Philippines - Industrial development problems and prospects (Vol. 1 of 2) : General issues

Report No. 280-PH ldustrall Deveopmrent Problems FL C And Prospects in the Phflippines (in two volumes) Volume 1 General Issues March 19, 1974 Industrial Projects Department Not for Public Use Document of International Bank for Reconstru2Ltion and Development International Developmnent Association I I . 1 , This report was prepared for official use only by the Biarl Group. It may not be published quoted or cited without Bank Group autilorization. The tiank Group does not accept responsibility for the accuracy or completeness of the report.   INDUSTRIAL DEVEL)PMENT PROBLEMS AND PROSPECTS IN THE PHILIPPINES TABLE OF CONTENTS Page No. VOLUME I - GENERAL ISSUES COUNTRY DATA .......... ....................I...... FOREWORD ................................................ ii I. SUMMARY AND CONCLUSIONS ...... ........................ 1 II. INDUSTRIAL GROWTH AND GOVERNMENT POLICIES .......... .. 11 Introduction ..................................... 11 Investment in Industry .......... .. .............. 12 Investment Incentives System ..... ............... 14 New Approaches to Investment Incentives Policy .. 17 Tariff Reform ................................... 20 Cost and Effects of Inveutment Incentives ....... 23 Investment PlarLs and Prospects .................. 25 III. MANUFACTURED EXPORTS ................................ . 28 Recent Record of Exports ...... .................. 28 Incentives and Export Performance ............. .. 30 Export Growth Prospects ...... ................... 32 Capacity Utilization ...... ...................... 35 Cost Competitiveness ...... ...................... 35 Engineering Industries ...... .................... 36 Wood Products ... ................................ 37 Problems of Finance ....... ...................... 38 Export Processing Zone ...... .................... 39 Administrative Arrangements .................. ... 40 IV. REGIONAL DISPERSAL AND SMALL SCALE INDUSTRIES ........ 42 Distribution of Employment ...................... 42 Small and Medium Scale Industries ... ............ 43 Cottage Industries .... ....... 45 Financial Needs and Facilities ................. . 46 Raw Materials .............................. 49 Technical Assistance . ........................... 50 Marketing ......... .... ...... 51 Administrative Arrangements ..... ....... 52  - 2 - Annex I - Terms of Reference Tatles - II - 1 to 14 III - 1 to 8 IV - 1 to 9  Country Data Area: 297,000 km2 Population: 39.0 million (mid-1972, estimated) Annual Rate of population growth: 3.0% (1960-72) GNP per capita in 1972 /1 US$192 Gross National Product in 1972 Annual Rate of Growth (% constant prices) 'US$ Mln_. X 1965-70 1971 1972 GNP at market prices 8,468 100.0 5.7 6.5 4.3 Gross Domestic Investment 1,674 19.7 1.6 5.9 -3.5 Gross National Saving 1,470 17.3 3.6 13.2 -8.2 Current Account Balance -75 0.9 - - - Exports /2 1,335 15.7 4.5 5.0 1.5 Imports T 1,410 16.6 7.2 5.4 2.7 Output, Emplon!ent and Product:Lvi /3 (1971) VElUe Added Labor Force- V.A. per Worker US$ k i Z of Total Mln. 2 US$ Agriculture 1,332 32.4 6.4 48.5 208 Industry 1,059 25.8 2.1 15.9 504 Services 1,717 41.8 4.0 30.3 429 Unallocated - - 0.7 5.3 - Total/Average 4,108 100.0 13.2 100.0 311 Merchandise Exports (Average 1970-72) US$ Mln. 2 Coconut Products 230.3 21.1 Sugar Products 211.3 19.4 Other Agricultural Products (including fruits) 73.6 6.7 Forest Products 264.6 24.3 Mineral Products 217.3 20.3 Other Manufactures 93.0 8.5 Total 1,090.1 100.0 Rate of Exchange: (Since 1971) US$1.00 - Peso 6.78 Peso 1.OO- US$0.15 L The Per Capita GNP estimate is at 1970 market prices, converted as in the Bank's 1972 World Atlas. All other conversions to dollars in the data tables are at the average exchange rate prevailing during the period covered. /2 Total of goods nd services, excluding interest. /3 Estimated in constant 1967 prices. L Total labor force; unemplayed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job.  Foreword 1. This report is based on the findings of an Industrial Sector mission which visited the Philippines in May 1973 and consisted of the following: Jivat N. Thadani Mission Chief (NDP) Toshikazu Nasu Industrial Economist (NDP) Vladimir Dragomanovic Industrial Economist (Office of RVP) Warren Hogan Economist (Consultant) Harry Choi Engineering Industry Specialist (Consultant) Walter Oettinger Engineering Industry Specialist (Consultant) Hugh McFarlane Pulp and Paper Industry Specialist (rBRD-PA) C P.) 2. The last Bank Economist Mission to the Philippines (January 1973) had undertaken a Survey of Industrial Development in that country which provides considerable statistical data, and an overview of the industrial scene. (Report No. 78a-PE, Vol. II, of July 25, 1973.) 3. The terms of reference for the Industrial Sector Mission are at Annex I. This report focusses on questions related to investment incentives, regional and sectoral planning, exports and small scale industry in the first part; and in the second part it reviews the problems and prospects of a few selected industries, namely, shipbuilding, agricultural equipment and other engineering industries, pulp and paper, textiels and garments, and footwear. 