Transition toward more rapid and labor-intensive industrial development : the case of the Philippines

Transition Toward More Rapid and Labor-Intensive Industrial Development: The Case of the Philippines FILE COPY SWP424 World Bank Staff Working Paper No. 424 wASELTWToU.DC2N2IMrNT October 1980 Prepared by: Barend A. de Vries Industrial Development and Finance Department Copyright 0 1980 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. The views and interpretations in this document are those of the authors and should not be attributed to the World Bank, to its affiliated l C O PYV organizations, or to any individual actinR in their behalf.   The views and interpretations in this document are those of the author and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. THE WORLD BANK Staff Working Paper No. 424 October l9sn TRANSITION TOWARD MORE RAPID AND LABOR-INTENSiVE INDUSTRIAL DEVELOPMENT: THE CASE OF THE PHILIPPINES This paper analyzes the policies for accelerating industrial growth and employment creation in the 1980s. The focus is on the ways in which home industries can expand along lines of comparative advantage, improving their efficiency and utilization of domestic resources, capital and labor. It also considers the possibilities and requirements of continued growth of export industries and their integration with the domestic economy. The paper supports a broad concept of incentive policies, concentrating on measures to reduce protection and make fiscal investment incentives and export promotion more effective. A main theme of the paper is that policy reform to be effective must be part of a comprehensive program for industrial development, including also technological deepening, credit allocation, strengthening of key insti- tutions, industry-specific planning and investment. The Philippines has been treated as a case study of policy adaptation and industrial planning; it has several characteristics giving its experience wide applicability, including availability of low-cost productive labor, a moderately sized market making integration with the world economy essential, improved manufactured export performance needed to achieve longer-run balance of payments viability, strong interest in overcoming regional disparities and establishing balance between labor-intensive and capital-intensive industries. Prepared by: Barend A. de Vries IndustriaLl Development and Finance Department Copyright G) 1980 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A.   TRANSITION TOWARD MORE RAPID AND LABOR-INTENSIVE INDUSTRIAL DEVELOPMENT: THE CASE OF THE PHILIPPINES TABLE OF CONTENTS Page I. Objectives of Industrial Policy 1 II. Achievements in Manufacturing 4 Changes in Policy Since the 1950s 4 Export Growth 5 Structure of Industry 6 Investment, Capital Intensity and Growth 6 Manufacturing Employment 7 III. Industrial Policy: An Assessment of Performance 8 Tariff iProtection 9 Investment Incentives 10 Export :Promotion 12 IV. Policies for Accelerating Growth 13 Industrial Investment Priorities 14 The Benefits of Rehabilitation and Investment 17 V. Concluding Remarks 19 REFERENCES 21 TABLES 1 - 12 22   TRANSITION TOWARtD MORE RAPID AND LABOR-INTENSIVE INDUSTRIAL DEVELOPMENT: THE CASE OF THE PHILIPPINES 1/ I. Objectives of industrial policy In the 1980s, industrial policy in the developing countries will necessarily have to face the tasks of accelerating output and export growth and ensuring that new investment will create more jobs. Industry now assumes a commanding position in all but the very poor and small countries, and no development strategy is conceivable that does not assign a specific role to manufacturing industries Countries will want to be able to generate their own momentum of industrial growth to assure a reliable supply of key inputs and enhance their own technological capability, while at the same time bene- fitting from the dynamics of the world market. The objectives of policy must be achieved despite a likely shortage of long-term capital, which is of particular significance for large-scale, capital-intensive manufacturing. A balance must necessarily be struck between generating employment and expand- ing exports on the one hand and achieving the strong and well-balanced industrial structure needed for longer-term growth on the other. In most developing countries, industrialization was initially biased in favor of import subst:Ltution. Governments played a substantial role in providing incentives and finance. The pros and cons of these policies have been extensively discussed in the literature. 2/ While import substitution industries grew rapidly in the 1950s and early 1960s, they slowed down signifi- cantly in the past 10-15 years. However, since the late 1960s, a growing number of countries have increased their manufactured exports dynamically, mostly of labor-intensive items. The issue for many countries in the 1980s is how they can reorient their industrial policies towards achieving increased growth in the home industries while maintaining a forward momentum of the export industries. This calls for broad-based improvements in the performance of home industries', stressing greater utilization of comparative advantage and product speciali- zation associated with job creation, training and entrepreneurial development, improved capital efficiency and technological development. Increased reliance on more rational industrial incentives may usually best be achieved in a 1/ This paper is based in part on the findings of a World Bank Mission that visited the Philippines in February 1979. It does not represent the views of the Bank. The author acknowledges the contributions made by Christiaan J. Poortmian, Yung W. Rhee, and comments received from Parvez Hasan and Lawrence E. Hinkle, Carlos F. Singer, and William G. Tyler to the material presented here, but he assumes responsibility for the contents. The full Mission Report, "Industrial Development Strategy and Policies in the Philippines," is being published separately. 2/ For a recent review, see Bhagwati and Srinivasan, 1978, Reference 9.  - 2 - gradual manner. A gradual approach will permit "market forces" to be supplemented by industry-specific measures, e.g., in assisting rehabilita- tion, new investment, resettlement and retraining. These measures will help industry adjust to lower protection levels. A related general issue is the likely coexistence and necessary integration of efficient export industries with initially often less efficient home industries. The former can be built up rather quickly, frequently with production and marketing assistance from abroad; financing requirements are moderate and easy to meet. The home industries are older and well entrenched, many receiving special fiscal and financial incentives and high protection. Industrialists and entrepreneurs in the two sectors may have quite different characteristics, with home producers being well established and export producers rather new on the scene, sometimes small- scale operators, and experiencing difficulties in getting investment finance from conventional sources. Reorienting home industry towards a more open economy and greater efficiency may take considerable time and investment. But increasing integration between home and export industries seems essential if the latter are not to remain a dynamic enclave in a slower economy and the former are to improve their contribution to development objectives. The orientation of industry must necessarily be labor-intensive. Most countries have a rapidly growing labor force, already suffer from high unemployment and have a comparative advantage in labor-intensive production. But this does not mean that large-scale, capital-intensive industries must be neglected. On the contrary, they are needed to achieve balance in the industrial structure, provide a strong base for longer-term development and technological deepening. But, as exemplified by the case discussed in this article, in a world of scarce capital and foreign exzhange resources, decisions on large-scale, capital-intensive projects must be based on a careful weighing of the economic costs and benefits. The experience in the Philippines is presented here as an illustra- tion of the policy issues that arise in a reorientation of industrial develop- ment. The country has several characteristics that give its experience wide applicability: (a) The Philippines is a middle-income country with a moderately sized market. While its market size permits some economic operation of large-scale, capital-intensive industry, its manufacturing growth must necessarily be in tune with the world market; (b) It has a substantial supply of low-cost labor that has proved to be highly productive under suitable conditions and can be easily trained; (c) Although tariff protection is still high, for almost a decade its foreign trade and exchange regime has been liberalized  - 3 - significantly, and the Philippines has made a highly success- ful start in promoting exports. Although the deterioration in the terms of trade has made management of the balance of pay- ments difficult, issues of industrial and trade policy do not have to be tackled in a crisis atmosphere. Continued export growth is essential for a sound balance-of-payments position; (d) The Ministry of Industry, Board of Investments (BOI) and other government: agencies have built up a competent technical staff, which makes it possible to pursue a comprehensive and rational industria:L policy, undertake industry-specific planning, and provide investment incentives and finance; (e) Given the present limited scope of basic industries, planning must strike a balance between large-scale, capital-intensive industries on the one hand, and labor-intensive industries on the other.; (f) The country has formidable problems in overcoming poverty and disparities among geographic regions. It has initiated policies favorable to small-scale enterprises and regional development to help