Philippine Globalization in the New Millennium

1
Philippine Globalization in the New Millennium

• IDEAs Conference on
• A Decade After Recovery and Adjustment since the
  East Asian Crisis
• 12-14 July 2007

2
Macroeconomic Context

• Jobless Growth
• MTPDP 2004 2010
• acknowledged the need to address the countrys
  unemployment problem
• 1.5 million jobs per year 10 million jobs by
  2010
• Early indications
• In 2004 977,000 new jobs were created 1,289,000
  new entrants into the labor market
• In 2005 455,000 new jobs were created led to a
  drop in the unemployed by 100,000 but
  unemployment rate remained high at 11.4.
• Such inability to create enough jobs points to
  the absence of a cohesive strategy to address the
  unemployment issue.

3
RPs External Economic Ties Three Salient
Features

• Business process outsourcing (BPO)
• Labor migration / Labor exports
• Bilateral trade and / or investment treaties

4
Business Process Outsourcing (BPO)

• Types of BPO Services in the Philippines
• Contact / Call Center
• Back Office
• Data Transcription
• Animation
• Software Development
• Engineering Development
• Digital Content

5
BPO Sector Recent Trends

• As of end-2005, the BPO sector employed 163,000
  workers.
• The contact / call center sub-sector employed 70
  of the BPO workers in the Philippines.
• The same sub-sector contributed 75 (USD 1.8
  billion) of total BPO revenues in 2005.
• The whole BPO sector represented 0.075 of GDP in
  2000, but this increased to 2.4 in 2005.

6
BPO Sector Overview
No. of Firms Revenues Revenues Employment Employment
No. of Firms USD Million Share Employees Share
Contact Center 114 1,792 75.10 112,000 68.61
Back Office 62 180 7.54 22,500 13.78
Medical Transcription 64 70 2.93 5,500 3.37
Legal Transcriptions 9 6 0.25 450 0.28
Other Data Transcription 39 1.63 3,000 1.84
Software Development 300 204 8.55 12,000 7.35
Animation 42 40 1.68 4,500 2.76
Engineering Design 14 48 2.01 2,800 1.72
Digital Content 11 7 0.29 500 0.31
Total 616 2,386 100.00 163,250 100.00
7
BPO Sector Recent Trends

• Sole dynamic sector in the economy in recent
  years.
• Regarded by the government as the panacea of the
  unemployment problem / jobless growth phenomenon.
• Employment in this sector is projected to rise by
  38 annually between 2005 and 2010.
• 27 of all new jobs in the country (if current
  trends persist) in 2010 will be generated by the
  BPO industry.
• Credited for surge in demand for office spaces /
  real estate, thus making the real property sector
  the highest-growing Services sub-sector in 2006.

8
Development Implications of the BPO Sector

• Threats to Philippine performance in the global
  BPO industry abound
• safety and political issues poor infrastructure
  expensive inputs
• stiff competition from India, Malaysia, China
• Job and Skills mismatch Hiring rate for call
  center applicants is only 14.
• Employee profile biased not only for highly
  educated individuals, but particularly graduates
  of top schools who could otherwise have been
  employed in more dynamic sectors of the economy.
• Diploma from a top school guarantees English
  proficiency, computer literacy.
• Call centers also hire on average twice as many
  middle managers than call center agents.
• Non-trivial wage premium.

9
Development Implications of the BPO Sector

• Low knowledge intensity, no technology transfer /
  human resource development
• BPO sector is clearly taking advantage of cheap
  skilled labor.
• How can the sector move up the knowledge
  intensity ladder?
• Very low inter-sectoral linkages
• Estimates of the sectors forward and backward
  linkages are well below 1.
• The Philippine BPO industry is not a key sector.

10
Development Implications of the BPO Sector

• BPO sector does not represent any opportunity for
  majority of the unemployed, much less the poor.
• Most of the unemployed are 15 24 years old with
  no college diploma.
• Poverty is still most deeply felt by the
  agricultural peasantry.
• BPO has no linkage to agricultural sector.

11
Philippine Labor Exports
Deployed Overseas Filipino Workers (OFWs) Deployed Overseas Filipino Workers (OFWs) Deployed Overseas Filipino Workers (OFWs) Deployed Overseas Filipino Workers (OFWs)
Year Total Land-Based Sea-Based
1990 446,095 334,883 111,212
1995 654.022 488,621 165,401
2000 841,628 643,304 198,324
2001 866,599 661,648 204,951
2002 891,908 682,315 209,593
2003 867,969 651,938 216,031
2004 933,588 704,586 229,002
2005 988,6155 740,632 247,983
2006 1,062,567 788,070 274,497
12
OFW Remittances, 1990 2006(USD Thousands)
13
Annual Growth Rate of OFW Remittances
14
Remittances FDI (1999 - 2006)USD Millions
15
Philippine Labor Exports

• Remittances have grown at an annual average of
  16.286 in the past five years
• 16.91 average annual growth rate since 1991
• Dip in remittances occurred during the Estrada
  Administration (1998 2001)
• Along with the BPO sector, these remittances have
  fueled consumption growth and the recent real
  estate surge.
• Dramatic appreciation of the Philippine peso
• The government is by and large pleased with this.

