Small enterprises and development policy in the Philippines : a case study

Ic-I SMALL ENTERPRISES AND DEVELOPMENT POLICY IN THE PHILIPPINES: A CASE STUDY by Dennis Anderson And Farida Khambata Series: Studies in Employment and Rural Development No. 66 Division: Employment and Rural Development Department: Development Economics Development Policy Staff International Bank for Reconstruction and Development This report (i) describes the size and regional distributions of industrial development in the Philippines; (ii) examines the incidence of leading sector policies on small and large scale industries, and their effects on incomes and employment in each; and (iii) presents an ex post evaluation of financing and extension programs specifically aimed at increasing employment and incomes in small scale. This study is one of a series being prepared under the World Bank's research project on small enterprises in developing countries (RPO 671-59). The views and interpretations in this document are those of the authors ard should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. Washington, D.C., October 1980 ACKNOWLEDGEMENTS The following report is one of a series of case studies and surveys of small enterprises in developing countrias being financed by the World Bank's Research Committee CRPO 671-59). The aims of this research are to examine the role of small enterprises in providing employment and earnings opportunities, and to compare the experiences of different countries with various policies. Since it is part of a research project, the findings and views expressed in the report are not necessarily those of the World Bank. The present study began in May 1978 in collaboration with the Ministry of Industry. The Development Bank of the Philippines, the Industrial Guarantee and Loan Fund, the Private Development Corporation of the Philippines and several private banks and investment houses were all most generous in providing information about their programs and experiences. The NCSO were also helpful in providing access to preliminary tabulations and worksheets, and the University of the Philippines' Institute for Small-Scale Industries gave us some of their research material. The help and co-operation of the staff of these institutions is gratefully acknowledged. It does not follow, of course, that they necessarily agree with the findings, or that theywe in any way committed to them. Carlos Singer did the background statistical work on the text tables and annexes, and was responsible for reviewing source material. Mrs. Fajardo was general consultant to the project, and directed the interviews and the review of file data reported in Chapter IV and V. Mrs. Tengra administered the research budget and contracts. - ii - Comments and discussions on the earlier drafts of various chapters, and on the progress of the study, were kindly provided by Raphael Sison, Rodolfo Manalo and Andres Castillo of DBP; Tomas Tan of PDCP, Mrs. Mijares of IGLF, and Evelyn Go (now with ADB). Tomas Paterno, oila Pedro, Nanette Agdeppa, Emanuel Almonte and Father Peron in the Ministry of Industry; and Cesar Macuja, Al Berry, Bob de Vries, Mike Gould, A Ted Hawkins, Larry Hinkle, Tan Little, Ernie Pernia, Joe Pernia, John Powers, Yung Rhee, Marcelo Selowsky, Khalid Siraj and Larry Westphal, Ernie Pernia was also kind enough to arrange for a seminar on the report at the University of the Philippines in July 1980. Table of Contents Page Acknowledgements VOLUME I - The Main Report I. Outline - Scope of the Report . . . 1 - Experience of the Financial Institutions . . . 6 - Industrial Extension . . . . . . * . . . * . . 10 - Industrial and Regional Development Aspects of Small Industries d u s * . * * s * 15 - Purposes of Small Enterprise Programs Reconddered * * * * * * * * * * * * * * * . 24 - Technical Supplement on Interest Rates .and Investment Criteria i t * . i * * * * * * 32 - Conclusions . * o * * * . * . * . * * * * * 37 II. Experience of the Financial Institutions (A): Individual Experiences - Introduction * * . * * * * * * * * * . * * * 39 - Commercial Banks * * * * * * * * . * * * * * * 40 - Development Bank of the Philippines * . * *5 55 - Private Development Corporation of the Philippines * * * * * * * * . * * * * * * * * 60 - Private Development Banks * . * * * * . . * 6 64 - Rural Banks * . * * . . . * . *. . . . . . . 67 - Non-Bank Financial Intermediaries . . . . . * 70 - Lending by Finance Companies and Investment Rouses to SSEs * . . . . . * * 71 -2- Page III. Experience of the Financial Institutions: Qb) Conclusions . . . . . . . . . . .73 - Privately Raised Resources . . . . . . . . .73 - Government Programs: (a) The Larger Small Industry Loans . . . . . . I . I. . . . 1 .77 - Government Programs: (b) Cottage (or Home) Industry Loans . . . . . . n 7 . . .78 - Government Programs: (c) Working Capital Finance . . . . . . . . . . c . . . . . . 79 - Postscript: Further Changes in 1979 . . . 81 - Summing Up . . . . . . . . . . . . . . . 81 IV. Industrial Extension , . . . . . . . . . . . .83 - Introduction . . .. . . . . . . . . . . . . .83 - Project Preparation Services (The MASICAP Program) . . . . . . . . . . . . . 84 - Advisory Services (The SEAC Program) 103 - Conclusions . . . . . . . . . . . . . . . 111 Addendum to Chapter IV - Effects of the Costs of Industrial Extension and of Enterprise Failure Rates on the Economic Returns to Small Enterprise Projects , . . . . . . . . . . . . 114 V. Small Enterprises and Industrial Development 116 - Data: Sources and Definitions . . . . . . 117 - Aggregate Changes in Size Structure Over Time . . . . . . . . . . . . . . . . 119 - Enterprise Expansion . . . . . . . . . . 122 - Enterprise Closure Rates . . . . . . . 126 - Further Micro Data: Sources and Uses of Finance . . . . . . . , . . . . . . , 132 - Product Markets . , ., . . . 136 - Sectoral Patterns and Trends in Size Structure , . . . . # . . . . . . . . . 139 - Industrial Policies and the Size Structure of Industry . . . . . . . , . . 4 . , 146 - Conc 1usions . . . . . . . . . . . . . . 160 -3- Page VI. Small Enterprise and Regional Development . . . . 162 - Urban-Rural Population Data . , . . . . . . . 162 - Manufacturing Employment in Urban and Rural Areas . . . . . . . . . . . . , . . . . . , 165 - Regional Distributinn and Growth of Manufacturing Employment . . . . . . . . . , . . . . . I . 1 170 VII. Small Enterprise Programs and Employment Policy: A Reassessment of Purposes . . . . . . . . . . . . . 185 - Introduction ,. . . . . . . . . . . I. . , . . .185 - Unemployment and Underemployment: Levels and Trends . . . . . . . . . . . . . . , . , . . . . .188 - Changes in Real Wages Over Time . . . . . . . . 191 - Earnings in Self Employment . . . . . . . . . . 201 - Incomes and Occupational Mobility . . . . . . . 207 - Implications for the Small Enterprise Program . 210 - Labor Intensity in Small Enterprises ..... 215 - The Demand for Labor in General . . . . . . .. 219 - Conclusions . . . . . . .... . . .. 221 VIII. Uncertainties in the Capital Markets, InterEit Rates and investment Criteria . . . . . . . . . . . . . 224 - Introduction . . . . . . . . . . . . . . . . 224 - Uncertainties in the Capital Markets . . . . . . 226 - Externalities, Economies of Scale and Interest 238 Rates , . . . . . . , . . . . . . . . . . . . , 238 - Appraising Small Enterprise Programs . . . 244 -Bibliography . . . . . . . . . 258 VOLUME II - Annexes SMALL ENTERPRISES AND DEVELOPMENT POLICY IN THE PHILIPPINES: A CASE STUDY VOLUME I The Main Report I, OUTLINE 1.1 This report presents a review of the small and medium industry programs in the Philippines, and examines their relation to industrial and regional development policies. It also reviews the available evidence on the size-structure of industrial development by region and over time. This chapter presents a self-contained discussion of this material under one heading. The main conclusions of the report are also summarized at the end of this Chapter (paragraphs 1.36 et. seq). The Scope of the Report 1.2 In most developing,countries, manufacturing employment is predominantly in households, workshops and small factories. A large share - particularly in small-scale manufacturing - is also found in the rural and urban areas of agricultural provinces, serving the markets generated by agricultural growth. But institutional finance and the training and advisory services for industry are heavily concentrated on large-scale manufacturing in metropolitan areas. The idea behind small 1/ enterprise programs is to extend finance and supporting services towards small industries with the purposes of improving earnings opportunities for a greater share of the labor force, and achieving a more regionally balanced growth of industry. 1.3 These were broadly the purposes behind the small and medium industry programs introduced in the Philippines in 1974. In the previous twenty years the labor force had increased from 7 to 14 million, and by the mid '1970s 500 thousand people were entering the labor market each year; 1/ A note on the use of the term 'small enterprises' is provided in the Annex to Chapter 1, -2- there was (and remains) in consequence a continual pre-occupation about providing gainful employment opportunities for the labor force. The bulk of industrial investment was taking place in Manila and its surrounding regions, and had been facilitated by an extraordinary growth of the organized financial sector, at over 11% per year in real terms, from an already large base, over the previous 20 years. In 1977 for instance, 87% of the total loans and investments of the private commercial banks (the largest financial institutions in the country) were in Metropolitan Manila, with 83% of their industrial lending being to medium and large scale industries. In contrast, workshop and factory-based manufacturing employment was both more extensive and growing more rapidly in the provinces. This can be seen from the estimates provided in Table 1.1: Table 1.1: DISTRIBUTION AND GROWTH OF MANUFACTURING EMPLOYMENT BY REGION, 1960-75 Distribution Growth Rate Region and Scale of Activity %, 1975 % per Year Manila and Rizal (Metr-politan Manila): - Household Manufacturing 9 6.9-- - Establishments with < 10 workers 4 4.4 - Establishments with > 10 workers 17 3.8 30 5.0 Provinces: - Household Manufacturing 41 0.4 - Establishments with < 10 workers 13 8.3 - Establishments with > 10 workers 16 7.4 70 2.6 Total 100 3.2 /1 There is quite a large margin of uncertainty in this figure. Source: Text Table 6.4, -3- The high growth rates of establishment-based production in the provinces. are a comparatively recent happening, and apparently reverse a trend experienced in the 1950s (and probably much of the 1960s) when agricultural development was given a low priority. 1.3 The distribution of industrial employment by scale and by region are to be examined at length in the following report. But it might be noted, first, that the declining share of household manufacturing in the provinces should not be interpreted negatively. It reflects the structural changes towards establishment-based production resulting from gradual improvements in infrastructure and transport services in the provinces, and from the markets generated by agricultural growth. Second, a significant portion of the growth of medium and large scale industry has its roots in the expansion of once small firms. In the 1970s, an increase in the rate of growth of provincial industries was expected as a consequence of a new emphasis to be placed on agricultural development; it was this that led to the idea of a regionally based program to address constraints on the flow of finance and supporting services to small and medium industries. 1.4 The first half of this report (Chapters 2, 3 and 4) presents an assessment of this program over its first five years. The program has several elements, including finance, extension and advisory services, training and entrepreneurship development; but the following considers finance and extension only, since the task would otherwise have been too great, Although the program was financed and administered entirely 1/ An outline of the arguments can be found in the ILO (1974) report. Most of the Government documents and memoranda, which naturally provide more detailed documentation, have never been published. -4- by Government agencies, it was designed to encourage a greater involvement of the private sector in financing and providing services to small enterprises; much of the report is therefore concerned with assessing how far this was achieved in practice and what constraints remain. 1.4 Chapters 5 and 6 examine the regional and size distributions of industrial development, and how they were affected by leading sector policies; it also presents interview data on the origins and growth of firms. Apart from providing basic descriptions on the changing size and regional structure of industry, these chapters seek to clarify how the policy environment is affecting the nature of employment opportunities in the country, and to discuss its implications for the small enterprise programs. While the programs are aimed at improving earnings opportunities, it is apparent that such opportunities - and thus the efficiency of the small enterprise programs - are overwhelmingly determined by leading sector policies. The indirect effects of investments in agriculture, and of industrial incentives and tariff policies on the incomes of those employed or seeking employment in small enterprises, are far more significant than those of direct interventions, such as financing and extension programs. Equally, the suggestion that the indirect effects of leading sector policies are important does not imply that direct interventions are not merited, If for instance they bring about a more rapid emergence and growth of small enterprises, as is currently happening with small-farmer agricultural projects in the Philippines, the benefits -5- of addressing the constraints in the capital markets and on the flow of supporting services are increased. 1.5 Chapter 7 reassesses the purposes of small enterprise programs in the light of the current pre-occupation with improving employment and earnings opportunities in the country. It winds up with a discussion of the use of the capital-labor ratio and the rate of return to capital as investment criteria, favoring the latter. The choice of criterion has implications beyond that of deciding whether or iot a particular project is worthwhile, however, although this is undoubtedly one implication. As in other countries, the understandable pre-occupation with creating jobs for the labor force has led to preferences for financing fixed assets over working capital, for assisting new or expanding enterprises over those simply seeking modernization without expansion, and for financing direct investments in industry over those in services and trade. The elementary point to be established is that what the majority of the labor force are seeking is not simply more employment, but more gainful employment; the programs should thus be regarded as an agent of structural change, and support profitable activities that offer prospects of an income gain, irrespective of whether an expansion of employment, of fixed assets, of manufacturing or trading, or of working capital is involved. As will be seen, this suggests new points of departure for the future of the programs. 1.6 The final chapter '(8) is a technical supplement, and discusses the theory underlying some of the earlier chapters. It provides a formal discussion of uncertainties in capital markets and their implications for -6- interest rate policy. Some analytical questions on project selection criterion are also taken up in this chapter, ExDerience of the Financial Institutions (Chapters 2 and 3) 1.7 As of December 31, 1978 the total assets of the Philippine financial sector amounted to P 163.1 billion. Table 1.2 below indicates the types of institutions holding assets in excess of 1% of the total assets of the Philippine financial system: Table 1.2; PERCENTAGE DISTRIBUTION OF THE ASSETS OF TIE PHILIPPINE FINANCIAL SYSTEM AS OF DECEMBER 31, 1978 Commercial Banks 55.1 Development Bank of the Philippines 11.2 Finance Companies 4.8 Private Insurance Companies 4.7 Investment Houses 2.9 Finance Companies 2.9 Rural Banks 2.5 Savings and Mortgage Banks 2.3 Land Bank of the Philippines 2.1 Others 11.5 Total 100.0 Source: NEDA The sector has two major components: the banking system and the non- 1/ banking system. The former comprises commercial banks, rural banks, thrift banks, development banks and savings and loan associations, and which together accounted for 88% of loans and investments outstanding of the financial sector in 1978. The non-banking system accounted for the remaining 12% and consists of government sponsored insurance programs such as the Social Security System, the Government Service Insurance 1/ The roles of the various financial institutions are summarized in Annex 2 of Chapter 2. -7- System and the Agricultural Credit Administration; it also includes institutions such as investment houses, finance companies and public and private insurance companies. 1.8 The rapid expansion of the financial sector since 1950 has been associated with a corresponding expansion of branch networks throughout the country. This was mainly to broaden the resource base; the commercial banks for examDle now have nearly 800 branches in the provinces and about 500 in Metro-Manila; 70-75% of their incremental resources came from deposits in the years 1976 and 77. But as noted earlier, lending to small enterprises by financial institutions accounts only for a small share of their total lending to industry and commerce. As far as institutions in the private sector are concerned, four reasons are commonly put forward to explain why the share is small: (i) The risks of loans not being repaid, and the administrative costs, are both too high to l/ develop a lending program for small enterprises; (ii) Institutional biases in favor of lending to the corporate sector; historically the private financial institutions evolved expressly to mobilize resources for the corporate sector, and indeed commonly have joint ownerships and directorships; Ciii) Transactions costs faced by the owners themselves of small enterprises in applying for institutional credit; and (iv) Interest rate ceilings and other structural constraints affecting the returns to lending to small enterprises. I/ Risks and administrative costs are jointly referred to as transactions costs. Risks are defined below as being the probability of loans not being repaid. -8- Ci) and Cii) led to the decision to finance small enterprises through the Government-owned Development Bank of the Philippines CDBP) on the assumption that the economic returns would outweight the private returns perceived at the time by the private sector. The Government also introduced a rediscounting facility, known as the Industrial Guarantee and Loan Fund CIGLF), with risk guarantees built into it, and which was available to accredited private sector institutions; besides widening the reach of the program, IGLF was also intended as an inducement to the private sector to develop lending programs to small and medium industries, and to begin to lend to them using privately raised resources. (iii) led to the establishment of an extension service, and is discussed further below. Less attention was paid to (iv), however. What were the results? 1.9 Financial institutions in the private sector still make few short-term loans and even fewer long-term loans to small enterprises out of privately raised resources, except to a small minority of borrowers of good standing. The reluctance to lend can be explained in part by the administered interest rate structure, which allows maximum effective rates of 16% and 19% respectively for short-term and long-term loans. The value of compensating business often raises the returns above these levels, but it is only significant for prime - mostly large scale - borrowers. In 1978, the weighted average costs of resources to the commercial banks were estimated to be 13.3%, and would have been significantly higher had more long term resources been raised; in 1979 the weighted average costs rose for several reasons, with the consequence that both actual and planned lending to small enterprises were cut back further. 9 Analysis of the administrative costs and risks shows that lending to a broader class of small enterprises would be unprofitable to the private sector under the present structure of financial incentives. This conclusion applies less strongly to short-term than to long-term lending, in which the risks and administrative costs are greater while the spreads between borrowing and lending long are, quite probably, narrower, 1.10 Hence lending by the private sector to small enterprises is unlikely to develop unless there is a drop in the costs of resources such that lending becomes profitable within the existing constraints, or unless there is a lifting of the constraints themselves. These arguments are familiar, However, in the following report it is suagested that financial incentives alone are unlikely to induce the private sector to lend out of its own resources. The experience of DBP and IGLF shows that the risks of lending to small enterprises are (as expected) initially high, and reducible only through a sustained institutional development effort over a long period. One element in the risks is undoubtedly the higher closure rates of small enterprises, which averages around 4% per year, But a larger element stems from (i) poor information; (ii) the tasks of developing screening, appraisal and supervision procedures, and of training staff; and (iii) the tasks also of developing internal control procedures to eliminate diversions and misuses of funds, Some of the smaller private financial institutions in the provinces, who are able to administer very small loans efficiently, could not handle the larger small loans available through IGLF, and also left the program. In the first five years of the program the risks declined noticeably from high levels, almost wholly on account of the accumulation of experience and the development of procedures within the institutions involved. Hence our conclusion is that the role of the Government's program in - 10 - shouldering the early costs and risks of providing small enterprises with access to institutional credit is being fulfilled; but that the impact of the program would be greatly enhanced if the structural constraints preventing the flow of private financial resources to small enterprises were addressed. 1.11 Both DBP and IGLF have also concentrated on term-loans, although short-term loans are probably in as great a demand, are less risky and likely to be more attractive to the commercial banks. For these reasons we have suggested that the programs might introduce short- term lending. Lending to small commercial enterprises would help small industries further by opening up markets and providing additional conduits for working capital and trade credits. Other suggestions are for a re-structuring of incentives at the 9maller loan end of IGLF, and possibly a removal of the floor limits: the smaller loans (in terms of numbers) are in greater demand; there is no prima facie evidence that they are more risky; as a percentage of loan size, they are not prohibitively costly to administer if accompanied by a decentralization and simplification of lending procedures; and there are institutions in the provinces capable of handling very small loans efficiently. Finally, a forum for the exchange of views and experiences between institutions is suggested, together with the establishment of a common credit record keeping system. Industrial Extension (Chapter 4) 1.12 At the beginning of the program two types of extension services were intorduced into the provinces;,both were administered by the Ministry of Industry and were intended to complement.the financing 1/ pograms discussed above. One (known as MASICAP) provided assistance 1/ Medium and Small-Scale Industries Co-Ordinated Action Program, - 11 - in the preparation of projects for finance, It was introduced since previous experience had shown that simply making finance available without the supporting promotional and advisory services was in itself likely to lead to a low demand and, where the demand did exist, to unsatisfactory proposals being put forward to the institutions. The idea was that once the extension and preparatory work had been completed for a sufficiently large number of projects, the information and experience gained would permanently reduce the average transactions costs all round, and financing would procede independently of the extension service. As noted in the text, the service was and is not intended to be a permanent aspect of the financing programs. The actual decisions to lend are of course the responsibility of the financial 1/ institutions. The other service (known as the SBAC program) was purely advisory in nature, and offered what are termed entrepreneurial counselling, business management, technical, marketing and referral services. For the most part, these services have been turned to by people planning to set up or expand their businesses in various ways, and are seen as centers for disseminating ideas and information on business opportunities and business practices. 1.13 Extension services for small non-agricultural enterprises are different in nature to those for agriculture. This is possibly because more experience has been gained with the latter, which are able to provide advice on husbandry and farm technologies, and more generally to act as an agent for up-grading farming practices in a region. As discussed in the text, however, a basic difficulty of 1/ Small Business Advisory Centers. - 12 - industrial extension stems from the heterogeneity of small business activities; they are found in practically all industrial sectors and,even within narrowly defined sectors at the 5 or 6 digit level, often differ in financial and technical respects, and in the location of markets and sources of raw materials supply. In the preparation of projects, an independent technical and business budget analysis is required for each case, based on an assessment of local wages and prices, the technologies available, and of market outlets. Exceptions are comparatively small projects for which simple checks on costs and profits will often suffice, and working capital finance, which can generally be tied to sales orders and collateral. The heterogeneity of small enterprises naturally restricts the range of advice that can be offered, raises the costs of extension, and requires the extensionsists to draw on the specialized trading, industrial and research associations: i.e. to act as referral services. Both programs have funcitoned within these limitations and, with one general exception, the main issues ahead relate to the supporting financial and non-financial services that exist outside the programs, 1/ 1.14 The MASICAP program has worked with a large number of enterprises in obtaining institutional finance that would otherwise have not had access to it, The existence and nature of the program largely ensures this, since people accustomed to drawing on institutional finance are generally not 1/ Since this study was prepared., the services provided under the MASICAP program have been formally taken over by SBAC, Below, the old acronym is retained for convenience, - 13 - referred to MASICAP by the institutions and have less need to draw on its services. The costs of the program have also been low, about 3% of project investments Cor 5% if a small number of comparatively large projects are excluded). The risks of the loans made, while not above the averages experienced by DBP and IGLF in the first five years, remain high however, and are undermining the financial returns. Closure rates of the enterprise assisted are also high - more than twice the rate experienced by small enterprises not assisted. Analysis of records sugests that there were three main causes of arrears and closures, other than 'natural' causes: (a) optimism (by both owners and extentionists) about sales and profits, and which left many enterprise vulnerable to shortfalls in markets and supplies; we have suggested that supervision and ex post accountability would help make forecasts realistic; (b) a tendency to concentrate on new rather than (the large number of) existing enterprises that had already established their businesses and which are much less risky to finance; and (c) with respect to arrears, the financial institutions themselves were still in the throes of developing their procedures, as discussed above. 1.15 Apart from these internal factors, the dependence of the program on DBP and the absence of working capital finance both restrict what might be accomplished. The dependence on DBP, which is having to shoulder a disproportionate share of the risks of financing small enterprises in the country, arises from the factors discussed above; that is, the structural constraints inhibiting lending by the private financial sector and, within the Government's own financing programs, the point that IGLF lending is unprofitable in the smaller loan range - 14 - (less than about P150,000 or $22,000). Approximately 75% of HASICAP's clients request loans are in the small loan range, with 45% being below the current IGLF floor limit of P50r000 (87,000). 1.16 The value of SBAC's services is less tangible, though perhaps no less important with 7,000 new manufacturing enterprises emerging in the country each year. The services appear to be widely sought, particularly during the transitional stages of a business's life: e.g. from those seeking advice before or during startup; or during periods of significant growth, when recourse to specialized management and supervisory skills, a search for new markets'or other major changes are being contemplated. Most of the services, however, have their counterparts in the private sector - in accounting and trading firms, in the banks and investment houses. and in the soecialized trading, industrial and research associations. With respect to services that are in competition with the private sector (as with the consulting and accounting services), there is the possibility that, being free of charge, they are undercutting private sector initiatives. But for those that are complementary, as with the referral services, the issue of charges is minor. The main issue here concerns the development of the institutional structure in support of industry. At present, the trading, research and industrial associations have for the most part developed round the modern sector, and are not broadly represented in the provinces; their present contributions in providing market intelligence, disseminating information on industry practices, establishing and maintaining industry standards, and in providing training and other services are, therefore, somewhat fragmentary. - 15 - Industrial and Regional Development Aspects of Small Industries (Chapters 5 and 6) 1.17 Two features of Philippine manufacturing in the past 25 years were the slow rate of labor absorption - notwithstanding high levels of industrial investment - accompanied by marked changes in the nature of manufacturing employment. Between 1956 and 1975 the shdre of manufacturing in total employment actually fell, from 12.5% to 11.4%; and the elasticity of demand for labor with respect to output fluctuated between the extremely low levels of 0.1 and 0.3. These aggregates, however, conceal underlying structural changes: in the mid' 1950s, three quarters of manufacturing employment was found in households, most commonly as a secondary source of ff-farm)income for farm families. But the share has since declined systematically in favor of wage employment in workshops and small and large factories in urban areas, in which it is more commonly a primary source of family income; in these activities the ratea of labor absorDtiQn and the elasticities of demand for labor where comparatively high (the elasticity averaged about unity in recent years). Table 1.3 shows some recent data. The growth rates, both of employment and of number of establishments, are 1/ noticeably higher in the small and middle size ranges. It might be worth examining-the reasons for this further in the light of their significance for the small enterprise programs. 1/ Previous studies based on survey data had found very low growth rates in small scale establishments. These data ignored the <;5s however, which employ the largest share of those working in small scale. - 16 - Table 1.3; GROWTH OF MANUFACTURING ESTABLISHMENTS AND EMPLOYMENT BY SCALE OF MANUFACTURING ACTIVITY, 1967-75 Type and Scale of Growth Rate, Activity 1967 1975 % per year Household Employment, 000s 827 882 0.8 Employment in EstablishmehEs (scale by No. of workers), 000s:- Less than 10 125 207 6.5 10 - 19 23 37 6.1 20 - 99 65 95 4.9 100 - 199 38 56 5.0 200 and over 268 374 4.3 1,223 1,651 3.8 No. of Establishments (scale by No. of workers): Less than 10 41,018 70,597 7.0 10 - 19 1,747 3,172 8.2 20 - 99 1,570 2,339 4.6 100 - 199 278 400 4.7 200 and over 384 481 2.9 44,997 76,989 6.9 Source: Census of Establishments and Labor Force Surveys Household employment is estimated as a residual. - 17 - 1.18 Rural-led Origins of the Structural Changes. The chanres from household to establishment-based manufacturing are occurring most rapidly in the provinces, and appear to be induced primarily by the markets generated by agricultural growth. The changes are more rapid in the more rapidly developing agricultural provinces, and less rapid elsewhere. In 1970, 68% of the Philippine population were rural, and a further 18% lived in a country-wide network of 488 towns and small provincial cities whose economic functions appear to be closely linked to local agriculture; the remaining 14% were in Metropolitan Manila and six regional cities of over 100 thousand 1/ inhabitants. Agriculture still accounts for 50-55% of the primary occupations of the labor force, and over the past 20 years provided roughly half of total labor absorption. Hence the growth of agriculture itself is capable of generating substantial markets for non-food goods and services in the provinces. Moreover, these markets (like the labor markets) are also suited for localized and labor intensive production on a small-scale: they are dispersed,for the most part consist of goods that can be produced by elementary technologies, and the comparatively poor quality of infrastructure and transport services both act as protection against external large scale production over a broad range of product groups. The extreme case of localized production is found in off-farm subsistence activities of the farm families themselves; such activities are still prevalent in the lowest income regions of the Philippines. But less extreme cases exist where the growth of rural incomes and infrastructure improvements have permitted a greater division of labor between farm and non-farm work, and for a rising share of the latter to become concentrated in workshops and small and large factories in the local urban centers. Further, 1/ There is a well documented study of conditions in rural areas by Mrs. Castillo (1977) entitled "Beyond Manila: Philippine Rural Problems in Perspective." - 18 - the growth of the urban centers themselves is now providing an endogenous source of market growth in the provinces. The evidence so far is that locally based small and medium manufacturers have been highly responsive to the growth of both local and regional markets (interview and file data on the market outlets of 500 small and medium firms are presented in Chapter 5). 1.19 The influence of agriculture on the product markets, the dispersion of the population, the advantages of localized small scale production for certain classes of products, and the growth of the provincial urban base together help to explain the structural changes from household-based to establishment-based production as agricultural output rises. They are consistent with the evidence in the Philippines that the growth of employment in workshops and factories is highest in regions where agricultural incomes are growing the most rapidly and broadly, as for instance in the small farmer rice and corn growing districts in Central Luzon, Southern Tagalog (Southern Luzon) and Mindanao. The available regional data are unfortunately not sufficiently disaggregated to document this point as thoroughly as one would like, though it is supported by studies of particular districts in the Philippines and other countries. As it is hoped is clear from the descriptions in Chapter 6, however, the changes are significant enough to be apparent even in aggregate regional data, some of which are reproduced in Table 1.4.: - 19 - Table 1.4: DISTRIBUTION AND GROWTH OF MANUFACTURING EMPLOYMENT BY REGION AND BY SCALE, 196C-75 % Distribution, 1975-= % Growth Rates, 1960-75 Establishment2L EstablishmentsL2 Households Small Large Households Small Large Metro 7anila 9 4 17 6./-'3 4.4 3.8 Luzon-- 22 8 9 1.3 8.3 9.6 Visayas 13 2 4 -1.4 6.0 4.3 Mindanao 7 3 3 2.2 9.7 5.4 /1 The percentages in the three columns on the left add up to 100, and are included here to indicate the weights that should be given to the figures in the three on the right. /2 Small Establishments have less than 10 workers, large 10 or more. /3 There is a wider margin of uncertainty in this figure than in the rest. /4 Excluding Metro-Manila. Source: See text Table 6.4. The figures are regional averages; the growth rates in the high growth districts in Luzon and Mindanao are higher than those shown in the above table. The urban growth rates in each of the regions are also broadly distributed, but tend to be higher in the high growth districts. For the country as a whole, the bulk of labor absorption in urban areas is occurring in the small provincial towns and cities, illustrating the point made above about the growth of the regional urban base. Currently, the annual rates of labor absorption stand roughly in the ratio 3.0: 2.5: 1.0 respectively for (i) small provincial towns and cities of less than 100 thousand inhabitants, (ii) Metropolitan Manila, and (iii) the six large regional cities of over 100 thousand inhabitants. 1.20 Although household manufacturing is declining overall, it is not doing so uniformly in all sectors and regions. In some it is rising -20- rapidly, as in the urban informal sector in Manila, and in the high growth engineering sectors. The declines are mainly in the "traditional" sectors such as foods, textiles and clothing, though even in these cases surveys have revealed activities in which investment and output are rising (piggeries, handicrafts, garment-crafts). Employment in garments and handicrafts in the Philippines has been further encouraged by the "putting out" of work by traders, on a system that appears in many respects to be comparable to the system once common in Japan. More generally, the incomes and conditions of employment in household manufacturing are broadly distributed; it still employs half the industrial labor force on a primary or secondary basis, and includes both the most primitive subsistence types of activities and others in high growth sectors. 1.21 Small Industries in the Long-Run. Further improvements in infrastructure and the growth of the urban base in the provinces is likely to result in a gradual reduction in the 'natural' protection of local small- scale manufacturers, and an erosion of their markets by large-scale. This has been the experience of the industrialized countries and the more recent experience of Korea and Taiwan. At present, small and large scale are not competing in a broad range of product groups. Bakeries, tailoring, furniture, sCructural concrete products and fabricated metal products, for example, are almost exclusively small scale activities at present in the Philippines, most of which are oriented towards small local markets; others,such as cotton and rayon textiles, plywood, chemicals, steel, and the manufacture of machinery are almost exclusively large scale activities, serving national markets, and in which economies - 21 - of scale are probably strong enough to offset the higher transport and marketing costs of distributing large scale's products. As these costs fall, competition is likely to occur in an increasing number of product groups and lead to a peaking and then a decline in the share of small-scale establishment-based manufacturing. The interview data presented in Chapter 5 suggest that much of the competition is likely to stem from the emergence and growth of small firms themselves; the large majority of medium and large firms begin with very small investments and expand in stages through the size structure - generally in the region of origin. Hence the role of small industries in the industrialization process is essentially a dynamic one, but with a lasting effect on the regional pattern of urban-industrial development. 1.22 Effects of the Industrialization Policies. The recent study of Bautista and Powers (1979) makes it possible to examine the incidence of the industrial tariff and tax incentives on large and small scale, and to address the questions: how did they effect the efficiency of small enterprise programs? and, what would be the effects of a transition (now being planned) to a more efficient structure of incentives? 1.23 The policies have been examined at length in a series of studies (cited in the text) and can be summarized briefly. In the 1950s industrialization proceeded under the protection provided by exchange controls and tariffs, with both leading to higher effective rates of protection for manufactured consumer goods than for capital goods. Since the early 1960s, a roughly similar structure of protection was maintained under tariffs alone, and did not change fundamentally under subsequent revisions in the tariff code. In 1967 and again in 1970 tax exemptions - mostly - 22 - on capital costs - were introduced to promote the capital goods industries and industrial exports, both of which had been thwarted by the tariff structure. The Acts that introduced these incentives also contained laws to encourage and protect foreign investments. The effects of these policies are familiar: (i) Fast industrial growth in the 1950s (at 12-15% per year) at the height of the import- substitution process, followed, once saturation set in,by slow zrowth ever since (at 4-6% ver year in the 1960s. and 5-7% in the 1970s); (ii) A labor saving bias in industrial investment; (iii) A huge shift of investable resources away from agriculture; (iv) Slower economic growth overall on account of the misallocation of investment (a) between industrial sectors, and (b) between agriculture and industry; Cv) A slower growth of economic output in the provinces on account of Ciii); and Cvi) An excessive concentration of investment in Manila on account of (v) and also of the transactions costs to firms of dealing with controls, tariffs and incentives if not located in Manila, 1.24 The tax incentives on industrial investment favored large more than small industries, though they were not used much by either on account of the transactions costs involved. The tariff structure worked against both small and large scale activities employing large shares of the labor force - but particularly against small scale. The following - 23 - table uses the estimates of effective rates of protection CEPR) by sector provided in Bautista and Powers' study to show the relative incidence of the tariff incentives on large and small, Table 1.5: EMPLOYMENT IN LARGE AND SMALL ESTABLISHMENT ACCORDING TO LEVEL OF PROTECTION 1974 /1 Effective Rate of /2 No. of Percent Emnloyed In- Protection; Range, %- Sectors Small Large > 500 6 13,1 9,8 100 to 500 20 1.5 11,7 75 to 100 9 1.6 17,1 50 to 75 8 .8 1,6 25 to 50 21 5,1 12.8 0 to 25 33 11.9 22.3 -25 to 0 5 1,6 16,2 -50 to-25 6 66,4 7,0 108 100.0 100.0 /1 Small Establishments have less than 10 workers, large 10 or more. A more detailed breakdown for different size groups was not possible from the information available to us. Note the bimodal nature of the size distribution,hou-ver, from Table 1.3, with the < 10's and the > 200's accounting for 75% of establishment based employment. /2 When an estimate is on the dividing line it is put in the upper category. E.g. and EPR of 0 is included in the 0 to 25% range. Source: See Annex Table 7 to Chapter 5. The above is the same as Text Table 5.14, and is reproduced here for convenience. See also Table 5.15. The 'underprotected' sectors would include those with EPRs of less than about 25%; about 80% of employment in small and 45% in large industries is found in this group. A similar analysis shows that employment shares in the more efficient sectors (ranked according to Domestic Resource Costs) are about 80% and 65% respectively for small and large scale establishments. -24 Hence . shift towards lower and more uniform tariffs would provide ineentives to both small and large scale to concentrate investments in the more efficient sectors. The sectoral composition of small enterprise projects in the protfolios of the financing institutions would also be more efficient. 1.25 But the main effects would be to increase the growth of the domestic markets both overall, on account of the efficiency of lower and more uniform tariffs, and in the provinces, since there would be a greater share of investment in agriculture. Any reduction of the labor saving biases in the present incentives system (or the introduction of positive employment incentives) could be expected to stimulate product markets further through favorable effects on employment and wages. Such developments would also encourage the growth of small and medium industries at the present time, in the provinces and in Manila. Purposes of Small Enterprise Programs Reconsidered (Chapter 7) 1.26 Unemployment, Wages and Incomes. The rapid growth of labor supply in the Philippines and the capital intensive development path that was followed did not act to increase unemployment, but to depress real wages and real earninss in self-employment. Unemployment'rates have actually declined all round in recent years, in urban and rural areas, among household heads, and in all age groups; under-employment rates, according to the measure used by the NCSO, also declined. Table 1,6 shows some data for 1965 and 1976;- - 25 - Table 1.6: UNEPLOYMENT AND UNDER-EMPLOYMENT RATES, 1965 AND 1976 October August 1965 1976 - - - - - Percentages - - - - - Unemployment Rate: - Urban 10.7 8.0 - Rural 4.1 3.6 Household Heads Unemployed 1.9 1.2 Unemployment by Age Group: 10 - 24 years 12.2 9.5 25 - 44 4.1 4.0 45 - 64 2.9 2.4 All Ages 6.2 5.0 /1 Visible under-Employment--- 9.3 5.1 /1 Percent working less than 40 hours per week and seeking additional work. Source: Labor Force Surveys. The movements in real wages are discussed in the text, which gives the full series dating back to the early 1950s. Briefly, for industrial labor the main features were rapid declines beginning in the late 1950s once the scope for import substitution became limited; a levelling off in the 1/ 1960s, followed by further declines - of nearly 40% - in the 1970s. 1/ The declines in the '70s- may have been exaggerated by inconsistencies in the wage series, though all series point in the same direction, and labor's share in value added also dropprd precipitously, John Powers rightly pointed out to us that doubts still remain about the precise movements in real wages, however. - 26 - The declines have been attributed to the combination of a rising labor supply and a concentration of investment in the capital intensive sectors, induced first by the tariffs and investment incentives, and then in the 1970s by the effects of world inflation on the prices of locally manufactured goods. For agricultural labor, there were slow but continual declines in real wages for nearly 20 years, up to the mid' 1970s; at this time the effects of an intensified effort to raise output in food-grains began to change the labor supply and demand conditions in some regions, and agricultural wages rose both in real terms and relative to industrial wages. 1.27 What were the effects of the declining wages on incomes? Many workers changed their jobs in response to a Slowly rowing demand for labor in the higher wage occupations, and in doing so increased their incomes even when the wages in the new jobs were declining. E.g. there were movements from wage labor in household manufacturing (where one in three workers are hired) and agriculture, to wage labor in workshops and factories, both small and large scale, and from unskilled to various grades of skilled jobs. Others moved into those entrepreneurial activities in which real incomes were rising - including household manufacturing in the more profitable activities. Occupational shifts have been widespread in the past 20 years, and for some workers have helped to diminish the adverse consequences of declining real wages. - 27 - 1.28 In addition, the majority C602. of the labor force are self- employed, principally in agriculture and non-farm activities in rural areas and towns, Their incomes were thus affected principally by yields and average labor productivities in agriculture. Although, on account of under-investment in agriculture, these quantities remained at very low levels in the 1950s and 1960s, both in fact grew slowly in this period; the growth rates then increased significantly in the 1970s under the influence of the development programs in food grains, and in rice production in particular. 1.29 ImDlications. The precise details of the recent changes in wages and incomes may become clearer in subsequent studies and surveys. They are however unlikely to alter the conclusion that labor supply and demand conditions in the past 20 years have affected the conditions of employment more than the levels of unemployment. Analysis of employment data and occupational shifts reveal relatively low unemployment rates - and also a widespread search, among those in the most ill-paying occupations, for more gainful employment. More gainful employment is obtained both through changing jobs, and through productivity gains in existing activities. What does this imply for the small enterprise program? 1.30 Principally, that it should support activities (where its services are in demand) capalle of providing an income gain, whether or not employment is being generated directly by the investments. Initially, the program financed the fixed assets of mostly new enterprises with the frequently expressed purpose of creating employment. Since new enterprises proved to be risky investment propositions, however, the approach was gradually changed towards the finance of existing enterprises - 28 - capable of being expanded (often referred to as "growth" enterprises). While this approach is not inconsistent with the purpose of generating more gainful employment, it nevertheless places a limitation on the program by eliminating desirable projects that do not have these features. Although, as noted earlier, the emergence of medium and large scale activities is in good measure due to the expansion of small firms through the size structure, only a small minority have the qualities necessary to do this. Less than 1 in 40 small industries, for instance, expand into the larger end of the small size ranges, or into medium scale, and of these less than 1 in 15 expand further into the large size groups (see Chapter 5). The majorit,y of small industries remain as they are, are replaced by other small industries using upgraded production technologies in response to changing market opportunities and factor costs, or turn to not dis-similar technologies themselves without expanding significantly. The latter two instances often involve an elimination of the most labor intensive (and ill-paid) activities, and are not necessarily associated with a net increase of employment; they are nevertheless associated with an improvement in the conditions of employment. 1.31 Criterion for Small Enterprise Projects. Apart from favoring Tgrowth!' enterprises, the concern about generating as much employment as is possible from investment has also led to a preference for projects with low capital-labor ratios; projects with high ratios, relative to* ome average for manufacturing as a whole, where occasionally rejected. As~discussed below, there are merits in examining the labor intensities of pr6jects, if only to determine if the technologies choses are optimal given the current costs of labor and capital. In the text, however, we have argued - 29 - that the familiar criterion, the rate of return to capital, provides a rigorous test of whether a project is likely to improve earnings opportunities. First-, note that small industries in aggregate are more labor intensive than large, as Table 1.7 below shows; hence by addressing constraints on investment in small industries, the programs should as intended help to raise the overall labor intensity of industrial investment:- Table 1.7: RELATIVE CAPITAL-LABOR RATIOS IN PHILIPPINE MANUFACTURING BY SCALE OF ACTIVITY, 1974 Scale of Activity Relative K-L ratio (Largest Scale 100) Household Manufacturing 5 Establishments: 5-19 Workers 18 20-49 34 50-99 59 100-199 76 200 or over 100 Source; See Text Table 7.7. 1.31 Another way of stating the rate of return criterion is to say that projects should be capable of providing for labors' income and earning a surplus after all other costs have been met; i.e. revenues from sales less material, running and capital costs should exceed labor costs. The recommended practice for treating labor costs is to estimate the opportunity costs of labor,which are the sum of: (a) the marginal products of labor in alternative (generally lower paid) occupations; and (b) the transport, resettling, personal and financial costs, plus the indiyiduals' valuations of the desirability of the new location and type of employment. - 30 - From this it follows that projects having an acceptable rate of return are also likely to offer better employment opportunities than in the alternatives available. In this sense the criterion is consistent with the employment objectives of the program. Two points might be added. First, in a relatively unconstrained labor market, wages adjust to these levels (Ca) plus (b)) in order to draw people into (or hold people in) the type of employment offered by the investments. This is roughly the situation in the labor markets faced by small enterprises in the Philippines, as the above outline of labor supply and demand conditions might suggest, where wages are generally a good approximation to the opportunity costs of labor. Second, the criterion would not in practice exclude working capital finance, or projects with high incremental capital-labor ratios that seek to upgrade production methods in a firm without increasing the number of employees; such projects too are not inconsistent with the objectives of improving the conditions of employment. A technical discussion of the criterion is provided in Chapter 8. 1.32 Labor Intensity. The idea of using the capital-labor ratio as an investment criterion was to encourage the search for more labor-using investments. In practice it did not prove to be very useful for this purpose,and was often in conflict with the interests of finding good projects. First, as one would expect, what determined the ratio for a project varied greatly with local wage levels. There were instances when it made sense to have projects that eliminated the more labor intensive and onerous of a firmls activities in order to raise output and labor - 31 - productivity: that is to have projects with negative K-L ratios, In other instances, little or no increase of employment was expected, but again an increase of output, leading to infinite K-L ratios. Second, the ratios varied greatly across industries, while only one average figure for manufacturing as a whole was used as a criterion; e.g. it varies over an 80:1 range at the two digit level. Intrinsically labor intensive project (e.g. in garments) easily fell below the average and the criterion had no influence on choice of technique, while others (e.g. ice factories for fisheries) fell far above it, and could not meet the criterion unless people employed indirectly (fishermen) were counted. Thus its use simply led to fudging. Apart from such practical problems, there were problems of interpretation that were ignored. Rising capital labor ratios might be an efficient and desirable response to rising wages or an inefficient consequence of capital subsidies) and need to be examined in the context of current economic conditions and policies.- Finally, there is the point that it is the corporate sector rather than small scale activities that have inefficiently high K-L ratios, on account of the industrial incentives and tariffs policies discussed earlier. Labor intensive methods of production are already widespread outside the corporate sector, frequently burdensome and generally associated with low wages and earnings - indeed, this is precisely the nature of the employment problems in the Philippines today. - 32 - 1.33 The attention that has been paid to the labor intensities of small enterprises reflects a common pre-occupation about the need for a more labor demanding industrial development path. What can be done about it? The relevant policies have been examined in several previous studies, dating back to and before Powers and Sicat (1971), ILO (1974) and more recently Bautista and Powers (1980) and several others cited in the text; they are therefore not reviewed in this report, except insofar as to determine what their findings imply for the small enterprise programs. The refo-fms proposed cover the structure of investment incentives, interest rates and tariffs, and were touched on briefly above (paras 1.22 et. seq.). Apart from being more conducive to growth, they have also been shown to be more labor demanding. Within the more modest scope of the small enterprise programs, an effort to examine and disseminate ideas about a broader range of investment choices in an obvious possibility for increasing the demand for labor on the projects it finances. The industrial and research associations that are now developing in support of industry could also be involved in the this task. Technical Supplement on Interest Rates and Investment Criteria (Chapter 8) 1.34 The overwhelming factors preventing an efficient flow of capital resources from financial institutions to small enterprises are (i) administrative ceilings on interest rates, and Cii) the risks of loans not being repaid, Simply removing the ceilings, however, as an incentive for institutions to face the risks, is not a sufficient condition for an efficient flow of resources to take place, The reasons for this are familiar from recent research on the consequences of imperfect information in capital markets. Some of this research is reviewed in Chapter 8, which - 33 - examines how both administrative costs and risks change over time with the accumulation of knowledge and experience within the branch networks of the institutions. A forward looking view is suggested when deciding on what interest rates are appropriate. 1.35 A recurring question with respect to the provision of institutional finance, is whether its alternatives - trade credits, borrowings in the informal markets, and use of own savings and retained earnings - are superior. No general answer to this question is possible. In particular circumstances, however, a comparison of the different sources is strictly necessary to determine the economic merits of supplying institutional credit. In this report we have found that institutional finance often complements rather than substitutes for other sources. E.g. it is generally combined with own savings and retained earnings when used for the expansion of fixed assets or working capital. We have also argued that reliance on own savings and informal sources is more appropriate for new enterprises, which are inherently riskier to finance than those that have already proved themselves. Furthermore, practically all firms in the middle and larger size ranges start with very small amounts of capital and grow in phases; the owners believe this to be a less risky course for them too, and regard any lack of access to capital as being more of a barrier to expansion than to entry. Trade credits are used widely in some industries Ce.g. where "putting out" and sub-contracting are common); but those having different capital structures and markets may rely more on the financial sector. In practice the financing arrangements for small firms are as heterogeneous as the firms themselves, and most use different sources at different times in their life-cycle, and may - 34 - even use several sources simultaneously. For these reasons we have concluded that the best rule is for institutions to follow the demand, and that the small and medium industries program has taken the right step in addressing the constraints that prevent them from meeting it. We have made several suggestions on how to address the constraints that remain. Conclusions 1.36 The conclusions to this report can be grouped under four headings. The first concerns the role of small enterprises in labor absorption, and the others the Government's programs and policies. 1.37 (1) Labor Absorption. The structural changes occurring in manufacturing employment in the Philippines, from household to workshop and factory based production, are currently associated with a rapid emergence of small and medium scale.firms, in which the rates of labor absorption are significantly higher than in large scale (e.g. about 6% per year as compared to 4.5%). A sizeable, if not precisely known, fraction of labor absorption recorded in the aggregate statistics for medium and large scale firms is also due to the expansion of a small proportion of small firms through the size structure. These trends are particularly apparent in - but not confined to - the small towns and urban centers in the provinces, where infrastructure conditions and the nature of the product market favor manufacturing on a small and medium scale. The growth of agriculture and of the regional urban base itself are generating the markets, and in doing so are helping to localize the structural changes from rural- agricultural to urban-industrial development. The trends are also likely to continue so long as a large share of the labor force is in the rural - 35 - areas and towns, and would probably accelerate with a restructuring of industrial incentives and tariffs, which have historically drawn investment away from agriculture and the provinces. 1.38 (2) Finance and Financial Incentives, The large majority of small firms are financed by family savings, retained earnings, trade credits and sometimes by borrowings in the informal markets; comparatively little institutional finance is forthcoming, except for that provided through the Government's programs or for borrowers of good standing. Although non-institutional sources have so far met the bulk of small firms' demand for finance, there is a rising demand for institutional credit, both long-term and short-term. The emergence and growth of small firms and the heterogeneity of their capital structure and supplier and buyer markets largely ensures this. There are also complementaities between different sources of finance.,with institutional sources being combined with or added to other sources, rather than displacing them. Hence it is relevant to address the two principal constraints on the flow of finance from public and private institutions. 