overcome these problems. The following analysis is based on conditions in the Philippines prevailing at the end of 1978 or early 1979. Since then the Government has taken several steps in a reform program which implements a number of recommenda- tions made in this paper.. The program envisages action on protection, invest- ment incentives and export promotions. The objective of the Government's protection policy is to promote industries in which the ]?hilippines has a comparative advantage and to foster greater competitiveness, capital efficiency, and labor use. With this objective, the Government seeks to achieve a phased general lowering and evening out of tariff rates. This restructuring of the tariff is to be accompanied by elimination of import licensing. The reform of the tariff code will be a key element in the Government's industrial restructuring program. As an initial step in this direction, many tariff rates will be lowered including bringing down peak rates to 50%. In certain under-protected industries, tariffs will be increased. While investment incentives will be continued, the Government con- siders it important to s:implify the present range of incentives, by seeking to make certain incentives more readily available to all industry, and to continue to reduce the current bias in favor of capital intensity. In adminis- tering investment incent:Lve policies, the Board of Investment will give special attention to capital efficiency, return on investment, employment creation, foreign exchange earnings, and regional dispersal of industry. A greater proportion of projects approved for investment incentives are expected to be labor-intensive. The Board of Investment intends to narrow the range of  - 4 - industries to which preferred attention will be given. Matured industries will no longer receive new incentives. Selected priority industries will be singled out for special focus. For some of these industries such as food processing and mechanical engineering, formulation of special sub-sector development strategies will be initiated. Special attention will be given to the location of new industrial projects in the outer regions. With this purpose, the Board may, at times, permit somewhat lower rates of return in the outer regions. The Government's policy is that non-traditional export manufacturing should be free of taxation on imports of raw materials and components and that this principle should also be extended to indirect exports (i.e., to sales of domestically produced inputs to export industries). It also regards maintenance of an appropriate exchange rate policy as crucial to stimulating the necessary rapid expansion of exports, in addition to its role in comple- menting the revised tariff policy in providing reasonable protection to domestic industry. The free trade export regime, already established under existing legislation, will be progressively extended to all export manufactur- ing. The Government has already taken several measures to expand its export promotion program and has made rapid progress in this area. The Government also contemplates several measures to improve availability of credit for working capital to export manufactures, including small and medium sized firms. II. Achievements in manufacturing in the Philippines 1/ Changes in policy since the 1950s Manufacturing has become a significant factor in Philippine develop- ment and will continue to be so. It now accounts for one-fourth of GDP and, in relative size, compares well with that of Mexico and the Republic of Korea. Any Philippine development strategy must specify the role of industry in raising output, creating employment and more equitable conditions among popula- tion groups and geographic regions. The pace and pattern of Philippine industrial growth suggests that the 1970s marked a significant change in that a rapidly growing labor intensive export sector was established. In the 1950s and 1960s, industrialization tended to favor production for the home market, and incentives benefitted capital-intensive industries. The industrialization pattern may well have reinforced regional and income disparities, since its effect in expanding employment and raising income of the poor was small. 1/ Changes and impact of longer-term trends in policy have been analyzed by several authors, including Baldwin, Bautista, Power, Sicat and Valdepenas (References 1, 2, 4 and 5). See also the ILO and IBRD Report (References 3 and 8).  - 5 - Starting in the 1950s, import substitution of consumer goods became the principal policy instrument to promote industrialization. Initially, the manufacturing sector responded favorably, with output growing at an average annual rate of over 12,% from 1950 to 1957. However, by the late 1950s, the domestic market started to limit the expansion of the sector, and output growth fell to an average level of 5% per annum. The sector no longer led Philippine development, Although the strict import restrictions prevailing in the 1950s were gradually decontrolled in the early 1960s, they were replaced by a highly protective tariff system (instituted in 1957). Policy reform in the 1960s therefore did not alter the bias of the incentive system in favor of import substitution. Manufacturing was limited in its backward integration and in developing new exports.. Since 1956, total employment in the manufacturing sector remained virtually constant at 10-12% of total employment, growing at an average rate of less than 3% per annum. In the period 1970-79, the industrial incentive policies of the Philippines have undergone several significant changes, including a steep devaluation, measures to help small, labor-intensive industries and the intro- duction of various export incentives. As a result of these new measures, both growth and labor intensity have improved, processing of raw materials for export has increased, and industrialization may well have reached a turning point in the second half of this decade. Export growth The rapid growth of non-traditional manufactured exports is changing the composition of industrial output, accelerating its growth and creating many more jobs. These exports increased by 30% per annum in real terms over the 1972-1977 period,and exceeded $1 billion in 1978 (28% of total export earnings). The impetus of manufactured export growth has come from a few labor- intensive products; garments and electronic products and handicrafts account!ed for two-thirds of the total in 1978. In addition to its strong resource base, the comparative advantage of the Philippines lies in the utilization of skilled low-cost labor. In the export industries, Philippine labor productivity and management compare favorably with those in competing countries. From 1972 to 1978, as a result of shifts in the exchange rate and wage relationships, Philippine wages have declined significantly relative to those in both com- petitor and customer countries (vis-A-vis Japan, Federal Republic of Germany, and Republic of Korea by 50% and the United States of America by 17%). While the productivity in home (nonexport) industries has lagged, productivity in Philippine export industries improved by 13% during the period 1969-1974, thus until recently keeping pace with manufacturing productivity in such countries as Federal Republic of Germany, Japan and Republic of Korea. At the end of 1978, Philippine wages were about one-third to one-half of those in competing countries such as the Rtepublic of Korea. The Philippines and other countries in a similar position can benefit from a widening of the markets for their  - 6 - products as these competing countries, in response to increases in their own labor costs and to the filling of import quotas for their products, move towards higher quality and more sophisticated products. Structure of industry The Philippine manufacturing structure is highly dualistic. The distribution of both employment and value added has a very pronounced skewedness. "Unorganized" manufacturing employs nearly two-thirds of the manufacturing work force, but produces only a small fraction of total value added in manufacturing. However, the "organized" sector clearly produces most of the value added in manufacturing. The unevenness between shares in value added and employment is even more marked for the large establishments (with over 200 workers each) and has become increasingly pronounced over time. The composition of manufacturing value added has changed little over the last 10 years. Food processing, including beverages and tobacco, has consistently contributed well over one-third of total manufacturing value added. The contribution of the chemical industries, including rubber and products of petroleum and coal, steadily increased in importance, while the share of all other industries fell gradually over time. As expected under the prevailing tariff and trade regime, consumer goods constituted about 55% of manufacturing value added until 1970. But its share fell to 47.9% in 1977 mainly as a result of the rapid increase in the production of intermediate goods, particularly chemicals (see Table 1). Cross-country comparisons, based on a methodology adopted from Chenery and Syrquin (Reference 6), show that, given the country's size and income level, the Philippine manufacturing sector in 1973 as a whole was larger (measured as a percentage of GNP) than one would have expected, while its services sector was smaller. Within the manufacturing sector, this seems to be mainly the result of the large size of resource-based industries (food and wood) and to a lesser extent of the chemical industries. On the other hand, the textiles, clothing and metal industries appear to be considerably smaller than expected from international comparison (see Table 2). A comparison with the Republic of Korea shows that the Philippine food industry is larger than that of the Republic of Korea. Investment, capital intensity and growth The pattern of investment changed but little