Philippines - Issues and policies in the industrial sector (Vol. 2 of 3) : policy annexes

Report No. 6706-PH The Philippines Issues and Policies in the Industrial Sector (In Three Volumes) Volume Il: Policy Annexes July 30,1987 Country Department II A..a Region FOR OFFICIAL USE ONLY Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PHILIPPINES ISSUES AND POLICIES IN THE INDUSTRIAL SECTOR Volume II: Policy Annexes Table of Contents Page No. I. THE PERFORMANCE OF PHILIPPINE MANUFACTURING: A RECORD OF ARRESTED STRUCTURAL CHANGE AND GROWTH ........................ 1 A. Introduction ............................................... 1 B. Antecedents of Philippine Industrialization .... ............ 3 The Early Period: Agro Based Export Led Phase (1902-1950) ...................................... 3 Trying to Take-Off: Industrialization Through Import Substitution 1950-1960 ................................. 5 C. PhiLippine Industry 1960-85: Growth, Stagnation and Changes in Structure ................................. 8 The-Record Since 1980 .................................... 20 D. Sources o_ Philippine Manufacturing Growth 1956-1983 23 Sources of Demand Growth .25 The Supply Side Sources of Growth .27 E. Selected Problems in the Record of Manufacturing .... ....... 32 Employment and Wages: Differentiated Growth in Large and Small Industries ............................. 32 The Concentration of Industries in Metro Manila .... ...... 35 F. The Current Situation: Causes of Recent Industrial Contraction ................................... 36 G. Industrial Development in the Late 1980s: Major Issues of Concern ....................... 39 Appendix: Methodological Notes .............................. 43 II. TRADE POLICY ................................................... 46 A. Historical Antecedents of the Protection Regime: 1950-80 ... 47 B. Trade Reform in the 1980s ..... ............................ 48 Overview ............. .................................... 48 C. Tariff Reform .............................................. 49 Indirect Taxes ............ .... 54 Import Restrictions ...................................... 55 Exchange Rate Management ................................ 65 D. Current Situation and Remaining Policy Agenda .... .......... 69 Exchange Rate t1anagement ................................. 71 Import Liberalization .................................... 72 Safeguard Mechanisms ..................................... 72 Multilateral Trade Negotiations .......................... 74 Export Promotion ......................................... 75 Further Tariff Reform .................................... 75 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Page No. III. FISCAL INCENTIVES AND POLE OF BOI .............................. 79 A. History and thb Policy Context ............................. 79 Introduction .............. ............................... 79 Industrial Policy and Fiscal Incentives .................. 79 Implications for the Study of Philippine Incentives ...... 81 B. Recent Changes in Philippine Incentives ........... ........ 82 C. The Current Incentive System ............................... 86 The Incentive Law and Associated Regulations .... ......... 86 Theoretical Effect of Incentives on the Rate of Return ... 90 Impact of Incentives in Practice ......................... 92 Biases of the Incentive System ........................... 98 International Comparisons ................................ 105 The New Omnibus Investment Code .......................... 109 Recommendations for the Near Term ........................ 112 Recommendations for the Intermediate Term .... ............ 114 D. Institutional Issues ....................................... 116 The Need for a Coordinating Agency ....................... 116 The Evolving Functions of the BOI ........................ 116 Recommendations .......................................... 118 E. Conclusions ............. 119 Appendix: Me:hodology Underlying the Cash Flow Calculation of the Marginal Effective Tax Rate ..................... 122 IV. FINANCIAL ISSUES AFFECTING INDUSTRY ............................ 125 A. Financial Condition of Private Sector Enterprises and Industrial Finance Restructuring ......................... 126 Strengthening Centr.-l Bank Regulations and Supervision ... 131 Instruments and Institutional Mechanisms to Facilitate Financial Restructuring ................................ 132 Ensuring an Adequate Legal Framework ..................... 136 B. Spreads to Intermediaries and Reserve Requirements Policy ...................................... 137 C. Adequacy of Instruments and Funding Sources for Term Finance ............... .......... 