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

1. Accelerating Inclusive Growth and Competitiveness through the AEC: Focus on the Manufacturing Sector Josef T. Yap 15 November 2013

2. Background

3. Lack of Economic Transformation

4. Comparing Per Capita GDP

5. Main Outcome: Poverty Situation in PH is dismal

6. Role of Regional Production Networks

7. Structure of Regional Production and Distribution Networks

8. Regional Integration Anchored on Regional Production Networks Regional Economic Integration Regional Production Networks FDI Manufacturing Sector

9. Value of Intermediate Goods Imports of Individual East Asian Countries and Regions from East Asia as a Whole (Billions of U.S. Dollars) Source: W. Thorbecke “Exchange Rates and Trade in East Asia”

10. Source: Cheewatrakoolpong, Sabhasri, and Bunditwattanawong (2013)

11. …Largely through FDI

12. PH export performance has lagged behind that of other EA economies

13. a. FDI vs. GVC participation

14. b. GVC participation growth vs. GDP per capita growth

15. 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.

16. 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

17. 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

19. Potential Growth areas: Nearby 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

20. Constraints to Growth • 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

21. Roadmap for structural transformationVision: globally competitive manufacturing industry Phase III 2024-2028 Phase II 2019-2023 Phase I 2014-201

22. Targets, Strategic actions, complementary 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

23. 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

24. 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

25. 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 • Process upgrading • Product upgrading • Functional upgrading • Chain upgrading

26. Government Coordination

27. Maraming Salamat!!! • Dios ti Agngina!!! • Dios mamajes dinio!!! • Dacal a salamat!!! • Salamat tunon!!! • Saeamat kimo!!! • Daghang Salamat!!! • Thank YOU very much!!!!