between the 1960s and the first half of the 1970s, despite the trade and export policy measures taken in the early 1970s. The food and textiles industries received the major share of manufacturing investment during the period 1960-1975, closely followed by such capital-intensive sectors as chemicals, oil and coal products, non- metallic minerals and basic metals (see Table 3). A rough comparison can be made of the investment and growth pattern of the investment and growth pattern of relatively capital versus labor-  - 7 - intensive industries. In the Philippines industry spectrum, textiles, beverages and printing are included as relatively labor-intensive. Comparing the first half of the seventies with the sixties suggests that the share of investment going into relatively capital-intensive industries increased slightly in the early seventies. Yet the output growth of relatively capital-intensive industries declined, while that of relatively labor- intensive industries improved. (See Tables 4 and 5) While the Philippine incentive system has tended to encourage capital-intensive industries, visits to individual plants suggest that Philippine manufacturing usually employs fairly labor-intensive methods. One encounters few, in any case, of excessive capital intensity. Economic data on 44 plants visited by a World Bank mission are given in Table 6. Export-oriented firms had a capital investment per worker of $2,800 and firms with predominantly domestic orientation, $22,000. The recent growth of labor-intensive induastries in the organized sector has thus significantly enhanced the contribution of manufacturing to Philippine employment. Average capital investment per unit of labor employed tends to rise with the size of establishment, except in the case of the furniture industry. Capital efficiency (as indicated by value added per unit of capital) shows considerable variation among establishment sizes in different industries. Small establishments are more efficient in their use of capital than larger enterprises in such industries as tobacco, textiles, wood manu- facturing and miscellaneous, mainly light, industries, e.g., rubber shoes, foundries and metalworking plants. On the other hand, larger establishments appear to be more capital efficient in the food and beverage industries, furniture manufacturing and in such capital-intensive industries producing chemicals, oil and coal products and transport equipment (see Table 7). Manufacturing employment The growth oE manufacturing employment reflects the dualistic structure of the sector. At 1.6 million jobs in 1977, manufacturing provided only just over 10% of total national employment, with as much as one million in the cottage sector. Factory employment has tended to rise more than twice as fast as total manufacturing employment (see Table 8). A complex of causes accounts for the limited labor absorption of Philippine manufacturing. The most labor-intensive sector, the cottage industries, has remained the most important in providing employment but, in terms of employment growth, has steadily lagged behind the more capital- intensive factory sector. Within the factory sector, the Government had a considerable influence on the composition of new industries and the choice of technology through the provision of official credit and investment incentives. In the 1960s, output and investment in industries with higher capital intensity grew more rapidly than in more labor-intensive industries producing for the home market and processing primary exports. These incentives themselves had a pro-capital bias, and the pricing of capital goods in the economy reinforced the capital-intensive bias in the factory sector.  - 8 - With the growth of labor-intensive, nontraditional manufactured exports after 1970, however, labor absorption of Philippines manufacturing has improved. The employment elasticity during the period 1970-1977 in non- traditional export manufacturing was estimated at 1.0 as against 0.6 for processed primary exports as 0.32 for industries producing for the home market. Consequently, exports of nontraditional manufactures probably accounted for more than 30% of manufacturing employment creation during the period 1970-1977 while accounting for less than 8% of manufacturing investment. III. Industrial policy: an assessment of performance The industrial growth of the Philippines reflects in several respects the orientation of policy pursued by the Government over a period of two or three decades. Industrial policy will be discussed here under three headings: tariff protection, investment incentives and export promotion. Before turning to these principal policy areas it would seem well to recapitulate some of the major problems to which policy must be addressed. Mention has already been made of the sluggish employment record and the slow output growth in home industries in recent years, slow particularly in relation to other middle-income countries in Asia and the Pacific or the major Latin American countries. Further, except for resource-based industries, manufactur- ing growth has been heavily concentrated in the Manila metropolitan area for reasons of orientation towards the home market, geography, infrastructure and credit availability. This combination of forces, operating in a geographically diverse island republic, has caused one of the most marked degrees of industrial concentration anywhere. Growth has proceeded to a point where several industries, e.g., food processing and clothing, have now reached a state of maturity to which they no longer need special incentives. Reduced reliance on special incentives makes the pursuit of appropriate general policies (especially exchange rate, wage, financial and budgetary) even more essential. On the other hand, while certain industries have grown rapidly, others have been left behind, notably the producer goods industries. To live up to their potential, these industries should receive more incentives. A number of industries are in need of rehabilitation or new invest- ment to make them more efficient and competitive and to enable them to make more efficient use of capital. Some of these also suffer from "overcrowded" conditions, a state of excess capacity caused by a complex of factors, including poor incentives for sound facility planning, sometimes excessive availability of long-term (often concessionary) finance, and over protection. Emphasis is placed on the need for continuing expansion of labor- intensive industries. But the Government also wants to give attention to certain imbalances in the industrial structure which to correct will require substantial investments in capital-intensive industry. Failure to correct them may eventually impose a costly burden on the industrializing economy. Thus the cement industry should be expanded if it is to keep abreast of prospective domestic demand. And while the country has developed a steel rolling industry, it still imports slabs and billets, items the supply of  - 9 - which could become unreliable or costly should worldwide shortages develop. Hence, there is a case for considering an integrated steel operation at an appropriate time to establish balance in the industry. As is also the case with the petro-chemical industry, the large investments involved (and their poor payoff in terms of total employment creation) make careful economic planning and time-phasing essential. Tariff Protection The combined effect of the incentive measures has been to build a bias in favor of production for the home market and impose a penalty on the export industries, which has been reduced by access to duty-free imports. Philippine incentives also have had the effect of lowering the price of capital goods relative to consumer goods. Tariffs have favored more capital-intensive import substitution, while the tariff on capital goods has itself been low. In addition, investment: incentives have the effect of reducing the cost of capital equipment. It is the larger, usually more capital-intensive firms, that have benefitted most from these incentives. The key element characterizing Philippine industrial policy since the early 1950s has been the protection of the domestic industrial sector from competition from imports. The level of protection rates for the domestic market is high and has remained so since the mid-1960s. The data in Table 9 are based on the 1974 tariff code and do not allow for redundancy of import licensing. The average level of effective protection for the entire economy in 1974 has been estimated at 36% by Bautista and Power (Reference 5). For manufacturing, the average level of effective protection declined from 51% in 1965 to 44% in 1974. Protection of inputs into construction declined significantly during the period. Despite the overall decline, the cascading structure is still strong, with capital and intermediate goods receiving relatively low protection. In particular, the capital goods sector is under- protected. The export sector is penalized where producers are subject to taxes, in particular orn their inputs. In practice, under the Export Incentives Act, many export firms have since 1970 been put on a free-trade basis. Since 1974, several tariff items have been reduced, but the 1974 estimates still correctly reflect the overall tariff structure and level as of the end of 1978. Tariff protection has had an adverse impact on manufacturing in several aspects: (a) It has tended to channel resources into industries, usually capital intensive, where the Philippines has less comparative advantage and has penalized labor-intensive products (e.g., simple producer goods in the mechanical engineering industry); (b) It has encouraged high costs, inefficient use of capital and excess capacity. Examples are the textile and steel rolling industries; (c) It has penalized exports by taxing imported inputs or permitting domestic inputs to be produced at high costs and low quality.  - 10 - The general penalty imposed on those exports from tariff protection averaged 30% in 1974. Examples are textiles, steel products and cans (for the food processing industry). Effective protection in the Philippines seems to be in the middle range when compared with other countries. Countries that have experienced very poor performance with respect to economic growth and export growth have frequently had high rates of effective protection. For example, Chile and India have been among the developing countries most heavily protecting their industrial sectors (see Table 10). Their average annual total export growth rates for the period 1966-1973 have been a slow 5% and 8% respectively; manufacturing exports grew not at all in Chile and at 7% annually for India. 1/ In addition to the association between low rates of effective protection and high rates of manufactured export growth, reductions in high rates of protection are frequently associated with an acceleration in industrial export growth. In Argentina, Brazil, Republic of Korea and Thailand, substantial growth in manufactured exports accompanied import liberalization measures. Investment incentives Complementing protection through tariffs are fiscal incentives granted under the Investment Incentives Act (1967) and the Export Incentives Act (1971). The legislation, administered by the Board of Investments (BOI), is designed to stimulate projects where domestic capacity falls short of domestic demand and projects with export potential. A wide range of industries have received benefits from the BOI. Under the Investment Incentives Act, the most benefits have gone to copper smelting and refining, pulp and paper, chemicals and chemical products and synthetic textile fibers. From available data, it would appear that under the Investment Incentives Act the industries that have received the most benefits in recent years are raw material processing, pulp and paper, chemicals and chemical products and synthetic textile fibers. A substantial proportion of the fiscal benefits granted consists of subsidies on the use of capital. For projects registered under the Investment Incentives Act, the exemption of import taxes on imported capital equipment and the accelerated depreciation allowance amounted to 40% of the total value of the incentives granted in 1977 (65% in 1975). While these incentives are also significant for export projects, other incentives, not involving a subsidy on capital use, emerge as the most relevant. In particular, the provision allowing for the deduction from taxable income of an amount related to labor costs and indigenous raw materials expenditure accounted for 53% of the value of the incentives to export-oriented, BOI-registered firms in 1977. The tax credits for import taxes on products used in export production accounted for an additional 21%. Tariff exemptions on imports used in export production 1/ C.f. Balassa, 1978, Reference 7.  - 11 - are permitted under three additional programs: (a) the permission for some BOI-registered firms to operate bonded manufacturing warehouses; (b) the drawback scheme, which refunds the tariffs paid, and (c) export processing zones. The protective effect of the investment incentives has been small in the aggregate. Although tariff rates averaged 38.9% in 1974, Bautista and Power have estimated that the tariff equivalent of tax subsidies averaged only 1.4%. The reason for this insignificance at the aggregate level is that the incentives and the output of BOI-registered firms are quite small in relation to output for the entire industry. However, seen from the point of view of the individual firm, BOI benefits can be an important factor in its profitability. Measured as a percentage of sales, the benefits frequently do not exceed the equivalent of more than 2-3%, but sometimes range up to 25-30% (Bautista and Pcwer, Reference 5). If the magnitude of the investment incentives for domestic market production is seen to be quite small in the aggregate, the same is the case for the incentives for exports. Yet the aggregate is not the most relevant measure. What matters is the effect that the incentives have on the profitability of individual firms. The BOI incentives can reach considerable magnitudes, especially if large investments are made. For the aggregate of all recipient firms in 1977, the total subsidies and rebates received under the Export Incentives Act amounted to 9% of their export sales. This amount has increased in recent years; in 1973 it was only 3%. Benefits under the Investment Incentives Act have tended to go to the larger and more capital-intensive firms, both firms producing for the home market and primary export processing firms. In 1977, some 62% of benefits went to firms in industries with above average capital intensity. A small portion of the benefits went to smaller firms (e.g., with fixed assets of less than 5 million pesos). On the other hand, benefits under the Export Incentives Act have been more evenly distributed over firms of varying size and have gone to more laLbor-intensive firms. Export-oriented firms have received benefits under both Acts, with the benefits under the Investment Incentives Act going to more capital-intensive firms than those under the Export Incentives Act. Finally, the capital intensity of BOI-preferred projects was generally higher than industry averages while capital efficiency estimates were lower. *Besides fiscaLl benefits, registration with the BOI may convey additional advantages. Such registration in effect constitutes a governmental recognition and tacit approval of the firm and its activities. On the basis of this recognition, thLe firm's dealings with other agencies of the Government may be facilitated. Fc,r instance, with a letter of endorsement from the BOI, it is easier for a firm to obtain foreign exchange for marketing efforts abroad. In addition, the Central Bank is also said to treat a firm's requests for import licenses more expeditiously if it is a BOI-registered firm. Finally, BOI registration may facilitate access to long-term credit from official financial institutions.  - 12 - As the manufacturing sector grows, it is important that the fiscal incentive system be simplified and administered with a minimum degree of case-by-case discretion. Then the technical staff assembled over the past decade could focus on priority issues and economic evaluation. The range of possible incentives is complex and could be narrowed down, inter alia, by making selected incentives generally available. Decisions on investment incentives should increasingly be governed by considerations of employment creation, comparative advantage and regional dispersion of industry. The list of industries eligible for investment incentive has become very long. Greater selectivity would result from more detailed subsector planning such as is needed in the metalworking industries. In the next phase of Philippine industrialization, the provision of adequate long-term finance may be more effective than special fiscal incentives in influencing the pattern of industrialization. Subsector planning and investment decisions should be linked with the extension of long-term finance. Export promotion The effect of the protection system in the Philippines is to impose the equivalent of a tax on the export sector, the magnitude of which is roughly reflected by the average level of protection. Estimates of the distortions imposed on the economy range from 19 to 34% (Bautista and Power, Reference 5). The higher estimate, based on the UNIDO procedure, assumes the existing protective structures. The actual price effect in case of full removal of protection might, of course, be smaller, depending on the accompany- ing adjustments in the balance of payments, in particular the increase in exports that would be associated with a change in protection policy. The tariff and tax disincentives for export industries have, since the early 1970s, been partly offset by putting approved export producers on a free-trade basis. Bonded (manufacturing) warehouses and other arrange- ments free exporters from paying duty on imported inputs, which would other-. wise represent a sizable penalty on export production (e.g., equivalent to 150% of value added in the garment industry). These facilities are separate from the fiscal incentives described in the previous section. As is evident from the dynamic growth of nontraditional manufactured exports, industries under this selective free-trade regime have benefitted greatly, and the profit opportunities provided by free-trade arrangements for serving large export markets have been sufficient to draw some resources away from the more profitable but limited domestic market. However, as a group, potential direct and indirect export industries that are subject to tariffs still pay a significant penalty on export sales. Continued export growth--which would rely in part on achieving both a more diversified product mix and higher net foreign exchange earnings through indirect export of domestically produced inputs--will require elimination of this penalty. Several further improvements were needed in the export-promotion system that existed at the end of 1978. The various methods through which  - 13 - duty-free importation currently takes place tend to be either time-consuming and burdensome (and thus tying up working capital) or too restrictive in terms of eligibility requirements (bonded manufacturing warehouse system). Costly paperwork and procedures required by various government agencies create overhead expenses and delays and thus act as a disincentive for exporters. Furthermore, the cost of the short-term export-financing facilities of the Central Bank were high compared with the rates charged for export-financing countries with which the Philippines competes. Many of the smaller or newly established exporters were not aware of the existence of this export-credit facility or are discouraged by its procedural requirements. Their access is also