4. These few industries, which were chosen in consultation with the Board of Investments, account for almost 20 percent of total investment in industry and 26 percent of value added in the sector. They provide ema,poyment for over 35 percent of the labor force in organized industry, and 13 percent of the country's total exports. Of greater significance, nowever, is the fact that they were reported as having the greatest potential for rapid growth and exports.  Industrial Development Problems and Prospects in the Philippines I. SOUMMARY AND CONCLUSIONS 1.1 The manufacturing industries sector in the Philippines did not achieve much growth in the years 1964-69. Since 1970 there has been some improvement,;but overall performance in both domestic and export markets appears to have fallen short of potential, and compares unfavorably with that of industry in some other countries which share common characteristics with it. 1.2 Following the reorganization of Government in the Philippines last year, there has been a considerable increase of emphasis on rapid growth of industrial output to meet growing domestic needs, to earn much needed foreign exchange in export markets, and to provide more employment for the rapidly growing worlk force (2.1-2.4). 1.3 The rate of growth of investment in organized industries, measured in constant 1967 prices, appears to have practically stagnated during the four years 1968-71; and it suffered a noticeable downturn in 1972 in response to extraneous circuimstances. Both corporate and private savings recorded declines, and so d:Ld loans from Development Banks. A contrary trend was, however, noticeable for commercial banks' loans to industry (mostly for working capital), which doubled between 1968 and 1972 to P 7.4 billion. Foreign investment declined very considerably during the 1960s, and has ceased to be a significant f.actor for the present; private foreign loans have also declined, but still play an important part in the total resource supply. High debt/equity ratios expose industries to serious liquidity problems even during short recessions, and there is felt need for greater mobilisation of funds for investment in industrial equity through a more active stock market (2.5-2.10). 1.4 Apart from guarantees and assurances (which cannot be quantified) to encourage foreign as well as domestic investment in priority areas, the Government has a well-articulated investment incentives system, contained in Republic Acts (R.A.) 5186, of 1967 and 6135 of 1970, dealing with manufacturing industries and exports respectively. The principal components of the systems are (i) exempition from custom tariff payments on imports of capital goods and certain ma-terial inputs for industries included in the several priority lists; (ii) tax credits for purchases of domestic capital equipment, for taxes withheld on interest payments on foreign loans, and for exports; (iii) exemption froa all other taxes except income tax, i.e. sales taxes, excises, etc. for 5-20 years; (iv) deductions from income (assessable for income tax) on account of accelerated depreciation, pre-investment expen- diture, losses carried over, profits reinvested, etc.(2.11-2.14). 1.5 The cost of taxes and tariffs foregone under R. A. 5186 during 1969-72 has been estimated at about 10 percent of the annual gross investment in industry in those years. This compares with about 20 percent of annual  gross investments in the years, 1965-68. The composition of taxes forgiven (for encouragement of industrial investments) has also changed. There is less reliaace now on forgiveness of customs duty on imports (50 percent of total in 1969-72, compared with 70 percent in 1965-68), and more use of relief from income tax, sales tax, etc. (2.36-2.39) which do not discriminate against domestic products. 1.6 Th,- Board of Investments (BOI), which administers the Investment and Export Incentives Acts, is now using more sophisticated techniques than it did in earlier years to define priorities and direct new investment funds to them. instead of merely listing various end products in one long shopping list of so-called "priority" industries, it is now beginning to identify industry groups which have logical interconnections, and plan for them on a "sectoral" basis. The term "sector" is loosely defined, and may cover for example, automobiles, or shipbuilding, pulp and paper as well as wood products (for integrated use of forest resources) textiles and garments, poultry feeds, farming and processing, etc. Inclusion of a sector in the Investment Priorities Plan (IPP) is related to development objectives, e.g. employment, balanced regional development, encouragement of small enterprise, promotion of exports(2.19-2.24). 1.7 soI now performs many functions which were not contemplated for it in the enabling Act, and for which it does not have the staff. Many of these functions belong in a Department of Government, and there is need for some reorganization. The problem is already under study by the Executive Office, which may either create a full-fledged Department of Industry and then limit B0I to its originally contemplated role, or formally add to the functions and staff of BOI on.a permanent basis (2.25). 