Research Paper of Dr Fernando Aldaba (as of 21 May)

Integrating Employment in Industrial Policies Page 1

First DraftNot for Quotation

A Framework for Promoting Decent Work by IntegratingEmployment in Industrial Policies in the Philippines

Fernando T. Aldaba

Institute for Labour Studies

May 2012


A Framework for Promoting Decent Work by IntegratingEmployment in Industrial Policies in the Philippines

Section Contents PageList of Abbreviations 4

I Introduction 5II Philippine Industrial Structure and Employment Growth 5

Overview of the Macroeconomic Landscape of the Philippine LabourMarket

5

1. The Macroeconomy 52. Sectoral Contribution to Employment 8III Key Employment and Labour Market Constraints 91. High Unemployment and Underemployment Rates despite Growth 92. Demand for Labour Constraints 113. Supply of Labour and Human Capital Constraints 12IV Brief Review of Industrial Policy and Sectoral Strategies and their

Employment Effects in the Philippines15

V Reforms to Address the Perennial Employment Problem 22VI A Framework and Diagnostic Tools for the Analysis of the Employment

Effects of Industrial Policies26

VIII Summary and Conclusions 35References 36


LIST OF ABBREVIATIONS

ASEAN Association of Southeast Asian NationsADB Asian Development BankBLES Bureau of Labour and Employment StatisticsBOI Board of InvestmentsBWSC Bureau of Workers with Special ConcernsCHED Commission on Higher EducationCSO civil society organizationDBM Department of Budget and ManagementDBP Development Bank of the PhilippinesDepEd Department of EducationDILG Department of Interior and Local GovernmentDOLE Department of Labour and EmploymentDTI Department of Trade and IndustryECOP Employers Confederation of the PhilippinesFDI Foreign Direct InvestmentsFIES Family Income and Expenditure SurveyGDCF Gross Domestic Capital FormationGDP gross domestic productGNP gross national productGSIS Government Service Insurance SystemHEI Higher Education InstitutionsHDI Human Development IndexILO International Labour OrganizationILS Institute of Labour StudiesLFS Labour Force SurveyLGC local government codeLGU local government unitNCR National Capital Region (i.e., Metro Manila)NEDA National Economic and Development AuthorityNPC National Power CorporationNSCB National Statistical Coordination BoardNSO National Statistics OfficeOFW Overseas Filipino WorkerOTOP One Town One ProductPDP Philippine Development PlanPEDP Philippine Export Development PlanPESO Public Employment Service OfficePEZA Philippine Economic Zone AuthorityPIDS Philippine Institute for Development StudiesPLEP Philippine Labour and Employment PlanPOEA Philippine Overseas Employment AdministrationPhilHealth Philippine Health Insurance CorporationPRC Professional Regulatory CommissionSMEDC Small and Medium Enterprises Development CouncilSSS Social Security SystemTESDA Technical Educational and Skills Development Authority


I. Introduction1

Industrial policy has recently become one of the recommended policy responses for thePhilippines after its economy reliant mostly on remittances and a small range of product exports hasbecome vulnerable to the ongoing global crisis (Usui, 2012; Aldaba, 2009). Structural transformationin terms of industrial upgrading and the expansion and diversification of the manufacturing sectorare again being emphasized as key ingredients toward a more inclusive and sustained growth of theeconomy. Manufacturing and industry have been the traditional sources of good quality jobs for thelabour force as experienced by most of the developed countries today.

Recognizing the need for employment-rich growth in the Asia and the Pacific Region, theInternational Labour Organization (ILO), with support from the Republic of Korea, has launched theproject Promoting decent work through integrating employment in industrial policies and sectoralstrategies in Southeast Asia. The main objective is to “contribute to poverty reduction and creationof income earning opportunities in Indonesia and the Philippines through national policies that leadto job-rich economic growth” by supporting efforts for the “better integration of employment inindustrial and sectoral policies.” Productive employment is by far the most important link betweengrowth and poverty reduction (Nubler, 2011).

This thrust towards employment creation through industrial policy is very much aligned withthe newly adopted Philippine Development Plan (PDP) 2011-2016. The Plan is anchored on theprinciple of inclusive growth, which means growth that delivers benefits for all, or growth thatmassively creates employment, draws many into the economic and social mainstream andsubstantially reduces poverty. Given high potential for growth or substantial employment generatingcapacity, 10 sectors or industries are identified in the PDP as priorities for government support andenabling measures. Under the PDP, the Department of Trade and Industry (DTI) has also committedto “formulate a comprehensive national industrial strategy that spells out opportunities, coordinatesand promotes the growth of forward and backward linkages in priority areas and high-potentialgrowth sectors as well as prepares other industries to attract investments and generate jobs”.

The main results of this research project aim to help DTI and other stakeholders toward thedevelopment or enhancement of strategies and programs that will produce and sustain employmentoutcomes for the priority sectors. This framework paper hopes to:

- provide a brief review of literature on industrial policies and sectoral strategies and theiremployment effects in the Philippines

- define a framework that highlights key features of industrial policy or sectoral strategies thatwill help grow employment or improve employment quality in the Philippines

- assist in the development of knowledge tools and applying such tools in mainstreamingemployment creation and decent work objectives in industrial strategies/policy

1 Mostly derived from the terms of reference of the project


This paper is organized as follows – section II provides an overview of the country’smacroeconomy, industrial structure and employment growth. Section III discusses the key labourmarket constraints that have resulted into high unemployment and underemployment rates.Section IV explains the various industrial policies adopted by the government in the last sixty yearsand the employment outcomes. Section V discusses the key reforms needed to address theemployment problem of the country. Section VI elucidates a framework incorporating employmenteffects of industrial and policies and some possible tools in analyzing such effects. Finally, Section VIIgives the summary and conclusions.

II. Philippine Industrial Structure and Employment Growth

Overview of the Macroeconomic Landscape of the Philippine Labour Market

1. The Macroeconomy

The Philippine economy’s growth has been characterized by boom and bust situation fromthe 1950s to the 2000s (see Figure 1 below). Recent bust episodes (1983-86, 1990-91, 1998-99,2000-01, 2008-2009) were typically identified with political uncertainties or economic recessionresulting from global or regional crises. In 2011, the Philippine economy grew by about 3.7% downfrom a high of 7.3% the previous year. This year, the government sees a 5-6% expansion of theeconomy.

Figure 1: Gross Domestic Product, 1947-2010

Source: National Accounts of the Philippines, National Statistical Coordination Board as cited in R. Aldaba (2012)

In terms of sectoral growth, there have been significant shifts in performance. While theindustry sector was the best performer from the 1950s to the 1970s, the services sector has becomethe leading sector in the following decades. From the 1980s to the present, the services sector hasincreasingly served as the source of domestic economic growth. It grew continuously from 3.6% inthe 1990s to 5.7% in the 2000s with most of its sub-sectors expanding consistently. Agriculture,industry and manufacturing in particular, suffered lethargic growth from the 1980s to the 1990 withmoderate expansion seen in more recent years. From 1980-1990, industrial growth was virtually nil.In the following decade, the sector registered a moderate annual average growth rate of 3 percent


and from 2001-2009, 4.2%. Manufacturing had an average annual growth rate of 0.9 percent in the1980s, 2.5 percent in the 1990s, and 3.5 percent in the more recent period.

Table 1: Average Growth Rates by Sector (in %, at constant 1985 prices)

Year 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10

Gross Domestic Product 6.2 4.8 5.7 1.7 3.0 4.7

1. Agriculture, Fishery,Forestry 4.8 4.2 3.9 1.1 1.8 3.0

Agriculture industry 4.8 1.0 5.7 2.0 2.2 3.0

Forestry 2.6 -3.6 -9.1 -16.7 -1.0

2. Industry Sector 7.1 5.5 7.6 0.3 3.0 4.2

Mining & Quarrying 8.7 7.1 6.1 1.9 -0.2 13.5

Manufacturing 9.4 5.7 5.9 0.9 2.5 4.1

Construction -0.6 4.2 14.1 -3.1 4.3 2.8

Electricity, Gas and Water 4.3 5.4 11.6 4.1 5.6 4.1

3. Service Sector 6.7 4.7 5.2 3.3 3.6 5.8

Transport, Communication &Storage 7.6 5.6 7.2 3.4 5.1 6.6

Trade 4.9 5.7 3.0 3.5 5.7

Finance* 6.4* -16.5 8.7 2.2 4.4 7.3

Dwellings & Real Estate 1.4 1.6 2.4 1.9 4.0

Private Services 7.2 -1.8 5.0 5.0 3.6 7.2

Government Services 7.6 4.3 3.6 2.9 2.7

Source of basic data: National Accounts of the Philippines, National Statistical Coordination Board* figure refers to combined finance and trade sectors

Within the services sector, the transportation, communication, and storage as well asfinance and private services sub-sectors have seen sustained growth rates since the 1980s. In thepresent period, finance recorded the highest average growth rate of 7.5 percent. Transportation,communication, and storage followed with an average growth of 7.3 percent (see Table 1 above)


Table 2 below shows a declining trend in the value added share of the agriculture sector asits share dropped from 33 percent in the 1950s to 26 percent in the 1970s. In the last two decades,its average share fell slightly from 20.8 percent to 19 percent in the 2000s. While the average shareof manufacturing value added was rising from 22% in the 1950s to 28% in the 1970s, this declined to26% in the 1980s, to around 24 percent in the 1990s and 2000s.