141 Improving the Instruments and Conditions for Term Financing ............. 141 Broadening Funding Sources for Term Loans ..... ........... 145 Equity Financing .............. 148 D. Access to Industrial Financing ............................. 148 E. Future Roles of the Different Types of Intermediaries in Providing Industrial Finance .......................... 150 V. EXPORT POLICY AND ADMINISTRATION ............................... 153 A. Introduction ............................................... 153 B. Basic Characteristics of Nontraditional Export Industries .. 154 Small and Medium Exporters .............. I ................ 154 Large Exporters .......................................... 154 Trading Companies ........................................ 156 High Volume Manufactured Exports ......................... 156 Backward Linkages ................,,.,.,................. 157  Pag No. C. Assuring Access to Inputs at World Market Prices ........... 157 Overview of Existing Schemes ............................. 157 Export Processing Zones .....................,.,,.,.,,,1.59 Bonded Manufacturing Warehouse System .................... 159 CAO No. 3-78 . ............................................ 163 Section 106 of TCCP ...................................... 164 Major Issues on Access to Imported Inputs ..... ........... 166 Direction of Reform ...................................... 168 D. Assturing Access to Export Financing ........................ 172 CB Export Loan ........... 172 Expert Finance Guarantee Scheme: Philguarantee .....,... 178 Other Financing and Guarantee Schemes for Small Producers .................................... 183 Major Issues ...... ... ............................. 184 Direction of Reform ...................................... 186 E. Institutional Support for Export Product Development and Marketing Abroad ..................................... 189 Public Institutions ...................................... 190 Private Institutions ..................................... 192 Major Issues and Direction of Institution Building .... ... 195 F. National Institutional Mechanisms for Export Policy Formulation and Implementation ........................... 196 Philippines Export Council ............................... 197 PEAC .. . . .............. 198 Major Issues and Direction of New National Institutional Mechanisms ............................... 199 VI. TECHNOLOGY DEVELOPMENT ......................................... 201 A. Introduction ............................................. 201 B. The Record of Technological Development in the Philippines ............... 202 Indirect Macro Indicators of the General Level of Technological Development ........................... 202 Microeconomic Evidence on the General Level of Technological Development ..................... 206 Technical Human Capital Infrastructure in the Philippines ..................................... 211 The Weakness of the Institutional Set Up for Science and Technology ................................. 213 C. Key Technology Development Issues .......................... 218 Access to Foreign Technology ............................. 218 Choice of Technology ..................................... 226 Efficient Assimilation and Use of Technology .... ......... 228 Diffusion of Technology .................................. 230 Research and Development ................................ 232  Page No, D. Policy Recommendations ..................................... 232 Integrating Technology Policy into National Development Strategy .......................... 233 The Development of Technological Infrastructure .... ...... 235 Promotion of Technology Activities ....................... 236 Appendix: Technological Behavior of Philippine Manufacturing Enterprises ........................... 239 VII. GARMENTS SUBSECTOR STUDY ....................................... 247 A. Industry Performance and Structure ......................... 247 Current Levels of Activity ..................... .......... 247 Trends in Garment Exports and Domestic Production .... .... 248 Resource Use and Structure ............................... 251 Value Added, Investment and Resource Use ............... 251 Nature of Export Firms ................................... 255 Marketing Channels ....................................... 258 Domestic Market Oriented Firms ........................... 260 B. The International Trade Regime and Competition .... ......... 260 Trends in World Trade .................................... 262 IUS Limits on Imports of Textiles ......................... 264 Philippine Utilization of Quotas ......................... 