1.8 The structure of import tariffs was revised in early 1973. A minimum 10 percent tariff on all imports was imposed; and while this is essentially a revenue measure, it has implications for the structure of protection. Other tariff rates were simplified and rearranged at 20, 30, 50, 70 and 100 percent (maximum). The element of protection in the tariff structure is reinforced by an impor.t licensing system, which will be administered in consultation with BOI in respect of industrial products and capital gocds for which domestic capacity exists or is planned. BOI may also recommend changes in tariff rates for industries included in the IPP. BOI should consider the full economic merits of a case befbre recomending enhanced protection. There appear to be some cases of rather high cost protection (2.26-2.35). 1.9 The draft Four-Year Plan for 1974-77 contemplates growth of the industrial sector at an average rate of 10 percent per year compared with 6 to 7 percent in recent years. Achievement of this ambitious target will require very considerable acceleration of new investments; and Government would have to play a much larger role than in the past to supplement both the domestic currency and foreign exchange resources of the sector. Develop- ment Banks will need Government assistance to fulfill their appropriate role.  - 3 - Foreign exchange loans as well as investments will alto have to be attracted on a much larger scale than in recent years. Finally it should be recognised that a more modest growth than the targeted 10 percent per year would still be a considerable achievement(2.42-2.47). 1.10 Exports of non-traditional manufactured items increased from US$49 million in 1969 to US$87 million in 1971 and US$110 million in 1972, thus increasing their share in total merchandise exports from 5.7 percent to 10 percent. Plywood, textileiu and garments, handicrafts, fish and fish products, and a wide array of new goods which are individually of small value, recorded significant gains (3.1-3.10). 1.11 Export incentives provided under R. A. 6135 have attracted widespread interest among exporting firm3. Analysis of a sample of cases showed that tax credits averaged to about 3.4 percent of export sales; about one quarter of the firms studied had gain,ed less than 1 percent, another quarter gained between 1 percent and 4 perceint; and the top half gained more than 6 percent. As the incentives schemes have beein in operation for only a short time, it is premature to judge their eEfectiveness conclusively; but such a study should be planned for 1974(3.11-3.15). 1.12 Expectations about the possible rate of growth of exports of manufac- tures have risen in early 197:3. These reflect the improved Governmental organization for encouragemenit of exi)orts as well as increasing appreciation of the competitiveness of Filipino goods in export markets. At the end of December 1972, 108 firms stood registered with BOI for export incentives, and in the first five months of 1973, 35 more firms were regisered. The products sought to be exported appear to be concentrated in a few industries, e.g. textiles and garments, e:Lectronic components and assemblies, footwear and handicrafts. Competitive strength of exports is derived chiefly from a cheap and literate labor force and some indigenous raw materials; it needs to be supported by easy accests to imported materials and components at inter- national prices. Weaknesses arise from high cost and unreliable quality of sone domestically produced ineermediates, and inadequate facilities for working capital for small and medium sized firms (3.16-3.28). 1.13 A longer term view imast consider the export potential of engineering industries which have not been significant exporters-in the past. Exchange rate adjustment, recent tariff changes, and the benefits allowed under the Investment and Export Incentives Acts, all are working in favor of these industries. The progressive car manufacturing program has initiated a healthy trend; and the Metal Industries Research and Development Centre, sponsored by BOI, could have a positive impact in the longer term (3.29-3.31). 1.14 Proposals for greater processing of natural materials within the country before export could face substantial difficulties which should be anticipated and dealt with. lrhe most important cuzrrent proposal is that requiring timber to be processied in the Philippines prior to export. In recent years log exports have amounted to about 15 percent of total exports,  _.4- w.1e pro-essed timber products earned only about 5 percent. Japan is the major market for logs and its tariff structure, like that of other developed countries, discriminates against import of processed products. It mry not ct easy tc secure changes in the tariff structure of importing countries, parcicularly while alternate sources of supply (e.g. Indonesia) are available to chem. Even presuming some tariff concessions by importing countries, chere will be need for Philippine forest products Industries to improve their efficiency and cost-competitiveness very considerably. More efficient utilizationr of timber, in keeping with Japanese and Europeani practice, would require large integrated operations and substantial investment of fixed capi- tat. The economic benefits of the uroposals should be appraised-before resources are committed to them on a priority basis(3.32-3.36). ;SIS Successive devaluations of the peso have generated greater need for working capital, to finance the increased cost of imported inputs and inventory. At the same time, the domestic currency burden of foreign debt repayments on the cash flow of export industries has iucreased. Hence, there is growing need for working capital. Special facilities to provide suffi- cieitt funds for exporters should be developed (3.37-3.39). 