Total Factor Productivity in the Philippines 135.0

Cororaton says TFP was negative for 35 years to 2000

Dr Caesar Cororaton, formerly of the Philippine Institute for Development Studies (PIDS), said in his paper that for 35 years through 2000, factor accumulation accounted for all growth and Technical Change (another name for TFP) was negative for most of the same period.

From his conclusion, the Philippine political economy must be fundamentally reorganized to provide a more solid growth foundation. Otherwise, the Philippines – despite punctuations like Manny Pacquiao or Typhoon Ondoy – will become irrelevant to the world from sheer mediocrity.

Note: This is a rewrite of Post 12 in the new SYNTHESiST style with length limit lifted. It is a Significant Post that I have repeatedly quoted as justification for the need for innovation to break through into substantial growth for the Philippines.

Temporary as permanent. The temporary OFW policy in the 1970s to respond to the first oil shock has become de facto permanent. It is a brittle or marupok strategy because we are dependent on others, or more correctly do not have a clear control and hold, on how our future would unfold.

By not sterilizing the effects of inward remittance from this windfall resource, say partially into pension funds for long-term savings like Singapore did in the mid-1960 on their labor through the Central Provident Fund, our domestic labor price became uncompetitive and thus hollowed out industry.

Dr. Cororaton is right. I am not an economist but my simple arithmetic coincides with Dr Cororaton’s findings.

As total economic growth is the sum of Factor Accumulation (FA) and Total Factor Productivity (TFP), for example, taking out the 0.93% growth accounted by technical progress from total growth of 3.5% (or 26%) for the best period of 1998 -2000 – the Ramos years with telecom liberalization – gives a difference of 2.6 percent. This number is roughly equal to the population growth rate at that period. Thus, FA accounted for 74% of growth at that best period but, even, negative for the whole 35 years.

As the utilization of the economy’s potential during this period was also characterized by high unemployment and underemployment, then there is no chance as in Singapore from 1965 where full utilization was achieved that the individual Filipino will enjoy greater wealth just from the shortage of supply and demand of his labor.

Note: While many of us laugh at the oft-repeated Magsaysay joke of writing a law to repeal supply and demand, President Arroyo, with her PhD in Economics, has actually tried to do that with EO 839 (though lifted today) and we are not laughing.

Definition of Terms. Factor Accumulation or FA is that part of growth that comes from the utilization of two factors of production, like labor and capital, treated as constant inputs, i.e. at fixed prices and without effects of efficiency improvements, quality and obsolescence over the period being studied.

The concept of Total Factor Productivity (TFP) was first used by Robert Solow in 1958 – he used the term technical change – to describe a residual, the difference between actual growth in the economy from that coming from Factor Accumulation above. Thus, it comprises net efficiency and utilization improvements, say from new technology.

Unfortunately, the state-of-the-art in economic modeling at that time did not allow a further breakdown (that was left to Romer in 1990). Thus, in accounting for Philippine growth, Dr. Cororaton’s TFP is likewise a catch-all basket without further analysis as to source.

Note: Factor Accumulation is measured at full capacity utilization of the factors. Hence, I believe, measuring TFP in a country like the Philippines where there is serious underutilization of labor especially from underemployment, may be fraught with misinterpretation, as this under-utilization may mask some benefits from innovation.

Avoiding Past Mistakes. We must not repeat the same mistakes with emerging post-industries like export labor services, the ‘new’ manufacturing. Instead of coddling the leaders from the post-industry in the labor export services sector like medical care, ship crewing and business process outsourcing through tax incentives that the entrepreneurs will just pocket, the re-organization should provide for support in terms of technology, facilities and innovation similar to how New Zealand built its dairy industry.

The more worrisome finding is that the situation on the 0.93% out of 3.6% (or 26%) coming from technical progress is deteriorating as industry has hollowed out.

Hollowed out economy. Industry has been hollowed out of the economy. As of July 2008 (click CIA Factbook, 3/2/09), industry comprises only 31.9 percent of the economy, lower than Singapore’s 33.8%. The service sector ballooned to 54.3 percent. Service is a catchall as farmers move to the cities to look for any work. Also, Philippine labor force ratio (measured versus total population and excluding OFWs) is lowest at 38.3 percent for the ASEAN-5. Singapore has the best at 60.9 percent. If the 10 million Filipinos abroad are counted as working, that only puts us at about 48 percent, which is still below Thailand’s 56.9 percent. Therefore, our economy is not able to provide jobs.

More importantly, without industry, we have little means for learning-by-doing and intensive learning that, for example, China uses to train its people for development. This is Lundvall’s DUI-Learning as source of growth from innovation.

While OFWs provided the cushion through 2008, the looming period of zero growth in the world could possibly result into a flood of jobless returnees. With new entrants to the workforce, 2009 could be a very bad year in terms of employment. The economy cannot absorb this available workforce even with the government stimulus package. Next year’s election in 2010 will be a challenge for the administration’s candidate to win.

I hope the people will elect a new president who is not mediocre and with the best program rather than the one with the most to spend. I hope the program builds on the strengths of the existing economy and creatively crafts a coalition of the willing (civil society) and the able (especially the wealthy investors) to change the economic course for everybody’s benefit.

Prologue as postscript. Dr. Caesar Cororaton, formerly of the PIDS said in the abstract of his paper:

In spite of the increasing share of skilled labor to the total, its contribution to TFP growth is observed to have declined through time. This may imply a number of things, among the critical ones include: (a) deterioration in the quality of education necessary for productivity improvement; in particular the marginal productivity of workers with higher education, as well as the efficiency of education itself, has declined; and (b) negative brain drain effect on productivity of massive Filipinos working abroad.

Dr. Cororaton has also migrated – to our great loss – becoming part of the statistic of the negative brain drain affect on productivity his excellent study identifies as the core political-economic problem of the Philippines.

(End of Part I. Click here for Part II in Post 13. )

(Image used with permission from PIDS. Click here for Dr. Cororaton’s paper from the PIDS archive.)
2002-01

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