Table 2: Value Added Structure by Major Economic SectorYear 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10

Agriculture, Fishery,Forestry 32.5 29.7 25.6 23.9 20.8 18.9Agriculture industry 32.5 26.5 20.7 22.1 20.5 18.8Forestry 8.2 4.9 1.8 0.3 0.1Industry Sector 30.6 32.6 38.3 38.0 34.1 33.1Mining & Quarrying 1.2 1.1 1.4 1.7 1.3 1.7Manufacturing 22.3 25.6 28.2 26.3 24.3 23.7Construction 6.1 5.0 7.1 7.3 5.5 4.5Electricity, Gas and Water 1.1 1.0 1.7 2.7 3.0 3.2Service Sector 38.3 38.4 36.6 40.4 42.4 48.0Transportation, Communication& Storage

3.7 4.0 4.7 5.5 6.0 8.4Trade 13.0 12.8 14.4 15.0 16.8Finance* 24.6* 15.8 3.4 3.6 4.4 5.4Private Services 9.9 8.3 5.1 6.6 6.8 8.3Government Services 4.6 4.5 4.8 5.0 4.4Source of basic data: National Accounts of the Philippines, National Statistical Coordination Board*: figure refers to combined finance and trade sectors

It is clear from Table 2 that the Philippine economy’s output structure is characterized by aburgeoning services sector. The services sector’s contribution continued to increase from anaverage of 37 percent during the 1970s to 40.4 percent in the 1980s, 42.4 percent in the 1990s andto almost 48 percent in the current period. Trade comprised the bulk of the services sector followedby transportation, communication, and storage and private services sub-sectors. Since the 1980s, allservices sub-sectors except for government services expanded their shares.

2. Sectoral Contribution to Employment

In terms of employment contribution, the services sector has also become the largestprovider of employment in the most recent period (Table 3). The share of the labor force employedin the sector consistently increased, from around 32 percent in the mid-1970s to about 48 percent in2001-2010. The share of industry to total employment has been almost stagnant at 15% from themid 1970s to the most recent period. Specifically, the manufacturing sector has failed in creatingenough employment to absorb new entrants to the labor force as well as those who move out of theagricultural sector. Its share dropped from 11 percent in the mid-1970s to 8.42 percent in 2010.While the contribution of agriculture has been decreasing, the sector has continued to be animportant source of jobs. From 52.8 percent in the mid-1970s, the agriculture sector’s share in totalemployment continuously declined in the succeeding decades and is currently around 33 percent. In


recent years, there have been inadequate income opportunities in the rural areas where most of thepoor are located.

Table 3: Structure of Employment (in percent)Major Sector 1975-78 1980-89 1990-99 2000-09 2010

Agriculture, Fishery and Forestry 52.83 49.60 43.16 36.58 33.18

Industry 15.23 14.49 15.98 15.20 14.98

Mining and Quarrying 0.46 0.66 0.59 0.39 0.55

Manufacturing 11.29 9.93 10.01 9.24 8.42

Electricity, Gas and Water 0.35 0.36 0.44 0.39 0.42

Construction 3.13 3.54 4.94 5.19 5.60

Services 31.87 35.90 40.94 48.21 51.84

Wholesale and Retail Trade 10.32 12.55 14.54 18.40 19.52

Transportation, Storage & Communication 4.08 4.45 5.80 7.47 7.56

Financing, Insurance, Real Estate & BusinessServices 4.55 1.79 2.18 3.34 4.29

Community, Social & Personal Services 14.05 17.11 18.42 19.00 20.47

Industry not Elsewhere Classified 0.49 0.02 0.05 0.00 0.01

Sources: Yearbook of Labor Statistics (1980-2000) and Current Labor Statistics (2001-2002), Bureau of Labor andEmployment Statistics, Department of Labor and Employment and Employed Persons by Major Industry Group, NationalStatistics Office Labor Force Survey (1970, 1975-1976, 1977-1978, 2003-2009).

In contrast, the services sector mostly urban based and employing most of the informalworkers absorbed much of the labour force during the last twenty years. The services sector alreadyemploys about 52% of the labour force. The structural adjustments in the economy have led tounemployment pressures, particularly from those coming from the agricultural sector. The actualnumber of jobs created per year is about 650,000 or a growth of only 2.7%, relatively slower thanthat of economic growth. The share of industrial and manufacturing employment, where relativelystable and higher quality jobs are usually found has markedly declined over the years and such hasbeen the main factor affecting the high unemployment and underemployment rates.

III. Key Employment and Labour Market Constraints

1. High Unemployment and Underemployment Rates despite Growth

Despite the recent economic growth of the Philippines in the last ten years, it still isconfronted with relatively high unemployment and underemployment rates. In 2011, the


unemployment rate was estimated to be around 7.0%. The rates were typically double-digit figuresfrom 2000-2005 but went down to single digits when the definition was revised.2 Prior to 2005, theunemployment rate was about 11.3% in the early 2000. The rate was lowest during 1971-80 at4.86% (see Table 4)

Table 4: Labour Market IndicatorsYear Unemployment Rate Underemployment Rate

1956-60 8.01 --

1961-70 7.26 --

1971-80 4.86 21.00

1981-90 7.43 25.74

1991-00 9.75 21.39

2001-04 11.43 17.20

2005-10 7.57 20.14

2011 7.20 18.80

2012 7.40 19.40

Sources: Yearbook of Labor Statistics. BLES-DOLE as cited in R. Aldaba (2012). The rates for 2011 & 2012 are from LaborForce Survey of NSO. Notes: Starting April 2005, unemployed persons include all persons 15 years old & over & arereported as (1) without work & currently available for work & seeking work & (2) without work & currently available forwork but not seeking for work due to the following reasons: tired/believed no work available; awaiting results of previousjob application; bad weather; & waiting for rehire/job recall.

2 Definition of unemployment was revised to adopt the International Standards as found in the Explanatory Notes of theLFS. www.bles.dole.gov.ph


Source: Yearbook of Labor Statistics. BLES-DOLE as cited in R. Aldaba (2012). The rates for 2011 & 2012 are from LaborForce Survey of NSO. Note: Starting April 2005, NSO changed the definition of unemployment (see above).

Parallel to unemployment is the challenge of a growing number of the underemployed. The2011 underemployment rate was 18.8% or around 7 million. Underemployment is a measure of thequality of jobs that are available in the economy. More than half (about 4 million) are visiblyunderemployed.3 But what are the reasons why unemployment and underemployment rates haveremained high over the past years? The following discusses the labour market constraints affectingthese rates.

2. Demand for Labour Constraints

The demand for labour is a derived demand i.e. it results from an increased demand forgoods and services. Thus, any factor constraining the growth potential of the country is also a hurdlefor employment generation. The ADB (2007) study on Philippine Critical Development Constraintspoints to the following key bottlenecks to economic growth in the country4: continuing tight fiscal situation which restricts government spending to improve human and

physical capital and investments in technology upgrading (R&D) inadequate infrastructure, particularly in electricity and transport which increases the costs of

doing business and adds to supply chain problems weak investor confidence due to governance concerns, in particular, corruption and political

instability and includes the speed in business registration, rule of law, enforcement of contractsand property rights, corruption, etc.

inability to address market failures leading to a small and narrow industrial base e.g. antiquatedlabour laws (including high cost of hiring and firing and litigation costs)

Weak Investments

The country’s performance in attracting both domestic and foreign investment has beenrelatively weak. The country’s gross domestic capital formation (GDCF), the best indicator ofbusiness expansion, as a percentage of gross domestic product (GDP) has been on the decline since2001, rising only very recently. While in double digits, the Philippines’ GDCF is still well below that ofits ASEAN and East Asian peers. In terms of Foreign Domestic Investments (FDI), the performance ofthe Philippines vis-à-vis our ASEAN neighbours like Singapore, Malaysia, Thailand, Indonesia andeven Vietnam, has also been poor. Because of this lack of investments, manufacturing and industrysuffered lackluster growth for many years. Poor quality of key infrastructure services, a fragile andunderdeveloped financial system are key factors affecting investments. Firms also identifiedcorruption and macroeconomic instability as the two biggest impediments to a good investmentclimate in the Philippines. Electricity supply, security and regulatory uncertainty also figuredprominently.