1.16 The export Processing Zone Authority is developing a Free Trade Zone at Mariveles. Some physical progress has been achieved at the site; but the costs that will need to be incurred appear to be high for the net benefits likely to accrue in the next several years. Information generated by analysis of cost data for this project should at least provide useful guidance for evaluating alternatives for further export development programs (3.40-3.42). 1.17 Responsibilities for export promotion and development are presently divided between the Department of Trade and tne Board of Investments, with the latter progressively initiating new policies and programs, as it is more closely connected with manufacturing industries. There is growing recognition of the need for a more comprehensive organization than has been developed so far for the task, and this should be followed through quickly (3.43-3.49). 1.18 Industrial employment in organized factories (20 or more workers) is highly concentrated in the Greater Minila area (47 percent) and Luzon. Small and cottage industries are more widely spread. The Government wishes to consciously promote dispersal of industrial employment, and is doing so by selective promotion of large units outside the Greater Manila area on the one hand and widespread encouragement of small industries on the other. An experimental program for small indlustries in North Mindanao is being developed; and if successful, would be extended to other areas. This appears to be a sound approach (4.1-4.3). I. 9 }Over a. iilliorn worVers are reported as employed in small and cottage Industries. Tne Annual Survev of Manufactures (ASM) covers only about 70,000 of these, *to work in some 82,30 units. Food, wearing apparel and footwear, Iu.;4ture and fixt:ures, printing, leather and leather products, non-electrical machinery apS.-ear so be the rcs,t important industries for small-scale enterprise. Very littcle i-s knoLwnr aDc-t .ae vast number allocated to cottage industries,  - 5 - and there is need for collection and analysis of information on a sample basis. Sub-contracting for large enterprises is not yet a widespread practice among small-scale units. Only the gvrment industry uses such arrangements on a substantial scale at present for export orders. There appears to be scope for extension of the pattern in other industries too (4.4-4.7). 1.20 While small industries need relatively little fixed capital per worker employed, their need for working capital is often considerable. The volume of credit extended to small industries in the Philippines by banks and institutions is very limited; and special arrangements are clearly necessary. The provisions for collateral s;ecurity should be less onerous; better appraisal of projects and supervision of operations by lending institutions can reduce risks of default. A Government: guarantee fund to share losses with Banks would be useful. A guarantee fee, payable by the borrower, could cover the cost of the scheme. There is also needl for technical assistance to prospective clients. Government should corLsider ways of sharing the cost of these services with banks as a promot:ional measure for three to five years (4.10-4.17). 1.21 Small manufacturers have special problems in procuring raw materials; and while reasons vary from one industry to another, there does appear to be need for special measures by Government to help the more important industries. Technical training of personnel. has played a useful role in small industry promotion; but there is need for considerably greater effort in this direction. The help extended to small industries for better marketing of products has been very limited so far, and rneeds to be extended. Two Government agencies are currently responsible for hlelping small industries, namely, the Department of Trade (formerly Commerce and Industry) and the BOI; there is need for clearer definition of their respective responsibilities and strengthening of staff for promotion and development in BOI (4.18-4.29). Engineering Industries 1.22 The equipment, capabilities and skills available in engineering industries are impressive. While many factories are dependent on imported inputs and utilize installed capacity only to a limited extent, a trend towards more integrated manufacturing operations is now noticeable. The major building blocks for future development are the metal working industry, the automobile industry and shipbuilding. The farm equipment industry and industrial electrical equipment are infant industries; both have potential for growth, but this will only be gradual, in keeping with the expansion of domes- tic demand (5.1-5.9). 1.23 The Progressive Car Manufacturing Program (PCMP) is a leading example of the "sectoral" approach ,to industrial development working success- fully. Its key elements are a flexible domestic content schedule which recog- nizes the realities of domestic suppliers' capabilities, and an export oriented sub-assembly production program (5.10-5.16). In view of the avail- able labor skills and technical capabilities, there appears to be scope for development of some capacitv for manufacture of tools, dies and medium- precision instruments, and for rebuilding used machinery (5.17-5.33).  -6- Shipbuilding 1.24 ihere are reported to be about 35 shipyards in the Philippines. The majority of these are small boat yards which can build or repair wooden or steel vessels up to about 200 GT; only a few can build vessels up to 1,000 GT. For vessels over 1,000 GT, there are repair facilities only at two places, and current demand exceeds available capacity. No existing shipyard is laid out or equipped to builc' inter-island or ocean-going vessels in the 3,000-5,000 CT range (5.34-5.37). ,.25 The Philippine fleet totals roughly 1.6 million GT, including about 800,000 GT of ocean-going vessels, 400,000 GT of inter-island vessels and about 400,000 GT in barges, tug boats and small fishing vessels. The replace- ment demand of the inter-island fleet alone has been considered by some interests to be sufficient for sustaining an active ship-building industry. A program for building 56 ships in the size range 1,000-3,000 GT in a 10-year period was drawn up; this has already been reviewed in 1972-73 by expert teams from Japan and France, which have made their respective recomendations for developing the shipbuilding industry in a phased manner (5.38-5.45). 1.26 A closer analysis of the composition of the inter-island fleet, and its requirements for replacement and expansion indicates that there may indeed by a need for about 16 vessels in the size range of 1,000-3,000 GT in the next 5 years, as envisaged by the Government; but that in the subsequent 5-year period (1979-83) the requirement is likely to be far short of the 40 vessels anticipated. The mission has attemp.ted, therefore, to examine the requirements of the ocean-going fleet as well for small vessels in the size range of 1,000-5,000 CT; and finds that if domestic shipowners were to increase their share of the growing foreign trade from the current level of 10 percent to about 20 percent (as is the case in Indonesia) there could be a demand for about 400,000 GT over the 10-year period 1974-83. Assuming that the required inivestment would earn an appropriate return, there would be room for a shipyard to construct about 40,O00 GT per year (by 1983) in the size range 1,000-5,000 GT (5.46-5.51). 1.27 It also appears that for vessels in the size range 5,000-20,000 GT, there could be a market for about 50,000 CT per year. A joint venture ship- yard, supported by an experienced shipbuilder, to cover this demand as well as to supply a limited export market, would be a possibility for detailed investigation (5.53). 1.28 Cost data for new ships up to about 500 GT built in the Philippines suggest that chese are competitive with Japan or Singapore. Larger size vessels have not been built in the country in recent years; but a brief study of relevant cost factors suggests that the Philippines could construct ships in the size range 1,000-3,000 GT quite economically (5.54-5.57). 1.29 'The concept of a standard all-purpose ship is interesting; but there does not appear to be enough justification for limiting construction capability to a standard type, as the economies to be achieved are less important than  -7- the advantages inherent in flexibility, in the context of the market demand envisaged (5.61). 1.30 Several countries support their shipyards by extending financial incentives to foreign purchasers. Philippine shipowners would naturally seek financial terms from dcnestic shipbuilders at least as good as, if not better than, those available to them abroad, e.g. in Japan or Europe. The Government will have to consider ways of helping existing and new shipyards to offer competitive financiial terms to prospective buyers (5.62). 1.31 The shipbuilding programs envisaged could create about 4,500 new jobs directly in the industry by 1983, and a considerably larger number in supporting and related industries (5.68). .Agricultural Machinery 1.32 Agricultural tractors (defined as having 4 wheels) have a relatively limited market in the Philippines, in sugar cane estates and dry land farming. Current annual demand ranges between 1,100-1,200 units; and domestic manufacture is neither contemplated by any entrepreneur nor considered feasible by Government. Tractor drawn implements are sold at an average rate of 2 per tractor, and the domestic market is estimated to be worth about P 6 million per year. A considerable part of this value could be supplied locally, though btearings, most hydraulic parts, and wearing parts made of special steels would have to be imported (5.75-5.83). 1.33 Hand-tractors (or power tillers) of various designs are used on wet lands (for the rice crop) in considerable numbers (about 5,000 per year) and demand is expected to grow very considerably. The International Rice Research Institute has designed a hand tractor which can be manufactured with relative ease in developing countries, using a variety of engines which can be imported. Several manufacturers have already been registered to produce hand tillers (5.84-5.89). 1.34 Miscellaneous agricultural machines, e.g. grain threshers, hammer mills, dryers, mixers, are currently used and locally fabricated in emall numbers. As demand grows, proDduction will grow too; but no mass market is presently foreseen (5.90-5.93). 