266 Reasons for Limited Penetration of European and Japanese Markets ................................... 266 C. Development Conce-ns ....................................... 268 International Technology Trends and Domestic Capabilities .................................. 269 Linkages to the Economy .................................. 273 BOI Incentives ........................................... 277 Export Quota Allocations ................................. 278 Conclusions .............................................. 284 Appendix Tables .......................................... 288 VIII. ENGINEERING SUBSECTOR .......................................... 296 A. Introduction ............................................... 296 B. Production Structure ....................................... 300 C. Strategic Issues ........................................... 303 D. Technology Development ..................................... 304 E. Some Recommended Actions ................................... 306 F. Sub-Sector Issues .......................................... 307 Progressive Manufacturing Programs for Motor Vehicles and Diesel Engines ............................ 307 Problems with the PMPs ................................... 309 Areas of Reform of PMPs .................................. 312 Appendix I: Review of Metalworking Sector Study .... .......... 315 Appendix II: Plant Visits ..................................... 321 References .......................... ........................... 330  I. THE PERFORMANCE OF PHILIPPINE MANUFACTURING: A RECORD OF ARRESTED STRUCTURAL CHANGE AND GROWTH V A. Introduction 101 Philippine manufacturing industry is in the midst of an unprece- dentd4 crisis, the magnitude of which surpasses any similar episodes since the turn of this century. The growth rate of value added in manufacturing has fallen successively in every year for almost a decade--from a growth rate of 7.71 recorded in 1977 to-7.6X in 1985. Including 1986, industrial value added will hav" suffered absolute declines for three consecutive years. The successful design of measures for the revitalization of industry in the Philippines necessitates an understanding of the factors and long-term structural problems underlying the sector's performance. 1.2 Between 1955 and 1980, the share of value added in manufacturing in GDP rose from about 151 to 251. Over the same period the share of agriculture fell from about 371 to 26% (see Table 1.1), while that of services has remained remarkably stable at about 40Z. As is clear from Table 1.1, the structure of the Philippine economy has remained relatively unchanged since 1970 after the rapid change of the previous 15 years. More significantly, the proportion of employment in manufacturing has actuelly fallen between 1955 and the present, particularly since 1970. It is in this sense that the current economic crisis in the Philippines should be seen in a long-term perspective as distinguished from a view which suggests that the past 3 years have been a particular aberration. Such stagnation in industrial structure is highly unusual for a country like the Philippines and gives much pause for thought. Ir most industrializing countries, c%anges in the structure of employment are inevitably much slower than the changes in the structure of value added. But the stable (or declining) share of manufacturing employment in the total must be exceptional for a country which underwent considerable economic growth over the period. These data provide some initial clues to the current crisis in the Philippine economy: the crisis was in the making over a long period of time and only got manifested as starkly as it did because of a constellation of particular circumstances in the 1980s. 1/ The main sources for this chapter are: Power and Sicat (1971); Bautista, Power and Associates (1979); Alburo and Shepherd (1986); Hooley (1985); Baldwin (1975).  - 2 - Table 1.1: STRUCTURE OF VALUE ADDED (VA) AND EMPLOYMEWT (E) BY INDUSTRY (percent) 1955 1970 1980 1985 Sector VA E VA E VA E VA E Agriculture 37.3 59.0 28.9 53.8 25.6 51.4 27.6 49.3 Industry 21.5 15.4 24.2 16.2 33.2 15e2 31.2 14.1 Manufacturing 15.1 12.5 17.2 11.9 24.2 11.0 23.3 9.7 Mining 1.2 0.4 2.1 0.4 2.4 0.6 0.7 Construction and utilities 5.2 2.5 5.8 3.9 6.9 3.6 5.9 3.7 Services 41.3 25.6 41.5 30.0 40.2 33.4 41.3 36.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1.3 This chapter briefly traces the history of Philippine industriali- zation since the turn of the century in order to put in context the current problems of Philippine industry. Philippine industrialization may be described as a "forced" industrialization which has resulted in the inappropriate industrial structure that is found today. Hence all industrial reform is to be aimed at making the growth of Philippine industry more organic and self sustaining. 