Which comes first: industrial policy or trade policy?

Second part of the open letter to BOI

Which comes first: industrial policy or trade policy?

At the recent BOI sponsored forum on “Optimizing Trade and Investment Policies to Implement a Modern Industrial Strategy” (December 9-10, 2021), the above question was raised. The response from our BOI officials is unequivocal: having a clear and coherent industrial policy takes precedence over trade policy. We fully agree with this political position of the BOI. The truth is that a country can only maximize gains from world trade if it has the capacity to produce goods that it can trade in mutually beneficial, value-added, bottom-up ways.

The problem is that some economic planners, driven by their neoliberal dogma, have taken the opposite position, namely that for the country to grow, it must open up and eliminate all trade barriers. The assumption is that industrial and agricultural development would automatically follow any program of trade liberalization and economic deregulation. The industrial and agricultural debacle of the Philippines under IMF and WB-guided liberalization-deregulation programs over the past 4 to 5 decades shows the folly of such thinking.

There is no doubt that the country has seen some gains, such as foreign investment in semiconductors and auto parts assemblies, mainly in the low level of production of GVCs. There were also gains in the production of export-oriented clothing in the 1970s and 1980s; these gains evaporated in the years 1990-2000, as GVC’s clothing investors packing their bags, taking to the skies and settling on cheaper production platforms like Bangladesh and Cambodia.

However, gains in the limited export sector were offset by general stagnation in domestic manufacturing. The latter was overwhelmed by cheap industrial imports, especially the “ukay-ukay ” and contraband goods ranging from PAP clothing to appliances and cars of all shapes and brands. These imports have flooded the entire archipelago with increasing intensity since the 1970s, leading to the double Philippine economic phenomenon: deindustrialization and agricultural development.

And yet the Philippines managed to survive the collapsing economy. It has evolved into a consumption-oriented service economy without undergoing an industrial revolution and large-scale agricultural modernization. How is it possible? The answer is well known: The remittances of more than 10 million Filipino workers abroad, now estimated at more than $ 30 billion a year, save the lives of the nation. Complemented by the country’s income from the call center-BPO sector, OFW family spending accounts for the rapid growth of service industries such as education, transportation, shopping malls, tourism, and more. Thus, despite the worsening national trade deficits, the country’s GDP growth rate has remained positive.

But it is blatantly obvious: a consumer-driven economy without industry and agriculture and dependent on OFW spending is uneven and unsustainable. It also cannot create jobs for everyone, especially for families without OFW connection. Hence the emergence of another phenomenon: the equally rapid growth of the informal side of the service sector, as evidenced by the galaxy of informal livelihoods across the country such as street vending, non-repair services. registered, micro-enterprises, etc.

Now back to the original question: trade policy or industrial / agricultural policy first?

The response of the hundred or so farmer organizations calling on the Senate to stop or postpone the ratification of the Philippines’ accession to the Regional Comprehensive Economic Partnership (RCEP) free trade agreement is unequivocal: first, the national production capacity. First, strengthen the preparation of the agricultural sector for competition from RCEP, in particular competition from major RCEP producing countries such as China, Thailand and Vietnam. First articulate and develop safety nets and preparedness programs for Filipino agricultural producers.

Further, they ask: why can’t the Philippines imitate India? In 2019, India, a major producer of cheap industrial agricultural products, withdrew from RCEP negotiations. Prime Minister Narendra Modi gave a straightforward explanation for the withdrawal: Indian industrial and agricultural producers cannot compete with their Chinese counterparts, who benefit from state subsidies. Recently, India also rejected three agricultural laws enacted by India in 2020 to open up India’s agricultural sector to large traders and the global market. These laws are similar to the Philippine Rice Pricing Law of 2019, a law blamed by rice farmers for the collapse of national rice cultivation in the past two years.

The issue of RCEP ratification in the Senate is similar to the 1994 Senate debate on the ratification of the Philippines’ WTO membership. At the time, the slogan of pro-WTO lobbyists was similar to the slogan launched today by pro-RCEP lobbyists: “The Philippines cannot afford to be left behind.” Then pro-WTO lobbyists came up with fantastic and imagined gains through early ratification: 500,000 new jobs per year in industry, 500,000 new jobs per year in agriculture and a general increase in production and resources. industrial and agricultural exports. The exact opposite has happened. Now, or 25 years of the Philippines joining the WTO, the industrial and agricultural sectors are both a picture of stagnation.

Clearly, that’s enough. The Philippines should stop listening to a small group of neoliberalizers who are trying to simplify the country’s development choices to a matter of openness or withering. A more rigorous and comprehensive process of strategizing and redefining growth and development is needed. Of course, trade policy is a critical and crucial element in the overall formulation of a sustainable development program for the country. But such an agenda requires careful balancing (and rebalancing) of industrial and trade policies. This is why the vision and development of an “industrial policy” with a capital I and P becomes extremely important.

So how exactly should industrial policy be designed? How can the country climb the global industrial ladder? More in the next issue.

Dr Rene E. Ofreneo is Professor Emeritus at the University of the Philippines.

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