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Chapter 3
ENHANCING
COMPETITIVENESS OF INDUSTRY AND SERVICES
Competitive industries and service sectors are sustainable sources of stable and remunerative jobs. Hence, enhancing the competitiveness of these sectors is crucial to sustained job generation and poverty reduction. Liberalization and regulatory reforms, clear and simplified rules and regulations, investments in science and technology (S&T) and research and development (R&D), continued infrastructure development and industrial peace, as well as a stable macroeconomic environment are important in ensuring long-run growth of industries and services.
The benefits from globalization shall be balanced with stronger regulatory capability, more transparency, and effective implementation of safety nets. The development of micro- as well as small and medium enterprises (SMEs) will be stepped up so that these can ultimately be linked to the global economy. Fast growing sectors like the information and communications technology (ICT) sector, where high-value jobs are most plentiful, will be promoted. Philippine foreign trade policy will be designed in the context of the Association of Southeast Asian Nations (ASEAN), while economic relations with the United States and Japan will be strengthened. A clear antitrust policy regime will also be put in place and enforced.
POLICY FRAMEWORK
In light of the greater integration of the Philippines with the world economy, the philosophy of free enterprise shall continue to underpin government policies and programs in stimulating business activities and promoting competition. Of particular importance is the promotion of technology that will be the foundation of the country’s future economic development.
The private sector will be the main driving force of the economy, playing a strong and leading role in generating productive employment opportunities and improving access of Filipino consumers to less expensive, more varied, and better quality goods and services. Government’s task will increasingly be to make markets work by simplifying bureaucratic procedures and promoting market-friendly regulations to reduce the cost of doing business, and protect the interest of consumers and sectors vulnerable to global integration. Sustainable development and gender-sensitive practices will be emphasized.
The long-term competitiveness of industry and services will be enhanced by liberalization and regulatory reforms. Investments in S&T, and an R&D culture will be fostered to ensure long-run growth of enterprises. Agricultural modernization and diversification of the rural economy will be supported along with continued infrastructure development, industrial peace, and stable macroeconomic policies. Policies to improve domestic trade linkages such as transport systems will be aggressively pursued.
Firms, especially microenterprises and SMEs, shall have access to skilled workers, least-cost capital equipment and power, credit, advanced managerial techniques, as well as new and advanced technologies. These will further broaden the local product range, generate employment, especially in the countryside, and increase the purchasing power of the domestic market.
Capacity building will be a priority to better prepare the industry and services sectors for global competition and technological change. Information and communications technology will be promoted to take advantage of the country’s competitive edge in the sector and harness productivity and efficiency gains for industries and services, especially SMEs.
The country will capitalize on market and investment opportunities offered by participation in bilateral, regional, and multilateral trading arrangements. Foreign trade policy will be designed in the context of ASEAN to push a common agenda for the region’s development consistent with national interest. Economic relations with the United States and Japan will be enhanced.
ASSESSMENT AND CHALLENGES
The industry and services sectors grew modestly in 1999 and 2000 (Table 3.1) tempered by the economic slowdown of some of the main trading partners, the lingering effects of the Asian financial crisis, and domestic socioeconomic and political developments in the country, particularly during the last quarter of 2000.
Manufacturing growth picked up during the period but its competitiveness has been hampered by a narrow export basket, low productivity in the nonexporting sector, rising cost of labor and electricity, hesitation of domestic market-oriented manufacturers to compete in their home ground, and underdeveloped backward and forward linkages. These have been compounded by high interest rates toward the latter half of 2000.
The services sector recovered steadily in 1999-2000, buoyed up by rising demand for telecommunication services. However, the performance of financial services remained weak in view of the nonperforming loan problem of the banking sector (see Chapter 1).
The growth of the country’s industry and services sectors also lag behind some of its ASEAN neighbors (Table 3.2). Among the key structural weaknesses that need to be addressed to improve competitiveness are the gaps in infrastructure, regulations, and training of workers.
SMEs, which constitute 99 percent of all firms and employ 67 percent of the labor force, only account for 33 percent of total economic output. Their potential to contribute to higher output, widening of the export base, and increased employment has been constrained by limited access to credit, underdeveloped sources of raw materials, limited access to modernizing technology, and lack or low level of market information.