limited because of the bias of the commercial banking system against high-risk export financing for industries without an established track record. Ideally, all manufactured export industries should be on a free- trade regime to the maximum extent feasible. This involves: (a) duty-free importation of raw material and components; and (b) provision of additional assistance where necessary. The present system is rastricted to selected firms in direct export manufacturing. It tends to place the smaller firms at a disadvantage, as well as "indirect exporters," i.e., domestic suppliers to export firms. A broader approach would need to be accompanied by improved financing facilities for raw material and semi-finished inputs. IV. Policies for accelerating growth Looking to the future, Philippine industrial development will benefit from continued and broadened expansion of manufactured exports and, in the home industries, better utilization of capital and domestic resources, improved job creation and training of labor and a deepening of technology. By becoming more competitive and concentrating on branches where the Philippines has a comparative advantage, home industries should also be able to export an increasing share of their output, either directly or indirectly. To realize these potentials, several steps were required. These do not represent a break with past policies, but instead evolved from them through adaptation to new conditions and opportunities. A lowering of pro- tection and simplification of investment incentives were needed to improve the performance of the home industries by increasing their competitiveness, capital efficiency and employment effects. Changes in the various elements of the export-incentive system were needed to solidify and broaden the manu- factured export drive. But, however essential, changes in incentive measures must be supplemented by related action in several other areas: credit policy, industry-specifie planning, vocational training, technological assistance and special measures in the regional dispersal and small industry programs. The central ,element was a gradual but broad reduction in import protection, evening out present differences in effective rates. Since import- substitution policies have extended over a period of two decades or more, a large and influential group of businesses will be affected by reducing pro- tection. Further, as already observed, cost competitiveness and efficiency  - 14 - in several industries will need to be improved through rehabilitation and new investment. Thus the lowering of protection could be undertaken in isolation but instead needed to be part of a comprehensive program of new investment and industrial growth. Careful and detailed economic and technical studies have already been made in preparation for the reduction of protection. In some industries, for example, textiles and steel, reductions in import protection will have to go hand in hand with programs to improve the efficiency and competitiveness of the industry. But in certain simple pro- ducer goods industries, where the Philippines' dynamic comparative advantage is currently underutilized, protection could be increased selectively, thus, the present low tariff in these industries would be brought closer in line with a reduced level in the rest of the manufacturing sector. Credit measures will have to go hand in hand with the application of other incentive measures. The full impact of changes in industrial policies in favor of technological development, labor-intensive production, small industry and regional dispersion will only be realized as they are matched by corresponding expansion of private commercial credit and the allocation of investment credit. Technical and technological assistance should be supplied more effectively in a way that permits individual firms or plants to benefit. The specialized institutes, e.g., those operating in mechanical engineering, forest products, textiles and food and nutrition, should be in closer contact with plant operations and focus more sharply on actual industrial practices. Their operations should also feed into the assistance rendered under the small industry program. In addition, the technical institutes may be instrumental in improving vocational training in selected industries. The reforms in the incentive system will require concerted action. Where tariff changes are geared to specific industry conditions, they must run parallel with the preparation and execution of programs for these industries. These programs must, in turn, be given priority when investment finance is allocated. Import licensing will need to be relaxed for those items that will receive lower duties lest continued licensing makes the tariff reduction ineffective. Export promotion will need to be backed up by credit policies. Investment incentives would in certain cases be granted to encourage export of part of the output from new investments, but they would usually not be granted if the new investments required effective protection above the level set as a general objective. Industrial investment priorities It is essential that the policy reforms described be accompanied by increased investment in priority industries. Total manufacturing investment may reach at least $12.5 billion (in 1977 prices) during the eight years 1977-1985, if the country is to accelerate output growth, expand exports and create more jobs. This would be more than double the investment in the previous eight years. An ordering of investment priorities makes this invest- ment perspective more concrete, even though it must necessarily be incomplete and tentative.  - 15 - Top priority should be assigned to continued expansion of labor- intensive manufactured export industries and a broader participation in the export drive. At present, with the notable exception of cottage industry handicrafts, export industries are heavily concentrated in and around Manila. Value added in manufactured export industries is a mere 25%. The greater part of raw material inputs of most export industries is imported. Net foreign earnings from manufactured exports are at best only 40% of gross. Only the wood, handicraft and food processing industries rely on domestic raw materials, and these industries should be put in a position to expand more rapidly than others. Domestic industries should increasingly be able to supply a larger share of the requirements of export industries. If backward linkages are to be successfully developed, the capital efficiency and cost levels of input-producing home industries will have to be improved through measures discussed previously. In addition, new export product lines will have to be introduced as the growth of older ones slows. Technological deepening of manufactured exports with the help of the specialized institutes and foreign investors (joint ventures) and greatly improved vocational train- ing will--over the medium and long term--be instrumental in both increasing the proportion of value added and the skill component and diversifying the product mix. The nontraditional export industries are projected to take up less than 10% of manufacturing investment (some $1.2 billion over the period 1977-1985 in 1977 prices) even though they may create 15% of new output and almost 40% of new employment in manufacturing. These estimates assume an 18% growth rate in labor-intensive manufactured exports. Having equal priority with the present major export industries are special industry programs for the footwear and furniture industries envisaged as a component of the small industry program and small-scale weaving. The footwear and furniture industries are labor intensive and potentially export oriented, and the furniture industry utilized domestic raw materials. The smaller enterprises in both industries require more technical and marketing assistance, some improvement in equipment and help in improving domestic raw material supplies and are suitable for more extensive regional dispersal. The food processing industry--the largest single industry in terms of output and employment--has a significant role to play in improving utiliza- tion of rich domestic resources for home consumption, greater production of nutritious low-cost foods, exports and regional (resource oriented) development. New investments in this industry may be moderate--some $30 million in the next few years--but substantial additional effort is needed to improve raw material supplies. The employment-generating effect of supplying larger quantities of agricultural materials is several times greater than that of the processing industry itself. Export potential, assuming adequate resource development (fruit and fisheries), is large, rising from $100 million at present to $500 million in the mid-1980s. Next in priority are industries where new investment or rehabilita- tion is necessary because of their impact on output, capital efficiency and  - 16 - employment creation. There is strong evidence that investment in these industries will have a high economic return because it will make possible considerably lower production costs and increased capital efficiency and enable the industries to supply at least part of their output to export industries (textiles and steel rolling), or enable the Philippines to exploit a comparative advantage (e.g., selected projects in the mechanical engineering industry including the foundry industry). Investment and rehabilitation in these industries can be designed to correct conditions that at least in part have been caused by excessive (or unduly prolonged) protection and/or excessive finance, or relative neglect by the incentive system (e.g., the producer goods industry). Some of the points of particular interest in the industry programs in this category of priority may be mentioned briefly here: (a) The textile industry rehabilitation program (approximately $250 million). About half the industry is reasonably efficient, but the rest