1.35 Prime movers are needed for hand-tillers as well as other agricul- tural equipment. The preferred power ratings are around 7 and 12 H.P. There is no domestic production at this time. Icports generally are divided between light gasoline engineai and heavier diesel engines. Gasoline engines have the advantage of being lighter and cheaper; but diesel engines are preferred for greater reliability and easner maintenance. The domestic market is estimated to be capable of absorbing over 50,000 units per year soon. There appears to be a case for a Government supported effort to investigate the possibility of manufacturing light diesel engines before any investment decision for production of convantional gasoline engines is allowed to be implemented (5.94-5.95).  -8- ?u p and Paper ..36 the Philippine pulp and paper industry began in 1941 with the construction of the world's first bagasse pulp mill. Since that time the irncustry has expanded to the point where there are 6 integrated pulp and paper mills with a total rated annual capacity of 194,000 MT pulp, 218,000 l!: paper and 7,500 MT paperboard; and 15 non-integrated paper mills with a total rated annual capacity of 105,500 MT paper, 53,000 MT paperboard, and 6,800 MT of abaca pulp. Six of the non-integrated paper mills have idle guip mills w-ith a total rated annual capacity of 22,300 MT; two larger mills r.ave a combined capacity equal to 50 percent of the total paper and paper- Doard capacity, whiile 10 small mills have capacities of less than 8,000 MTE/year each (6.1-6.3). 1.37 Paper and paperboard consumption in the Philippines has been growing at a higher rate than in other oountries with comparable per capita national income, with a level of 7.6 kg/capita being attained in 1971. It is expected that the per capita consumption will reach 11.8 kg by 1980 and 14.4 kg by 1985. Total demand for paper and paperboard products was about 290,000 MT in 1971. It is expected that this will rise to 420,000 MT in 1975, and 800,000 MT in 1985(6.4-6.12). 1.38 Firm and potpntial projects will add 85,000 tons of Paper and paper- board to the country's supply by 1985. The supply-demand gap, 136,000 MT in 1971, would decrease to 42,000 tons in 1975, and then rise to 380,000 MT in 1985 (6.13). 1.39 Pulp imports of all types were 52,000 MT in 1971, with domestic supply at 109,000 MT. Projects underway and potential future projects will raise the comestic supply to 347,000 MT in 1975, and 514,000 MT in 1985. if virtual self-sufficiency (exports balancing imports) were to be desired by 1985, additional pulp supplies totalling 359,000 MT would be necessary (6.16). 1.40 The Philippines is lacking in long fibre pulpwood resource but has large short fibre pulpwood and bagasse resources, which could be exploited, both to satisfy the domestic short fibre demand and provide significant export earnings. Both these resources require detailed study to determine the most advantageous course for further development (6.23-6.32). 1.41 Present wood costs do not give the Philippine pulp producers any significant competitive advantage, but it appeare that plantations of fast growing species could alter this position favorably(6.44). 1.42 Development of abaca pulp production is proceeding, but its export mark;et potential has not been evaluated adequately. Abaca offers some posjibility of replacing imported long fibre wood pulp, but such a policy f.eets careful economic evaluation, as the profit from exports may be greater (6.34-6.35).  -9- 1 .43 The industry has a high proportion of small mills. Tariff protection and distance from alternate supplies have enabled these mills to survive. However, they are ncw finding it difficult to obtain pulp supplies at reasonable cost.and production costs could escalate considerably. Policies to discourage further small mills and to actively rationalize the existing mills are required (6.40-6.48). 1.44 Recent changes in forest concession policies, favoring longer term concessions, should be followed through to establish large integrated forest industries, which should include pulp and paper as well as mechanical wood products, to achieve internationally competitive costs. This. is essential for healthy growth of the industry to meet domestic and export de8ands (6.66). Textiles and Garments 1.45 The textile industry had been classified as "overcrowded" for several years; but it has overcome its difficulties in the domestic market, largely on account of devaluation of the Peso, and now appears poised for export oriented growth. The BOI is now allowing investment incentivcs for new textile mills located outside the Greater Manila area, as well as for export oriented expansion (7.1--7.3). 1.46 The industry is deperndent on :Lmports of cotton as well as synthetic fibres. One plant for manufacture of polyester fibre and filament was established in 1971 and another has been approved; but it will take so"e time before these can supply synthetic fibres at internationally competitive prices. Hence access to imported raw materials, specially for exports, is important to the future of the textile industry (7.4). i.47 The garment industry makes a significant contribution to exports and employment. There are about 54,000 workers in organized units, and about 160,000 out workers. Wearing apparel and under-garments are far more important now than embroidered ,goods for both domestic and export markets. The industry has very substantial potential for expansion, which should be speedily exploited (7.5-7.11). 