16
PhP / USD Exchange Rate Trends
1996 1997 1998 1999 2000 2001 2002 2003
PhP/ USD 26.22 29.47 40.89 39.09 44.19 50.99 51.60 54.20
D -1.9 -12.4 -38.8 4.4 -13.1 -15.4 -1.2 -5.0
2004 2005 2006 2007 2007 2007 2007 2007
2004 2005 2006 Jan Feb Mar Apr May
PhP/ USD 56.04 55.09 51.31 48.91 48.38 48.52 47.82 46.81
D -3.4 1.7 6.8 8.8
17
PhP Cross Rates
Period EURO HK SK Sing Malay Thai Indo India
Dollar Dollar Won Dollar Ringgit Baht Rupiah Rupee
1997 3.8068 0.0314 19.7974 10.5341 0.9684 0.0105
1998 5.279 0.0294 24.4744 10.4582 0.9981 0.0042
1999 41.7205 5.0337 0.0329 23.0852 10.2879 1.034 0.0051 0.9093
2000 40.7246 5.6715 0.0391 25.6243 11.6296 1.0997 0.0053 0.984
2001 45.6939 6.5404 0.0397 28.4775 13.4208 1.1472 0.005 1.0826
2002 48.8125 6.6174 0.0424 28.8364 13.6979 1.2006 0.0056 1.0764
2003 61.3506 6.961 0.0456 31.1237 14.2659 1.307 0.0063 1.1661
2004 69.6852 7.1955 0.049 33.1644 14.749 1.3932 0.0063 1.2391
2005 68.6102 7.083 0.0538 33.109 14.5482 1.3697 0.0057 1.2523
2006 64.4473 6.606 0.0538 32.302 13.9972 1.3542 0.0056 1.136
PhP has been appreciating against other
currencies as well in the past two years.
18
Philippine Labor Exports

• Moreover, the inflow of OFW remittances has
  enabled the BSP to increase its foreign exchange
  reserves to about 4 months worth of imports.

19
Gross Intl Reserves (1997-2007)USD Millions
20
Development Implications of Labor Exports

• Primary example of brain drain
• Mobile labor is well-educated, highly-skilled,
  and often belonging to the Philippine middle
  class
• Medical doctors, nurses, and other medical
  practitioners, engineers, teachers.
• De-skilling
• Doctors taking up nursing courses in order to
  leave the country.
• Nurses becoming careworkers.

21
Development Implications of Labor Exports

• Hollowing out of the labor market
• More difficult to move up the knowledge-intensity
  ladder in exports

22
Development Implications of Labor Exports

• Peso appreciation
• With further appreciation of the peso, the effect
  of cheaper inputs (since exports are also largely
  input dependent) will be outweighed by higher
  domestic costs, thus eroding whatever little
  export competitiveness the Philippines possesses.
• Already, exporters have been wary of signing
  contracts
• Standard contracts are for 2 years.
• De facto Factor Price Equalization, but via the
  exchange rate
• OFWs are complaining more and more about the
  smaller wage premium they enjoy.

23
Development Implications of Labor Exports

• Social cost of foreign reserves
• Reserves generally seen as necessary to preclude
  financial crises

24
Bilateral Investment and/or Trade Treaties (BITTs)

• Argentina
• Australia
• Austria
• Bangladesh
• Belgium
• Cambodia
• Canada
• Chile
• China
• Czech Republic
• Denmark
• Finland
• France
• Germany
• Italy

• Japan
• Myanmar
• Netherlands
• Pakistan
• Portugal
• Republic of Korea
• Romania
• Russian Federation
• Spain
• Sweden
• Switzerland
• Thailand
• Turkey
• United Kingdom

25
BITTs Overview

• Standard provisions on
• national treatment
• Expropriation
• Compensation
• Dispute settlement.