1.4 The origin of Philippine industrialization lay in two periods of dynamic growth: the export led phase of 1902-18 which lay the groundwork for the mainstay Philippine exports of coconut and sugar; and the import substitution phase of 1950-1960 when a predominantly consumer goods industry grew behind stringent import controls. In the earlier period, industry was based on the processing of domestic raw materials for export while in the later period it was based on finishing and assembling imported semi- manufactures. In the earlier period the manufacturing sector looked inward for supply and o-tward to demand, while in the later period it looked inward to demand and outward for supply. During both periodsp the sector grew under a protective umbrella--first under American protection against other tropical producers and second under protection against imports. Given such incentive regimes there was little chance for a naturally competitive industry to arise. Furthermore, the history of tax incentive laws demonstrates that the industries which grew in the 1950s needed to be coaxed into existence by the granting of over-generous tax concessions. It seems that these tax concessions were addictive: the expiring of each law spawned a new one to enable the continuance of tax exemptions. 1.5 Given these conditions, the finding of negligible total factor productivity growth over the whole period from the turn of the century to 1960  - 3 - is not surprising. During the 1950s, the various policies--trade controls, exchange controls, tax incentives--conspired to cheapen capital resulting in considerable capital formation in industry but in no growsth in total factor productivity. Another feature to note in the industrialization process during these two periods is the dependence on the US and the Government for entrepreneurship and capital. The investment in the sugar and coconut sectors was US dependent: the Philippine National Bank was founded as a Government owned Bank to fund sugar related investments. Similarly, during the 1950s many American corporations established final assembly industries behind the import barriers and were helped in capital formation through the availability of low interest long-term loans from primarily government owned institutions. The various regulations requiring different degrees of Filipino ownership for eligibility for import allocations and availment of tax incentives did help in the creation of Filipino entrepreneurship--but the class of entrepreneurs which grew in this environment grew in a manner heavily dependent on government support. 1.6 Many of the policy measures attempted in the 1960s and 1970s were designed to counter these chronic problems but failed or perversely reinforced them, resulting in the crisis of the 1980s. these origins of Philippine industrialization explain the high degree of difficulty currently being encountered by Philippine manufacturing as it loses traditional American and governmental protection and coaxing. In order to understand better this forced nature of Philippine industrialization, it is necessary to review the record of Philippine industry in the two dynamic periods mentioned in comparison with the other periods of relative stagnation. B. Antecedents of Philippine Industrialization!/ The Earlv Period: Agro Based Export Led Phase (1902-1950) 1.7 There was little manufacturing to speak of in the Philippines when the US colonized the country in 1899. The proportion of labor force employed in manufacturing was less than 5% in 1902 (see Table 1.2). Manufacturing grew at a relatively rapid rate of 4.1% per annum between 1902 and 1918 (much higher between 1904 and 1915) although agriculture still led the growth of the economy. After some stagnation, manufacturing grew rapidly again between 1926 and 1934 at an annual average rate of over 10%. The main impetus for this economic growth came from the opening up of the American economy to Philippine agriculture and agriculture based products. Philippine exports to the United States received a 25% preference until 1909, free trade with quotas until 1913 and full free trade access thereafter until the 1930s. This was thus the beginning of the Philippine sugar and coconut industries which were able to grow under the protective US umbrella at the expense of other tropical countries. The share of food manufacturing, doubled from about 25% of total manufacturing value added in 1902 to over 50% in 1918, this growth being almost fully accounted for by sugar; similarly, the share of chemical products--mainly coconut oil--shot up from about 2% to o-er 10% of