1.48 rhe industry has stronig links with foreign principals, who provide raw materials, product specifications and marketing channels. Tradi- tionally, the Filipino garment industry has not provided much stimulus to the domestic textile industry; but the position has undergone change in recent years, and textile mills are increasiugly interested in forward inte- gration into the garment industry. While there may be short term problems of reconciliation of interests of small and large firms, it would be advanta- geous to encourage competitive strength through efficient integration, parti- cularly for exports (7.12-7.18). 1.49 The popular image of the garment industry as one requiring little capital in relation to employment and value of output masks the real need for considerable working capital, specially for export oriented production.  - 0 - To achieve its growth potential, th:le industry needs financial credit on a substantial scale and easy access to some imported inputs (7.19-7.23). Poolwear 1.50 w-hile rubber and plastic footwear are produced mainly in a few large plants, leather products are produced by a large number of small-scale units as well as a few large factories. The industry is labor intensive, and has been an active exporter in recent years. Some of the problems which arfect exIort growth prospects are (i) the relatively small size of plants, and (ii) raw materials shortage. In common with other small-scale industries, this industry needs Government and institutional help to obtain financial credit for expansion. It will also need to develop greater marketing capabi- lity for exports. It could have significant implications for regionally dispersed employment (8.1-8.11).  II. INDUSTRIAL GRO TH AND GOVERNMENT POLICIES Introduction 2.1 Manufacturing industries occupy a relatively small but significant place in the Philippine economy. The record of growth in recent years is generally recognized as having bexen slower than it was during the 1950's and early 1960's, and considerably less than the perceived potential of the sector. Industry accounted for about 21 percent of Net Domestic Product - in 1963; its share declined gradually to about 18 percent by 1969, and thereafter has risen back to about 21 percent for 1972. It appears that through the decade of the 1960's,, while the economny grew at an average rate of about 6 percent per year, the output of manufactures grew at an average rate of about 5.2 percent per year. It is only in the past three years that this trend has been reversecl, and industrial output has grown more rapidly than the economy as a whole. -In the past year, Government has taken various measures to make investment in industry more attractive for investors and entrepreneurs, and it is anxious to develop a healthy basis for further growth. This first chapter deals with the major issues relating to the availability of funds for industrial investment and the structure of fiscal incentives and tariffs. 2.2 FiLipino industries are generally oriented to the needs of the domestic market. Up to 1969 manufactured exports (excluding traditional products related to sugarcane, coconut, pineapple, abaca and tobacco) accounted for a mere 6 or 7 percent of total exports. Since then, largely in response to changes in the exl:ernal value of the Peso, exports of various manufactures have shown a buoyanl: trend; and in 1972 they accounted for about 13 percent of total exports. Conscious of the scope now available for industrial activity and employment directed at foreign matkets, the Government is keen to develop a healthy base for long-term growth. It has recently taken various measures to encourage export industries, and would like to extend them methodically. Problems and prospects of eixport industries, and considerations for policy are dealt with in the next chapter. 2.3 Data on employment der:Lved from the Annual Survey of Manufacturers (ASM) are not entirely consisteni: with figures from the population census and other sources. It appears that iLbout 1.4 million persons were deemed as employed in the manufacturing sector in 1970; about 404,000 or 29 percent were recorded as employed in "organized" industries covered by the ASM, of whom 332,000 worked in establishments employing 20 or more workers and 72,000 worked in small establishments wLth 5-19 workers. The "residual", numbering almost one million workers, were reported as employed in the "unorganized" 1/ Calculated at 1967 constant prices and shown as. percentage of NDP instead of GDP following th44 practice in National Income Accounts data.  - 12 - small scale sector, for which very little reliable information is available. There are indeed numerous small scale and cottage industries in the country, for which only partial information is available in concerned Government agencies; but it is not at all clear that they employ a million workers. This figure probably also includes many part-time and unemployed workers, who would count as small scale and cottage industry workers for census purposes. 