic policy Target
Source: Zander, Tulder, Pelkmans-‐Balaoing [2016]
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What can be done? • AnJcipate new challenges and approaches (bejer than “build it for whoever may come”): – strategise regarding country’s posiJon in the global division of labour
– formulate policies accounJng for heterogenous firms – connect with leading global firms based awareness of firms’ strategies and country’s prioriJes (compeJJveness and inclusiveness)
– form a smarter bureaucracy that engenders trust in its strategic policies and decisions
– align infrastructure and higher-‐educaJon (S&T) investments with strategic goals.
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