26
Excerpts from Australia RP BIT

• 1. Neither Party shall nationalise, expropriate
  or subject to measures having effect equivalent
  to nationalisation or expropriation (hereinafter
  referred to as "expropriation") the investments
  of investors of the other Party unless the
  following conditions are complied with
• (a) the expropriation is for a public purpose
  related to the internal needs of that Party and
  under due process of law
• (b) the expropriation is non-discriminatory and
• (c) the expropriation is accompanied by the
  payment of prompt, adequate and effective
  compensation.
• 2. The compensation shall be computed on the
  basis of the market value of the investment
  immediately before the expropriation or impending
  expropriation became public knowledge. Where that
  value cannot be readily ascertained, the
  compensation shall be determined in accordance
  with generally recognised principles of valuation
  and equitable principles taking into account the
  capital invested, depreciation, capital already
  repatriated, replacement value, currency exchange
  rate movements and other relevant factors.

27
BITTs Overview

• Rejection of the Calvo doctrine
• insists that investment disputes lie within the
  exclusive purview of domestic legislation, and
• strikes at the core of the international minimum
  standard by repudiating the claim to MFN status.
• Japan Philippines Economic Partnership
  Agreement (JPEPA)
• 9 September 2006
• most recent and probably the most controversial
  BITT that the Philippines is party to.

28
JPEPA Provisions

• Comprehensive BITT covering major areas
  including
• trade in goods and services
• Removal of tariffs on products (agricultural and
  non-agricultural)
• Gradual tariff reduction towards zero tariff on
  selected agricultural and non-agricultural items.
• MFN tariffs on the automotive sector (sensitive
  sector for RP)
• elimination of tariffs by 2010 under AFTA
• Exclusions Rice, wheat, milk, herrings,
  sardines, mackerel, and other fish.
• Japan will allow Filipino nurses and careworkers
  to access the Japanese market, with conditions.
• must master written and spoken Nippongo
• must pass the nursing board exam within two years

29
JPEPA Provisions

• investments
• Article 89 National Treatment
• Article 90 MFN Treatment
• prohibits requirements on export volumes,
  domestic content, input, foreign exchange earning
  , employment, technology transfer, RD, etc
• intellectual property
• Article 127
• New Varieties of Plants
• Each Party recognizes the importance of providing
  a system of protection of new varieties of plants
  and shall, within its capabilities, endeavor to
  increase the number of plant genera and species
  that can be protected under its laws and
  regulations. In this regard, each Party shall
  consider the concerns of the other Party.

30
JPEPA Provisions

• government procurement
• accords MFN treatment in government procurement
  procedures, with a new round of negotiations for
  national treatment in five years.
• Trade facilitation and harmonization of customs
  procedures, use of ICT and paperless trading
• movement of natural persons
• competition policy

31
JPEPAs Development Implications

• Philippine trade law experts have said that the
  JPEPAs implications are very far-reaching that
  it may possibly require full-bodied legislation
  and/or amendments to existing legislation.
• Fiscal Impact
• DOF estimates PhP 4 billion in forgone revenues.
  
• Other estimates PhP 3 5 billion range.
• huge costs in order to comply with numerous
  provisions of the treaty, most if not all of
  which are not development priorities.

32
JPEPAs Development Implications

• Negligible growth impact
• Most upbeat estimate is that the treaty will
  contribute 0.09 GDP growth.
• Japan is already the 2nd largest trading partner
  of the Philippines
• USD 1.5B total exports and imports in 2005)
• any comparative advantage the Philippines has
  vis-a-vis Japan will come to pass with or without
  a JPEPA.

33
Overview of Philippine Tariffs
Sector No. of Lines Simple Average Weighted Ave.
Agriculture and Food 1,407 11.85 9.22
Chemicals and Chemical Products 2,122 4.64 4.16
Textiles, Paper, Wood, and Leather 1,966 9.18 6.84
Base Metals and Non-base Metals 1,317 5.69 3.69
Machinery and Transport Equipment 4,497 7.96 1.78
Agriculture 1,407 11.87 9.22
Mining 131 2.47 2.79
Manufacturing 9,711 7.26 2.97
Overall 11,309 7.77 3.56
34
JPEPAs Development Implications

• It can be argued that further reduction of
  tariffs will no longer pose much harm to
  industries. JPEPAs pernicious elements, however,
  lie beyond the standard tariff reduction
  requirements of a FTA / BTT agreement,
  particularly in its provisions on other issues
  such as the following
• The Singapore Issues
• investment, competition policy, trade
  facilitation, and government procurement
• have not made headway in the WTO talks, with
  developing-country members insisting that the
  more fundamental and developmental issues.
• The Philippines was part of the G-22 alliance
  during the Cancun ministerial of the WTO (2003).
  
• All these issues now have been included in the
  JPEPA.