2.4 The Government is at present responsive to the problems of regional economic disparities and attaches special importance to the role of small scale industry as a potential balancing factor. There is indeed a prima facie case for examining the role that it can play in extending industrial employment to the less developed regions. Even more important perhaps is the need to. improve productivity and earnings of small scale and cottage establishments, and to develop their export potential. These questions are dealt with in Chapter IV. Investment in Industry 2.5 Statistical information on investment in industry is rather limited, and inadequate for detailed conclusions. The Annual Survey of Manufactures (ASM) data on fixed capital formation are hardly usable, as they are known to suffer from gross underestimation and varying coverage from one year to the next. A more useful estimate of industrial investment trends appears possible on the basis of National Accounts data. An analysis of information available for industrial projects registered with the Board of Investments (BOI) in 1968-72, (which account for about one-quarter of total industrial investment in the country during that period), suggests that durable equipment accounts for about two-thirds of total investment in the manufacturing sector, And the remaining third relates to non-equipment components. Applying this ratio to National Accounts data on investment, an exercise has been attempted for the years 1968-72 (Table II-1) which suggests that, measured at constant prices, manufacturing investment has practically stagnated during these five years; and there was a noticeable downtunn in 1972. 2.6 Several factors have contributed to the depressed investment trend in recent years. First, the performance of the economy as a whole was generally sluggish. In the years 1967-72, while GNP grew at an average annual rate of 5.5 percent, total investment in fixed capital formation hovered around P 6,500 million (at 1967 constant prices): expressed as a percentage of GNP, it declined from 23 percent (1967) to 18.3 percent (1972). The share of investment in manufacturing, industry in this total actually increased a little, from 28 percent in 1967 to 30 percent in 1972; but its stagnation in terms of real value reflected the sluggishness of the overall economy. The bulk of manufacturing capacity is domestic market oriented, and the slow growth of domestic incomes and demand had a substantial effect on capacity utilization and new investment in the manufacturing sactor. It is also worth mentioning here that the growth of several sub-sectors of industry in the early 1960's had created production capacity in excess of current demand; this continued to remain underutilized longer than could have been envisaged, with consequent adverse effects on profits.  - 13 - 2.7 Second, the movements of private sector savings from year to year have been rather.erratic. Between 1967 and 1972, they ranged between a high figure of P 3,358 million and a low figure of P 1,832 million; the annual average for the.6 years was P 2,512 million. The range of variation was almost as great for the corporate sector as for households and unincorporated enterprises. Reported growth in the value of equity of existing enterprises has fluctuated between P 50 million and P 200 million per year during these years. Hence the funds available for investment in industry have been quite limited. The paid-in capital of new enterprises has ranged around a level of P 100 million per year in i-ecent years. 2.8 Third, while the overall trend of domestic credit flows to manufacturing has been favorable in recent years, some important components have shown a sharply downward trend. According to Central Bank statistics, loans granted to manufacturing industries by the Development Bank of the Philippines (DBP), private development banks, and rural and savinZs banks, in the years 1970-72 amounted to only P 40-60 million per year, as compared with P 200-400 million per year in 1968 and 1969. The most important element in this decline was the DiP, which had to curtail its new loans sharply when the Peso was devalued in 1969-70 and the Bank had to pay out large sums of money to honor foreign repayment guarantees for which it had been carrying the exchange rate risk itself. It did not have the resources to maintain its earlier rate of lending to industry at that time. Non-Bank financial institutions stepped into the breach to an extent; their lending to the manufacturing sector rose from P 48 million in 1969 to P 116 million in 1972. This increase was largely directed to the working capital needs of existing industries. Philippine manufacturers depend very considerably on imported inputs, and devaluastion of the Peso in 1969-70 had increased their domestic currency requirements very sharply. Only relatively small amounts of these additional loans could be used for long-term investment. The table below summrizes the overall credit position: . Credits Granted to Manufacturing Industries, 1968-1972 / (million pesos) 1968 1969 1970 1971 1972 Commercial banks 3,583.3 3,656.2 4,055.8 5,966.2 7,391.3 Development banks 182.0 383.0 44.8 16.7 39.2 Rural banks .12.9 13.8 15.7 18.6 17.7 Savings banks 2.5 0.5 1.6 2.5 0.6 Non-bank financial institutions 19.8 48.2 83.9 71.9 116.0 TOTAL .800.5 4101.7 4 18 6,075.9 7,564.8 /1 Source; Central Bank of the Philippines.  14 - 2.9 Fourth, foreign investments in manufacturing as well as mining industries, which had been quite buoyant in the early 1960's, declined to almost neglig