The export sector remains dependent on electronics as a vehicle for growth. The narrow export base, decelerating export growth, and concentration in a few markets indicate the need to improve product quality, diversify exports and markets, and strengthen the domestic market through the removal of domestic trade constraints and bottlenecks, and diversification of the rural economy. The accession of China to the World Trade Organization (WTO) poses a major challenge to the country’s ability to compete globally over the long term given China’s potential to access new markets. A serious and real challenge for local producers is to compete with their foreign counterparts in a regime of low tariffs.
Future expansion in mining and quarrying and the development of new areas will depend on the Supreme Court decision on the ownership of minerals. Antimining sentiments of some local governments and nongovernment organizations (NGOs) arising from past failures to minimize environmental damage, and misconceptions about the environmental effects of mining, have constrained investments in mineral exploration and development.
Meanwhile, industrial progress and high population growth have also put pressure on the environment. Air quality in urban centers has deteriorated due to emissions from motor vehicles and industries. Water quality in rivers and coastal waters has declined due to industrial and domestic waste, and indiscriminate dumping of solid, toxic, and hazardous wastes in the water system.
The services sector will have to continue gearing up for a more competitive market. The challenges to upgrade the quality of existing services and introduce new, more responsive, value-added services must be met.
TARGETS AND STRATEGIES
Targets
The growth of industry over the medium term is premised on higher manufacturing output, increased private sector-led infrastructure activities, higher demand for utilities, and better prospects for mining operations. Transportation and communications, trade, and finance are expected to lead the services sector’s expansion during the period (Table 3.3).
Strategies
Accelerating the development of SMEs
SMEs are a potent force in the war against poverty. They disperse economic activities to the countryside, and thus contribute to a more equitable distribution of income. A vibrant SME sector provides a strong domestic supply base for globally-competitive industries.
Since access to financing has always been a major roadblock to SME development, government will work to improve the banks’ capability to understand and service the special needs of small borrowers. With greater understanding of these needs, banks may be encouraged to reduce their requirements and give SMEs access to available funds.
At the same time, innovative alternative sources of financing will be pursued. For instance, the recent launching of the SME Board by the Philippine Stock Exchange will help address small business financing requirements. The growth of microfinancing services, especially to the disadvantaged sectors, will be encouraged. Lending programs that employ the guarantee mechanism will continue to be implemented.
Faster development of SMEs in the rural areas will also be promoted through industry clustering which will facilitate the provision of cluster-specialized resources such as technology, knowledge, skills or networking infrastructure, both physical and social, as well as marketing and distribution support system to SMEs. In areas where large industries or firms operate, the government will give adequate focus to the needs of the supporting industries.
Government will rationalize, in coordination with the private sector, the many existing training programs for SME entrepreneurs, managers, and workers to avoid duplication, improve content and delivery, and ensure that the actual needs of SMEs are met. Distance-learning modes such as correspondence and computer-based or online training will be further explored to improve SME access to training programs. Up-to-date and relevant information will be provided to enable SMEs to make strategic business decisions. Franchising fairs and consulting caravans will be held to give SME clients on-the-spot consultation and avoid shuttling them among government offices.
The existing provincial SME Development Centers will be a coordination point for access to information, training, and advisory services. The government will also put in place a National Business Registry to track all business firms from start to closure, giving an up-to-date picture of the status and location of business establishments at any time.
The full potentials of ICT and e-commerce will be tapped for the benefit of SMEs. Existing SME laws, policies, and programs will be reviewed with the end in view of creating an environment that will enable these enterprises to become more competitive. Local government units will also be encouraged to provide an environment conducive to SME development. Line agencies, on the other hand, will give due consideration to the constraints faced by SMEs in the implementation of policies and regulations pertaining to their sector or functions.
Promoting competition
Effective competition will continue to be promoted to facilitate the provision of adequate, varied, and reasonably-priced goods and services. Trade and investment liberalization, deregulation, and facilitation will continue to be pursued to stimulate trade, investments, and production. In 2004, tariffs on most products except for sensitive products will range from 0 to 5 percent. To help local producers prepare for regional and global competition, the Philippines will continue to participate in trade and investment liberalization and facilitation initiatives under the auspices of the WTO, ASEAN, and the Asia-Pacific Economic Cooperation (APEC) forum.