3 Visible underemployment are those working below 40 hours a week but are willing and looking for additional work.4 These remain true up to current time


SMEs Lack of Access to Credit and other Types of Support

SMEs contributes around a third of the employed workers in the country (www.dti.gov.ph).However, the lack of access to financing has severely constrained the growth of SMEs as privatebanks are reluctant to lend to SMEs because of their general aversion to dealing with a large numberof small accounts. Many SMEs cannot access available funds due to their limited track record,limited acceptable collateral, and inadequate financial statements and business plans. With theirlimited management and financial capabilities, many MSMEs have remained domestic orientedrather than take the risks of focusing on export markets. Linkages of SMEs with large firms especiallymultinational enterprises still need to be strengthened by fixing coordination problems andbottlenecks. Another key concern is the low productivity of MSMEs due to lack of access to newtechnology, weak technological capabilities, and failure to engage in innovation and research anddevelopment activities (MSME Development Council, 2011).

3. Supply of Labour and Human Capital Constraints5

Challenges in providing quality education

The challenges for government stem from the following: (i) the inadequacy of budgetarysupport to public educational institutions providing both basic and higher levels of educationaltraining relative to the student population and (ii) the inability to address issues of quality viaregulatory policies. The result of these gaps is the weakened capacity of the country’s labour force torespond to skill requirements of the workplace. The education sector is also characterized byincreasing drop-out rates, poor student-input ratios, poor performance in national achievementtests and a more disappointing showing in international achievement tests.Table 5a: Elementary Achievement Rates (2006-11)

Grade Six 2006-07 2007-08 2008-09 2009-10 2010-11Achievement Rate (MPS) 59.94% 64.81% 65.55% 68.01% 68.15%Mathematics 60.29% 63.89% 67.37% 63.26% 68.43%Science 51.58% 57.90% 58.86% 63.14% 60.37%English 60.78% 61.62% 61.81% 67.81% 65.12%Hekasi 61.05% 67.44% 67.84% 70.88% 70.40%Filipino 66.02% 73.18% 71.90% 74.98% 76.45%

Source: www.deped.gov.ph

Table 5b: Secondary Achievement Indicators (2006-11)2nd Year High School 2006-07 2007-08 2008-09 2009-10 2010-11

Achievement Rate (MPS) 46.64% 49.26% 46.71% 45.56% 47.93%Mathematics 39.05% 42.85% 38.03% 39.64% 42.00%Science 41.99% 46.71% 42.11% 43.80% 39.35%English 51.78% 53.46% 52.90% 46.95% 46.45%Filipino 48.89% 47.64% 51.05% 58.08% 58.93%Araling Panlipunan 51.48% 55.63% 49.44% 39.32% 52.03%

5 This section borrows heavily from Aldaba and Ang (2012)


Source: www.deped.gov.ph

The tables above show that in terms of quality, those who graduated from the secondary level havevery weak foundations that may affect their future productivity levels, scoring less than 50% over-all.

High drop-out rates

Another major problem is the high drop-out rates of youth from school and the general lackof skill of the youth because of the current quality of education. Education performance indicatorsshow that much needs to be done especially in terms of secondary education.

Table 6: Secondary Education Performance Indicators

Indicators 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11Participation Rate 59.9% 58.5% 58.6% 60.3% 60.7% 59.86% 60.88%Cohort Survival Rate 78.15% 67.3% 77.3% 79.9% 79.7% 78.44% 79.33%Completion Rate 72.4% 61.6% 72.1% 75.4% 75.2% 73.55% 75.06%Drop Out Rate 7.9% 12.5% 8.5% 7.5% 7.5% 7.95% 7.79%

Source: Department of Education

From the total secondary school age going population (13-16 yrs old), only around 60% are actuallyin school and out of those who enter secondary school only 75% will complete. This means thatother external factors are pushing the youth out of school. It is important to respond to thesefactors since a significant number of out of school youth unable to learn basic skills that will allowthem future labour mobility and improve their productivity. Worse, they may become sources ofpeace and order problems.

Years of Schooling

The basic education cycle has been pegged at ten years, comprising six years in elementaryand four years in high school. This cycle falls short of the normal average of twelve years amongcountries in the world. This means that many of the graduates of the educational system are eithertoo young or not mature enough to handle professional tasks. Hopefully, the very recent K-12reform will remedy this but the challenges are daunting for the government in terms of additionalschool buildings and teacher capacities.

Tertiary Level and Technical Education

Quality standard issues become more complex at the technical and tertiary education levels.Cultural belief that a tertiary education diploma is the passport to faster social mobility has spawnednumerous colleges and universities mostly privately run. There are currently 1,523 private and 537public higher education institutions (HEIs) nationwide. Under the current set-up the governmentregulates tertiary education through the Commission on Higher Education (CHeD), while thetechnical education is supported by the Technical Education and Skills Development Authority(TESDA). About 58 or less than 3% of all HEIs are deregulated and autonomous institutions due to


their exemplary performance. Performances are also gauged based on the professional licensureexaminations. Table 6 below summarizes degrees with licensure examinations with more than 1,000Examinees.

The low quality performance of basic education is reflected on the low passing percentagesof Elementary and Secondary Education teachers as can be seen in the table below. These twoprofessions registered the lowest passing percentages among the licensure examinationsadministered by the Professional Regulatory Commission (PRC). These data also shows thepreference courses taken by the students. Most of them take nursing, education, criminology,accounting, midwifery, marine management and engineering. Overall, the average passingpercentage of these 10 courses is around 40.5% which is less but may already reflect the averagesecondary achievement rate of around 50%.

Table 7: 2009 Top 10 Professional Licensure Examination and Percentage of PassersField or Profession Number of Examinees % PassedNurses 77,898 41.9Elementary Teachers 67,129 23.1Secondary Teachers 62,239 26.8Criminology 21,840 34.2Certified Public Accountants 11,191 36.8Midwives 9,807 52.6Marine Deck Officers 8,534 48.8Civil Engineers 7,620 45.4Electrical Engineers 4,103 39.7Mechanical Engineers 3,381 56.1

AVERAGE PASSING 40.54Source: Professional Regulations Commission (PRC) as cited by Aldaba and Ang (2012)

Meanwhile, TESDA from the time of its inception has increased its certified manpower fromaround 24,000 in 1995 to more than 430,000 in 2008.6 It has around 57 accredited offering post-secondary education of up to 3 years. It also offers short-term training program at their 15 regionaland 45 provincial centers. The program offerings range from household work to 3D animators.However, graduates are not placed automatically in jobs here and abroad.

High Population Growth Rates

The continued increase in the supply of labour force which is a consequence of sustainedhigh population growth rates over past decades is a major constraint. The youth population, aged15-24 which forms bulk of the labour force grew at an average of 2.2% in the last decade which ismuch higher than the total population growth of 2.0%. This translates to an average of 350,000-400,000 potential new entrants to the labour force yearly. The momentum of growth of this age-group provides a big challenge in ensuring that majority if not all will have the opportunity of

6 www.tesda.gov.ph accessed August 18, 2010


participating productively in the labour market. The perennial budget constraints coupled byincreasing demands for education as the population of school age children grows has resulted in adecline in quality and increasing difficulty in access.

Institutional Factors: Long Search Time and Labour Mismatches

The long job search time experienced by most college graduates is another factor. Onlygraduates of top universities in the country have relatively short job search duration. This has beendue to asymmetry in information or the relatively high search costs. There is also a general mismatchbetween the labour needs of firms and the available supply of youth labour, creating a disconnectbetween courses chosen and the courses taken by the youth and the available work in the labourmarket.

IV. Brief Review of Industrial Policy and Sectoral Strategies and their Employment Effects in thePhilippines

The following section provides an overview of the industrial and sectoral policies adopted bythe Philippine government over the last sixty years. The employment effects of such policies are alsobriefly discussed when possible as literature on such in the Philippines are relatively scant. Industrialpolicies may be categorized into two broad types – horizontal or vertical. ‘Horizontal’ industrialpolicy support concerns a wide range of firms and sectors. It encompasses the broad frameworkconditions under which the entire enterprise sector operates, including macroeconomic stability,rule of law, protection of property rights, absence of administrative barriers and red tape, goodpublic sector governance, and so on. More narrowly, horizontal industrial policy refers to measurestargeting economic activities that are common to many sectors and firms and that are plagued bymarket failures, notably the presence of spill-over effects in the production process. The mostcommon example of horizontal industrial policy targeting a specific economic activity is innovationsupport. In contrast to the non-selective horizontal industrial policy, vertical industrial policy targetssupport to a specific sector or an individual firm. The economic justification for such selectivity -spatial externalities and rent shifting by means of strategic trade policy from foreign competitorswith market power to a domestic producer and by means of a domestic merger to a domesticproducer. In the Philippines, the government utilized the two types of industrial policies from 1946to the present although horizontal policies dominated the economic environment most of the time.This has been the result of the failed vertical policies during the Marcos administration that wascharacterized by cronyism and rent seeking.

Overview of Industrial and Sectoral Policies

Industrial Policies from 1946-607

After the second world war, the government pursued policies that curtailed imports to stemthe haemorrhaging of foreign exchange such as import quotas, import licensing according toessentiality and foreign exchange controls. Eventually, these policies evolved into a major tool for

7 Derived mostly from Tecson (1988)


encouraging investments in the manufacturing sector for import-substituting industries and until thefirst half of the 1950s, manufacturing was the leading growth sector of the economy with annualgrowth rates of 13.5%. But because of the import dependent nature of these import substitutingindustries and the sluggish performance of export, the trade balance deteriorated in the years 1956-57 leading to an overvaluation of the peso. The tariff policy embodied in the Tariff Code of 1957 alsoreinforced the import substituting effect of the foreign exchange control policy for domesticindustries. In this period, the trade and industrial incentive policies of government had been inwardlooking with a bias for the domestic market as against export market sales.