35
JPEPAs Development Implications

• JPEPA and IPR
• JPEPA effectively restricts and stifles the
  recognized flexibilities under the TRIPS
• International Treaty on Plant Genetic Resources
  for Food and Agriculture (ITPGRFA) (September
  2006) awaiting concrete national implementation.
  
• JPEPA does not recognize the inherent right of
  farmers to accumulate, use, exchange and sell
  farm-saved seeds and/or propagating materials by
  either providing a limitation on its IPR
  provisions or sufficient safeguards acknowledging
  and protecting it.
• Strengthening and increasing the scope of plant
  variety protection will only promote further
  monopoly control over seeds by TNCs.

36
JPEPAs Development Implications

• Legalization of trade in hazardous and toxic
  waste
• Almost all goods, including toxic wastes, will be
  granted a preferential tariff rate of zero
  percent.
• Article 29
• Originating Goods
• 2. For the purposes of subparagraph 1(a) above,
  the following goods shall be considered as being
  wholly obtained or produced entirely in a Party
  
• (i) articles collected in the Party which can no
  longer perform their original purpose in the
  Party nor are capable of being restored or
  repaired and which are fit only for disposal or
  for the recovery of parts or raw materials
• (j) scrap and waste derived from manufacturing
  or processing operations or from consumption in
  the Party and fit only for disposal or for the
  recovery of raw materials
• (k) parts or raw materials recovered in the
  Party from articles which can no longer perform
  their original purpose nor are capable of being
  restored or repaired

37
DESCRIPTION MFN JPEPA
Ash and residues (other than from the manufacture of iron or steel), containing arsenic, mercury, thallium or their mixtures 3 0
Ash and residues from the incineration of municipal waste 3 0
Waste pharmaceuticals 20 0
Residual products of the chemical or allied industries, not elsewhere specified or included municipal waste sewage sludge other wastes 30 0
Municipal waste 30 0
Sewage sludge 30 0
Clinical waste adhesive dressings and other articles having adhesive layer wadding gauze bandages, surgical gloves 30 0
Other clinical waste 30 0
Waste organic solvents halogenated, and other 30 0
Other wastes from other chemical or allied industries containing organic constituents, other 30 0
Wastes of metal pickling liquors, hydraulic fluids, brake fluids and anti-freeze fluids 30 0
Worn clothing and other worn articles / 0
Used or new rags, scrap twine, cordage, rope and cables and worn out articles of twine, cordage, rope or cables, of textile materials / 0
38
JPEPAs Development Implications

• According to law experts, the importation of
  toxic and hazardous wastes comes into conflict
  with numerous Philippines laws
• Under the Constitution, the State is mandated to
  promote the peoples right to health (Art. II,
  Sec. 15) and right to a balanced and healthful
  ecology (Art. II, Sec. 16).
• Republic Act No. 6969, the Toxic Substance and
  Hazardous and Nuclear Waste Act of 1990
• Clean Air Act of 1999
• Republic Act No. 4653
• Basel Convention, which was adopted in 1989 by
  133 countries (including the Philippines and
  Japan) to minimize the production and regulate
  the trans-boundary movement of hazardous and
  toxic materials.

39
Overall Development Challenges

• Absence of an overarching industrial and
  development strategy
• Particularly in the context of already extremely
  low tariffs
• Aggressive negotiation and pursuit of trade deals
  in spite of the absence of a master plan
• DTI handles GATT, NAMA, et al
• DoA handles AoA
• NEDA handles GATS
• The Governments strategy is laissez faire.

40
Overall Development Challenges

• GDP Growth at 6.9 in the first three months of
  2007
• On the production side
• Service sector is highest contributor to growth
  (9.1)
• Important Sub-sectors finance (13.4)
  transport, communications, and storage (9.6)
  wholesale and retail trade (9.1) private
  services (8.9) government services (7.1)
• Industry grew at 5.3
• Agriculture at 4.3
• Demand / Expenditure Side
• Consumption grew at 5.9
• Government Spending grew at 13.1
• Due to expenditures in preparation for May 2007
  elections
• Exports grew at 9.1
• Investments grew at 0.6
• Investments in durable equipment decreased by
  -0.4
• Government construction grew 16.9

41
Overall Development Challenges

• Dismal outlook on overall economic performance
• Government spending surely not sustainable News
  on recent fiscal revenues have not been good.
• Export outlook has also been bleak.
• Electronics demand worldwide is expected to slow
  down, alongside projected slowdowns of major
  economies in the world. Electronics exports
  comprise almost 75 of our exports in recent
  years.
• Indeed, the paradoxical shrinking of the import
  bill has been partly due to a weakening of
  imports of electronic inputs. This is clear
  evidence of an export slowdown in the near future.