the 2/ This section is mostly based on Power and Sicat (1971)  - 4 - total. Other subsectors stagnated over this period, partly because of the reciprocal openness of the Philippine market to US manufactures. It is striking that these two mainly exporting industries--sugar and coconut--have dominated Philippine manufactured exports until the 1970s. Subsequent to the 1920s, there was more balanced growth until the outbreak of the Second World War, with clothing and footwear, printing and non metallic minerals being the main lead sub-sectors. Food manufacturing continued to account for about half of manufacturing value added until World War II. The depression of the 1930s brought with it reduced demand and new restrictions against Philippine exports to the US and a consequent slow down in growth of Philippine manufacturing. Table 1.2: STRUCTURAL CHANGE IN THE PHILIPPINE ECONOMY Item 1902 1918 1961 Output /a (% of total) Agriculture 55 60 34 Manufacturing 13 12 28 Employment /a (% of total) Agriculture 78 82 71 Manufacturing 5 6 14 Output/Worker (1939 pesos) Agriculture 81 116 98 Manufacturing 302 324 403 Other sectors 139 358 483 /a Total output and employment excluding construction and services. Source: Power and Sicat (1971) p.19. (from Hooley (1968)). 1.8 The important issue to note from the Philippine pre-war experience in industrialization is that the initial impetus was a somewhat artificial, external impetus provided by US discrimination in favor of the Philippines. The United States accounted for about 13% of Philippine exports in 1900; this share increased to 44% in 1905-1915 and 70-80% from 1920 to 1940. The sugar sector continued to manifest this dependence until the 1970s. Because of reciprocal openness of the Philippine market, other manufacturing industries did not grow as they might have, given the income growth from the lead agro- based export sectors during that period. Until the early 1950s, the Philippine manufacturing sector therefore suffered from a narrow fragile base overly dependent on the sugar and coconut industries. 1.9 The other disturbing information in Table 1.2 is the very slow rise in per capita product over 50 years in both agriculture and manufacturing. It seems that labor productivity actually fell in agriculture after 1918 while it grew at less than 1% a year in manufacturing. As a result, the small increase  - 5 - in per capita income resulted essentially from the inter-sectoral shift from agriculture to manufacturing and from apparent increases in productivity in other sectors. 1.10 A growth a Pounting exercise confirms the xinding of low productivity change._ The average growth rate of 4.6X (see Table 1.3) per annum in manuf:-turing output between 1902 and 1961 is accounted for fully by the growth in capital and labor inputs. Over the whole period, capital grew by 5.52 per annum and labor by 4.12. Hence, depending on what is assumed to be the labor share (ranging from 0.5 to 0.7), the record of total factor productivity over this long period is one of negligible improvement or decline. Since growth in capital was higher in the early portion of the period, 1902-18, productivity clearly fell during that time. Table 1.3: PRODUCTIVITY GROWTH IN PHILIPPINE MANUFACTURING 1902-1961 (average annual growth rates) 1902 - 1918 1902 - 1961 Rate Contribution Rate Contribution Item of (labor share) of (labor share) growth (0.70) (0.60) (0.50) Growth (0.70) (0.60) (0.50) output 4.1 4.6 Inputs Capital 7.1 2.1 2.8 3.5 5.5 1.6 2.2 2.8 Labor 3.6 2.5 2.2 1.8 4.1 2.9 2.5 2.0 Total Inputs 4.6 5.0 5.3 4.5 4.7 4.8 Total Factor Pro- ductivity -0.5 -0.9 -1.2 0.1 -0.1 -0.2 (Output Per Unit of Input) Source: Power and Sicat (1971) (taken from Hooley (1968)). Trying to Take-Off: Industrialization Through Import Substitution 1950-1960 1.11 The 1950s constituted the most dynamic period in Philippine history in terms of manufacturing growth. As shown in Table 1.4, the growth rates achieved in the 1950s have never been repeated again. The share in GDP of 3/ Hooley, 1968 op. cit.  - 6 - value added in manufacturing rose from about 12.5Z in 1950 to 17.5X in 1960. Growth was particularly rapid in the early part of the decade. Considera^ile diversification took place with the share of food manufacturing falling to about 27Z by 1960. Other industries emerged during this period so that by 1960 textiles, clothing, metal products, machinery and petroleum products each accounted for over 5Z of manufacturing value added, in addition to the traditional industries of wood processing and chemicals (coconut oil). Table 1.4: SECTORAL GROWTH RATES OF VALUE ADDED IN CDP (percent per year at 1972 prices) Item 1950-55 1955-60 1960-65 1965-70 1970-75 1975-8J 1980-85 Agriculture 7.1 2.9 4.8 3.5 4.3 5.3 0.47 Manufacturing 12.1 7.7 4.5 6.1 6.9 6.0 -2.7 Services 9.0 5.1 4.5 4.8 5.7 5.7 0.8 NDP 7.9 4.6 4.8 4.4 6.2 /a 6.2 /a -1.23 /a CDP. Source: NEDA: National Income Accounts. 