Foreign exchange liberalization commenced in April 1960 with the introduction of multipleexchange rates as the first phase. The second phase implemented in November of the same yearwhen changes were made in the proportion of foreign exchange that can be obtained at the variousrates. In terms of export proceeds, only 50% can be exchanged at the free market rate which wasaround P3.45 to a dollar. A year later, further relaxation of requirements were made but it was onlyon January 21, 1962 when full decontrol was actualized. It abolished decontrol order licenses butrequired letters of credit on imports coupled with special time deposits, the amount of which wascontigent on the essentiality of the import. The peso was floated in the free market and stabilized toP3.95 to a dollar. Full devaluation and unification of the exchange rate was achieved in November1965. But to ease the effects of the devaluation on domestic industries, tariffs were raised and fiscalincentives like tax exemptions and duty free importation of machinery, equipment and spare parts.Despite these interventions, manufacturing growth continued to decline while exports growth ratesincreased from 6 to 7.9% between 1956-61 and 1962-66 with manufactured exports expanding ateven higher rates.

It was on June 21, 1969 when RA 5490 was passed which provided for the conversion ofMariveles, Bataan into a port of entry establishing the first free port zone in the Philippines. TheForeign Trade Zone Authority was also set up to plan, develop and manage the zone. On 20November 1972, Presidential decree 66 amended RA 5490 to establish the Export Processing ZoneAuthority mandated to manage and operate all export processing zones in the country. Pante andMedalla (1990) concluded that in general, these EPZs have not been effective in attaining the goal ofregional dispersion of industries. There was substantial unused capacity in these zones that indicatedfailure of the fiscal incentives offered to lure investors away from MetroManila and its periphery.

Tidalgo and Esguerra (1974) highlights that these policies contributed to the bias againstbackward integration and production for export which continued to stunt the growth of industries,concentrated industries in metropolitan areas especially Greater Manila, and neglected small andmedium industries. Thus, the failure of the industrial sector to create more jobs was due not only tothe inability of output to expand but also to the nature of the industrialization process itself.



Another devaluation amidst an exchange rate float in February, 1970 signalled a definiteshift to export promotion. The Exports Incentive Act (RA 6135) granting fiscal incentives to export-oriented establishments was promulgated in 1970 boosting further export growth. But despite thesepolicy changes in terms of the exchange rate and fiscal incentives, the tariff policy still remainedinward-looking. After sugar, consumption goods were the most protected, capital goods likemachinery the least while exports were being penalized as shown by a negative effective protectionrate in 1965. Tariff reforms were introduced in January, 1975 but the structure of protectionremained the same.

In September 1979 Marcos also announced a 6 billion dollar package (Broad, 1988) proposaland plan for 11 major industrial projects, with the intention of shifting the focus of the nation'sindustrial economy from consumer goods to basic heavy industry. Included in the plan were steel,petro-chemical, pulp and paper, a copper smelter, aluminum, phosphate fertilizer, diesel engines,gas and oil, a coconut industry, and the nuclear power program. But by 1981, the governmentseemed to abandon many of the eleven projects as these were heavily criticized even by the WorldBank(Broad, 1988).

Studies on Employment Effects of Industrial Policies

The literature on Philippine employment in the 1970s exhibited a strong bias towards anexamination of the determinants of employment as well as the impediments to greater employmentgeneration. However, it has viewed the unemployment situation during those times as merely theresult of imperfections in the structure of relative prices arising from the implementation ofincorrect policies. As a result, the solution to the problem of unemployment has been reduced tomere job creation, regardless of the terms at which the resulting employment might be obtained. Ithas not emphasized the role of income levels and income distribution (Tidalgo and Esguerra, 1974).

The Over-all Picture 1946-80 and Employment Impacts

Over these years, it was clear that exchange rate reforms and the promotion of fiscalincentives were geared towards export orientation but these were not enough to completelyeradicate the bias against exports. In addition, the over-all industrial strategy was not able togenerate enough jobs towards full employment. There was also evidence that capital intensivetechnological choices were favoured as large firms grew faster than small and medium ones. Afterthree decades of industrial growth, income disparities even widened.

The employment impact of industrialization thrusts initiated during this post-war periodcreated a dominant pattern of fiscal and monetary policies which have conflicting objectives in termsof achieving economic growth and full employment. While these increased investments and outputin general, the inherent capital bias resulted in a low rate of labour absorption. Manufacturing alsofailed in increasing output and generating employment because it has limited its focus on thedomestic market. In the 70s when an outward oriented strategy was initiated, the pattern of fiscalincentives remained bias for high cost industries where the country has no comparative advantageand the global environment remained protectionist (Reyes, Sanchez and Milan, 1988)


Industrial Policies from the 80s to the Present

Industrial Policies 1981-908

The structural adjustment program that was instituted in the 80s aimed at pursuing a moreefficient and internationally competitive economy and towards this end, the main instruments thatwere utilized were the Tariff Reform Program and import liberalization. Since 1981, four TariffReform Programs had been implemented, with each one staged on a five-year period (except TRP-IV) to cushion the impact of the changes in the tariff structure. These Tariff Reform Programs wererationalized by the objectives of liberalizing the trade environment, improving access to essentialinputs, making available more choices of goods for the consumers, enhancing competitiveness oflocal industries in the domestic and export markets, and simplifying the tariff structure for ease ofcustoms administration, among others.

The current Philippine investment incentives program is primarily drawn from EO 226 or theOmnibus Investments Code of 1987. A variety of incentives was made available to registeredinvestors and detailed the procedures on how to avail of these incentives. Such incentives areapplicable to both Filipino owned and foreign owned investments. This law also specified the role ofthe BOI, which has been mandated to be responsible for the regulation and promotion ofinvestments in the country while being organizationally attached to the DTI.

Industrial Policy 1991-20009

R.A. 6977 of 1991: Magna Carta for Small Enterprises (amended by Republic Act 8289 in1997), a very important piece of legislation provided the general legal framework through whichinformal businesses may be able to improve their access to formal resources. The provisionscontained in the Magna Carta for Small Enterprises follows four guiding principles: 1) minimize thesets of rules and simplify the procedures and requirements for MSMEs, 2) harness private sectorparticipation in implementing MSME policies and programs, 3) coordinate government efforts atMSME development, and 4) decentralize MSME development efforts by establishing regional andprovincial offices and working with local government units and other local partners. A veryimportant provision of the Magna Carta was the establishment of the Small and Medium EnterpriseDevelopment Council (SMEDC).

A three-pronged policy of privatization, liberalization and deregulation was implementedproactively in the 90s especially during the Ramos regime. Foreign investment liberalization waspursued through the Foreign Investments Act of 1991 or Republic Act 7042. The law permittedforeign equity participation of up to 100 percent in all areas, whether catering to the domestic orexport markets, except those that are included in the Foreign Investment Negative List (FINL). In

8 From Medalla (1998)9 Borrows from PIDS (


1996 however, the FINL was timed down to allow for greater foreign participation in previouslyprohibited sectors.

In 1994, Republic Act 7721 or the Foreign Bank Liberalization Act authorized the entry of 10foreign banks in the country subject to three different modes of entry. In 1995, three major policieswere introduced to liberalize three sectors of the economy: telecommunications, water and airtransport. Called the Public Telecommunications Policy Act of the Philippines, Republic Act 7925 waspromulgated in March 1995 highlighting that telecommunications services shall be provided byprivate enterprises within a competitive environment. This legislation effectively broke themonopoly of the Philippine Long Distance Telephone Company and resulted to the entry of otherplayers in the market. In June 1995, Republic Act 8041 otherwise known as the National Water CrisisAct of 1995 was passed leading to the privatization of state-run water facilities.

Executive Order 219 establishing the domestic and international civil aviation liberalizationpolicy was released by President Ramos in January 1995. This was consistent with the governmentstrategy of breaking monopolies and expanding investment and trade. While there have beenimprovements in domestic air transport with the entry of more airlines, there has not been muchdevelopment in international air transport though more recently, a limited open skies policy wasadopted by the Pnoy administration .

Exports as a national strategy for sustainable agri-industrial development received a boostwith the enactment of Republic Act (RA) 7844 otherwise known as Export Development Act of 1994.In its policy declaration, the law designates the private sector as lead in the promoting exports andas partner of the government in the concerted effort to increase the country’s share in the exportmarket. The law also mandated the Department of Trade and Industry (DTI) to prepare a three-yearPhilippine Export Development Plan (PEDP), the implementation of which shall be overseen by theExport Development Council.

