Accelerating Inclusive Growth and Competitiveness through the AEC: Focus on the Manufacturing Sector Josef T. Yap 15 November 2013 Background Lack of Economic Transformation Share of Manufacturing in GDP (%) 1980 1990 China 43.9 36.5 Indonesia 13.5 23.0 Malaysia 21.6 22.7 Philippines 27.7 26.8 Thailand 21.5 24.9 Viet Nam 16.1 12.3 2000 40.4 27.7 29.9 24.5 33.6 18.6 2006 32.9 27.5 28.8 23.6 35.0 21.2 2011 32.2 24.3 24.6 21.1 29.9 19.4 Source: UN Statistics Division [http://unstats.un.org/unsd/dnlList.asp; accessed, 6 October 2013] Comparing Per Capita GDP Table 1: Per Capita GDP (in constant 2005 USD) 1960 1980 1984 2012 Hongkong, China 2,968 10,325 12,696 32,742 Indonesia 201 556 646 1,732 Korea, Republic of 1,154 4,270 5,498 21,562 Malaysia 813 2,318 2,713 6,765 Philippines 692 1,109 1,005 1,501 Singapore 2,251 9,645 11,951 33,989 Thailand 321 882 1,018 3,353 Source: World Bank's World Development Indicators, accessed on 7 October 2013 Note: 1960 data are in constant 2000 prices and were accessed on 15 August 2012 Main Outcome: Poverty Situation in PH is dismal Role of Regional Production Networks Structure of Regional Production and Distribution Networks Regional Integration Anchored on Regional Production Networks Regional Economic Integration Regional Production Networks FDI Manufacturing Sector 200 Billions of US Dollars 160 China 120 ASEAN 80 South Korea & Taipei,China 40 Japan 0 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. Note: ASEAN includes Malaysia, the Philippines, Singapore, and Thailand. Source: CEPII-CHELEM Database Value of Intermediate Goods Imports of Individual East Asian Countries and Regions from East Asia as a Whole (Billions of U.S. Dollars) 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 Source: W. Thorbecke “Exchange Rates and Trade in East Asia” Source: Cheewatrakoolpong, Sabhasri, and Bunditwattanawong (2013) …Largely through FDI FDI Inward Stock (million US$), ASEAN and China FDI inward stock (million US$) 1990 2000 2010 2012 Indonesia 8,732 25,060 154,158 205,656 Malaysia 10,318 52,747 101,510 132,400 Philippines 4,528 18,156 26,319 31,027 Singapore 30,468 110,570 461,417 682,396 Thailand 8,242 29,915 137,191 159,125 Viet Nam 1,650 20,596 65,348 72,530 China 20,691 193,348 587,817 832,882 Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics), accessed on 6 October PH export performance has lagged behind that of other EA economies Export of Goods and Services (in million US dollars) 1995 2000 2005 2012 Japan 441,538 479,323 595,697 798,937 Korea 125,058 172,268 284,419 547,870 Indonesia 45,418 62,124 85,660 190,032 Taipei, China 111,405 151,458 198,168 300,533 Philippines 17,447 38,078 41,255 51,995 Malaysia 73,865 98,229 141,595 227,334 Thailand 56,444 69,152 110,360 228,141 China 148,780 249,203 761,953 2,048,900 Hongkong 173,753 201,855 289,325 442,775 Viet Nam 5,449 14,483 32,447 114,573 Source: ADB Key Indicators for Asia and the Pacific 2013 a. FDI vs. GVC participation b. GVC participation growth vs. GDP per capita growth Main argument: A more dynamic manufacturing sector would have provided more higher-paying jobs to the lesseducated 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 Strengths • • • • Good macroeconomic environment Political stability: “Daang Matuwid” Young, trainable, English speaking workers Export zones’ legal framework, incentives Weaknesses • • • • 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 • • 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 17 Potential Growth areas: Nearby Criteria Leamer Nearby: Detailed Commodity Group (SITC 4 digit) Highest level sophisticat ion Highest 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 Highest labor intensity Cereal Flours & meals, of meat , fish 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 Source: Usui, N. 2012. Taking the Right road to Inclusive Growth. ADB. Manila. • Can be developed with relative ease, can utilize existing capabilities (inputs, institutional/infrastructure, skills, technology) embedded in the current export structure 19 Constraints to Growth Major Area Main Issues & Constraints Infrastructure & Logistics High cost & unpredictability of power High cost of domestic shipping Governance & Regulation Smuggling, corruption, bureaucracy & red tape Lack 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 20 Roadmap for structural transformation Vision: globally competitive manufacturing industry Phase III 2024-2028 Phase II 2019-2023 Phase I 2014-201 -Rebuild capacity of existing industries, strengthen emerging industries, maintain competitiveness of comparative advantage industries -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 -Deepen participation in regional integration by serving as hubs in production networks for industries like auto, electronics, machinery, garments, food 21 Targets, Strategic actions, complementary measures Coordination mechanism Vertical measures Horizontal measures • • • • • • HRD SME development Technology upgrading, innovation Power, smuggling, logistics & infrastructure Investment promotion Competitive exchange rate 30% value added; 15% employment • Close supply chain gaps access to raw materials: food furniture, garments integration mechanism: copper, iron & steel, chemicals • Expand domestic market & exports automotive & shipping open trade regime, sustainable macro policies, sound tax policies & administration, efficient bureaucracy, secure property rights 22 • • • 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 • HORIZONTAL Programs to address coordination failures • • Cluster-based intervention: increase supply of skilled workers, encourage technology adoption, improve regulation & infrastructure 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 23 Step (2): Upgrading (more difficult but not impossible) 1. Upgrading in industry structure Plugging into GVCs ↓ Rising wages due to the absorption of surplus labor ↓ Necessity of upgrading and diversification in industry structure (otherwise you will be caught in the “middle-income trap”) Upgrading in industry structure Resource and labor intensive industry → capital and technology intensive industry Policy measures to upgrade industry structure e.g. More emphasis on tertiary education, Technological cluster development, promotion and attraction of FDI in R&D 2. Industry cluster development Attract more assemblers (FDI) → More induced demand for parts and components (through the “backward linkage effects”) Policy measures to support local SMEs e.g. match-making, credit scheme, technology assistance, skills training, certification scheme Policy measures to attract foreign suppliers e.g. tax incentives, industrial estates for SMEs 3. Upgrading along GVCs I. Process upgrading II. Product upgrading III. Functional upgrading IV. Chain upgrading Government Coordination Agency 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 26 • • • • • • • • Maraming Salamat!!! Dios ti Agngina!!! Dios mamajes dinio!!! Dacal a salamat!!! Salamat tunon!!! Saeamat kimo!!! Daghang Salamat!!! Thank YOU very much!!!!