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Philippine Globalization in the New Millennium

Philippine Globalization in the New Millennium. IDEAs Conference on A Decade After: Recovery and Adjustment since the East Asian Crisis 12-14 July 2007. Macroeconomic Context. “Jobless Growth” MTPDP 2004 – 2010 acknowledged the need to address the country’s unemployment problem

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Philippine Globalization in the New Millennium

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  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 country’s 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. RP’s 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

  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 sector’s 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

  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

  17. PhP Cross Rates 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. 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 Bilateral Investment and/or Trade Treaties (BITTs)

  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, R&D, 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. JPEPA’s Development Implications • Philippine trade law experts have said that the JPEPA’s 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. JPEPA’s 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

  34. JPEPA’s Development Implications It can be argued that further reduction of tariffs will no longer pose much harm to industries. JPEPA’s 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. JPEPA’s 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. JPEPA’s 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. JPEPA’s 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 people’s 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.

  38. 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 Government’s strategy is laissez faire.

  39. 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%

  40. 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.

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