In 1995, the Special Economic Zone Act was passed under RA 7916, which higlighted theobjective of accelerating a sound and balanced industrial, economic and social development of thecountry through the establishment of special economic zones in strategic locations. This lawpromoted shifted privately initiated and led industrial zones. Moreover, under this legislation, firmsare no longer required to be either wholly export-oriented or engaged only in industries beingpromoted. All firms can then decide to locate in these industrial parks regardless of marketorientation, while separate EPZs will continue to be committed to export production. Governance ofthe special ecozones was given the Philippine Economic Zone Authority (PEZA), replacing the EPZA.The Special Economic Zone Act basically called for greater private sector participation in zonedevelopment and management via incentive offerings to private zone developers and operators.

Fast forward to the present time, Director General De Lima reported that PEZA was able togenerate a total of P288.34 billion in investments for the whole of 2011 or 41 percent higher thanthe P204.395 billion investments haul in 2010. Employment generation was also up 15 percent to837,136 total jobs in the various ecozones registered with PEZA as against 728,318 direct jobsgenerated in 2010. De Lima even noted that jobs generated in PEZA ecozones have six timesmultiplier effect in terms of indirect jobs creation and eight times for the electronics sector.


Priority Sectors10

Patalinghug (2000) observes that there were implicit or ad-hoc industrial plans that can beseen from hodge-podge programs of various government agencies attempting to address the issueof growth and competitiveness of Philippine-based industries during this time. An example of anattempt at industry classification was found in the Medium-Term Philippine Development Plan: 1993-1998) which identified three groups of priority industries: (a) industries with strong competitivepotential, (b) basic industries, and (c) industries critical to agri-industrial development. Anotherclassification was done by the Department of Trade and Industry (DTI) which identifiesd 14 “exportwinners” in its Medium-Term National Export Development Program: 1993- 1998. DTI also added 16“emerging exports” to its original lists of 14 “export winners”. Another industry priority list wasfound in the Science and Technology Master Plan (STMP) of the Department of Science andTechnology (DOST) which enumerated 15 priority sectors. DOST’s Science and Technology Agendafor National Development (STAND clustered priority industries into four categories: export winners,basic domestic needs, support industries and coconut industry. In addition, the Development Bankof the Philippines (DBP) identified priority subsectors for restructuring. And the Board ofInvestments’ (BOI) 1997 Investment Priorities Plan (IPP) classified priority industries into six majorgroups: export-oriented industries, catalytic industries, industries undergoing industrial adjustments,support activities, mandatory inclusions, and priority investment areas for the Autonomous Regionin Muslim Mindanao or ARMM.

Employment Impacts of the Ramos Years

The government has not done badly in the area of employment generation during the earlyyears of Ramos, creating some 3.0 million net new jobs in the three-year period 1993-1996 or anaverage of about 1 million net new jobs per year. The average growth rate of employment in thefour-year period 1992-1996 was 3.5 percent. This is clearly superior to the 2.7 percent average ofthe preceding four years of 1988-1992 (Sanchez and Jurado, 1998). Come 1997-98, the economy wasbattered by the East Asian Financial crisis which saw the unemployment rate shoot up to 10.3% in1998 from 8.8 in 1997.

Industrial Policies 2001- present

In 2001, a key horizontal industrial reform through the passing of a vital legislation, this timeimpacting on the electric power sector. Republic Act 9136, also known as the Electric Power IndustryReform Act of 2001 called for key reforms in the sector particularly calling for, (1) enhancing theinflow of private capital and broadening the ownership base of the power generation, transmissionand distribution sectors; (2) providing for a transparent privatization of the assets and liabilities ofthe National Power Corporation (NPC); and, (3) establishing a strong and purely independentregulatory body and system to ensure consumer protection and enhance the competitive operationof the electricity market.

10 This section was derived from Patalinghug (2000)


Industrial Clusters

Industrial clusters, or geographical concentration of firms and auxillary units in the samesector, can create various advantages for small firms, from agglomeration economies to jointspillover effects. The cluster model highlights internal linkages, whereby cluster benefits areproduced by local firm cooperation, local institutions and local social capital. The nature ofinterconnectedness enables firms within the cluster to be more productive and competitive. Firmscan have access to stable sources of inputs, and market and technical information (Ignacio, 2011).External linkages also matter, global buyers can help local clusters access distant markets, acquirenew forms of knowledge and upgrade. Clustering is one of the key elements of the Philippine ExportDevelopment Plan since 2002. In fact, a National Cluster Management Team (NCMT) under theExport Development Council has been created to sustain this program.

The Department of Trade and Industry (DTI) is implementing the three-year NationalIndustry Cluster Capacity Enhancement Project (NICCEP), which seeks to enhance SMEs’ capabilityfor job creation, investment generation, export growth, SME development, and poverty alleviation.During the series of industry cluster development planning workshops, strategic development plansfor target industry clusters were drafted using the value chain framework. The following industrieswere chosen after a series of consultations with key industry players and experts: milkfish, dairyproducts, coffee, bamboo, tourism, information and communication technology (ICT), health andwellness, wearable and homestyle in Luzon; gifts, decors and housewares, tourism, ICT, health andwellness in Visayas; and banana, mango, coconut, seaweeds, wood, mining, tourism, ICT, rubber,poultry, tuna and palm oil in Mindanao. Through the NICCEP, these industry clusters’ capacities toplan, implement, and evaluate projects will be enhanced. This project also intends to improve thecompetitiveness and business environment of these industry clusters. The NICCEP is funded byJapan International Cooperation Agency (JICA) in coordination with the DTI to develop and mobilizepilot industry clusters nationwide. Twenty-four pilot projects were already identified in Luzon,Visayas and Mindanao11. The employment impact of this relatively new endeavour remains to beseen.

Enhancement of the Magna Carta for MSMEs

Enacted by the Philippine Congress in 1991 as RA 6977, amended by Republic Act 8289 in1997, and further amended by RA 9501 in 2008, the law is geared towards the development of theFilipino entrepreneurial spirit by providing a business environment conducive for MSMEs. This lawincluded the micro sector in its coverage and increased the mandatory lending from 8% to 10% (8%for micro and small and 2% for medium). Further, it limited the alternative compliance mechanismsto improve direct compliance by banks and enhance better access to loans by the MSMEs. TheBangko Sentral ng Pilipinas (BSP) reports over-compliance to the law as of September 30, 2010 - thepercentage compliance for micro and small is 8.07% (out of the required 8%) and for mediumenterprises 7.36% (out of the required 2%) for a total MSME compliance of 15.43%.

11 SME Clustering to Boost Economy by Bernie Cahiles-Maglikat, www.mb.com.ph, May 13, 2012


In 2003, the Philippine government launched its National SME Development Plan for 2004-2010. Recently, it has drafted the new Plan for 2011-2016. To develop a vibrant MSME sector, thenew Plan envisions the implementation of measures to create an enabling business environmentand provide government support not only to improve MSME access to finance and expand marketaccess but also to strengthen MSME productivity and competitiveness and their linkage with largeenterprises and value chain networks. Moreover, coordination and monitoring of activities amongnational agencies and local government units (LGUs) will also be intensified to harmonize theimplementation of the Plan. MSMEs contribute around 90% of total employment in the country.

One Town One Product (OTOP) Program

The OTOP is a program managed and spearheaded by the Department of Trade and Industry(DTI) in close partnership with municipal local government units. Its key feature is the identification,development, and promotion of a specific product or service over which a particular municipality hasa competitive advantage. Municipal LGUs take the lead in implementing the OTOP program in theirlocalities and in providing the proper enabling environment for identified businesses to grow anddevelop. The DTI and the other partner government agencies assist the LGUs in delivering thenecessary support services to the identified businesses such as product design and development;skills and entrepreneurial training; marketing assistance; and introduction of appropriatetechnologies. Financing assistance is also provided via the SULONG program. From a minisculecontribution of just around 1,500 employed persons, the OTOP Program has generated 70-85,000jobs annually as reported by the Department of Trade and Industry.

Figure 3 Generated Employment OTOP Program

Source: DTI-OTOP website


V. Key Reforms to Address the Perennial Employment Problem12

Addressing the Critical Constraints to Sustained Economic Growth

Many of these critical constraints are clearly interrelated. Only when the fiscal situationsufficiently improves will the Government be able to allocate more resources to infrastructureinvestment. However, improved infrastructure alone is not enough to reduce the cost of doingbusiness and to catalyze private investment. Better infrastructure has to be matched by increasedinvestor confidence, which can be done if Government adequately addresses governance concernsespecially reducing corruption and improving political stability. Removing these three constraints(e.g., tight fiscal space, inadequate infrastructure, and weak investor confidence) will result inincreased private investments from domestic and foreign sources. But, to ensure that growth can besustained at a high level similar to that achieved by many Southeast and East Asian economies inrecent decades, the Government will also need to address the market failures (such as informationand coordination externalities) in order to encourage investments in diversifying and expanding themanufacturing sector and exports, and in upgrading the level of technology. Sustained and highgrowth, resulting from removing its critical constraints, will create more productive employmentopportunities. This is essential because insufficient employment is the most critical constraint topoverty reduction in the Philippines. By solving key investment constraints particularly the high costof doing business in the country, the country will be able to attract both foreign and local investorsin the economy.