1.39 The first of these arises from the administrative constraints on interest rates and the structure of financial incentives open to the private sector, which currently offer no prospects of long run profits from lending privately raised resources to small enterprises - unless there is a drop in the costs of these resources. Consequently, there is an almost exclusive and growing dependence on the Government's programs, with the risks being borne disproportionately by a small number of institutions. This issue is quantitatively important in view of the huge volume of the private sector's resources relative to those that can be made available through the Govhrnment's programs, - 36 - 1.40 The second cQntraint, afflicting all institutions, and thus a large number of sound and efficient small firms, are undoubtedly the risks of financing unsound and inefficient firms. The risks have not proved to be static quantities, however, but to have declined significantly with the accumulation of information and experience within the institutions, as originally intended by the programs. Hence we have concluded that the role of the programs in cushioning the initial risks of lending to small enterprises is being fulfilled, but that it is necessary to address the issue of financial incentives if the programs are to have both broader and longer-run benefits. 1.41 (3) The Government's Programs, Apart from the general issue of incentives, there are a number of ways in which, it seems to us, the scope of the programs could be broadened while reducing the administrative costs and risks:- (i) Working Capital Finance. The small and medium industries program has so far over-emphasized the finance of fixed assets and under-emphasized the finance of working capital through short-term lending facilities. A greater emphasis on the latter would reduce risks, be more likely to involve the commercial banks, and would be consistent with the employment and regional objectives of the programs. (ii) Non-Industrial Enterprises, Broadening the scope of programs towards non-industrial enterprises - and towards trading and service enterprises in particular - would improve access of small manufacturing firms to markets and materials supplies and provide added conduits for working capital finance, - 37 - (iii) Small Loan End of IGLF, For loans of less than about P 150-200 thousand, lending through IGLF is generally unprofitable; it is also not porsible below the P50 thousand floor limit, Yet there are a very large number of firms seeking loans in this range. There are also institutions with the necessary basis and experience for making small loans efficiently in provincial communities, but which were not qualified for making the larger IGLF loans. Thus involving them in lending through IGLF led to high arrears rates and bad debts, and to the exclusion of those borrowers they could best deal with. Making IGLF more profitable at the small loan end, and possibly removing the floor limit, could greatly widen the scope of the program. (iv) Risk Reducing Institutions, A forum for the exchange of information and experiences between institutions is needed, together with the establishment of a common credit record keeping system. Cv) Industrial Extension. This program has served both educational and screening purposes in providing a large number of small provincial firms with access to financial institutions for the first time; it has also provided counselling and referral services. The main danger ahead is the possibility of its becoming part of the bureaucracy of administered credit on account of the growing dependence, referred to in C2) above, of small firms on the Government's financing programs. Involvement of the extensionists in post-appraisal (supervisory) services, and a system of ex post accountability for the projects, would also help to improve the quality of the services. - 38a - Cvi) Project Selection Criteria. When deciding on what kinds of projects the program might best support, if it is to provide more gainful employment, we have suggested that projects are best judged by the robust if old fashioned criterion, the rate of return to capital; that is,the loan appraisers and extensionists are doing the right thing in considering only profitable projects. The capital labor ratio has not proved to be practical as a device to search for more labor using projects, and has a number of theoretical defects, even bearing employment aims in mind. Ex post evaluations of samples of projects by the research and evaluation departments of the institutions involved could be helpful in determining ground rules and sector priorities for the Government's programs. C4) Leading Sector Policies. The last and most general conclusion of the report is that, the more efficient the leading sector policies, the more efficient the small enterprise programs are likely to be. Lower and more uniform tariffs on manufacturers are now being considered and, if implemented, should encourage growth in the more efficient sectors, which account for 80% and 65% of the labor force currently employed in small and large scale respectively. But the main benefits would be to stimulate product markets via growth. Agriculture in particular should stand to gain, with generally beneficial effects on the growth of the provincial markets for non-food goods and services; as noted it is the growth of these markets that explains the current high rates of emergence and growth of small and medium industries in the provinces. Investments in small-holder agriculture and its supporting infrastructure and services work in the same direction. Also under review - 38b - are proposals to reduce the labor-saving incentives in the current investment and interest rate policies, or- even to introduce labor-using incentives. The effects on markets would be similar, and not insignificant in magnitude. - 39 - II, EXPERIENCE OF THE FINANCIAL INSTITUTIONS; (A) INDIVIDUAL EXPERIENCES Introduction 2.1 Term loans for small enterprises are available from commercial banks, private development banks, the savings and loan associations, 1/ 2/ rural banks, and some nonbank financial institutions. But for reasons discussed below, most of the term-loans are provided through two Government programs: the Small and Medium Industry (SMI) lending activities of the Development Bank of the Philippines (DBP), and the Industrial Guarantee Loan Fund (IGLF), the Government's rediscounting facility available to financial institutions in the private sector. The IGLF program is intended to complement private sector and DBP financing in several ways. Since several commercial banks and non-bank financial intermediaries participate in it, the Government's program has a far wider geographic reach than would have been possible if SSE lending were confined only to DBP and its branches. Through its risk guarantee facility, the program also provides an inducement to private sector financial institutions to develop procedures for handling long-term loans to SSEs. In regions where both DBP and IGLF financing is available, the entrepreneur is provided with the opportunity of borrowing from either a government institution (namely DBP) or a private financial institution operating as the conduit for IGLF funds, Finally, the composition of the IGLF program enables the inherent risk of SSE lending to be spread between institutions rather than being concentrated in any one institution. 1/ Principally, the Private Development Corporation of the Philippines (PDCP), and the Philippine Investment Systems Organization (PISO). 2/ An outline of the institutions in the financial sector can be found in Ann--x 2 of this Chapter. See also Chapter I for a brief statement. -40- 2.2 While the Government directly controls the resources of D3P and IGLF, it exerts an indirect control over the mobilization and allocation of private sector resources through its fiscal, monetary and interest rate policies. The structure and level of interest rates have had a major impact on the relative availability of short- and long-term finance in the economy as a whole, and the allocation of resources between different types of borrowers. 2.3 The following analysis assesses how these various programs and policies have affected the profitability of lending to small enterprises. For each type of financial institution the weighted average cost of their sources of funds is first computed, and compared with the use of and return on funds by type of borrower. The difference between the two gives the gross spread accruing to the financial institution. From the gross spread, transaction costs are deducted to arrive at the net spread to the institution. Commercial Banks 2,4 Background. As of December 31, 1978 commercial banks accounted for 55% of the total assets of the financial system; over the last five years the assets of commercial banks have increased fourfold (in current 2/ terms). The commercial banking sector comprises 25 privately-owned banks, and 1/ The transaction costs faced by the financial institutions are the sum of (a) the administration costs of loan appraisal, supervision and collection, and (b) the risks inv.lve4, i.e., the probability of arrears and default and its associated cost. The two are inter- related in that a substantive effort in loan appraisal and supervision, for instance, considerably reduces the risk of arrears and default. 2/ The Government-owned Philippine National Bank is the largest commercial bank and in 1977 accounted for 27% of the assets of the banking system. two government banks. Together they had an extensive network of 1,200 branches in 1978, reaching to all regions of the country. About one third of commercial bank lending goes to industry while another third to commerce. 2.5 Sources and Cost of Funds. At the end of 1977 the total assets of the commercial banking system amounted to P 70.4 billion ($9.5 billion). A summarized balance sheet of commercial banks is given in Annex 1, Table 2.3. Deposits, borrowings and equity plus reserves accounted for 50%, 41% and 9% respectively of total liabilities. In recent times there has been a sharp increase in the liabilities of commercial banks; over the period 1976-1977 deposits increased by P 8.2 billion and accounted for 74% of the increase in liabilities over the same period. The sharp increase in deposits has occurred both as a result of the expansion in 2/ the branch network of commercial banks and legisiative action taken by the Central Bank. The Central Bank Circulars of January 1976 attempted to increase the level of bank deposits both by raising the maximum interest rate payable on deposits and by reducing the yield on money market instruments which had been used by investors as an alternate form of investment to bank deposits. 2.6 All the commercial banks interviewed were offering the maximum permitted rate on deposits placed with them, namely 7% on savings deposits and 8.5% to 12% on time deposits depending on maturity; no interest is paid on demand deposits. Owing to bcth the structure of deposits and the interest rate paid on various types of deposits, their weighted average cost, in 1977, amounted to about 6.5%. This figure, however, reflects 1/ Exchange rate used US$1 = 7.4. 2/ New branches were established (109 in 1977) because it was felt that they could help mobilize deposits. -42 - merely the financial cost of deposits and, since all commercial banks offer the maximum permitted rate on all deposit categories, ignores the various service costs involved in raising deposits, The cost of money market and other borrowings ranges around 14% while the cost of equity has been computed at around 12.8% resulting in a weighted overall cost of capital of around 11% p.a, The cost of loanable resources is, however, higher than this, since Central Bank regulations necessitate holding 20% of borrowings in liquid assets which yield 3% while another 20% have to be held in specified securities yielding around 12%. Consequently, the weighted average cost of loanable resources is nearer 2/ 13.3%. Clearly the cost of capital and loanable funds for individual banks will vary and will, to a great extent, be determined by the proportion of deposits and other borrowings in their liability structure. The weighted average cost of resources would also rise if the proportion of medium and long-term deposits were to increase; at present these account for less than one sixth of their resource base. 2.7 Uses of and Return on Funds. As of December 31, 1977 the asset portfolio of commercial banks comprised: loans (62%), investments (16%), cash due from banks (13%) and other assets (9%). The loan portfolio of P 43 billion ($5.8 billion) comprised loans, discounts and overdrafts. An 1/ In order to estimate the cost of share capital, the ratio of dividends (adjusted on a pre-tax basis) to the book value of equity has been considered. While there are a number of objections to estimating the cost of share capital in this way, no other data are available. A more precise estimate would not significantly alter the overall weighted average cost of capital, however, since this source of funds accounts for less than 9% of resources. E.g. if we doubled the above estimate, the w.a. cost would rise by about 1%. 2/ Or [11.0 - 0.2 x 3 - 0.2 x 121/0,6 = 13.3. interest rate ceiling is imposed by the Central Bank: the maximum interest rate permitted on loans under two years is 12% and 14% p.a. on secured and unsecured loans respectively, In addition, a service fee of up to 2% may be charged raising the effective rate to 14% and 16% respectively. The maximum effective lending rate (including service fees) on loans over 2 years in 19%. 2.8 As of December 31, 1977, 86% of loans outstanding were short-term (up to 1 year), 10% were medium-term (1-3 years) and only 4% were long-term (over 3 years). In the case of prime borrowers it was found the commercial banks were charging marginally below the maximum rates permitted. However, the return on compensating business (e.g. letters of credit, foreign exchange transactions and compensatory deposits) raised the rate by 2% to 3% resulting in an effective rate on short-term loans of 16-17% and of 18-19% on medium and long-term loans. Firms with good credit standing but which could not be regarded as prime firms were paying the maximum interest permitted on both short- and medium-term loans. Few loans were made to businesses not having an established credit rating. EFFECTIVE RATES ON COMMERCIAL BANK LOANS, 1978 /a Credit-worthy Prime Borrowers Non-prime Borrowers Value of Value of Nominal compensating Effective Nominal compensating Effective Loan duration rate business rate rate business rate Short-term 14% 2-3% 16-17% 16% n.a. 16% Medium- and long-term 16% 2-3% 18-19% 19% n.a. 19% /a The rate of inflation over the period 1975-77 varied between 9.2% - 10%. Source: Interviews with 10 Commercial Banks. -44- Given a weighted average cost of funds of 13.3% the effective gross margin on short-term loans to prime and nonprime borrowers would be around 2.7% while for medium-term loans it would be nearer 5.7%. As noted earlier, the latter overstates the spread on medium term loans, since the cost of term resources is above the weighted average estimated 1/ here. 2.9 Term lending. While commercial banks are a major source of short-term credit they engage in relatively little long-term lending. For January-August 1977, 60% of total credit granted was for a year, 1% was for 1-5 years and 0.6% for over 5 years. The comparable figures for 1976 were 68.6%, 0.6% and 1.02%. Though nothing in the rules and regulations governing commercial banks prevent them from lending long, these figures show that little medium- and long-term lending is undertaken by them. This, in part, can be explained by their adherence to the "golden rule" of banking which states that the maturity structure of the resource base should match that of the loans made. Despite the 2/ rule some term transformation can occur without jeopardizing the solvency of the individual institutions or the system as a whole. However, commercial banks appear to be extremely reluctant to lend long-term for several reasons. 2.10 First, and most important, taking all costs and returns into account, short-term lending appears to be at least as profitable as long- term lending. Until 1976, the maximum interest rate that could be charged on loans, irrespective of maturity, were 12% for loans secured by real estate 1/ PDCP have recently raised medium-term resources at 15-16% (para. 2.32), which would imply a spread of around 3%. 2/ For a more detailed discussion see the report of the Philippines Financial Sector mission (1979). -45- and 14% for others. As these maximum rates were being charged by commercial banks for short-term loans, there was no incentive for them to lend long-term, an activity inherently more risky than short-term lending. In 1976, interest rates were restructured and the maximum effective rate that can now be charged on loans up to two years is 16% while the maximum effective rate on loans over two years is 19%. However, while the CB is willing, under certain circumstances, to discount short-term paper Cup to one year) it is not willing to do so for instruments 1/ with a maturity of over a year. Further, in an economy where deposit 2/ and lending rates have fluctuated significantly commercial banks are unwilling to lend long- term as they are then locked into a leading rate without knowing how deposit rates or lending rates may move. Finally, most commercial banks do not have the institutional expertise necessary to make term loans since most of their experience is with short- term,collateral based lending. The current nominal interest rate differential of about 3% between short-term loans and long-term loans is not sufficient to induce the commercial banks to lend long-term and face the liquidity constraint, the greater resource costs, the greater project risk and general uncertainty of so doing. 2.11 Instead of lending long, the practice followed by the commercial banks is to book a loan as short with the understanding that the loan will 3/ be rolled over, On the basis of existing information, it is not possible 1/ This possibility is no being considered, however. 2/ There were substantial changes with respect to both deposit and lending rates in 1976 and 1977. 3/ With this arrangement the enterprise, not the institution, bears the risks. - 46 - to quantify the extent of rollovers. However, interviews suggest that up to about half of those loans booked as short-term may be rolled over for at least another year, and one third for 1-3 years. The process of rolling over is also profitable for the bank owing to the service fees and other charges involved. This additional income further reduces the effective differential between short- and long-term lending rates and may even turn short-term lending into the more profitable type of operation. 2.12 Lending to SSE. The proportion of loans outstanding going to home, small- and medium-scale industries as of December 31, 1977 amounted 1/ to 2%, l1% and 11% respectively. These figures probably do not reflect the situatinn accurately as a large proportion of these resources are IGLF funds which are merely being onlent by the commercial banks. There appears to be no data on the volume of commercial bank resources going to the small enterprise sector. Using a sampling technique, a study conducted by the International Development Center of Japan concluded that only 1% of SSE resources come from commercial or rural banks. There are several reasons which explain the reluctance of commercial banks to lend to this sector, except perhaps to a small minority of small borrowers of good standing. First, the effective return on loans to prime and near prime clients, once compensating business is taken into account, amounts to about 16% for short-term loans and 19% for longer term loans (para 2,07). Since these rates are the maximum that can be charged, the return on SME loans is not likely to be significantly greater than this, 2/ particularly as they bring in little compensating business. However, 1/ Annex 1, Table 2.4 provides a breakdown of commercial bank lending. 2/ It was pointed out to us that some SMEs bring in compensating business (e.g. through foreign exchange dealings), and others have good standings, and qualify as prime borrowers. They are, however, a small minority, and our remarks are not adressed to these cases, - 47 - while the return on prime and SSE loans is almost the same, the administrative costs per unit lent of processing SSE loans is significantly greater. The administrative costs are higher because there is no readily available information on the credit standing of the enterprise since most SSEs have neither audited financial statements nor long standing relations with the financial community. During discussions with commercial banks it became clear that the loan processing time for prime companies was minimal, and costs amounted to less than 0.4% of loan value. In the case of near prime companies, the complete loan processing time varied between 1-4 days and costs seldom accounted for more than 0.5% of the loan value. In the case of loans to S3Es without an established track record the processing costs amount to approximately 2-3% of the loan value. Hence, deducting these costs from the gross margin of 2.7% estimated above (para 2.8), the net margin accruing to commercial banks to cover provisions, writeoffs and profits would be 0.7% and 2.3% for SSE and regular loans respectively. If, in addition, it is assumed that SSE loans are more risky, then both elements of the risk-return trade-off favor larger loans. At present there is little hard data for commercial banks on the relative riskiness of SSE lending and other types of lending. Experiments involving commercial banks in SSE lending have shown that without rigorous appraisal and supervision procedures (which raises the administrative costs still further) small loans are 1/ prone to high arrears. 1/ Some examples quoted were the money-shop program of the PCIB, the "social loans" programs run by some commercial banks in the 1960s and 1970s; and a NACIDA loan program, which was initially run outside the banking system, but later redesigned and run by the Philippines National bank. In each instance arrears were extremely high (in one case 93% of loans were in default). - 48 - 2.13 Second, in the cases when commercial banks go in for SSE lending it tends to be collateral based. Many small borrowers, however, are short of acceptable collateral, particularly in the case of new projects, and are therefore ineligible for commercial bank credit. Finally, even if commercial banks were to lend to SSEs on the basis of project viability it might be difficult to do so as they currently do not have the necessary institutional expertise to undertake such lending. 2.14 Long-Term Lending and IGLF. Commercial banks operate as conduits channeling long-term IGLF resources to SSEs. When the lending to SSEs first began in 1974, the commercial banks would identify a project and send it to IGLF for approval. Once approval was granted, the project risk would be shared between IGLF and the bank on a 60:40 ratio, the bank having a gross spread of 5% on the transaction. Since none of the bank's own resources were tied up in the transaction, the spread was available ,o cover the administrative costs of lending and 40% of the risk. In theory, loans were to range between P 50,000 to P 800,000 although in practice no loans over R 500,000 were made. Maturities were for 5-10 years while the effective interest rate (including the guarantee fee) to the final recipient was 13.2%, 2.15 The initial response to the program by the commercial banks was encouraging; in the period July-December 1975, 91 loans were approved of which 25 were sponsored by commercial banks, However, the number of projects sponsored fell r,harply and only 19 IGLF projects, in total, were approved in CY77. Two reasons were given by commercial banks for their lack of interest: the inadequate return and the "red tape" involved - 49 - in dealing with IGLF. The red tape problem was reduced significantly once the accreditation scheme was put into effect in 1976, Under this scheme an accredited institution could approve a loan without the prior approval of IGLF. Nevertheless, the commercial banks generally remained unwilling to participate in the program. Initially (in 1974/75) 19 banks participated, but as of September 1, 1978 only 10 had been accredited, of which only 5 made any IGLF loans. As of September 30, 1978 the IGLF loans outstanding to commercial banks amounted to P 42 million, or about 0.5% of their total loans outstanding to manufacturing activities. 2.16 The high level of arrears associated with earlier IGLF operations was the main explanation for the continued unwillingness of commercial banks to participate. As of September 1978 total arrears amounted to 34.2% of 1/ loans outstanding while loans affected were 56.4% by number and 52.1% by value. When the final recipient was in arrears, the bank was still expected to make good to IGLF; in such a case tha bank tied up its own 2/ resources on which it earned 12% but might have earned 16% to 19% if these resources were lent to its regular clients. In addition there were the costs of processing the arrears which in their turn can be broken down into three parts. These are the cost of (a) rescheduling the loans 3/ for some clients, which might involve a complete reappraisal; this cost is more closely related to the number of loans in arrears than the actual amount in arrears; (b) write-offs for "coffin" cases; and (c) litigation, which is an expensive but necessary step both to recover the value of the 1/ Based on a sample survey of participating institutions and their end users. 2/ While its own cost of funds was 13.3%. 3/ It is not known to what extent reseheduling costs are covered by penalty rates. - 50 - 1/ collateral and to maintain confidence in the institution. It has not been possible to compute the costs associated with loan rescheduling, write-offs and litigation. However, from the reaction of the banks to IGLF, it appears that they exceeded the 5% gross margin on the loan, particularly since the commercial banks have had to make good to IGLF from their own resources. 2.17 The aggregate data, however, hide what has in fact been a very mixed experience among the commercial banks; some have used IGLF occasionally and have found the operation profitable, with less than 5% of their loans in arrears; others have used it rarely, but again with low or no arrears; 2/ while in the case of some banks, 50% to 90% of their loans were in arrears. During the interviews it became apparent that there were two basic reasons for the relative success of some banks. First, the successful banks generally had applied far stricter standards in project selection, paying particular attention to the credit standing of the entrepreneur in the community, his previous track record and the value of the collateral offered; a personal knowledge of the 'character' of the individual, acquired by the local 3/ branch staff and branch managers, was also important. In addition to the above, a fair amount of time and effort appeared to have been devoted to loan appraisal, supervision and collection. It became clear that, whenever one or more of these criteria had been relaxed, the level of 1/ It has been pointed out to us that the costs of processing arrears also decline as an institution's procedures are developed. Apparently the costs in Korean banks are now quite low, 2/ This information was obtained during the interviews; the estimates were provided unofficially and are not precise. 3/ Mr. Manalo of DBP made precisely the same point, which we found was independently shared by the staff of several commercial banks and investment houses. - 51 - arrears increased sharply. Several cases were cited in which borrowers had diverted funds or were giving a low priority to repaying the IGLF loan as the interest rate on the IGLF loan was lower than on other borrowings. These instances reflect the weak supervision and loan collection procedures of the financing institutions. In some cases collateral requirements had been relaxed to match the bank's share in the risk (40%) on IGLF loans; these had resulted in larger and riskier loans being permitted than if stricter appraisal standards had been applied. It should be added that such problems did not necessarily arise because the banks took IGLF lending lightly, but because for several banks IGLF was a new form of lending (long-term versus short-term and project versus collateral based) to a new category of client, and required much effort in appraisal and supervision than had been anticipated; only for a small minority of SMI owners, with good standing, is it possible to relax the discipline of appraisal and base the loans, as in short-term lending, on 'character and collateral'; most SMI projects did not fall into this category however. The experience of DBP, PDCP and of the Medium and Small Industries Coordinated Action Program (ASICAP) programs had shown that a substantial pre-loan service for preparing project and loan requests is required due to the extremely poor records and information kept by small enterprises. None of the commercial banks help the entrepreneur prepare projects but, instead, concentrate almost entirely on collateral based lending. 1/ DBP states that the unreliable information presented by borrowers is one of their main problem areas. Rudy Manalo: Talk to the Small and Medium Industries Convention, May 1978, Philippines International Convention Center, Manila. - 52 - 2.18 Conclusions, Commercial banks have found that the administrative costs and the risks of participating in the IGLF program were higher than originally anticipated. A few commercial banks have found lending to SSEs, both from their own resources and IGLF funds, profitable but only by concentrating on a small number of clients with track records and good credit standings. Since most SSEs most do not have an established credit standing, it is unlikely that the commercial banks would lend to them without financial incentives sufficient to cover the costs of pre-loan services (to complement those provided by MASICAP) and more rigorous loan appraisal, supervision and collection procedures, In cases when commercial banks have attempted to keep administrative costs low and sacrificed on loan screening procedures there have been high rates of arrears and default. 2.19 For these reasons, some modifications have recently been introduced l/ into the IGLF program. These were: (a) to increase the spreads and reduce the bank's share of the risks on small loans; (b) to raise the returns and reduce the risks further by raising the upper limit on IGLF loans (from P 800,000 to P 2.5 million), thus allowing the banks to lend to medium as well as small industries; Cc) to reinforce the MASICAP program of technical assistance, particularly to the smaller enterprises, by improving the quality of information available on the enterprise, thereby reducing the transaction costs faced by the lending institution. 1/ In the second IGLF project. - 53 - In addition, a forum for the exchange of views and experiences between institutions seems desirable in the early stages of the program, together with the establishment of a common credit record-keeping system. The methods and criteria for appraising loans to SSEs and pre- and post-loan services have not yet been developed in the commercial banks as they have in some of the non-bank financial intermediaries. 2.20 Even with an expanded IGLF program, the volume of lending that can be undertaken will be small when compared to that which commercial banks might undertake from their own resources. One of the objectives of the IGLF program was to act as a catalyst to encourage lending by private financial institutions to SSEs, by absorbing some of the early risks and costs of developing term lending programs to small borrowers. Hence it is important to address the constraints that prevent commercial banks from lending their own resources to the SSE sector. Under the present set-up, commercial banks are mobilizing resources for the well established 1/ corporate sector only, and the banks appear to be incurring financial 2/ losses in their attempt to develop a new SSE clientele. 2.21 Precisely what steps are required to induce commercial banks to lend to SSEs from their own resources merits a much closer examination of interest rate and related policies than can be given in this report. The present policies are effectively closing off the large majority of small 1/ Loans outstanding to single proprietorships in March 1978 amounted to P 1.2 billion; to partnerships, co-operatives and associations, P 0.8 billion; and to corporations, P 30.9 billion. Annex 1, Table 9. 2/ It was pointed out that the corporate sector may (and in fact does) relend to SSEs, and that this might be an efficient way of approaching (i.e. of lending to) them. We agree with this, but would add two points. First, most SMIs serve local markets directly, drawing on local traders and suppliers, many of whom are themselves small scale. For this reason we later suggest, second, that lending to small (and medium) scale traders is also desirable (see chapters 3 and 4). - 54 - enterprises from access to an extremely large and rapidly growing volume of resources raised through the extensive branch network of the commercial banks. Essentially, the effective spreads need to be increased to make lending to small enterprises more financially attractive. This could be done through changes in interest rates, in service charges, or in tax incentives; it need not involve subsidies, however. 2.22 Even with major reforms in the structure of financial incentives, however, it is difficult to see the commercial banks voluntarily developing an active lending program to SSEs using privately raised resources; for this reason, we believe that any re-structuring of financial incentives should be seen as a way of enhancing the present programs of the Government, not of displacing them. First the experience of government and government- sponsored institutions show that the costs and risks involved in lending to SSEs are far greater than the commercial banks would be willing to undertake even if appropriate interest rate adjustments were made. An important exception would be the larger sized category of small loans to enterprises with an establsihed track record and adequate collateral. This would, however, exclude a large number of small enterprises, as the benefits of developing a small enterprise program tend to accrue several years beyond the planning horizon of commercial banks. Second, the possibility of institutional biases in favor of lending to the corporate sector - both national and transnational - cannot be dismissed lightly, given the extent to which the commercial banks have evolved in response to its demands, Third, the large majority of the owners of SSEs are unaccustomed to, and untrained in, gaining access to and managing - 55 - institutional credit. This is why the extension programs and the pre-loan services of the Government financing programs remain important, Development Bank of the Philippines (DBP) 2.23 Background. DBP was established in 1958 as an autonomous govern- ment-owned development bank with a mandate to supply long-term credit to the leading sectors of the economy. At the end of 1978, DBP held 11.2% of the assets of the financial system. DBP plays a major role in the Philippine economy, being the largest supplier of long-term credit. As of June 30, 1978, the proprotion of loans going to industry, agriculture and real estate were 64.8%, 14.4% and 15.2%, respectively. About 80% 'of industrial lending goes to large industry with 10%, 6% and 4% going to medium, 1/ small and home industries respectively. In addition to its direct lending, DBP lends indirectly to home, small and medium industries through its association with the private development banks (para 2.35). 2.24 Sources and Cost of Funds. As of December 31, 1978, long-term borrowings, short-term borrowings (under one year), equity and deferred credits accounted for 53.9%, 25.0%, 18.9% and 2.2%, respectively of DBP's total resources. Savings and time deposits with maturities of under one year constituted 66% of short-term borrowings. The weighted average cost of short-term borrowings was about 8.0%. Long-term foreign borrowings comprised loans from international institutions and commercial sources with a weighted average cost of capital of 9.7%. Domestic long-term borrowings comprised bond issues, notes from government and financial institutions, IBRD resources onlent by the Government in local currency, 1/ Home industry loans are loans of up to P 50,000; small industry loans range from P 50,000-800,000; medium industry loans vary from P 800,000- 3.0 million, while large industry loans are in excess of P 3.0 million. Note that these scales do not correspond precisely to HSMIs defined in terms of assets (see chapter 1). - 56 - and others. The weighted average costs of these borrowings is 12.4%. This figure is likely to underestimate the true cost of these resources as DBP has privileged access to low cost local currency funds. As DBP declares no dividends, it is difficult to estimate the cost of its share capital. In order to compute the cost of capital, DBP's share capital might be viewed as a long-term debenture issue; the return on DBP's Countryside Bonds is around 9%. If this is done, the weighted overall average cost of capital to DBP is around 9.9% p.a. As the cost of DBP's deposits, equity and long-term domestic borrowings is likely to be understated, the weighted average overall cost of capital should be seen as a base-line figure. 2.25 Use of Return on Funds. DBP's operations include loans, guarantees and equity investments. In FY78, loans accounted for 59% of all DBP approvals. The size of loans vary from a minimum of P 5,006 to over P 5 million. In terms of sectoral allocation, industry, agriculture and real estate accounted for 65%, 14% and 15%, respectively of all approvals. DBP's industrial loans alone will be considered below. In 1976, the weighted average return on industrial loans outstanding was 10% while the weighted average cost of resources at that time was 8.8%, resulting in a gross spread on industrial lending of 1.2%. Administrative costs incurred by lending to industry were estimated at 0.7% of industrial 3/ loans outstanding, leaving a margin of 0.5% for provisions, write-offs 1/ Until January 1979, DBP bonds offered such privileged terms as tax exemption and reserve eligibility. 2/ The first three issues of DBP countryside bills offered an interest of 9% payable semiannually. In the fourth issue (January 1979), the Government decided to remove the privileged features on DBP bonds; the average effective cost of this issue to DBP was 14.69%. 3/ As of June 30, 1976, arrears on industrial loans were approximately 7.5% of loans outstanding while the portfolio affected was 41.4%. 57 - and profits, The very small operating margin has resulted in DBP making some changes in its lending policies; there were also some concerns that cheap loans were making industrial investments too capital intensive. The rate of interest on loans not secured by land mortgage has been raised from 12% to 14% p.a. In addition, a supervision fee of 2% has been introduced for all loans in excess of P 150, 000. This has resulted in a weighted average return of 13.5% for industrial loans less than F 150,000 and 15.5% for those above. In FY78, less than 3% of DBP's industrial loans in value terms were below P 150,000. Hence, its weighted average return on lending is around 15.5%. Once these interest rate increases are reflected in the return on industrial loans outstanding, DBP will be operating on a gross margin of 5.6%. Even if administrative costs were to rise to 2% of loans outstanding, it would still leave a margin of 3.6% to cover provisions/ write-offs and profits. 2.26 Lending to Rome, Small and Medium Industries. DBP currently has a separate department to lend to these industries, the volume of lending to which increased from R 48 million in 1974 to P 158 million in 1978 (Annex 1, Table 2.5). The growth was particularly fast during the first two years during which time, however, a serious arrears problem began to develop (para 2.26). Apart from making direct loans, DBP has a program which provides Private Development Banks (PDB's) with equity and rediscounting facilities (para. 2.35), and which both widen the geographic reach of its own programs and encourage private sector participation. 1/ See para. 2,34, et. seq. Over the period 1974-78, DBP had rediscounted 3,000 industrial loans of the PDBs amounting to P 65 million, with an average size of P 30,000. In contrast, DBP had, over the same period, made 5,300 loans for P 650 million with an average loan size of P 120;000. - 58 - The returns and costs to DBP of lendin2 to industru are given below: DBP: RETURNS AND COSTS OF LENDING (%) Large Medium Small Home industry industry industry industry Gross return 15.5 15.5 15.3 13.5 Weighted cost of resources 9.9 9.9 10.5/b 10.5/b Gross spread 5.6 5.6 4.8 3.0 Estimated administrative costs 0.3 2.6/c 2.6/c n.a. Net spread 5.3 3.0 2.2 n.a. /a Approximately 10% (by value) of SMI loans are below P 150,000. /b Loans to home and small industry are in local currency. /c The administrative cost to the head office and branches is 2.5% and 2.7% respectively. The arithmetic mean has been taken. Source: DBP (internal report). 2.27 DEP receives net spreads of 5.3%, 3,0% and 2,2% respectively on its loans for large, medium and small industries; the spreads are to cover overheads, profits, write-offs and provisions. The arrears position on the industrial loans by loan size are shown in Annex 1, Table 2.6. As expected, the risks for large industry loans are significantly lower; in 1978 principal and interest in arrears as a proportion of loans outstanding amounted to 4.7% and 20.9% for large and small respectively. Within the latter group, home industry loans appear to be only slightly riskier than loans to small and medium industries, though the level of arrears are high across the board. The arrears on loans to the smaller industries, however, are significantly lower (by a factor of four) in the branches than they are at head office; arrears on branch office loans in 1976 varied between 5.6% and 11.8% of loans outstanding, which was not significantly higher than arrears on loans to large industry. 1/ The arrears figures on large industry loans probably understate the actual level of arrears as no account is taken of loans rescheduled by DBP. - 59 - The manager of DBP's small and medium industry programs pointed out (as had people in other financial institutions) that lending in small communities was often easier and less risky than lending out of the head office in the Manila area as the branch staff have greater personal knowledge of the local community and its enterprises.-/ 2.28 In the first year of the program, the arrears as a percentage of loans outstanding were exceedingly high, but declined subsequently for several reasons. A fast growth in the portfolio and a restructuring of loans at first increased the share of loans in the grace period Cup to six months for the finance of fixed assets, before 1979), and also the share of young loans on which arrears problems had not yet surfaced. But the size the portfolio peaked in 1976 and then declined in 1977 and 1978, so that the shar. of young loans and loans in the grace period declined. At the same time there were noticeable declines in the arrears levels, reflecting changes in policies and procedures as more exper:ance was gained in lending to small enterprises. The 2/ principal changes included intensified efforts in the training of staff; the development of stricter screening, appraisal, supervision and loan collection procedures (all of which were associated with an expansion of trained staff); and the introduction of monitoring and control procedures to reduce diversions of funds. Evaluation studies of problem accounts were also undertaken. 1/ Since these discussions were held in 1978-79, however, the arrears rates in Manila have declined significantly, while those in the branches rose (Annex Table 2.6). 2/ The institutional effort required to develop the program has been immense, as can be gauged from the level and growth of professional and support staff in DBP. Professional staff alone grew by nearly 50% from 1,900 to 2,800 in between 1976 and 1978, and total staff by 40% from 3,100 to 4,400. See Annex 1, Table 2.7. - 60 - 2.29 Conclusions. Considering the net spreads on the different types of DRP lending, it is apparent that the profits made by lending to large industries are absorbing some of the costs of lending to smaller industries. In addition, small loans are more prone to arrears than are loans to large industry. Despite the changes, it is not particularly profitable (given current spreads) for DBP to land to small industries, but it continue to do owing to the high priority placed by the Government on this form of lending. The DBP experience has, however, shown that the initially high risks of lending to small enterprises can be reduced as experience is gained, and as decentralizing decision making procedures for small loan approvals are introduced. Private 'evelopment Corporation of the PhiliDnines 2.30 Background. PDCP was established in 1963 and has been legally defined as an investment house although its operations are those of a development bank. PDCP is probably one of the only private financial institutions to make long-term loans and provide pre-loan services 1/ to their SSE clients. A small business loan department was established in 1972 for this purpose. Loans approved by PDCP classified by the asset size of the recipient enterprise is given in Annexl, Table 2.8. The number of small enterprises financed by PDCP increased sharply once PDCP received accreditation from IGLF in late 1976. The lower limit on PDCP loans is P 50,000; loans between P 50,000-500,000 are considered to be small loans while loans above F 500,000 are considered as regular loans. In the early stages of PDCP's small industry program most of the loans were in the Metro Manila area. P 500,000 are considered as regular loans. 1/ A recent convention of small and medium business owners passed a resolution requesting other financial institutions to provide pre-loan services similar to those now provided by PDCP. Philippines International Convention Center, Manila, May 27, 1978. - 61 - Recently, both as a result of PDCP's growing branch network and the Government's emphasis on regional development, approximately 50% of the loans are to borrowers located in the provinces. 2.31 Lending from PDCP's Own Resources. The volume of small loans financed by PDCP from its own resources has been relatively small, the major constraint on PDCP for this type of lending being that long-term peso resources are unavailable. At present PDCP is not allowed to accept deposits. Consequently, the only way it can mobilize peso resources for onlending is either by borrowing from other institutions or by issuing its own bonds. Given the current interest rate structure it is not possible for PDCP to raise resources through these mechanisms and earn an adequate spread by so doing. Hence, PDCP concentrates on foreign currency denominated loans; over the period 1963-78, approximately 78% of PDCP's lending has been in foreign exchange. As most small industries require local currency financing, PDCP is unable to finance a significant volume of SSE loans from its own resources. 2.32 Recently, PDCP has been able to mobilize some medium-term peso resources by issuing 1 to 5 year notes at around 15% to 16%. These resources are on-lent at 19%. Owing to the different tax incidence on the borrowing and lending rate, the gross spread accruing to PDCP is not 3%, but nearer 5%. The administrative cost of lending to SSE has been computed 1/ at 3% of loans outstanding which leaves about 2% to cover provisions, 2J write-offs and defaults. 1/ When the necessary project data is not available, PDCP's appraisers might spend 4 to 6 weeks collecting it, a task which could cost as much as P 6,000 Cexcluding overheads). A project analysis is then undertaken which concentrates on the management, financial, techuical and marketing aspects of the projects, Despite the project analysis, all loans are fully collateralized; for SMIs, land, buildings and machinery are valued at 100%, 900% and 70% of appraised value respectively, and for large industries at 80%, 70% and 60%. 2/ Katrine Anderson Saito and Dan P. Villanueva, "Transaction Costs of Credit to the Small-Scale Sector in the Philippines". - 62 - 2.33 Lending through IGLF Funds, PDCP was accredited under the IGLF program in 1976 and has been using IGLF resources to finance a significant number of SSE projects; as of September 1978, 70% of the snall industry loans financed by PDCP are from IGLF funds. IGLF funds have been obtained 1/ at 7% and were on-lent at 12% (excluding the guarantee fee), In aldition PDCP charged i one-time service fee of 1.5% giving a gross spread of 6.5% for the first year and 5% subsequently. In order to maximize returns from its IGLF operations PDCP has tended to concentrate on the larger of the small loans; the average loan size having increased from P 175,000 ($25,000) in 1974 to P 370,000 ($50,000) in 1978. Exceptions are made when the enterprise records are in good shape, in which case the administrative costs to PDCP are much lower; this occurs for instance with second loans, which apparently require half or less of the 3/ processing costs of first-time loans. 1/ Recently the IGLF leneing rates were revised. For small industry loans (from P 50,000 - P 800,000), participating institutions charge interest at no less than 13.2% p.a. plus a service charge of 1.5% p.a. payable at the time of loan; for medium industry loans (P 800,000 - P 2.5 million) participating institutions are allowed a spread of 8% on small industry loans and 6% on medium industry loans. 2/ PDCP head office and branch staff made the point that the services of SBAC and MASICAP can be useful in reducing the administrative costs simply by improving the records of the businesses, though they find that it is still desirable for their own staff to continue to provide pre-loan services and work with the proponent directly. PDCP staff often give lectures to and participate in the seminars of the MASICAP and SDAC field (extension) staff. In addition, PDCP run a training program for project analysts. 3/ In the past no single borrower could obtain more than P 500,000 from IGLF resources. This prevented the borrower and the financing institution benefitting from these economies of scale. ....... .- - 63 - 2.34 The arrears and defaults on PDCP's small loan portfolio have been significantly lower than for other financial institutions. (Annex 1, T-9 shows the arrears position for both PDCP's small and regular loans). For small loans, principal in arrears over 3 months increased sharply from 3.7% in 1975 to 8.2% in 1976 but fell to 3.9% in June 1978, largely as a result of a substantial increase in PDCP's small loan portfolio and a corresponding increase in loans in the grace period. If principal and interest in arrears over 3 months is compared to principal outstanding in the repayment period, 1/ the improvement in the arrears situation is less dramatic but noticeable. In comparing small and regular loans in terms of arrears and defaults it is apparent that on any criteria small loans have proved to be more risky. While it is difficult to estimate the costs involved in rescheduling,write offs and litigations, it appears that the gross margin accruing to PDCP from utilizing IGLF funds is sufficient. 2.35 Conclusions. Since PDCP carries out project appraisals for both its small and large loans, lending to small enterprises is more expensive for PDCP than lending to large industries, owing to the higher administrati-,ve costs in relation to loan size. By intensive efforts in appraisal and supervision, PDCP has kept the risks of lending to SSEs relatively low, and has made such lending profitable by concentrating on the larger of the small industry loans (loans in excess of about P 100,000). Their lending is, 1/ The percentage of loans in arrears fell by two thirds in 1978. - 64 - however, heavily dependent on IGLF, and the development of a lending program out of privately raised resources is constrained by the general scarcity of long-term peso resources in the economy. Private Develooment Banks 2.36 Background. Private Development Banks (PDBs) are financial intermediaries constituted as stock corporations under the mortgage bank provisions of the General Banking Act. PDBs were set up to provide decen- tralized credit facilities to small agricultural and industrial enterprises 1/ that would not otherwise have had access to long-term credit. 2.37 Source and Cost of Funds. As of June 1978, the total resources of PDBs amounted to P 666.4 million; a summarized Balance Sheet of PDBs is given in Annex 1, Table 2.3; deposit liabilities, borrowings and capital funds in the form of share capital and retained earnings accounted for 57.5%, 22.6% and 19.9%, respectively. The Central Bank permits PDBs to pay marginally more on their deposits than is paid by commercial banks, and in 1978 they were offering 7.5% on savings deposits and from 9% to over 12.5% on time deposits, depending on maturity, leading to an overall weighted average cost of depos-cs of about 8.8%. The share capital comes from private contributions and contributions from the Government in the form of preferred shares held by DBP and the Land Bank of the Philippines. The cost of share capital is difficult to estimate, however, since few PDBs have declared dividends and the returns to primary shareholders is often in the form of higher salaries, bonuses and fringe 1/ As of June 30, 1978, the 35 PDBs had 105 branch offices and employed a staff of nearly 1,500. - 65 - benefits. If share capital and retained earnings are viewed as a long-term deposit with a risk element attached to it then the minimum opportunity cost would be around 15%, resulting in an overall weighted average cost of funds for PDBs of about 10.5%. If, on the other hand, the cost of capital were computed on the basis of dividends actually paid, then the cost of the share 1/ capital would be about 2% and the overall weighted average cost of capital 6.8%. 2.38 Use of and Return on Funds. As of June 1978, the total loans outstanding to PDBs amounted to P 400 million, of which approximately one third was in industry, somewhat over one third in agriculture and the remainder in commerce, real estate and other sectors. Over the period 1973-78, PDBs made over 10,000 loans to cottage and small industries as compared to 5,400 such loans made by DBP, PDCP and IGLF together (Annex 1, Table 2.10).About 70% (by number) of these loans were financed from the PDBs own resources, 29% from the rediscounting facilities provided by DBP and the Central Bank, and a small percentage by IGLF. Many PDB loans do not qualify for IGLF financing as they are for less than P 50,000, which is the minumum acceptable IGLF loan size; over the period January-June 1978, approximately half the industrial loans made by PDBs were below P 20,000 but a few large loans resulted in an average loan size of P 40,000. 1/ The low return on capital has made it difficult for PDBs to raise additional resources from the private sector, - 66 - 2.39 When lending from their ovu resources, the PDBs are allowed to charge an interest rate of 19% on loans with a maturity of over 2 years, resulting in a spread of 8.5% to 12.2%, depending on the assumption made about the cost of their share capital. The average administrative costs on all operations were computed at about 4.4% of loans outstanding. It is not known by how much the administrative costs of industrial loans exceed this average, but they appear to be kept to minimal levels by basing 2/ appraisals on the borrower's ability to meet collateral requirements and 3/ a personal knowledge of the "character" of the client. Some PDB officers interviewed said that they would not lend to people they did not know well; as with the DBP branch staff, they benefit from having a good working knowledge of the local communities and enterprises. For these reasons, the administrative costs appear to be well within the spreads estimated above. The arrears, however, amounted to 10% of principal outstanding in 1978; but the conservative valuing of collateral has resulted in the PDBs having minimal write offs. 2.40 The spreads on loans rediscounted with DBP vary, since the extent of the rediscouiting varies between 50% and 100% depending on the size of the loan and the economic sector of the business. On a fully rediscounted loan, the rediscounting rate is 12%, including a 2% service charge to DBP, giving the PDBs a gross spread of 7%. 1/ The low return on capital has made it difficult for PDBs to raise additional resources from the private sector. 2/ The General Bank Act requires PDBs to accept only real estate and high grade investments as collateral. In addition, the loan collateral value of various types of investments is also stipulated. 3/ Several managers interviewed said that this is often first acquired through the businesses becoming depositors in the branches. 2.41 IGLF loans made by most PDBs have been subject to high arrears; in 1978 principal and interest in arrears on IGLF loans as a proportion of loans outstanding amounted to 30%. (The rural banks have run into similar difficulties with IGLF, as will be discussed below.) Several explanations have been offered for the high arrears and for the inability of the PDBs (and the rural banks) to bring them down. A possible explanation is that IGLF has involved the PDBs in a scale of lending that was outside the capacity of all but a few banks to handle, with the average IGLF loan being ten or more times the average loan made out of their own resources. As a result, a different and more substantive approach to loan appraisal and supervision was required and the smaller PDBs were unable to structure their policies accordingly. 2.42 Conclusion. The PDBs are a well adapted and an effective channel for handling large numbers of very small loans with relatively low adminis- trative costs; the arrears are still quite high, however, and a greater input into the development of the institutions is required to achieve significant reductions. The PDBs are thus filling a void in the credit market by making loans to the smaller end of the SSE distribution, and enjoy an advantage over large institutions, such as PDCP and the private investment houses, derived from their personal knowledge of the local communities. This advantage is less applicable, however, when it comes to making large SSE loans for which the appraisal procedures employed by PDCP and other similar institutions are better suited. Rural Banks 2.43 Background. A rural bank is a locality specific unit bank. There are currently 960 individual rural banks which are privately owned but heavily dependent on Central Bank funds. The Government has used the rural - 68 - banks to implement many of its rural credit programs, such as Masagana 99 and Masagana Maisan for rice and corn production respectively. Despite their wide network, at the end of 1978 rural banks contributed only 2.5% to the total resources of the financial system. 2.44 Sources and Cost of Funds. As of December 31, 1978, the total resources of rural banks amounted to P 4,037.2 million. A summarized Balance Sheet for Rural Banks is given in Annex Table 2.3. Borrowings (primarily from the Central Bank), deposits, other liabilities and paid-in capital and reserves accounted for 47.8%, 33.6%, 3.1% and 15.6%, respectively, of total resources. Borrowing by rural banks comprise special savings and time depo- sits, and bills and loans payable. A large proportion of these borrowings come from the Central Bank to finance particular programs and are secured by promissory notes from the recipient banks. In 1977, the weighted average cost of these borrowings was around 2% p.a., reflecting the large volume of low-cost Central Bank funds in the borrowings of rural banks. As of January 1977, no interest was paid by rural banks on demand deposits; savings depo- sits offered 7.5% p.a. while the return on time deposits varied from 9% to 12.5%. The weighted average cost of deposits was 6.3%. The paid-in share capital of rural banks comprise common stock and government-owned preferred stock. Inadequate data on dividends paid makes it difficult to compute the cost of capital for rural banis. In an opportunity cost sense, the share capital could be seen as being equivalent to a long-term deposit. On this basis, the cost of its capital has been estimated at 15% p.a., resulting in a weighted overall cost of capital of around 6% p.a. 2.45 Use of and Return on Funds. Approximately 83% of the assets of the rural banks are in the form of loans. Of the loans granted in 1978, 86.8% went to agriculture, 8.7% to commerce, 2.7% to industry and 1.8% to others. - 69 - In terms of maturity, approximately 90% or more of rural bank loans are short term; medium- and long-term loans being confined almost entirely to loans financed under the Central Bank/IBRD program. The rate of return on loans outstanding to agriculture, commerce, industry and others was 7.4%, 8.9%, 4.8% and 29.0%, respectively for 1978, resulting in an overall weighted return on the rural bank loan portfolio of 7.8% for 1978. Administrative costs for rural banks were computed at 3.6% for 1976, leaving a negative margin of l/ 1.8 even before considering provisions, write-offs and profits. 2.46 Lending to SSE. In theory, rural banks could operate as ideal outlets of small loans as they have a wide geographical coverage; in practice, however, they have made very few loans except to agro-related cottage industries such as fisheries, piggeries and poultry. As outlets for IGLF resources, they have not been particularly successful: by the end of 1978, arrears as a proportion of IGLF loans outstanding amounted to 55%. A possible reason for the high level of arrears on IGLF loans is that in their normal course of business, RB make short-term production-credit type agricultural loans while IGLF loans were essentially long-term industrial loans; in addition, the average size of an RB loan out of non-IGLF resources is less than one-tenth of the size of loan they were typically expected to handle under the IGLF scheme. Consequently, IGLF loans required a different type of appraisal which RBs did not have the institutional expertise to 2/ undertake2 The rural banks alsQ had a major responsibility for administering 1/ If instead of imputing a value to the cost of capital, it were derived of the basis of dividends actually paid, then there is likely to be a substantial reduction in the cost of capital to rural banks. 2/ It was pointed out to us by Mrs. Mijares that the floor limit on IGLF probably raised the risks by limiting the options of the RBs (and the PDBs), who can manage very small loans efficiently. - 70 - the agricultural credit programs (Massagana 99), which severely strained their capacity to implement other programs. 2.47 Conclusions: Loans made by RB have tended to finance agriculture or agro-related industries. The RB loan portfolio has been faced with high arrears; as of December 31, 1975 arrears amounted to 21.4% of their out- standing portfolio. These figures, however, underestimate the true level of arrears since short-term loans are frequently restructured so that arrears are held below the 25% limit established by the CB as the rediscount- ing eligibility criterion. In addition, medium- and long-term loans made by RB are not deemed to be "in arrears", irrespective of the repayment per- formance, until after the maturity of the loan. IGLF loans to SSE channeled through RB have also faced high arrears, the long-term nature of the loan and the larger loan size serving to increase the likelihood of arrears. Non-Bank Financial Intermediaries 2.48 Background. Non-bank financial intermediaries (NBFIs) comprise institutions such as private insurance companies, finance companies, investment houses, and Government sponsored insurance programs. Private insurance companies make few loans to industry. When loans are made they need, by law, to be completely secured by real estate or by an iron clad commercial bank or parent company guarantee. Consequently, no lending is undertaken by private insurance companies to SSEs. The finance companies tend to be subsidiaries of commercial banks and are primarily engaged in 1/ While the Private Development Corporation of the Philippines is defined as an investment house it is not included in this section as it operates as a development bank and has been discussed above, - 71 - financing consumer durables and provide short and medium term finance to local manufacturers and traders. The investment houses also appear to provide a limited amount of financing to industry. 