1.12 Part of this industrial growth may truly be called accidental. Although the country gained independence from the US in 1946, it agreed to various limitations on its sovereignty in return for war-damage payments from the United States. The key limitation was an agreement to keep the peso dollar exchange rate at the pre-war level of P 2 to a US dollar: moreover, this could not be changed without permission from the US, the peso was to remain freely convertible and capital movements were not to be restricted. Other limitations included: a preference to be given to Americans over other foreign nationals with respect to investment in natural resource exploitation and public utilities; denial of power to impose export taxes; requirement of free repatriation of proceeds of US investment in the Philippines. 1.13 The result of these policies was that there was a severe balance of payments crisis, towards the end of the 1940s. War damage payments had begun to decline, exports were yet to reach to pre-war levels, and imports of food, and consumption goods, in addition to the capital goods employed in recon- struction, continued to increase. With the exchange rate fixed, the response of the authorities to this crisis was the adoption of across the board import controls in 1949 followed by exchange controls in 1950. When these measures were taken, they were purely in response to the capital flight and balance of payments crisis that had erupted: they did not constitute a conscious effort to induce import substituting industrialization through protection for manufacturing ir.dustry. Nonetheless, it is now clear that they did provide a powerful incentive for investment in domestic manufacturing activities. The magnitude of the incentive may be measured by the increase in domestic  - 7 - wholesale prices relative to c.i.f. import unit values--this ratio rose by 30 to 501 within the first two years of import controls and continued to rise to about 75Z by the end of the decade. 1.14 The structure of import controls established in 1949/50 continued until 1985 despite changes and the many attempts at liberalization. The degree of control was based on a classification of commodities according to their degree of essentiality: goods were classified as necessities, essen- tial, non-essential, and luxury imports. Raw materials and capital goods, which were classified as necessities, were not subject to stringent con- trols. As a result, the import of consumer goods was tightly controlled and the share of consumer goods in total imports fell from about 401 in 1949-50 to about 241 within three years and further to 161 by 1960. The share of capital goods shot up from about 101 in 1950 to 40X of imports by 1960, the rest being accounted for by intermediate goods. This is consistent with a typical pattern of import substituting industrialization--growth in consumer good and intermediate good industries heavily dependent on imports of capital goods for investment and on continuing imports of other intermediate goods. 1.15 Apart from the import and exchange control policies which were in effect during the 1950s, the other main set of policies affecting the mode of industrialization during this period were a succession of tax incentive measures designed to promote industrial investment. The first act in this area was passed immediately after independence in 1946 (Republic Act 35). The Act authorized the exemption of "new and necessary" industries from the pay- ment of internal revenue taxes for a period of 4 years--these exempted taxes included income tax, sales tax, real estate taxes and advance sales tax on imported inputs, along with a few other minor taxes. There were no clear definitions of "new and necessary" but the Ministry of Finance administered the Act quite liberally. There was little response to the Act until the import controls went into effect in 1949-50. Subsequently, RA 35 was replaced by Republic Act 901 in 1953 which extended the exemption list to custom duties and the exemptionl,up to 1958. There was also a clearer definition of eli- gible industries -/ and a minimum investment criterion (US$100,000) was introduced. In the ten years between 1950 and 1960 about 1,000 product lines were exempted of which one half were accounted for by food manufacturing, textiles, basic metal products, and chemical industries. 