Helping small and medium enterprises to flourish (as they are the main generators of jobs in thecountry)

Any serious job creation strategy must strengthen SMEs through: Access to credit and finance - Some private banks were able to overcome these challenges by

providing assistance in preparing accounting records, business advice, and simplifying loandocumentation and tailor fitting loans to match the borrower’s cash flow.

Establishment of institutions to monitor and diffuse new technologies and provide technologicalservices e.g. material testing, inspection, certification of quality, instrument calibration,establishment of repositories of technical information, patent registration, research and design,and technical training

Formulation of programs for the provision of information exchange to local firms to makestrategic linkages with multinational corporations (MNCs) – like the Singapore model

Assisting local governments to create an adequate environment to attract and sustain investmentsespecially labor intensive ones

Full support to the program of the National Competitiveness Council for the 120 “spark plugLGUs” and maximizing the emulation and spillover effects of these LGUs

12 Derived mostly from Aldaba and Hermoso (2009)


Institutionalize involvement of key LGU representatives in the formulation of industrial policiesand job creation strategies and programmes

Development of financial markets to tap domestic savings and harness remittances into productiveinvestments especially in local rural economies (to provide both in farm and off farm employment)

Creation of a variety of financial instruments that would attract savings from the middle andupper classes including remittances from OFWs which could then be channeled to variousprivate sector initiatives especially in the rural areas.

Enhancement of the equity markets and open access to such by capable and efficient SMEs

Improving the capability of our workforce

Creation of a sound population management policy. Passing the Reproductive Health Bill intolaw will be a very good start.

Forming the young by improving the quality of basic education (primary and secondary), healthand nutrition

Implement substantial reforms in all stages of education and training system Tap public-private sector partnership mechanisms to improve the quality and completion rates

of primary and secondary school students. The length of schooling must be brought at par with international norms through the sound

implementation of the the K-12 reforms. Skills upgrading and training for out of school youth and those who drop out of school Establish key programs to address youth unemployment Strengthening of vocational and technical training especially for in-demand jobs and occupation

- Technical schools must reorient their curricula to serve employer needs and requirementsand address specific skills needed by industries.

- The dual tech system is a good practice which may adopted by technical schools and theirpartner training institutions.

Solving labour market information and mismatch problems

This can be done through more efficient by Institutionalizing a private sector – academe-government mechanism to analyze labor market

demand and supply and formulate strategies for such Involving the private sector in curriculum development and agree on longer and earlier

internships Encouraging the private sector to train people beyond their requirements through double-

deduction of training expenses


Strengthening Social Protection

Implementation of a comprehensive social protection that covers both the formal and informalsector especially the poorest of the poor or the chronic poor.

- Formal Sector: unemployment insurance, Philhealth policy on unemployment- Informal sector (entrepreneurial poor): micro finance and microinsurance (MBAs)- Poorest of the Poor: Conditional Cash transfers; 100 day guaranteed employment- Continued implementation of National targeting system towards a database on poor

households regularly updated.- Rationalization of remaining social protection programmes to avoid duplication and

wastage.

Labour Migration and Development Policy

Providing an explicit policy on labour migration is a must. It is high time for the government toaccept that given the current state of development of the country, Filipino workers especiallythe more educated ones include in their options, the choice to go abroad. An explicit labourmigration policy must be established to ensure that Filipinos leaving to work abroad get qualityjobs and that they are amply protected in the host countries. This should be complementary tothe labour migration management programmes that the government already has through POEAand OWWA.

Institutionalization of the Employment Strategy

Mainstreamed Employment Strategy Mainstreaming an employment-creation strategy (jobs created must be high quality and

emanating from sustainable enterprises in sectors that have huge scale and market potentialand where the country has comparative advantage) in Major Development Plans from thePhilippine Development Plan (PDP) to the Philippine Labor and Employment Plan to LocalDevelopment Plans (LDPs)

Regular Review of Employment Strategy Ensuring that any new and major economic policy or program must be reviewed for its

employment impact; assigning government and private sector champions to spearhead thesereviews; offer incentives for labor-intensive investments

A Feasible Implementing Mechanism Establishing a multi-stakeholder mechanism (including the private sector champions) that will

generate ideas for policies and programs for job creation and monitor implementation of suchshall be established in coordination with the National Competitiveness Council (NCC)


Empowering LGUs Key national agencies in cooperation with the National Competitiveness Council (NCC) shall

assist the Local Government Units (LGUs) in incorporating an employment creation strategy intheir Local Development Plans (e.g. Spark Plugs Project)

Strengthen the coordination of the three training and education institutions – Deped, Ched, andTesda

There must be a well coordinated education and human resource development programme forthe country and this can only be done through institutional coordination among three agencies– Deped, Ched and Tesda.

Monitoring of Indicators Various key indicators on employment creation shall be regularly gathered and monitored (e.g.

unemployment and underemployment rates, official and those privately generated like SWS;hiring and firing rates, etc.) as these are important inputs for policy and program formulation

Crafting and implementing a sound industrial policy

And finally as the main focus of this paper for job creation, we also recommend the need tocraft and implement a sound industrial policy to generate good quality jobs. According to Harvardeconomist Dani Rodrik, a sound industrial policy is founded on a strategic collaboration between thegovernment and the private sector with the aim of identifying where the constraints and obstaclesfor industrial restructuring lie and what type of interventions most likely will remove them. It isshould also be complementary to market forces not distortive and should maximize its contributionto growth while minimizing its risks of generating waste and rent seeking. The focus is not on policyoutcomes per se but on the policy process where a venue in which public and private sectorcollectively solve problems in the production sphere knowing the opportunities and constraintsconfronted by each other.

Industrial policy applies not just to manufacturing but to other sectors as well as activitiesthat are characterized by constant or increasing returns to scale The state through industrial policymust also be utilized to translate successes in global integration into more productive employmentand higher household incomes through the promotion of backward and forward linkages betweenexternally related activities and the rest of the economy. (Montes, 2008). The government must:

Provide venues of collaboration and support for sunrise and potential industries where thecountry is competitive and has comparative advantage especially for highly labor intensivesectors or for those that create multiple linkages (backward and forward) in the economy.

Assess strategically sunrise and potential industries and sectors – examining their strengths andweakness and looking at how government will be able to assist in improving the globalcompetitiveness of such sectors in terms of basic infrastructure support to industrial clusters,market information, linkage and networking, research & development and favorable policyenvironment (Usui, 2012)


VI. A Framework and Possible tools for the Analysis of the Employment Effects of IndustrialPolicy or Sectoral Strategies

Employment as an Important Criterion for Selecting Priority Sector

Vertical industrial policy as opposed to the horizontal one virtually selects sectors that thegovernment will support towards growth and expansion. Several criteria are proposed in selectinggood candidates for industrial promotion13: (1) that they have strong inter-industry linkages i.e.backward and forward linkages (2) that they are a leading sector in the rest of the economy i.e. theyhave high growth possibilities and wide spillover effects for the rest of the economy (3) that they canbe characterized by a high share of industry-specific innovations in output growth and (4) that they(and their linked sectors) have high labour absorption. The last criterion is what we are actuallyfocused on in the paper. In a developing economy where there is a dearth of good quality jobs for abig bulk of the population, a sector’s capacity to generate jobs will certainly be an important criteriafor the government to prioritize such a sector. However, one should note that it is only one of thecriteria which means that it is still possible for a non-labour intensive sector to be chosen as long asit satisfies the other criteria. For example, if it has very strong backward and forward linkages leadingto the creation of jobs not directly linked to the concerned sector. But of course, the governmentmust weigh the various trade-offs in selecting the sectors especially if the economy suffers fromchronic unemployment and underemployment resulting in high levels of poverty.

A. Framework for the analysis of employment impact of industrial policy or sectoral strategies inthe Philippines (Please see Figure 4 below)

This section discusses a framework in tracing the employment effects of industrial andsectoral policies. From Figure 4 below, industrial policies affect employment through labourdemand and labour supply. It may even influence both labour supply and demand if governmentdecides to intervene in wage policy setting. A caveat in this framework is that there are othereconomic policies which may affect labour demand – fiscal and monetary, trade and exchange ratepolicies for example.

Direct and indirect employment effects

We are concerned on both the direct and indirect employment effects of industrial policy.Direct effects refer to the actual number of workers employed in the sector (or sectors) itself whichis subject of vertical industrial policy. Indirect effects meanwhile are the number of workersemployed in the backward and forward linkages of the aforementioned sector. It also includesemployment due to other spillover effects that the industrial policy generated. This means that ourframework also gives consideration to the employment spawned by the linkage of the selectedsector with its related sectors of the economy and the spillover effects it created among non-relatedsectors. It might not be impossible then to have sectors that have greater indirect rather than directemployment effects.