2.49 Lending by Finance Companies and Investment Houses to SSE. Two 1/ finance companies and two investment houses were interviewed. Two of the four institutions stated that they had made short-term loans (180 days to 1 year) for working capital financing. Even the short-term loans had gone to well-established on-going businesses which had, over time, developed a relationship with the NBFI concerned. 2.50 None of the institutions had made term-loans to SSEs from their own resources. There was considerable reluctance to lend to SSEs. It was pointed out that the administrative costs per unit lent to SSEs was signifi- cantly greater than to their established customers. Processing time and cost were particularly high as it was difficult to obtain information on the SSE and its credit standing. Por this reason, loans were only made to enterprises with a proven track record and which could provide collateral at least equal to the size of the loan. In addition to the cost of loan processing the NBFI's claimed not to have the necessary institutional expertise to undertake term-lending. 1/ The two finance companies were Manphil Investment Corporation and Multinational Capital Corporation. The two investment houses were Ayala Investment and Development Corporation and Bancom Development Corporation. 2/ According to one estimate the direct cost of processing an SSE loan varied between P 7,500 - P 12,000. - 72 - 2.51 The experience of NBFIs using IGLF funds for onlending has been mixed. Most NEFI's complained about the red tape involved in dealing with IGLF, and argued that the high level of arrears on their lending through IGLF would be tolerable if the loan ceiling were raised, the guarantee feature improved and the red tape reduced. 2.52 To concludV, NBFIs to date have been averse to lending to SSE. While in some instances short-term loans are being made the volume of such lending is insignificant while the volume of term landing is non-existent. 1/ Most of the suggestions have been incorporated in the recent IGLF loan. - 73 - III. EXPERIENCE OF THE FINANCIAL INSTITUTIONS: (B) CONCLUSIONS 3.1 In the preceeding analysis, three categories of lending were consi- dered: lending by the private sector institutions out of own resources; lending directly undertaken by the Government owned Development Bank of the Philippines, and indirectly through equity finance and rediscounting facili- ties provided to the Private Development Banks; and lending by private sector institutions using the Government's rediscounting facility (the Industrial Guarantee and Loan Fund) for term-loans to small industries. 3.2 Privately Raised Resources: Private sector financial institutions in the Philippines make few loans and even fewer term loans out of their own resources to small enterprises. Commercial banks, which are the largest source of institutional credit in the country, go in principally for short- term loans, undertaking very little medium- or long-term lending. The reluct- ance to lend long-term can be explained partly by the interest rate structure and the banks' adherence to the "golden rule" of matching maturities between borrowing and lending. Under the present system, the maximum effective inte- rest rates on short-term (up to 2 years) and long-term loans (over 2 years) have been administratively set at 16% and 19% respectively. The weighted average costs of resources to commercial banks is currently 13.3%, but would be higher if a greater volume of long-term resources were to be raised. The spreads between borrowing and lending rates are about 2.7% on short-term loans; something in excess of this for short-term loans that are rolled over, allowing for the service fees and other charges involved; and probably not much over 3% for long-term loans, allowing for the higher costs of raising long term resources. Considering the greater administrative costs, project -7L - risks and environmental uncertainties of lending long, the banks are finding it more profitable to lend short. The economy wide shortage of long-term peso resources is also affecting the privately-owned development finance companies and nonbank financial intermediaries, who traditionally concentrate more than the commercial bnaks on long-term finance. 3.3 The interest rate structure, aside from encouraging short-term lend- ing, discourages lending to SSEs. Prime customers are charged marginally be- low the maximum rates permitted while creditworthy, near-prime customers are charged the maximum. In addition to the nominal return on loans, both prime and near-prime customers bring in compensating business which increases the effective return on loans made to them. Given that most SSEs bring in little compens:ating business but are charged the same nominal interest rate, the effective rate of return on SSE loans is lower than on loans made to near prime companies. In addition to the effective return being lower, the ad- ministrative cost per unit lent are significantly higher on SSE loans. All the financial institutions interviewed stated that the cost and time involved in processing a loan for an SSE, without an established track record, would be about 2.4% to 3.0% of the loan value as compared to 0.4% and 0.5% for prime and near prime companies respectively. The higher administrative cost results in a lower net spread to the institution. In addition, the risks of arrears and write-offs on SSE loans are higher than on loans to well established enterprises. Consequently, in terms of both return and risk there is little incentive currently for private financial institutions to lend to SSEs out of their own resources. When loans are made by private financial institutions to SSE's they tend to go to a small minority of entrepreneurs with adequate col- lateral and an established relationship with the financial institution concerned. - 75 - 3.4 Lending to SSEs through private sector resources will therefore require greater financial incentives than are currently available; changes in the effective spreads through changes in the interest rate structures, service charges and tax rates are obvious possibilities. But as Pr.gied in the text, changes in financial incentives are needed to enhance the present programs, not displace them. The Government's programs have shown that the risks and arrears of lending to SSE are far higher than commercial banks would normally accept. Although there has been a reduction in arrears over the past 5 years, it is clear that the returns from developing a small enterprise clientele lie beyond the planning horizons of financial institutions in the private sector. A comparison of the experiences of the different institutions involved in implementing the programs reveals at least five reasons why risks are initially high: (i) Purely irreducible and random factors; (ii) Term loans to the larger sizes of small and medium industries being outside the scope and specialization of some private sector institutions (the smaller rural banks and PDs); (iii) Internal and external diversions and misuses of funds until control procedures have been fully developed .; (iv) the shortage of information on small enterprises and the absence of a formal record-keeping system on credit worthiness; related to this is the point that the abilities and other qualities of owners are 1/ broadly distributed, leading to difficulties in distinguishing between sound and unsound loan requests until sufficient information and experience have been gained; and 1/ This same characteristic also leads to high turnover rates of small enterprises. - 76 - (v) The tasks of traini 7 staff and developing screening, appraisal and supervision procedures. The last three items each involve high fixed costs and economies of scale in developing the lending programs. While the traditional economics argument would be to let interest rates rise to reflect costs, there are difficulties in implementing it in practice. Higher interest rates for loans to small than to large borrowers might be subject to policital charges of discrimination. Even if interest rates went to high levels, this could raise doubts within the institutions about the capacity of SSEs to service debts; that is, supply curves could be backward sloping. 3.5 Allowing for these factors makes it difficult to decide what mix of incentives is appropriate, and for this reason we have merely raised the issue. One obvious possibility is the adoption of mandatory ('forced balance sheet') measures to back up any shifts in financial incentives. But such methods are themselves easily avoided without extensive controls and monitoring procedures. An alternative would be to encourage a small but select number of financial institutions to develop a long-term interest in small enterprise lending and derive benefits from economies of scale; IGLF was of course conceived with this in mind, except that it has been spread thinly 2/ across a large number of institutions in practice. The development of a long term interest, however, would still require adjustments in the financial incentives. 1/ A comment made to us by Naburo Kawai. 2/ Concentrating on a few institutions would also make IGLF easier to monitor. - 77 - 3.5 Government Programs: (a) The Larger Small Industry Loans. Since private sector financing is not available, there is almost exclusive reliance on the Government's programs. The lending rates on loans made through these 1/' programs to small enterprises are below the 19% ceiling rates,-' but the spreads accruing to the financial institution have not been sacrificed as the funds were made available at less than the market rate. 3.6 Some commercial banks had found IGLF loans to be profitable, but only by accepting highly creditworthy clients with solid collateral, and have in consequence made very few loans. On the other hand, non-Bank financial intermediaries such as PDCP have made a greater number of loans, but concentra- ted on the larger end of the small enterprise size distribution, with loan 2/ sizes averaging over y 350,000 (in 1978); the service charges-- enabled them to put substantial effort into screening, pre-loan services, loan appraisal and supervision. Analysis of the experience of other institutions, including BP, shows that such screening procedures are necessary if risks are to be kept down. In the IGLF program, institutions with high arrears tended to be those which did not have much past experience in term lending. In the case of the Rural Banks and the smaller Private Development Banks, the IGLF loan sizes were also several times greater than those of their normal loans, and they were unable to appraise and supervise them appropriately. 3.7 One of the achievements of the program has been the development of project-lending procedures within DBP and some private sector institutions (such as PDCP). The immediate aim is to develop these further and, in the 1/ With the exception of loans made by the PDBs, and rediscounted by DBP and the Central Bank. On DBP loans the rate charges is 15.5% while on IGLF it was 13.2% as of December 1978 (the latter was recently raised to 14.2%). 2/ These work out at about 2% of loan amount, regardless of loan size. -78- case of IGLF, to involve private sector institutions selectively. Given the difficulties encountered in the first five years of the program, and the progress made in developing procedures, a forum for the exchange of views and experience between institutions seems desirable; the establishment of a common credit-record keeping system (for both private and Government pro- gram loans) would also help. 3.8 Loans to small enterprises continue to be prone to high arrears, however, and a rapid rate of decline seems unlikely given the poor state of records in and information on small enterprises- or more generally, the difficulties of servicing a diverse and largely unknown clientele, One method employed by DBP and IGLF to cushion the losses is to blend the small industry programs with lending to medium-scale industries so as to increase the return and reduce the overall risk on the institution's SME portfolio. In addition, it permits the financial institution to make second loans to expanding enter- prises (loans to enterprises with track-records are much less risky). 3.9 Government Pro grams: (b) Cottage (or Home) Industry Loans. The formalized screening and appraisal procedures discussed above are too costly to apply to small loans (of less than p 50-100 thous..-Ad), so simpler proce- dures have been adopted by DBP and the PDBs, who are the only institutions offering term-loans to home industries.-2_ Loans are made at the branch lev7-- on the basis of character, collate-ral, and a personal knowledge of the local enterprises. The experience so far is that such procedures have cut both administrative costs and risks: arrears are significantly lower in the pro- vinces (by a factor of four in the case of DBP);-! and the administrative 1/ Which is why the M{ASICAP program and the pre-loan service.- of PDCP are so important. Z/ PNB also have a cottage industry loans facility, but it is not actively promoted. 3/ The small industry loans of DBP also had similarly lower arrears in the provinces. -79 - costs are within the gross spreads estimated above. The branch networks of DBP and the PDBs have thus proved to be low cost and relatively low risk chan- nels for handling a large number of small loans to home industries. The PDBs 1/ have also lent quite extensively out of privately raised resources,- prin- cipally savings and time deposits. 3.10 Cottage (or home) industries in the Philippines are defined to include small manufacturing establishments and workshops with assets of up to p 100,000. (The term is thus a misnomer, since these activities are not in the home.) As noted in the introduction, there are over 70,000 such establish- ments, which are one of the most rapidly growing sources of employment and earnings opportunities in the country. (Manufacturing employment in households has peaked and probably started to decline.) DBP and PDBs currently lend to this sector. However, the reliance on DBP and PDBs for home industry loans limits the geographical coverge of the program, and its ability to cater to a grow- ing demand. The floor limit of p 50,000 on IGLF loans also effectively closes of this channel to home industries. If the limit were removed, and accompanied by appropriate simplications in loan procedures for "home" industry loans, the branch networks of the commercial banks could prove to be ideal outlets; as with the DBP branches and the PDBs, commercial bank branches benefit from a close knowledge of their local communities and businesses. 3.11 Government Programs: (c) Working Capital Finance. Since the programs concentrate on the finance of fixed assets and permanent working capital, we have so far not discussed working capital finance for small enterpriseY. At this point 1/ For reasons discussed above, the weighted average cost of resources to PDB is lower than for other banks. Consequently the gross spread accru- ing to PDBsis higher than would normally be the case. - 80 - it might be useful to ancitipate some findings on the subject reached in the next Chapter. This entails duplication; but the issues are sufficiently important to warrant it, and were raised both during interviews with the enterprise owners themselves and by the staff involved in the program. The first finding is that the demands of small industries for the finance of working capital are probably as great as those for the finance of fixed assets. The historical experience of the industrialized countries, and the current (if sketchy) evidence from developing countries, indicates that more than half of the asset structure of small and medium industries is made up of working 1/ capital.- Second, the finance of fixed assets only, without tailoring the financial package such that subsequent access to short-term finance is guaranteed, places a financial stress on the business, and increases risks, by leaving it with high overheads and a limited ability to respond to changes in orders. Financing 'permanent' working capital does not provide for this since it is concerned only with minimum levels of inventories and cash reserves, not with needs resulting from day-to-day changes in sales and purchases. Third, because it can be related to current sales levels and contracts, working capital finance is inherently less risky. Fourth, it is also more likely to involve the commercial banks in the program. 3.12 For these reasons we have suggested that the provision of working capital finance ought to form a point of departure for the future of the program. The point was also made that the most effective - though by no means exclusive - channels for working capital finance in industry are trading firms, which pro- vide the further advantage of coupling the finance with access to markets, 1/ Kennett (1979). Working capital includes t>e value of materials and supplies, work in process, finished products in stock, cash reserves and accounts receivable - 81 - reducing risks all round. In the interests of providing small industries with improved access to finance and markets, therefore, it seems desirable to expand the scope of the program to cover small (and medium) enterprises, in the general sense that we have defined the term in Chapter 1. 3.13 Postscript: Further Changes in 1979. The interviews on which the above analysis was based were conducted with twenty institutions in November 1978. There have naturally been some changes since then, all of which, however, confirm the general conclusions reached above. Supplementary interviews were undertaken with six institutions at head and branch office levels in November 1979., The weighted average cost of resources had risen from 13.3% to close to 16% during the year (one institution was actually using a shadow price of 16% for planning purposes), on account of the pres- sure on short-term resources brought about by falling sugar prices and rising oil prices on the balance of payments. The effects on lending to SSEs were (predictably) a substantial cut-back on both current and planned lending, and a readiness to lend - on the part of the accredited financial institutions- only through the Government's IGLF program. One other private financial institution (Allied Banking Corporation) had begun to develop specialization in term-lending through IGLF, more or less in lines with arguments set out above, and in parallel to the efforts of PDCP. 3.14 Summing up. The Government's programs are providing an increasing number of small enterprises with access to institutional credit, and they have shown that the administrative costs and risks of lending to small enterprises can be reduced with experience and as appropriate screening procedures are developed within the institutions. But the volume of lending is small compared to both the demand for credit by small enterprises and the resources of the - 82 - private financial sector. The structural constraints preveuting private financial institutions from lending out of their own resources to SSEs will have to be eliminated if financial institutions are to build on the experience gained through the Government's programs. - 83 - IV, INDUSTRIAL EXTENSION Introduction 4.1 In parallel with the financing programs for small and medium industries, the Government introduced in 1974 two kinds of industrial extension service, both run by the Ministry of Industry. One offers assistance in the preparation of projects for finance out of the enterprises' own resources or by the financial institutions, and the other a range of entrepreneurial counselling and other advisory services. The former is known as MASICAP (the Medium and Small Scale Industries Coordinated Action Program) and the latter as the SEAC (Small Business Advisory Centers') program. The two are administered under one department and share the same field offices. This Chapter reviews the activities of the programs over their first five years and considers the questions:- - what has been the demand for the services offered? l/ - what are the costs and the nature of the economic benefits in providing then? - in what ways might the services be improved? - is the private sector providing them also and, if so, what is the role of the Government's programs? 4.2 The last question is often raised in connection with government- sponsored extension progran, and a discussion of it in a Philippine context helps to provide some clarifications. What is at issue is less whether the services in themselves are sought by small enterprises (though there is surprisingly little known about the extent of the demand) but whether they need to be provided through government programs. Further, 1/ Relevant dataare not available for quantitative estimates to be made. - 84 - given the large number, the geographical spread and the heterogeneity of small enterprises there is also the issue of whether they can in fact be serviced effectively without great expense and establishing a large bureaucracy, The findings are summarized in the concluding section. 4.3 While the following analysis concentrates exclusively on the Ministry of Industry's programs it should be added that several other Government agencies offer services to small enterprises. Their activities have not been reviewed here because the task would be too long. They have been documented in a thesis by Chico (1976) and more recently in a study by the University of the Philippines' Institute for Small-Scale Industries (1979). The various agencies are represented on a Comission for Small and Medium Industries, which has the responsibility for developing overall policies; a review of the Comission's work is also outside the scope of the present report.1/ Project Preparation Services (the MASICAP program) 4.4 Background. The idea that led to the MASICAP program can be summed up by noting that small enterprises, like financial institutions, face transactions costs (risks and administrative costs) in obtaining loans. Moreover, the poor shape of their records raises the transactions costs to the institutions. Before the extension programs were introduced 1/ Members of,the CSMI are; the Ministry of Industry (which chairs the Commission); the Department of Trade (to which the National Cottage Industries Development Authority is also affiliated); the University of the Philippines' Institute for Small Scale Industries; the Development Bank of the Philippines; the Central Bank of the Philippines; the National Economic and Development Authority; the Department of Local Government and Community Development; the National Science Development Board; the National Manpower and Youth Council; the Design Center of the Philippines; and the Food Terminal Incorporated. Other agencies (such as the Technology Resource Center) are also involved in the program but are not members of the CSlI. - 85 - in 1974, lending facilities were aLready available to small enterprises, but had been little used in practice. The reasons given were '(a) that the institutions had not developed the capability of handling a large volume of small loans to small industry, and (b) the majority of small industries, having previously had no access to institutional credit, were unable, at least initially, to exploit this new resource properly and fully." With the introduction of term-lending facilities in 1974, transactions costs to both borrowers and lenders were expected to rise further since project analyses (involving forecasts of cash flows) were considered to be necessary for all except small projects and businesses of good standing. The idea was to absorb at least part of the transactions costs in the extension program, since the extension workers could under- take much of the preparatory work in submitting projects to the banks: in doing so they could also serve an educational purpose of disseminating ideas about business management practices and information on production methods. The theory was that once the preparatory work had been done successfully once for an enterprise, the transactions costs would be permanently reduced on both sides; furthermore, with increasing numbers of projects financed, there would be a greater willingness on the part of the institutions - provided the program had generated a satsifactory proportion of successful projects - to finance small enterprises independently of MASICAP, 4.5 The program was in fact designed not to be a permanent aspect of the Government's programs. It was also intended to be educational in itself, and a means of supplying public and private institutions with - 86 - experienced field workers having a knowledge of the workings of small businesses. The extension workers are given two year appointments, and practically all are recruited by financial institutions,industry or other government agencies on leaving the program. 4.6 The program covers all regions outside Metropolitan Manila, in accordance with the regional objectives mentioned in Chapter 2. In the first five and a half years, project studies had been completed for 2/ 5,000 businesses and submitted for financing. The annual volume of projects prepared has fallen somewhat in recent years as the extension workers have begun to work increasingly in the towns and villages away from the regional centers. The decision to finance is at the sole 3/ discretion of the financing institutions, who have so far approved 50% of the projects submitted; 24% were withdrawn or rejected after a preliminary screening, and 6% were disapproved after full appraisal; on account of long queuing and processing times (to be discussed further 1/ A key feature of the staffing policies is the recruitment of senior students with outstanding academic records from colleges and universities; they may substitute some course work for field work in the program. In 1978 the MASICAP staff totalled 147, of whom 134 were field staff on two year appointments, and only 4 (all at headquarters) were permanent. Since then a core of regular and experienced staff have been recruited in each of the 12 field offices to supervize the extension work and introduce more maturity and continuity in the program. Training of the extension workers is provided through lectures from representatives of various public and private financial institutions, government agencies and the senior extension workers. This staffing policy was in part a compromise, since it was necessary to recruit people "(a) willing to live and work in rural areas and towns, and (b) with the technical ability to identify promising projects and turn them into bankable propositions. At the beginning of the program the first qualification was considered more crucial than the second. Moreover, it was expected that the banks would provide the quality control through appraisal." These descriptions, together with the one quoted in the previous paragraph, were provided by Joe Pernia. 2/ Plus a further 500 small rice mill projects submitted to the National Grains Authority for licence permits. (The NGA requires the mills to conform to certain standards, including maximum allowances on wastage levels.) 3/ See Annex Table 4.1 for more details. -87 - below), about 20% are still awaiting decision.1/ 4.7 In practice, it is the smaller and more uncertain cases that are generally referred to or identified by the extension workers. As discussed in Chapter 2, the private financial institutions using IGLF offer preloan services to the larger of the small enterprises requesting loans upwards of about P 100-150 thousand, for which the service costs, as a percentage of loan amounts, are relatively low; loans in this size range have so far formed practically all of their portfolios. About 75% of MASICAP projects are far less than P 150 thousand, and 46% for 2/ less than P 50 thousand (Annex 1 Table 4.2). The large majority (96%) are also single proprietorships, employing less than 20 workers at the time of loan requests; in comparison, between one half and two thirds 3/ of the enterprises financed independently of MASICAP are incorporated. 4.8 Before turning to issues facing the program, one other aspect of the extensionists' work that merits comment is the heterogeneity of businesses encountered; it is this that necessitates an independent technical and financial analysis of each case. Small enterprises are 4/ found in practically all sectors of industrial activity, and may differ 1/ See paras 4.18 et. seq. 2/ The large volume of small loan requests has also created a dependence on DBP, as discussed further below. 3/ Source: File records of IGLF reviewed in Mrs. Fajardo's report. 4/ Annex 1, Table 4.3 provides a three digit breakdown of a sample of MASICAP, DBP and IGLF projects. - 88 - in technical and financial respects even within narrowly defined industrial sectors. In contrast to agricultural projects, it is not possible to consider different scales of activity, make an assessment of the cash flows and business budgets for various technology packages, and determine the economic and financial merits of a program of inputs for a region; even the market outlets and sources of material supply may differ between businesses that are otherwise similar, some for instance concentrating on local and others on national or export markets. Industrial extension presents difficulties fundamentally different to (though certainly not greater than) those found in agricultural extension. The costs of industrial extension are also raised by the need to assess the technical and financial merits of each case individually. 2/ 4.9 Issues. The issues facing the program can be grouped under ,o four headings: (a) Risks, as reflected in the arrears on loans and the closure rates of the enterprises assisted; (b) the costs and risks of the program in relation to its economic returns; (c) the dependence of the program, and thus of the enterprises financed, on DBP; and (d) the shortage of short-term loans for working capital finance. 4.10 (a) Arrears and Closure Rates of Enterprises Assisted. Monitoring surveys were undertaken by the Ministry of Industry in 1977 and 1979, the first taking a 50% sample of all projects, and the second a 100% sample of all manufacturing enterprises having received loans 1/ See Chapter 5 for a discussion of the markets of small industrial enterprises. 2/ The following is based on analysis of records; interviews with extensionists and the branch and head office staff of several financial institutions; visits to 30 enterprises assisted under the program; and the interviews reported in Chapter 5 with 80 enterprises not assisted. of over P 15,000. The questions considered were, are the enterprises still operating? are they up-to-date or in arrears in loan repayments? if in arrears, what are the causes? and how do actual sales, profits and employment compare with what was projected? 4.11 The statuses of the enterprises assisted, and of the loans made to them, are shown in Annex 1, Table 4.4. About 25% had closed down by 1979, an average closure rate of about 9% per year. The latter is higher than the "natural" closure rates of 3 to 5% per year for small and medium enterprises as a whole, estimated in Chapter 5 from NCSO and 3/ interview data, and appears to have increased significantly since the 1977 survey. Forty six percent of the projects hhd loans in arrears. Total arrears in principal and interest outstanding were 15%, which is lower than the averages reported in Chapter 2 for IGLF and DBP, but much higher than the private sector would consider as being acceptable. Higher risks might be expected on MASICAP projects since as noted earlier it is the more uncertain cases that are referred to the extension workers in the first place. In addition, the arrears levels are partly a consequence of the still evolving appraisal and supervision procedures 1/ Also included were non-manufacturing enterprises with loans of over P 50,000. Unfortunately, self-financed enterprises assisted by the extension workers, which could have provided some useful contrasts, were excluded from the sample. 2/ Estimated as follows, Let n be the number of enterprises assisted in year t, t years before the monitoring survey, f the closure rate and P the proportion having closed down by the time of the survey. Then the proportion remaining Cl-P), is given by E nt (1-f)t/Fnt Values of n are provided in Annex 1, Table 4.1, and (1-P) is 0.252 from Annex i, Table 4.4. 3/ Paras 5.16 et. seq. -90 - of the financial institutions; the financial institutions are solely responsible for accepting or rejecting a loan request and,with hindsight, several of those involved in directing the MASICAP program were surprised that the rejection rate of MASICAP projects during appraisal was so low (Annex Table 4.1). Nevertheless it is necessary to inquire if MASICAP's own procedures can be improved in various ways to reduce the risks; on this, two suggestions can be made. 4.12 First - a not uncommon phenomenon - there is a tendency for project benefits to be overestimated and costs to be underestimated. Examination of a sample of 100 projects showed that sales levels in the first year were at least 50% below what was forecast in 66% of the cases, and 1/ between zero and 50% below forecasts in another 24%. Actual employment levels were also substantially below forecasts. Since the loans went to finance an expansion of fixed assets, the costs of which were also underestimated, most firms (including many not subsequently in arrears on loan repayments) immediately ran into cash flow problems. While the monitoring surveys commonly attributed the arrears problem to a lack of markets, the reality was that the markets, and the firm's share in them, had been overestimated. One safeguard against the optimism would be to involve the extension workers more in follow-up work on the projects, as has recently been proposed in the Ministry. At present the projects are left entirely to the banks after appraisal, and the extension 1/ Reported by Mrs. Fajardo (1979). - 91 - workers have no systematic knowledge of how they work out in practice. The idea is that, apart from being useful to the banks in their own supervision work, an arrangement which involved the extension workers visiting and reporting on the projects periodically would also introduce more realistic expectations into their forecasts. Having to be accountable for the quality (as opposed to quantity, as at present) of projects would 1/ also be a good discipline. 4.13 A second way of reducing risks would be to make finance .2/ available only to existing enterprises, and to relate the amount lent to the current size of the business. This would not preclude offering advisory and training services (through the SBAC program) to new or prospective businessmen, but the evidence is that to finance them when new, or to increase the size of a business substantially in one step, significantly increases the risks. An additional point is that the majority of. businesses start with very low levels of investment in order first to develop the products and establish their markets and supplies before expanding into larger 3/ entities; very few need large amounts of finance when beginning. Annex Table 4.5presents data on the characteristics of enterprises in arrears and up-to-date in loan repayments. Comparing the percentage distributions shown in the Table, the percentage of projects in arrears on loan 1/ The annual and quarterly reports on the program currently give only the numbers of projects prepared and in various stages of processing, but no records as to their status after finance, 2/ C.f. the practices of the private financial institutions discussed in Chapter 2, which only lend (other than for small personal loans) to people having been in the business for some time. 3/ For a further discussion see Chapter 5. - 92 - repayments are relatively high among enterprises (a) that were new, (b) had received the largest loans (of P 500,000 and above), or (c) had received large loans relative to the size of the enterprise before the loan. All three situations leave the businesses with comparatively large overheads and highly vulnerable even to small shortfalls in markets and supplies. 4.14 Another feature of interest in the Table is the lack of any association between the incidence of arrears and the type of ownership, the location and type of product market, or the size of the loan (below about P 500,000). There is no apparent variation in arrears with respect to the type of ownership (single proprietorships or incorporated enterprises), market location (local, regional, national or export), or market group (low or high income). 4.15 One other possibility for reducing risks would be for the program to respond more explicitly to the demands for working capital loans, which are inherently less risky than loans for fixed assets. As working capital finance raises several issues not related 1/ to risks, however, it is taken up under separate heading below. 1/ Paras 4.22 et. seq, - 93 - (b) Effects of Extension Costs and Enterprise Closures on The Economic Returns to the Program. The costs of training and paying for extensionists to work individually (often over a long period) with each of a large number of small enterprises naturally raises the question, how seriously do they affect the chances of having a satisfactory economic return to the program? A similar question can be raised about the high closure rates discussed above. The lack of reliable ex post estimates of profits and earnings in the enterprises assisted unfortunately prevents specific estimates of economic returns being made at the present time; but by considering a range of values, some general answers are possible. The economic benefits of each project can be estimated by comparing the present worth of incremental sales with incremental costs. If these are aggregated up over all projects and an economic rate of return is calculated, denoted by r* then the actual returns to the 1/ economy are given by: r =r* (100 + e) where a represents the costs of extension, expressed as a percentage of the capital costs of the investments, and A the closure rate (percentage of enterprises closed per year). 4.1§ Overall costs in the first five years of the program were P12.8 million ($1.8 million), and the number of projects prepared and subsequently 2/ 3/ financed, 1,800. Average loan size was P190 thousand, so that assuming 1/ See Addendum. The formula does not include the administrative costs faced by the financial institutions, since here we are only considering the effects of extension costs on the returns. r and r* should therefore be compared with the opportunity cost of supplying capital from the banks. 2/ Allowing for those in the pipeline at the time. 3/ Based on a sample of 100 projects. (Only the size of loans requested appear in the MASICAP reports.) -94 - 20% equity finance the costs of extension worked out at about e = 3.0% of the total investments in the projects. If a small number of large 1/ projects are excluded, however, involving loans of over P500 thousand and which are not representative of the program's work, the figure would more realistically be close to 5%. The closure rates for the enterprises financed after the assistance from the program averaged about 9% per year, though as discussed earlier there are some grounds for thinking that the figure is rising. If, then, to take an example, the rate of return on financing the enterprises was 15%, ignoring extension costs and closures, it would fall to 15.0/1.05 = 14.3% including extension costs, and by nearly two thirds to 5.3% allowing for closures. Considering a range of values of r* gives the following: Rate of Return, not including extension costs and before allowing for enterprise closures 5,0 10.0 15,0 20.0 Rate of Return, including extension costs but before allowing for closed enterprises 4.8 9.5 14.3 19.0 Rate of Return, including extension costs and allowing for closed enterprises -4.2 0.5 5.5 10.0 Hence the closure rates are probably having a more adverse effect on the economic returns than the costs of extension, which by comparison are insignificant. The extra costs of introducing supervision prodecures, as suggested above, and placing during supervision a greater emphasis on the quality (as opposed to quantity) of projects would no doubt be justified if, as intended, they were to reduce the closure rates. 4.18 The largerquestion as to the ex-post benefits of the program cannot be answered at the present time without information on the profits and labors' earnings variables noted in the Annex. Ex-post estimates at present might in any case be misleading as to the long-run value of the program, if, as argued above, there is scope for improving it further. Ex ante estimates are possible but would be undependable until a 1/ Comprising 8% of the number of projects in the portfolio. - 95 - 1/ better forecasting record has been achieved. 4.19 (c) The Dependence of the Program on DBP. About 75% of the projects generated by the program were financed by DBP, 11% by IGLF, and 14% by the owners' own equity, other public banks and (a very small percentage) by private banks and investmen, houses out of private resources, 4.20 The low involvement of the private sector (other than via IGLF) is a consequence of the structural constraints discussed in Chapter 2, which make private lending to SSEs unprofitable. There is consequently a high demand for DBP and IGLF loans, for which queuing times average fcur months, and are often six months to a year CAnnex Table 4.6). The low interest rates of DPP and IGLF further encourage queuing, and also a number of enterprises to seek the assistances of MASICAP that would not normally do so, but see the program as a way of obtaining low cost funds, A survey of the file data and visits to enterprises showed that a not small percentage of MASICAP and IGLF clients had had very good educations, and had both the income and familiarity with banks to undertake or otherwise organize the preparatory work themselves. These points highlight a danger facing the MASICAP program. This is that, so long as the structural constraints inhibit the private financial sector's involvement, there is a possibility of the program becoming a permanent part of the bureaucracy of administered credit. 11 See also Chapters 7 and 8 on methods of estimating benefits. - 96 - 4.21 Within the Government's financing programs the dependence on DBP follows from the size distribution of loan requests in MASICAP's projects; 44% are fcr under P50,000 which is below the floor limit on IGLF, and 74% for under P150,000, which is about the minimum size of loans (though there are exceptions) that the private institutions using IGLF find profitable. If then the intention is to use IGLF to encourage a wider involvement of the private sector in lending to small enterprises, there is a case for making the spreads on IGLF greater at the very small loan end, and fcremoving the floor limit. 4.22 (d) Working Capital. The shortage of working capital finance is (like the program's dependence on DBP) not strictly an issue to be taken up in connection with the MASICAP program; but since it is the experience gained through the extension program that serves to highlight the issue,-it is appropriate to raise it in this Chapter. 4.23 The present financing programs of the Government are almost wholly concentrated on term lending. While some of the finance is for "permanent" l/ working capital, the main part is for fixed assets. The share of finance 1/ See Annex Table 4.2, footnote 1, - 97 - for working relative to fixed capital is also often reduced during appraisal, in part because the latter can be used to secure the loan. Although we were unable to demonstrate the point quantitatively, interviews with several proprietors suggested that perhaps over one third of the pr6jects would have been better suited for working capital finance, or required a better blend of working and fixed capital finance. In some cases, the projects were applications 'in disguise' for working capital, in which the fixed assets (on buildings, especially) had been dressed-up in various ways; this had often placed a financial stress on the business, by adding to overheads without adding correspondingly to output. In other cases the owners said explicitly that what had been 2/ needed in the first place was working capital, 4.24 The available data on small manufacturing enterprises shows high proportions of woking capital in the asset structure. In the industrialized countries, it has historically been the principal element, Kennett (1979) remarks that "the technological transition of the Industrial Revolution was largely financed in the form of working capital. In the middle eighteenth century the ratio of inventory to fixed capital in metal working and textiles in England was around 8:1 .... The technology change saw an increase in fixed capital, but well into the nineteenth century the value of inventories was 3 or 4 times the replacement value of fixed capital." For US manufacturing in 1974 his estimates of the ratios of working to fixed capital were 2.03, 1.70 and 1.33 respectively for small, medium and large firms. Precisely comparable 1/ See Annex Table 4.2. 2/ This point is also apparent from the monitoring surveys of the MASICAP program, -98- data are not available for Philippine man-afacturing. Working capital assets include accounts receivable, cash and short-term securities, and inventories. Data are only available for inventories, which according to estimates from other countries comprise less than half of working l/ capital assets; theyir are shown in Table 4.1: Table 4.1: FIXED ASSETS AND INVENTORIES IN PHILIPPINE MANUFACTURING, 1974. (PERCENT DISTRIBUTION) 5 - 19 Employees 20 or More Employees Fixed Assets (Based on Book Values) Land 11.9 3.1 Buildings 12.4 8.2 Machinery and Transport Equipment 34.5 34.4 Other 4.2 3.3 Total 64.0 48.9 Inventories (Based on Year End Values) Finished Products 9.7 15.4 Work in Process - 3.6 5.9 Materials, Supplies, etc. 22.7 29.8 Total 36.0 51.1 Total 100.0 100.0 Source: NCSO Annual Survey of Manufacturers. The data are not dis-similar to those footnoted below for India. The share of inventories in total assets varies greatly with industry, ranging from about 26% for food processing, 32% in textiles, 41% in wearing apparel, and 62% in the manufacture of machinery and equipment (these 2/ figures are all for small scale). 1/ Kennett's estimates for small-scale industries in India (in 1970) and in the U.S. (1974) are as follows; the figures shown are percentages of total assets: India U.S. A/C receivable 24 26 Cash 3 13 Inventory 35 28 Fixed Assets 38 33 100 100 Kennett adds that the 'cash' figure for India may be higher for various reasons. 2/ Source. As for Table 4.1. - 99 - 4.25 It may help to make issues in working capital finance more concrete if an example is taken. If a business expands its fixed assets by P 100 thousand using a DBP or IGLF term-loan, it is likely to require at certain times of the year an expansion of assets in working capital ranging from about P 70 thousand to P 200 thousand or above depending on the sector - say P 150 thousand on average, corresponding to 60% of assets being in the form of working capital. Of this, about P 30 thousand or 20%, will be a minimum below which stocks and accounts receivable will not fall, unless the business is in dire straights; this is the 'permanent' working capital of the business, and by coincidence it is roughly the amount that DBP and IGLF finance on average. The remaining P 120 thousand - which is still greater than the original investment in fixed assets - must come out of retained earnings, trade credits or further loans. But in most cases, further loans are forestalled by the collateral already tied up in the loans on fixed assets, unless the appraiser and the owner were. prescient enough to anticipate the need to leave some collateral 'in reserve' for working capital loans. Trade credits in the form of advanced purchases may be common for some firms, such as those to whom work is 'put out' or subcontracted; but however important this source may be, it is not universally available or useful to all firms. Trade credits on materials supplies are often available too, and are common in the garments industries (where putting- out is also common). But what about firms with relatively long production periods, in which labor costs and overheads are high while material costs and stocks are low? Similarly, what of the firms in the agricultural provinces - e.g. those maintaining or supplying agricultural equipment, - 100 - or others catering for fairly steady demands where the consumers incomes fluctuate seasonally - which may need to offer credit to,rather than receive credit from, their customers? In these cases, trade credits are either not available, or supplied rather than received, and, in the absence of short-term finance from banks, the business must turn to the curb market or retained earnings. If these sources are also scarce, the result is a substantial financial stress on the business. 4.26 To sum up, both the needs for and the sources of supply of working capital finance vary greatly between businesses, and in practice many businesses 'blend' different sources of finance. Further, some may need for more short-term than long-term finance. 4.-7 There is then a case for the programs to respond more explicitly to the demand. First, there are several disadvantages of supplying working capital finance "permanently" since the timing and the magnitudes of a businesses' demands for working capital are highly uncertain, and vary with the flow and size of job-orders and the availability of supplies. Second, it would eliminate the financial stresses just mentioned that are unnecessarily placed on some businesses, and which are reported by the extension workers to have caused several closures. Third it would reduce the risks on the program. Working capital finance is intrinsically less risky since the amounts requested can be related to current sales and assets or contract orders, instead of to forecast values. There may also 1a some merit in financing more of the former and letting a greater share of investment finance come out of retained earnings. It would, for instance, constrain an enterprise to grow - 101 - more naturally in relation to the growth of its markets, and avoid the dangers of expanding (as happened in several of the cases discussed above) in large steps to meet anticipated but as yet unrealized markets; one can be too conservative in these respects, but as seen above it is also too easy to be excessively optimistic. Fourth, the demand could be met more speedily, and the policy would reduce the congestion now faced by DBP, and the long-processing times (which are not admissible for working capital finance) faced by the borrowers. There is also no reason why it should not - and perhaps more so than with long-term loans - act to familiarize institutions in lending-to small enterprises and reduce their perceptions of the risks involved; it would be consistent therefore with the basic ideas of the Government's financing programs. Lastly, it would probably be a better way of involving the commercial 1/ banks in the program. Although there are exceptions (as discussed in Chapter 2) IGLF has met with resistance in part because term-lending is not a specialization of commercial banks, and has proved to be more acceptable to those non-bank financial intemediaries more specialized in term finance. 4.26 As to supply, the ideal policy would be to release the constraints on effective spreads, discussed in Chapter 2, and support the changes as necessary with risk-guarantee or risk-sharing schemes (analogously with IGLF). Alternatives are possible, however, and the purpose of the present discussion is merely to raise the issue. There also seems to be no good reason why the supply points of working capital to industry should be concentrated on the financial sector alone; trade credits from commercial enterprises in many respects make much more 1/ Joe Pernia pointed out that, if the extension program were involved in providing assistance with working capital finance, it would require a revision of procedures, - 102 - efficient and lower risk suppliers - if only because they also offer the market outlets, materials supplies and a range of product design, advisory and training services as well. This was particularly apparent in a series of interviews held with enterprises in the garments and handicrafts sectors. In several cases the enterprises were ostensibly in manufacturing, but most of the work was in fact put-out to households; the owners themselves were mainly involved in designing the products, marketing, obtaining raw materials supplies and training the household 1/ workers. Hence the Government's policies - and in particular their financing aspects - could be more effective if tney did not concentrate specifically on small industrial enterprises, but responded to the demands of 9mall enterpri2e more generally. 4.27 One objection to supplying working capital might be that it is less likely to be associated with an increase in the demand for labor. There is, however, no evidence for this, as the examples provided in the preceding paragraph illustrate. The demand for labor is determined more by the growth of markets than perhaps any other factor. By improving access to supplies and the capacity of business to meet larger orders, working capital finance should have a measurable influence on employment 2/ and earnings opportunities. If Two of the small enterprises of this type that we interviewed (one in garments and blankets, the other in macrame) were marketing the output of over 200 households (the figure was easily checked from figures 6n the sales volumes and the times taken to produce the articles). One had since established a central weaving and garment making factory, but continued putting-out work to households; in the other, only a dozen employees worked in the main establishment, some to provide training, the others handling materials and storage. The households work in groups, each with a group leader, to whom a commission is paid, responsible for passing out the materials, supervision and controlling quality. "Putting-out" appears to be quite widespread in the Philippines, as it was historically in Japan. 2/ See Chapter 7 for a discussion of methods for assessing the benefits and costs of alternative policy and project measures. - 103 - Advisory Services (The SBAC program) 4.28 So far the discussion has only considered the preparation of projects for finance. But the larger element in the Government's extension programs, at least in terms of professional staffing, is to provide advisory services to small industries. From the beginning of the Government's SMI program these have always been considered desirable since it was felt that the demands of small enterprises would not necessarily be solely for finance. This is particularly true ;or enterprises just starting up (as the enterprise interviews reported in the next chapter will show), when most begin with very small investments. Since 1974, Small Business Advisory Centers have been set up in each of the 12 administrative regions of the country; they now employ over 100 regular professional staff variously specialized in engineering, finance and business management. Before examining questions (a) about the demand for such servides, and (b) what the Government's role is in providing them, it is necessary to discuss what they are intended to do, Some points will also be footnoted from another 1/ a report on the same subject;- although produced in a very different context it provides evidence and conclusions remarkably similar to those following from the Philippines' experience. 4.29 Services Offered. The services are provided free of charge, and cover most aspects and stages of small business activity. Most of the clients are "walk-ins" or referred to the SBACs by others (Annex Table 4,7),About 30% of the SBAC's work is in what is called entrepreneurial 1/ The Bolton Report on Small Firms in the U,K. (November 1971; Reprinted 1978,) 2/ The issue of whether to charge for services is taken up further below. Para 4. - 104 - 1/ counselling for new or prospective business people, and another 40% for established businesses with "no serious problems" but who visit the SBACs to talk to the staff about the running or expansion of their businesses. While advice on specific technical, marketing or 1/ The advice offered here is about marketing opportunities, whether the industry is over-crowded, sources of equipment, sources of finance, suggestions on cash flow management, various pitfalls (of which starting too large before markets are established is common). Seminars for small business proprietors are sometimes held in the centers. 2/ One of the distinguishing charactersitics of very small businesses is that the owners control all aspects of the business, are often able to keep records in their heads, and have no felt need for accountants or managerial support. The SBAC staff find that the most noticeable tendency of small businesses when expanding is for the owners to cling to the control of all aspects of the business, even when it becomes too large for one person to manage. Workshops also become congested and expand haphazardly. Discussions on when to employ people with, say,management or accounting skills, showing what other businesses have done, are apparently helpful to the owners in making their own decisions. It is interesting to compare this experience with what the Bolton Report mentioned above had to say about small industries in quite a different setting (op. cit. p.112):- "The majority of small firm proprietors have no professional or other formal qualifications and only a tiny minority have specific qualifications in management. They run their business on the basis of their experience and commonsense. This may be very effective so long as the scale of the firm's activities remains small enough for one man to control them all effectively, and so long as no serious crisis overwhelms his pragmatic management. Either of these eventualities, however - significant growth or a need to consider drastic changes in the firm's policy - is likely to reveal a need for certain specialist skills which are most unlikely to be found within the average small firm. "Every large company as a matter of course employs specialists in the functional fields of management. These include, for example, financial management and accounting, purchasing, production planning and control, marketing and personnel management. The small firm is prevented by the scale of its operatians from employing a specialist in every function, and in any case, the impositian of a management structure more suited to a large organization would lead only to confusion and/ or unnecessary expense. So far as they are needed therefore, and so far as the need is recognized, sophisticated management skills and s,ecialist knowledge must usually be brought in from outside. It is very often the case that the need is not recognized: The implication of this is that there is a very large potential market among small firms for advisory and management services of all kinds." - 105 - financial issues is often sought, the SBAC staff say it is as often difficult to pinpoint precisely what it is that the owner may wish to discuss, or, in the case of a business with "serious`-,problems," 1/ what the causes of the problems are, Reports are prepared if requested, and the SBAC staff member may work with a business over a long period; when a matter lies outside the specialization of the staff, referrals to the specialized trading, industrial and research associtions are common. 1/ There is again a close parallel here with what the Bolton Report found about small firm consultancy services in the U.K. (op.cit. pp.122-123):- "There are two serious difficulties in providing consultancy for small firms: first, the consulting operation is not, as might be thought, necessarily more simple than advising a large firm, but in some ways more difficult; and second, the strong sales-resistance of the typical small businessman necessitates a powerful marketing effort which the majority of consultants, given a high level of demand for their services,are not prepared to make. It is consequently very difficult to run such services profitably. "Because the small firm will rarely have identified correctly the problem giving rise to the need for advice, the consultant will need very wide experience, since his first task will often be to survey the whole of the firm's operations and identify the basic trouble. This point was well made by a representative of the Management Consultants Association, who said: 'If ICI ask you to come in and do some time study on the loading bay you can be pretty sure that is what they want, whereas if a small business asks you to do that you have not a clue whether that is really the problem.' The small businessman who calls in a consultant is normally aware only that something is going wrong and he expects the consultant to diagnose the trouble and suggest a solution. Very often, he is - - unwilling to discuss his problem with his staff and [has] nobody else with whom to share the decision making. In these circumstances, if the consultant can gain the businessman's confidence he may perform a very valuable service in providing a sympathetic ear, putting the problems in perspective (which involves pointing out that they are not unique, but have probably been faced and solved in most successful business), and generally acting as a trusted counsellor." - 106 - 4.30 Follow-up and Evaluation of SBAC Projects. There are presently no procedures which require the SBAC staff to follow-up and report on the progress of the enterprises after they have sought advice. Current records provide descriptions on the backgrounds of the clients and often quite detailed analyses of the technical, financial and managerial aspects of the business. Since the staff often spend a considerable time with the business (from a few hours to several weeks in some cases) a detailed picture of the business and whatever problems are faced is obtained; in the process, the staff workers generate more than a little trust and goodwill. Contact is commonly maintained with the business afterwards, but only informally. As with the MASICAP program, there are good grounds for formalizing the follow-up work and keeping records on current sales, employment, investments and expenditures in the enterprises assisted, and reporting on any current issues. Apart from providing feedback on the program, the information so generated could be useful for reporting on the conditions of small businesses in the provinces (though in both instances it would need to be supplemented by studies of businesses not assisted by the program). While, for instance, the NCSO, the Central Bank and several private sector institutions publish reasonably up-to-date surveys and studies of large industries, there is no up-to-date information on small businesses; this alone is a major source of risks. 4.31 The absence of information on the subsequent developments of business after the SBAC staff have worked with a firm also makes it difficult to assess the usefulness of the services. The costs of the program over 1/ the first four years were about 9 8m ($l.m), and averaged about 1/ The program started in 1975, one year after MASICAP. - 107 - 1/ P 2,500 ($340) per client; but there is no information at present that would enable the benefits to be determined. From an economic viewpoint, the purpose of the services is to increase the economic returns (that is, r* and r in the formula above) by encouraging the adoption of better business practices and production methods, and assisting in the search for markets. If, then, material were collected on the economic returns to capital for a sample of SBAC-assisted enterprises, and compared with enterprises not assisted, it should be possible to estimate the economic 2/ returns to the program using variance analysis. 