Is the Philippines de-industrializing?

I was heartened to read an Agence France-Presse report that quoted Subic Freeport administrator Armand C. Arreza saying the most sensible thing about the future of Subic.

By Dr. Bernardo M. Villegas - Philippine Daily Inquirer

As more and more manufacturing activities in the Philippines are being phased out because of competition from countries like China, Vietnam and Indonesia which offer lower labor costs, some of our leaders are concerned that the Philippines is “de-industrializing.” This trend started in the last century with the closing down of textile, garments, shoe, plastic, and chemicals factories. More recently, we are witnessing the accelerating disappearance of electronics and semiconductor devices manufacturing, the most notable of which was Intel, the giant that for 30 years waxed lyrical about the productivity of Filipino workers. Is it true that if more of these manufacturing activities disappear, the Philippines will be de-industrializing and will become an economy where services and agriculture will predominate?

Before we announce the demise of industry, let us be clear about definitions. Manufacturing is only one of the four major components of industry. The other three are mining; public utilities (like energy, water and telecom); and construction. Even assuming that manufacturing would shrink as a percentage of GDP over the next few decades, we shall continue to see the expansion of mining (the Philippines is the fourth mineralized country in the world); public utilities (there is tremendous room for growth in energy, water and telecom); and construction (we are light years behind in infrastructure development compared to countries like China, Taiwan, South Korea, etc.). That is why I am not worried about the Philippines de-industrializing.

I was heartened to read an Agence France-Presse report that quoted Subic Freeport administrator Armand C. Arreza saying the most sensible thing about the future of Subic. Commenting on the shift in Subic from manufacturing to tourism and logistics, he said that Subic’s manufacturing future had been in question even before the ongoing global crisis hit electronics companies. He said that for the past several years, low-wage competition from China and Vietnam has been luring companies away from Subic. He categorically stated that “low-cost manufacturing is not the area where Subic is competitive. Most of our land area is protected forests and protected seas. We don’t have any space to accommodate large industrial parks.” In his opinion, the future of Subic lies in tourism, medical care, shipbuilding and logistics, using the ample space still available for warehouses, especially the space around the largely unused Subic airport.

Subic is like a microcosm of the entire Philippines. We have more than 7,000 islands, many of which can attract millions of tourists (domestic and foreign) if only we build more efficient infrastructure (which, I repeat, are part of industry). Besides, we have highly educated and motivated industrial workers. We can, therefore, graduate to higher-value manufacturing in the electronics and semiconductor devices sector. When I say that the likes of Intel, Fairchild, Texas Instruments will phase out their labor-intensive manufacturing activities, I am not suggesting that the whole industry is doomed to extinction. The key is found in the statement, quoted in the same AFP report, of Prof. Danny J. Piano, president of the Subic Chamber of Commerce: “Subic manufacturers can survive. The Philippines has the capability to do good high-end work due to workers’ better education, communication and English skills.”

The electronics and semi-conductor devices industry is now in crisis because for 30 years, it has hardly graduated from low-value manufacturing to the high-end work to which Piano is referring. Unless we can produce more engineers and highly skilled technical workers who can be employed at the higher end of electronics manufacturing, then we will see more firms in this sector (that accounts for more than 60 percent of our exports) following the example of Intel, which decided to leave the Philippines even before the present deep recession. I hope other export-processing zones such as those in Mactan, Batangas, Laguna and Cavite are listening to the wise advice of the Subic officials. They have to encourage their industrial tenants to go upscale in the manufacture of electronics and semiconductor devices.

(Dr. Bernardo M. Villegas is senior vice president of the University of Asia and the Pacific. For comments, his email address is bvillegas@uap.edu.ph.)