13 Reasons 1-3 are from Noland (2004)



Quantity and quality of jobs created of selected sectors

We are also interested not only in the total number of jobs created in the economy thatresults from industrial policy but also with the types of employment generated. Thus, a priority ortarget sector may produce jobs that are mostly skilled and semi-skilled than non-skilled or vice versa.Or it could happen that the sector promoted is dominated by subcontracting arrangements withSMEs. In other words, it would also be important to be able to monitor the types and quality of jobscreated even if this would prove to be relatively difficult to implement.

“Maximizing” backward and forward linkages of selected sectors

The raison d’etre of industrial policy is the need for coordinated investments in terms ofRosenstein Rodan’s idea of the “big push” in the 1950s. Many development economists claim thatthe possibility exists for welfare-enhancing industrial policies through government coordinationactivities to capture inter-industry externalities, thus promoting growth and industrial development.The significant factor is the existence of inter-industry externalities, which when captured, expandthe production set and possibilities of the economy.

Backward and forward linkages were first presented by Hirschman in 1958 with his classicpaper, The Strategy of Economic Development. The linkage concept is generalised to the observationthat ongoing activities induce agents to take up new activities. Backward linkage effects are relatedto derived demand, i.e. the provision of input for a given activity. Forward linkage effects are relatedto output usage, i.e. the outputs from a given sector will induce attempts to use this output as inputsin some new activities14 or sectors. However, according to Hirschman, backward and forwardlinkages are not automatically created. It is thus not just the relation between the market size andthe economic size of a plant that will spark the required entrepreneurship or coordination forlinkage investments. Variables such as technological proximities of the new economic activities inrelation to the ongoing ones, as well as obstacles in the form of the need of large amounts of capitaldue to scale requirements and the lack of marketing access and knowledge are also important.

Positive spill-over effects of coordinated investments15

In thinking about how industrial policy targets a key sector that affects the whole economy,it is helpful again to use a taxonomy provided by Albert Hirschman. There are three possiblelinkages between the priority sector and the other sectors of the economy. The first of these arefiscal linkages in which a measure of resource rents are appropriated by the government and used topromote industrial development in unrelated sectors. The second linkage is the consumption linkagein which incomes earned in the production of the concerned sector can in turn generate thedemand for other locally produced goods. However, the removal of protective tariffs has meant that

14 This is measured by Rasmussen’s index, the power dispersion index - describing the relative extent to which an increase in final demandfor the products of a given industry is dispersed throughout the total system of industries.15 The three ways were suggested by Hirschman in terms of the commodity sector as cited by Kaplinsky (2011)


in the modern era, many of these consumption leakages are being experienced abroad rather thandomestically. Third, according to Hirschman, are the production linkages—backward in the supply ofinputs and forward in the processing the output of the said sector. We add to this the possibility ofhorizontal linkages in which capabilities developed in backward and forward linkages also serve theneeds of other sectors. For example, the development of an entire supply chain may create spillovereffects toward the other non-priority sectors.

Complementary investments in human capital and training responding to new demands of selectedsectors

The issue of skills and human resources is a crucial component of industrial policy.Effectiveness of policies in this area will directly affect the success of any industrial strategy andwill help in creating a sufficient level of qualified employment. Low level of skills in the labour forceposes serious barriers to the competitiveness of the private sector. Cognitive and practical skillsacquired by individuals during their education determine the future productivity level of the labourforce. Problems in hiring employees with sufficient qualifications for certain positions in the privatesector constrain the growth of the economy. These are often the result of labour mismatches whereschools and universities produce graduates not needed by the private sector. Inadequacies intechnical education are also the main reason for the lack of qualified intermediary level employees.Coherence between industrial policy goals and policies designed for the improvement of humanresources must be given importance.

B. Diagnostic tools to measure employment effects of industrial and sectoral policies

Ex ante and ex post employment assessment of selected industries and sectors

Estimating employment effects of industrial policy is important before and afterimplementation. Ex-ante assessment may be significant in terms of selecting priority sectors invertical industrial policy. For example, one needs independent evaluation of employment generationclaims of specific sectors vying for prioritization in terms of government support. Ex-post assessmentwill be important for monitoring and evaluation especially in terms of whether targeted jobsgeneration has actually been achieved. Thus various tools may be used whether it’s ex ante or expost assessments.

Estimating employment elasticities16

One indicator widely used for analysing the operation of the labour market is employmentelasticity. The most basic definition of employment elasticity is the percentage change in the numberof employed persons in an economy or region associated with a percentage change in economicoutput, measured by gross domestic product. Hence, the elasticity of employment seeks to capturethe responsiveness of the labour market to changes in macroeconomic conditions (as represented

16This section on elasticities is derived mostly from Islam and Nazara(2000) and Kapsos (2005)


by GDP growth). However, the aggregate employment elasticity is sensitive to the method ofmeasurement as well as the time period over which the measurement is carried out.

Issues in the estimation of employment elasticities

There are a number of criticisms that one can make against the notion of employmentelasticity. First, the notion of employment elasticity focuses only on the demand side of therelationship between GDP and employment (with GDP acting as a representation for aggregatedemand) and ignores the supply side (the output-creating effect of labour utilisation).

Second, even if it is valid to focus primarily, or only, on the demand side of the employment-GDP relationship, the notion of employment elasticity is valid for a given state of technology andknowledge. As technology changes and knowledge about ‘best-practice’ production processeschange, it can make a given percentage growth of GDP more or less employment intensive.Furthermore, the notion of employment elasticity is ‘endogenous’ to the policy regime. A givenpolicy regime could be more or less conducive to the growth of employment, promote labour-usingtechnology or they could impart a capital bias in production processes.

The third issue is that the impact of GDP on employment is not symmetrical. Implicit withinthe indicator (of employment elasticity) is the assumption that economic growth will promoteemployment while economic contraction will result in unemployment. The latter is not necessarilythe case because of the so-called ‘unemployment as luxury’ hypothesis. In the absence of anycomprehensive unemployment insurance in a developing economy, unemployment during aneconomic contraction becomes a luxury that only those with adequate non-labour income canafford.

Fourthly, an economy-wide employment elasticity is also unable to distinguish between theimpact on employment of changes in sectoral GDP and total GDP. It will be necessary to disentangletwo effects: a direct effect on job creation working through the channel of sectoral GDP; an indirect‘substitution’ effect (the movement of people between sectors) as the economy as a whole expands(as reflected in the growth of overall GDP). Any estimation procedure should thus be able to identifythe net effect of economic growth on sectoral employment.

In the Philippines, it is important to note that the manufacturing and industry sectors havethe highest employment elasticity among the three major sectors. Lanzona and Felipe (2005)estimates from 1993 to 2004 that industry has elasticity of 1.09, services, .744 and agriculture, .64.Thus with low growth in industry, generation of quality jobs remained insufficient. Jobs in agricultureand services are mixed with the so-called “low quality, unpaid type of jobs” prevalent in the informalsector.

Using input-output to estimate employment effects (backward-forward linkages and supply chainanalysis)


Linkage Analysis

Linkage analysis, an important method used to examine the interdependency of productionstructures, was introduced by the works of Rasmussen (1956) and Hirschman (1958). Since that timemany different methodologies were improved and expended for the measurement of linkagecoefficients. One of the well-known methods for the analysis of interdependency between economicsectors is backward and forward linkage analysis. Backward and forward linkages are descriptivemeasures of the economic interdependence of industries in terms of the magnitude transactions.Linkages show the estimate of the direct and indirect increase in output following an increase in finaldemand. Backward and forward linkages, which were first proposed by Rasmussen (1956), arecalculated from what is called the Leontief inverse or total requirement matrix.

Input-Output Analysis

Among many measurement methods, researchers prefer to use the input-output model tomeasure the employment effects of changes in final demand. The input-output (I-O) technology canreflect the interdependence among industries in national economic system comprehensively andsystematically. An I-O model is created from actual data for a specific economic zone (e.g., acountry, region, province, etc). The data consists of flows of products from each sector or activity,considered as a producer, to each of the sectors considered as consumers. These flows, usually inmonetary terms, are calculated over a certain time period (e.g., annually) and are arranged in atransactions table. The rows of this table give the allocation of a sector’s output over the economyand the columns indicate the allotment of inputs required by a particular sector to produce itsoutput. Also, there are consumers who are external to the sectors that comprise the producers inthe economy (e.g., governments, households, and foreign trade). The demands of these exogenousconsumers are referred to as final demand. These are included in the transactions table as columnsto the right of the endogenous sectors. Furthermore, a sector pays for other items, like labor andcapital, and uses other inputs such as inventoried items. These are called value added in sector i andare incorporated as additional rows in the transactions table. El Ackhar (2010) used the 2000 Input-Output tables as one of the bases of his one digit PSIC level employment projections for thePhilippines.