4.31 The Government's Role in Providing Small Business Advisory Services: A Comment. The SBAC staff classify their services under the following headings: financial (advice only), accounting and record-keeping, management, marketing, technical and general services (covc-ing more than one aspect of the business). It is not difficult to think of instances where these services may be found or developed in the private sector, so some comments on how the Government's services relate to those in the private sector are appropriate. 1/ The average is P8,000 if only clients for whom written reports were prepared are counted. It would, however, be wrong to ignore those assisted less formally. 2/ It would evidently be necessary to allow for differing endowments of the owners. If r is the return to capital of enterprise J, then one might correlate r with variables from the following groups (each in themselves being haracterized by several variables):- educational background of owner; initial wealth or income; access to infrastructure (roads and electricity in particular); location; management practices adopted; types and vintages of production methods and equipment; and whether SBAC advised or not. - 108 - 4.32 Accounting firms, banks and consulting firms are common sources of financial and management advice in many countries, and employ people who can back their advice with substantive experience of their industry 1/ or profession and (as important) a knowledge of local business. In the Philippines the services offered by banks (which as seen in Chapter 2 presently are accessible to only a small percentage of the small business community) can be expected to grow with the growth of savings deposits and of loans made under the SMI program; in this, as with the SBAC's advisory services on accounting and management, the Government programs serves to create an awareness of the value of proven business management practices, and should if anything stimulate the demand for private sector services. The only potential conflict arises from the SBAC's services being free of charge in certain categories of services in which the program is competing with the private sector (e.g. in accounting). Since the program has an educational purpose that goes beyond the strict idea of supplying services, full cost recovery would probably not be merited from an economic viewpoint at the present time; there are in addition fixed 1/ In the industrialized countries they are probably more sought after than the Government's services. In the Bolton Report (op.cit. p.116) for the U.K., the results of a survey were quoted in which the question was asked: "If you need help, to which of the following would you be most likely to turn? "Replies were received from 3,740 firms as follows: Accountant 1,383 Solicitor 561 Bank Manager 543 Chamber of Commerce 496 Trade Association 485 Business Consultant 143 CBI 129 The report added that "the outstanding feature of this Table is that the sources most likely to be called upon are localized and familiar; accountants, solicitors and bank managers will usually be personally known to the businessman seeking help. The same is true of chamber of commerce officials (another localized service) and to a lesser extent of trade associations." - 109 - costs to the economy in promoting the services, which set average costs above marginal costs. But charges for certain categories of services, or for selected.costs might be considered - e.g. for repeater clients, and for the expenditures on staff and materials when written reports are requested. 4.34 Marketing and technical services (including research) by their nature require a highly specialized knowledge of the industrial sectors in which they are demanded; and, in the provision of them, it seems important not to overlook the role of the industrial and trading associations. In most countries such associations were formed for purposes quite different to those which they eventually came to serve, many of which were (and still are) identified with the avoidance of competition. But the range of services now offered ate also important for the growth of industry - the provision of market intelligence, legal advice and technical publications; supporting trade missions, exhibitions and industrial research; and in some cases providing training and advisory services for their 2/ members. In the Philippines they cover quite a large number of industries, but for the most part are fragmented and confine their activities to industries in Manila. Most appear to have been formed as a consequence of the exchange controls in the 1950s, but are now beginning to offer 1/ On this see the third footnote to para 4.27 on the problems of developing consultancy services. 2/ A report known as the Devlin (1972) Report on Industrial and Commercial Representation in the U.K. provides a review of the origins and current work of the industrial and trade associations in Europe. Many of its comments and views are not irrelevant to a discussion of the future role of such institutions in developing countries. - 110 - a forum for promoting their industries and opening up marketing 1/ opportunities; a number have also introduced training programs. These developments are being further encouraged through a series of dialogues between the Ministry and the Associations. 4.35 What the above suggests, from the viewpoint of developing the SBAC program, is that many of the specialized services needed by both small and large industries are capable of being developed by firms and institutions in the private sector. The temptation to develop a plethora of specialized and costly services within the program might better be resisted, therefore, in favor of the current emphases of the program, These are (i) to increase awareness among the small husiness community of the advantages (once the businesses are no longer very small) of adopting proven principles of business management and finance; (ii) to improve the quality and timeliness of information on small industries; and (iii) to act as referral services for the firms and institutions capable of providing specialized advice. (This suggestion is of course only intended for the extension programs, not for the industrial development programs of the Ministry as a whole, and which may well require specialized inputs. What is not clear at present is that it is necessary to develop specialized capacity within the extension services for each and every industry that merits 'promotiont.) 1/ A recent survey of subcontractors for vehicle parts manufacture found that 72% were members of one association or another, including the following: Philippine Chamber of Industries, Consolidated Automotive Parts Association, Philippine Foundry Society, Machine Shop and Buildersi Association, Confederation of Philippine Exporters, Manufacturing Electronics Component Association, Anodizing Association of the Philippines, Purchasing Association of the Philippines, and several regional chambers and other industry and suppliers' groups. One can gather from this that a varied and complex institutional structure is emerging in the engineering sector (as it apparently is in others). When asked about their reasons for joining half said that it was to achieve an exchange of market information and technical know-how. - 111 - Conclusions 4.36 The project preparation services (of 'MASICAP) have helped to make institutional finance available to a large number of enterprises in the provinces that would not otherwise have had access to it. Administrative costs were also low, about 3-5% of project investments, The main issues identified in the course of the present study were the following: Cl) Arrears rates and closures of the enterprises assisted. Both are high and seriously affecting the economic returns to the program. Both could be reduced by preparing projects only for businesses already in existence and by relating expansion to the current size of business (expansion in too large a step increases risks all round). As will be seen in the next two chapters, the rate of formation of new business establishments in the Philippines is already high, and there is little need for the program to attempt to create new ones. But the main causes of arrearages and closures are unrealistic expectations for the projects, leaving many enterprises with little or no cushion against shortfalls in markets and profits. Involving the extension workers in follow-up work and supervision of the projects after finance would help in making expectations more realistic. Ex post accountability for the quality of the projects would also help. (2) Economic Returns. The conclusion about the desirability of supervison and follow-up work was also supported by an analysis of the effects of extension costs and closure rates (risks) on economic - 112 - returns; the returns are much more sensitive to the latter than to the former. (Since the economic returns cannot yet be estimated, given limitations on the data, a range of possible values was considered; a method for estimating the returns was also proposed,) (3) The dependence of the program on DBP. The lack of the private sector's involvement, for reasons discussed in Chapter 2, has made the program dependent on DBP and (to a much lesser extent) IGLF. This has placed a disproportionate share of the risks and the administrative burden on DBP, in contrast with the original aims of the program. Seventy-five percent of the projects are either below the P 50,000 floor limit of IGLF or below the point (about P150,000, though there are exceptions) at which IGLF lending becomes profitable to the private sector. Adjustment of spreads at the smaller loan end and a removal of the floor limit would help to involve more financial institutions in the program. A restructuring of financial incentives to secure a wider involvement of the private sector out of its own resources would still require attention however. (4) Working Capital. Several advantages of increasing short- term lending - both out of private sector resources and through the Government's own programs - were outlined in the text. The main ones would be to lower risks and obtain a greater response from the commercial banks; both would be consistent with the aims and ideas behind the Government's programs. Trading enterprises would be particularly 'effective conduits for the flow of short-term resources to industry, and could be expected to open up markets and further lower the risks; this is one reason why the program might be reoriented to respond to the demands of small enterprises in general rather than just industrial enterprises in particular. - 113 - 4.37 The advisory services (SBAC) program has similarly reached out to a large number of enterprises in the provinces, also at a low cost per project. The issues identified were: (1) Follow-up work. Not much is known about the subsequent developments of the enterprises after the services are provided. A systematic follow-up and reporting procedure would be valuable both as an information service and as feedback, (2) The Government's role in providing advisor services. Many of the services arL either available or gradually developing in the private sector - in the banks themselves, in accounting and consulting firms, and in the specialized trading, industrial and research associations. In many respects the SBAC program should stimulate the demand for rather than displace private sector activities; this is most obvious in the SBAC's work as a referral service, but other examples were cited. Since SBAC's services are provided free of charge, there is a tendency (particularly with respect to accounting and general consultancy) to undercut initiatives in the private sector; hence charges for certain types of services and costs are worth contemplating. The future development of specialized services ought not to be planned or proceed independently of the development of the specialized associations in the private sector. - 114 - Addendum to Chapter IV Effects of the Costs of Industrial Extension and of Enterprise Failure Rates on the Economic Returns to Small Enterprise Projects If there are N small enterprise projects financed each year, each increasing annual sales on average by S, and running costs (materials, labor and other variable costs) on average by R, the present worth of the net benefits obtained in any subsequent year t is: N (S-R) /(1+r) t(1) where r is the opportunity cost of supplying capital (i.e. including the costs of raising and lending funds). This assumes of course no closures, If a fraction Xfail each year, the number of projects available to generate these benefits in year t would be: N/(l+X)t (2) assuming no reopenings 'under new management.' In practice reopenings could offset most of the losses to the economy if the capital was used at full capacity. If u is the average reopening rate (adjusted for time lags between closure and reopening), then the net closure rate is A' = (A-u), and is the quantity to be used instead of A in (2). At present there is no information on u; but it is likely to be quite small given the nature of the closures experienced so far, since most have been due to markets being less than forecast and to a shortage of working capital; even before closure, output was well short of full capacity 1/ output, Rence one might not be far wrong - and may even underestimate the effects of closures - by using A instead of (A-u) in the denominator of (2). Hence adjusting (1) for closures, the net benefits in year t are roughly: NCS-R)/Cl+r+A)t (3) 1/ See para 4.12. - 115 - Summing over the average lifetime, T of the projects gives; N(S-R) 11-Cr+X)~ 1/(r+A) 0A) If the average capital costs of the projectare denoted by K and' the extension costs, expressed as a proportion of K, by e, then (4) needs to be compared with total project costs for the N projects of N(l+e)K (5) 2/ Equating (4) and (5) and using a linear approximation for the numerator of (4) gives the following formula for the rate of return: r = (S - R)/(1 + e)K - 1/T - X (6) where the first term represents the economic returns before depreciation, the second depreciation, and the third losses due to enterprise closures. Considering the case where extension costs are ignored and where there are no enterprise failures, the rate of return, denoted by r* in this case is r* = (S-RI/K-1/T and, substituting for (S-R)/K in (6) shows the effects of extension costs and of enterprise closures to be given by r = r*/ (l+e)-X-e/ (I+e)T ,r*/Cl+e)-X since e is likely to be small relative to (1+e)T, and the last term small relative to the first two. 1/ K would also include the "permanent" working capital costs associated with the project. 2/ [1-(l+x) I /xff(1+xT). - 116 - V. SMALL ENTERPRISES AND INDUSTRIAL DEVELQPMENT 5.1 This chapter first examines how the size structure and patterns of Philippine manufacturing have developed over the past 25 years, and presents data obtained from interviews on selected characteristics of small and large firms - their origins and growth, closure rates, sources and uses of finance, and the location and 1/ types of product markets. Data on characteristics of household manufacturing are also presented. It then examines the incidence of the country's industrialization policies on large and small and considers the questions, how do these policies affect the coverage and efficiency of small enterprise programs? and what would be the effects of a transition (now under review) towards more efficient and labor demanding policies based on revisions in tariffs and investment incentives? The aims are therefore both descriptive, in that it provides some clarifications on the backgrounds and workings of small enterprises; and normative in that it assesses the efficiency of various policy options. 5.2 The analysis covers manufacturing activities only, since Chapter VII discusses incomes and employment more generally. But to keep things in perspective, data on output and employment by sector are provided in Annex Table 5.1, from which the following might be noted: (i) Manufacturing as a whole still provides only 11-12% of total employment in the country; the share in fact declined from 12.5 to 11.4% between 1956 and 1975. Cii) Large scale manufacturing (using NCSO definitions of large of large as being establishments of 20 or more workers) employed only 3.6% in 1975; if one follows the definitions of - 117 - large scale used by other government agencies (roughly 100-200 or more workers, the share would be about 1,6 to 2.0%., Hence at least with respect to large scale manufacturing, one is dealing with a-very small percentage of the labor force - though not a small percentage of total investment and output in the country. (iii) Agriculture still provides the bulk of employment (about 53.5% in 1975) and labor absorption (47.2% in the period 1956-75); as will be discussed further in Chapter 6, it is the growth of agriculture and the level of urbanization that still exert the greatest influence on the size structure of industrial development in the Philippines. Data: Sources and Definitions 5.3 A distinction is drawn between - household manufacturing activities, - small manufacturing establishments and workshops employment less than 10 or 20 workers, and - establishments employing over 10 or 20 workers, and often referred to as the factory sector. Establishments in the factory sector are often classified into small, medium and large factories, and its size structure is also examined below where the data permit. 5.4 Employment in household manufacturing is estimated in the usual way as the difference between the estimates of manufacturing employment provided in the population censuses or (in inter-census years) the labor force surveys, and those provided in the censuses of establishments. The 1/ In the census years, the NCSO classify manufacturing employment into enterprises with less than 10 workers, and enterprises with 10 or more. In the establishment survey years, the classification used is 5-19 workers, and 20 or more workers. - 118 - latter includes any manufacturing activity at "a fixed location and having permanency of assets such as goods for resale, materials, products, equipment; etc., in its premises;" activities not thus counted are generally those that take place within the households. In the establishment census years, all establishments with one or more workers are counted, but in the survey years (between censuses) only these with five or more. Since establishments and workshops with less than five workers are quite numerous, ignoring them 1,aads to an underestimate of employment in small non-household enterprises, so the census data are used as far as possible. 5.5 Apart from differing in scale, the three groups also differ greatly in their use of labor and in their product markets. Staley and Morse (1966) note that household activities include artisanal homework, the manufacture of items for consumption or use by the family, and the manufacture of goods for industry and trade under the "putting out" or dispersed factory system. But perhaps the most distinguishing feature is their use of family labor; in the Philippines three out of fput workers in household manufacturing are family workers. Small establishments (with less than 20 workers) market a larger share of their output, make more use of hired labor, and are generally owned and run full-time by the family's main income earner. Thus while household manufacturing is commonly a secondary source of family income, manufacturing in small estabishments is commonly the primary source. Factory activities make a much greater use of hired labor, and of management, clerical and supervisory staff. - 119 - Aggregate Changes in Size Structure Over Time 5.6 Household activities are still the largest source of employment in Philippine manufacturing. But their share in manufacturing employment declined from about 75% in the mid '50s, to 65% in the mid '60s, to less than 55% in the mid '70s (Table 5.1), and may be entering a period of decline in absolute terms. They are however likely to remain an important source of earnings for the labor force for some time, and their current employment of 900 thousand is approximately five times the employment in small and medium factory based industries (of about 20 to 200 workers) to which the Small and Medium Industries Program is addressed. 5.7 A noticeable feature of the size structure is the extent and growth of employment in the smaller size groups; e.g. establishments with less than 20 employees have been significantly faster growing sources of employment than any other size group since the mid' 1960s, and indeed this is true for small and medium establishments as a whole (up to, say 200 employees) compared to large scale. The same patterns are apparent when examining the net formation rates of small and medium establishments CTable 5.2):- 1/ This figure is based on the residual between the labor force and establishment surveys for 1956. The residual (which came to 80%) was adjusted downwards by 5% to allow for firms with 1 to 4 workers. - 120 - Table 5.1: EMPLOYMENT IN PHILIPPINE MANUFACTURING ACCORDING TO SCALE OF ACTIVITY Scale (by No. of Annual Growth Rates Employees/Establishment 1961 1967 1972 1975 1967-75 1961-75 Householdi 665 827 690 882 0.8 2.0 Establishments: Less than 10 96 125 204 207 6.5 5.6 10 - 19 23 27 37 6.1 20 - 99 267 65 69 95 4.9 5.5 100 - 199 38 43 56 5.0 200 and over 268 285 374 4.3 Total 1,028 1,223 1,323 1,651 3.8 3.4 Percent of Total Employed in Year HouseholdA 64.7 67.6 52.5 53.4 Establishments: Less than 10 9.3 10.2 15.4 12.5 10 - 19 1.9 2.0 2.2 20 - 99 26.0 5.3 5.2 5.8 100 - 199 3.1 3.3 3.4 200 and over 21.9 21.5 22.7 Total 100 100 100 100 I. See text for definition. Source: Establishment data are obtained from the NCSO censuses of Manufacturing for 1961, 1967, 1972 and 1975 (preliminary tabulations). Total Employment in manufacturing is obtained from the National Sample Surveys of Households for 1961 (October), 1967 (October) and 1972 (November); for 1975 it is taken from the NCSO Population Census. Household employment is calculated as a residual. - 121 - Table 5.2 : GROWTH OF NUMBER OF ESTABLISHMENTS BY SIZE CATEGORY, 1961-75 Establishment Size Annual Growth Rates (No. of Workers) 1961 1967 1972 1975 1967-75 1961-75 Less than 10 33,310 41,018 63,052 70,597 7.0 5.5 10 - 19 1,803 1,747 2,075 3,172 8.2 4.2 20 - 99 1,731 1,570 1,665 2,339 4.6 2.2 100 - 199 233 278 306 400 4.7 3.9 200 and over 206 384 432 481 2.9 6.2 Total 37,2 44,997 67,5 76,989 6.9 5.3 Source: NCSO Censuses of Establishments for respective years. 1975 data are preliminary tabulations. Some of the recQrded increases could of course be due to improvements in the ennumeration procedures of the NCSO, though it is difficult to know how to allow for this. The measurement errors in the second smallest category (10 to 20 workers), on the other hand, are probably quite low, since such enterprises are more visible, and less susceptable to counting errors; here l/ too, the net rates of formation have been high. 5.8 The above Table also indicates quite high rates of "emergence" of small and medium factory establishments employing 10 to 200 workers, confirming an assumption of the SMI program that it is servicing a growing sector. The growth of employment in such establishments averaged about 5.1% per year during 1967-75, and was systematically higher than for employment in large factories. 1/ The NCSO's Annual Surveys of Manufacturing establishments also indicate high net rates of formation in the 5-20 size range. The number increased from 7,200 in 1960 to 13,300 in 1974, a growth rate of 4.5% per year. - 122 - Enterprise Expansion 5.9 The above trends understate the extent of labor absorption in small enterprises since firms rarely start out by setting up medium or large establishments, but begin small and expand in stages. To 2/ assess the significance of this process, 72 firms were interviewed about their origins and growth and other aspects of their business. The sample covered all size ranges; 50% were taken at random from various size groups in NCSO listings of large establishments of over 3/ 20 workers), and the remainder contacted in during the course of field trips. The records of a sample of 55 now large enterprises that had once borrowed from IGLF in the 1950s and 1960s were also checked, 4/ and led to conclusions similar to those reached below. 1/ Exceptions in the establishment data tabulated above are the new branches of large corporations; since the census data do not indicate whether an establishment is a branch or a whole firm, it was not possible to determine precisely how much labor absorption was accounted for by' branch expansion of large firms, and how much by the growth of smaller firms. A recent survey made by the UP Law Center of the top 1,000 Corporations in the Philippines found that 461 were in manufacturing, of which 212 were partly or wholly foreign owned. A sub sample of 117 of the 212 accounted for 140 thousand employees, or 22% of the factory sector labor force in the mid '70s. Scaling up, about 40% of manufacturing employment (in the factory sector) may be in the branch establishments of corporations partly or wholly foreign owned. This leaves 60% of employed in wholly Philippine-owned large corporations; but it is not possible at present to divide any increases of employment in them between (a) expansion of existing corporations themselves, and (b) the emergence of new large corporations from the middle size ranges. As the interview data suggest below, however, (b) could be sizeable; several of the firms interviewed were expanding rapidly through the size structure. 2/ 80 were interviewed but in 8 cases the results were unreliable. 3/ The actual number that were identified for interview in this way was selected from a much larger number first identified at random, and which had to be pared down on account of the costs and difficulties of interviewing enterprises in some regions. This naturally imparted an Yurban bias' in our sample. 4/ Report by Mrs. Fajardo (1979). - 123 - 5.10 Of the 72 firms interviewed only two were contracting; slightly less than half were maintaining sales and employment at more or less constant levels, or expanding slowly, while half were expanding at varying rates through the size structure. The data on employment are provided in Annex Table 5.5, and are summarized below in Table 5.3. Full time series data could not be obtained in every case: it Table 5.3: SIZE DISTRIBUTION OF FIRMS OVER TIME: RESULTS OF INTERVIEWS OF 66 FIRS Size Group of First Year of In In Firm (No. Operation/I 1976 1978 Employed No. of Firms (%) No. of Firms (%) No. of Firms (%) 1 - 5 30 (71) 7 (23) 6 (9) 6- 10 4 (10) 4 (13) 12 (18) 11 - 20 3 (7) 4 (13) 10 (15) 21 - 50 3 (1) 11 (37) 17 (26) 51 - 100 2 (5) 3 uio) 14 (21) 101 - 500 0 (0) 0 (0) 6 (9) Over 500 0 (0) 1 (3) 1 (2) Total1 42 (100) 30 -Cim 66 LILUO Average Size of Firm (No. Employed), all firms 8,1 96.2 78.0 Average Size of Firm (No. Employed), excluding the one firm in the sample with over 500 employees; 8.0 23.9 43.0 1 Note that the data were not always obtainable for firms in the first and intermediate years of operation. 2 Data were not available in all firms, hence the totals are not the same for each year. - 124 - was of course easier to obtain current employment than employment in intermediate years (though quite a large number of owners could recall roughly how many were employed at startup, if only because most began with less than half-a-dozen employees). The main pattern than emerges is that the majority of firms either start small and remain small, or, if they expand sales and employment, they do so continuously or in steps. For the sample as a whole the number of employeies averaged about 8 in their first year of operation, rising to 24 in 1975 and 43 1/ by 1978. These averages exclude the largest firm in the sample, which had grown rapidly and continually from a dozen employees when it 2/ began in 1963 to over two thousand in 1978. They also include firms not expanding or expanding slowly and thus understate the rate of growth of firms that do expand, which is often extremely fast once they have gained a footing in the market; e.g. for the 12 expanding firms on which recent time series data were obtained, employment increased by 160% in the period 1976-78 (all these firms were in the size range 3/ 10 to 99 employees in 1976). Since the sample is small, it would be hazardous to place too much emphasis on the precise values of the figures estimated; but it is sufficient to reveal the importance of the growth of small and medium firms through the size structure as a source of industrial labor absorption. 1/ Note that reliable time series data were generally more difficult to obtain (and so were not recorded) for the more quickly growing firms, so these series probably underestimate the growth in the samples. 2/ Case 49 in Annex Tables 5.2 to 5.6, 3/ Cases 3, 9, 10, 14, 17, 41, 45, 51, 63, 66, 70, 71. Case 49 was excluded since it is so large. - 125 - 5.11 During the interviews it became apparent why starting small and expanding continuously or in stages was the general rule. A high investment, either initially, or to increase output several-fold after startup, leaves the business highly vulnerable to short-falls in supplies and markets. If in addition the owner's collateral is fullycommitted to a previous loan obtained for purposes of investment,,it is difficult to obtain a working capital loan to meet business overheads if, for instance, there are slippages in production. We also noticed one particularly critical period in the expansion of the firm, which occurred during their transition from back-yard, part-time to factory based, full- time operations. Before the change, the owner generally has an alternative source of income (which is lost after the change), low overheads (which are high after the change) and running the business may require few management and record-keeping skills (but which are required after the change). It might be added that advisory services can be particularly helpful during this period. 5.12 In practice the majority of businesses remain small, and it should be re-emphasized that the above sample, by including middle and larger sized firms, is not representative of those that do. In 1967 there were about 41,000 establishments employing less than 10 workers (Table 5.2); by 1975 the number of establishments with 10 to 99 workers 1/ There is therefore some sense in the ground rules adopted by some financial institutions of limiting the loan size to a given multiple of the current sales and asset levels of the business; the rule may be relaxed if the enterprise owner has sufficient collateral to provide for contingencies. While the policy is often criticized for being conservative, the evidence is that less-conservative policies put both business and the banks at risk. (See Chapter 2 for a further discussion). - 126 - had increased by about 2,000 implying that less than one in twenty could have expanded into this large size group. Furthermore, of those that had expanded into the size range of 10-99 workers by 1967, less than one in fifteen could have expanded into yet larger l/ entities by 1975. These figures are over estimates since (a) they ignore the growth due to new branch establishments of large corporations, and (b) do not allow for the failure rates of small establishments. 5.13 To sum up, the growth of employment in non-household manufacturing is made up of (1) the formation of small firms, (2) the expansion of once small firms through the size structure, and (3) branch and central expansion of large firms. The data on (1) were given earlier (Table 5.1) and appear to have accounted for about a quarter of employment growth (in non-household manufacturing) in recent years, While only a very small percentage of small firms make the transition to medium or large scale production, those that do provide a significant source of employment growth in the factory sector. Enterprise losure Rates 5.14 The closure rates of enterprises can be estimated from two sources of information supplied by the NCSO:- (i) the number of enterprises actually existing in a particular year, and (ii) the- humber'existing in the same year and still existing at some later point in time. 1/ In 1967 there were 3,317 establishments with 10-99 workers; the increase in the number with over 99 workers in the period was 219 (able 5.2). - 127 - The latter can be obtained directly from data on the age profiles of l/ industrial enterprises which appear in the NCSOts listing of establishments. The difference between Ci) and (ii) gives the number having closed in the intervening years. Estimates for small and medium industries are provided in Table 5.4. In 1977 there were 15,777 manufacturing establishments in the NCSO listings; colums (3) of the table shows how they were distributed according to year of formation, and column (4) the cumulative total of column (3). Thus, -to take an example, there were 4,039 establishments formed during or before 1966 and still existing in 1977; but the actual number existing in 1966 (shown in column 5)was 9,666, so that 9,666-4,039=5,627, or 58.2% had closed in the following 11 years, an average annual closure rate of 7.9% per year (on a logarithmic basis). The same calculation is repeated for each year in the Table. The closure rates averaged about 7% per year in the 1960s, though seem to be lower (about 4%) for the early 1970s. 5.16 The term 'closure', as used above, is somewhat misleading since enterprises may not close down yet disappear from the establishment listings because of a change in location or in the nature of the business; counting errors in the listings also cannot be totally avoided. Further, it does not imply that they had failed financially since the owners may have sold the business, retired, or moved into another form of employment. (Changing the product line, or even the member of the family who owns the business, is also a common way of re-qualifying the business for tax holidays.) These kinds of changes are reportedly commonplace among small enterprises, particularly among the smallest G1 TAble 5.4: DATA FOR ESTIMATING ESTABLISilMENT SURVIVAL AND CLOSURE RATES SINCE 1957 /I Average Annual Age, T No. Formed Cumulative No. Actual No. Percentage which by 1977 had Closur Rates, % /5 Year Years in Year Formed - NT in Year - NA Survived Closed InarC og timlc (1) (2) (3) (4) (5) (6) (7) (8) (9) /6 1977 1 3116 15,777 15,777 100.0 0.0 - - 1976 1 151- 15,746 n.a. - - - - 1975 2 2,372 15,595 15,169 /7 /7 - - 1974 3 1,622 13,223 12,808 7 - - 1973 4 1,544 11,601 n.a. - - - - 1972 5 1,860 10,057 12,206 82.4 17.6 3-5 3.9 1971 6 1,013 8,197 9,857 83.2 16,8 2.8 3.1 1970 7 1,255 7,184 10,135 70.9 29.1 4.2 4.9 1969 8 720 5,929 n.s. - - - - 19611 9 744 5,209 9,703 53.7 46.3 5.1 6.9 1967 10 426 4,465 9,628 46.4 53.6 5.4 7.7 1966 11 291 4,039 9,666 41.8 58.2 5.3 7.9 1965 12 645 3,748 n.a. - - - - 1964 13 294 3,103 n.e. - - - - 1963 14 292 2,809 n.a. - - - - 1962 15 258 2,517 8,224 30.6 69.4 4.6 7.9 1961 16 166 2,259 10,333 21.9 78.1 4.9 9.5 1960 17 397 2,093 7,023 29.8 70,2 4.1 7.1 1959 18 142 1,696 7,185 23.6 76.4 4.2 8.0 1958 19 157 1,554 7,411 21.0 79.0 4.2 8.2 1957 20 1,397 1,397 7,421 18.8 81.2 4.1 8.3 and earlier 11 I.e. cumulative total of column (3). J (4) t (5), % (or NT/NA). /3 100 - 6, 7 (or I - NT/NA). /4 (7)1(2), % (or (NA - NT/NAT). 5 In (NA/NT) t T. /6 The very low numbers of enterprises recorded as having being formed in these years are probably due to the lag between the date of formation and their "appearance" in the establishment.surveys. / Closure rates are not calculated for these years since the measurement errors are too great, and would be negative according to the figures shown. In recent years, the closure rates are small differences between two large numbers. The measurement errors become less significant the further back one goes in time because the difference between col. (5) and col. (4) becomes larger. Sources: Estimates based on data and calculations of Fajardo "Study on Small and Medium Industries in the Philippines, April 1979, Vol. II, Table 1.3, (mimeo). Data on enterprise ages, obtained from establishment listings (prel minary tabulations) of 1977 Survey of KMnufacturers. Data on actual number uf enterprises are from NCSO Annual Surveys of Manufacturers for respective years. Small and medium industries are defined as those with 5 to 2P0 employees. -129- enterprises in large urban areas in which the competition between 1/ wage and self-employment is greater. An attempt was made to allow for these points by contacting the owners of a sample of 170 enterprises recorded in the NCSO's 1972 listing of establishments. In 100 cases, the enumerators simply verified if the enterprise was still operating or 2/ not. In the other 70 cases (all in Metro-Manila), additional information was obtained on whether Ci) the firm was operating in the same place or had changed location; (ii) it had been merged, sold, or taken over by a relative; or, after checking secondary sources, (iii) it had closed down. Since the sample was based on the establishment listings, which do not cover establishments with less than 5 workers, there is still no information on the closure rates (which are probably quite high) of the smallest enterprises. Nevertheless, some patterns do emerge quite clearly, as shown in Table 5.5. Table 5.5: DISAPPEARANCE RATES OF SMALL AND MEDIUM INDUSTRIES BY SIZE OF FIRM AND BY REGION Region and Firm No. of Firms or No. Closed % Closed Size in 1972 Firm Owners Traced Down Down Metro Manila: > 20 Workers 24 2 8% 5 - 20 Workers 43 9 21% Firm Size n.a. 71 14 20% Provinces: Firm Size n.a. 31 1 3% Total 169 26 15% Source: H. Fajardo "Study on Small and Medium Industries in the Philippines" (Mimeo), April, 1979, Vol. II, Tables 1.6 and 1.7. The interviews were between June and December, 1978. 1/ See Chapter 7. 2/ Quite a large proportion of enterprises change location or change names, so tracking them down can be time consuming. 3/ Neighbors mainly. - 130 - 5.16 The results conform with the common perception of closure rates being higher in small than in larger enterprises. The closure rates are also significantly higher in Manila, and probably reflect the greater competition both among small manufacturers themselves and between large and small manufacturers found in that region. (Note that the greater turnover rates reconcile quite well with the experience of the financial institutions, which find lending to small enterprises more risky in Manila than in the provinces.) The above data also square quite well with those just estimated from the NCSO data. The weighted average percentage of firms disappearing in the 6 year period in Metro Manila would be about 19%, according to the above data (and assuming one firm in five with over 20 workers), giving a weighted average 1/ disappearance rate of ln(100/80)/6, about 3.5% per year. 5.17 The questionnaire was not sufficiently detailed to determine the causes of closure or other changes in the business, a task that iust now await further study. Why businesses fail financially, as opposed to merely changing their product line or location in some ways, is of particular interest to those involved with the small enterprise programs, One commonly discussed factor is undoubtedly the great variation in natural and acquired entrepreneurial abilities among the'owners; it is apparently one explanation for an equally large variation found in the technical efficiencies of otherwise comparable businesses. How far the extension and training programs are ablie to improve the acquired abilities is also a task meriting further study. 1/ The closure rates as calculated from NCSO data were 4.9%, 3.1% and 3.9% for 1970; 71 and 72 respectively. See Table 5.4. - 131 5.18 Since the above study of closures was undertaken, a more compre- hensive study of the extent and causes of closure due to bankruptcy among small firms has been completed by Mr. Itao of the University of the Philippines Institute for Small Scale Industries,1/ based on interviews with the owners or former owners of 260 small firms identified from the 1975 establishment listings of the NCSO. The principal findings were:- - about 3.6% of small firms closed each year due to bankruptcy, though the closure rate varied greatly between years (this estimate compares quite well with the estimates provided above); - relatively short life-spans (of about 3 years on average) for firms going bankrupt; - closure rates due to bankruptcy not associated with the educational or social background of the owner,- nor with the level of development of the region; and - closure rates strongly associated, however, with the management practices of the business. Annex Table 5.8 summarises some data on the last two points. It is interest- ing that the tendency to keep books and records, to separate business and family accounts, and to use the services of professional accountants, were all noticeably lower in the firms that went bankrupt. 1/ See Itao (1980). 2/ Their educational backgrounds, on the other hand, were generally quite of high standard (see Annex Table 5.8), the majority having been to high school or college. - 132 - Further Micro Data: Sources and Uses of Finance 5.19 Given the emphasis in the Government's program on supplying credit to facilitate the expansion of small enterprises, there is some interest in the sources of enterprise finance during startup and subsequent operations. (Fifty six of the 72 enterprises interviewed were started before 1974, the first year of the Government's program.) The enterprises' answers to our questions on this subject are summarized in Annex Table 5.2. 1/ 5.20 All but three had begun with vezy small initial investments; e.g. less than P 5,000 (in 1978 prices) in 10% of the cases on which information was obtained, and P 5,000-50,000 in half of the cases. Table 5.6 provides more details:- Table 5.6. SIZE DISTRIBUTION OF INVESTMENTS BY ENTERPRISES AT START OF BUSINESS Size Range of Initial Investments No. of in P 000s (Constant 78 prices at Cases time of staft-up) 5 or Less 4 6 - 20 15 21 - 50 8 51 - 100 7 101 - 500 7 Over 500 3 This pattern of small beginnings applied to the seven large enterprises in the sample with assets of over P4 million (the Government's definition of large), including the nation's largest jeepney manufacturer with over 500 employees, and a large electrical applicance manufacturer and subcontractor with assets of P31 million and over 2,000 employees. 1/ The one that had begun the longest 'ad obtained a P 3.4 million (4fm,fnnlf loan from a financial institution; it was one of two businesses in the sample in trouble, having poor market outlets and very low capacity utilization (case 44 in Annex Table 5.2). - 133 - 5.21 The majority began with their own savings, sometimes supplemented by small inheritances or by revenues from another business; only five (8% of the total sample) mentioned that they had borrowed from financial institutions when starting up, two had obtained small credits from suppliers, and one had rented all the facilities and equipment. No instances were found in which credit has been obtained or sought from moneylenders and other "informal" 1/ sources. When some owners were asked if they would have,preferred to have started larger, finance permitting, it became apparent that they saw advantages in starting small in order to first establish their markets and contacts with suppliers. 5.22 Once the enterprises had become established, however, there was a significant rise in their use of institutional credit. The rise is of course partly due to the financial institutions' own preference for dealing with enterprises having track records; but it was also noticeable that several of the owners interviewed had actively sought to develop their credit standings with the institutions almost from the outset of their business. All reinvested a portion of their profits, either for working or investment capital purposes, and in 20% of the cases the businesses were financially self-sufficient. But most businesses used a mixture of re-invested profits, commercial bank loans, loans or equity finance from DFCs, supplier and buyer credits, and loans from friends and relatives. Again, there was no instance of borrowings from informal sources of credit, unless friends and 1/ See however the second footnote to para 5.25 below on the use of institutional credit by cottage industries in the Ilocos Region. - 134 - Table 5.7 NMAIN SOURCES OF FINANCE AFTER STARTUP OF ENTERPRISES Purpose /1 Working Investment Sources of Funds - Capital Capital Profits Plus Institutional Credits - DFCs 2 18 - CommeTiial Banks 15 102 - Other-3 0 5 14 Profits Plus Trade 12 3- Credits Profits Plus Borrowings from Relatives etc. 5 4 Profits onl 31 24 Sample TotaL 65 64 1l Other combinations, such as institutional and trade credits plus profits for working capital were not identified because the questions were not detailed enough; in practice, it is likely that these combinations of finance also exist. /2 Some IGLF loans, plus 3 cases in which short term borrowings were rolled over fo finance the investments. /3 Equity finance from various institutions. /4 Includes one case where rented equipment is counted as a trade credit. /5 Both figures include 12 businesses that were financially self-sufficient. /6 Data are not available in all cases. - 135 - relatives are counted as such, though several attempts were made during I/ the interviews to determine their extent. Details are provided in Annex Table 5.2, and summarized in Table 5.7, Note that the institutional credit is used as often for working capital as for invescment purposes. 5.23 The increasing use of institutional credit was not associated with either excessive capacity in equipment and buildings - the workplaces were overcrowded and congested in most cases - or a decline in the enterprises' desire to find low cost equipment best suited to their needs. Some evidence on these points is presented in Annex Table 5.6. The owners' responses to questions on capacity utilization were naturally less precise and more difficult to verify than those on equipment costs, but tended to show utilization rates of 75% or more in four out of five cases. The responses on equipment costs were more revealing, and we noted a widespread tendency to purchase second hand or renovated equipment wherever possible (the tendency was particularly marked in the metals and machinery sectors, where it was not uncommon to find workshops with 2/ second hand machines from several countries); about 40% of the firms on which reliable information was obtained used such equipment for one purpose or another, and in 20% of the firms, it accounted for over half their fixed assets. Furthermore, those purchasing new equipment were as 1/ One reason perhaps why we found little use of informal credit was that our sample contained a high proportion of people with good family incomes, higher education and professional experience, and who were able to pass the credit worthiness checks of the financial institutions. (We did not know in advance of the interviews anything about the owners backgrounds, and it is possible the propensity of an enterprise to expand is correlated with the educational and professional background of the owner; our sample is not large enough, nor does it have sufficient information, to test for this, however.) Mrs. Fajardo (1979) also found that 103 out of 148 IGLF accounts were for businesses run by people with college educations. 2/ Cortes and Escandon also find second hand equipment used extensively by small enterprises in Colombia, and for this reasnn undertook a special investigation on the subject. "Use of Second Hand Equipment in Colombia" (Mimeo) IBRD, August 1979. - 136 - likely to do so out of their own resources as out of institutional credit, as indicated in the following Table; i.e. we found no evidence of institutional credit leading to extravagance: Table 5.8: USE OF NEW AND SECOND HAND EQUIPMENT IN SMALL ENTERPRISES No. of Enterprises Using: Equipment (% Composition Own Resources & Own Resources By Value) Instit. Credit Entirely Total Over 75% New 16 14 30 25%-75% Mix of Old and New 6 2 8 Over 75% Old (Second Hand) 8 3 1 30 19 49 Source: Enterprise Interviews. See Annex Table 5.6. Product Markets 5.24 Two sources of data were used to determine the nature of the products and product markets of small enterprises. One was the file records of the technical assistance (MASICAP and SBAC) and financial institutions, which routinely comment on the markets of the enterprises financed or assisted. For household goods, this source does not give any indicatian of the income groups most likely to purchase an enterprise's products; but this could be deduced not inaccurately from descriptions of the products and of the products' qualities provided in the reports. The second source was our own interviews of 72 enterprises. The locations of the markets according to industrial category are summarized in Table 5.9, the first four columns showing the interview data, the last four the data from both sources; the full interview data are in Annex Table 5.4. - - 137 - 5.25 The main characteristic of the markets is their diversity with respect to sector, location and income group, and it is not possible to place them in a few categories. All the high growth enterprises interviewed were in high growth markets, but the markets were spread across several sectors and specializations - a range of food processing, canning, preserving and baking activities; metals, machinery, and transport equipment; furniture of all types and qualities; garments and fabrics for all income groups and for exports; and ornaments and handicrafts. Production for local markets is commonplace in all sectors, though a surprisingly large number were found to be producing for national and export maiKets (Table 5.9). Given the diversity of products and market locations, it is not surprising to find no tendency for small and medium industries to cater for any particular income group or industrial sector. A summary of market structure of enterprises in the two samples is as follows (the numbers indicate the percentage of enterprises in the samples); Main Market Location Main Market Group Local 55 Agriculture 7 Regional 17 Industry 26 National 12 Construction 4 Export 16 Service 3 100 Households: - high income 15 - middle income 31 - low income 14 100 Source: Aa for Table 5.9 Table 5.9: MARKET LOCATIONS OF SMALL AND MEDIUM INDUSTRIES IN THE PHILIPPINES, 1978 Interview Data /l Full Sample /1 Code Industry Classification Local Regional Natl. Export Local Regional Natl. Export 311 Food Manufacturing 10 6 11 4 48 19 19 9 312 Animal Feeds/grain & Poultry 3 2 - - 32 11 3 - 313 Beverage Indus - - - - - - - - 314 Tobacco Manufacturing - - - - - - - - 321 Manufacture of Textiles 1 1 1 - 23 3 6 6 322 Wearing Apparel ex. Footwear 5 - 1 4 45 11 6 26 323 Leathergoods, Leather Substi. 2 1 1 1 5 3 3 4 324 Footwear 2 2 - - 14 2 5 3 331 Wood & Cork Products 2 - - 1 45 5 9 26 332 Furniture/Fixtures 2 1 - - 37 14 5 10 341 Paper and Paper Products L1 - 1 6 2 3 - 342 Printing/Publishing - - - - 12 4 1 - 351 Mfr. of Industrial Chemicals - - - 8 5 1 - 352 Other Chemical Products - - - - 10 2 - - 353 Petroleum Refineries - - - - - - - 354 Misc. Prods. of Petroleum & Coal - - 1 - - - 1 - 355 Rubber Products 2 1 - - 10 3 - 1 356 Plastic Products - - - - 13 1 5 1 361 Pottery, China & Earthenware 1 - - - 6 2 - 2 00 362 Glass & Glass Products - - - - 1 1 1 1 363 Mfr. of Cement - - - 1 1 - - 369 Non Metallic Mineral Prods. - - - - 30 5 1 2 371 Iron & Steel Basic Indus - - - - 1 - 2 2 381 Fabricated Metal Prods. - - - - 2 2 - - 382 Machinery ex. electrical 1 1 - - 34 13 5 6 383 Elec. Machinery, Apparatus 11 6 1 - 46 14 5 2 Applicances & Supplies 384 Transport Equipment 1 - 2 - 10 1 8 3 385 Professional, Scientific, Meas. 2 1 2 - 21 7 6 1 & Controlling Equip. 386 Furniture/Fixtures of Metal - - - - 3 - 2 390 Other Mfg. Industri,-s 1 1 - - 2 1 - - Non-Manufacturing Agriculture 1 1 - - 15 3 1 1 Tourism - - - - 10 - - - Services - 1 - - 26 3 2 - TOTAL 48 24 23 10 483 148 106 136 /1 Note that the horizontal totals add up to more than the sample size because enterprise frequently cater for more than one market. Source: Interviews with 72 enterprises plus file data 6f MASICAP, DBP, PDCP and IGLF. Draft by 1Mrs. Fajardo (1979), Table 2.9. - 139 - Sectoral Patter-fs and Trends in Size Structure 5.26 The rising share of manufacturing employment in work3hops and factories in the Philippines, and the declining share in household activities, follows the trends observed for other countries. As in other countries, however, the trends differ both in magnitude and in sign between sectors, as shown in Table 5.10; employment in households activities may be declining rapidly, stagnating, or increasing rapidly, depending on the sector being considered. In food processing household activities have entered a period of rapid decline in favor of both small and large scale mechanized activities. In textiles, employment in households appears to have peaked, and it is large scale manufacturing that is providing most of the labor absorption. Similarly in wearing apparel household employment seems to have peaked, though at a very high level, but here it is small scale activities (particularly tailoring and seamstressing) that are providing most of the new employment opportunities, In the engineering sectors (metal, mechanical and electrical products and transport equipment) household employment has ±ncreased rapidly along with employment in workshops and in both small and large factories. The engineering sectors all have high growth markets, and the data in Table 5.10 are consistent with those of the interviews discussed above in which it was found that small manufacturing enterprises (a) are highly responsive to market opportunities, and (b) commonly begin as household activities. 5.27 Further analysis of household employment is made difficult by an almost total absence of relevant information, other than the two-digit data provided in the population census years. The only documented information that is available is provided in a survey undertaken by NACIDA in the region of Ilocos in Northern Luzon in 1977. Since over 80% of the region's 1/ The survey aimed at obtaining a 100% coverage of all cottage industries in the region; the estimates of people engaged in manufacturing employment were quite close to those of the population censuses. NACIDA's estimates of employment in cottage industries in the region were 68,000; in 1975 the labor force in manufacturing was 70,000 according to the regional volumes of the population census, of which about 6,000 would be in establishments of over 20 workers (see ASM for 1974). - 140 - Table 5.10: -STIMATED EMPLotE0NT IN HOUSEHOLD AND SMALL AND LARGE MANUFACTURING ESTABLISHMENTS, 1961 AND 1972 Emrlovment 000s Growth iare 1961 1972 ner Year Food HoLseholds 87 6 - 21.6 Eat, <'10 Workers 31 67 7.3 Est. > 10 Workers 55 90 4.6 173 163 - 0.5 Textiles Households 97 109 1.1 Est. < 10 Workers 2 5 8.7 Est. > 10 Workers 30 61 6.7 129 175 2.8 Clochine and Footwear Households 230 229 0.0 -sa. < 10 Workers 35 81 7.9 Eat. > 10 Workers 24 22 - 0.8 Z8 332 1.3 Wood and Cork Households 20 * Est. < 10 Workers 2 7 12.0 Est. > 10 Workers 29 56 6.2 30 83 9.7 ?urniture & Fitures Households 14 16 1.2 Est. < 10 Workers ( 9 7.7 Eat. > 10 Workers 5 3 4.4 23 33 3.3 Mecal ?roducts, Mech. and Elect. Machinery, Transoort Equiv. Households 2* 126 HighA Est. < 10 Workers 10 15 3.8 Ear. > 10 Workers 33 37 3.1 45 198 14.4 All Other Households 237 174 - 2.3 Esr. < 10 Workers 13 20 4.0 Est. > 10 Workers 87 145 4.8 337 339 0.1 All Manufacturin2 Households 667 680L 0.2 Est. < 10 Workers 96 204 7.1 Est. > Workers 263 439 4.8 I026 1323 2.3 * Escimares of residual are small and not accurate enough for growth rates to be estimated reliably, /1 'Tote that there are quite large irregularicies in the household employment daca: the figure for 1967 and 1975 (preliminary) are over 800 thousand; see Table 5.2. Sources: The basic data for the estimates are provided by the Population Censuses of 1960 and 1975 and the Manufacturing Censuses of 1961 and 1972. Since no two-digit breakdown of total employment is available other than in the Population Census years, the following procedure was used to estimate household employment. The percentage distribution of the labor force among the two digit classi fication shown were calculated from the Population Censuses for 1960 and 1973, the former discrIbution .as then apulIed to the total labor force in manufacturing for 1961 and the latter to :he total labor force in 1972. The hanufacturing Censuses gives the data for less than 10 and 10 or more employees; household employment is then calculated as a residual. A similar exercise using the 1967 Manufacturing and the 1970 Population Censuses was not done on account of apparent inconsistencies in the data on female employment in clothing and footwear, NEC in 1970. - 141 - population are rural, the survey covered a large proportion of off-farm activities such as piggeries and poultry, as shown in Table 5.11. Otherwise, the data show similar patterns to the two-digit data in Table 5.10, with a large proportion of workers being in garment craft and weaving, metal and wood crafts, and various handicrafts based on bamboo, ceramics and others. There was also some evidence of investment and growth in the activities surveyed; asset levels per worker averaged about P 1,500 ($200) and apparently most households had invested further 1/ in the activities after they were started. While most of the growth has stemmed from the growth of local markets (as with piggeries, poultry, metalcraft and food preservation) certain traditional handicrafts (bamboo, garments, needlecraft and ceramics) have benefitted from a fourfold increase in the export markets for cottage industry products in recent 2/ years. 5.28 The data in Table 5.10 suggest that the net shift away from household manufacturing is occurring towards both small and large manufacturing establishments, with the pattern again varying between sectors. An attempt is made to show the pattern in more detail in Table 1/ The investments were mostly self-financed, though a surprisingly large number appear to be turning to financial institutions for credit. In a sub-sample of 7,000 households over 1,500 (or 22%) had obtained loans from financial institutions; 65% financed their own investments; the other 13% had used informal sources and a now defunct credit facility offered by NACIDA. The institutional sources were not identified in the sample, but they probably include Rural Banks (which offer short-term loans for poultry and piggeries), the small loans facilities of the Private Development Banks, and the small "home" and "cottage" industry loan facilities of DBP and PNB respectively; for reasons discussed in Chapter II, they are unlikely to include the private commercial banks. 2/ NCSO Foreign Trade Statistics. Table 5.11: CHARACTERISTICS OF COTTAGE INDUSTRIES IN ILOCOS, 1977 fl No. of Labor Force Assets Industries % % 7 P 000s Percent Activity Counted Total Female Male Family Hired Initial Present Increase Bamboocraft 469 1,834 34.3 65.7 60.9 39.1 348 1,862 435 Ceramics 863 2,442 10.9 89.1 44.6 53.4 1,677 12,715 658 Garmentcraft 4,178 6,989 63.8 36.2 38.7 61.3 2,584 7,728 199 Fibercraft 106 265 32.8 67.2 77.0 23.0 93 268 188 Food Preservation 509 1,655 42.6 57.4 55.2 44.8 1,470 4,947 236, Loom-weaving 1,258 3,934 81.7 18.3 34.1 65.9 1,362 7,862 477 Metalcraft 1,490 3,681 5.7 94.3 47.3 52.7 2,478 8,286 234 Needlecraft 906 1,930 91.2 8.8 68.4 31.6 909 4,908 441 Other Crafts 2,052 9,075 53.9 46.1 89.0 11.0 1,067 5,171 384 Piggery 10,121 19,189 55.1 44.9 88.2 11.8 11,580 26,900 132 iggery-Poultry 2,390 ) 8,120 35.7 64.3 79.8 20.2 1,137 2,569 129 10oultry 2,913 ) Shellcraft 892 1,155 62.8 37.2 79.0 21.0 464 1,567 237 Agricultural Hand Tools 23 45 0.0 100.0 60.0 40.0 107 371 267 Other Industries 665 1,791 28.3 71.7 60.0 40.0 883 3,648 313 Woodcraft 1,981 5 505 13.5 86.5 58.7 41.3 4 201 J5,722 274 TOTAL 30,816 67,610 1 46.4 53.6 73.9 36,1 30,360 104,524 ,244 /l Since cottage industries are defined to be those with assets of up to P100,000, a number of small establishments are probably Lncluded, Source; "The Profile of Cottage Industries in the Ilocos," NACIDA publication, 1977. - 143 - 5.12, which presents data for 29 industries at the 5-digit level. The industries shown accounted for 98% of employment in establishments with less than 10 workers in 1972, and 92% of employment in establishments with 10 or more workers. They have been divided into three groups in order to identify the sectors in which the movement out of household is: (A) Mainly towards very small establishments (with less than 10 workers); (B) mainly towards larger establishments (with 10 or more l/ workers); (C) towards both larger and very small establishments. In summary, the growth rates and percentage shares in employment (in manufacturing establishments) for the three categories are as follows: Movement of Employment % Total Employment (1972) Growth Rates (1967-77) Mainly Towards:- Small Large Small Large A. Very small 27 5 14.0 -2.5 B. Large 3 45 - 3.7 8.1 C. Both 5 15 7.7 1.6 35 65 11.0 5.2 Source: See Table 5.12. 5.29 Most of (A) appear to be activities in which small enterprises derive advantages by concentrating on local markets - bakeries, tailoring and dressmaking, furniture, structural concrete products and fabricated metal products. Rice milling is the only exception in that it serves both local and national markets, though small scale activities presumably derive some advantage from being close to their sources of supply. A large 2/ proportion of small activities are also located in the provinces, and 1/ A breakdown of size structure at 5-digit level is not available for establishments with 10 or more workers. They thus overestimate employment in large and underestimate it in small; to emphasize this point the terms "very small" and "larger" establishments are used in this and the next two paragraphs. 2/ In both (A) and (C); see Chapter 6. -144- .able 5.12: SECTORAL CHANGES L.N EMPLOYMENT IN 7ERY SMALL AND LARGER ESTABLISIENTS, 1967-72 Very Small Establishments Larger Escablishmencs wich with less than 10 'orkers 10 or =ore qorkers Growth Growth 1967 1972 Rate 1967 1972 Race A. Ecoloyment (in 000s) in Selected Activities in thich Emoloymenc Growth is Occurrtn More in Verv Small than in Larger Establishments. Rice Milling 18.9 34.5 12.8 8.1 7.2 - 2.3 Bakeries 12.4 20.2 10.3 8.2 5. /1 - 6.4 Tailoring Shops 31.8 55.1 11.6 (23.9)- (2.5)- - Dressmaking Shops 9.9 19.6 14.6 0.4 0.3 - 5.6 Furniture (incl. upholstered) 2.4 8.2 27.9 4.2 5.6 5.9 Structural Concrete ?roduccs 1.8 5.6 25.5 2.9 2.8 0.7 Fabricated Mecal ?roducts 5.2 10.2 1- 6.2 3.5 SUB-TOTAL 82.4 nn * 3.2 380 - 7 B. EmoLoyment 'in 000s) in Selected Activities in 'Which Eoloyment Grcwth is Occurring More in Large chan in Small Establishments. Sugar Milling 2.5 2.0 4.4 21.4 29.9 6.9 Dessicated Coconuc 0.0 0.0 0.0 8.4 9.2 1.8 Cotton Textile Mills 0.0 0.0 0.0 24.7 29.9 3.9 Rayon and Fibre Textiles 0.0 0.0 0.0 3.6 10.8 24.6 Garments (Womens & Childrens) 0.3 0.8 /3. 2.1 10.8 38.8 Sawmills 0.2 0.4 7 20.7 21.5 0.9 Veneer, Plywood & Hardwood 0.0 0.0 0.0 22.2 23.7 1.3 ?aper Mills 0.0 0.0 - 2.6 12.4 36.7 Other Princing and ?ublishi 0.8 2.4 1 2.4 11.1 35.8 Pharmacautical & Medical 0.0 011 13 6.5 8.2 4.8 Other Chemicals and Products4i 0.7 1.3 A 17.6 38.3 15.6 Other Stru ural Concrete Products- 1.4 2.6 /3 14.6 17.0 3.1 Black Furnaces & Ro.lling Mills 0.0 0.0 - 3.9 6.1 9.4 Other Basic Mecals- 0.2 0.0 /3 1.8 3.1 11.1 Machinery and Equipment 2.1 1.7 /3 6.1 9.9 10.2 Electrical Machinery & Apparatus 3.2 0.4 - 34.0 9.1 13.6 8.4 Transport Equiment 6.5 3.1 13.8 14.7 16.0 1.7 SUB-TOTAL. 17.9 14.8 -3.7 182.4 Z71.8 3.3 C. Emoloyment (000s) in Selected Accivities in which Emolov=ent Graveh is Comoarable, in cth Sites of Escablishments Other Foods jtcl. canneries) 4.8 11.9 19.9 L 33.8 40.0 3,4 Other Textiles- 3.4 5.1 8.4 12.3 17.6 7.1 Other Vearing Apparel/ 5.3 1.5 - 22.0 19.3 11.2 -10.3 Other Wood and lurnitur- 3.6 7.1 14.5 8.9 :2.5 7.0 Commercial Job Printing 1.5 1.. - 1.4 5.8 5.8 0 0 SUB-TOTAL 18.6 27.0 7.7 80.39 8,7.1,2 l.