The improvement of domestic trade linkages will facilitate the flow of goods and services between and among regions of the country, as well as production and market centers. This can be achieved by fostering competition in the telecommunications sector, encouraging the entry of new technology, modernizing shipping, speeding up delivery and lowering the cost of postal communications, constructing feeder roads and rail systems connecting key areas, and liberalizing the airline industry.
The privatization and participation of more players in the operation of government ports will improve the turnaround time of shipment and cargoes while rationalized rates will reflect the cost of providing the service. Executive Order No. 59 will be thoroughly reviewed and a new executive issuance will be formulated in consultation with the private sector to liberalize port management policies and significantly improve efficiency in the transport of goods, cargoes, and passengers. Foreign air carriers will also be encouraged to operate in the Philippines under bilateral agreements and in accordance with existing laws to ensure that adequate and affordable international air services are provided.
Local retailers, which link products to markets, will be introduced to innovative products and modern retail or distribution formats that offer a wider range of services. This will promote consumer welfare by giving consumers access to a wider variety of reasonably-priced products. Measures will be adopted to ensure that the competitivenessof small local retailers will be enhanced with the entry of foreign players in retail trade activities.
Improving the business environment
The government will continue to simplify and streamline business procedures and the issuance of licenses and permits. This will be done by cutting processing time in half and utilizing, as much as practicable, online services (e.g., One-Stop Special Investors’ Resident Visa, Business Name Registration System). Customs administration will be modernized and customs procedures will be simplified to facilitate international trade and collect the correct taxes.
The government will continue to implement measures to further improve the delivery of services, based on comparable benchmarks of countries with perceived low costs of doing business. The early resolution of pending court cases will be pushed while administrative reforms that will facilitate multiagency decisions will be institutionalized, such as those involving issues on land use. Red tape and corruption at national and local levels will be addressed to encourage investments.
Local governments will be encouraged to reduce and standardize their business requirements and application procedures; set a more reasonable cap on fees charged from business; and set a deadline for the release of government approvals, licenses, and permits. In streamlining bureaucratic processes, the government will seek the assistance of the private sector and civil society in monitoring its performance and in exacting accountability from public officials.
Promoting investments
To attract long-term domestic and foreign direct investments, attention will be given to macro measures and concerns. A focused active search of prospective investors will be conducted with the consolidated efforts and resources of the Board of Investments, Philippine Economic Zone Authority, Clark Development Corporation, Subic Bay Metropolitan Authority, and Cagayan Economic Zone Authority. This will be complemented by efforts to push the clustering of horizontally- and vertically-linked industries to accelerate investments in the countryside.
A stable policy environment and enhanced investor services shall be put in place. Investment laws will be interpreted in favor of the investor. To attract investments to the countryside, local governments will be encouraged to be investor-friendly.
Key bottlenecks to investments will also be addressed such as expensive power (see Chapter 6), high cost of capital (see Chapter 1), and deficiencies in the incentive structure that discourage investments in agriculture. The incentive system will be simplified and clarified to make the incentives structured, performance-based, uniform in application, competitive with those offered in the region, and simple to administer.
Promoting an efficient and responsive banking system
The government shall continue to enhance the growth of the banking sector in view of the need for credit as well as various forms of financial products, instruments, and services. The important role of microfinance institutions and small banks will be strengthened as these are expected to become niche players, assuming significant roles in
intermediating funds for particular segments of the economy, particularly the SMEs or the informal sector. The increased participation of foreign banks will continue to be promoted to provide additional impetus needed to sustain as well as enhance the competitiveness and efficiency of the banking system.
Electronic banking will be promoted to reduce information and transaction costs and enable clients to get wired into the sources of funds. As the volume of e-banking transactions increases, the identification, assessment, management, and control of the attendant risks will be properly evaluated.
To further strengthen the stability of the banking sector, the monetary authorities shall continue to introduce prudential regulatory reforms (see Chapter 1).
Developing and diversifying products and markets
The export of goods and services will continue to be a major vehicle to accelerate the economic development of the country. Government will regularly assess the country’s export development thrust to respond to changes in the global and local environments.
The opportunities offered by bilateral and regional trading arrangements and free trade areas, as well as those identified in the updated Philippine Export Development Plan will be explored to diversify the Philippine export market. Philippine foreign trade policy shall be designed in the context of ASEAN. Economic relations with the United States and Japan shall be enhanced. At the same time, government will put more effort into the diversification of export products to reduce the country’s dependence on electronics. As the agriculture sector becomes more competitive, it can also contribute to the growing diversification of the export basket. The country’s advantages in providing ICT and related backroom services for multinational firms will be promoted.