1.16 As the provisions under RA 901 were about to expire, the industries receiving these incentives exerted great pressure for the extension of exemp- tions: the result was the enactment of the Basic Industries Act in 1961 (RA 3127) and an amendment in 1963 (RA 4093) which clarified the list of Basic Industries further. In the following years, about half of the firms receiving incentives under these acts were existing firms established under the earlier 4/ Paper and paper products, medicinal and pharmaceutical products, rubber products, electric motors, household and kitchen utensils, industrial abrasives, iron and steel products, processed local fuels, chemicals, copper products, refraction, processed food, textiles and fiber, fertilizers, agricultural equipment, refrigerators and air conditioners.  - 8 - ircentive acts. Finally, the Board of Investments came into being in 1967 with the passage of the Investment Incentives Act (RA 6135) (the provisions of RA 6135 and later changes are discussed in detail in Chapter III). Other special incentives have also been provided to specific industries at different times--cottage industries, textiles (1964-70), fertilizers (1961-66), and chemicals (1965-69). 1.17 In addition to these tax incentives, a low interest rate policy was pursued through the 1950s: The Central Bank maintained a rediscount rate of 1.5% between 1954 and 1957 and between 3% and 7.5% in the rest of that decade. Along with these low interest rate policies, the favored industries governed under the incentive laws also had preferential access to long-term financing from the Government's long-term lending institutions. With the import control regime in operation these industries also received preferential allocation of imports and foreign exchange. 1.18 These policies combined to produce higher (relative to the rest of the world) prices in the domestic market of finished goods which were subject to import controls, and relatively low prices of imported inputs which the overvalued exchange rate and import policy permitted. The private sector responded to this set of incentives with alacrity and the foundation of Philippine industry was thus laid. Foreign investment, mainly American, also responded to these incentives and leapfrogged the import barriers to produce goods which could no longer be exported to the Philippines. The balance of payments data are graphic in showing the rise of foreign investment in the Philippines during the 1950s, ranging between $50 to $100 million in most years between 1954 and 1960 and falling to a trickle thereafter when imports controls were lifted. 1.19 Tariff policy had remained unchanged between 19C9 and 1957 when the first broad ranging tariff law was enacted. Tariffs had been unimportant prior to that given the tariff preference agreement that existed with the United States until 1956. The new tariff structure was in line with the prevailing pattern of import controls; consumption goods were subject to the highest average tariffs (64X), followed by intermediate goods (25%) and capital goods (16%). The average for all manufacturing in 1961 was about 46%. Until the decontrol of 1960-62, the tariff regime did not perform a protective function because of overlapping and comprehensive import controls. C. Philippine Industry 1960-85: Growth, Stagnation and Changes in Structure 1.20 The phase of industrial growth based on easy import substitution came to a close toward the end of the 1950s. The growth rate of manufacturing declined to less than 6% per year by the end of the decade: a significant drop compared to the 12% growth rate posted in the first half of the decade. Nonetheless, a major structural change had taken place in the economy in terms of sectoral shares of national product and considerable investment, both foreign and domestic, had taken place in manufacturing. It appears that there was substantial employment growth as well in manufacturing during this period. The employment share of manufacturing rose to 12.5% in 1956 as com- pared with about 7% just before the War in 1939. There was also a measurable  - 9 - increase in the gross investment rate from about 13-14X in the early part of the decade to about 16X at the end. Since all of these changes took place behind tight import controls, the economy also became much less open over this period. The share of exports and imports fell from about 13-15% each in the beginning of the 19509 to about 101 by 1960. It was this constraint on imports, along with some decline in the investment rate in the mid-1950s, and exhaustion of the easy import substitution opportunities that led to the slowing down of the economic engine. 1.21 Over this whole period, the exchange rate had been fixed at P 2 per US dollar, but in reality, a multiple exchange rate system had come into