- TOT.L 118.9 195.2 10.5 305 396.7- 3,3 (Total Manufacturing) (125.2) (204.0) 10.3 (393.6) (629.2) 1.7 /1 The decr=ent implied Between 1967 and 72 seems unusually large. /2 Excludes tailoring shops from sub-total (see f.n. 1). /3 The rates of increase or decreaae are cuie large for these sectors but the initial bases, and in most cases the absolute changes are too small for the calculaced rates to be meaningful. /4 Includes Drincing of periodicals, books, cards and newspapers, electrotyping, bookbinding and related work. - ----- -. - - /5 Includes industrial chemicals, and petroleum, coal, rubber and plastic manufacturing. /6 Includes all manufacturers of non-metallic products except structural concrete products, /7 Refara to iron and steel founries, furnaces and mills; and the manufacture of non ferrous mecals. /8 Includes such products as meat, milk, fish and grains. /9 Although growth rate is much Freater in small, these sectors were grouped under (c) because the labor absorption is large was comparable to that in small; they might wall, however, be better grouped under (a). /10 Includes weaving, spinning, knicting mills, etc. /11 Includes mans and boys garment factories, manufacture of hats, gloves and neckwear, /12 Includes manufacture of lumber, doors, windows and rushes; sawah, migra and splic cane factories; manufacture of ractan furniture and wood carving and crafting. /13 Growth rate is 4.5% p.a. excluding "other wearing apparel." Source: NCSO, Census of Establishments, 1967 and 1972. - 145 - are likely to face increasing competition from large scale (e.g. in tailoring, dressmaking and furniture) as transport and marketing costs decline with improvements in the country's infrastructure. Most of (B), in contrast, serve large markets - e.g. cotton and rayon textiles, sugar milling, plywood, chemicals, steel, basic metal and the manufacture of machinery and transport equipment - and the economies of scale are probably strong enough to offset the higher transport and marketing costs of centralized production. Most of (C) are in an intermediate category in which the trade-offs between economies of scale and transport and marketing costs probably vary significantly with 1/ location, and with the type and quality of product; they include for instance foundries, furnaces and mills; knitting mills; meat, fish and dairy products; printing of books, periodicals and papers; bookbindings; rattan furniture; and other. 5.30 The census data are neither sufficient nor reliable enough for a quantitative analysis of the relationships suggested in the previous 2/ paragraph, and special surveys would be required into production technologies and costs, product design and qualities, and marketing and transport costs in order to provide further clarifications. The above data suggest that very small and large generally have a non competing relationship, with each tending to concentrate on those products in which it holds a distinct economic advantage over the other. These advantages vary 1/ The data in Table 5,12 are at the five-digit level, and are thus not detailed enough for analysis of product type and quality. 2/ Such as are now being undertaken in Colombia and India. as part of the present research project. - 146 - with location Ci.e. with transport and marketing costs) and with the type of product. A more detailed breakdown of the size structure might of course reveal more competition between the larger-end of small scale, and the medium and large scale manufacturers; though again, the infrastructure conditions may also be protecting even medium scale manufacturing in the provinces. What can be said at present is, first that four fifths of establishment-based employment is either (a) in sectors in which very small activities are growing rapidly, while the larger scale are declining, or (b) in which the converse is true. Second, it is likely that improvements in infrastructure in the provinces, and the growth of markets, will both act to draw small and large scale into 1/ greater competition in some sectors. And third, recalling the interview data presented above, that competition will occur as much from the emergence and growth of small as from the expansion of already large enterprises. Industrial Policies and the Size Structure of Industry 2/ 5.31 Summary of Policies. Though differing in detail between years, the industrial incentives' policies of the Philippines have fallen broadly into three phases; the first two were: 1/ Staley and Morse (1966) observed a tendency when this happens for the two to become reorganized into a less-competitive and more complementary relationship. The examples they cite include the emergence of small-scale maintenance, repair and installation services for large-scale's products. 2/ The policies have been documented and analyzed extensively in several studies, most recently by Bautista and Powers (1979) and the research group that they directed. They are therefore summarized very briefly - no doubt inadequately - below, as a background to their effects on size structure. Other studies that have been influential and which provide valuable documentation are Powers and Sicat (1971), Baldwin (1975), collected papers of Sicat (1972), ILO (1974), World Bank (1976 and 1979), Valdenpenas (1970),and Hicks and McNicoll (1971). - 147 - (1) Import substitution under protection provided by exchange controls in the 1950s, and then (2) Under tariffs in the 1960s. In both periods the protection was greater for consumer goods than for intermediate goods and machinery; in addition an increasing number of firms belonging to "new and necessary" industries were exempted from taxes and customs duties on imported machinery and equipment. Powers and Sicat (1971) estimated the average effective rates of protection in 1965 to be 86%, 65%, 34% and -19% respectively for manufactured consumer goods, intermediate goods, machinery and exports. The effects of the incentives on output and employment have been well documented in the references cited. The capital goods industries hardly developed; and the growth of manufacturing -became increasingly restricted by the growth of the domestic market. Manufacturing output grew at 12-15% in the early 1950s when import substitution was proceeding at a high rate, but declined to 6% in the late 1950s and then to less than 5% by the mid 1960s as the import substitution possibilities became exhausted; the growth of manufacturing employment in the factory sector fell correspondingly. It was this situation that led to the third phase of the incentives' policies, and which has lasted throughout the 1970s: (3) Maintenance of protection under tariffs, but a broadening of tax incentives to raise industrial investment and exports, and to promote backward linkages in industry, The policies were expressed in the Investment Incentives Act of 1967 and the Export Incentives Act of 1970. - 148 - 5.32 Since the two Acts, the industrial growth rate has risen from 5% per year in the mid' 1960s to about 6-7% per year in the early and mid' 1/ 1970s. But the Acts themselves made only a slight contribution to the rise; manufactured exports, though expanding rapidly, accounted for only 2/ 5% of output in manufacturing by 19757 while the use of the investment incentives was much less than hoped for, and has even declined in recent 3/ years. The tariff system still dominates the incentives' structure. Tan (1979) estimated the average effective rates of protection to be 247%, 23%, 18% and 16% respectively for manufactured consumer goods, intermediate goods, machinery and exports in 1974; her estimates allow for the tax incentives under the two Acts, and show if anything that the incentives' structure is yet more strongly oriented towards domestic consumer goods markets than it was in the 1960s. The higher growth rate in the '70s must therefore be explained by the growth of the domestic markets, in which two factors appear to have been important. First has been '-he more rapid rise in agricultural output in response to the land reform programs, the introduction of 1YVs and the expansion of irrigation, infrastructural and agricultural services since 1/ The annual growth rates have fluctuated too much for a precise trend to be estimated for this period. E.g. from 14.8% in '72-73 to 2.9% in '74-75. 2/ Further, devaluation and the adoption of a floating exchange rate in 1969-70 did more than the Acts to stimulate manufactured exports. 3/ In 1972, total tax concessions under the Acts amounted to P70 million, or less than 2% of industrial investment, The number of projects registered by the Board of Investments (who administer the Acts) fell from a peak of 169 in 1973 to 39 in 1977 for the Export Incentives, while the number remained constant in the 60-80 range for the Investment Incentives. The reasons for the low use of the concessions have been the "red tape" and costs involved in obtaining them. 4/ In Bautista and Powers (1980). - 149 - 1/ the early 70s. Second, the factory sector is itself becoming larger in both relative and absolute terms, and its continued expansion is having a larger influence on the domestic product and labor markets (notwithstanding the labor saving bias of the industrial incentives). Employment in establishments with over 20 workers rose from 17% in 1956, to 21% by 1966 and 32% by 1975 (Table 5.13); the higher labor productivities and earnings in these establishments (also shown in Table 5.13) will have acted to increase the rate of growth of domestic expenditures on manufactured goods. 5.33 Two other aspects of the industrialization policies that should be mentioned were the concessionary finance to industry though DBB and IGLF, and the ceilings on the lending rates of the organized financial sector. Concessionary finance has accounted for only a small fraction of industrial investment, however The interest rate ceilings,on the other hand,were probably a disincentive for industrial investment since their practical effect was to restrict the supply 2,/ of long-term peso resources in the economy, as discussed in Chapter 2 and 3. 5.34 Effects on the Aggregate Demand for Labor. From the perspective of the present study, the policies outlined above raise several questions. What were the likely effects on the demand for labor in large and small enterprises? Row would the demand (again, in large and small enterprises) be affected if - as most economists have urged - the policies were to become less protective, more outward-looking and less labor-saving? And what would such policy shifts 1/ The links between agriculture and industrial growth will be discussed further in Chapter 6. 2/ The analysis in Chapters 2 and 3 only covers recent years; but interest rate ceilings have been in effect throughout the past 30 years; the private financial sector has historically made few term loans to industry, while short-term lending - which only recently has been at or near to ceiling rates - has expanded rapidly for over 20 years. Table 5.13: INDUSTRIAL OUTPUT, EMIPLYMENT AND WAGES: 1956-75 Quantities Growth, Rates Percent Per Year Size and Type of Establishment 1956 1962 1966 1971 197 1956-62 1962-66 1966-71 1971-74 1956-75 Employment in Manufacturing, 000s Establishments > 20 Workers 151 230 276 353 S25 7.2 4.7. 5.0 10 .4 6.8 Establishments 5-19 Workers 55 48 . 51 68 89 - 2.2 1.5 5.9 7,0 Households and Estbs. of -5 5Workers 686 767 1004 1051 1037 1.9 7.0 0.9 0.3 2.3 Total 892 1045 1331 1472 1651 2.7 6.2 2.0 2.9 3*3 Value Added, Constant1 72 Prices, Million Pesos Establishments > 20 Workers 2427 404 6 4950 7854 10043' 8,9 5.2 9.8 6.3 7.8 Establishments 5-19 Workers 288 193 288 346 230 - 55 10.4 1.2 Households and Estbs, of 5Workertn.a, 755 548 608 n.a. n.a. 3.8 -17.9 -16. n.a. H __8,1 0 Total n,a" 54994 3716 8808 6755 n.a. 5.1 7.6 n. a. Value Added Per Worker, Constant 1,572 Prices. Pesos Establishments > 20 Workers 16073 17591 17935 22429 19219 1.5 0.5 4.6 0.4 -3.6 Establishments 5-19 Workers 5236 4020 5647 5088 5284 3.3 8.9 - 1.7 -15.9 - 0 .9 Ilouseholds and Estbs. of 5 Workers 984 546 578 n.a. . - 1.2 -19.8 -12.5 n.a. Average, All Manufacturing 3042 3182 3769 17I7 n.a. 1.1 3.4 8.0 n.a. wacs, Constant 1972 Prices. Pesos Establishments > 20 Workers - 4127 4633 4174 3291 n.a. 3.0 - 2.1 - 7.6 n.a. Establishments 5-19 Workers - 1642 1878 1659 1020 n.a. 3.3 - 2.4 -15.0 n,a. .Sources' NCSO, Annual Survey of Manufactures. - 151 - imply for the Government's small industry programs? For example, would employment in large scale increase and in small scale decrease such that the "demands" of small-scale for the services provided by the programs would also decrease? - or would the opposite happen? To answer these questions, it is first useful to consider the general effects of the incentives on the demand for labor, and then the relative effects on the demands of large and small industries. 5.35 According to the studies cited there were 5everal ways in which the policies eventually reduced the overall demand for labor; they can be grouped into substitution effects (of capital for labor) and market effects (in both domestic and export markets). The substitution effects occurred on two counts: the comparatively low levels of protection on capital goods and equipment, 1/ supported by tax exemptions on capital inputs. Concessionary finance, to the extent that it was available, would have worked. in the same.directioc.- Some indirect evidence of substitution occurring is provided by Bautista (1979), who found a weak Spearman Rank Correlation between the effective rate of protection and capital intensity for 51 industrial sectors. Since capital intensive sectors need more protection than labor intensive sectors, there may have been some lobbying for extra protection; but the conclusion to draw from Bautista's study is that the incentives have encouraged the emergence and growth 1/ The Investment and Export Incentives Acts included some provisions to encourage industry to employ more labor (such as a tax deduction on labor training expenses, and another on the labor costs of some exporting firms), but they were quite minor, and more than offset by a range of tax reliefs on capital inputs - on the compensating tax on imported machinery, double deduction of shipping costs, tax credits for locally produced machinery, accelerated depreciation, re-investment allowances, tax credits for taxes on foreign loans, and others. During 1970-72, about 80% of all tax reliefs under the two Acts were estimated to be on capital costs, IBRD (1976). 2/ The correlation coefficient was 0.183, significant at the99.0% level. The data used were the Powers-Sicat EPR data for 1965, and the ASM data listed in the ILO (1974) report for 1969. - 152 - of the more capital intensive manufacturing sectors, though the effect was 1/ slight. 5.36 The market effects were probably greater on account of the inefficiencies in the incentives' system. The low level and growth of manufactured exports up to the 1970s has already been noted, and is discussed 2/ elsewhere. As far as the domestic markets were concerned, these were depressed in two ways (once the import substitution possibilities had been exhausted). One was through the costs (in terms of slow economic growth) of the 3/ misallocation of resources between agriculture and industry, resulting int too slow a rate of growth of demand for manufacturers in the agricultural provinces. The other was through the misallocation of resources within manufacturing itself; 4/ the costs of this are indicated in a recent study by Bautista and Tecson (1979) who found strong correlations between the effective rates of protection and the domestic resource costs of industrial sectors in 1969 and 1974.- The incentives' system thus eventually acted to reduce the growth of the markets it was protecting, and for this reason has adversely affected the demand for _ labor -in both'small and large scale. 1/ The correlations provide only a partial indication of the degree of capital-labor substitution, however, since they cover only the allocation of resources among sectors; within sectors, it is likely that the substitution of capital for labor was greater (though no empirical evidence is available to estimate extent of this effect). 2/ See e.g. Powers and Sicat (1971) and IBRD (1979). 3/ Powers and Sicat estimated the EPRs for agriculture and manufacturing to be 17% and 51% respectively in 1965. 4/ In Bautista and Powers, op. cit. special paper 5. 5/ Spearman Rank Correlation of 0.654, significant at the 5% level; 76 industries were in the sample (1974 data.) - 153 - 5.37 Relative Effects on Large and Small, The tax concessions and concessionary finance evidently reduced the demand for labor more in large than in small establishments, since they were mostly available to the former. Since 1974 concessionary finance has been made available to about 5,000 small manufacturers, and it is likely that their demand for labor I/ would also have been greater had interest rates been cost reflecting. 5.38 The structure of protection has similarly worked against small scale, with 80% of those people engaged in small establishments being in sectors with low, zero or negative rates of protection (c.f. 45% in large), as shown in Table 5.14.- A more detailed breakdown by industry is provided in Table 5.15, from which it is apparent that the bias against small is largely due to the concentration of employment in garments and rice milling (EPRs both less than minus 25%). Otherwise the system is relatively neutral, and there are instances of small industries rising behind protective barriers. A more detailed breakdown by scale of activity to examine the incidence on activities in the intermediate size ranges was not possible from the informa- tion available to us.- 1/ As noted earlier, however, the main gain from cost-reflecting interest rates would be to increase the supply of long-term peso resources. 2/ We are grateful to John Powers for spotting a number of errors in an earlier version of the following table - as well as for his constructive comments on several other aspects of the study. 3/ Note that the distribution of employment in manufacturing is strongly bimodal, however, with 75% being iether in establishments of less than 10 workers (28%),or-of over.200 workers (47% in 1975..(see Table 5.1. -- Still, the possibility remains that the incidence of the tariffs is itself inhibiting growth of the very small scale through the size structure. - 154 - Table 5.14: EMPLOYMNT IN LARGE AND SMALL ESTABLISHMENTS ACCORDING TO LEVEL OF PROTECTION Effective Rate of No. of Percent Employed I Protection; Range, 7. Sectors Small Large > 500 6 13,1 9,8 100 to 500 20 1.5 11.7 75 to 100 9 1,6 17.1 50 to 75 8 .8 1,6 25 to 50 21 5,1 12,8 0 to 25 33 11,9 22.3 -25 to 0 5 1.6 16.2 -50 to -25 6 66.4 7.0 Actual No. Employed, 000- 108 10010 100. 1 Small Establishments have less than 10 workers, large 10 or more. /2 When an estimate is on the dividing line it is put in the upper category. E.g. an EPR of 0 is included in the 0 to 25% range. i3 For the sample of industries studied. ' Data not available for all sectors listed in Annex Table 7. Source: Annex Table 7. The estimates of EPRs are those of Tan (1980). 5.39 A shift to a more uniform and less protective incentives' structure would act to encourage growth in several sectors in which small enterprises now provide a significant level of employment; examples are rice and corn milling, some dairy products and Ireserves, footwear, embroidered products, custom tailoring and garment making, furniture, printing of books, leather products, 1/ This is not included in Tan's data, but it is a large source of employment in the country, which probably has the same ERP as ready made clothes (i.e. minus 26%). See also ILO (1974) for a study of the effects of protection in the textiles and garment industries. 2/ See Bautista (1979) on the effects of protection in the leather and leather products industries. The results are almost exactly parallel to those of the ILO's study of textiles and garments (Ibid): low protection for an efficient sector that provides a large amount of employment, but which has to use a costly and inferior raw material input from highly protected domestic producers. - 155 - Table 5.15: EMPLOYMENT IN SMALL AND LARGE INDUSTRY BY RANGE OF EFFECTIVE PROTECTION AND SECTOR, 1972 AND 1974 Effective Rate of Protection: Employment Percent Range % and Sector Small Large Small Large > 500 Flour Milling & Cereal Flour 68 2566 .7 Bakery Products 21097 10019 12.3 2.9 Candy & Chewing Gum 1382 3240 .8 .9 Cocoa & Chocolate - 740 - .2 Starch & By Products - 1549 - .1 Cigarettes - 15685 - 4.5 Subtotal 22547 33977 13.1 9.8 100 - 500 Slaughtering; Poultry Pressing 84 - - - Distilled, blended liquors 624 154 .4 - Wines 22 2206 - .6 Paper products 5 1102 - .3 Paper & Paperboard containers 390 3089 .2 .9 Miscellaneous paper 102 385 .1 .1 Tanning & leather finishing 106 779 .1 .2 Rubber footwear 209 4439 .1 1.3 Tires and inner tubes 124 3636 .1 1.0 Paints, varnishes 27 1332 - .4 Soap and other compounds 33 4701 - 1.4 Structural concrete - 2731 - .8 Metal cans, boxes, containers 587 3408 .3 1.0 Household, radio, TV sets 52 3911 - 1.1 Refrigeration and A.C. equipment 46 3053 - .9 Motor Vehicles, Manuf. & Assembled 20 5425 - 1.7 Jewelry, Silverware 314 266 .2 - Subtotal 2603 40762 1.5 11.7 75 - 100 Canned fruits, vegetables 42 8247 - 2.3 Other fish products 648 2641 - .8 Macaroni, spaghetti, noodles 511 1290 .3 .4 Textile mills products - 41683 - 11.9 Structural metal products 1421 4499 .9 1.3 Heating Apparatus 54 311 - .1 Sport equipment 53 893 - .3 Subtotal 2727 59564 1.6 17.1 50 - 75 Meat products uncanned 419 134 .3 - Butter, cheese 18 895 - .3 Plastic materials 40 1943 - .6 Electrical wires - 1210 - .3 Motorcycles, cycles 359 880 .2 .3 Musical Instruments 351 346 .2 .1 Toys, dolls 130 40 .1 - Subtotal 1317 5448 .8 1.6 25 - 50 Processed coffee 120 2321 .1 .7 Prepared food for animals 58 2590 - .7 Carpets, rugs 253 663 .1 .2 Pulp, paper, paperboard - 12487 - 3.6 Fertilizer, lime - 1371 - .4 Glass 116 6683 .1 1.9 Pottery, china 1433 859 .8 .3 Basic ferrous metal - 9061 - 2,6 Cutlery, handtools 2847 471 1.8 .1 Stamped, coated Prods. 3501 192 2.0 .1 Other electric Machines 23 734 - .2 Communication Equipment - 246 .1 Electrical Lamps 14 1272 - .4 Shipbuilding 373 5370 .2 1.5 Subtotal 8738 44320 5,1 12.8 - 156 - Table 5.15: (Continued) Effective Rate of Protection: Emlovment Percent Range % and Sector Small Large Small Large 0 - 25 Meat products, canned - 1361 - .4 Evaporated, condensed milk - 1210 - .3 Flavoring extracts - 181 - - Footwear 5611 2556 3.3 .7 Lumber 389 5993 .2 1.7 Plywood & Veneer - 24579 - 7.2 Furniture 9067 8041 5.2 2.3 Books & Pamphlets 1156 2456 .7 .7 Other rubber 193 2344 .1 .7 Compressed, liquified gas - 1518 - .4 Medicinal pharmaceutical 124 8134 .1 1.3 Insecticides 9 588 - .2 Petroleum refineries - 1014 - .3 Other oil products 29 99 - - Fabricated wine 14 667 - .2 Agricultural machinery 604 1600 .4 .5 Other special industry 86 1049 - .3 General industrial equipment 10L3 7648 .7 2.2 Electrical Distribution & Control 28 603 - .2 Motor vehicles engines 1979 4861 1.1 1.4 Scientific equipment 101 691 .1 .2 Office supplies 10 365 - .1 Subtotal 20403 77558 11.9 22.3 - 25 to 0 Fish canning 45 234 - - Sugar milling 1266 - 9.1 Dessicated coconut - 9422 - 2.7 Cigars - 1482 - .4 Knitting mills - 7707 - 2.2 Cordage 686 1932 .4 .6 Doors and windows 1642 317 1.0 .1 Basic industrial chemicals 81 1633 - .5 Structural clay 327 2204 .2 .6 Subtotal 2781 56197 1.6 16.2 - 50 to 25 Rice milling 34523 2559 20.0 .7 Corn milling 2643 1233 1.5 .4 Clothing 76193 19048 44.3 5.5 Embroidered products 569 1089 .3 .3 Leather products 523 468 .3 .1 Subtotal 114451 24397 66.4 7.0 Total 17:309 347565 100.0 100.0 Sources: Effective rates of protection from Norma A. Tan,"The Structure of Protection and Resource Flows in the Philippines, 1974", Ph.D. dissertation University of the Philippines 1979. These figures were taken from "Industrial Development Strategy and Policies in the Philippines", October 1979, Report No.2513 since we do not have Tan's thesis. Also NCSO, Census of Establishments, 1972. -157- pottery and earthenware; mechanical, electrical and agricultural machinery; motor vehicle bodies; and others. All have low or negative ERPs, and in several instances are high growth sectors (see Tables 5.10 and 5.12), Equally, there would be a number of sectors in which profits and labor demand in small enterprises could be expected to decline; but in contrast to the proceeding, most of them could hardly be described as the bread and butter of Philippine manufacturing - e.g. motorcycles, toys, musical instruments, jewelry, chocolates, wines; and paper prodtcts, and tanning and leather finishing. 5.40 Similar contrasts can be made for large scale manufacturers. But the overall effects are clear, and have already received analysis in the papers cited. One question that remains is whether competition between large and small would be heightened if there were a major re-allocation of resources among sectors, and if this would lead to a rapid decline of small. The earlier analysis suggests that this is unlikely, with some exceptions (such as in metal working and machinery)> as shown earlier, large and very small are generally non-competing, and tend to concentrate in sectors in which one or the other has the economic advantage - another indication of the -ability of manufacturers to adapt efficiently to the existing incentives structure. 5.41 It is possible that, as rural infrastructure is improved, large scale will enter markets that are currently the stronghold of small-scale on account of tfe "natural" protection provided to small-scale by iigh transport costs in the agricultural provinces. Further, as the manufacturing sector becomes - 158 - large in relative terms, its expansion will have an increasing pull on the labor markets, acting to narrow the wage differential between large and 1/ small. In these circumstances, employment in small scale activities may decline in both absolute and relative terms, as is apparently happening 2/ in Korea and Taiwan. But this situation is not an imminent prospect in the Philippines, given the large share of the labor force still in agriculture. A reform of the incentives' structure, by accelerating the economic growth rate, is likely to bring the time nearer when manufacturing employment is predominantly in large scale, but it cannot bring this about immediately. Moreover, some of the large-scale activities that will by then exist are themselves likely to have evolved through the size structure. 5.42 Efficiency of Large and Small Manufacturing Establishments. Some recent estimates by Bautista and Tecson (1979) of the Domestic Resource Costs (DRC) in Philippine manufacturing can be used to show the distribution of large and small establishments in sectors ranked according to economy efficiency; their estimates are reproduced here in Annex Table 5..7 and cover 82 manufacturing sectors. According to the DRC criterion a sector is less efficient the more the value of the DRC exceeds, and more efficient the more it lies below, the 3/ shadow exchange rate. The exchange rate in 1974 was about 6,8 pesos per dollar, but various estimates cited by Bautista and Tecson put the shadow exchange rate at about 9 pesos per dollar. Table 5.16 below shows how the manufacturing of employment in large and small establishments 1/ See Chapter 7 for a further discussion. 2/ Ho (1979). 3/ Let E be the shadow exchange rate, P the world price; D the domestic cost component (in shadow prices) and F the foreign exchange cost component of a manufactured good. Then the cost-benefit criterion is F x E + D < PE for an efficient sector. Or, D/(P-F) < E, where the term on the left hand side is defined to be the Domestic Resource Cost. - 159 - varies with the DRC. Approximately 80% of employment in small establishments lies in the efficient sectors, and 65% of employment in large establishments. Table 5.16; EMPLOYMENT IN SMALL AND LARGE ESTABLISMENTS ACCORDING TO LEVEL OF DOMESTIC RESOURCE COSTS IN 1974 Domestic Resource No.of Percent Employed ir-- Costs, Range % /2 Sectors Small Large < 20 8 .4 4.4 15 - 20 6 13.2 12.3 10-- 15 18 3.5 14.9 7 - 10 28 27.1 21.8 5 - 7 25 55.6 45.4 < 5 7 .1 1.2 92-- 100,0 100.0 Actual No. Employed 000s 170 290 /1 Small Establishments have less than 10 workers, large 10 or more. Data are for 1972. /2 When an estimate lies on the dividing line between two ranges, it has been put in the upper range. /3 No. of sectors in the sample. Estimates not available for all sectors listed in Annex Table 7. Most of the sectors now having low ERPs turn out to be economically efficient, and it must be cohcluded that a transition to a more efficient incentivest structure would benefit (by railsing profits) a large number of manufacturing activities.both large and small scale. Furthermore, these activities employ the majority of those now working in large and small establishments. 1/ See para 5.35 above on Bautista's correlations between ERPs and DRCs across industrial sector. -160- Conclusions 5.43 The basic trends in the size distribution of Philippine manufacturing activities are (a) a continual decline of self-employment in household activities, except in some high growth sectors and others in which it remains important as a secondary source of income; and (b) a comparatively rapid emer,ence and growth of wage employment in workshops and factories. These trends reflect structural changes in the nature of manufacturing employment, and the decline of household manufacturing should not be viewed negatively. They also help to explain the low aggregate elasticities of demand for labor in manufacturing, and which can be expected to remain low so long as household manufacturing employs a large share of the labor force. 5.44 A feature of the size distribution is the rapid emergence and growth of manufacturing establishments in the small and middle size ranges in response to market growth. Small industries concentrate on local and regional markets for the most part, and in activities in which localized production has an economic advantage; their relation to large is complementary and non-competing in m-Ost product groups, an exception being in the high growth engineering sectors. Infrastructure improvements and market growth in the provinces will probably introduce competition in an increasing number of products over the long haul, but the immediate effects, as will be discussed fruther in the next chapter, would be to stimulate production in both large and small scale manufacturing. Closure rates of small scale were found to be high, as expected. Finally it was found that the growth of employment in large scale is in good measure due to the expansion of a small minority of ance small firms through the size distribution (the remainder being the branch expansion of large corporations). Most of the larger firms interviewed began with very small investments and levels of employment. -161- 5.45 The industrial tariffs system, which has been the principal element in Philippine industrialization policy for nearly 20 years, worked against the majority of those employed in both small and large scale. About 80% of employment in very small establishments is in "underprotected" sectors; over 80% is also in efficient sectors (with low DRCs). The investment and export incentives introduced in 1967 and 1970 favored large more than small, mainly by subsidising capital costs, though their ovarall effect was comparatively minor. 5.46 Various proposals are now under review to make industrial tariffs lower and more uniform, and to make the industrial investment incentives more labor demanding. Several studies have shown that this would (a) increase growth overall by promoting the more efficient industrial sectors, (b) increase growth in the provinces yet further, principally through favorable effects on agriculture, and (c) increase the rate of labor absorption in large scale by making its investments more labor intensive. What would be the effects on small industries? Principally, to stimulate the product markets directly (via growth) and indirectly (via labors' incomes). As with large scale, some restructuring of manufacturing activity could also be expected towards the economically more efficient sectors - in which the majority of the labor force in small industries are in fact already employed. - 162 - VI. SMALL ENTERPRISE AND REGIONAL DEVELOPENT 6.1 Approximately two thirds of manufacturing employment in the Philippines is in the agricultural provinces, of which 60% is in households. It is in the agricultural provinces, however, where the share in household employment is declining most rapidly, and there is a movement of labor into large and small manufacturing establishments in local urban centers. The movement - and with it, the growth of the regional urban base - is most rapid in those regions where agricultural development is most rapid and broadly-based, and can be explained by two factors: agriculture's influence on the regional product and labor markets, and the advantages of localized production for certain classes of manufactured goods. This chapter examines these various trends and changes, and concludes with a comment on the recent emphasis by the Government on agricultural development and its implications for the small enterprise programs. In the absence of sufficiently detailed information by region on agriculture and on the activies of the labor force, the points to be made are general, and necessarily brief. Urban-Rural Population Data 6.2 Slightly over one third of the population currently live in urban areas, which in the Philippines are defined so as to include small villages 1/ and towns. Castillo (1977) has described the extensive network of towns and villages in the countryside in which there are 40,111 barangays (the smallest unit of government at the village level), 522 municipalities, 1/ The NCSO definitions include: (1) All cities and municipalities having a population density of at least 1,000 persons per square Km; (2) Central districts of municipalities with a population density of at least 500 persons per square Km; (3) Central districts having a recognisable street pattern, at least six establishments engagedin manufacturing, commerce or service activities, and at least three of the following: (1) a town hall, church or chapel with ro.ligious services at least once a month,(ii) a public plaza, park or cemetry, (iii) a market place or building where trading activities are carried on once or more a week, or (iv) a public building like a school, health center or library. Also included are barangays having 1000 inhabitants or more in which condition (3) is met and where the occupation of the inhabitants is predominantly non-farming or fishing. All other areas are considered rural. - 163 - 60 cities and 72 provinces; in 1970 there were over 400 provincial towns with populations of less than 20,000 inhabitants. The 1970 distribution of population among rural and the various sizes of urban areas is shown in Table 6.1. The percentage of people counted as living in rural areas is evidently quite sensitive to the definitions of urban and rural. UN definitions include villages and towns with 20,000 inhabitants or less in their estimates of the rural population on the grounds that such centers for the most part are servicing rural areas. Applying this definition to the Philippines in 1970 would raise the rural population estimates from 68% to 80% of the total population. 6.3 From the viewpoint of the present study three other demographic features should be noted: - the still high rate of population absorption in rural areas; two-thirds of total population growth occurred in rural areas over the period 1960-75; - the spread of urban growth across a large number of urban centers ranging in size from a few thousand inhabitants to over 4 million in Manila. - the wide variations in urban growth rates in regions outside Manila. Data on the first two features are shown in Table 6.2. Outside Manila, the aggregate values shown in the Table conceal growth rates varying from near-zero 1/ or negative values in some provincial towns and cities, to 4 to 6% and higher in others. 1/ Annex Table 6.8. - 164 - Table 6.1: DISTRIBUTION OF POPULATION AND MANUFACTURING EMPLOYMENT BY RURAL AND SIZE OF URBAN AREA, 1970 Distribution of No. Of Population Distribution Manufacturing Empl. Location Centers 000s % 000s % Rural Areas - 24,987 68,3 706 52.1 Urban Areas By Size (Population in 000s) /1 /2 < 10 372-- 3,355/2 9.2 73 5.4 10-20 72 1,031 2.8 54 4.0 20-50 28 894 2.4 63 4.6 50-100 16 1,161 3.2 85 6.3 >100 6 1,166 3.2 85 6.3 Metro Ma.ila- 1 4,004 10.9 288 21.3 /1 Cities, Provincial Capitals and "urban agglomerations" of municipalities; their total population is 10.1 million. In addition there are 1.6 million inhabitants in very small urban centers (the number is not provided in the census). /2 Includes 1.6 million inhabitants in the (very small) urban centers noted in f.n. 1. /3 Includes Rizal. Sources and basis of Estimates: Compiled from 1970 Population Census, National Summary, Volume II, Tables I-5 and 1-6. The distribution of manufacturing employment is estimated as follows. The Census provides the urban-rural breakdown. For urban centers of less than 10,000 about 2.2% of the population are employed in manufacturing;for those of 10-20 thousand, 5.2%j and for centers with over 20,000, 7.2%. The first two of these percentages were obtained from the provincial 1975 census volumes (we did not have access to the 1970 volumes) for Agusan del Sur, Aklan, Antique, Catanduanes, Bukidnon, Ifugao and Lanao del Norte, whose average urban populations were less than 10,000 in 1970; and Laguna, Misamis Oriental, Negros Occidental, Nueva Ecija and South Cotabato whose combined average urban population was about 15,000 in 1970. The 7.2% for centers with over 20,000 is calculated as a residual These provinces were used as a data base (a) on account of the sizes of their towns and (b) to provide a broad geographical coverage. -165- Table 6.2: LEVEL AND GROWTH OF POPULATION IN URBAN AND RURAL AREAS, 1960-75 Population Millions Change, 1960-75 Growth Rate, Location 1960 1975 Millions % Total % 1960-75 Rural Areas: 18.9 28.8 9.9 66 2.8/1 Urban Areas: /2 /1 - Small Urban Areas-- 2.8 4.6 1.8 12 3.3- - 6rin a 2.6 3.7 1.1 7 2.3-- -56 Provin 2. / Cities- - Metro Manila 2.7 5.0 2.3 15 4.1 Total 27.0 42.1 15.1 100 3.0 /1 There are some definitional changes introduced in 1970 regarding what comprised an urban area. These affected the urban areas outside Metro-Manila; they would be 5-10% larger had 1960 definitions been used consistently. /2 Total Urban Population minus total population of 60 principal cities known as chartered cities in the Philippines). /3 Population of 60 principal cities minus the population of the cities that form Metro-Manila. Source: Population Censuses for 1960 and 1975 (see the f,n. to para 6.2 on definitions of urban and rural). Manufacturing Employment in Urban and Rural Areas 6.4 The distribution of manufacturing employment is also shown in Table 6.1; approximately 52% was in rural areas in 1970, 27% in provincial towns and cities, and 21% in Metro-Manila. There are several reasons for thinking that the share in rural areas is declining, though it is not possible to detect this in the series shown in Table 6.3. - 166 - Table 6.3: EMPLOYMENT IN MANUFACTURING IN URBAN AND RURAL AREAS, 1965-76 /1 No. Employed, 000- Percent Distribution Year Rural Urban Rural Urban 1965 653 568 53.5 46.5 1966 742 589 55.7 44.3 1967 767 623 55.2 44.8 1968 754 634 54.3 45.7 1969 697 594 54.0 46.0 1970 706 648 52.1 47.9 1971 852 620 52.9 47.1 1972 792 675 54.0 46.0 1973 723 695 51.0 49.0 1974 761 747 50.5 59.5 1975 868/2 783/2 52.6 47.4 1976 907-2 773/2 54.0 46.0 /1 May series, except those noted in f.n. 2. /2 August series. For urban areas the August series are about the same as the May series. In rural areas, the May series show employment levels about 10% above those in the August series. Sources: NCSO Survey of Households and 1970 Population Census. (Data here are taken from the compilations in the 1977 Labor Yearbook,) - 167 - 6,5 The still high share of manufacturing employment in rural areas is surprising. It probably reflects the point that, for rural families, manufacturing is a secondary "off-farm" activity, undertaken mostly by women, and which for this reason has to be combined with farm-work and 1/ domestic duties. Notwithstanding the network of towns in the country, access between farm and town is still time consuming in most regions, and it is not possible for women to "commute" to local towns in search of 2/ secondary earnings in commerce or manufacturing establishments. Consequently the majority of rural manufacturing activities are undertaken within the household. 3/ 6.6 The lack of data and descriptive material limits what can be said about manufacturing activities within rural households and their role in enhancing rural incomes. They are, however, declining in importance in favor of wage employment in establishment-based,non-farm activities in the provincial towns and cities. At a general level, they can be divided into two kinds: the production of articles for own use, which is declining rapidly according to the data in Annex Table 6.1; and 4/ the production of articles for sale, which is declining slowly. Consider also changes in the types of employment undertaken by women, who provide two thirds of the labor force in manufacturing activities in rural areas 1/ Evenson, Popkin and King-Quizon (1979). 2/ The root mean distance between the 472 towns with less than 50,000 in- habitants (Table 6.1) is over 16 kilometers in cultivated areas. (Cultivated area is 12 million hectares.) 3/ Such as is provided on farmers in Mrs. Castillo's (1977) excellent study of provinces in the Philippines. 4/ In Manila, in contrast, household manufacturing of this kind is rising rapidly (Annex Table 6.1). See also para 6.12 below on the growth of the urban informal sector. - 108 - (c.f. one third in urban areas). Nine tenths of the women recorded as being in rural manufacturing are working in textiles and wearing 2/ apparel; household employment in both of these sectors has peaked according to the evidence discussed in Chapter 5 (Table 5.10) in favor of rising employment in large establishments in the case of textiles and small establishments in the case of wearing apparel. Furthermore, women are shifting increasingly out of mandfacturing into commerce and services. Between 1956 and 1976, their participation rate in the labor force remained about constant, but their occupational distribution changed as follows: in manufacturing, a decline from 8.0 to 5.2%; in government services, a rise from 1.7 to 4.6%, in commerce, a rise from 6.1 to 7.1%; and in personal services a rise from 4.5 to 5.4%. There were on the other hand rising shares of the male labor force in manufacturing, 3/ mostly as wage-labor in small and large establishments. 6.7 To sum up, these various trends are suggestive of three basic changes in the allocation of labor both within and among families with changes in output and infrastructure in the agricultural provinces: 1/ Population Census, 1970. 2/ Population Census, 1970. 3/ See Chapter 7 for a further discussion of the movements into wage-labor. - 169 - (i) A movement of women out of household manufacturing for subsistence (own use) purposes into wage and 1/ self-employment in tertiary sectors; (ii) A maintenance or slow decline of some household manufacturing activities employing women, and which provide a secondary source of family income; (iii) The emergence of manufacturing in workshops and mostly - though by no means exclusively - small factories as a primary source of family income. Since this employs mostly male labor, it also solves the 'commuting' problem referred to above. It is of course the manufacturing activities and changes noted under (ii) and (iii) that offer the better prospects for enhancing rural incomes. 6.8 The current emphasis on agricultural growth and infrastructure improvements in the provinces is likely to increase the growth of manufacturing and commerce in the local towns and cities, and to accelerate the movement of labor out of rural household manufacturing. Rising farm incomes permit a greater division of labor between farm and non-farm work, given the high income elasticities of demand for non-food goods, and stimulate the local markets for both locally and externally made manufactured goods; in the case of the demand for external goods, a rise 1/ The rising shares in tertiary activities were lamented in the ILO (1974) report as being a sign of too low a demand for labor in manufacturing and the primary sectors. While tertiary activities sometimes offer better earnings than the more marginal household manufacturing activi- ties, it is generally believed that they are overcrowded. -i7u- of employment also happens in local retail and wholesale outlets, and in repair and installation services. Furthermore, the broader the base of agricultural development, the broader the effects on the labor and product markets. A study of Gibb (1974) of four provincial towns in small farmer rice growing areas in Central Luzon showed a rapid expansion of small-scale manufacturing and commercial activities in the towns, in response to the farm incomes generated by the introduction of HYVs and supporting irrigation and infrastructural services. His findings are summarized in Annex Table 5.2, and are consistent with 2/ those of studies in other countries, the more recent work of Alburo and associates (1979), and the regional data presented in the next 2ection. Regional Distribution and Growth of Manufacturing Employment 6.9 The demand for labor to work in manufacturing in the agricultural provinces is derived from three sources: (a) the demand for consumer goods, and which rise with incomes in agriculture; (b) external demands for local manufactures, principally garments and handicrafts; and Cc) the demands for inputs and intermediate goods by agriculture, and also by local manufacturing itself, and which rise with agricultural output. (Crop processing is included in Cc).) The result is a very broad spectrum of manufacturing activities in.theconsumer and intermediate goods industries, as indicated below by the employment data on manufacturing establishments: 1/ For a further discussion see World Bank (1978). 2/ One would like to see more case studies of this type, since they provide a more accurate assessment of the response of non-farm activities to agricultural growth and infrastructure improvements, and a clearer picture of the growth of the urban base in the provinces. For studies in other countries see Epstein's (1973) historical study of two villages in India, and Webb C1974) on Peru. Webb notes "New types of activities springing up in the countryside include small businesses and trading ... a vast network of small rural markets has formed ... small businesses are probably the most important occupations in the growing urbanization of the countryside." A study by Child and Kaneda C1975) of the tubewell pumpset manufacturers in rural towns in the Pakistan Punjab is also worth reading. For a discussion across countries, see also World Bank (1978). - 171 - Metro-Manila Provinces Percent Employed in - Consumer goods 55 72 - Intermediate goods 30 24 - Capital goods 15 4 100 100 Actual Employment, 1977 (000s) 401 377 Source: See Annex Table 6.10 for further details. The data are for establishment of all scales. 6.10 The level and growth of manufacturing employment in the regions,if they are to be classified by scale of activity, have to be examined at a more aggregative level on account of data limitations. Some data are provided in Table 6.4 for Manila and Rizal (Metro-Manila) and the Philippine's three major island groups: Luzon (excluding Metro-Manila), Visayas and Mindanao. Since the economic conditions vary considerably 1/ between the regions within each group, the data are still too aggregative for comparative purposes. Luzon for instance has three of the poorest and most slowly growing agricultural regions in the country (Ilocos, Cagayan Valley and Bicol) and two of the most prosperous and rapidly growing (Central Luzon and Southern Tagalog). The regions within Visayas and Mindanao also require separate analysis on account of differences in 2/ their primary resource base: forestry (accounting for over 40% of the country's total annual production) and coconut in Northern Mindanao; corn, coconut and forestry in South-Central Mindanao; low levels of per capita production in all major crops in Western Mindanao, Central Visayas and Eastern Visayas; and sugar (accounting for over 60% of the country's total annual production),rice and fisheries in Western Visayas. But it is 1/ Annex Table 4, summarizes the economic characteristics of the 12 main regions of the Philippines. 2/ See Annex Table 4, - 172 - difficult at present to construct a consistent time series on manufacturing 1/ employment by scale of activity for each region. (A regional breakdown for small and large industries is shown in Annex Table 6.3 for 1970, the latest year for which consistent regional data are available; and a time series on the numbers of large and small manufacturing establishments is shown in Annex Table 6.6 though even here inconsistencies remain.) 6.11 Within these various limitations imposed by the data, four features stand out as regards changes in the size distribution of employment by region (Table 6.4): (i) The concentration in Manila of employment in 2/ large scale manufacturing, amounting to 53% of total employment in large scale in 1975; (ii) The level and growth of household employment in Manila; (iii) The regional dispersion of employment in small-scale: 82% of employment in household manufacturing, and 78% in small establishments, was in the provinces in 1975; 1/ In 1975 the population census used a different definition )f employment to the one used in the establishment census. It is possible to make adjustments for this (see Annex Table 6.5), but the assumptions do not hold up well at a disaggregative level. Even the aggregate data in Table 6.4 and Annex Table 6.5 have a number of caveats, as footnoted. 2/ Depending on the definitions adopted for small and large scale; 53% refers to establishments with 10 or more workers. For establishments with over 200 employees, the preliminary tabula- tions of the NCSO indicate that about 52% of the employment is in Metro Manila. - 173 - Table 6.A: REGIONAL DISTRIUTION AND GROWT OF mANUFAC7'RING neLOuLmT BY SCALE OF ACTIVITY, 1960-75 Region and No. EmDloved, 000s Discributions, 1975 Trend, Scale of Activitv/i 1960 1970 1975 r '.rmp Tor-I 1960-75 Manila & Rizal Households 556 811 150, 9 Z4 18 /4 6.9A Establishments <10 27 39 63 4 22 - 4.4/2 Establishments >10 159 244 288 17 53 3.8!3 Total 241 364 501 30 30 5.0 Luzon (excluding Manila and Rizal) Households 298 396 361 22 43 1.3 Establishments <10 35 69 126 8 45 8.3z Establishments >10 39 63 149 9 27 9.6/ Total 372 528 636 38 38 3.6 Visavas Households 264 275 214 13 26 -1.4 Establishments <11 19 30 40 2 14 6.0 Establishments >10 32 43 60 4 11 . Total 315 348 314 19 19 0.0 Mindanao Households 78 70 108 7 13 2.2 Establishments <10 12 30 52 3 19 9.7/ Establishments >10 18 59 49 3 9 5.4/3 Total 108 159 209 13 13 6.8 Countr-7 Totals Households 695 822 833 50 100 1.2 Establishmentzi <10 93 168 281 17 1,, 7.7 Establishments >10 248 409 546 33 100 .4 Total 1030 1399 1660 100 100 3.2 , The scales talata to numbers of workers employed. Household employment is estimated as a residual. Actual trends for 1961-72 shown in Annex Table 5. & Actual trends for 1961-75 shown in Annex Table 5. /4 Since the residual (household employment) is only a small percentage (20-30%) of total employment L, Manila and Rizal, the estimates here are more uncer- tain than in the oth, regions: a small error in total employment is magnified 3 to 5 times in the r,isidual; in othei regions the errors are magnified by about l,3 to 1.5 on avurage. Sources and Basis of Estimates: Total employment by regions is given in Annex Table 5 (columns 1960b, 1970, 1975b) . The establishment data are in Annex Tibla 6; since these are for the years 1961, 1967, 1972 and (for establishments of over 10 workers only) 1975, the estimates for 1960, 1970 and (for the less than 10's) 1975, are simple trend interpolatiorsor extrapolations from the nearest years. - 174 - Civ) The high growth rates of establishment-based employment (in both small and large scale) 4,u the provinces, in conjunction with a rapidly declining share of household employment.-/ (i) is familiar, and can be discussed briefly. The concentration of large scale in the Manila region is partly a consequence of the market for consumer goods in the region itself, and in the adjacent and relatively propserous agricultural regions in Southern Tagalog and Central Luzon. Aside from the historical concentration of wealth and income in Manila, investment there was also stimulated by the structure of industrial incentives. The high rates of effective protection on consumer goods industries, tax reliefs on capital inputs, low rates of effective protection on capital inputs and on agricultural and forestry products all acted to favor investment in industry over agriculture, 2/ as discussed in Chapter 5. Simultaneously, the transactions costs of using the incentives, low tariffs on imported materials, and the costs of obtaining imported inputs to industry, both favored industrial investment near the Government and near the port of Manila.- 6.12 (ii) Household Manufacturing Employment in Manila. This encompasses a very broad range of activities and earnings levels, and for this reason it is hard to explain why it is growing so rapidly while declining elsewhere. In Manila (as elsewhere) families primarily dependent on household manufacturing often have earnings comparable to or in excess of those of skilled labor in the 1/ John Powers mentioned that this reverses a slow trend experienced in the 1950s, when capital was moving away from agriculture at a historically high rate under the influence of protection. This is documented in a paper by Moran (1979), to which we did not have access at the time of writing. 2/ See especially the ILO report on this subject. 3/ Powers and Sicat (1971), p. 106. - 175 - organized sector; others are amongst the poorest in the country. For 0 2/ some families - though a rapidly declining number - it is a subsistence activity. For others it provides a secondary source of employment and earnings, undertaken by women and (perhaps moreso than in the provinces) has been encouraged by the putting out system, in the garments industries 3/ in particular. It is also likely to include employment in a number of the high growth capital and durable gocis industries referred to in :1 4/ Chapter 5. 6.13 Any explanation .f the growth of household employment in Manila must therefore recognize the diversity of cctivities involved. The possibility of measurement errors cannot of course be discarded; yet the evidence is consistent with both cross-section and time series data on th,. size and growth of the 'urban informal sector' in other 5( countries, and one might best draw on the models of this sector to find the elements of an explanation. The growth of labor supply due to 1/ This can be inferred from the data presented in Chapter 7 (table 7.6 and Annex Table 7.9). In 1971, 18.3% of the families primarily dependent on entrepreneurial activities in manufacturing were in the top quintile, and another 18.3% in the next-to-the top. The number of families in these groups (72 thousand) significantly exceeded the number of manufacturing establishments in that year. Since these data are for the country as a whole they do not show the point explicitly for Manila, though it is highly unlikely that Manila would have none of the better-off in these types of activities; in fact several such families were met during the course of field trips in the present study. 2/ Compare the figures on production of articles for 'own use' and 'for sale' in Annex Table 6.1. 3/ The 1975 Population Census gives 103 thousand women in Manila and Rizal as being in the weaving apparel industry, of which less than half can be accounted for by employment in establishments. 4/ Several of the interviews reported in that Chapter were with firms in the Manila area that had started out as household activities. 5/ Mazumdar (1976), - 176 - in-migration and the 'natural' population growth of the city is obviously one element, combined with the low demand for labor from the corporate sector. Another is the growth of the urban product markets including the markets generated by the 'informal' 2/ sector activities themselves. The fastest growth of household manufacturing in Manila also occurred during 1970-75 (Table 6.4), a period of inflation, declining real wages and a declining share for labor in value added; as will be discussed in Chapter 7, it thus became more remunerative for many workers to move into or remain in self-employment. Even before the inflation, however, the distribution of earnings from self-employment and from wage-employment in skilled occupations in the 'formal' scctor overlapped, and is suggestive of a greater competition in the labor markets for the two kinds of employment than is commonly supposed. Finally, as in Japan in the earlier part of this century, there are economic and political advantages to large trading and industrial firms in the "putting-out" of certain 3/ types of work. 6.14 (iii) Geographical Dispersion of Small-Scale. It is sometLdes suggested that the geography of the Philippine islands enforces a dispersed pattern of manufacturing and commerce, This is possibly true in the mountain provinces, but the separation of provinces by sea in fact has comparatively little influence, except perhaps in the three main islands of Visayas, since 75% of the population live on the two 1/ Preston (1979) has pointed out an often overlooked point that the growth of large urban areas stems in a greater measure from their 'natural' population growth rate than from in-migration, thugh this is r. t.- suggest that the latter is unimportant. 2/ Mazumdar, op. cit., p. 672. 3/ Shinohara in Hozelitz (1968). - 177 - large islands of Luzon and Mindanao, where small scale manufacturing is also dispersed. It will be argued below that (as in other developing countries) dispersion is a consequence of the still large share of the labor force in agriculture and living in rural areas, and which in practice leads to dispersed product markets and to fragment production into small scale units. The rural populations in regions outside Metro-Manila range from 70% of total population in Central Luzon, to 90% in Ilocos. Household manufacturing is mainly in the rural areas as discussed earlier, while manufacturing in small establishments is found mostly in local urban centers on account of better access to infrastructure and markets. For some products it is possible for large scale manufacturers to reach the provincial markets through the trading networks, as happens for instance with modern durables; but the transport, storage and marketing costs for others (furniture, construction materials, job-order-metalwork and bakery products, for instance) are prohibitive until infrastructure and transport services are sufficiently developed. Low wages and the demands for cheaper if often lower quality products in the provinces also presumably favor local small manufacturers. Although such relative cost and marketing advantages for small manufacturers decline with the growth of per capita rural incomes, and with infrastructure improvements, this appears to affect a limited number of sectors CChapter 5, Tables 5.10 and 5.12). In others, it leads to the provincial 1/ manufacturers reaching out to the regional and national markets, and to an overall expansion of establishment-based manufacturing activity. 1/ Chapter 5, Table 5.9, 2/ See Table 6.4 and Annex Table 6.6. - 178 - 6.15 (iv) Changes in Manufacturing Employment Over Time in the Provinces. In the Philippines, the above-mentioned expansion has been the most rapid in Southern Tagalog and Central Luzon, where agricultural growth is less narrowly-based than elsewhere, and also more rapid. In 1975 the two regions accounted for over 30% of total rice production (the country's principal crop); Southern Tagalog also had quite high shares in coconut, corn and timber production (Annex Table 5.4). High yielding rice varieties were being used in Central Luzon as early as 1966, but the main increases in rice production occurred in the 1970s, during a revival of a long-standing but defunct land reform program for rice and corn farmers, and an intensification of extension, credit, infrastructure and irrigation programs. Since time-series data on inputs and outputs by region are not readily available, it is necessary to consider national aggregates and keep in mind that provinces in Central Luzon and Southern Tagalog were among the principal beneficiaries of the programs. By 1977, HYVs were being planted on 86% of irrigated and 68% of rainfed rice areas in the country; but perhaps as important were the lasting improvements on rice farming practices and the supporting supply and marketing services. The changes in rice production are apparent in Annex Table 6.9 and Figure 1, which show the general increase 2/ in yields and outputs that occurred in the 1970s. (The decline in 1972 was due a rice crop virus, "tungro", and in 1973 to severe flooding in 3/ Luzon.) 1/ "Philippines Sector Survey: Agricultural Support Services," June 14, 1979, IBRD. 2/ Ibid. The report remarks that for the first time in its history the Philippines is becoming self-sufficient in rice production, even in the face of adverse weather conditions, and a net exporter of rice. 3/ Report on the Masagana 99 program by Jesus Alix (1979). 3U Jl) (. ( . (f3 t 3 C C3 If) eD c) u)C e -1 l ~~c -r~~ T iir~I L V{IJ1i I I 1] Lf)ETTFTFT LÄc J CP CO T[1l T T 1 7' T T T - T T I T T -T T - TT' T T cr ~ 3cr- (1) CD) CC c ä ,1 JI L:i i 2c 3 [fl li LDtf 1L 3 1 Co C o~cr CI C [ HC~1 CO -1- ci -. ( 3 () ( ~)j C) flC (1 tu 1 .1 .l .s C2 )IPL - L f - *>J C l> -.4. Cl)CD C CD .3 ( CD 1 L - 180 - 6.16 The associated trends in establishment-based manufacturing employment were provided in Table 6.4 above. For Luzon as a whole (excluding Manila and Rizal) the employment trends since 1960 averaged 8.3% per year for small establishments and 9.6% per year for large establishments. (There is evidence of employment doubling since 1970, a growth rate of 15% per year, but the preliminary nature of the census data do not permit these figures to be taken too literally.) These figures probably understate the growth in Central Luzon and Southern Tagalog since they include three of the slowest developing 1/ regions in the country. Other features to note are the decline in the share of household employment from 80% to 57% over the 15 year 2/ period ) as the preceding analysis would predict; the net migration 3/ into the regions (Annex Table 6.4), notwithstanding their closeness to Manila; and the high average growth rates of the principal cities 4/ (Annex Table 6.8). If Ilocos, Bicol and Cagayan Valley. Ilocos and Bicol show below average rates of establishment formation, Cagayan slightly above average. Cagayan has a relatively small number of establishments however. Annex Table 6.7. 2/ See Table 6.4. 3/ The in-migration rates can be inferred from the population growth rates in these regions, which were above the 'natural' population growth rate. (Annex Table 6.4 provides data on population growth, but not on migration.) An analysis of internal migration patterns in the country up to 1973 is provided in Mrs. Castillo's study (1977), Volume III, in which she notes that "the in-migration regions are .... Northern and Southern Mindanao ...... and Central and Southern Luzon" (p.865). Quite detailed tabulations are presented in this volume. 