suffers from obsolescent machinery and can at present survive only as a result of high protection (50-70% nominal, over 100% effective protection). Rehabilitation would be combined with increased product specialization and would reduce costs and improve utilization of capacity. Some of the new output could be exported--in fact, some export could be a condition for receiving investment incentives and finance. The program would go hand in hand with a lowering of protection. (b) The steel rolling industry. A number of rolling mills, particularly the larger and newer ones, can be operated economically. Some mills require modernization and rounding out of an investment (approximately $100 million) would expand the capacity of National Steel's cold rolling mill to its ultimate potential of 700,000 tons per year, almost four times its present level. This investment would permit the company to increase productivity, lower costs of production, and ultimately to lower prices--hence make possible lower protection--and still obtain an economic return; (c) The mechanical engineering industry. In the interest of efficient longer-run development, producer goods should receive greater incentives from the Government, including more technical assistance and long-term investment finance. New investment or expansion in the producer goods subsector could amount to $100 million in the next few years. Areas of immediate opportunities could be mining and material handling equipment. Foundries, fabrication shops and machine shops require new tooling; (d) The cement industry. A rehabilitation program is needed to restore run-down facilities. It would also include improve- ments in pollution control and have a coal conversion component. The program could require an outlay of some $130 million.  - 17 - Finally, there are several capital-intensive industries deserving attention in the next 5-10 years. Among these are cement expansion (some $1 billion to be carried out in stages) and integrated steel (at least $1.3 billion). The proposed integrated steel project would ensure a more reliable supply of steel to Philippine industry over a period when steel-using branches will gain importance. The large investment in steel should be compared with other high priority claims in infrastructure, agriculture and other branches of manu- facturing. Investment in these other areas would not necessarily come at the expense of steel and vice versa, but a balance must be struck among competing priority claims lest the efforts of continued manufactured export growth and necessary industrial rehabilitation fail. The steel investment would initially require an outlay about equal to the total annual capital expenditure of the Government (10 billion pesos in fiscal year 1978). Within the industrial sector, the steel investment can be compared with the total investment in non-traditional manufactured exports of some $1.2 billion in the period 1977-1985, which is projected to create new jobs for 360,000 workers and net additional foreign exchange earnings of at least $1 billion per year by 1985. The steel investment is more than three times as large as the combined outlays required for the rehabilitation of the textile and cement industries. The benefits of rehabilitation and investment The policy and investment measures described above are designed to help the Philippines make better use of its comparative advantage and its capital, labor and raw material resources. The pay off on these measures can be considerable in terms of increased exports, employment and total output growth. On the other hand, the cost of not taking the measures could be very high, especially in terms of employment opportunities foregone. Broadening support for manufactured exports would enable the Philippines to utilize its cost and productivity advantages and make possible a growth rate of labor-Lntensive manufactured exports of at least 18% per annum. While this repriesents some slowdown, export growth now proceeds from a much larger base. In fact, total non-traditional manufactured exports may exceed $3 billion in the mid-1980s, assuming that the growth of industrial countries will not fall significantly below 4% per annum in the next decade. Conditions in customer markets are constrained by protectionist attitudes, but for many Philippine products quotas have not yet been filled. Considerable opportunities exist for developing new and higher-quality items and breaking into new markets. Further, the measures outlined would make possible a broader partici- pation in export growth in several respects: more and smaller firms, greater regional dispersal of export production, new product and market development, increased skills, and a greater share of inputs to be procured at home. They should thus also help in increasing the proportion of value added in nontraditional manufactured exports ancl the net foreign exchange earnings from them.  - 18 - Export growth alone will not be sufficient to improve the performance of the manufacturing sector. Increasing the rate of growth and the capital efficiency of home industries is essential, since they now account for 85% of manufacturing output and employment. Several of the measures discussed, in particular, lowering of protection, greater emphasis on labor-intensive industries in the administration of investment incentives and special invest- ment programs for strategically placed industries, would improve home industry performance. The small industry and regional diversification programs would help in spreading the benefits of industrial growth. A shift towards more labor-intensive investment would be in line with Philippine comparative advantage and the overriding need for providing productive jobs. This will involve, among others, placing greater stress on promising small and labor- intensive industries and developing the mechanical engineering industry. Continued growth in labor-intensive manufactured exports and greater attention to employment effects of home industry investment would bring about dynamic changes in the composition of manufacturing employment and its contri- bution to creating jobs in the economy. Moreover, as the domestic industry becomes a more efficient producer of intermediate inputs, the linkages between the export sector and the domestic economy can be strengthened. Manufacturing growth will also contribute very substantially to employment in the service sector (transportation, finance, procurement, marke-ing) and the construction industry. Improved capital utilization at home and continued export expansion should make possible an acceleration in manufacturing growth to at least 8%. Employment growth in manufacturing would triple, and the direct contribution of manufacturing to the increase in total national employment would rise from 10% in the period 1970-77 to 20% in the period 1977-1985. In all, the manu- facturing sector would account for close to one million new jobs during the period 1977-1985, growing at an annual rate of 5.9% or about twice its historic rate. This improvement would come about even though the large cottage sector would grow only very little. The export industries would contribute 46% of all new employment in manufacturing (see Table 11). These employment projections imply a decrease in the capital-labor ratio from $30,000 (1970-1977) per job to $20,000 (1977-1985) per job in home industries and an increase in the employment elasticity of manufacturing output from 0.32 to 0.57 in the two periods. Such changes can be expected from continued export expansion, and to employment effects and capital efficiency in investment decisions. In the absence of the various policy measures, the employment elasticity would not improve and output growth might likewise be lower-- say, at the 6% of recent years or less instead of the 8% assumed earlier. This would mean that employment in home industries would continue to increase by only 1.9% (instead of 4.2%) reaching 1.6 million in 1985 (instead of 1.9 million). If, in addition, nontraditional exports were to increase at a slower pace--say, by 12% foreseen for all developing countries--the cost in  - 19 - terms of jobs lost would be another 160,000 jobs per year by 1985. In total, the loss in new jobs resulting from slower growth and greater capital intensi.y would be 450,000-500,000 jobs by 1985 (see Table 12). The projected changes in employment are not out of line with those observed in other countries in the region. The Philippines' projected growth in manufacturing employment of 5.9% per annum for the period 1977-1985 is less than what was achieved by Malaysia (6.6% per annum, starting from a low base) and the Republic of Korea (15.2% per annum) over the period 1970-1975. In the Republic of Korea, in 1969-1970, manufactured exports contributed 38% to employment growth in manufacturing and 33% in the economy (including indirect employment generation); in 1970, exports accounted for one quarter of manufacturing employment. As manufactured exports became more important in the Republic of Korea, the cottage sector also declined in relative importance. V. Concluding remarks This paper supports a broad concept of the incentive system. Although the analysis is focussed on protection, fiscal incentives and export-promotion measures, they must be supplemented and supported by several other elements of industrial policy, especially credit allocation, technical assistance and investment. Neither analysis nor policy can be complete if industry-specific planning and investment (and the associated strengthening of institutions) are not brought into the picture. In the industrial strategy described, vigorous manufactured export growth is placed first, both because of its essential contribution to output growth and a viable balance of payments to new employment in the manufacturing sector (close to one-half of new jobs provided by the sector in the next decade). The estimates of future growth are illustrative, while