Strategic partnerships to support identified sectors will be maintained. Emphasis will be given to bringing in new technologies and skills to improve quality, productivity, and competitiveness. Participation in industrial complementation programs will be intensified and an aggressive international subcontracting program undertaken to expand export markets. If necessary, support to the private sector for the establishment of certain industries will be provided.
Technological innovation will facilitate the shift in production from low- to high-growth business sectors such as ICT. The private sector will be encouraged to develop an aggressive attitude towards technological innovation and adaptation to be competitive. The government will encourage cooperation and networking between and among firms to share information and expertise to reduce the uncertainties involved in developing new products and markets. Science and technology institutions, especially those in the academe, will be tapped to ensure synergy and optimization in the use of resources in developing technology-based and high-value products.
Efforts will likewise be exerted to improve Philippine product standards to conform to international standards. For this purpose, product testing and quality control services of concerned government agencies and private entities will be enhanced.
Improving productivity through research and development
S&T will be further harnessed to make industry and services more technologically competitive. Programs that will attract students to pursue careers in mathematics, science, and engineering with industrial applications will continue to be implemented.
In carrying out government-sponsored and university-based R&D, the needs and priorities of industry and services will be considered. Specific collaboration programs will be undertaken to ensure the cooperation of key sectors. Science and technology services that will allow firms to better select and acquire needed technologies will be provided.
Developing the country’s knowledge base provides leverage to improve local access to global sources of knowledge. The country’s innovation system will be improved to meet the challenges of globalization. Intellectual property rights will be protected in a manner that will both stimulate technological innovation and encourage technology diffusion throughout the economy. Scientific research in areas strategic to national development, such as ICT, biotechnology, materials science, and manufacturing technologies will be pursued based on the inputs and priorities of the private sector, academe, and civil society.
These initiatives will be accompanied by improvements in the technical skills and productivity of the labor force (see Chapter 2) that will entail the expansion and improvement of public education and employment systems (e.g., PhilJobNet), and equivalency and accreditation for technical-vocational education and training. These will allow flexible entry and exchange between the formal and informal systems of technical education, thereby matching new labor demand with a steady supply of workers engaged in higher value-added, skill- and knowledge-based activities. It is also important to review the training offered to women, in particular, and aid them in developing skills beyond those traditionally available to them.
Promoting industrial peace
To further enhance investor confidence in the country’s ability to produce goods and services, and provide stability for workers and their dependents, labor-management cooperation and coordination will continue to be encouraged to maintain industrial peace. Government will promote programs to enable labor and management to recognize their interdependence and their responsibilities to society.
Promoting consumer welfare
Proactive measures to empower consumers, promote competition, and enforce trade regulations shall be adopted to ensure that consumers get value for their money. A key example is the parallel importation of essential and life-saving medicines under the Presyong Tama, Gamot Pampamilya program, a joint activity of the Department of Health and the Department of Trade and Industry (DTI) to make medicines more affordable, especially to the poor.
A nationwide consumer assistance and enforcement network will be established to monitor compliance of locally-sold products with quality standards and provide a more efficient and cost-effective consumer assistance and response system, particularly in the areas of consumer education, complaints handling, and information dissemination.
The Consumer Act will be amended to clarify and strengthen the consumers’ advocate function of DTI; provide protection against scams such as pyramiding or chain distribution plans; amend price tag regulation to factor-in technological developments (e.g., bar code) and trade liberalization; and regulate online advertising and sales, and complaints handling.
Enhancing the participation of women
To ensure proper formulation of sound policies in enhancing the participation of women in industry and services, agencies will continue to generate sex-disaggregated data. The welfare of women and other vulnerable groups, including children and contractual labor, will be ensured.
Promoting sustainable development practices
Environmental management systems and employment of clean production technologies and more environment-friendly materials shall be intensively promoted in consultation with the private sector and civil society. Further, the government shall closely monitor domestic and global environmental phenomena and involve itself in forging international-level solutions under the various environmental protocols and bilateral, regional, and multilateral trade agreements where the country is a signatory.