4/ The variance in the growth rates should be noted. Growth rates range from 2.2% per year in San Jose (Central Luzon, Population 53 thousand), to 8 to 9% in Olopango and Palagan (population 147 and 12 thousand respectively). The average in Central Luzon was 4.9%, and in Southern Tagalog 3.4% (c.f. 4.8% for Metro-Manila). - 181 - 6.17 The next highest growth regions in the country are in Mindanao, where the main products of the primary sector are timber, corn and coconut, in which local production amounted to 68% and 65% respectively of the country's total production in 1975 (Annex Table 6.4). While the overall growth rates in these sectors have been comparable to those for rice production,-the origins of the growth have been quite different. The response to improved practices and HYVs for corn farming was low compared to rice (Castillo, 1977) and 70-80% of the growth in 1/ output in the 1970s has been due to an area expansion, as can be seen from Figure 2; this of course implies a slower growth of earnings on fixed area small farms than would occur under conditions of rising yields. Coconut, in contrast to most other crops, is genrally a secondary activity for farm families and, while overall output increased at about 3.5% per year (Annex Table 6.9), this has been accompanied by a systematic decline in yields over a 15 year period. Timber production, which expanded at over 5% per year in the 1960s, was first held constant and then reduced in the 1970s for reasons of forestry conservation, reforestation and ecology. Overall per capita output from the primary 2/ sector in the region has nevertheless risen over a long period. Associated with this were a decline in the share of household manufacturing employment (from 72% to 52% over the period 1960-75); growth rates of 9.7% and 5.7% respectively of manufacturing employment in large and small establishments; and an average growth rate of 4.2% of Mindanao's 1/ The difference between the two plots in Figure 2 provides a measure of the increase in output due to the increase in area cultivated. 2/ Sicat (1972), Chapter 15 provides estimates of relative regional growth rates up to 1966. Since regional accounts were not available, he used surragate measures based on tax data and expenditures of regional governments. INDICS OFCORN182 - INDICES OF CORN PRODUCTION RND CORN YIELDS (1960=100) 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 300.0 - 300.0 275.0 275.0 *-PRODUCTION 250.0 --YIELD F-GURE 2 250.0 225.0 225.0 -J U.J 200.0 200.0 z 175.0 175.0 C 150.0 150.0 125.0 125.0 100.0 100.0 75.0 75.0 50.0 50.0 1960 1962 1954 1966 1968 1970 1972 1974 1976 1978 YERRS - 183 - 14 principal cities (Annex Table 6.8). 6.18 Regions experiencing the slowest (and also the most narrowly- based) growth in the primary sectors include Western Visayas (the main sugar growing region in the country), Eastern Visayas, Bicol and Ilocos, Each have the following in common: net out-migration, a slow rate of growth of the principal cities (2.3% in Western Visayas, 2.1% in Eastern Visayas, 1.8% in Bicol and 2.7% in Ilocos), and a slower rate of growth of employment in establishment - based manufacturing. Even in these regions, however, the share of employment in household manufacturing is declining, though it remains significantly higher than elsewhere (e.g. 68% in Visayas, as compared to around 55% on average in other provinces). 6.19 Crop yields in the Philippines are still low by East Asian standards (Table 6.9), which suggests that the potential for rural-led industrial growth in the provinces is still considerable:- Table 6.9: NATIONAL AVERAGE CROP YIELDS: SELECTED ASIAN COUNTRIES, 1977 TONS/HA Philippines Indonesia Thailand Malaysia India Japan Rice (rough, dry paddy) 1,96 2.76 1,81 3.061/ 1.87 6.17 Corn (maize) 0.88 1.19 1.46 7.001/ 1.13 2.67 Sugar Cane 43.6 83.8 53.1 36.0 53.6 54.5 1/ Malay Peninsula. Source: FAO Yearbook, Vol. 30, 1977. 1/ Again note the variability from 1.6% in Gingoog (population 67 thousand) to 6.1% for Cagayan de Oro (population 165 thousand). - 184 - The potential cbviously varies greatly between provinces, and was examined at length during the preparation of the current Development 1/ Plan. It is for instance much more limited in Ilocos (where fisheries, handicrafts and tourism have been stressed) and Central Visayas (where the development of the larger urban centers has been stressed); also, in some regions the urban-industrial base is itself now large enough to provide a lead. This is clearly not the place to review plans, however, and it is sufficient to note that it is intended to maintain the emphasis that has been placed on a broad based development of agriculture since the early 1970s. What can be said from the limited perspective of the present study is that, to the extent that these policies are successful in achieving a more broadly based growth of incomes in the rural areas and towns, chey should stimulate the product markets of local manufacturing establishments, both large and small scale. The demands for the services and finance provided by the small enterprise programs are likely to be greatest in these regions. 6.20 To sum up, the evidence presented above underlines the importance of agriculture as the leading element in urban-industrial development in the provinces. This conclusion is not new. But the strength of the linkages between agriculture and local industry and commerce appear to be even stronger than might have been thought earlier; in the high growth agricultural districts, the emergence of small and large manufacturing establishments in the local urban centers has been very rapid in recent years; and the rapid growth of establish- ment based manufacturing in the provinces has apparently reversed the trends experienced in the early phases of industrialisation, when agri- culture was given a very low priority. 1/ Five Year 1978-82 Philippine Development Plan, NEDA. - 185 - VII. SMALL ENTERPRISE PROGRAMS AND EHPLOYMENT POLICY: A REASSESSMENT OF PURPOSES Introduction 7.1 The small and medium industries program is seen primarily as a means for improving the employment and earnings opportunities for the labor force. At the time the program was introduced in 1974, the labor force had expanded at over 3% per year in the previous 20 years, from under 9 million in the mid' 1950s to over 14 million by the mid' 1970s; by 1979 it was over 17 million, with 600 thousand people entering the labor market each year. Between 1956 and 1974 agriculture provided about 51% of labor absorption, commerce 12.2%, government services 13.6%, and factory-based manufacturing activities, although accounting for about one fifth of gross fixed capital formation in the private sector, 1/ only 4.9% (Table 7.1). It was often noted that low productivity tertiary activities absorbed more labor than industry, as for instance with 5.8% of the new entrants being employed in domestic services (mostly as domestics) over the period. A second purpose of the program stemmed from the growing concentration of industrial investment in Metropolitan Manila, which by 1974 accounted for about one half of 2/ all manufacturing investment in the country. The new emphasis to be placed on agricultural development in the early 1970s, however, was expected to stimulate industrial employment opportunities in 1/ The ILO (1974) report provides an analysis of trends in labor absorption and labor productivities by sector. 2/ Estimate based on the relative capital labor ratios of 0.329, 0.764 and 1.0 for small, medium and large establishments respectively, and regional employment data provided in a report by the UP-Institute for Small Scale Industries (1977). - 186 - Table 7.1: EMPLOYMENT AND LABOR ABSORPTION BY ECONOMIC SECTOR 1956-74 Change % Share in Total Sector 1956 1974 1956-74 Change, 1956-74 Agriculture 4,548 7,684 3,136 51.2 Construction 198 403 205 3.3 Manufacturing - factory based- 151 454 303 4.9 - household & small-'- 811 969 158 2.6 Commerce 803 1,549 746 12.2 Transport 228 491 263 4.3 Government Services 392 1,225 833 13.6 Domestic Service93 332 685 353 5.8 Personal Services- 135 225 90 15 Other 104 139 35 0.6 Total 7,702 13,824 6,122 100.0 /1 Establishments with 20 or more employees. /2 Includes establishments with less than 20 employees. /3 Other than domestic. Sources: NCSO. Labor Force Surveys and Surveys of Manufacturing Establishments. - 187 - the provinces, particularly in small and medium industries. Hence by addressing the constraints on the supply of capital and services to these industries the program had the dual purposes of increasing industrial employment opportunities in the country and achieving also a degree of decentralization of urban-industrial development. 7.2 From the standpoints of implementing and evaluating the program, however, it is necessary to define the employment objectives more precisely; in particular, to decide what is meant by improving employment opportunities. There is a tendency to see the desirability of the projects financed in terms of employment creation. This is reflected for instance in the early emphasis placed on establishing "new" enterprises, the more recent emphasis on "growth" enterprises, an almost exclusive preference for financing fixed assets over working capital, and a preference for financing only labor intensive small Enterprise projects. But a closer look at the evidence on employment and incomes suggests that the preoccupation with employment creation at low cost places an unnecessary constraint on what the program might otherwise accomplish: (a) Un and underemployment rates have declined systematically during the past 20 years, notwithstanding the rapid growth of the labor force; Cb) Real wages, on the other hand, have passed through periods of stagnation and other periods of decline; and (c) Family incomes in the lowest quintiles have varied in a more complex manner, but have remained low, 1/ For a fuller discussion of the background to the program, see the ILO (1974) report. - 188 - In these circumstances it is not the absence of empioyment, but the type of employment and the low incomes derived from it that becomes the main issue. This has several implications for the future directions of the program, the types of projects it finances, and also for the criterion as to what comprises an economically desirable project, 7.3 This chapter first briefly reviews the evidence on employment, wages and incomes, and then discusses the ±mplications for the small enterprise programs. A comment on labor intensity in small and large enterprises is offered, together with some observations (drawing on other studies) for raising the demand for labor in general. A method for evaluating small enterprise projects and programs is also outlined (its technical aspects being covered in more detail in the next chapter). Unemployment and Underemployment: Levels and Trends 7.4 Various series on employment over the period 1960-76 are shown in Table 7.2. The first column shows the NCSO's estimates of participation rates, which declined slightly over the period, from 54-57% in the early '60s to 50-52% in the mid '70s; a closer look at the data by age group shows that the declines were most marked among teenagers, presumably on account of the rising shares attending school or college. 7.5 Unemployment rates for household heads,and for the urban and rural labor forces are also shown, from which the following points stand out: (i) the systematic declines in unemployment rates from about 6-7% in the early '60s to 3-5% by the mid '70s; (ii) the relatively low unemployment 1/ Labor Force Surveys. A further discussion of participation rates can be found in Lal (1979). Table 7.2: LINERPLOYM!ENr AND) UNDER EMPLOYMEN1T IN THE PHILIPPINES, 1960-76 Total Percent Percent Unemployed Measure Labor Force Labor L3 Working 40 Visibly and Visibly of Un and % flouseholds /2 Participation Force Unemployment Rate %'or more 4 under /5 Under /6 Uder WIth) Family Year Rate, %. (Millons) Urban Ru ralI Total hours/weeks Employed Employed-7 Employment X fiends IUemployed ()(2) (3) (4) (5)) (7) (8)()O1) 1960 53.8 9.1 - - 6.3 - -- 1961 55.6 9.7 - - 6.4 ---12.7- 1962 57.1 10.3 - - 6.5 ---13.0- 1963 55.2 10,2 - - 4.6 - -12.9- 1964 59.9 11.3 - - 6.4 - 10,8- 1965 53.1 10.8 10.7 4.1 6.2 84.5 9.3 15.5 13,1 1.9 1966 55.1 11,8 10.0 5.7 7.0 84.9 8.1 15.1 11.6 1.6 1967 54.7 11.8 10.3 ".6 7.7 84.0 8.3 16.0 - 1.5 1968 49.6 11.4 9.0 7.4 7.9 81.6 10.5 18.4 14.4 2.2 1969 52.0 12.0 9.2 5.7 6.7 85.7 7.6 14.3 10.9 1.91 1970 - - - - - - - - - - 1971 50.2 13.2 8.7 3.7 5.3 89,1 5.6 11.9 8.0 1.7 0 1972 48.4 13.3 9.8 3.3 5.4 89.4 5.2 10.6 9.1 1.8 1973 50.4 14.6 8.0 3.3 4.8 89.0 6.2 10.8 7.7 1.9 1974 49.7 14.3 5.7 2.0 3.2 91.8 5.0 8.2 6.6 1.3 1975 51.0 15.2 7.8 2.6 4.2 90.1 5.7 9.9 6.8 ['5 1976 51.8 16.2 8.0 3.6 5.0 89.9 5.1 10.1 7.3 1.2 /1 See text for defi-nitinns of terms. (A dash indicates Lhat thle data were not readily available or not available.) 12 October rounds of the BCS Survey of Households except for 1964 and 1969, for which surveys were only available in May; for 1971-711 (November rounds), and 1975-76 (August rounds). The May rounds do not differ much from the August/October/Novemnber rounds for all variables except the visibly under-employed, where the differences may be as much as 3 percentage points (in absolute terms), the May figures being higher; for Lthe other series Lthe differences are generally within one percentage point. For Lthe visibly underemployed in 1964 and 1969, a downwards adjustment was applied to the may Round. /3 All those recorded as wanting work on a full time basis. /4 Includes those with a job or business but not at work because of temporary ill1ness, vacation, strike or other reaszkns. /5 Working less than 40 hours per week and seeking additional work. /6 Col. 5. plus Col, 7. flUn-employed plus the full time equivalent of Lie visibly unider-employed, defined in f.n. 5. Figures taken from ],al's (1979) report, Table 1, Col. 10. Sources: BCS Surveys of Households for respective periods, except for Col. 9, which is indica--ad In f.n.7. - 190 - rates in rural areas in all periods (on average they have been about 60% lower than those in urban areas); and Ciii) the relatively low levels of unemployment recorded among household heads (about 1.2 to 1.5% in the mid '70s). As in other countries, unemployment is more concentrated among the younger of the labor force, though again there is some evidence of a decline for all age groups over time (Table 7.3):- Table 7.3: UNEPLOYMENT RATES BY AGE GROUP, 1965 AND 1976, (PERCENTAGE OF LABOR FORCE UNEMPLOYED IN EACH GROUP.) Age Group All 10-24 25-44 45-64 Ages 1965 (October) 12.2% 4.1% 2.9% 6.2% 1976 (August) 9.5% 4.0% 2.4% 5.0% Source: As for Table 7.2. Finally, the NCSO series also show declining unemployment rates for 1/ males and females and for both agricultural and non-agricultural workers. 7.6 A presentation of yet further statistics on unemployment rates would be monotonous. Perhaps the main question to be answered is whether the definitions or the sampling methods used have changed over the years so as to bias the estimates in some way. Neither appear to have changed 2/ significantly, however, over the period considered. The unemployed are defined as all those "wanting and looking for work on a full-time basis (40 hours per week)" or wanting full-time work but not.looking for it 1/ Yearbook of Labor Statistics, 1977. 2/ Ernie Pernia rightly pointed out to us that the definitions of unemploy- ment in the population censuses of the NCSO have changed (see also para. 6.11 and the supporting annex tables); the labor force surveys have been more consistent, however. - 191 - "in the belief that it was not available, or because of temporary illness, bad weather or other valid reasons." This definition has been followed consistently in the labor force surveys since 1956. 7.7 The NCSO's surveys also provide estimates of what are defined as the"visibly under-employed7 who are people with part-time jobs(i.e., working less than 40 hours a week) and wanting additional work.-/ The series are also shown in Table 7.2 (col, 8) for the period 1956-76; again the noticeable feature is that the rates declined)from about 8-9% in the mid '1960s to 5-6% in the mid l970s. Working hours were also long and increased (col. 6); in 1965, 85% of the labor force claimed to be working more than 40 hours per week and in 1976, 90%. Ia column (9) of the table a composite measure of unemployment is provided,Z/ based on the full-time equivalent of the visibly under employed plus the unemployed, and indicates that about 7.3% of man-days of work were lost due to un or under employment in 1976,' as compared to 13.1% in 1965. 7.8 Hence the available data show that the economy has been able to absorb its labor force during the past 20 years,notwithstanding the capital intensive path of industrial investment discussed in Chapter 5, and the under-investment in agriculture. This has not happened, however, without its cost in terms of the quality of employment provided and its effects on the real wages and incomes of the labor force. 3/ Changes in Real Wages Over Time 7.9 Published data on wages are not comprehensive, and are available in some sources only for Metro-Manila,and in others for particular 1/ There are of course several others definitions of under-employment based on disparities between wages and marginal productivities of the employed. The relevant data are not available to use these definitions here; even if they were, however, they would not affect the following analysis for the same reasons as are laid,out by Stewart (1977, Chapter 2) in her book on Technology and Underdevelopment. 2/ Taken from Lal (1979). 3/ This section draws heavily on Lal's (1979) report and is kept brief. The following includes a discussion of agriculture, agricultural wages and earnings in self employment (which are not discussed in his report). - 192 - industries or time periods. Selected series are shown in Figures 1, 2 l/ and 3 tabulated in Annex Tables 1 to 4. The first plots movements in real wages for skilled and unskilled labor in large establishments in Manila since 1950; the second, real wages in agriculture and in selected industrial occupations (again in Manila) over the same'period; and the third real weekly earnings of wage and salaried workers for several sectors (but over a much shorter period on account of data limitations). These figures show that, with certain exceptions to be noted below, real wages have been more or less constant in some periods, and have declined rapidly in others; the period of most rapid decline was 1969-74, when real wages fell in some sectors and occupations by over 40%, 7.10 What caused these changes? An allowance must of course be made 2/ for measurement errors. It was pointed out to us- that the introduction of wage supplemehts and bonuses in the 1970s may have given an exaggerated picture of the downward trends shown in same series. While the various series treat these factors differently, however, and sometimes ignore them, they give results that differ more in magnitude than in direction, as can 1/ The data have the advantage of coming from several independent sources, which serve to provide some cross-checks. The series draw on the Central Bank's surveys of large establishments in Metro-Manila; Beacon, for agricultural wages; the BCS (later NCSO) surveys of households; the NCSO surveys of establishments; and unpublished Wage and Salary Surveys in the Philippine office of Compensation and Position. The Wage Commission also make independent analyses of the wage series from these sources in connection with minimum wage legislation, and presumably check the series further. 2/ By John Powers. 3/ The NCSO's series count weekly earnings and the Central Bank's monthly earnings, so both ignore cash bonuses such as the "13th month bonus." The NCSO's establishment data, however, are based as annual earnings, presumably include cash bonuses, and also show a precipitous decline in labor's share in value added in the 1970s. - 193 - AG RATE INDEX :N i UaTRIAL ESTASISHMENTS IN MRHLA :972=i30 1250 1954 1953 125 1955 1970 1324 1278 170.0 7. 150.0 L00 150.0 O-SK ILLEJ L.S52E- S 150.0 10, 140.0 3 P0 - Q 30.G n 120 .0 -) -JI 120 .0 .0 -- 110.0 0 . \ »0.0 9- 0 -900 30 - 0- 0.0 70.0 70 .0 50.-0 50 s.o 500 - K .' I.i- L - r 5 s.o l25Q [Js4 1951 12 1255 1370 132' 1275 Y ERR … ど長よ共ににに写三員：：買「1 「’「「は“黙「一“’説－n「×－に－’三― 1 fj U') 0 c7ý c:) C,3 C) (D C) C) W C) C2I c 1ý c-) C) C) C) C') fr-1 C.J c (VI -T- i -1-r--T-r- i- LIJ C.I M Li (.~x 1,J t,' t'-i IL i-- u IL] CT- ^> LU cr ci C) Ir c? r.ý ce: LL- C7I CD C-3 Li Jl I- J -1-1 ..L l. L u) C) C) cl c c in c l I J M "'Jc.ý 9 c) N I N ýJ LJ -J -1 - 196 - be seen from Figures 1, 2 and 3. Furthermore, detailed analysis Of the series- show a remarkable association between changes in the real wage levels and contemnooraneous economic events. In.-oarticular, the changes in-any period can be traced to one or more of three factors: -product prices, which have at various times acted to draw investment towards the more capital intensive manufacturing sectors of the economy, and away from the more labor intensive sectors, both agricultural and non-agricultural; - investment incentives which raised the capital - until recently, comparatively low investment in infrastructure and suppport for agriculture. Superimposed on this were the effects of the continual rise in labor supply, In each instance, however, a rise in labor supply or a fall in labor demand resulted in a downward pressure on wages rather thanincreased unemployment, and also (as will be seen later) in some shifts between wage and self-employment. 7.11 A formal analysis of wage movements is outside the scope of this study, but in view of their implications for the small enterprise program (which was largely seen as a way of raising the demand for labor in industry) a short digression to summarize the main economic events and their associations with wage movements might be useful. These events can be grouped very roughly into five periods. 7.12 Cl) 1950-58. This was a period of high prices of manufactured consumer goods under the protection provided by exchange controls. 2/There was in consequence a large shift of investment away from the more labor intensive 1/ See Lal's report. 2/ See Powers and Sicat (1971) and Baldwin (1975). - 197 - agricultural activities towards large scale manufacturing, and which acted to keep wages and productivity in agriculture at low levels. Manufacturing 1/ output grew at over 121 per year in this period, when import substitution was proceeding rapidly, and probably accounts for the rise in real wages, to historically high levels, in large manufacturing establishments in the Manila area (Figure 1). The concentration of investment in Manila, and the smallness of the large establishments' share in manufacturing employment (about 16%) and total employment (less than 3%) in the '50s necessarily confined any favorable impact on real wages to a vefy small share of the labor force. 7.13 (2) 1958-63. By the late '50s the possibilities for further import substitution were becoming increasingly limited. Industrial growth rates declined quickly to one half and then (by the early '60s) to one third of the levels in the early '50s, averaging about 4.9% in the period 1958-64 (Annex Table 6); in addition,the capital intensity in large-scale manufacturing rose steadily, in part because of a range of 2/ exemptions on import duties on machinery and equipment to industry. Both lowered the demand for industrial labor and, while this may have resulted in a slight reduction in the growth rate of industrial employment (Annex Table 6), its main consequence was a sharp fall in real wages (Figures 1 and 2). 7.14 (3) 1963-69. Beginning in 1960, the exchange controls and a multiple exchange rate system were gradually phased out, the process being 1/ See Annex Table 6. In the early 1950s, the growth rate was around 15% p.a. 2/ See Powers and Sicat, op.cit., for a further discussion. - 198 - completed by 1963. Protection was maintained under tariffs. This might have reduced the relative price of manufactured goods slightly since, though the tariff system was instituted in the 1950s, prices 1/ up to 1963 were above c.i.f. prices plus tariffs. The period 1963-69 was one of relative prica stability, while the industrial growth rate also bottomed out at 4-5% per year. Real wages in large industries remained more or less constant in this period (Figures 1 and 2) while real wages in agriculture fell slightly (Figure 2). 7.15 (4) 1969-74. In this period several events seem to have had an influence on the observed decline of real wages all round - in modern establishments in Manila (Figures 1 and 2), in agriculture 2/ (Figure 2) and in non-industrial sectors (Figure 3). To promote backward linkages in industry, the Investment Incentives Act offered tax reliefs and subsidies for the capital goods manufacturing sectors, as discussed in Chapter V, again shifting resources away from the more labor intensive (non tradeables) sectors. But the main factors reducing real wages, at least in industry, appear to have been the management of aggregate demand and trade deficits in 1969, and in 1972-74 a rise in the relative prices of locally manufactured goods induced by rising 3/ world prices and the maintenance of a fixed exchange ratea, In each instance it was argued that the effect was to raise the relative prices 1/ "So long as exchange controls were in effect the tariff system served (merely) .... to permit the Government to share in the rising scarcity premia on imported goods." Powers and Sicat, op. cit. p. 93. 2/ The declines also occurred in most regions of the country, according to Annex Table 5. While this Table is for the period 1973-76, note that there were also large declines in real wages between 1973 and 1974 (Figures 1, 2 and 3), 3/ Lal, op. cit., p. 114 et, seq. It should be added that "this was a period of great instability in the economic environment. A substantial surplus in the trade balance ..... (followed).... the upsurge of international prices of primary commodities (in 1973) .... (and which was then) ..... completely negated by the sharp increase in the import bill for crude oil Bautista and Powers (1979) op. cit. p. 22. - 199 - of - and cause a permanent shift of resources towards - the mora capital 1/ intensive traded goods sectors, Finally, although agriculture was by then receiving higher priority, the programs had yet to have a major effect, and were in addition set back by crop diseases and floods in 2/ 1972 and 1973. 7.16 (5) 1974-78. Since 1974 the declines in real wages appear to have bottomed out in the non-agricultural sectors (Figures 1, 2 and 3), but to have risen significantly in agriculture for the first time in over 20 years 3/ (Figure 2);;- there was also an increase in agricultural wages relative to those for industrial labor in Manila (Figure 4).- In the '70s, and particularly since 1974, output in foodgrains has also rise at historically high rates, following the introduction of the agricultural development programs mentioned in chapter 6.- Given the importance of this crop in the country, it is possible that this has had a significant effect on raising the demand for - and thus the wages of - both farm and non-farm labor in the 1/ In 1972-74 the effect of holding the exchange rate constant was an unambigious rise in the relative prices of traded goods. In 1969 the events were more complicated. According to Lal (p. 111 et. seq.) excessive Government spending caused a rise in domestic expenditures on non-traded and traded goods; a rise in the relative prices of non-traded goods; and a balance of payments deficit. Rather than restore the trade balance and relative prices through a period of deflation and mild devaluation, the Government devalued by over 40%, actually resulting in a larger share of investable resources being allocated to the (more capital intensive) traded goods sectors than previously. Inflation followed, real wages declined as did labors' share in value added in manufacturing (which was 23% in 1969, and 15% in 1974, according to the establishment surveys). The redistribution of income that took place intensive sectors) presumably further reinforced the shifts in production through a redistribution of consumption patterns. 2/ See Chapter VI, Figures 1 and 2. 3/ There were some slight rises in 1959, 1961, 1969, 1970 and 1973. 4/ John Powers pointed out again that the comparisons may be distorted depending on how wage supplements were treated in the series. 5/ See Figures 1 and 2 of that Chapter and the accompanying discussion. - 200 - 1955 350 1954 1958 1=72 1976 300.0 3001.0 275.0 - 275. 250.0 - eSKILLED L.IMANILA 250.0 - -UNSr L LED LS .M N! LP -RGR . LRS . LLj 225.0 225.0 200 .0 200,0 17s - - 175.0 LLJ 10.0 - 10.0 25.0 25.0 Ls -355 19 000 - 100.0 75 .0 -* 7 . 50.0 -50.0 21.0 5 10S 1354 10SS 1972 1975 2. - 201 - provinces. Finally, although the structure of protettion did not change signif- icantly in this period (though changes towards a less-protective policy are now being considered), large scale manufacturing was relatively a larger source of employment than previously, and its continued expansion was probably having a greater influence on the labor markets. 7.17 The above explanation of wage movements obviously rests on the assumption of a competitive labor market, in which any differences between labor demand and supply are eliminated by changes in the wage levels; this assumption applies both to individual sectors (wage relativities) and to the sectors in aggregate (wage levels). These 2/ assumptions have been investigated elsewhere and hold up to scrutiny. There is, for instance, no evidence of institutional, technological or geographic constraints on the labor market which seriously affect occupational mobility. Minimum wage legislation has probably only a slight effect on ths labor market (and then only on a small number of large firms); minimum wages have generally followed rather than led actual 3/ wages in the past 30 years, and small firms registered with NACIDA are exempted from paying minimum wages under the Labor Laws. Earnings in Self Employment 7.18 The general declines in real wages over the period since the mid '1950s do not provide a wholly satisfactory picture of what happened 1/ In 1976 it accounted for over 35% of employment in manufacturing. 2/ See Lal's review and also Castillo (1976). 3/ See Annex Table 7, and also the ILO (1974) report for a further discussion. - 202 - to the earnings of the labor force since the majority (approximately 60% in 1976) are self-employed or family workers. Table 7.4 provides some statistics. Approximately 85% of the labor force in agriculture were self-employed in 1976, 33% in manufacturing and 60% in commerce. Three categories of self-employed workers will be considered below: owners of very small manufacturing establishments with less than 10 workers, small farmers, and people in household manufacturing. 7.19 Owner's earnings in very small manufacturing establishments were more stable than real wages and might even have increased in the '70s when the latter were falling. Table 7.5 compares some estimates of owners' earnings per day with wages in different occupations: Table 7.5: AVERAGE DAILY EARNINGS OF OWNERS OF VERY SMALL MANUFACTURING ESTABLISHMENTS AND WAGES IN SELECTED OCCUPATIONS, 1961-75 (Pesos/Day, 1972 Prices) 1961 1967 1972 1975 Manufacturing Establishments with less than 10 workers (whole country) Owners' Share of Daily Value Added 18.4 19.2 15.3 17.2 Ditto - Per Family Worker (incl. Owner) 12.2 11.9 8.8 12.5 Average Wage of Hired Labor 5.9 5.1 5.3 4.1 Selected Occunations in Manila (large industrial establishments) Industrial Labor 11.3 10.8 10.4 7.6 Mechanics 11.4 15.3 14.0 10.6 Foremen 24.2 20.9 18.3 14.3 Agricultural Labor 6.1 5.4 4.0 4.0 Sources and Basis of Estimates: See Annex Table 8 for Manufacturing Establishments, and Annex Tables 2 and 3 for other occupations. 1/ For brevity, family workers will also be referred to as being self- employed. - 203 - Table 7,4; EMPLOYMENT OF SELF-EMPLOYED AND WAGE AND SALARIED WORKERS, 1965-76 No. Employed, 000s Change, 1965-76 Percent Distribution Type of Work 1965 1976 000s % Total 1965 1976 Wage and Salary work in: Agriculture 906 1,287 381 7 9 8 Manufacturing 593 1,106 513 10 6 7 Commerce 287 553 266 5 3 4 All Other 1,896 3,429 1,533 29 19 22 3,682 6,375 2,693 51 36 41 Self-Employed and Family Workers in: Agriculture 4,818 6,822 2,004 38 48 44 Manufacturing 507 572 65 1 5 4 Commerce 827 1,304 477 9 8 8 All Other 267 354 87 2 3 2 6,419 9,052 2,633 49 64 59 Total 10,101 15,427 5,326 100 100 100 Source: NCSO Surveys of Households (October 1965 and August 1976). - 204 - One can see that the earnings rates in self employment have risen significantly above those even for the higher paid forms of industrial labor (such as industrial foremen) in Manila. This profit incentive helps to explain the rapid emergence of small establishments throughout the country since the mid '1960s (see chapters 5 and 6) and why some people have moved out of wage employment to set up their own firms (see interview data in Chapter 5). 7.20 Turning to small farmers the only time series data available are those of the Family Income and Expenditure Surveys (FIES) of the NCSO, which since 1956 have been conducted about every five years. These data, which- are reproduced in their raw state in Annex Tables 9 and 10 have quite wide (if quantitatively unknown) confidence intervals because of changes in sampling and questioning procedures between surveys; measurement errors were also large, and family incomes were under l/ a ne-reported more in .some. years than in others. But from the perspective of the present study, one relatively non-controversial conclusion can be drawn. This is that the capital intensive development path of the economy did not act to increase unemployment rates among the self employed in agriculture, but as with wage labor, to depress earnings. The majority of families in the lowest quintiles in 1971 were self-employed in agriculture: 61.7% in the lowest quintile, 50.2% in the second lvwest and 42.1% in the middle quintile (Table 7.6). Up to 1970 it is difficult to tell whether incomes rose or fell for these groups, but in either 2/ event, they remained at very low levels. In the 1970s the NCSOs surveys (FIES) suggest a marked increase in income of about 30-50% for the lowest two quintiles (Annex Table 10); this could either be a measurement 1/ See Berry (1979), Mangahas and Barros (1979) and IBRD's(980)' draft on "Poverty, Basic Needs and Employment." 2/ Berry (1979) and IBRD (1980). Recalling that the majority in these groups are small farmers, roughly constant real incomes in this period would also be consistent with roughly constant (or slight increases) in labor productivities (Annex Table 6). In the 1950s value added in agriculture kept pace with the growth of the labor force through land expansion and in the 1960s through increases in yields. ILO (1974, pp. 442 et, seq.) - 205 - Table 7.6: MAIN SOURCE OF FAMILY INCOME BY FAMILY INCOME GROUP AND TYPE OF EMPLOYMENT, 1971 Type of Employment of Main Source of Income Wages & Salaries Entrepreneurial Activity in Family Income o Agri-.' Non Agri- Trading & Manufac- Agric- Other /1 Group cultural cultural Transport turing culture Sources- Total-- ....... .......... No. of Families, 000s ......................... Lowest 20% 138 133 79 44 784 90 1,270 Second 20% 158 263 99 40 637 72 1,270 Third 20% 194 333 101 41 535 66 1,270 Fourth 20% 136 595 129 36 326 47 1,270 Top 20% 54 725 176 36 174 106 1,7 Total 680 2,050 584 197 2,456 381 6,350 ................. Percent Distribution............................ Lowest 20% 20.3 6.5 13.5 22.3 31.9 23.6 20.0 Second 20% 23.2 12.8 17.0 20.3 25.9 18.9 20.0 Third 20% 28.5 16.2 17.3 20.8 21.8 17.3 20.0 Fourth 20% 20.0 20.0 22.1 18.3 13.3 12.3 20.0 Top 20% 7.9 35.0 30.1 18.3 7.1 27.8 20.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ........ ....... Horizontal Percentages........................... Lowest 20% 10.9 10.5 6.2 3.5 61.7 7.1 122.3 Second 20% 12.4 20.7 7.8 3.1 50.2 5.7 100.0 Third 20% 15.3 26.2 8.0 3.2 42.1 5.2 100.0 Fourth 20% 10.7 46.9 10.2 2.8 25.7 3.7 100.0 Top 20% 4.3 57.1 13.9 2.8 13.7 8.3 100.0 Total 10.7 32.3 9.2 3.1 38.7 6.0 100.0 fl Includes incomes from ownership of land or capital, and from gifts and income transfers. /2 Rounded Source: NCSO, Family Income and Expenditure Survey. See Annex Table 9 for an urban-rural breakdown. - 206 - error or the first positive signs of a favorable impact on rural incomes of the new emphasis on agricultural development, but is probably a combination 1/ of the two. The increasesin the rate of growth of output and yields in food grains support the last view; there is also some circumstantial evidence for it (see Chapter 6) in that the emergence of establishment- based manufacturing in the provinces, the corresponding decline of household manufacturing, and the growth of commerce in the rural towns in the late 60s and 70s could not have occurred without some lead from agriculture. 1/ Although there is no shortage of criticism in the studies cited of the unreliability of the FIES income data (and in particular of the 1975 surveys) the data in fact square quite well with the wage series discussed earlier. The following list converts the 1975 income data for each quintile into a daily earnings rate by dividing by 300 working days per year, and then provides some examples of types of wage-earners whose families (if they were the family head) would fall into these groups: qunitile Mean 1975 income (1972 prices) Corresponds to (Examples) Lowest 20% P 1,141 = P 3.8/day Agricultural Labor (Annex Table 3). Second 20% P 1,951 = R 6.5/day Unskilled industrial Labor (Annex Table 2) Third 20% P 2,707 = P 9,0/day Various categories of skilled industrial labor in Manila (Annex Table 2). Fourth 20% P 4,000 = P 13.3/day Industrial formen (Annex Table 2); lower end of earnings from self- employment in manufacturing (Table 7.5). Top 20% P 11,240 = P 37.5/day* White Collar and property owners. (*Mangahas and Barros (1979) rightly point out that, as in previous surveys incomes in the top quintile have been particularly susceptible to under- reporting.) Similar cross-checks on wages and the 1970 FIES income data are provided in Annex Table 15 (source note (b), third paragraph), again with no marked anomalies between the two sources being apparent. - 207 - 7.21 The effects of the economic events described above on families primarily dependent on self-employment in household manufacturing are more mixed, since these families are found in all income groups, 1/ low, medium and high. To make a general point again, however, it was incomes (rather than unemployment levels) in these activities that were most effected by the pattern of investment in the country. A large proportion of household manufacturing activities are rural (Annex Table 9) where the incomes are dependent on the markets generated by agriculture; others are tied to low income markets in the urban informal sector, and indeed are part of it; while a not insignificant number later emerge as establishment- based manufacturing units (Chapter 5 and 6) in the high growth markets. Incomes and Occupational Mobility 7.22 Changes in the incomes of the labor force can be considered in two parts; changes in wages and earnings within given occupations, and which were discussed above; and others-arising from the movement of labor, during periods of marked structural change, towards better paying occupations. The latter are discussed briefly below, and serve to highlight the kinds of activities that should or should not be considered for finance under the small enterprise program if it is to effect an improvement in earnings opportunities. It 1/ See Table 7.6 which shows that in 1971 there were 36 thousand families in the top quintile primarily dependent on entrepreneurial activity in manufacturing, and another 36 thousand in the second-top quintile. There were, at that time, less than 60 thousand manufacturing establishments in the country, implying that at least 12 thousand families primarily dependent on'household manufacturing were in these quintiles. 2/ The movement helps to explain the paradox of incomes not necessarily declining, and possibly increasing in recent years, in the presence of the significant declines in real wages - though changes in the earnings in self-employment must provide most of the explanation. See also Berry (1979) for a discussion of wages and incomes up to 1970. - 208 - is convenient to consider the movements themselves in two parts: i.e., movements (i) of the self-employed into better paid forms of wage employment or self-employment elsewhere; and (ii) of wage labor into better paid forms of wage employment. 7.23 The extent of the former is indicated in Annex Table 11 (bottom three rows) for the period 1965-76. Over this period the share of the labor force in wage and salary work rose by 6.2% in absolute terms (from 40.6 to 46.8%) and in self-employment in the tertiary sectors by 1.4% In self employment in manufacturing there was a slight decline of 1.2%, mostly on account of people leaving household manufacturing, and in self-employment in agriculture a decline of 6.4%. As one might expect, a comparison of these shifts with the income distribution data shown in Table 7.6 reveals that they were greater the greater the likelihood of an income increase: Absoluta Change in Income Distribution of Type of Occupation Share of Labor Force Occupational Group (Table 7.6) Wage or Salaried Work + 6.2 Strong upwards skew Self-Employed Trading and Transport + 1.4 Skewed upwards - Manufacturing - 1.2 Fairly Flat - Agriculture - 6.4 Strong downwards skew 0.0 7.24 It is possible to project these changes on the income distribution data shown in Table 7.6 to estimate, holding other things constant, their effects on incomes. Briefly, the distribution of incomes for the whole labor force is a weighted average of the distributions for its occupational groups, in 1/ A third part is the movement of wage-earners back into self-employment, and which was briefly discussed above. - 209 - the present case wage and salary earners and three categories of self-employed workers (in agriculture, manufacturing and commerce); the weights are then changed to reflect the occupational shifts, holding the component l/ distributions constant. The calculation is provided in Annex Table 11, and shows that the approximate effects of these shifts (other things constant) would be to have raised the average income of all families in the bottom two quintiles by about 9% over the period, and the average 2/ incomes of those families who actually moved by about 56%. 7.25 A comparable calculation for the effects of occupational shifts of wage labor is only possible for the period 1960-70 (at least until the 1975 establishment census becomes available). Annex Table 12 shows the changing shares of employment for the various categories of skilled and unskilled labor. The share of wage labor in agriculture declined by one third, from 32 to 21%; in household manufacturing (where one in four workers are hired) by one sixth; and remained stationary or declined very slightly in domestic services. These are all among the lowest paid forms of wage labor. In the higher wage occupation the shares increased: in large and small production establishments, sales work, land transport and in the hotel, restaurant, service and other trades. The same table shows wages in the higher paying occupations to vary between two to four times above those in lower paying ones. The effects on average wages can then be divided into a change due to the decline in real wages, and a change due to the increase in the 1/ If the shares of the four occupational groups are S ...S 4, (ESi=1) and the distribution vectors are CD ) .... CD4), then tke aggregate distribution vector is CD) = S (D1) + S2(D2) + S3CD3) + S 4CD 4). The values of S ....Sf are then changed to get the new CD). 2/ See supplementary calculations (Z and (3) in the Table. 3/ Professional administrative and clerical workers are excluded from the analysis since the intention is to examine income changes in the lower quintiles. - 210 - 1/ shares in higher wage occupations. The calculations are made in Annex Table 13, which suggests that the latter offset about 80% of the 2/ declines in real wages in the 1960s. Had of course the labor demand conditions been such as to raise real wage levels, the occupational shifts (which in those circumstances could well have been greater) would have acted to increase incomes yet further, as opposed to simply having a mitigating effect on the adverse consequences of declining real wages. 7.26 To sum up the discussion so far, the economy has been able to absorb its rapidly growing labor force, but the labor demand conditions resulting from a capital intensive development path have exerted a downward pressure both on real wages and on earnings in self-employment. But analysis of occupational structure shows a continual movement of labor out of ill-paying to better paying forms of wage and self-employment. This movement has been shown to have a significant effect on both the level and the distribution of incomes, though the effect cannot be quatified precisely over the period 1960-76. Implications for the Small Enterprise Programs 7,27 It follows that the program should be seen as an agent of structural change, by encouraging activities that offer prospects of a real increase in incomes and by drawing people out of ill-paying ones that do not, If If W. is the wage in occupation i and S. the share of the total labor Z force employed in wage labor, then the change in average wages in the presence of a change in wages 6Wi and a change in shares ASi is approximately (AW .S + Wi AS ) This is the calculation made in Annex Table 12. 2/ 80% = 0.7/0,9, referring to columns CA) and (5) of the table. In the 1970s, the more rapid declines in real wages were probably not offset to the same extent by occupational shifts. - 211 - This is different to seeing its purpose as being one of creating labor intensive employment, which is essentially neutral as to income effects. The pace of structural change, and the wages and incomes of those employed or seeking employment in small enterprises, are obviously determined more by leading sector policies than by investments made directly through the program. But this does not imply that the program is in any way a second best measure (in the economists sense of the term) since as noted earlier it is in,-ended to serve a complementary purpose by addressing constraints in the supply of capital and institutional services to small enterprises. These constraints are likely to exist whatever the leading sector policies, and also under a more efficient incentives system in the financial sector. What is implied is that the more efficient the leading sector policies, the greater the benefits of the program are likely to be in terms of its capacity to raise incomes. A more efficient system of industrial incentives is likely to encourage the growth of the more labor demanding industrial sectors and favor a greater investment in agriculture. Both can be expected to bring about a more rapid emergence and growth of small and large enterprises in the Philippines at the present time on account of their influence on the domestic product markets. Additional financial, institutional and infrastructural support for a broad based growth of agriculture can be expected to have the same effect, particularly in the provinces; there is indeed some evidence that this is happening already. - 212 - 7.28 What is a suitable criterion for financing or otherwise supporting small enterprise projects? An obvious one is to accept only those projects with a demonstrated potential to generate income sufficient to pay labor after all other costs have been met. That is: Present worth of sales' less material and capital costs > 1 Present worth of labors' earnings This is of course exactly equivalent to using the rate of return on capital 1/ 2/ as a criterien, or more simply to saying that the project should be profitable: Present worth of sales less material, capital and > 0 labor costs So at least from the viewpoint of the extensionists and the financial institutions they are doing the right thing in financing only profitable projects. 7.29 From the viewpoint of the Government agencies, however, it is natural to inquire if following a purely financial criterion - profits - does not lead to some conflict with the economic aims of the program. Should weight be given to certain types of projects, for instance, over and above financial considerations? The short answer is that chere are now standard ways of adjusting the above criterion by using shadow prices and shadow wages instead of actual prices and wages when making the calculations. These are discussed further in the next chapter in the context of the Philippines' small enterprise programs, Shadow wagesare probably not very different from actual 1/ If S represents annual sales, and M, WL) and K respectively represent materials, labor and capital costs (W=wages, L=employ-ment), then if A(r) is the annuity rate this criterion is S - M - (WL) - A(r) K > 0 assuming for simplicity a constant time stream for each variable. If this is set as an equality, the rate of return is derived from: A r) = (S - M - (WL)YK where/ is the rate of return. The first criterion mentioned above is (S - M - A(r)K)/(WL) > 1. 2/ Where no incremental employment is involved, either this or the rate of return criterion would have to be used. - 213 - wages, on account of the lack of constraints in the labor market; but the shadow prices of products, materials and capital inputs may differ substantially from actual prices on account of the present structure of industrial incentives. 7.30 To elaborate on the point about shadow wages, if people are to move into wage employment in(say) a project financed by the program, the actual wages offered should (a) be better than wages or earnings in alternative occupations, and (b) include a sufficient financial incentive to cover the transport, resettling and any other extra personal costs anticipated by the employee. The sum of these two terms gives the social opportunity cost of labor (or the shadow wage rate), and equals actual wages unless there are any marked inefficiencies in the labor market. Where inefficiencies do exist 1/ it is necessary to estimate (a) and (b) from survey data or other sources to determine whether a project is likely to improve earnings opportunities or not. At the present time in the Philippines wages probably do reflect (a) and (b), at least to a good approximation, and the employment issue in the country arises not from inefficiencies in the labor market, but from an insufficient number of employment opportunities in the better income occupations. It is the provision of such opportunities that should form the central task of employment policy, of which the small enterprise program is a part. The merit of the profitability criterion stated above it that it proviles a strict test of whether the project in question 1/ E,q, on the lines recommended by Little and Mirlees. -214- is in practice capable of raising incomes. 7.31 It would obviously be impractical to apply shadow prices to each project financed by the program, and also unnecessary. There are too many judgements and interpretations required for shadow prices to be applied reliably by extensionists and bank appraisers; in addition, the financial profitability of the projects is unavoidably the over-riding consideration of the enterprises and the financial institutions. But shadow prices could be applied to samples of projects by the research or evaluation groups of the agencies involved: e.g. to provide guidance on which kinds of activities might be supported, establish sector priorities, decide whether and in which ways the program might be expanded or contracted, or (a more general point) provide an empirical base for industry studies. If such studies are done, they are perhaps better done ex post than ex ante since, first, the data used would be more reliable and objective, and, second, they would provide feedback on the progress of the program and problems encountered. Ex post evaluation (like monitoring surveys) is now a common feature of many types of development programs on account of the uncertainties about the design of the programs and the lack of information about the intended beneficiaries - both of which are also apparent in small enterprise programs. 7.32 What kinds of projects are likely to meet the above criterion? Most frequently, they would be in types of activities in which the demand for labor is rising, as with sectors having a large number of expanding enterprises. Second, projects offering prospects for acquiring new or upgrading existing skills in various wayssince these are exhibiting rising -215- shares in industrial employment and succeed in attracting labor on account of the higher wage levels. Conversely, the more marginal of the household and very small scale manufacturing activities would l/ not meet the criterion. Finally, projects that do not necessarily lead to a direct increase of employment in the enterprise would also meet the criterion, provided a net income gain is involved; working capital loans are often a good example here (though sometimes these are associated 2/ with an employment increase), but certain types of investment projects to enhance the efficiency of a business in various ways could meet it also. Indeed, projects with infinite incremental capital-labor ratios are not ruled out by the criterion. Labor Intensity in Small Enterprises 7.33 Since investment in small enterprises was seen as a way of raising the average labor intensity in industry, it might be useful to examine the implications of this last point further; namely,,why projects with large or infinite incremental capital-labor ratios are often desirable and why others with very low ratios often are not. This will serve to make the general point that what is required at the present time is an increase of labor intensity across the board in industry, in both capital and labor intensive sectors, to levels commensurate with the relative opportunity costs of capital and labor. 1/ Given the large number and heterogeneity of household and very small scale manufacturing activities, a heavy reliance must be placed on the screening procedures of the institutions to determine in any given case whether a proposal offers prospects for an earnings increase. 2/ See Chapter 4, para 4.24, - 216 - 7.34 To begin with, the overall labor intensity of small industry in the Philippines, as in other countries, is greater than it is in large industry (Table 7.7): Table 7,7: CAPITAL LABOR RATIOS IN PHILIPPINE MANUFACTURING BY SIZE OF ESTABLISHMENT, 1974 Size of Capital Labor Ratio, Relative Capital-Labor Establishment P OOOs/Worker Ratio (Largest = 100) Household Manufacturing 1.4 5 - 19 Workers 4.7 18 20 - 49 8.7 34 50 - 99 15.2 59 100 - 199 19.7 76 200 or over 25.8 100 Source: NCSO Establishment Surveys and NACIDA (1977) for households (the NACIDA figures are those shown in Table 5.11 in Chapter 5, and converted to 1974 prices). The data shown are for book values of fixed assets and are subject to the usual problems of definition and measurement. Even allowing for these uncertainties,however, it is clear that in aggregate the smaller the scale of industrial activity the less its capital intensity. Hence the small enterprise program is likely to be associated with a more labor intensive class of industrial enterprises; and, insofar as it facilitates a greater level of investment in them than otherwise would occur, it is likely to raise the average labor intensity of industry. Beyond this general point, however, there are several doubts about using labor intensity as an investment criterion and further, even within the range of services provided by the program1, several other actions are merited to raise labor intensity in industry. Five doubts will be raised below though the list could be longer. - 217 - (1) The evidence is not conclusive that small industries are more labor intensive across sectors than large industries. Some data on this point are presented in Annex Table 16. They are at the two digit level, indicate average book values of fixed assets, and are not available for establishments with less than 20 workers. Such shortcomings naturally limit what can be said, but the conclusions to be drawn are strikingly similar to 1/ those derived from better data for other countries. In aggregate the capital labor ratio follows the familiar pattern just noted of rising with scale. But for individual sectors it is different, and almost always varies erratically; in some sectors it rises (e.g. foods, paper, chemicals, basic metals, transport equipment) and in others it is more or less constant or falls (e.g. textiles, clothing, wood, furniture, rubber, electrical machinery). Thus to encourage investment in small industries in some sectors may well raise the average capital intensity of industry. For reasons to be discussed below this is not necessarily objectionable from an economic point of view, but it does cast doubt on the assumption that by increasing investment in small scale one is necessarily raising labor intensity. One reason for the higher aggregate capital intensity of large scale is that large scale manufacturing is frequently in sectors with intrinsically high capital intensities (e.g. petr6leum and coal products, basic metals, non metalic minerals and pulp and paper). If one excludes these from the aggregate data on the grounds that there is little choice between large and small scale production (and thus a comparison of K-L ratios is not helpful) the average ratio for industry rises only slightly with scale (Annex Table 16). 1/ Sam, P. S. Ho, "Small Scale Industries in Two Rapidly Growing Less Developed Countries: Korea and Taiwan - A Study of Their Characteristics, Competitive Bases, and Productivity," Employment & Rural Development Division Paper No.53, December 1978. A. Berry and A. Pinell-Siles, "Small-Scale Enterprises (SSEs) in Colombia: A Case Study", Employment & Rural Development Division Paper No.56, July 1979. - 218 - (2) The ratio varies greatly between sectors, and a different criterion would be needed in principle for every sector. In Annex Table 16 no two sectors have the same ratio and the most capital intensive sector has 80 times the c.apital intensity of the least. The variance is greater if sectors are examined in more detail since the data in the table are two-digit group averages. (3) The ratio can be expected to vary over time and by region with changes in real wages. If the purpose of development policy is to achieve a rise in labor productivities and incomes, this will require an increase of machinery and equipment at the workers' disposal and, unless prices of capital goods fall commensurately, an increase of capital intensity. More generally there is an optimum ("appropriate") ratio for each enterprise corresponding to local wages at the time of investment, and to the current cost of capital; it is functionally related to (wages)/ (costs of capital) and rises as real wages rise. One would therefore need to undertake industry studies regularly to determine what might be the appropriate ratio at a particular point in time and for each region. 1/ If there is a continuous range of techniques available for a particular industry, then the optimum ratio is (K/L) = a(w/r)b,where a is a constant, b the elasticity of substitution between capital and labor, w wages and r the cost of capital services. If b = 0 (i.e. no substitution is possible), (K/L) = a and is independent of the relative costs of labor or capital. But most industries have a range of alternatives, particularly w.hen one considers the extent to which second hand equipment embodying older technologies is available (c.f. the interview results presented in Chapter 5). In some cases unly discrete alternatives are available, while in others they may be increased in number by invention or adaptation. The optimising criterion then becomes more complicated, as it does with a multi-period optimising model with inherited capital stock. But the point that the optimum, or "appropriate," ratio varies with wages remains. - 219 - (4) Some of the most labor intensive projects are also the most impoverished and offer no prospects for raising incomes. Examples are the more marginal household manufacturing activities; to channel resources to them is likely to perpetuate an already low income activity and waste the investment. The capital-labor ratio, in providing no information about earnings, may thus lead to socially and economically undesirable projects being financed. The merit of the financial and economic criteria discussed above is that they favor only those projects that offer prospects of a real income gain. (5) Finally, it is often desirable to finance projects with. large or even infinite incremental capital-labor ratios. Examples are trade credits which may expand earnings without necessarily increasing employment directly. Investments to upgrade working facilities or machinery and equipment may have this feature too. The Demand for Labor in General 7.35 While labor intensity (or its inverse, the capital-labor ratio) is not very reliable as an investment criterion there are both distributional and efficiency grounds for raising the overall labor intensity of industrial investment in the Philippines at the present time. First consider distribution. 7.36 A greater demand for labor would act to raise real wages and labor's share in value added. The distributional benefits of this may often merit the finance of "excessively" labor intensive projects; i.e. projects employing more labor than a strict analysis of the opportunity costs of labor and capital might suggest. To allow for such alternatives in a consistent manner, various studies have proposed that - 22V - the income streams of projects should be weighted according to the 1/ income groups affected. (Under this procedure the optimal capital- labor ratio is no longer a function of wages divided by capital costs, but of wages weighted according to income group divided by capital costs.) Thus the methods proposed turn out to be a modification of the profitability criterion stated above. 7.36 The weighting of incomes according to these methods remains controversial on account of the difficulties in choosing weights. It is also an unsatisfactory substitute for direct incentives to raise the labor intensity of industry directly, most of which can also be justified on efficiency as well as distributional grounds. The various incentives 2/ available are familiar and have been examined in several studies. They includee (i) a restructuring ot tariffs and of the investment and export incentives, and which could be expected to favor a greater share of investment in the more labor intensive sectors of the economy, both industrial and non-industrial; (ii) cost reflecting interest rates for industrial loans and; (iii) subsidies or tax exemptions on labor costs. Of these, only the third item has not received the attention it merits in the Philippines. It is evidently a redistributive device that could be used to offset losses that might follow a removal of current subsidies and tax exemptions on capital costs. Subsidies on tax exemptions on incremental rather than total employment are often regarded as a stronger incentive, and could be applied to new investments financed during the year. Administrative difficulties would necessarily limit the device to medium and large industries, but it has great appeal nevertheless. 1/ Little-Mirrlees (1975) and Squire van der Tak (1977). 