they may appear high, they are moderate in comparison with the achievement of some other countries in the Pacific Region and well within the potential of the Philippines. An export growth strategy can be successful in an expanding and "open" international environment and in countries with a reasonably low-cost and well-trained labor supply and relatively free entry of capable entre- preneurs (both indigenous and foreign) into the export sector. While the Philippines meets these conditions, a genuine concern exists that export growth may be frustrated by protectionism and economic constraints in the industrial countries. Consequently, emphasis should be placed on strengthening the competitiveness and the productive and technological capacity of both the home and export industries. Without broad-based industrial and techno- logical development, the export effort will make only a shallow contribution to longer-term growth. The policies recommended are needed not merely in the interest of manufactured export growth but, more broadly, of efficient resource utilization for longer-term development of the entire manufacturing sector. Export growth can initially be achieved despite the well-entrenched position of import substitution industries receiving high protection. Parallel  - 20 - with the export-promotion effort, attention is being given to the moderniza- tion, rehabilitation and restructuring of home industry, by far the more important sector in terms of output and employment. It holds the key to increasing capital efficiency and investment returns in the economy. It includes the more capital-intensive industries that are needed to assure a reliable supply of intermediate goods and industrial raw materials at economic prices. Simplification of investment incentives and reduction in protection, greater emphasis on the utilization of comparative advantage and domestic resources and on job creation are essential ingredients of industrial policy. A move towards greater freedom in trade and industrial policies must be part of a more comprehensive program of industrial development. The manufacturing sector, through emphasis on labor-intensive industries, plays an essential role in employment policy. Other sectors are more important in employment creation, especially services, construction and rural reform. But manufacturing can often make a more important contribution than it has made in the past, and the secondary effects are often a multiple of the direct effects. For the poorer of the population groups, industry can lead the way to higher incomes, since its jobs are productive and rewarding. It plays a key role in improving the economic prospects of outlying regions and small cities. Industrial incentives can be designed to accelerate geographic dispersion. The cottage industries, very important but with a sluggish record overall, need special attention focussed on their more dynamic components, lest incomes in this sector fall too far behind the rest of the economy. Many opportunities exist to increase the links between manufacturing and the rest of the economy and between industrial and other aspects of development policy. Improved job training, often industry-specific and sponsored by industrial associations or institutes, is a key element in enhanc- ing value added and sophistication of production and design. In the crucial food processing industries, greater agricultural supplies are essential, including supplies from small farmers to help avoid excessive concentration in the industry. Export industries can obtain domestically an increasing share of their needs as home industry efficiency improves. Regional dispersion may also be instrumental in making possible greater access to indigenous raw materials and skills.  - 21 - References 1. Vicente B. Valdepenas, Jr., The Protection and Development of Philippine Manufacturing (Mani:La: Ateneo University Press), 1970. 2. John H. Power and Gerardo P. Sicat, The Philippines: Industrialization and Trade Policies (London: Oxford University Press), 1971. 3. ILO, Sharing in Development: A Program of Employment, Equity and Growth for the Philippines (Geneva: International Labour Office), 1974. 4. Robert E. Baldwin, Foreign Trade Regimes and Economic Development: The Philippines (New York: Columbia University Press), 1975. 5. Romeo M. Bautista and John H. Power, Industrial Promotion Policies in the Philippines (Manila: Philippine Institute of Development Studies) 1979. 6. Hollis B. Chenery and Moises Syrquin, Patterns of Development, 1950-70 (New York: Oxford UJniversity Press), 1975. 7. Bela Balassa, "Export Incentives and Export Performance in Developing Countries: A Comparative Analysis", Weltwirtschaftliches Archiv, Volume 114, No. 1, ]L978, pp. 24 - 61. 8. IBRD, The Philippines: Priorities and Prospects for Development, by Russell J. Cheetham and Edward K. Hawkins (Washington, D.C.: IBRD), 1976 9. Jagdish N. Bhagwati and T. N. Srinivasan, Trade Policy and Development in International Economic Policy: Theory and Evidence; Rudiger Dornbusch and Jacob A. Frenkel, Editors; Baltimore, 1978.  _22- TABLE 1: Comoosition of Gross Value Added in Manufacturing (at constanc i972 orices) 1967 1970 1977 Food, beverages and tobacco 41.1 41.8 39.4 Textiles, clothing and leather 10.9 9.9 9.5 Wood, cork, furniture 6.2 4.9 4.2 Paper products, printing 4.9 5.3 5.2 Chemicals and related products 15.9 16.5 22.5 Nonmetallic mineral products 4.6 4.2 3.3 Basic metals 2.6 4.2 4.0 Fabricated metal, machinery & equipment 12.6 11.8 10.8 Other manufacturing industry 1.2 1.4 1.1 All manufacturing 100.0 100.0 100.0 .Memo items: Total manufacturing value added (P billion, 1972 prices) 9.8 11.8 18.8 Share of manufacturing in GDP- (%, current prices) 21.2. 22.5 23.9 Share of consumer goods in GVA /a (%, 1972 prices) 56.9 54.9' 47.9 /a Defined roughly as food, beverages, tobacco,- textiles, clothing, leather, furniture, printing, other industries. Source: NEDA, National Income Accounts.  TABLE 2: COMPARISON OF THE STRUCTURE OF PhIILIPPINE MANUFACTURING WITII CROSSCOUNTRY STRUCTURAL "NORMS", 1973 /a Percent of GNP /b Percent of total manufacturing /c Industry Observed Predicted Residual Observed Predicted Residual (Actual) (Norm) (Actual) (Norm) Food 8.11 4.06 4.06 37.54 24.10 13.44 Textiles 1.83 2.60 -0.77 8.46 15.46 -7.00 Clothing 0.29 0.73 -0.44 1.33 4.34 -3.01 Leather 0.04 0.11 -0.08 0.16 0.67 -0.50 Wood 1.13 0.55 0.58 5.21 3.25 1.96 Paper 0.62 0.52 0.10 2.85 3.09 -0.25 Print-lng 0.42 0.45 -0.04 1.93 2.69 -0.76 Ciheiiiicals 4.16 2.31 1.85 19.25 13.71 5.54 Rubber 0.42 0.42 - 1.93 2.50 -0.57 Nonmetallic minerals 1.01 1.04 -0.04 4.65 6.21 -1.56 Basic meLals 1.10 1.19 -0.08 5.11 7.07 -1.96 Metal products 2.19 2.43 -0.25 10.12 14.46 -4.35 Miscellaneous 0.32 0.28 0.03 1.46 1.68 -0.22 ToLal 21.62 16.83 4.79 100.00 100.00 - Primary seetor /d 38.26 36.31 1.95 Indtistriatl sector /e 24.11 21.62 2.49 Services sector 37.64 42.07 -4.43 /a Comparisoni between the composition of Philippine manufacturing output and the results of a 93 crosscountry regression analysis aimed at determining the average, or "norm", inidtistrial structure at different levels of developmnent and according to country size. /b Shiare of sectoral value added in GNP. /c Sliare in total manufacturing value added. /d Including agriculture and mining. /e Including manufacturing and construction Sourc e: IBRD "Patterns of Industrial Development" Project.  - 24_ TABLE 3: MANUFACTURING: VALUE ADDED, OUTPUT AND INVESTMENT IN 22 INDUSTRIAL BRANCHES, 1960, 1970 AND 1974 /a /b (In millions of 1972 pesos) Value added Output Investments 1960 1970 1974 1960 1970 1974 1960-69 1970-75 Food 1,061 1,805 3,149 2,455 4,640 9,402 1,481 1,876 Beverages 294 602 565 466 1,013 1,141 262 360 Tobacco 185 516 627 405 1,060 1,392 180 279 Textiles 222 489 769 603 1,329 2,260 1,034 1,197 Footwear/clothing 144 127 113 410 337 279 101 85 Wood 163 305 314 401 791 830 485 679 Furniture 35 32 49 74 67 125 33 22 Paper 100 223 356 251 610 1,022 216 752 Printing 133 192 170 246 368 432 151 119 Leather 17 13 12 44 40 39 16 6 Rubber 122 233 208 255 484 522 162 143 Chemicals 375 959 1,016 1,002 2,607 3,024 660 634 Petroleum & coal NA 535 830 NA 1,647 4,090 584 634 Nonmetallic mineral products 139 288 415 233 561 1,073 677 885 Basic metals 59 300 355 124 1,080 1,474 636 611 Metallic products 211 192 220 495 609 835 248 147 Machinery 72 71 209 111 137 407 57 121 Electrical machitnery 120 271 308 246 620 787 192 261 Transport equipment 113 259 299 288 753 1,216 175 336 Other 275 95 155 455 245 447 96 226 Total 3,840 7,507 10,139 8,564 18,998 30,797 7,446 9,373 /a Establishments employing at least five workers. /b Series deflated by the National Accounts Implicit Price Index. Source: NCSO, Annual Survey of Establishments and N`EDA, National Income Accounts.  