Other Examples of the use of Input-Output Analysis in analyzing Philippine industrial sectors includethe following:An Input-Output Analysis of the Philippine BPO IndustryNedelyn Magtibay-Ramos, Gemma Estrada, and Jesus Felipe (2007)

This paper provides a profile of the Philippine business process outsourcing (BPO) sector andanalyzes the industry’s intersectoral linkages and its potential impact on compensation andemployment. The Philippine BPO sector’s growth is largely driven by the contact center subsectordue to its large share in total BPO employment and revenues as well as government support. Theinput-output linkage analysis shows that the BPO industry is not a key sector in terms of stimulatingproduction in other sectors of the Philippine economy. However, growth in the sector’s revenuescan have a significant impact on compensation and employment. An increase in the sector’s


revenues will generate a considerable increase in the sector’s total wage bill and in that of the othersectors. If appropriate policies are enacted and with improvements in human capital, it is estimatedthat the Philippine BPO sector may become an important employment-generating sector. The sectorcan provide 7-11% of the new jobs for the labor force entrants between 2007 and 2010. It is alsoestimated that the BPO total workforce size will reach 500,000 to 600,000 in 2010, which isconsiderable for a single economic activity.

Employment Impact of E-commerceDe vera (2002)

The study seeks to estimate the employment effect of ecommerce—specifically business -to-consumer or B-to-C e-commerce—on Philippine workers. Specifically, the objectives of this studywere: (1) To formulate different scenarios describing how B-to-C e-commerce will influencepurchase processes; (2) To estimate changes in employment levels, with B-to-C e-commerce, forselected industries; and (3) To assess the changes in the nature of future jobs with the coming of e-commerce. Revenue projections were used to estimate corresponding employment impacts for the11 industries related to e-commerce, as well as for the whole economy, using input-output (IO)methodology. The projection period for the estimation of the impact of B-TO-C ecommerce onemployment is from the year 2000 to 2005.

An Agenda for High and Inclusive Growth-MiningHabito (undated)

The inclusiveness of the growth that the sector can provide is analyzed. The relevantquestions were (i) how much employment growth in the sector would generate; and (ii) how muchother sectors in the economy would benefit from mining growth, through its backward and forwardlinkages. This would be indicated by the industry’s labour intensity (labour—output ratio), andmeasures of its backward and forward linkages with the rest of the economy. Input—outputanalysis, using the 2000 Input—Output Table of the Philippine Economy showed the following: Interms of employment generation, mining and quarrying has relatively low labour—output ratios.Labour compensation accounts for only 13.3% of the sector’s output, against an economy-wideaverage of 20.7%, giving a labour absorption index of 0.64. With a backward linkage index of only0.46, the industry uses relatively little input from other domestic industries. Likewise, a low forwardlinkage index of 0.82 indicates that forward linkages are below the average for all sectors of theeconomy. This is because a major proportion of the industry’s products are currently exported inprimary form with less processing done within the country.

Other examples include the Employment Effects of Multinational Enterprises in the PhilippinesBy Miranda (1994) and Employment, Productivity and the Informal Sector in the Philippines, 1974-88: An Input-Output Analysis by Venida (1998)

Limitations of I-O model

Compared with other methods, input-output has an comparative advantage in measuringtotal impact of changes in final demand on employment. However, the classical input-output model


always assumes that the relationship between the output of various sectors and its employment islinear. According to economic theory, employment is more sticky than output, which impliesemployment has a non-linear relationship with the output. Thus, the linear model will overestimatethe employment effects of the changes in final demand. To solve the problem, econometric modelsare designed to estimate employment elasticity by sector and introduce the results into the input-output model to get a partial non-linear input-output model. One must also note that the latestPhilippine input-output table was still developed in 2000 and certainly needs updating.

Using computable general equilibrium analysis to estimate employment effects of industrial policyreforms17

Computable general equilibrium (CGE) models are a class of economic models that useactual economic data to estimate how an economy might react to changes in policy, technology orother external factors. A CGE model depicts the economy as a web of interrelated activities by fourtypes of agents: producers, households, government, and the rest of the world. The economy isorganized into “markets.” A market is a hypothetical place in which a product is traded; it comprisesa demand and supply function for the product. Markets exist not only for products by the industrialsectors, but also for the production “factors” labour and capital.

All markets are assumed always to be in equilibrium, that is, quantity supplied equalsquantity demanded (this constitutes “general equilibrium”). CGE models synthesize the process bywhich general equilibrium comes about, but a conceptual explanation is offered usually by anunderlying economic theory or relationship of variables. A CGE model consists of (a) equationsdescribing model variables and (b) a database (usually very detailed) consistent with the modelequations e.g. a social accounting matrix. The equations are neo-classical, often assuming cost-minimizing behaviour by producers, average-cost pricing, and household demands based onoptimizing behaviour. However, most CGE models conform only loosely to the theoretical generalequilibrium paradigm. For example, they may allow for:

non-market clearing, especially for labour (unemployment) or for commodities (inventories) imperfect competition (e.g., monopolies and oligopolies) demand not influenced by price (e.g., government purchases) negative externalities, such as pollution introduction of fiscal variables like taxes

Strengths of CGE models

The strengths of CGE models are obvious: They are able to accommodate detailed economicdata and can trace indirect economic effects of various variables. Thus they allow us to analyze thedistribution of policy impacts over different groups of the population, by occupation, region, andincome depending on the extent of model detail.

17 R. Aldaba (2012) discusses CGE models for trade and employment


Issues on CGE Models

Traditional CGE models use a number of assumptions that obviously lack realism. This castsdoubt on the plausibility of model results (projections on prices, sectoral output and employment);also, the assumptions lead to unwarranted normative conclusions. As for the realism of CGE modelassumptions, the most sweeping criticism can be levelled at the assumption of the rational actorwho possesses perfect information and pursues an exogenously given objective. Anotherproblematic assumption is that there are no “missing markets.” In CGE models, prices are the mainstimuli for economic activity. But in reality, there are no markets, and hence no prices, for things likeair or water quality and peace and order, even though these constitute important influences andconstraints on human behaviour. Finally, CGE models focus on equilibrium but there is possibilitythat equilibrium may be unstable, difficult to reach and maintain. Multiple equilibria may also exist –both bad and good equilibrium. There is also no credible price adjustment mechanism thatguarantees movement from a state of disequilibrium to equilibrium.

The Dynamic Social Accounting Matrix Model (DySAM)

The CGE models are typically based on Social Accounting Matrix (SAM). A Social AccountingMatrix (SAM) embodies the flows of all economic transactions that occurs within an. In essence, it isa matrix representation of the National Accounts for a given country, but can be extended to includenon-national accounting flows, and created for whole regions or area. SAMs refer to a single yearproviding a static picture of the economy. More recently time series SAMs were introduced – theDynamic SAMs which the ILO suggests as a most appropriate diagnostic tool for studying theemployment effects of industrial and sectoral policies.

Since the seventies, the SAM framework and model have been utilized in empirical workdealing with growth and distribution issues. Some computable general equilibrium (CGE) modelswere developed using the SAM as a consistency framework to calibrate those models. As discussedabove, CGE models are based on a high number of assumptions such that results may become toocontingent on them. Thus, the SAM accounting model has been further developed to includebehaviour of agents, as well as employment variables trying to capture the labour market structureof a given country. The DySAM is dynamic and considers changes over time, but also provides somedistinction on technology choices.

Estimating changes in labour productivity in selected sectors due to human capital investmentsand/or institutional reforms

Many studies have been dedicated to the importance of labour productivity growth. Thereason is that the rate of productivity growth can have a relatively large effect on real output andliving standards. As a component of total productivity, the growth of labour productivity is oneimportant marker in determining the rise or fall of overall economic growth. Labour productivity is aleading indicator of other economic indicators as it offers a dynamic measure of economic growth,competitiveness, and living standards within an economy. Labour productivity can be defined as how


efficiently and effectively human resources are used at lowest possible cost. It is also a majordeterminant in attracting both foreign and local investments. Industrial policies may specify varioushuman capital interventions that will increase labour productivity and corresponding returnsthrough higher wages.

Other qualitative quantitative and tools

Government may also use other tools in the effort to measure jobs generated through:

Surveys among firms within sectors that are subject to industrial policies The collection of administrative data by agencies involved in industrial policy; can be used toestimate cost per job generated Case studies within specific sectors or geographic areas where industrial clusters or zonesare located Key informant interviews and FGDs with industry and sector experts to determineemployment potential of sectors

VII. Summary and Conclusions

The paper highlights the perennial unemployment and underemployment problemof the country and discusses the main labour market constraints that affect them. Severalrecommendations were made to be able to meet the challenge of employment and jobcreation. A key strategy to generate good quality jobs is to promote industrial upgradingand restructuring through industrial policy. Then, a framework for analyzing theemployment effects of industrial policies is explained and a description of various diagnostictools that can be utilized for such analysis.

The endeavour to determine the possible and actual employment effects ofindustrial policies must be integrated in the process of the over-all strategy of industrialupgrading and restructuring. The multi-agency and multi-stakeholder mechanismsestablished to oversee the implementation of industrial policies must also regularly monitorand evaluate such in terms of employment creation. For the government, greatercoordination among DTI, DOLE and NEDA is needed to be able to regularly assess theemployment effects of industrial policies. In the end, a successful implementation of suchpolicies must clearly result in greater investments and an upward shift in the demand forlabour not only in the priority sectors but possibly in the other sectors of the economy.


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Documents

Research Paper of Dr Fernando Aldaba (as of 21 May)