2/ Cited and discussed in Chapters V and VI above and in the discussion on wage trends and relativities in this Chapter. Note that the increased emphasis on broad-based agricultural growth discussed in Chapter VI is also likely to raise industrial labor intensity indirectly by changing aggregate consumption patterns towards the products of the more labor- intensive manufacturing and tertiary sectors. - 221 - 7.37 There are also institutional measures that can be used to 1/ encourage more labor intensive investment. These include the use of the extension services, the vocational training programs and the specialized trading and industrial associations to inform manufacturers about the more labor intensive investment alternatives that are available. Finally, there is the role of the research associations in identifying or modifying existing technologies in ways more suited to the current 2/ costs of labor and capital. Conclusions 7.38 Relative price movements in the Philippines brought about by a combination of industrial incentives and macro-economic management policies have consistently drawn investment into the capital intensive sectors of the economy and lowered the overall demand for labor in the country. But the consequence was to depress real wages and also real earnings in'certain types of self employment (principally in agriculture); un and under employment rates actually fell to modest levels. Occupational shifts of the labor force out of ill-paid employment have been extensive, and to some extent have offset adverse effects of these trends on incomes. More recently, the increased growth rate of yields in food grains appear to have had a favorable effect on incomaes from farm and non-farm employment in the provinces. 1/ A recent empirical study entitled "Choi,:e of ::hnology in Low gage countries; A non-Neoclassical Approach", by 'ecraw also emphasizes the importance of non-price as well as price measures. QJE November 1979 Vol. 373. 2/ The qualification here is that the aim should be to identify technologies to minimize capital plus materials plus labor costs, not the ratio K/L. - 222 - 7.39 The implication of these various trends and changes is that the program should continue to address itself to projects that offer prospects of an income gain over other forms of employment that are available. This translates quite simply into the conclusion that only financially and socially profitable projects should be financed. Yet, however platitudiuous this may seem, it does suggest some points of departure for the future of the program, and which were discussed in Chapters 2, 3 and 4. For instance, projects having large incrementv-1 capital-labor ratios would be desirable if they raised incomes, as with working capital finance (though in practice this is often associated with a direct employment effect) and investments intended to improve the efficiency of or the labor productivity in an enterprise. 7.40 Labor intensity as an investment or appraisal criterion was rejected on these and other grounds: it is essentially neutral with respect to incomes, and is too often associated with the most impoverished activities offering no prospects of an income gain. In addition, there is the practical complication it it varies greatly between sectors, and between regions and over time as real wages change. But raising the current labor intensity of investments in the Philippines, to levels commensurate with the relative social opportunity costs of labor and capital, remains enormously important for the welfare of the labor force. The conclusion in this report is that labor intensity needs to be raised all round: in small and large scale, in most industries and in all regions. The measures available have been examined in several studies and are now familiar: - 223 - a restructuring of industrial incentives, tax exemptions or subsidies on labor costs in industry, and a continued-perhaps greater-emphasis on rural-led growth. On the institutional side, the Government's extension and training programs, and the specialized industrial and trading associations, could be effective channels for identifying and disseminating information about labor intensive investment alternatives. The 'appropriate' investments, however, are those that minimize costs, not the capital-labor ratio. - 224 - VIII. UNCERTAINTIES IN THE CAPITAL MARKETS, INTEREST RATES AND INVESTMENT CRITERIA - A technical supplement to Chapters 2, 3, 4 and 7 Introduction 8.1 This chapter discusses interest rate policies and project selection criteria in relation to small enterprise programs. On interest rates the now standard argument is that administrative ceilings (in the Philippines as in most other countries) prevent the rates from rising to risk and cost-reflecting levels; lending is thus unprofitable and does not take place. While it is difficult to disagree with this, analysis of uncertainties in capital markets shows that removal, of the ceilings is not a sufficient condition for lending to take place, even to large numbers of would-be borrowers with efficient and financially sound projects, and with every intention of repaying the loans. The initial magnitude of the risks in developing lending programs to small enterprises are extra-ordinarily high, while the long-run returns may be in dispute; high cost and risk reflecting rates, assuming they were politically acceptable, raise project risks yet further and may extinguish any institutional interest in the market or prevent it from becoming established. Further, the risks are high because potentially "good" borrowers are indistinguishable from "bad" borrowers, Since both must be charged the same rate, the former are frequently driven out of the market by the latter, or must substantially reduce their 1/ investment, with a loss of economic efficiency. Or as Rotschild and Stiglitz (1976) note: "high risk individuals cause an externality: the low-risk individuals are worse off than they would be in the absence of high risk individuals" (p.629). - 225 - 8.2 These arguments are familiar from the literature on uncertianty in capital markets, most notably in the market for "lemons" paper by Akerlof (1970), the readings edited by Diamond and Rothschild (1978) and the recent work of Stiglitz and Weiss (1979 and 1980) and 1/ others that will be cited, Most of these papers are concerned with the behavior of capital markets under uncertainty rather than with reaching normative conclusions'on interest rates, government financing and risk- guarantee schemes, which is the purpose of the discussion below, The evidence in Chapters 2 and 3 showed that both risks and administrative costs decline over time at a rate depending on an institution's response to risk and also on the accumulation of information and experience within the institution. That is, there is "learning by doing" of the kind discussed by Arrow (1965),and economies of scale,each requiring a forward looking view of interest rate policies. Optimal interest rates are derived below first from a financial and then from an economic perspective, taking into account the various constraints faced by the institutions;both converge to the same result, with the "best" policy suggesting interest rate levels sufficient to make lending profitable over the long-haul, but supporting the idea of risk-sharing and direct financing to absorb the more-immediate losses, (This is also the conclusion reached in Chapters 2 and 3.) Given the importance of learning and economies of scale, it is not surprising that the expected volume of business is a crucial factor in determining long-run profitability, and thus the economic desireability of the programs. 1/ We are grateful to Noburu Kawai for bringing this literature to our attention in his "Comment on the SSE Research Project,"October 22, 1979. Ofimeo), There are also some striking parallels between the analysis below and the analysis of risk in agricultural credit policies; see e.g. the paper by Lipton (1979), which I. J. Singh drew to our attention. - 226 8.3 A discussion of these matters takes up the first half of this chapter, which begins with an analysis of changing nature of risks. The second half turns to project appraisal criteria, and has the following aims: to show that Ci) the benefits of providing institutional finance ought to be measured against those of its alternatives - own savings, retained earnings, informal capital markets, trade credits or simply of cutting back on investment; Cii) the net benefits can be estimated from the rates of return to capital of the investments made possible by the programs; and (iii) the rate of return is a rigorous criterion for steering finance towards economically efficient projects offering more gainful employment opportunities for the labor force. In connection with (iii) there is a discussion on the correspondence between actual wages in the labor markets faced by small enterprises in the Philippines, and the opportunity costs of labor. Uncertainties in the Capital Markets 8.4 Although risks and administrative costs change over time, it is their initial magnitude - and of risks in particular - that inhibits lending as much as any other factor. This is partly because ceilings on interest rates contribute towards institutions planning for the short-run; but given the even greater uncertainties about the demand for loans in the long-run Cat least with respect to the demand from small enterprises) it is possible that short-run considerations would still predominate, and it is useful to consider this case first before examining the forward-looking case. 8.5 Initial Magnitude of the Risks. To begin with a simple aggregative statement, let p be the probability of the principal and interest due on the loans not being repaid, and Cl+r) the actual principal plus interest outstanding per unit of principal. The fraction of principal and interest - 227 - likely to be recovered is C1-p)C1+r). Similarly let Cl+i) be the principal and interest on raising resources, and 'a' the administrative costs of handling the loans, each again being expressed per unit of principal. Then for lending to be profitable it is necessary that: (l-p) Cl+r) > (1+i) + a or r > Ci+a+p)/(l-p) (1) Note that p appe-rs in both the numerator and the denominator on the RHS of (1) since the interest payments from the "good" accounts must cover the lost principal in addition to the lost interest from the "bad" accounts. The former are thus penalized twice. Putting some numbers into this expression, i was about 16% for short term resources in December 1979 (see Chapter 3) and of course would be higher for long- term resources; 'a' would be about 4% but could be more or less depending on the size and maturity of the loan and the familiarity of the bank with the borrower. Hence the annuitised cost would be in excess of A(20%) = 33% for borrowings of 5 year maturity. If one takes the percentage of principal and interest outstanding that is in arrears 2/ by more than 6 months to be a measure of p, then the initial value of 3/ 4 p would be in the range 0.3 to 0.5 or higher. Hence for term-lending to 1J Expressed on an annual basis, the above criterion is the same as ACr) > A(ita)/(1-p), where A(r) and A(i+a) denotes the annuity rate, and can be etimated from standard financial tables. (Here of course, r and Ci+a) are interest rates.) 2/ Several banks reported that once a loan had been in arrears for more than two quarters, it was extremely difficult to retrieve. It is important to upot arrears problems very early, 3/ One private commercial bank reported bad debts on two thirds of its portfolio in a private small loans program introduced in the mid' 1970s, and had consequently closed it down. This was, moreover, for short-term loans. 4/ Taking loans of 5 year maturity. - 228 - be profitable in the early years, risk-reflecting annuity rates would have to be in the range 33/(0.3 to 0.5) = 66 to 100%, implying interest rates of 60 to 97% or higher - roughly three to five times the levels required for loans to large borrowers. 8.6 In practice, interest rates in the Philippines (as in most other countries) are prevented from rising to such levels by administrative ceilings. Even without the ceilings, however, it is unlikely that the banks and non-bank financial intermediaries woul" be prepared to charge very high rates for small borzowers alone. Apart from fears of political attack, there are grounds for believing that their willingness-to-lend would decline as interest rates rose to high levels, and that the supply 2/ curve may be backward sloping. First, the margins for contingency on the borrowers' projects as planned would be greatly reduced, raising doubts in the institutions about the capacity of small borrowers to service debts. Second, related to this, is the argument of Stiglitz and Weiss (1979) that higher interest rates may attract the riskier and deter the more conservative borrowers, and induce others to undertake yet riskier projects in the expectation of higher returns. That is, while revenues per loan repaid rise with interest rates, the probability of repayment decreases, and Stiglitz and Weiss argue that there is an optimum interest rate which under plausible conditions can be below the market clearing rate. Hence we are still left with credit rationing and a system in which potentially "good" borrowers are driven out of the market by the "lemons". Finally, the banks and non-bank financial 1 Note that this range is comparable to that often noted for loans in the informal sector. 2/ See also Jaffee and Russell (1976), who however argue that the existence of credit rationing does not depend on the particular shape of the supply curve. - 229 - intermediaries have to maintain a reputation for financial soundness, and would not wish to report high risk elements in their portfolios even if, on account of high interest rates, those elements were not leading to a financial loss. 8.7 Hence a policy of simply letting interest rates float in and of itself is unlikely to induce banks to lend to small businessmen out of their own resources, except to a small and slowly growing minority of good standing. This is the theoretical case for the risk-guarantee schemes and direct financing by government banks discussed in Chapters 2 and 3; it is essentially to absorb the initial risks of financing small enterprises until information and screening procedures have been developed within the institutions, on the assumption that the programs will be profitable over the long-run. Hence from a strictly economic point of view, such schemes are merited only if Ci) the risks are in fact reducible over time; and (ii) the net present value of the expected returns, once the reductions have been achieved, exceed the net PV of losses during the adjustment period. The latter presupposes a continuing volume of business from small enterprises after the adjustment period. Consider these points further. 8.8 Changes in Risks and Administrative Costs Over Time. It is convenient to consider the probability of loans not being repaid in two parts: 1/ The growth of savings deposits throughout the country is probably establishing the credit standing of an increasing number of firms. The interviews in Chapter 5 revealed that several firms had established savings deposits precisely for this purpose. - 230 - p= The probability of loans not being repaid from known creditworthy borrowers; it would include for instance losses due to uninsured personal misfortunes (illness or injury, economic slumps etc) plus an allowance for 'human errors' on the part of branch staff and/or the borrowers on the viability of the project being appraised. p" = The probability of loans not being repaid from borrowers whose credit-worthiness is unknown or is more difficult to ascertain. In other words p" represents the probability of financing "lemons" on account of their not being distinguishable, when the programs begin, from "good" borrowers whose real risks to the institution, were they not otherwise confused with the former, would be closer to p'. 8.9 No institution of course expects to be free from the risks represented by p'; but through a range of devices (collateral, diver- sification of portfolios) and arrangements to check on credit-worthiness, they are kept to low levels. To gauge from the percentages of bad debts and loans in arrears on thei:r portfolios, private sector institutions typically operate with a p' of around 2% (often less) for short-term loans, and 3-4% for long term loans. The second category of risks are normally avoided simply by not lending; in instances when it has been attempted, as discussed in Chapter 2, they have been found to be alarmingly high (10 or more times the level of p') even when the loans were fully collateralized; the reaction, at least among private sector institutions, - 231 - - was to pull-out quickly. The questions to be discussed below are thus: (i) is p" in fact reducible, and if so how is this accomplished and over what length. of time? and (ii) under what conditions is it economically desirable to incur the losses when p" is high in the expectation of longer run benefits once it is low? 8.10 Similarly, the administrative costs can be divided into two parts: a', to represent the administrative costs of dealing with borrowers with established credit ratings, and who are both familiar with and to the institution concerned; and a" the extra costs of dealing with new and unfamiliar borrowers. The latter, like p", is expected to decline over time as the volume of lending increases. The criterion (1) above is then (ignoring the cross-product p'p" in the numerator): r > i+a '+a"+p'4P" C2) cl-p') (l-p") if lending is to be profitable at any point in time. (The multi-period criterion will be considered shortly.) 8.11 Those who do not repay loans, except under the circumstances discussed under p', vary greatly in competance and motivation. There has beeen a tendency in the literature to classify them simply as "dishonest" borrowers, though during interviews with borrowers themselves, or with the branch staff of the banks who have made loans to them, it is apparent that the degree of dishonesty varies greatly; furthermore, dishonesty is not the most common cause of failure to repay. It is worth discussing this point further since it helps to explain how institutions respond to the risks faced, In particular, it is possible to classify those who do not repay into four groups. First, of course, there are some borrowers, though fortunately a small minority, who have no intention of repaying the loans from the outset, and are correctly described as being dishonest. They - 232 - obtain the loans anticipating that foreclosure or making them repay will be too troublesome or costly for the institution, or that repayments will not be expected for reasons of collusion. This source or risk is reduced by the development of internal control and credit checking procedures, and the accumulation of knowledge among the staff in the branch networks of the more t-ustworthy business people in the local communities. A second and much more numerous type are those who are prepared to repay provided the incentives to do so are sufficiently strong (the "honest if" types). In the SMI program in the Philippines, there was a tendency initially among many borrowers (of fully collateralized loans) not to take repayment seriously, particularly when a large number of others were known not to be doing so (the greater the number not repaying, the greater the tendency for others not to repay). The reaction of some institutions to this situation, as one manager put it, was to "flex muscles", by threatening foreclosure, publicising cases under litigation, mounting loan collection drives, and simply by visiting the borrowers more frequently as part of supervision to instill an awareness among them that they were being watched. Although effects of these measures took some time, they were probably responsible for halving the arrears levels over the first five years of the program. They also show that p" is not independent of a" (nor is p' of a'), though it is not a simple l/ matter to decide how much administrative effort is required. 8.12 A commonly discussed incentive to be honest is the prospect of subsequent loans, and is often thought to be an advantage of loans for working capital over those for fixed capital. Stiglitz and Weiss 1/ Obtaining and training qualified staff, in particular, can be a problem. See e.g. the figures of DBP's staffing, discussed in Chapter 2. - 233 - (1980) consider this non-price incentive, noting that "banks can exploit the desire of firms to obtain loans by conditioning future loans on the repayment of past debts" and adding that subsequent loans are generally less risky than the first. (The significance of this incentive was also apparent in the interviews discussed in Chapter 5 above.) Elsewhere, Bottomley C1975) has argued that subsidized interest rates provide an incentive to repay if subsequent loans are permitted, since the borrowers have an obvious reason for remaining on good terms with the institutions that offer them; this does not, of course, argue for subsidized'interest rate policies, but it does help to explain the low arrears and default rates in administered credit schemes in some countries. 8.13 A third type not repaying the loans are perhaps best described under the heading of "honest mistakes." Instances of these in the Philippines were discussed in Chapter 4. In the early years of the program there was a tendency to be too optimistic about the sales prospects of businesses to be expanded under the loans, with costs and overheads being higher, and sales lower and later, than anticipated. The reduction of risks of this type proved to be a matter of experience: specifically, a knowledge of what happened to previous projects after finance proved to be a valuable lesson for the loan appraisers, who became stricter with 1/ subsequent loan requests, and better counselors to the borrowers. A further source of risk under this heading, and which is common in many countries besides the Philippines, is the over-emphasis of fixed capital finance, and the under-emphasis (and sometimes neglect) of working capital finance. Apart from a shortage of the latter placing a financial stress on business expanded under the former,, working capital finance is inherently 1/ Risks are also a function of size, type and maturity of loan and newness of the business (see Chapter 4). Statistical analysis of risks often helps institutions to develop better ground rules for lending. - 234 - less risky to supply and would be consistent with the theory behind the risk-guarantee and direct financing schemes (i.e. to reduce p" so that long-run profitability is achieved). 8,14 Fourth and last, there are those who, however honest, prove not to be successful or competent in their business (the honest "but" types), As in other instances discussed above, a growing knowledge of local enterprises within the branch networks helped to reduce this source of risk in the Philippines. Given the higher turnover rates of small and very small firms, it was also found to be important to finance businesses with proven records, and most institutions interviewed now have stricter criteria for this. 8.15 Similar observations about the changing nature of risks, and how they may be reduced by various measures, or sometimes simply through 2/ knowledge and experience, are also noted by Akerlof, who also stresses the importance of knowledge of the local communities. He quotes several cases that are still worth reading, including one regarding seasonal credits offered by cotton ginning companies in Iran, in which "in the first years of operation large losses (were to be) expected from unpaid debts - due to poor knowledge of the local scene." It is nevertheless clear that the period required to reduce p" (and also a") to comparatively low levels can be quite long, particularly if the emphasis (which is excessive in our opinion) is placed on term loans, In the first five years of the SMI program in the Philippines, for instance, the probability of loans not being repaid has been reduced to less than one fourth of the I/ ,C.f, Chapter 4, in which it was found that financing new business was about twice as risky as financing those already existing. 2/ Op. cit., pp. 246-249. - 235 - levels originally experineced, but it is still significantly higher than private banks would consider to be acceptable. 8.16 A Forward-Looking Financial Criterion. The decision to initiate a program is profitable if the present worth of the annual returns exceeds the present worth of the losses represented by p" and a" during the adjustment period. If the volume of lending in any year t is Qt and c is the opportunity cost of resources to the institution, 2/ expressed as a yield or an interest rate, this criterion is:- (1+r)(1l-p') (1-p") (1+i)+a'+a" ,Q(3) t (1+c)t t (1+c)t 3/ Rearranging C3), and neglecting the cross-product p'p", lending to small enterprises is likely to be profitable over the long haul if the interest rates on loans are allowed to rise such that Ci+a'+p') + IE(a"+p"))qt/(l+c)t I .I]/(1+C)t (l-p') - [p"Q t/(l+c) t [Et /(l+c) t 8.17 The second terms in the numerator and denominator represent the losses during the adjustment period. Both are present worthed and weighted by the volume of business; both are also divided by the present worth of the volume of business. The terms involving p" and a" are summed over the period over which these quantities are significant. As discussed above, this is not necessarily a short period; it is, however, shorter 1/ This happened in two ways, One through the reduction of arrears within DBP, and the other through IGLF leading becoming more concentrated in institutions prepared to develop the procedures and expertise. See Chapter 2. 2/ In practice c and i are probably quite close. 3/ Including it does not affect the substance of the argument. - 236 - than the period over which the denominators should be summed, If Q t expands rapidly, the second terms are likely to be small, and conversely if Qt does not. Hence the likelihood of establishing a profitable lending program turns in an obvious manner on one's assessment of the role of small enterprises in the economy and on the growth of their demand for institutional credit. 8.18 The limiting case of (4) occurs at high rates of growth of demand and/or when a" and p" decline to low levels over a comparatively short period. It then approaches: r > i + at + p' (5) 1 - pi (Note that the static case, given by (2) above, yields the same result if a" and p" are written as declining functions of Q.) It also approaches this level the more the losses due to a" and p" are cushioned by the risk-guarantees and the spreads on government backed financing schemes such as were reviewed in Chapters 2 and 3. 8.19 In those Chapters it was revealed that there remains little long-run interest on the part of the private sector institutions in the Philippines to develop lending programs to small enterprises, even though the losses from a" and p" are being cushioned as described. The basic reason for this is that, under the current administered interest rate policies, even the less stringent criterion, (5) above, is not being met. 8.20 Interest Rates and Governime:nt-Backed Financing Schemes, Supposing there was a high volume of demand for credit, Interest rates corresponding to (4) or (5) would not need to rise to the extreme levels previously estimated (from (1)), sufficient to depress the demand and extinguish - 237 - any institutional interest in meeting the demand, In this case the arguments for the schemes are no longer strictly economic or financial in nature: (i) Even small differentials in interest rates between small and large borrowers may be resisted politically, except perhaps those that can be accomodated under reductions, within an otherwise uniform structure, for prime borrowers. As noted earlier, the private financial institutions may face this constraint in the absence of any ceilings set by the government. In this case the schemes become a device for narrowing differentials, and are a "second best" measure from an economic viewpoint. (ii) Perceptions differ between the public and private sector as to the extent and growth of small enterprises and the I/ growth of demand for credit over the long-run, In this case the schemes are a device for promoting investments in regians and activities in which the public sector expects a satisfactory return to the economy but in which the private financial sector has doubts. 1/ Given the limited information and understanding on the extent and changes in the size and regional distributions of industrial development, these differences of perception can be huge. E.g. infrastructure improvements and agricultural growth have been shown in this report to increase small business activity in the present stage of development in the Philippines. But an entirely opposite view is still quite prevalent, and until recently had some theoretical support (see Anderson and Leiserson (1980) for a disctsiion): this is that such developments lead to an increasing demand for externally manufactured goods and a rapid decline of local small scale industries all round. - 238 - (iii) While the private sector bases its projects on expected returns adjusted for risks, these adjustments may be larger than is economically efficient in the absence of institutions or mechanisms to insure against 1/ 2/ risks. There is then a function for the public sector to step in with guarantees or other forms of 3/ subsidy of its own. Other and perhaps more familiar reasons put forward are (iv) the schemes are necessary to affset institutional biasses in favor of lending to large scale arising from the structure of ownership and control of industry and 4/ finance; Cv) small enterprises have special advantages over large scale; and (vi) the schemes have a redistributive aim by raising the demand for labor in low income regions. Externalities, Economies of Scale and Interest Rates 8.21 The criteria (2) and (4) above were both financial, leading to an interest rate capable of covering the average costs of providing loans (or a present worth weighted average of costs in the multi-period case). Two factors that modify these criteria from an economic standpoint are: 1/ Arrow and Lind (1970), who further argue that the public sector's decisions should be neutral to risk, given its size. For a less conclusive view, however, see the comments of Foldes and Rees (1977) on Arrow and Lind's paper. 2/ One mechanism often conspicuous by its absence is a means for sharing records between institutions on borrowers, so as to provide additional checks on creditworthiness. In several instances in the Philippines we encountered borrowers who were in default with one institution but who were still able to obtain credit from another. 3/ Mayshar (1977). 4/ Although the advantages of SSEs are the most touted reasons for intervention, interventions would arguably not beneeded to secure an efficient flow of capital to SSEs were it not for Ci) to (iv) and the transactions costs Cdiscussed in Chapter 4) faced by most owners. - 239 - Ca) the probability of financing a "goodilborrower rises the greater the volume of borrowing that is undertaken, though the rise is less marked the clcser (1-p") approaches unity; (b) the marginal administrative costs of financing loans are below average costs, the latter declining with the volume of lending; i.e. there are economies of scale. As in (i), however, the gains from scale diminish at higher volumes of lending. Both suggest a modification of (2) and (4) and lead to results which converge more rapidly towards (5) as demand rises. 8.22 Simple Static Case. Let B represent the benefits of financing "good"borrowers, excluding any losses due to the "natural" risks denoted above by p'. B would thus be the area under the demand curve up to Q, and @B/@Q = (l+r). The actual benefits would then be B times the probability of losses due to natural risks (1-p') and the probability of finding a "1good" borrower (l-p"), The net benefits are then: (1-p)B'- (l+i+a)Q But both p and 'a' change with lending experience, that is with Q, and the marginal conditions are: Cl-p)(l+r) - B3p/3Q-C1+i+a)-q8a/aq = 0 from which the first term (which is negative) in the bracketed expression represents the marginal benefits of finding a good borrower the greater the volume of - 240 - business undertaken, and the second (also negative) the benefits of scale. The former appears to correspond to the external benefits identified by Arrow (1965) in a growth model that examined the economic implications of "learning by doing." Here learning was associated with 1/ the cumulative production of capital goods, from which he concluded: "the presence of learning means that an act of investment benefits future investors, but this beneift is not paid for by the market. Hence, it is to be expected that the aggregate amount of investment under the competitive model .......will fall short of the socially optimum level." The term is given intuitive meaning in figure 1, in which the lower demand curve corresponds to a lower probability of finding a good borrower than the higher demand curve. If the initial price is P and demand Q1, the demand would rise to Q2' say, if the price were dropped to P2 on the assumption that meeting the increase of demand, Q2 Ql, made no difference to the institution's ability to finance good borrowers. If, howevrr, the extra experience gianed with extra lending eventually makes a difference, the actual demand met would rise, say to Q,. Even if P2 fell below the current marginal cost of making the loan, the extra benefits generated,(Shown by the vertically shaded area)may be sufficient to offset the losses (shown by the cross shaded areal. It is apparent that the case for setting prices below marginal costs.diminishes the less (l-p) increases with an increase in demand. 8.23 One possibility that arises is where the extra "good" borrowers that are found as (l-p) rises are always marginal, i.e. that the vertically shaded area in Figure 1 is always small, At high levels of Q is this likely, but not at low levels, corresponding to the cases considered by Akerlof, when potentially "good" borrowers are indistinguishable from the "lemons". 1/ Op.cit, p. 168. -- 241 - F E\)O2 P{ L1 Q \\c1 - 242 - 1/ 8,24 The first term on the RHS of C6) is the same as (2)7~so the economic criterion suggests lower interest rates than the financial criterion so long as there are significant benefits to be obtained from learning and from economies of scale. The limiting cases of both 2/ (2) and (6) are the same, however: p tends to p', a to a', ap/;Q to 0 and @a/3Q to 0 as Q rises, so that r tends to (i + a' +p')/(l-p'). For instance take the case where learning and economies of scale both show 3/ diminishing returns. One pattern might be: p po" e a"t a " e 0 where p " and a " are initial values. Taking B as being proportional to Q C= bQ, say) and substituting in (6) gives the result: i+a'+p' + a " e XQCl - XQ) + p," eXQ (1-bQX) 0a 1 - pf - p 0 fe Q which tends to (i+a'+p')/(l-p') at high Q, 8.25 The Dynamic Case. All quantities that vary with time are given the subscript t, including r, i, p and a. The present worth of benefits, if x is the discount rate, is then: Z(1-pt)Bt/(l+x)t - E (1+it+at)Qt/(1+x)t t t where aBEtMt = (l+r ) and both pt and at are each a function of the cumulative experience - assumed here to be correlated with the cumulative volume of lending - up to time t; that is 1/- The "static" financial case, j Also the same as the forward looking financial case -n 3J Arrow considers a case 0(Q) = 00Q with n > 0. But whether this or the exponential form is assumed, the results are similar. - 243 - t pt Et) t and Co (0) Taking the marginal conditions of the above objectives function and rearranging gives the result: it+a t+p m B s ap q s rt t 1 s s(7 1pt 1-pt s=t t(l+x)s Qt 1+)s The first term in the bracketed expression is the present worth of the marginal benefits of finding "good" borrowers in the future on account of the extra experience gained in the present period; the second term reflects the gains from economics of scale. As in the static case, there is a downwards adjustment to the marginal costs of providing the loans in the present period. 8.26 The limiting case is again the same as that for the financial ^criterion (4). Both at and pt tend to a' and p' as the cumulative volume of lending rises, with p Qs t and 3a /ae tending to zero, so that i + a' + p' t ~(14 )C) 1/ The differential of the first term in the objective function gives the series; (l-p t)(l+r t Bt t t1 at+1 t t+1 (l+x) (1+x) a q (1+1x) Q - The second term gives a similar series, -244 The contrast between (4) and (7) is illustrated in Figure 2. The economic criterion implies lower interest rates than the forward looking financial criterion during the adjustment period. 8.27 The above results raise the question, is there an economic case for subsidy, in addition to points Ci) to (vi) raised in paragraph 8.20, when a" and p" are large? If there is, it is probably not a strong case, since economies of scale are evident (and possibly greater) in many other sectors, while Arrow suggests that learning by doing is widespread. There may be a case for subsidising investment in general, or for selected subsidies in sectors where the economies of scale and learning by doing are most marked; these may or may not include small business credit programs. The most appropriate answer, perhaps, is that eocnomic analysis does not argue against subsidy during the adjustment period. Appaising Small Enterprise Prograns 8.28 It is possible to determine whether small enterprise projects are desirable or not,from an economic point of view,by using cost-benefit analysis. As with other projects, it is necessary to compare the investments in question with their alternatives, allowing (using shadow prices) for possible inefficiencies in the levels of prices and wages, 8,29 Alternatives to Institutional Finance. These include a greater reliance on: (a) internal sources of finance (family savings, retained earnings); and (b) other external sources (trade credits and the informal sector capital markets). 1/ The following draws on the principles discussed in Mishan (1971), Little and Mirrlees (1975) and Squire-and van der Tak (1975). J.J - 246 - Where the inputed cost of (a) or the actual cost of (b) are greater than the costs of institutional finance, a reduction of investment and output is implied if the latter is not available, except in the unlikely event of the derived demand being inelastic. The provision of institutional finance then: - makes additional investments possible that would otherwise be unprofitable if financed out of other (higher priced) external sources, or which would not have been worthwhile to the owner if the inputed cost of internal sources were too high; and - for those projects that would still be undertaken without institutional finance, provides a cost savings to the enterprise. Industrial extension aims to have the further effect of: - raising the demand curve for institutional credit by reducing the transactions costs faced by the borrowers (as discussed in Chapter 4, these are also expected to decline over time through "learning by doing"). 1/ The alternatives can be summed up in a familiar way by the supply and derived demand curves for finance: the derived demand curves representing the rates of return to capital of individual projects, one supply curve (generally higher) representing non-institutional sources and another institutional sources of finance. supply from non-institutional sources demand curve without extension (Shaded area represents the demand curve with extension three sources of supply from institutional sources. benefit discussed below). - 247 - The relevant question is then whether these three sources of benefit, after allowing for losses due to "lemons',' outweigh the costs of the program. All three are part of the consumers' surplus, and it would not be necessary to estimate them if payments on principal and interest fully covered the costs of the programs. But since this condition is generally not met in practice, it might be useful to examine how they can be estimated. This can be done without precise information on the demand curves. 8.30 Each project financed is used to increase the capacity and output and/or improve the efficiency and profits of an,enterprise in various ways. Each project is thus expected to be associated with: - a change, AS, in the annual sales of the enterprise, - a change, AM, in its material and running costs, and - a change, AL, in employment. If the amount of investment made possible by the loan is K, and the average wages are w, then the expected annual incremental. benefits, AB, to the enterprise are AB= AS -&- WAL -ACr)K (9) where A(r) is the annuity rate and r now denotes the interest rate on the loan. The expected rate of return to the investment, denoted by y, is then given by ACy) =(dS - AM - wAL)/K (10) 8.31 In principle therefore it is possible to estimate the rates of return to the programs by considering a sample of the projects financed, - 248 - estimating the various quantities in (9-), and grossing up over the whole sample. Fixed overheads, ddministrative or other costs of the program need to be deducted from the estimate of EAB. The sales and variable cost figures are all expected quantities, to be derived from the projections for each project and multiplied by the probability of the projects' being successful. This may be greater than the probability of principal and interest being repaid since there is no guarantee that the owners of successful enterprises will repay the loans. On the other hand, since their not doing so is damaging both to the institutions and ultimately to other borrowers, it would not seem good practice to count these cases as being successful. The quantities p' 2/ and p" as defined above are probably the right ones to use. 8.32 The above procedure is likely to over-estimate the rates of return to the programs unless it is accompanied by an analysis of, and an allowance for, the costs of alternative sources of external finance (trade credits, informal capital markets), which in some circumstances may prove to be the more efficient alternative. If these sources are available at a cost of, say, f, then businesses with higher rates of return to capital than this can, and presumably do, turn to them in the absence of institutional credit. It is therefore only appropriate to include the whole of the returns to capital (as estimated in (10)) in cases where y <; in others, the quantities to estimate are the cost 1/ This calculation is actually made by the extension workers and the financial institutions when appraising the larger term-loans. The forecasts frequently turn out to be highly optimistic, however. 2/ In failed projects the whole of the investment is of course not lost, but presumably can be salvaged for use elsewhere or by new owners. To allow for this (1-p') and (1-p") should include recoveries from foreclosures and exclude costs of litigation. -249- savings, which are given by f minus the opportunity cost of supplying institutional finance. 8.33 When are the Alternatives Preferable? The above analysis is a simplification of what is in practice a complex pattern of demand and supply of finance for small enterprises. It raises the basic questions: what is the expected demand for institutional credit (for either short-or long term loans)? and, are the projects financed expected to have satisfactory returns, sufficient to justify the costs and the losses in developing a lending program? As shown, an assessment of alternatives is crucial in arriving at answers to these questions. 8.34 It does not follow, however, that if instiuttional credit is in demand for some purposes that the alternatives will be displaced or unneeded for others - or even for the same purposes. In fact, the interviews reported in Chapter 5 (see Annex table 5.3 in particular) show more evidence of complementarities than of competition between alternative sources of finance (e.g. the demand for trade credits rising with fixed asset finance). The complementarities stem from variations in the capital structure of small firms, and in the nature of the product and supplier markets; what is a suitable financial arrangement for one firm is often not for another. An obvious contrast is between the garments and engineering industries. The former have low overheads and rely more on trade credits to finance materials supplies-and work in progress; even the smallest scale activities often obtain the credits indirectly through the "putting out" system, The engineering industries, having larger overheads, a larger share of work in progress, and often being expected not to receive, - 250 - but to offer credit in the form of delayed receipts from customers, appear to rely more on the banking system to organize working capital finance, or, in the absence of this, to rely exclusively on retained earnings. It is hard to generalize, however, since engineering firms working under subcontract, for instance, may have different financial arrangements. 8.35 We also suggested in Chapter 4 that own savings, retained earnings and such informal sector finance as is available, were the best sources of finance for new businesses. The probability of a bank's financing a "lemon" is much less for a business that has proved itself and established its markets and sources of supply, A bank's finance is generally advantageous when a significant increase of output and or assets is contemplated, since informal sector loans appear to be very short-term and in small amounts. Another suggestion in Chapters 3 and 4 was to use traders as conduits for working capital finance, rather than always working directly with small manufacturers. Finally, most institutions regard it as good practice (a) to require a significant injection of a businesses' own savings or retained earnings into a project, either for fixed or working capital; and (b) to be satisfied that, if one type of finance is to be provided (e.g. term-finance), finance will still be available from other sources (whether internal or external) to meet the other requirements of the firm. 8.36 Hence a mixed solution is suggested rather than an exclusive reliance on one source or another. The task of the small enterprise programs is to develop the capacity and know-how of the financial institutions, and address the problems posed by uncertainty, where there is a latent demand for their particular services. The above criteria - 251 - are intended to provide a check on the efficiency of the projects, and determine when this effort is worthwhile. 8.37 Summing up, the economic returns to small enterprise programs can be estimated from an analysis of the rates of return to capital invested in the enterprises, allowing for the probability of unsuccessful projects and deducting any costs of the programs not included in the project costs. Allowances for alternative sources of finance may be necessary in some cases, though institutional sources are often used to augment and complement rather than compete with the alternatives. 8.38 Shadow Prices. It is obviously impractical to estimate the shadow prices for the inputs and outputs of each of the projects financed or otherwise supported by small enterprise programs, and also unnecessary. But seen as part of the research and ex post evaluation work of the institutions involved in the programq, their role is constructive. The- are perhaps best used in evaluations of samples of projects to determine the relative efficiencies of investments in different sectors, and thus for determining the sector priorities of the programs. A comparison of economic returns, using SPs, with the financial returns of the projects should also provide current evidence on the incidence of industrial 1/ tariffs and investment incentives on small scale activities. 1/ Now that the tariffs and investment incentives are being revised in the Philippines, this exercise becomes more relevant. What were once relatively low-profit activities in the under-protected sectors should stand to gain considerably from a change to more uniform tariffs, The converse is ture of currently proftitable activities in the over- protected sectors. In other words, the profitability - and economic efficiency- of the projects that make up the loan portfolios of the financial institutions is likely to change with the tariffs, along with a change in the composition of the portfolios. - 252 - The theory and practice of the estimation and use of shadow prices for these and other purposes is fully documented in the references cited. 171 8.39 Shadow Wages and the Employment Issue. Given the importance of projects that offer improved earnings opportunities for the labor force, there are at first sight grounds for using a shadow wage (SWR) below actual wages (w) when appraising the porjects, so as to give a premium to those projects that actually do raise earnings levels. Thus the social benefits of a project, as estimated in (9) above, would be increased by AL(w-SWR). Since this may entail the selection of some projects that would make a financial loss, the preceding argument is sometimes used to justify subsidized credit programs for small enterprises. Apart from the difficulties that such subsidies cause for the raising and adminstering of loanable resources, there is another objection to this argument in that, at least with respect to small enterprises in the Philippines, shadow wages and actual wages probably do not differ significantly. The following discussion explores this point further, and aims to show why the current practice of appraising projects based on actual wages should lead to a selection of projects that are consistent with the aim of improving earnings opportunities, 8,4C First note that the rate of return or net benefit criterion can be rewritten as: AS - - A(r) >(11) wAL 1/ A paper by Medalla (1980) in Bautista and Powers presents an estimate of the SWR for unskilled labor in the Philippines. It is a country-wide estimate however, and does not allow for variations according to region, occupation, skill levels and the experience, qualities and job preferences of individuals. - 253 - That is, a project is desirable if it is capable of providing for labor's income after all other costs have been met. The rate of return is thus a rigorous criterion for screening for projects offering more gainful employment provided the wages reflect the opportunity costs of labor (or the shadow wage rates). To see why the latter condition is met in the Philippines,at least to a good approximation, it is instructive to consider the recommended practices for estimating SWRs. 8.41 In Chapter 7, it was shown that the wage labor in manufacturing was being drawn from several sources: (a) wage labor in agriculture, Cb) self-employed labor in agriculture, Cc) wage and self-employed labor in low-income, mostly rural and non-agricultural activities, (d) the un- employed, and Ce) new entrants to the labor force who would otherwise be in one or the other of (a), Cb), Cc) or (d). Even if a worker happens to be drawn directly from another lesser paid job in manufacturing, it will generally create a vacancy to be filled by workers from one of the above. This pattern of movement appears to be quite general in developing countries, and for this reason the starting point for estimating an SWR is usually taken to be a weighted average of the daily 1/, 2/ earnings in Ca), (b), Cc) and Cd). There are, in addition, further 3/ adjustments recommended in the literature to allow for the following: Ij See Little-Mirrlees, op. cit., p.257-262. The calculation appears to be extra-ordinarily intricate to do properly, particularly if (as with SSE programs) it is necessary to allow for regional disparities in wages and marginal productivities of labor. 2/ Since Cd) Is relatively low in the Philippines, the SWR would mostly be made up of Ca), (b) and Cc). 3/ See Squire van der Tak and Little-Mirrlees, - 254 - Ci) the transport andresettling costs of moving to a new phase of work; (ii) the costs of labor being temporarily unemployed or working in part-time or lowly-paid work before l/ finding the better-paid job in the project; (iii) the possible social costs of the workers using the wages for consumption when the money, if invested, might yield higher consumption benefits in the 2/ future; and (iv) the added incentive required to make the new job 3/ sufficiently attractive relative to the old one; e.g. the higher wage rates that are needed in urban areas to provide for the higher costs of dwellings, food and transport. The first two adjustments act to raise the SWR over the weighted average of earnings in pervious work. The third is generally thought to reduce it, though it is very likely small in the Philippines on account of the 1/ Mazumdar (1976). 2 This is the term (l-1/S)Cw-MP) in the references cited, Here (w-MP) is the net increase in earnings (MP=marginal product of labor). S is the ratio of the value of uncommitted government income to the value of consumption. It is generally taken to be greater than unity on the grounds that workers do not save and invest sufficiently but consume excessively. The whole term is a measure of the net loss assumed to occur on account of the income being consumed by workers instead of being invested (in the interests of future consumption) by the govern- ment. 3/ Harberger (1971). .. . . .. - 255 - opportunities for workers to save and invest.I/ The fourth term is probably quite large for workers moving to Manila, where wages for given occupations are significantly higher than elsewhere, but not so large for those moving to workshop and factory production in the provinces; it helps to explain why the opportunitycosts of labor (like wages) are likely to vary greatly among regions. 8,41 For people moving into skilled occupations, further adjustments are needed to allow for Cv) the costs of training labor and (vi) the workers' preference for skilled over unskilled work. Finally, there are questions regarding the quality and the experience of the workers and which must also bear, in principle, on the estimation of the SWRs. 8.42 Given the obvious practical difficulties of estimating SWRs on the above principles, the question arises whether it is necessary. The above list of adjustments is a useful way of indicating the factors determining the opportunity cost of labor; but the same factors must also determine actual wages if labor is to be drawn into the enterprise or project in question. It is only when there are institutional influences 1/ These opportunities are now quite widespread with the growth of the branch networks of the organized financial sector: 900 rural banks, 1200 branches of the commercial banks, plus the branches of the savings and loan associations, the private development banks and the Development Bank of the Philippines. Indeed, the branches of the commercial banks have spread rapidly largely to increase the resource base from deposits, which accounted for 75-77% of incremental resources in 1976-77 (see Chapter 2). A national savings campaign was also initiated by the Government in the mid'70s. Apart from these channels for mobilizing savings, secondary activities have been promoted such as piggeries, garment crafts and other "cottage" industries. It is also very likely that private investment in education and dwellings by the families of wage earners are commensurate with their incomes. - 256 - or other constraints in the labor market that actual wages begin to depart from the opportunity costs above. In Chapter 7 it 77as suggested that such influences, if they exist at all, are not very strong in the labor markets in which SSEs operate. To a good approximation the supply price of labor appears to meet the condition of "being the wage that must be paid to induce the worker into a particular employment and reflects the workers' private valuation of all its aspects, pleasant and unpleasant." Thus the SWRs and the actual wage rates can probably be taken not to depart significantly. This conclusion is not dis-similar to that reached by Harberger (1971) in his analysis of the labor market in India: "Why have the differentials between urban unprotected sector wages and rural wages been so persistent over time rather than being eliminated as a consequence of more rapid migration flows? My answer is that the differential in question is very largely a self-equalising one. In rural areas of India most of the houses (or huts) of rural labourers are built by themselves (with help from family and friends), using local materials; they are very inexpensive, if not virtually free. By contrast, even the most rudimentary urban quarters have rents amounting to a third or more of the unprotected urban wage. Food in the cities is also considerably more expensive than in the villages, where largely local produce is consumed. Transportation to and from work also typically claims a considerable portion of the urban labourer's budget, while in the villages the trip to the nearby fields is usually made on foot...1 conclude, then, that the social opportunity cost of labour to be used on a project in a rural area is the going wage in that area while that of labour to be used in an urban project is the prevailing wage in the unprotec- ted sector of the labour market in that area." 1/ Squire and van der Tak (1975), p.80. For a more skeptical note on relying too much on supply prices (even in the absence of distortions) see Vaughn (1980); uncertainties and disequilibria in the labor markets are her main concern. - 257 - 8.42 Using actual wages paid in small enterprises as a measure of the opportunity costs of labor both favors investments in the provinces, where wages are lower, and simplifies analysis. Estimates of shadow wage rates are generally available only on a country-wide basis for one or perhaps two categories of labor. Yet small enterprises have to pay wages that vary with the skills, qualities and experience of the workers, as well as with location and local labor market conditions. The information on wages are also readily available to the appraisers of projects, who generally estimate the wage bill when assessing the profitability of an enterprise and the project before deciding whether or not to finance it. 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World Bank, "The Philippines Poverty, Basic Needs and Employment A Review and Assessment," Washington, D.C., East Asia and Pacific Regional office, May 1980. SMALL ENTERPRISES AND DEVELOPMENT POLICY IN THE PaILIPPINES: A CASE STUDY VOLUME II Statistical Annexes ANNEX TO CHAPTER I NOTE ON THE USE OF TERMS The use of terms differs between agencies in the Philippines. The Ministry of Industry and the financial institutions classify industries into cottage (or home), small, medium and large industries according to assets as follows: Asset Range C million) Classification Less than 0.1 Cottage (or home) industries 0.1 to 1.0 Small industries 1.0 to 4.0 Medium industries Over 4.0 Large industries When referring to the Government's Small and Medium Industries Program these terms are used to avoid confusion. Elsewhere the term "small enterprise" is used in a broad sense, and includes enterprises in the tertiary sector. Most of these terms are arbitrary, and could be changed without seriously affecting the analysis. An exception, however, is the term cottage (or home) industries which confuses two quite different levels of activity. In 1975 there were about 900 thousand people who were working in manufacturing activities within their homes (see Table 1.3 above) or at least not working in identifiable establishment and workshops; for nearly two decades there has been no discernable growth in the level of such employment in the country. In contrast, the 3ame period saw a rapid increase in the number of non-household manufacturing establishments and workshops, and which would come under the above definitions of cottage industries. For purposes of analyzing size structure and other aspects of small industry development it is necessary to distinguish more 1/ The term 'home' industries is used by DBP. precisely between household and establishment-based manufacturing, as far as the data permit. The following table shows how MOI definitions compare with the size distribution categories in the establishment censuses; household employment is normally estimated as a residual between the establishment censuses and population censuses (or the labor force surveys non-census years): Type and Scale of Activity Approximat 1MOI CCSO Classification) Employment in 000's Definitio Household employment 882 Cottage Establishments: Less than 10 workers 207 Cottage 10 - 19 workers 37 Cottage 20 - 99 95 Small 100 - 199 56 Medium 200 and over 374 Large Total 1,651 /1 The average assets per worker in.1974 for industries with 5-19 workers was P4,700 say P5,000 in 1975, so that enterprises with 20 workers would have assets of P100,000 on average. Source: Censuses of Establishments and Population Census. Except when the discussions specifically relate to the financing and extension programs, the terms followed will relate to the left-hand side of the above table. While the intention of the analysis is to examine the full size structure of industry, the NCSO's census and survey data on establishments are often only grouped into 'small' and 'large', the former being establishments with less than 10 employees in census years, and less than 20 in survey years; the tables and comments in the text make it clear which of these two sources are being used. ANNEX I TO CHAPTER II Table 2.1: PHILIPPINES FINANCING OF SMALL SCALE ENTERPRISES Loans and Investments Outstanding by Institution, 1950-77 (Amount in million pesos) 1950 1960 1970 1974 March 1977 Type of institution Amount % Amount % Amount Amount % Amount % Banks Commercial banks 627 70.2 1,850 63.2 10,968 62.3 31,056 66.0 46,300 66.0 Rural banks 0 0.0 69 2.4 548 3.1 1,790 4.0 2,629 3.8 Development banks 253 28.4 566 19.4 2,935 16.7 5,330 12.0 11,181 15.9 Savings banks 1 0.1 57 1.9 564 3.2 965 2.2 1,923 2.7 Subtotal 881 98.7 2,542 86.9 15,015 85.3 39,141 88.4 62,033 88.4 Nonbank Financial Institutions Private 4 0.4 11 0.4 228 1.3 814 1.8 1,126 1.6 Government 8 0.9 373 12.7 2,360 13.4 4,311 9.8 7,019 10.0 Subtotal 12 11.3 384 13.1 2,88 14.7 j5,12 11.6 8,145 11.6 Total 893 100.0 2,92 100.0 17,603 100.0 44,266 100.0 70,178 100.0 Source: NEDA. ANNEX I TO CHAPTER II Table 2.2: PHILIPPINES FINANCING OF SMALL-SCALE ENTERPRISES Loans Granted by Financial Institutions in 1977 (Amount in million pesos) Private development Specialized Non-bank financial institutions Rural bank banks banks /a Private Government /b Sector Amount % Amount % Amount % Amount % Amount % Agriculture 1,799.1 87.1 101.6 45.4 571.3 19.8 27.5 2.0 40.1 1.0 Commerce 180.7 8.7 - - 10.3 0.3 46.2 3.3 - - Industry 55.5 2.7 70.2 31.4 2,080.5 72.1 305.3 21.6 40.1 1.0 Others 30.4 1.5 51.9 23.2 224.5 7.8 1,030.6 73.1 3,852.6 98.0 Total 2,065.7 100.0 223.7 100.0 2,886.6 100.0 1,409.6 100.0 3,932.8 100.0 /a Comprising DBP, Land Bank of the Philippines and Philippine Amanah Bank. /b Comprising GSIS, SSS, ACA and NIDC. Source: Central Bank Annual Report 1977. ANNEX I TO CHAPTER II Table 2.3: PHILIPPINES FINANCING OF SUALL SCALE ENTERPRISES Summarized Consolidated Balance Sheet of Commercial Banks, Private DeveloDment Banks and Rural Banks Commercial banks Private development banks Rural banks (December 31, 1977) June 30, 1978) (December 31, 1978) Amount % Amount % Amount % Assets Cash and due from from banks 9,109 12.9 80.5 12.1 341.9 8.5 Loans 43,361 61.6 481.0 72.2 3,348.0 82.9 Investments 11,304 16.0 41.5 6.2 96.4 2.4 Other assets 6,673 9.5 63.4 9.5 250.9 6.2 Total assets 70,447 100.0 666.4 100.0 4,037.2 100.0 Liabilities and Net Worth Deposits 35,317 50.1 383.4 57.5 1,356.8 33.6 Demand (7,477) (10.6) - - (18.8) (0.5) Savings (12,442) (17.6) (236.4) (35.4) (955.7) (23.7) Time (9,730) (13.8) (147.0) (22.1) (317.8) (7.8) Other (5,668)/a (8.1) - - (64.5) (1.6) Bank borrowings/ notes payable 20,540 29.2 150.2 22.6 1,928.0 47.8 Other liabilities 8,053 11.5 - - 123.8 3.0 Net Worth 6,537 9.2 132.8 19.9 628.6 15.6 Total liabilities and net worth 70,447 100.0 666.4 100.0 4,037.2 100.0 /a Deposits of the Government and other banks. Source: SGV: A Study of Commercial Banks in the Philippines, December 31, 1977. IBRD: Follow-up Report on the Private Development Banks (February 1, 1979). Rural Banking System in the Philippines, 1978. ANNEX I TO CHAPTER II Table 2.4: PHILIPFPINES FINANCING OF S%KALL-SCALE ENTERPRISES Commercial Banks: Total Loans Outstanding by Different Categories Pesos, billions % distribution /a Classification 6/30/74 12/31/77/a 5/30/74 12/31/77 Economic Sector industry and agriculture /b 11.2 19.7 53 49 I/b Trade 7.0 12.0 33 30 Contract construction 0.5 0.9 2 2 Consumption - 1.3 - 3 Others 2.4 6.3 11 16 Total 21.1 40.2 100 100 Tyne of Borrower Induscrial 5.0 7.3 24 18 Single proprietorship - 1.0 - 3 Partnership 0.7 1.0 3 2 Cooperative 0.3 - I - Corporation 14.3 30.3 68 75 Government 0.8 0.6 4 1 Tocal 21.0 40.2 100 100 Size of Firm /c, /d Cottage industries n.a. 0.7 n.a. 2 Small-scale industries a.a. 3.1 n.a. 11 Medium-scale industries n.a. 3.1 n.a. 11 Large-scale industries a.a. 15.5 n.a. 56 Others n.a. 5.1 n.'