TABLE 4: MNiJUFACTiIH1NCI CAPITAL IN'IENSITY, INVESTMENT AND CROWlIl IN OUTPUT, VA.UE ADDED AND EMPLOYMtNT IN 1960-74 /a /b (In 1972 prices) Investment Average annual growth (X) Induetry anli capital intenatty Kb/N 1960-69 1970-75 2 of total Output Value added Employment (1974) (P'OOO) 1960-69 1970-5 1960-70 1970-74 1960-70 1970-74 1960-70 1970-74 Oil aad coal prodticts 621,191 5H4ic 634 7.8 6.8 S.7ft 25.5 5.2ic 11.6 4.8/c -4.u Food 24,469 1,481 1,876 19.9 20.0 6.6 19.3 5.5 14.9 3.3 1.1 Relainler, of willch 16,899 5,381 6,863 72.3 73.2 7.6 8.0 6.4 4.5 5.5 7.2 1. Above average Induntry Kb/N /d 43.913 2,189 2,882 29.4 30.7 11.7 7.9 10.2 4.9 7.8 7.9 It. Below average Induatry Kb/N e 10,064 3,192 3,981 42.9 42.5 5.7 8.1 4.9 4.3 4.9 7.0 All Iliduatry 19,957 7,446 9,373 100.0 100.0 7.4 12.8 6.0 7.8 5.0 7.1 /a Ietablihalmenta employing at least five workers. Lb Deflated by tbe Natlokal Accontits lIplicit Price Index. je Data io for 1961. li lidustries inciltded In thli category are: nonmetallic minerals, paper, basic metals and chemica la. Oil and coal products and food prodtucts are Ulan above Lite average Kb/N but are excluded. /c All other Indt4trLes except tikose in footnote /d. Source; Table 6  TABLE 5: MANUFACTURING: CAPITAL PER WORKER, LABOR PRODUCTIVITY AND CAPITAL EFFICIENCY IN TIIE FACTORY SECTOR, 1974 (AT CURRENT PRICES) /a Capital per worker (Kb/N) Labor productivity (VA/N) Capital efficiency (VA/Kb) Number of workers Number of workers Number of workers 5-19 20+ Total 5-19 20+ Total 5-19 20+ Total Food 5,934 30,009 24,469 4,089 55,332 43,523 0.689 1.844 1.779 Beverages 3,269 12,547 12,494 5,361 46,416 46,182 1.640 3.699 3.696 Tobacco 667 9,524 9,519 5,667 44,035 44,014 8.500 4.624 4.624 Textiles 2,227 13,493 13,157 3,847 13,965 13,661 1.727 1.035 1.033 Footwear/clothing 1,978 2,815 2,341 2,767 5,923 4,136 1.399 2.104 1.767 Woo(d 3,022 12,974 11,874 5,175 12,126 11,365 1.712 0.935 0.957 Furniture 4,836 3,932 4,294 4,212 8,075 6,527 0.871 2.054 1.520 Paper 7,231 57,436 57,793 10,323 46,163 45,303 0.143 0.804 0.784 Printing 4,760 12,128 11,041 6,694 20,001 18,039 1.406 1.649 1.634 leather 4,777 6,976 6,502 4,586 8,750 7,852 0.960 1.254 1.208 Rubber 8,337 13,571 13,435 11,185 25,085 24,726 1.342 1.848 1.840 Chemicals 19,380 23,929 23,771 17,869 55,336 54,348 0.922 2.313 2.286 Oil & coal products 98,687 627,743 621,191 16,563 1,003,515 991,293 0.168 1.596 1.596 Nonmietallic products 7,084 78,751 70,314 4,602 27,820 25,097 0.650 0.353 0.357 Basic imietals 7,398 24,104 23,777 9,585 33,432 33,092 1.296 1.387 1.392 Metal products 5,690 11,624 10,424 8,779 21,791 19,134 1.543 1.875 1.836 Maclinery 5,658 11,911 10,933 9,089 30,357 26,926 1.606 2.549 2.463 Electrical machinery 7,832 10,101 10,036 9,154 25,040 24,639 1.169 2.479 2.455 rransport equipment 7,483 15,490 15,033 3,064 31,556 30,215 0.409 2.037 2.010 Miscellaneous 3,537 10,659 9,821 7,689 14,270 13,496 2.174 1.271 1.374 TotaL 4,689 22,571 1 957 4,514 33,677 29,414 0.963 1.492 1.474 (Average) /a Establishments employing at least 5 workers. Note: VA = Value added; N = Employment; Kb = Book value of fixed assets. Source: NCSO, Annual Survey of Establishments.  27 _ TABLE 6: MANUFACTURING: VALUE ADDED, OOTpUT AND INVESTMENT ARRANGED BY INDUSTRIAL BRANCMS AND BY DECLINING Kb/N RATIO, 1960, 1970 AND 1974 /a /b /c (In millions of 1972 pesos) Kb/N Value added outDut Investments (1974) 1960 1970 1974 1960 1970 1974 1960-69 1970-75 Oil and coal products 6z1,191 340 535 -830 717 1,647 4,090 584 634 Nonmetallic minerals 70,314 139 288 415 233 561 1,073 677 885 Paper 357,793 100 223 356 251 610 1,022 216 752 Food 24,469 1,061 1,805 3,149 2,455 4,640 9,402 1,481 1,876 Basic metals 23,777 59 300 355 124 1,080 1,474 636 611 Chemicals *23,771 375 959 1,016 1,002 2,607 3,024 660 634 Transport equipment :15,033 113 259 299 288 753 1,216 175 336 Rubber 13,435 122 233 208 255 484 522 162 143 Textiles :13,157 222 489 769 603 1,329 2,260 1,034 1,197 Beverages 12,494 294 602 565 466 1,013 1,141 262 360 Wood L1,874 163 305 314 401 791 830 485 679 Printing L1,041 133 192 170 246 368 432 151 119 Machinery 10,933 72 71 209 111 137 407 57 121 Metal products 10,424 211 192 220 495 609 835 248 147 Electrical machinery 10,036 120 271 308 246 620 787 192 261 Miscellaneous 9,821 275 95 155 455 245 447 96 226 Tobacco 9,519 185 516 627 405 1,060 1,392 180 279 Leather 6,502 17 13 12 44 40 39 16 6 Furiture 4,294 35 32 49 74 67 125 33 22 Footwear and clothing 2,341 144 127 113 410 337 279 101 85 Total 19,957 4,180 7,507 10,139 9,281 18.998 30,797 7,446 9,373 (Average) /a Establishments employing at least five workers. /b Deflated by the National Accounts Implicit ?rice Index. /c The capital-labor ratio (Kb/N) described above is based on book value of fixed assets which has considerable difference with replacement cost of fixed assets (Kr) as described in foot- note /a of Table 3.5. The Kb is used in the Annual Suzvey of Establishments and does not account for price distortions, utile the Kr requires some data manipulation to account for price distortions and equipment life. The Kb for all industries, for instance, is US$2,734, while the Kr is USS11,207, which represents a more realistic cost per job for the industry as a vhole. Sources: NCSO, Annual Survey of Establishments and NEDA, National Income Accounts.  - 28 - TABLE 7: SUMMARY OF PLANTS VISITED BY MISSION All Export Nonexport Per plant data firms firms firms Investment ($ million) 14.6 3.0 22.2 Number of jobs 1,033 1,083 1,002 Sales ($ million) 17.3 4.5 22.0 Exports ($ million) 7.1. 6.0 8.5 Value added ($ million) 8.2 1.2 10.6 Investment per job ($) 14,114 2,764 22,111 Value added/sales (%) 47 26 49 Export/sales (%) 41 71- 37 BOI benefits/sales (Z) 7.8 6.8 8.9 Source: IBRD estimates. TABLE 8: RATES OF EMPLOYMENT GROWTH IN PHILIPPINE MANUFACTURING, 1956-76 Annual Incremental Em:oloyment growth growth Size (employment) 1956 1976 1956-76 1956-76 '000 Z '000 Z CZ) (Z) Organized (factor7) 5-19 55 5.7 80 4;8 1.9 3.5 20+ 151 15.7 550 32.7 6.7 55.6 Subtotal (20) (21.4) (630) (37.5) (5.8) (39.1) Unorganized (cottage industries) 1-4 756 78.6 1,050 62.5 1.7 40.9 Total 962 100.0 1,j80 L00.0 2.8 100.0 Source: NEDA  - 29 - TABLE 9: EFFECTIVE RATES OF PROTECTION FOR MAJOR PRODUCT AND END USE GROUPS 1965 1974 (%) (%) Total Manufacturing 51 44 Capital Goods 16 18 Intermediate Goods 27 23 Consumption Goods 70 77 Inputs into Construction 55 16 Sources: 1965 estimates are from Reference (2). The 1974 estimates are from Reference (5).  30 TABLE lo: AVERAGE EFFECTIVE PROTECTION FOR M&NUFACTURING IN SELECTED DEVELOPING COUNTRIES Average rate of effective protection in manufacturing Country Year (%) Argentina 1958 162 1969 89 1977 39 Brazil 1966 181 1967 76 1973 47 Chile 1961 182 Colombia 1969 29 India 1961 313 Malaya 1965 6 Mexico 1960 27 Pakistan 1964 271 Philippines 1965 51 1974 44 South Korea 1968 -1 Taiwan 1965 33 Thailand 1969 50/a 1971 40/a /a Thai estimates are for the import competing manufacturing sector only. Sources: Bela Balassa and Associates, The Structure of Protection in Developing Countries (Baltimore: Johns Hopkins Press, 1971), p. 54; Ian Little, Tibor Scitovsky, and Maurice Scott, Industry and Trade in Some Developing Countries (London: Oxford Univer- sity Press, 1970), p. 174; Larry E. Westphal and K-ang Suk Kim, "Industrial Policy and Development in Korea," World Bank Staff Working Paper No. 263, August 1977, p. 3-10; Thomas L. Hutcheson, "Incentives for Industrialization in Colombia,t' Ph.D. Disserta- tion, Unversity of Michigan, L973, p. 68; William C. Tyler, Manufactured Export Epansion and Industrialization in Brazil (Tubingen: J.C.B. Mohr, 1976); IBRD staff estimates.  IBALE 11.: HANNUACTURINO GROWth: PAST, P1iESINT ANI) IUlJURE, 1970-85 (BIllions of pesos/I977 prices) Outptunt /a Cross Valtue Added /d Investment le EmPIOYment /- i970 1977 1985 1970 1977 1985 1970-77 1977-as 1970 1977 1985 (proj.) (proj.) (est.) (proj.) (proj.) MhamifaCtuoted EXPOrt SeCto(r1 Tradititoanal ImIanufctCures 9.3 13.9 24.0/b 3.7 5.6 9.6 4.2 8.8 92/f 120 180 Nwirradli.omial mantufactures 0U9 5.4 20.2/b 0.2 1.4 '5.0 3.0 9.0 20/f 140 500 D/)meSLIC Fla-keL-Orheiited IndulstrIes' 68.8 106.7 185.8 20.6 30.8 54.4 32.3 75.8 1,211 1,420 1,920 Total MKallIfUactrlnl 79.0 126.0 230.0/c 24.5 37.8 69.0/c 39.5 93.6 1,323 1,680/1 2,600 Of whiich: FacLory seCtor /i 404 630 1,440 Utiorganized sec tr 919 1,oso 1,160 LJ T'he uiata for dimiestici imarket-orlented ndustries ign thils table are calculated as a residual. Ia Foir exports, an excicanige raite of US$1.00 - P 6.5 Is used for 1970: a rate of US$1.00 - P 7.5 Is used for 1977-85. /b From Table 1.17. Jc Ibased ',i a1 real Irate of growth lin grotss valtie added lof 8Z per anntuL durlnLg 1977-B5. - -1 liTCe flIlow1ing v.ilie aidl`t11i coeffictente are asstimed: 0.4 for tradittional umanufacttures: 0.25 for noI[raditional manufactUree; 0.3 for LtOtI Walaifaccrl rigS sector. Ic 'IIe fji I tIWLIu I( IORts iae as st iireul: 2.2 for traditional matnufacLtires; 2.5 for tlontraditlonal ranufactures; 3.0 for total WINIt ac I aIr t i t i A *'p se :c to r . If Estimaited on tliu bisIs of the 1969i i sJlipjilne input-output data. See Table 1.24. Jg In thousIaVIs of workers. Tfie fol lowing capital-labor ratios are asstinued: P 150,000 for traditIonal manufactures; P 25,000 for no,,tracLitIoiiir iilsiiii;LUctures; P 100,000 for total manufacturinig sector (1977). Ih Esi:a lsh,cteui.a emluyhI,ylig mire thait five workers. / Icuu:aljse f ia tfall in total se;tnufacturing euuployment between 1976-77, tile Cstinare for 1976 lis used. 1 Eml loyllc.-itt Iit ithe 111organ I zedl seuctor assumed to grOw at Its hlistoric rate of 1.5% per aninum duiring 1977-85. Sources: - NCSO, Census of Establishments and Annual Survey of Establishments - Emmanuel A. Hife, "Factor Productivities and Intensities in Philippine Manufacturing with Emphasis on Establishment Size, 1974", Industrial Promotion Policies Project at the University of the Philippines (See Reference 5). - IBRD estimates.  TABLE 12: ALTERNATIVE PROJECTIONS FOR MANUFACTURING GROSS VALUE ADDED AND EMPLOYMENT, 1985 (Billions of Pesos/1977 prices/thousands of workers) Alternative I /a Al-ternative 2 /b Alternative 3 /c Alternative 4 /d G.V.A. Employment G.V.A. Employment G.V.A. Employment G.V.A. Employment Manufactured Export Sector Traditional manufactures 9.6 180 9.6 180 9.6 180 9.6 180 Nontraditional manufactures 5.0 500 5.0 500 5.0 500 3.4 340 Domestic Market Oriented 54.4 1,920 54.4 1,670 49.1 1,600 49.1 1,600 Total Manufacturing of which: 69.0 2,600 69.0 2,350 63.7 2,280 62.1 2,120 tactory sector 1,440 1,190 1,120 960 Unorganized sector 1,160 1,160 1,160 1,160 /a From Table 11 /b Same as alternative 1, but assumlling employment elasticity of home iidustries to be equal to its historic rate (70-77) of 0.32 onily. /c Saiime ims alternative 2, but assuming growth rate of home industry G.V.A. to be equal to its historic rare (70-77) of 6% per aniumii 0 on] y. /d Samne as alternative 3, but assuming a real growth rate of nontraditional exports of 12% per annum only.  -_ HG3881.5 .W57 W67 no.424 c.3 De Vries, Barend A. Transition toward more rapid and labor-intensive industrial development : the