. 19 Total n.a. 27.4 n.a. 100 .egion /c Metro Manila n.a. 23.8 a.a. 87 Provinces n.a. 3.6 a.a. 13 Total n.a. 27.4 n.a. 100 Macurity Demand n.a. 7.5 n.a. 19 Short-term n.a. 26.8 n.a. 67 Intermediate-cerm n.a. 4.2 n.a. 10 Long term n.a. 1.7 n.a. 4 Total n.a. 40.2 n.a. 100 /a The total credits outstanding are about 8% lower than those indicated in Table 3.1. This table excludes past due items, items on litigation domestic bills-clean and foreign bills-clean. /b From Table 2.2. It will be noted that 35% went to manufacturing. c Excluding PNB. /d Loans to agriculture and commerce appear to have been included in these definitions, which follow those noted in the text. Ia Totals may not add up to 100 due to rounding. Source: Central Bank records. ANNEX I TO CHAPTER II Table 2.5: PHILIPPINES FINANCING OF SMALL SCALE ENTERPRISES DBP: Lending to Home, Small and Medium Industries /a Fiscal Years 1974-78 (amount in million Pesos) /blb /c /c 1974 -L- 1975 -Lb 1976 1977 -L 1978 -c Classification No. Amount No. Amount No. Amount No. Amount No. Amount Regional distribution Metro Manila 125 20 247 43 349 63 270 84 216 68 Provinces 417 28 501 67 1,406 109 868 76 924 90 Total 542 48 748 110 1,755 172 1,18 160 1,1409 158 Size distribution Home industries 432 6 494 7 1,466 27 759 18 756 13 Small industries 98 27 212 45 235 59 331 55 328 52 Medium industries 12 15 42 58 54 86 48 87 56 93 Total 542 48 748 110 1,755 172 1,138 160 1,140 158 /a Definitions of home, small and medium industry loans are respectively loans of less than P 50 thousand, P 50-800 thousand, and P 800 to 300 thousand. /b In 1974 and 1975, 620 loans each under P 50,000 and amounting to P 8.3 millon were approved by branch managers. Since the allocation of these loans between the two years is not available they have been equally divided between the years. /c Includes loans approved under discretionary authority of branch managers (R 150,000 and below) as confirmed by the Board of Governors. /d The value was unusually high for this year since it included high volume of tricycle loans. Source: DBP. ANNEX I TO CHAPTER 1I Table 2.6: PHILIPPINES FINANCING OF SMALL SCALE ENTERPRISES DBP: Arrears as a Percentage of Value of Loans Outstanding at the Head Office and Branch Levels, 1974 to 1978 /d Fiscal Year (ending June 30) 1974 1975 1976 1977 1978 1979 /e 1980 Branch Lending Ab Home industries 35.6 19.0 11.8 .. /a Small industries 35.1 /c 13.5 11.3 .. .. ) 23.0 /f Medium Industries n.a. 2.5 5.6 .. ) Head Office Lending Rome industries 63.3 41.5 40.2 . Small industries 44.2 33.0 38.2 .. .. ) 12.2 /f ) 11.2 If Medium industries 40.0 41.4 28.6 .. ) Total: Head Office and Branch Lending /b Home industries 49.2 28.9 20.9 18.9 28.6 Small industries 43.1 c 27.7 29.1 23.8 23.1 Medium industries 39.3 24.7 23.9 16.4 18.1 Average 41.5 27.2 27.0 20.5 20.9 16.4 Large Scale Industries 7.5 4.0 4,7 .i not obtained or available. /bIn each year data were not available for some of the branches. In 1974 three branches are excluded, in 1975 two, -a 1976 three, in 1977 none, and in 1978 thirteen. / Includes loans to corn and rice mills, which were classified as agricul- tural loans in subseq-tent years. / Aging of Arrears. Most of the arrears are by more than three months. As of June 30, 1977, loans in arrears by more than three months, as a percentage of all loans in arrears, were 85.9% for home industry loans (14.1% being in arrears by less than three months), 88.3% for small industry loans, and 81.8% for medium industry loans. /e December 31, 1979. If Averages for small and medium iidustries. Source: DBP. ANNEX I TO CHAPTER II Table 2.7: PHILIPPINES FINANCING OF SMALL-SCALE ENTERPRISES DBP: Present and Projected Staffing Position Actual 1976 Projected 1978 (Se,tember) (August) Professional Staff Head office support 411 588 Head office operations 532 1,050 of which: SMI program /a (61) (149) /c Large scale industries (79) (102) /c Department of rural and private development banks ( ) ( ) All branches 965 1,133 Total 1,908 f71l Non-Professional Staff Head office support 332 488 Head office operations 162 335 of which: SMI program /a (17) (28) Large scale industries (16) (23) Department All branches 722 878 Total 1,7216 01 Total Staff 4,472 Id /a Inluding the home industries program. /b This is the department handling the equity and rediscounting operations mentioned above. L As of September 1977 the number of professional head office staff working on the SMI program (including home industries) had risen to 101, while the professional staff on the large industries program had risen to about 90. Id In August 1978, DBP staff had risen to 4,398. A staff complement of 5,192 is projected for August 1979. Source: IBRD Appraisal Report, 1972-PH, April 1978, Annex 4, T-2. Table 2.8: PHIILIPPINES FINANCING OF SMALL SCALE ENTERPRISES PDCP: Loan Approvals Classifted by Asset Size of Reelpient Enterprise (P Million) Cumulative 1963-1972 1973 1974 1975 1976 1977 Total No. Amount No. Amount No. Amoait No. Amourt No. Amiount No. Amount No. Aniount Large Enterprise 113 439 23 90 32 185 19 79 14 97 15 119 216 1,009 Medium Enterprise 58 54 12 14 5 6 7 7 5 3 10 10 97 94 Small Enterprise 23 11 7 1 14 3 20 3 28 6 82 20 174 44 Total 194 504 42 105 51 194 46 89 47 106 107 149 487 1,147 Source: PDCP 0 ANNEX I TO CHAPTER II Table 2.9: ?HILIPPINES FINANCING OF SMALL SCALE ENTERPRISES PDCP: Arrears in Relation to Principal Outstanding for Large and Small Loans, 1975-78 June 30 1975 1976 1977 1978 SMALL LOANS PROGRAM No. of Firms 36 49 89 119 In arrears by 3 months or more: - No. 7 16 33 15 - Percent 19 33 37 13 Princioal Outstanding (billions of' pesos):- (A) - in grace period 1.6 2.1 4.1 13.2 (3) - in repayment period 3.7 5.4 12.8 12.8 (C) - subtotal 5.3 7.5 16.9 300 Arrearages of 3 months or more (million pesos):- (D) - Principal and interest 0.3 0.9 1.0 1.4 (E) - Principal only 0.2 0.6 0.7 1.0 Rations: (F) - (D) (C), % 5.6 12.4 6.2 6.4 (G) = (D) (B), % 8.1 17.1 8.2 11.1 (H) = (E) (C), % 3.7 8.2 4.3 3.9 REGULAR LOANS TO LARGE AND MEDIUM ENTERPRISES No. of Firms 140 147 136 141 In arrears by 3 months or more: - No. 36 26 36 31 (of which, No. in litigation) (1) (2) (4) (4) - Percent 26 18 26 22 Princioal Outstanding (billions of pesos):- (A') - in grace period 302 190 97 179 (3') - in repayment period 392 502 630 542 (C') - subtotal 694 692 727 721 Arrearages of 3 months or more (million pesos):- (D') - Principal and interest 30 33 39 38 (E') - Principal only 14 18 24 22 Ratios: (F') - (D') (C'), % 4.3 4.8 5.4 5.3 (G') = (D') (B'), % 7.6 6.5 6.2 7.0 (') - (D') + (C'), % 2.0 2.5 3.4 3-7 Source: Provided by PDCP for IBRD supervision report of November 15, 1978 (see Annex Table 24 of latter report). Table 2.10. PilI 111I NES FINANCING 0F SMAI. SCALE ENTERPRISES Idtntifled Source of Finance for Ilome induatry and SSE Loan1, 1974-1978 (P '000) 1974 1975 1976 1977 1978 No. Amount uN. lulnuut % No. Anount x No. Amount Z No. Amount % Developnat Bank of the Phui1ppineaf_b 220fc 28,836f4 77.6 396_c 48,543fe 45.5 1,7011d 86.321 71.1 1,090 73,032 66.7 1,084 64,800 48.0 Industrial Guarantce and Loan Fund 31fe 5,645fe 15.2 349fe 54,671/e 51.2 130 29,220 24.1 71 20,332 18.6 140 46,989 34.8 Private Development Corporation of the Philippinesfl 14 2,648 7.2 21 3,559 3.3 26 5,823 41.8 64 16,131 14.7 69_ 23,350f1 17.2 Total 265 37,129 100.0 766 106.773 100.0 1,857 121,364 100.0 1,225 109,495 100.0 1,293 135,139 100.0 a_ lased on approvals. fb Figures are for flacal ycars (July I to June 30) c Excludea home Industry loans approved by branches ilthin their diseretlionary authority and amounting to P 8.3 w1ill:o. fd Includes a large nuaber of tri-cycle lonna. ]L For FY75 (July I to June 30) subsequent data is for calendar ycars. ff Net of 1CLF funds onlent by PDCP. gEs t Liated. Lil Total excludes lending by PDa. Source; DUP, IGLF and PDCIP. C)' ANNEX II TO CHAPTER II PHILIPPINES FINANCING OF SMALL SCALE ENTERPRISES Financial Institutions in the Philipnines Banking Institutions 1. Commercial Banks. At the end of 1978, there were 26 private banks, l/ 2 government owned banks and 4 foreign banks. - Commercial banks- are by far the largest source of institutional credit in the country, accounting for 55% of the total assets of the financial system. Over 70% of commercial bank lending is to manufacturing and commerce, the share having increased steadily from 55% in 1960. Most commercial bank lending is short-term and serves to provide trade credits and working ca,ital to industry and commerce; for the period January-August 1977, 60% of total credit granted was for a year, 10% was for 1-5 years and 0.6% was for over 5 years. 2 The comparable figures for 1976 were 68.6%, 0.6% and 1.02%. The above figures, however, do not reflect the element of rollover credit for long-term finance which, though unquantifiable, appears to be significant. 2. Develovment Finance Institutions. The government-owned Deve- lopment Bank of the Philippines (DEP), the privately-owned Private Deve- lopment Corporation of the Philippines (PDCP) and, to a lesser extent, the Philippine Investment Systems Organization (PISO) are the major providers of long-term finance. As of December 31, 1978, the total assets of DBP, PDCP and PISO were P 18.1 billion, R P billion an& P 189.3 million respectively. 1/ As of December 1977 the percentage distribution of assets were as follows: Private domestic banks 59%, foreign banks 11%, and government-owned banks 30%. 2/ The remaining 38.4% was in the form of short-term demand loans. ANNEX II TO CHAPTER II (Continued) 3. DBP was established by the Government in 1958 with a mandate to supply long-term credit to agriculture and industry. DBP plays a vital role in the economy as it is by far the largest sulpplier of both long-term local currency and foreign exchange resources. As of December 31, 1978 DBP had loans outstanding of about P 11 billion. 4. Although PDCP is defined as an investment bank its main business is the provisio.n of long-term loans which accounted for 76' of its total assets as of December 31, 1978, equity investments occupying a relatively minor (3.5%) position. ?DCP lands primarily for manufacturing and transportation. 5. PISO, incorporated in 1974, is privately owned and operates as an invesment banking institution. Until recently PISO operated primarily in the money market but is increasingly going in for term lending. As of December 31, 1978 its money market operations and long-term loans accounted for 74% and 4.1% respectively of its total assets. ?ISO lends principally to manufacturing and service industries and for transportation equipment. 6. Private Develooment Banks (PDB). The 35 PDBs have been promoted by DBP/Central Bank of the Philippines in various regions to mobilize local savings and make resources available to both agriculture and industry. As of June 30, 1978, the total resources of PD`Bs amounted to P 666 mil- lion with a deposit base of P 383 million. As of the same date, the total outstanding long-term portfolio outstanding of PDBs amounted to P 399.2 mil- lion. In terms of sectoral distribution, 53% went to agriculture, 38% to industry and 9% for miscellaneous activities such as low cost housing, vocational schools and commercial loans. ANNEX II TO CHAPTER II (Continued) 7. Rural Banks. Rural banks are unit banks which are municipality specific and provide short-term loans primarily to agriculture. The rural banking system comprises around 906 privately-owned banks. At the end of 1978 their total assets amounted to P 4.0 billion while deposits amounted to P 1.5 billion. Non-bank Financial Institutions 1/ 8. Investment Houses. The 12 - nvestment houses are the only entities which can engage in the underwriting of securfties on a firm basis. The volume of underwriting business undertaken by the investment houses 7as minimal during the period 1970-76. During this time, money market operations were extremely profitable and the investment houses tended to concentrate on these. It is estimated that in 1976 approximately 80% of their resources accrued from such operations. The reduction in the profitability of money market operations has resulted in investment houses going in for more under- writing and syndication. However, relatively little long-term lending is 2J done by investment houses. 9. Finance Comoadies. The Securities and Exchange Commission has 260 finance companies registered with it. Of these, the 42 largest account for 80% of the turnover. At the end of 1978, the finance companies had total resources of ? 7.3 billion while loans outstanding amounted to about P 4.8 billion. Most of the finance companies are subsidiaries of major comercial banks and are engaged in financing the purchase of consumer dur- 1/ As of September 30, 1978. 2/ The most notable exception is the Private Development Corporation of the Philippines which is classified as an investment house but operates as a long-term lending institution. ALNNEX II TO CHAPTER II (Continued) ables, and providing short- and medium-term credit to local manufacturers and traders to finance inventory, receivables and transport equipment. Until 1978 .inance companies were not covered by CB interest rate ceilings and, conse- quently, could charge up to 24% a year on discounting of receivables. Under a recent Presidential Decree, finance companies are to be directly regulated by CB with respect to the interest race charged on assignment of credc:, purchase of installment papers and accounts receivable. ANNEX'TO CHAPTER IV Table 4.1 SUMM4ARY OF STATUS OF MASICAP PROJECT STUDIES, 1973 TO JUNE 1979 No. of Projects % A. Projects on which YASICAP Committed to Provide Assistance /1 Completed and Submitted for Licencing or Financing 5,468 84 Discontinued During Feasibility Study 763 12 Shelved or Still in Process 263 4 Total 6,494 100 B. Assistance Rdndered (completed Projects) Submitted for Financing 4,895 90 Subm ted for Licencing 424 8 Oth 149 2 Total 5,468 100 C. Status of Projects Completed (All Projects) /3 Approved After Appraisal /4 2,499 46 Withdrawn Without Full Appraisal 1,164 21 Disapproved After Appraisal 280 5 Still Awaiting Decision 122 28 Total 5,468 100 D. Status of Projects Submitted for Financing Approved After Appraisal 2,499 51 Withdrawn Without Full Appraisal 1,163 24 Disapproved After Appraisal 280 6 Still Awaiting Deicsion 957 20 Total 4,899 100 E. Projects Approved for Financing by Year 1973-74 49 2 1975 563 23 1976 864 35 1977 544 22 1978-79 (first two quarters) 479 19 Total 2,499 100 /1 Mostly rice-mill projects submitted to the National Grains Authority, which requires all mills not to have wasteage rates of below 80%. /2 Mostly projects for finance by owners. /3 89 (or 3%) of the projects were dropped for various reasons by the owners after they were approved by the financial or licencing institution. /4 That is after preliminary screening by the financial institution. The most common reason for withdrawing projects is failure to satisfy the institution's collateral requirements. Source: MASICAP Quarterly Report, Second Quarter, CY1979, Ministry of Industry. ANNEX TO CHAPTER IV Table 4.2: SIZE DISTRIBUTION AND PURPOSES OF LOAN REEQUESTED IN MASICAP ASSISTED PROJECTS, 1973 TO END JUNE 1979 /1 /2 /3 Loai Size (P '000) Number of Projects % Distribution 0 - 50 1906 44.3 51 - 100 664 15,4 101 - 150 616 14.3 151 - 200 172 4.0 201 - 300 232 5.4 301 - 400 151 3.5 401 - 500 202 4.7 501 - 1000 222 5.2 1001 - 2000 86 2.0 2000 - above 53 1.2 Total 4304 100% /1 The loan requests are often different to the amounts granted, the main tendency being for the banks to reduce the working capital component. This is for example evident in comparing MASICAP requests with the actual loans granted by DBP or through IGLF. The sample cases reported on by Mrs. Fajardo (1979) give the following: Percent Distribution Purpose MASICAP Requests DBP Projects IGLF Projects Permanent Working Capital 41 16 26 Land 5 2 4 Buildings 19 33 28 Machinery & Equipment 35 49 42 100 100 100 Note: The three distributions are taken from different samples, but one can see that DBP's finance provides on average for much lower levels of working capital than MASICAP's recommendations. /2 Mean Loan Size: -201,000. /3 Prepared and Submitted for Approval. Sources: (Other than f.n.1): MASICAP Quarterly Status Report, Second Quarter, 1979. ANNEX TO CHAPTER IV Table 4.3: SECTORAL COMPOSITION OF A SAMPLE OF MASICAP - ASSISTED PROJECTS, AND A SAMPLE OF PROJECTS OF DBP, PDCP AND IGLF (COMBINED) MASICAP DBP, PDCP and Code Industry Group Projects IGLF Projects MANUFACTURING 311 Food Manufacturing 14 14 312 Animal Feed, Grain & Poultry Products 6 8 313 Beverages 1 - 314 Tobacco 321 Textiles 2 8 322 Wearing Apparel 9 24 323 Leathergoods, & Leather Substitutes - 4 324 Footwear (Exce. Plastic & Rubber) 2 3 331 Wood and Cork 7 15 332 Furniture & Fixtures 13 7 341 Paper & Paper Products 1 1 342 Printing Publishing & Allied - 7 351 Mfr. of Industrial Chemical - 3 352 Other Chemical Products 1 3 353 Petroleum Refineries - 354 Misc. Products of Petroleum and Coal 355 Rubber Products - 2 356 Plastic Products n.e.c. - 10 361 Pottery, China & Earthenware 1 3 362 Glass & Glass Products - 1 363 Manufacture of Cement 369 Other Non MetallicMineral Products 5 8 371 Iron & Steel Basic Industries - 1 372 Non Ferrous Metal Basic Indus. - 3 381 Fabricated Metal Products 2 19 382 Machinery ex. electrical 11 7 383 Electrical Machinery Apparatus, Appliance & Supplies - 8 384 Transport Equipment - 8 385 Professional, Scientific, Measuring & Controlling Equipment 1 4 386 Furniture/Fixtures of Metal - - 390 Other Manufacturing Industries 3 12 NON MANUFACTURING Agriculture 12 3 Tourism - 17 Services 2 17 Sample Totals 93 205 Source: Samples taken from files of MASICAP (95 cases), DBP (loo cases), PDCP (47 cases) and IGLF (56 cases). ANNEX TO CHAPTER IV Table 4.4: OPERATING AND LOAN REPAYMENT STATUSES OF MASICAP ASSISTED PROJECTS % Distributions Enterprise: 1977 1979 Enterprise: Still Operating 86.7 66.5 Closed Down 4.0 25.2 Transferred Ownership or Location 1.0 Divernd Funds 9.3 2.9 Other- 4.4 100 100 Loan Repayment Status Up-to-Date 51.8 51.5 In arrears by: - up to 3 months 7.9 ) 16.2 - 3 to 6 months 12.9 ) - over 6 months 27.4 32.3 100 100 /1 Based on number of projects in samples. Source: Ministry of Industry's Monitoring Surveys (MASICAP.Monitoring Reports) for respective years. ANNEX TO CEAPTER IV Table -.5: CHARACTERISTICS OF ENTERPRISES "IN ARREARS" AND OF ENTERPRISES "UP-TO-DATE" IN LOAN REPAYMENT UNDER SIE OMI PROG?A4 Percentage of Loans: 71 Category of Loan Recipents Up to Date in Arrears 1. Enterprise New or EZxisting at Time of Loan New 14 25 Existing 86 74 100 100 2. Tvne of Ownershio Single Proprietorship 51 60 Partnership 5 13 Corooration -4 37 100 100 3. Product Market Grouv of Enterrises Agricultural 8 6 Industrial 27 25 Construccion 3 Service 11 12 Vage Goods: -High Income 13 12 -Y-iddle Income 26 25 -Low Income 12 17 100 100 4. Location of Product Markets Local 54 52 Regional 20 23 National 8 9 Exoorts 6 16 100 100 5. Size of Loan ?50,000 and Below 15 15 P101,000 - ?100,000 11 1 7101,000 - ?150,000 9 5 ?151,000 - ?200,000 9 7 ?201,000 - 1300,000 10 7 ?301,000 - ?400,000 8 1 ?401,000 - 7500,000 10 8 Above 1500,000 28 45 100 100 6. Loan Size+Business Assets at Before Loan Less than 1.0 45 40 1.0 - 1.99 25 20 2.0 - 2.99 6 11 3.0 - 3.99 9 4.0 and above 15 24 /I In arrears by more than one quarter. Source: File data of MASICAP, DBP, PDCP and IGLF, tabulated on Mrs. Fajardo's report. A randon sample (stratified between projects in arrears, and projects up-to-date) of 300 projects was taken; of these 170 projects were taken from the "projects up-to-date" files. Hence the relevant comparisons are relacivities becreen the two :olumns, not the absolute figures. ANNEX TO CHAPTER IV Table 4.6: LOAN PROCESSING TIMES FOR DBP, IGLF AND OTHER FINANCIAL INSTITUTIONS Loan Processing DBP Final IGLF Time (Days) No. % No. % 1 - 30 164 9.4% 33 12.8% 31 - 60 256 14.6 37 14.4 61 - 90 254 14.5 34 13.2 91 - 120 220 12.5 34 13.2 121- 180 346 19.8 48 18.7 181- 360 365 20.9 58 22.6 361 over 145 8.3 13 5.1 TOTAL 1750 100% 257 100% /1 Direct lending by public and private banks out of other government lending facilities and own resources. Source: MASICAP Quarterly Status Report, Second Quarter, 1979. ANNEX TO CHAPTER IV Table 4.7: STATISTICS ON THE ACTIVITIES-- OF THE SMALL BUSINESS ADVISORY CENTERS, 1974 TO JUNE 1979 No. of Clients Percent Total Source of Clients -Generated in the course of extension 56 5.3 -Walk-ins 281 26.4 -Referrals - from MASICAP program 218 20.5 - from other businesses 41 3.8 - other organizations 120 11.3 -Other Sources or not Recorded 349 32.7 1065 100 Standing of Business -Pre-business "Entrepreneurial Counseling" 234 22.0 -New Businesses (less than 1 year old) 82 7.7 -Established Businesses with "Serious" Problems 216 20.2 -Established Businesses with no sericus Problems 384 36.0 -Other Established Businesses 50 4.7 -Failed Busineses 15 1.4 -Other 84 7.9 1065 100 /2 No. of Workers in Business-- Under 20 715 67.1 20 - 99 170 16.0 100-190 16 1.5 200-499 5 0.5 Not Recorded 157 14.7 1065 100 /1 These are activities which included written reports. A further 2000 were visited in the course of extension or visited the SBAC offices seeking information or consultations not requiring reports. /2 Pre-business counselling is included in the first group. Source: SBAC Quarterly Report, MOI, Second Quarter, June 1979. ANNEX TO CAPER V Table 5.1: r-mPLoYErT AN) OU-T BY ECONOMIC SECOR, 1956-75 Annual Growth Races, ?ercenca2e Eploved No. Emoloved, 000as ncrease, 1956-75 1956 -966 1975 L956 1966 1975 110.300s Tcal 1956-60 1966-75 Agriculture, acc. 59.0 37.5 53.3 -.,548 6,290 7,768 3,220 47.2 3.3 2.4 Hanuacurng,, Smal-Scale- 10.5 5.7 7.3 811 954 1,126 315 4.6 1.6 1.9 - :arge-Scate 2.0 2.5 3.6 151 275 525 374 5.5 6.2 7.4 Comerce 10.4 10.3 11.2 503 1,126 1,623 320 12.0 3. 4.1 Conscruc.ion 2.6 2.6 3.1 198 283 456 258 . 3.3 3.6 5.4 Se rvi aes: - ?ersonneL 1.3 2.2 1.9 135 242 272 137 2.0 6.0 1.3 - Domestic ,3 -.6 a, 332 502 782 450 6.5 4- 5.0 - 5avern=enc 3.1 7.2 9.2 392 788 1,335 943 13.3 7.2 6.0 Transport, etc. 3.0 3.3 3.4 228 38Z 492 264 3.9 5.4 2.3 All ocher 3 0.9 0.9 104 9 38 34 0.5 1.4 1,7 Tocal 00.0 100.75 10.0 7,. 7 02 T -,9 63 14,517 ;7 6,15 100.0 3.6 3.2 Concribution to NDP Percenra2e of MD? '6. ?esos, 1972 ?rices Increase, 1956-75 Annual Growh Races,', 1956 1966 1975 1956 1966 L975 PH 1 Ttcal 1955-66 L966-75 Agriculture, are. 35.7 34.2 30.5 3,206 12,157 16,791 8,765 27,4 .0 3.7 %anuiacturing 16.1 17.7 19.7 3,716 6,289 10,S42 7,126 22.3 5.4 6.2 omerce 23.7 23.6 22.3 5,457 8,404 12,295 6,838 21.4 4. !.3 Construction 5.1 4.8 5.9 1,178 1,709 3,252 2,074 6.5 3.8 7. Services 14.0 14.4 15.2 3,225 3,116 8,361 5,13E 16.1 4.7 5.6 7ansport, ace. 3.4 3.6 3.9 777 1,272 2,140 1,363 4.3 5.1 6.0 AlOer2.0 1.7 2.5 i5 49 L!382 928 2.4L 3.6 8.8 .All Oche- 54 N?10010i0o.0 100.3 23,70 13 3-,596 55,363 31,960 10O0 Z-5 5.0 National ncome 22,445 35,276 55,232 25,577 41,240 68,291 11 iouseholds and establishments with less than 20 workers (calculated as residual). /1 20 or more workers. /3 -he Nacional Accounts data for value added i small-scale and household manufacturing are not reliable (see Chapter 6, paras 6.29 at seq.), and so are not shown separately here. Source: Taken from 1978 Philippine Statiscical Yearbook, 1978 MEDA. Organized sources are the Narional Accounts and the Labor Eorca Surveys. �� ANNLT :0 СЕц7Рд '1 > tгhLa 5.'r SOl4цУУ 0У ?Т-&У9 LMEЯVIГlEO�..�1 05ГдУ. LOCATION. УЕАд ОР OFOAMZAIION д55Е1'S� -_.�@tAYH£Lff а210 3ALE3 'L+ar о! Ог3аа1гдс1аnаl ,о�а1 ,taaa[а 7о.. '-soLoveea 5aiay-� v Vo. !:1wсп хеяааа 5[src-ас 5сагиа _ ?'000 ,aul 5k111ed 7nвaiilad _.vueL Quanclcv � _ Уедиlаг) �?eeutac' ,_ ?")OOffear 7wlczy 5 Мав lввд а111 ZI 1412 ;na. 4,JC0 34 IO 2!- - п.х. Сгап4 Эов![ ЧагЬiаlац ц 2469 3 580 �1 75 i - ,.00 3 3гУегf. 7тосwад Eruiu. . aleiclea I7 1977 4 Z00 54 - ;0 200 дяра аод Lал вqиlр. гаw. III /ЭТЗ 3 n.г. 100 7J 5 Ы ].100 5 С,адв аад tЬадва Г7 1970 5 Ьв1w СОО 1п LO - - L00 г Ь цгад ггаегал, цсв Tnshвca 7У 196Э 4 Salw 100 '! В 7 - -00 - Чис ргодиеса Ь сииу ааеа Р 1,472 9 belw LO !0 7 7 + :СЬ д :Мlаhгаав Еаrацnц Ь с+паlа; I 197й 3 .. 9. 3 'ЭОО Э Фосоlаса саагtТ CZI 1976 3 о.а. 90 7 37 30 л00 � 10 риЕlвд eiu S рарсап сааду Р !972 150 б0 :0 50 - )00 '1 tioodlea i=1ca) Р 1976 9 L20 6 7 7 - ?дЬгаlдвnд .•lосkав Ь ah.aca а.а. t977 3 n.a, 11 ' + - i00 ' I3 �оод л vеgвсгЪLв ргвевпев 17 1374 , ]5 , п,г, у а, ,.90 $стлгмтгу �ат ind vlaa 2 1968 Lы. ovec 1,300 62 ._п:еа, 50 "30 13 аnрыТ ы.ыiигигаг IP-A 1953 гы. 500 • 1,000 а.а. .. а.а. 15 Зева7 !ahsica-Еита1в61n3а IY-А 1970 Iы. +�000 170 :г2 � 3 - !7 ;!аиlдвд гиЬЪвт рго.Еот Lnd. LP-А 19Ь9 500 2Э 30 . - , tyi00 tд T1n сва ыm.faacurlag N-А 1962 4 а.а. 140 .. . 1'.0 :,]00 14 цоод 6 аесвl даол. vladorв СР-А 1937 Iac. iГА t00 п.а, .. . п.г.. 20 Оавд о11 гвllalaq 2I2 1974 S L30 ] t аха - 500 21 511ppвrs 'доавасlе цкWса) IP-A 1977 Lы. . 5,000 100 п,а. о.а. п.а, 1,800 ' 2Т СЬцдп¢`а сlосЫаЕ IP 1932 Lы. },300 140 1:.0 - - ?3,')00�� 3J Эtоиви, gwns Ь длвааа 1972 3 1,000 20 30 - - .30,91Ю ,4 ?awa'1гу aslclag :J-Aa 1906 омег 1,000 +д +4 4 - avec t,000 23 Clagerla, дгЧаи LV 193д 50 20 70 - - 750 5 ргомаавд [уlса Lp 19Ь1 mr 3,000 170 :0 - 130 7,'00 27 :iоодlвв Рвссогr 2 1970 оvег 500 n.г, а.а. - • а.+. 29 Guacoca bu11c !игаiсигв L7 19Ь0 9 wnr 1,00 з5 :5 • 30 а.+. 79 Асгаессгvв Ъассегi�а Z4 L9б] 5 п.в. и8 -8 - - 133 ЗО 2lвестiсаl auqpllaa ь aquap. г7 1971 Iаг. 1,730 76 .. . .а, а.а. 9,Ь70 71 5lippeca 27-Ь !96д 3 - 8 - - +6 . 32 Lingвrls i7 1971 5 ',ЭОО 7Э0 1Э0 - 130 Ь,ЬОО 7Э Plahoaad 17-А 197I 9 2,300 15 п.а. а.а. а.а, 2,.00 14 ?аqlпв cxbuildiaR 5 nк.hlae � shov i0 197Э 100 13 п,ы. а.а, а,а. '20 33 Чагсгы '.ооlа s D1u ,Р L974 tы, l93 )8 l7 11 - 1Э51 36 31ев Ч111iа{ 1II L964 9 41 • ]5 L,,000-� 37 ?1гв :LствадlгsВ II2 1977 � а�793 40 n.a. n�в. .. , а. 7д Сатл.аса Iv 197е га<. ао t1 э г - .ь,7toj� 39 Сав- цrед avan L7 196д о L,004} 18 а.а, о.а. а.а. LOOr=7 :0 Чкh1м .4�ор Sвrvlсв 4 � ?abrlcacloa 2V 1977 9 а,а, 12 10 2 - L,300 .1 Са1иа асивват-iва,. Ъ•1еа, S1cqcla ааввггl7 СР-А L963 5 +50 dZ п.а, а-а. а.а. а.в, +2 Сагтага IP 1931 4 5,000 50 :0 - 10 2,700 .7 `lиhlав 5пор S.ггlса Ь ' раЬдибоа W С9Ь9 5 :3 13 - - а.г. � УвсгL аоиlд• Еот 71авг1с 5 . дlааа lддиагтТ i7-► 19T4 1ас. а.а. n.a. .. .. �.а. -5 Зг1пв ситвд d1ag.C ц 197] Lы. 4,000 123 п.г. а.а, п,а, З,п250 даадЪвgа Ь accaaaoriu !7 196д Э L,000 100 п.а. .. а,г, ¢.а, +7 Сгкхваса IV 19Т3 а.а. В 5 n.a. п.и ,. , � ' � s:chla. varlu гР 19sг Inc. Зо0 ta0 100 - - а.,. . 49 Рlвссгlс А7рСlагr.ва fдвlгlgв- earore, Na, .ге.) 196] 2ае. 31,000 ;, ц0 n... а.а. .. 191,000 50 5ив1 Саblавеа 19ТТ 3 1,12Э Gb п,+. а.а. п,а. 3,27J ц гвксllа 511У Зстиа ргiас'ац 197ь 2 и1 4а з0 а.,. :а 17х 72 Zoad Ргосвваlаб 1963 Lac. n,a. 24 5 19 - а.а. 3] pawt Соавегсlаg 1977 Э а.а. 10 10 - - 4,1Ю0 � . Д цl[вд .=1ah рав[а IP 1946 5 7,000 92 а.а. а.а. о.а. 10,000 � 55 Aaflala; о! Оавд Oi1 LP 1971 3 100 5 2 З - ]00 36 Cargo �S1pp1aS г 197J Гх. 7,500 !00 ,а. 7,200?/ 3) 3aaery г 1977 5 100 5 aL а5в - 700s1 за ч.смiы s�op х 197Ь s 1о Ь З г 1 э-91 - з4 г:оод Ртадисса г С975 3 200 l0 .. . п.а, а.+. 100 - 60 lоод Ртосеавlаб г 19:Л S 130 10 - 10 - о.а. 61 flаеhlдв дЪор г 197Э 2ы. 1,ССО 18 L2 4 750 62 Сетавlа Vала IP-A 1973 !РикгЬавед) 2ае. 500 9 п.а. .. а.+. 1,300 5] Fикцсигв IP 19Т2 Iы. 2.000 7г а.г. а.а. п.а. 1,407 64 ]вера, Sпгеk, 3оду ЭuLldiaq I11 197й 3 110 Ь п,а. п,г. .. l1u 63 Laduaerial Ь Адiтlситеl ЧаеЫигу I22 1977 З I^1 38 3д - - " 3b1 5Ь 1еа[Ьет ртодиееаtНгадетаlсвд) IP 1974 S 707 30 а.г. п.а. J25 � 5Т Jоодва toT ;Smulцearinq г4 1960 $ n.a. 4 2 2 - р50 bд scutl.д т11. Iv 19ЬS s 10 и 1 З - рб0 о9 Wгавгу Furalcure Ip 1960 5 3 4 - ?30 70 геrа Wc а! tlaplacu fl 19Е2 5 10 1В l2 Ь - Р100 � Т1 5hвllcralt (Ъиегоов. �м1q) IZ 193I 9 1,300 д0 . 10 20 30 еВ00 � 72 Oo,.waca сору авМев ц 197Ь 3 а.а. 7 7 - - Р110 С1 91ц�1в proprlacar+hlp от согротасlаа. �1 :4аас агlи Llgvтn гаlгев со 1977 ог ал аvвг ема раве 12 дмгЪ• ас с1д• о[ lосвсчlеч; Тмв Еlgиги ал арргокlт.агlопа, аад uatue ocheмL• Еоасааид, ааlеа Е1д.lги лlае со chauaaad рвеов рег увлг. 7Г Ялlел се рLеац 7вг vввд. � • l! tta:ara ta 'с11аа рег dry, 1 3Г ialвл ео реюа рвг meoch. 61 Авlак• сс иаlса рпдисад, =� МЕар са'а.етlе iaaa. 91 двlота га рsваа рвг mvarh. 91 Звlал ее раааа par тоагЬ. ,�- ,..,._ �..._„_. ,, w.,.r_� ,.,...... A1,1TEX TO CH"TER V Table 5,3t SU`.'LkRY OF FI9245 WrERVIEWED: SOURCES OF F71iANCE interview Subse went 0 eraci as Co=ancs an Q er I,buzzber: Scarcup of Business Working Capital Investment CopttTl Management, ocher I Business purchased. Purchase price not Firm gives trade credit of 60-90 Equity finance by SPDA of Large and growing local given. PNB (IGLF loan of p 500,000 assumed days an sales. Receives suppliers ? 1.0 million in 1972, La.. markec; region imports by new owners. Original owners held equity credits of 15-30 days an by SPDA of P 2.3 million in product. of F 150,000, materials. (Is =a included in 1978 at 6%. price agreements.) 2 Own sources provided P 30,000. Through Conmercial Bank loans. one year loan of P LOQ,000 Son cook over and expanded (Family also has agricultural from Equitable Bank. Bank business in [974, businesses and has good credit of America loan of ? SOtDOO. 3taading. BusLaess orciits also major source. 3 O sourced provided P 50,000 Obtained from commercial banks. Business proftes, Makes cake, rolls for large (Decails not disclosed). ice-creas indescry, 4 n.a. n.a. Business adapts and designs its a- products. 5 Own Sources n.a. IGLF Loan (Amounc noc disclosed) 6 O savings plus very mail loan frm Business resource.. Business profits. Racuirks: friend. "Given up hope of getting a bank loan" - no collateral, 7 Own saving and borrowing from relatives. 1GLF lose of P 12,000 for permanent SBAC assisted, and 1 aaazed at nan gave up teaching to go 4orking capital . ease of getting loan"). tr,'bu.imess. a Inherited land and moaey. Business resources, Borrowed from IGLF through owner am agronomist; has rural banks. (Amount not cr.ined empLoye.s. disclosed). 9 own savings and borrowed from, Business resources. Borrowed !or delivery cruck Devised preservacive, reLatives. Uses family homes for frm D8P. (Amount nor die- production, closed). Business profits, and reluctant to borrow. 10 O sources provided P15,000 Business resources. DBP loan of P 122,000 for Does own marketing, delivery trucks, 11 Borr-d P35 000 cc finance ICLF loan of P72,000 co pay No investment since 4carcing. buildings; source not disclosed. overiieads an buildings uncil Owner owns a grocery store which business recovers. probably provided same funds. 12 not d isclosed. Local lecters of credit from Nor disclosed. --arcial banks. 13 Funds from retirement pay. Hot disclosed PDC? (IGLF) losol amounc nor owner Is Food Technologist, disclosed. retired from goverment, has concacc with exporter. 14 Own sources, started with less than Probably part of DBP loan used Used P 32,000 fr= retirement Initially a household iadustry; P 20iaoo. for permanent working capital. fund in 1972. Large DBP loan Owners "Ib economics" graduate, other sources (If any) met La 175 raised assets from determined. p 200,000 to P 1,500,000. 15 Started in 1953 with P 700 frm own Moat f expansion came out of Started on small repairshop. sources. Cossearcial banks (data not profits; but coca had loan of No. largest producer in given). P 150,000 from Co-.rci.L Banka. country. (Date not zLvea). 16 Four friends puc in P ,000 each for ,;at disclosed. Profits from expanded capital Major supplier to hotels during buying and selling chemicals. base (FICO,030 in one year), construction boom. Reinvested in 10 second-hand haudlo=. for heavy fabrics. Business profirs financed further expansion to 100 handlams. 17 Own savings of P200,000 from 5 years Not disclosed. Assets expanded fr= F100,000 No previous experience; advice of working in Canada. in 1969 to P400,000 in 1973 and from friends. P750,000 in 1977; Sources: Equity of F250,000 by bcother or friend, rwainder from profits, is On savings of P5,000 invested in Has borrowed at various times Loan of P20,000 from DOP in 1963; Pcevtouoly worked La t l and die busimes.. from major commercial banks; Increased to 238,500 Ln 3am* maawfaccuring, And rmarked that he was year. Further loan of P127,000 ?'highly con cious of credit in L965 for purchase of land standing". and factory buildtag 19 Own savings of P1,500 (La 1957) invested Obtains suppliers credits And Borrowed from DBP and commercial Was a carpe4tec, now has professicnak in business. loans from coasmarcial banks, backs an several occasions to scaff and selesmen. expand business. 20. Sold old Saanlin. station business and profit margin on processing high; obtains used oil from gas stations; purchased iecand-hand used-oil refinery, offers suppliers credits to planning to process individual oil. Purchased supported by loan, but source purchasers. of amaunt not disclosed. . ...с.с:< < 7soia 5.7: .Сапсlг.иид) _ncarv(гЧ SиЬчваагпс Jоег�ггlэпs ]иг,леnс лп ¢тес :iu=oar iсатгир at 5иаlдаяа �осхLд.} Gaptcal :диеастеп[ С�рца1 Иапдgедепс, �сhгг _, Jr3anlzad согрлтасl¢а +ieh acker eplIadyuaa OneaLla плс оЬсаlг.ид, hue In(с1г1 proi(са гlпапеед С1гц 5иоясапеlгl гхрегtепсв сп зfilpping 71с6 раlд ир capical д£ 250,000. ;Эецап оу аорасапсlу ал� hae ragular veaxl.:.aana аЕ ?750,�00 'гат Ьвiоге асагс(пц; аотв pcoduccs саагевсl¢ц апд acraagl¢g осhыс сст.лапlеа' aca,.as со цgадlхед capicaL соствссlаl бanr аад 3иЬяеqиепс Lдсlиде г1се, :Luur, слта, сетепс, vaaaeL, ' Геасигсеа, им оЕ Р] а(111ип (?ОС?) enabled агееl, Iugs, 2ece1L(гвга. {urehar екрат!лп. 9ылс: �qulcy rncLoa varying fr� 75/65 апд �j 1Сl70 ovsr ридс four уеагя. е 22 IаЬагlсед 6uиlnaas Етт eacher 1а 1t}54, W:дглгтдеlоа. Чо lnfacaгelan. 31g 1ocaL детадд, рlии тг{сес иисlа[ Caraencs haad яаw СЬаrв£оп 1аiсlУл 1п Noпgkong. csplcal t1a L932) иав 1аи. г'Э ;fac Э1аеlааед. 5horr сект 1iаЬiцсf.гч нLCh ЬапVса ?47, о[ proElt ceLnveaced tnca �гдн[лg vackec апд Ftqn pcuilc �aeg�ne, � пЕ ?80,С00 Sш(nesa. , Lопд :вт :1ао111Сеч _ vlc6 аапkа�ог ?д0,�00. . :4 cqu¢дад Ьу Eachnr +а1сЬ avn ааvlпца� Сааагасед frou aualnaas ]:лгo-сест:Ьоггаv_iдgs {cw арргок!rar[а1у ?5,С00 1¢vesced ?25,700 Ьу орегасlааа, coaanarelal ЬапНя а.Е р1:0,000 Ьис vary :438. e1mLd аЬаис bocrwtng; h1я acher Ьивlпевк uhare ч¢r:cLng capLwl еаа Ьа дтзнn Егля. - =3 5сзггад vlеЬ Е1ие заvlпg maehlaaa Егаа а :а¢ееасед с'тот Suяlaesa готгоvад Егот 3од.а1 5aeurtcy iуесгт SиЬелпетаеся са lасца ехрогсеrч'у ргеvlлив paпaerahlp; funda Eram ииа aperaclarta. £ог houaa еопчсгидсlлп, ioECloa.uf аиорlу nachlnery, '_ aavlrt8a• uhleh гllасасед {ог che Есср ry арггасiлпа. ?5 Stзгеад vlch ?10,000 1n (461 {гет ааvlпца .;апагвсед :гит Ьичiмаа ib Ьогтоиlаgа. .,даllу managed. аод lпдиriегд рlеге аЕ 1апд, оратас!¢дя, '.7 З5,000 :aplcal Егощ aavin3a апд Ьлсrоиlпgа "•t® Ьивtпаач aperaClana - �1Ее эnд huaband знп tnduacr�. Erm ипеlг. ;torked (а полдlе Eaeeury Еаг LO улага. 19 5c.tzcea �riсЪ р100 аа ;иг¢lсика гераl�ет.. s"scm Ьиа(nesa oaиracions апд Соаа пое bостон �гои hanka. Ovnac La ап acchlcacc зпд haa vocked � suppllar'ч .гедlс. Ln cha Еигпlгиге Lnduacry, 1п аа[еа ' эпд Сд ргадиссlод. :9 5сагсед иlгh чavlaga л£ ?д,000р иаед ow "ггдт Ьиаlnачя ирагае! та, Оаеа пос бalleva Lп аvlпц шychLng, Онпег иаад :а насk vlrh Эигеаи а£ � 1Ье Еог Ьиагдеая. has лое b¢erwad. ?ublle ЧCghwyд, chia haa 1ад tл яате gоиесгзав¢с ригсhачаа, 30 ��cacuiey рау лЕ ?20,000 Егга £отеГ т:рlоуее Его¢ Ьиаlмчя лрдгасlопа. ,\ddl.lonaL гqиlетеае Егат сотрапу Оипаг 1а an alaceriea(laechanlcзl тд ааиlпца of Р5,000. еаrпlдца гпд 6ocravsnga Егот ОВР anqlneer. �огхед 1п лм ai сЬе !ar;e Р100,000. equlpmane апд nac6lnar� эиррllага 1п ЧапС1а. 72 3avinga аЕ ?450 ard Ьопаиlаg Lтот rela[!уе дrот Ъивlоеаа орагасlопа. AddL[1oaa1 аасЬlпеа Erw Ьиаlпича Ovnar 1s hlцh schoo! Згадиаса 'alch о£ -^1.500. opanc(лпа. : уеап ехрацепсе Ln ггил''л3. 72 �va :vada о£ р?0,000, гтот Соотеггlаl 3ankи, допоиlпgа :гот 08р сдг ахрапаlоп ид Jьтвг hач раа[ haatneaa � ctenca butldlag апд aachLnery. tn сгис'ctng. " 13 5avi.agв of ?40,000 апд Ъогсоиlпgа :сот Srom DBP !ои¢а. Rol1a Ьоттоиtпца Егот 05р аг Ounar Еа11ад 1n {(гае uf cvo bиеlаича 08Р о£ Р200,С00. Р700,000 ln 1473, р450,000 Ln 1975, ееС-ирч, P6i0,000 1а 1977. ✓» 5аvlаца лЕ р5,ОС0 апд Р:гН boпovLnцa оЕ 3опои(nga froa zalaclvu, ?100,000 Еття 555. Sза11у Ьияlnааа аlгh ао¢а, havlnц З10,000, ргоfаадiомl глрегlипсе. 35 5tаггад v1сЬ, онп Evдds, Ihrough еатетеiгl ban¢ Loan and Ссатегсlаl яhдгс сегд 6enk lоапа Еде Оипег-тапаgаr Ьаа had 15 уеага Етот oEHean аад чсоеУ2:оlдгга ригсhею oi тасЫпвry 4 aqulpmeac акрагlедса [п весгl lnduчcry. аа зdvanena. Сиагnлвг'я двроаlса оЕ РЬО,ООО 1д L975. Aaochar thocc Venruted Lnca ovn hualnnas [п 197� 70; со 50L о� соае, свп lоап лС Р50,000 ш 1978 Еос аа аlпцlе pzoprLecocяfitp зпд яlее гвlоеасlап етрапаеа, !Ш lang convacead со mcqoratlon Ьу 1415, сдга lаапа. 76 :пhедlсад £гаа рате¢са. Gnapaced trom Ьиаlмае, ОЬР lлаа 1п 1967 Еог ригсЬааа ог Оипиг нurked Егот cЫldhuod tn ратвпсз 1д£Ва Ф111, СоПвССцСс1ОR о£ Vare� Ф1(1 Vh1C}1 }1ч 1ПЬtlГ1Сдд СП 1464. houae апд ритсhгас лЕ дг/ег. Саап ia 507. ui с¢са1 caplcal. M1 J7 регаопаl aavlдgz о£ У450,000, ргдт 1п1с1а1 taptCallгаtlод, Peraanal ааvlпца �иgдепсед Ьу Ovnee �апаgаг (а г nevLy.graduacod � _�• _ _ _ Ьогтоиtдgа Егат зп invescmanc meahanleal еп3(neer, �lне уедr � ' houaa ае 10Z lnearыse, орагагLам а[ а 1oes, 78, Froa тсl:ат еотрапу, Етооь moehar еатрепу сарlсаl.. 'гУат юсЬаг галрапу, - paeaarly а dLv(slon оЕ а secucley , agancy сд auppLy Виагд unLEaraa. � � � ' Сопvвгсад а аиЬаlдlаry сатрлгасlдп " " ` '"' " Eaz othвe mackets, 74 thr¢ aavlIIцe. 5ц7р1(вГв CLЯdSC аЛд CapLCd1 p10,OCD Етот Ост f8v(ngl, Owac SиаLпвд] lС1Тсlд Р2оФ ОипеГ'а deaL3n9 Вааагасдд Lrcm 6ualnaaa. длвя пос Ьвllаvа 1п Ьо пouLag monay, апд [пvгпсlап. Jvnaг La а cradq зсhсиl Вгадивса. ' 40 5гаггед н1гЬ ?200 аад д lладед tache Сеаасаеед £тса Ьиа[м аа, ,yachlпar/ аиррller'я tГедlе. Shoce бипаг 1а а Елгтыr tnce цl,цгпса тагhlди �:tch waa рауаЬlв� ьпеа Ьиаlnаая csrm bank Ьиттоиtпgа. oEiiear tn сhи т411сае/. ргеягпс агдrсед ирагацоnа, яhлр aica длеа пос а1Wи Еог nasded � ехрадвlоn. »1 ]саггвд vlck ?4J0 Са rav(аца, Симrаеад Етдт Ьиаlааав. 3orroved Егот аСосег Р200,000 6(arced :гот тапиЕасеига оЕ едlнаа ' ьгiсh па collsucal, рдулblв 1п ассичогlаа, dwlnaц haa дiуарчС£1ед 10 yaan, trtco hагдиагв сгадlпц, tlartuEaCCUra а2 helca, аад ааа®Ь1у оЕ ЬСсусlаа, Оьтеr яhаги from bank bqcrov(пgя, Омве рхееет¢ Елr Ьиаlаеаа groveh 1я dl+мraLElcaciort Lписаад о£ акрапвlо❑ 1д ane С1пе. � 7 ..tta-tý. 7.bý.qu-c j-rci- zi=ena i. Cmýc '- r ý"ccup r 3..ina- ';hrxlng zåpic.L Zhv.Sch.nc. Capýc.l 3t"«r _z Inicial i.V*3m.nc e P40,000. canaraced Ercas B-Lna... 2750,000 gr- h-k t- 3..1 .... ....... sch ta i. qc.Lizy f 1971 which vas ... verr.d pcoducas. e~c-lly inc. q.Icy. F::- ..vinge og p15.000. b-£~ p.raciaaa. Frace busina.s 0~ t. a ~hanL-I -gi.e.rL.å St.d4.c:l,fl962) haj veck«d ta CJC.blL ed ..chin. hop.. 44 -insxol.Z .1 ?3,40D,000 by DBP. ?art 34 Einaacing F=c..dg. DB? fin..ciag. la 1969 c.cc.d his c,wn b.".ess. Y.ASIC" of ch. Acadinby 3t :ha 2hLI'Lppi- cb I-ace u-id. .11. '11.ccbp.lit- kr.a bua marKtc La :ne Mecro area. Fr- i-ingg i ?50,000. i- b.äine.j id-rac.d Er- business. 'klch..gh L, L.C.Kr.c.d backvård vilh a plancicion, the proce,,Lag pi.nc h., Scn«raccd oth.r ft=.Lnq p.c.cl- c. ýUpqLy M-k.C dä,x.ad. Own.rle;.-%.r t - - ..ria. e.,3tn««r by d...ci.n, 4.3 y..c. old ,d forbåtr m.c.cc r.PCC-c.CL- E n -1 ca.P-y' ý6 Savinsj bg P75. ~ aced E-t. OBP b.rr~ 4. of P530,300 La 1976 kft.r b.ing Ib.ocer, ta ýh- ga ... ly, ior ýpansion. Uj4d Zor building h- ... d i.d i00 z- ch.Lr b.Sin-; and zanhineýj. Boch I-ncary ~h.01 3r.du.ces. Up cc 30% of Suckl- pc.U.cton lb'Q'b.d by 4.ý.db.a _kl.a. Giva. by Uch.r ic ch. jaacc ýnd G1-c by fachar i 28,000 Frpnz Uch.r and busin~. zq.r.c.% P.Ct-ci.. C.3.cneý tth & ... ratad by L. ýuo-q.åac aczendlng 3cho.L. cootå Er- faoily ~ years. ',lan.. ..c b.ch. ced by profit or 1-. ýz fraa Cockh.ld.ri 6..c14 a. ý_Lly -if.red . -c, back ta profit in 1967, sicuacion was rev.r3*d by a cha.g. La -ag~c. cr-gy. bank 11-x. L963 a~ ....9- va. -9 ca. La a d.iu..-_ l.rg. i. ~ husln.$'. The Cmpany La "" 0.. i ch. bLgg-C ýpplLca- an.E..cur-, in cha country carr71ag wall known brands 43 2.n. avi.g. i P400,000 bank l-... G.-r.tad fr- buxia... and 3.ak b.cravtng,, wlian ha tett ca icarr ~ business La ~h. a. WIUc. *4..clogh..,.. G.E., c=. 50 r~ r.teå fran and 2.43 barcowilngz Bustnas. was bougha irhe: a brother -,na luppliårs aredit. J4.-. L11 lad ... Id .. I.ng.r -. :h. bu.L..-. c-c14 ... %er u-d c. be . ;rader in zcacL cablnec3. 3ain merkae 51. Stårtid ich 995,000 a partnär,hIp !roct Stipplierl cr.dit ýM advanc.. er- ýWI horr6'ýýný--.- O-r/Managtr assticed by wkte in tuning S.Vi.52. fr±.axl.. rh. b.,ta.*%, 52 Fr- savfag«. Genererad froci huattalt. Brtvad fr- relativa. ad B-La«.. tarc*d by ~king - L.b.. .-.total bank for xpansloa Ecr public czansporcacion driver5 by I agrar 2 y-s of p.cacL.n, Ko ýUqbx.nc 1...co.. 53 Fr- ..v-lzg. og P60,000 f partner.. Supplierg credia and c~ cial 2.9.r on~ ing pl.nt bui.ed Start.d i. k. . cr.d.r -d ... c bInk.I. fr- 1.4.. aýang-tnc. Inco piper converrin% after I year of operation.. 1. &..d credi-. c-dL.g vich c~cciaL bank# wLch credLc LInci å£ ab.ut ?10 54 Scarc.4 with 94,000 Ln ownar13 å.vingz. ~ raced fr= buxtn-s hank 4. Long c.m borr-ing. for a. -played -Qlg.r of ch. borr-in34 o. ghort t- and capLtal Lnv«jchaac. f-~ry. original o-ar ... 4 to-er suppllar3 cr.dic., g gr ... ry tt~. 35 ElrýIZ41 gr- Fr- hu.trit.. !1. börro.ing3. Ownerl-4.n.ger ... d ca be --a the j.jolio& j.rvic. c.tion 36 950,000 poo Lad wich ftiondå. rA"racdd frm huaLoftg. Bor~ad fr= c- cial and Business provides cransp-c service for d*V.lop~ banka c- rcLal and lduscýLýL pr.du.c.. Con.Lders -11 fl=, h.et.r attencs ch.. laxge ona% ta tam. f pcLci.3 and c.LI-tion. 57 Yrova 25,000 La e.raings 2~ gailor ihop. -v- Qcher busin..944 such 4* 5~ .d 995,000 froce D11P a i~ Mu.b..d and Lf. icarctag ich . catl.rt.S .ecail zor. and Uro. Punchx &irer statt up. bu.lna.. &M r= chts far 10 y..c. bagare shifting to b.kecy. 53 zalci.L L"cl=aac 09 P10.000 fr= JAVLazz. Cuzcoawar depoift and £cm rh* tio harr~ 83' Oundr La r«CLred Milkcary man. b"to..x. 59 $tattdd with P5,300 fr= $sving$. Caur.a.d fr- b.stn.x.. Lo.a Erexa DE? ag P6,300 1. 1976. Cp.c.cLag 4n Lind with.ut rcnta4, Ma2 no lacha and conccacta ýuc3ttio ~rvic. for jhaptng f ..ed. 60 Stårtad with ?5,000. rýn.r.ceå ft- bu.ina.s. annerwed C103,000 Er- DB? in 1975. prgduczLon c,anoc cop* wich de ... d hut Alio börrcýad pr*viouily fr- c.!u-cl ffer e ?I Lilian PhillppLan National Bank and a loan fr= privacc service%. ?rLvaA. bank Uct, w.re P.Ld b.ak, ㅢ . д � 9 i1 п N у ��.� v rn т сл и и т rn и т rn и сл и ьл i., и и�n и1 v1 + 1� F F� 4` F' й#` А-� й•� �� w w t., w ы��> w и w 1.i г� 1�а N г� 1� 1� i� г� N r- г� 1� 1-- ,� г.• 1.., ь� 1� r• а w r о� ои v и и.Р w ы r о ш т ч а. �1 й- w ы г-� о w а v т и Л w го N о ш оа �+ а, t,1 .Р w n� r о•д w ч и и с w ю м о го w ч а, и{. w hs 1.� о и[л �+ а, и т•� w ю i- �1 � ГУ 1�• W 1➢ Н L" О� ov • К 1а. т н н н н � н n � г-, 1•Г С- г� т м А п гоr� •F�" н н н А н k К Х н % н К н н н н н н н iь н н н н н ij н н Х k iC н н н F3 т 0. W W • п го и � � ю ю н н н н ю н ос ., н н н :с н � G � т г� �- о о r� м йн нннн - н н н ю г: :+н ннw ю х нн юнн �юннннн нкюню ню н k "л,"' �,1 ��. 1Ч м и � � 1� F! (� W Q О' F3 г-' (П г-1 1➢ '.1j (,j ♦� U1 о н н н н н н ю ю н н н н � н н ,: н н н н н н н н н н н н ю к qa.� `i�• а �„ и r1 � ' N н н н н н н н ю н н Н k н Н н н н н :9 н н ю н н:4 н н н?: ю н н н н ю н ю н?1 ю н н н н н н ю ю ю н.С н U ,• ~ ,� tЛ Н 1.г - г`�и п � ' г- г нК нн нн н н нн ню юю ю н К `r: ннн :G ;ix иср' � 1�• � �н р � гаi СС и д- N гЭ 1т О О � Н W П гЭ �л н н`r: н н н н н н н н n ю н:. О г+ t'1 N � � ~ �� ['а W н % н 'rC н н ю н ю iS N и К '� н п ' .,rr6�s :з :�.г, , Тас[а 3.3. �..3¢г13 ОР :1L"Э : 1А _.v3LGY"..L2if Эа1sв ?ет ?sar !3иивад ot ?еsол ас Csrrecc :Rадаг �icved ? ••гаг -_сваl _цeiTLev ЭL^аС� -1_]С �0 .. :lо. Уеакi_заЭ70 :ЭТг :974 L976 !978 °ец :970 :Э72 :374 .Э76 i978 ,5 3=ь �4 ьг0 :•'ь0 9 :8 :д 7В ]6 +1 -6 !]0 7_0 :ч40 7 д и 54 =}0 ЭОО - 100 !00 2]00 J100 } Э 10. l0 ЭЬ 'Б :00 6 д 11 ЗОО 700 7 у9 10 3S I06 3 7 д 750 ?00 9 Ь5 69 90 ?00 200 930 , 10 ц� b0 200 700 « ц ц 5 4й0 72 12 11 11 120 3:0 ц 3 - 30 з� 600 11А0 L'00 16 22 '1 48 52 3 22 760 Ьй} 750r. ц i (100 � 1962) i (9аеlсlдt at 500 Sa1ca1 9' ' Z5 i0 JO - L1 6 I7 ц :Оо ;00 1100 :а 3 ! 4о :1w !9 100 � ] ] ] З � 31 4 '_00 r, • 6 (I932) 1AU г5000'� 2з ц :0 20 г00 ]50 jS g чз 30 1000 � ц 7 12 20 'S� гб L70 1461. г1з.9 7670 . , 27 , г9 5 ЗО !00 19 5 L^ t35 2100 ' 30 } 16 79 Э670 31 2 10 »Ь 32 3з0 5i60 зз ц зо зоа по0 3л з :о ц 7г 3ьо :20 зs за _00 41д 5з0 ЗЬ +1 � 37 ' ЗВ 11 11 :б '&�.� ` 34 l 18 7 :00 '00�= 40 1 ? 2 300 41 з и :4 гг ц 62 7 30 г300 7�00 67 3 73 44 45 8 гЛ 227 500 500 ЭОООгS +б 2 1W 60 i ц4' , 47 3 3 Ь 4д l00 1000 г006 +9 '-3 L477 '+^.ТО 161) '.'+78%. 43988 �076J 121780 1ЭцJ6 ;0 /L' й4 44 I:H7 32з7 31 3 ц 68 L06 ?ОЬ 172 }2 S ,: 6w0 203оа ,�о00 Э3300 аа000 50ао0 S] 1D '_700 +000 14 � Э2 7300 :0000 . 53 3 3 3 D 300�7 36 4 100 S00 3200�- 37 7 ]00 58 2 ь 100 100 S9 г 10 ���ч 60 b 10 1.G0 160�-= 61 l8 770 62 30 8 ц8 ц00 63 20 гб +5 50 72 ЭОО 10Q0 L4D0lэ 66 6 6 6 50 :+S- 67 }4 36 720 370 бб 10 40 50 Зц ' 6) L 1 г 1 3 4 4 6 10 Z3 70 50 бё 1 г 3 Ь Ь ц г0 ]0 з� }0 6о Ь9 l 1 2 3 3 4 S LO ц г3 75 50 70 S 0 12 ц !3 5 l0 г0 »} ЬО 90 i1 г � 25 33 33 50 ЭО 'SO 1д5 295 Lд0 :000 2В00 72 I 3 3 50 tCA ц0 (�1, даlвтл cs и1+а pst эопсh. jj, Va1u 3а1д (�мроqа). . � riоавв рег ивеi. L ?ввnа per та¢с't. � L On1u рвт �еат. !Б Т`дwцаад сЕ 'bas шхl,еа адд Ьиеlсlаа. !7 �;всnе шц ot havic{а;. !3 Ln Рвгсаасаgи. L pctca раг Уваr. 10 1э70�iёа цё ¢ ins югаа�сг�iгреае cbвE3La�itsss 1д е«i со гlsатс вaihw�a sСосеlSд�.15Ьс azeв4ccia ддд yиsajt� uD s � � � Тiп pusehиd 1а 1976. йrцег hiaco.7 тс mrnm. . � � t �.�-ойiчХй �wн .°��ат vм.и,. "' г ь� W� иг �иии и и � • � �у � �wйro w�+-+�и� и.- � тчи й�йй.» `б:й й1. гL{�."'-.о�т'vaйгGйr�o�w�, ...иь+и.- g) ё ' °��Lië Ь"f.- мwмя q .-nи.г.- "�� о �У •g"b'8` w�..-ac.-� ..,G� ' �х .. ,.��оь-�^ F .�ry.nгi�n� .-и � � ��� 'J'�� с�.� "'iS� С.ры°й�У"Ь.,� �- ^� g'� ,7уΡ+ � ь � м4" �гы��Р ��'�R_ди Sьа "°'�,9�$��;PIC��':��&��� � . х ' 'R аБ�еvи�� 'nGi �гS .'oi"У. й Ь`Ь'м� � 1 xGC43�i ь '8.�^•k�o.'. • . .��"� ;` P�i'п'� .^ 'ci°�@SE.�-:C �'��^К� "� ;сiЙ �2�'�.��;«.. "Е�...".�i�8•� '_.Сг-м �$ �e��k-� ��х�и��:я" �ё�а�в�к�.�рΡ�'��с�� а�����..�'ь: ���� �8s•х����•�aw �:?��у5:^���-:�rW� _ �"ЕК�А ����ь....1� .7� Ум� м �0.�ыт.,.w- �G: �r.м.'�г-�.-.°д:- �'.Р. 'в�� iп'8' 7 �: .°ч в 9 �р л„ r �� wе���-- �t.�zюe pgё�° еpг: е °ё• _ г: �":8 х�г „ �'` n^ �'и-ии� _ 5•�8 �r+ `р•i Ti 8 Yi. } G�&-.��•Г� м�-•�й.-•� рΡ л.Fг 8r. мк8 R - ло^ о°. � л �S G ...У'- аА� � •� " �.�.7 ..,�� � �'�"�: -.�С'r��w� `g' Р�К' G°. .��yg. У6 ч°и i'��•' пс.нw°�.. oS R�'� ['.r..P. 'G'н"• � 8к.. в f �s=� �. й r мг �-;�.:г:е^ � eti •ё•Р.��� eF2 : ër.. • м g Е � -'д' F У°' :�' "��`Ё � �.... С'С�� � R � .. G�."� �,��� � ?а '�- g��s �-�� s" р .�р tRrрΡ �� .Р ..� к �(,.в.�уΡ:. "�_�с8� �` �- .. „ �� .��.�:ё� ��. }°iй �" ro�rCCцц ь'" . О b�C 'д& � Р. . Гi'�:7 р',� м�iЙм i� iСΡ. �^7.до ��Раб Иi�r : п rw is��:"��" '_ � -` �� Qт�L•• ���у- х� r�Rгь ���� �. i� а-� i:i�P` GvFM' й�"o�SКF��� в F fг �:�iг �. Е�� �р �� й.�$os.'1��� � � � Fr м� о'!G �: а �•Р.Еа ��м ь''й �' п�8 .� •F''�:• " .....- . 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" '� и � �. м � е ... • g r� � е е g Р е G� � �уг � � � � .- � 4 � � ё� G � е а -[�� r . . .i -` • 1�'� й ч С- Й • ��о. - S .� �������� �:: :�:� :���::�я ..�г�$�� �' ��::� .���� ��г��� ���::�}�$���4������9��� t � я � " мЭ� п�� Ь Е � � " ��� � ё х k . {уΡ у �r sr sr � i.` � � , иgОΡ «..и� P s- ааайрΡ3 �.ар.-аиа нс ни ос.P- и.-и � и и�и i�i �ааи и 8r ' О О О д О• и О О О И О и О О$`�' О О •••�••• •• ` Ф,• N О' О° О • И М О`� ~ У�$ ь в$ в О в h О О� ° •• У О Ч�О �•�q � �R •� �F � �������� ��� 'я�9 �я�яг��- �г����ч �п �а��� �г��� �..�у. ,��'�'�ч��'ag�ss�яa��a� (� � ю r р � о G - ..,..... .г. с�..� ....i..ь вв....й ..... .г.�ь.�� ...i.�. ��.�.�ь�..г,гRгi'.i'994•("'1 д : � g Чт i _ д О •^ • ......ь. , . .... ...�:г . ....... .. � .. ..... ... .. . ......... ��ч••s��•N I�` �' ��а ANNEX TO C11APTER V I" EFFECTIVE RATES OF ?ROT E7TTU M DOMESTIC RESOURCE COSTS FOR LARGE AND SMALL SCALE XkNUF&CTURING ESTABLIS11MEN'TS, 1972/74 Emal.--t Nominal Rate of Establishments Establishment Protection (Tariffs Effective Rate Do,eascic Resource *'ich LAs. with 10 at A.c.al Sector & indirect Taxes) % of Protection Costs than 10 Workers or. ork.rs F mplaymenc (1) (2) (3) (4) 5) (6) (7) Food Slaughtering; Poultry Dressing 25 128 8.00 100.0 - 84 ,test produces,camed 25 5 8.26 1.2 9818 1361 Meat products, uncanned 39 68 9.43 75.8 24.2 553 Evaporated; condensed milk 16 5 1.67 1210 Butter, cheese other 33 52 18.13 2.0 98.0 913 Canned fruits', vegetables 19 80 10.33 8287 Other presei*ved imics & vegetables L3 19 9.94 - Fish canning 1.1 6.33 6.0 -179 Ocher fish products 55 76 9.36 19.7 90.3 3299 Rice Killing 0 49 9.86 93.1 6.9 37082 Cam Killing 0 46 7.45 68.2 31.8 3876 Flour tilling & Cereal Flour 41 1148 26.02 2,6 97.4 2634 Bakery Products 110 3371 15.68 67.8 32.2 31114 Sugar ,tilling & Refining 6 - 12 6.40 - 100.0 31266 Candy and Chewing Gum Products 86 519 15.18 Z9,9 70.1 4622 Cocoa 5 Chocolate products 51 1750 10.38 100.0 740 Processed Coffee 46 36 9.97 419 95.5 244L Dessicaced Cocanu C 4 - to 4.69 - 10010 9422 Starch and Byproducts 44 650 10.55 100.0 1549 20 71.6 1801 Hacroni, Spaghetti & Noodles 63 78 9.44 .4 VeSecable Lard and 4argarina 82 /b n.a. - 100.0 L527 Prepared Foods for Anim als 33 34 .06 2.2 9718 2648 Flavoring Extracca 9 7 a... - ioa.a i8l Miscellaneous Foods 39 156 23.97 - - Beverages Distilled, rectified, blended liq-r 209 394 15. L6 1.0 9910 2223 WLaes 57 113 'a. a. 80,3 19.7 781 Brewery and Malt Products 72 69 ..a. - - - Tobacco Cigarettes 182 18758 18.13 15865 Cigars, chewing & Smoking cobacco 0 - L2 6.15 - 10010 1482 Leaf Taba.cco Processing 115 lb 26.26 .7 99.3 2193 Textile. Textile Hills' Products 57 78 12.15 - 100.0 41683 Knitting Hills' Produces 23 4 6.92 - 100.0 7707 Cordage, Twin. and Nee 0 2 10.18 -6.2 73.9 2618 Carpets, Rugs 28 43 R.a. 27.6 72.4 916 other Textile, Products 48 36 8.15 Foomear L9 is 6,47 6B.7 31.3 8167 Clothtn Ready made clothing 0 26 5.13 8010 2010 95.241 Embroidered produces 0 41 5.74 34.3 65.7 1658 other made-up goods 19 1 6. e15 - - - V.0d Lumber 4 16 6.14 6.1 93.9 63BZ Plywood and Veneer 4 5 6.48 LOO.0 24579 Door. & Windows 0 2 11.53 82.9 17.1 1981 Ocher wood 0 0 10.18 - Furniture 1 0 5.77 33,0 47.0 17108 ?ever Pulp, p.p . "-a paperboard 46 38 9.14 - loolo 12487 Paper pro"ets 109 195 11.10 .5 9915 1107 Paper and paperboard containers 128 181 11.47 till 88.3 3479 Kisc.llan.au. paper 72 478 10.22 20.9 79.1 487 Printing Books & P.-phl.c. 25 19 8.17 32.0 68.0 3612 LCAth* Tanniag & leather finishing 68 145 M5 12.0 8810 885 Leather products a 27 6,25 5218 47,2 991 Rubb. Rubber footwear 108 454 M36 4.5 95.5 4648 Tires and inner tubes 103 323 9.85 1.3 96.7 3760 other rubber 27 21 Z8.41 7 6 92.4 2537 411461 .......... -7. 1 '1 Emalayment Nominal Rate of Establishments Escablishments Protection (Tariffs Effective Race Donestic Res9rce jirh less with 10 or more Act.al sector r Indirect Taxes)% of Protection o. Costa - than 10 Workers Workers Eploysenc (1) (2) (3) (4) 5S ( Chemicals Compressed Liquified gas 2 17 6.35 - 100.0 1518 Basic Induscrial Chemicals 17 - 7 10.06 4.7 95.3 1714 Fertilizer and Lime 31 41 6.98 - 100.0 1371 Other oils and facs 24 - 28 7.34 - 100.0 516 Paints, varnishes 95 221 15.36 2.0 98.0 1359 Plastic materials 45 56 7.51 2.0 9.,0 1983 Medicinal & Pharmaceutical 23 9 6,33 115 98.5 8258 Cosmetics & toilet preparations 249 lb 139.08 2,4 97.6 1306 Soap and ocher compounds '1 175 10.39 .7 99.3 4734 Insecticides 19 17 4.03 1.5 98.5 597 Other chemical products 42 25 n.a. - Pil and Coal Products Petroleum refineries 21 21 8,96 - 100.0 1014 Other products of Oil 25 16 6.12 22.7 77.3 128 Non Metallic Minerals Structural Clay Producti 5 11 7.94 12.9 87,1 2531 Structural Concrete 57 110 9.79 - 100.0 2731 Glass 56 45 11.09 1.3 98.3 6799 Pottery, China and Earthenware 47 31 8.68 62.5 37.5 2292 Hydraulic Cement - 4 - 36 7.09 - 100.0 5127 Other Non-Metallic Minerals 28 26 n.a. - * n.a. Basic Metals Basic Ferrous 35 27 13.06 - 100.0 9061 Basic 4on Ferrous 10 0 5.05 - 100.0 486 Metal Products Mecal Cans, Boxes & Containers 57 110 4.78 14.7 85.3 3995 Cutlery, Hand Tools 39 34 13.74 85.8 14.2 3318 Structural Metal Products 65 95 9.89 24.0 76 5920 Stamped, Coated and Engraved Products 37 38 7.26 5.2 94.8 3693 Pabricated Wire 28 14 6.47 2.1 97.9 681 deating Apparatus 59 85 9.76 14.8 85,2 365 Other Fabricated Meal 62 79 25.52 - - Mach inery Agricultural Machinery 29 14 5.87 27.4 72.6 2204 Other Special Industry 13 4 4.75 7.6 92.4 1135 General Industry Equipment 18 7 5.98 17.0 88,0 5691 Electrical Machinery Office Computing & Accouncing 29 27 n.a. - - Electrical Distribution & Control 25 18 5.40 4.4 95.6 631 Other lec, Industry hachines 33 30 na. 3.0 97.0 . 757 Communication Equipment 31 31 14.55 - 100,0 246 Batteries 56 73 5.45 7.4 92.6 2044 Electrical Lamps and Fixtures 38 27 8.35 1.1 98.9 1286 Electrical Wires and Wiring 40 51 n.a. - 100.0 1210 Household Radio, TV sets 164 204 n.a. 1.3 98.7 3963 Refrigeration and Air Cond. Equipment 142 195 14.91 1.5 98.5 3099 Other Appliances 95 103 12.37 . - Transoort Eauiment Slipsvilding & Repairing 17 26 6,45 6.5 93.5 5743 Motor Vehicles Manuf. & Assembled 93 127 n.a. .4 99.6 5445 Motor Vehicles Engines, Bodies, Parts 29 23 9.82 29.0 71.0 B46 Motorcycles, Cycles 50 52 7.23 29.2 71.0 1239 Other Transport Equipment 6 9 n.a. - - n.a. Miscellaneous Jewelry, Silverware 91 133 n... 54,1 45 2 580 musical Instruments 60 61 n.a. 50.4 49.6 697 Fabricated Plastic Products 92 194 23.24 - - - Scientific Equipment 15 12 4.21 12.8 87,2 792 Medical Supplies 14 9 4.39 - - Photographic and Optical 37 30 n.a. - - Sport Equipment 91 93 n.a. 5.6 94.4 946 Office Supplies 65 0 n... 2.7 97.3 375 Toys, Dolls 74 72 n.e. 76,5 23,5 170 Miscellaneous 61 41 6.75 - Total 531077 /a Using the UNIDO method, the ahadow exchange rate for 1974 has been estimtted at 9.21 (IPPP, 1978). Lb EPR cannot be calculated for the sector because of its negative-derived international value added. Original Source: Nominal and effective rates of protection are from Norms A. Tan, "The Structure of Protection and Resource Flows in the Philippines, 1974", PhD dissertation, University of the Philippines, 1979, The domestic resource cost estimates were taken from Romeo H. aautista and Gwendolyn R. Tecson, "Domestic Resource Cosc In Philippine Manufacturing: 1969 and 1974", IPPP Working Paper No.13, University of the Philippines, September 1978. (Note- The above figures were taken from IBRD report since we did not have Tan's thesis), ANNEX TO CAPTER V Table 5.8: SELECTED ASPECTS OF SMALL FIRES BANKRUPT AND OF OTHERSSTILL OPERATING, 1972-79 Percentage Distribution of Firms: Asuects of Business Bankruct Still Oerating Educational Attainment of Owner: No Formal Education - 2 Grade School - attended 5 3 Grade School - completed 10 10 High School - attended 10 12 High School - completed 21 15 College - attended 19 26 College - completed 29 28 Vocational Schools 5 2 100 100 Region of Business: High Income Regions 40 40 Middle Income Regions 56 49 Low Income Regions 4 10 100 100 Management Practice: Percentage Following the Practice: Keeps books 76 80 Segregates business and personal funds 57 75 Records receipts immediately 66, 75 RetainsCPA for audit 40 67 Records all costs incurred 43 60 Continues to develop the product 62 80 Diversifies products 24 22 Avoids dependence on one customer 74 80 Hires relatives or employees 71 64 Source: Itao (1980). Based on sample of 260 firms in 1975 establishment listings. ^NEX -0 CHAPTER VI Table 6.1: ?EXCEM' 0F FAMILIS EAVING NCME ?MM SECI=IED SOUS: URBS AND ZRAL 1961, 1965 ANiD 1971 lurxL Oth.r Urban Area Mtro intla Toal U-rban All ?amiliew 1961 1965 1971 1961 1965 1971 1961 1965 1971 1961 1965 1971 1961 1965 1971 5o. of Fa=41ie. 2921 3606 434 1144 1062 1388 361 458 525 1305 1520 1913 4426 5126 6347 V&Re and Salaries Ågriculcural 30.9 36.4 28.9 25.0 14.7 7.5 0.6 1.3 0.6 17.6 10.7 5.6 26.4 28.8 21.9 9on-Agri.cultural 18.5 22.2 25.5 57,2 59.2 64.7 82.1 82.4 84.3 63.1 66.2 70.1 33.7 Z5.2 39.0 çreareneurial Accvities Trading 12.0 13.5 13.6 21.5 21.9 24.4 14.5 16.5 16.3 19.8 20.2 22.2 14.7 15.5 16.2 Manufaccuing 13.3 11.4 11.0 10.1 11.0 9.9 3.8 5.7 7.9 8.6 9.4 9.4 11.7 10.a 10.5 TransporC 2.1 2.9 2.5 3.6 4.0 2.7 2.6 0.9 1.8 3.3 3.1 2.4 2.5 3.0 2.5 Orher Enterprimes (including practice of profiasion ar 1.7 1.5 1.4 6.6 5.4 5.1) 5.4 4.8 3.1 6.4 5.2 4.6) 3.3 2.6 2.4 ecada) 0.8 0.9) 2.8 2.3) 2.0 3.7) 2.5 2.7) 1.3 1.4 Farming (including putry and livescock 89.0 81.3 74.1 57.7 38.1 26.1 5.8 5.3 0.9 45.2 28.2 19.2 74.1 65.5 57.5 ?tshing, Farery and Huncing 83.3 75.2 69.0 50.0 37.4 25.8 2.0 6.5 1.2 38.5 28.1 19.0 68.0 51.2 54,0 Product:ion of Arciclas for own usu 64.2 50.3 37.2 41.8 24.6 15.0 15.2 18.6 5.4 35.4 22.8 12.3 54.4 12.2 29.7 Oth.r Sources .andowner's ehart of crepi, livestack and pu1cr7 ra«ed 10.3 13.3 9.8 14.1 11.0 7.6 1.4 0.6 0.8 11.1 7.8 3.8 10.6 11,6 8.6 Rrat recuived from nn-.gricultura.1 lands, for bldgs., roos and ocher propertizs 1.7 4.3 4.0 5.9 7.3 8.9 11.2 9.9 7.3 7.2 8.1 8.5 3.3 5.4 5.4 Z,ncal , lua cf oner-oc ied hous. house 97.6 97.7 96.2 93.1 90.1 80.8 52.3 "8.5 35.6 83.3 77.6 68.4 92.8 91.7 87. atneestm and Dtv"Ldøadf 0.6 0.7 1.6 1.9 3.2 4.6 2.1 9.5 9.4 2.0 5.1 5.9 1.1 2.0 2.9 ?roftts from Stocks and onds 0.2 0.1 0.0 0.2 0.2 0.2 0.9 0.5 0.1 0.4 0.3 0.2 0.3 0.2 0.1 pnamion ar Ret±rement Benerits 1.1 0.4 1.0 3.0 2.8 2.7 3.1 3.3 4.7 3.0 3.1 3.3 1.8 1.2 1.7 3ackpsy and proc4ds from Lnaursan 0.3 - 0.2 2.0 0.3 0.8 1.2 0.6 0.4 1.8 0.4 0.7 0.8 0.1 0.3 Gift, suprt, awistanre & raliet 22.7 14.5 24.7 22.9 17.2 33.9 14.5 67.2 39.7 20.9 32.3 35.5 22.1 19.8 28.0 .f.c winnings from =smbling, S aeepscakes ar lcctaries 6.8 4.3 4.9 6.5 4.5 4.9 1.4 3.4 3.0 5.3 4.2 4.4 5.3 4.3 4.7 Inh*ritanc» in sh or conveed Ca0b 1.3 0.7 1.0 1.6 0.7 1.1 0.4 0.1 - 1.3 0.5 0.8 1.3 0.7 0.9 Others 1.0 0.1 0.8 0.9 0.2 0.4 0. 0.3 0.6 0.9 0.2 0.5 1.0 0.2 0.7 12 7ndex of diveritcy of ino sourcs Total 409.2 373.0 353.9 343.4 282.7 257.2 138.6 204.7 141.7 294.4 259.1 225.6 370.3 339.4 315.3 ti Probably refern to tnputod valuts (IES d%finitions ar* not elear). Il each family bas only =ne sourc* of itno, tha eal ould be 100 prcen. Orgial Sourc of Data: Philippine Statistical Survey of Households, ?aily Inoe and Lxpenditurms, 1961, 1965 and 1971, BCS. This Table wa takera from Castillo (1977), p.105. ANNEX TO CHAPTER VI Table 6.2: EMPLOYMENT IN ESTABLIS=MNT IN FOUR TOWNS IN THE GAPAN AREA (IN CENTRAL LUZON) 1961-71 /1 /2 Percent Sector /3 No.Emp-oyed Distribution Annual Growth19 (Formal Sector Only) 1961 -L-1971 1961 1971 Rate, 1961-71' Retail Trade - Groceries, Clot es, Other 308 611 9,2 - Modern Durables'- 14 89 1.3 322 700 10.5 8.1 Personal Services - Restaurants, Refreshments 47 117 1.8 - Parlours, Bakers 51 120 1.8 - Billards, Bowling, Movies 23 60 0-.9 - Other Services 32 49 0.7 153 406 6.1 10.3 Light Transport Services - Jeepneys 71 164 2.5 - Transport Shops 24 79 1.2 - Tricycles-- 0 900 13.5 - Pedicabs and Colesa.eA 350 10 0.2 445 1,153 17.4 10.0 Trades and Crafts - Tailoring & Dressmaking 71 208 3.1 - Bakeries 37 101 1.5 - Sash Works 8 51 0.8 - Iron Works 6 20 0.3 - Wood & Furniture 27 51 0.8 - Construction/Contractors 48 196 3.0 - Cement Products 0 84 1.3 - Gravel, sand supply 57 70 1.1 - Construction Suppliers 30 57 0.9 284 842 12.7 11.5 Speciality Industries - Sandals and Shoes 80 346 5.2 - Rattan Furniture 38 123 1.9 - Needlewrk Contractors 43 125 1.9 - Others-t7- 195 196 3.0 356 790 11,9 8,3 ANNEX TO CHAPTER VI Table 6.2 (Continued) /L /2 Percent Sector /3 No. Employed Distribution Annual Growth (Formal Sector Only)- 1961 1971 1961 1971 Rate 1961-71 Public Services - Government 278 457 6.9 - Teachers (Primary) 468 727 10.9 - Teachers (Secondary) 59 165 2,5 - Medical 53 124 1.9 - Utilities and Other 56 87 1.3 914 1,560 23.5 5.5 Agro-Industries - Agricultural Supplies 16 45 0.7 - Rice, Milling & Trucking-L 268 730 11.0 - Repair and Service 58 134 2.0 - Transport Shops (Heavy) 35 56 0.8 - Vehicle Body Builders 21 33 0.5 - Assembly (Light) 1 30 0.5 - Other 45 80 1.2 460 1,192 17.9 10.0 Total 2,934 6,643 100 8.5 /1 Regular as opposed to seasonal or casual labor only, except where otherwise noted. /2 Estimates for an intermediate year (1967) are also provided in Gibb's report along with a breakdown between the town of Gapan and the three rural towns; the latter together accounted for about 50% of employment in 1971 and expanded at roughly the same rate over the 10 year period. /3 Informal sector employment was estimated at 2,400 in 1971, 6f which half were in retail trade (sari-sari stores mainly). /4 Electrical appliances, gas stoves, vehicle parts, etc. /5 Motor powered, typically an adaptation of a 120 cc. motorcycle. "A family with three or four children is readily accomodated (or) several pigs, 500 pounds of rice or fertilizer....." /6 Horse drawn carriages. /7 Mainly traditional crafts: pottery, coffin makers. /8 Seasonal workers. /9 The 1961 figures are underestimates since Gibb was unable to count businesses that had failed.in the period, The growth rates are thus over estimates. Source; Gibb C974) "Agricultural Modernization, NQn-Farm Employment and Low-Level Urbanization. ANNEX TO CHAPTER VT Table 6.3: REGIONAL DISTRIBUTION OF MANUFACTURING EMPLOYMENT FOR 1970 BY SMALL AND LARGE SCALE INDUSTRIES- Manufacturing Employment Region Distribution (in %) Total, Percent of Which in of Employmen ,, in Region 000s Small Large Small Large-- Total Metro Manila 301 22.9 77.1 6.9 57.5 21.6 Luzon (Other than Metro-Manila) /3 Southern Tagalog- 174 89.4 10.6 15.7 4.6 12.4 Central Luzon 178 83.1 16.9 12.6 8.0 12.9 Cagayan 30 82.0 18.0 2.5 1.3 1.2 Ilocos 110 94.2 5.8 8.8 1.6 7.9 Bicol 97 96.9 3.4 9.4 0.9 6.9 Sub-Total 589 89.1 10.9 46.5 16.4 41.3 Visayas Western 136 80.3 19.7 11.0 6.7 9.8 Central 122 86.8 13.2 10.7 4.0 8.7 Eastern 61 95.9 4.1 5.9 0.6 4.3 Sub-Total 319 85.9 14.1 27.6 11.3 22.8 Mindanao Western 35 80.9 19.1 2.8 1.7 2.5 Northern 89 68.5 31.5 6.1 6.8 6.3 Southern 63 60.5 39.5 3.8 6.2 4.5 Sub-Total 187 68.1 31.9 12.7 14.7 13.3 Total 1398 71.1 28.9 100.0 100.0 100.0 /1 Small industries here include household employment plus employment in establishments with less than 10 workers. /2 1972 figure (see source notes). /3 Includes islands of Palowan and Mindoro, which account for less than 1% of manufacturing employment. Source Notes: The regional distribution of total manufacturing employment can be obtained from the regional volumes of the 1970 Population Census; the data are summarized in the 1970 NEDA Situation Report from which the above were taken. Regional data on employment in establishments are available in the 1972 Census of Establishments, but no data are available for 1970. The percent distribution among regions obtaining in 1972 were applied to the 1970 estimate of total employment in large establishments; the latter was obtained by straight-line interpolation between the 1967 and 1972 establishment census figures and is about 8% lower than for 1972. Employment in small scale establishments and households was calculated as a residual. � . _ • . ' 1 т.а14 ь,ь.. : [1[4Т[U ССдlУ'У11Г. УИАУАСГСЧIУI'1Ctl иУ МУСI11Иу 1-п .У. Упииl.гlли 1 и.игли�. w1u и.а.и�' t l.аот For�. �[.У1ил'. гы.г. 1п 1>иlриг иг и.1п,Сгарв - У Увуlип`. sы.г. ц. и�nиигс и.г-� �^�_�.'^п. авlлсlvв Га.l1У i 7ига1 Сгwгы Rвгв Уириlвгlип sгввг Grovгl� lu aиrlcиlaur• д_ S1.4ьс�19�13 -. }.-. _ч. й _... 'L"L�Z7% YlвL.rfв. 51ьвг< 1м/14 [.У1ли 7пги.. 1471, 1 lчгs 19au-n ил.и. fЧ7ч Аыг. х. 1ЧаИ-7s 1975 [1г.rУ Слг�� сиго w"suY.rt-'т1.ЬвгЕ- lndun ху Аи.lсиlгигг твггl.тr тлиl свС<ы (4ягй)-- - И.тrиуl,1ц,� х11 ta.4 й.У ял й.У г - ' - - - ы - s7 ы7 Z�J, I<аС1идlЧв МвСГи-Мваllв) - 11иел. Уя 7.и х.а � 1я �,7.. ьа 7 ) 1 1 1 а 5 й И - СвУауьи Ув1lвУ ьS 4ь6 ].д !1 1° 7l 1] 11 - - 11 l Ь 1 0 . Свц[гвl lивоп 1l1 1D.й ],] ]х й.У 45 16 1 - Ч 1 9 1] й д , - - sоигы.гп пУг)лУ пь и.й 1.s я ].< <) и ь 1ь и п и и е з -[1со1 76 1.6 1.6 l1 l.д ц 10 й Ь 1 7 7 ) ] ] Vlввrвs - Чгвавп УGввувг (jQ я.М 1_д i6 7.] Ч 1д 1х � 1 Ь9 't 9 1й 1 7У - С.пггвl Чlвьуа. [а-15 [.0 7.4 х[ 1.д().])1- л4 1Ч<- х 9 � 7 У ! ) 6 Ь 4 - е.гвагп v!•вт.а а.х 1.а !я 1.1 а й п s й i ь 1 : И1пд.п.и _ L1 - 4иг[ы.�ц ей-У1i� s.s ].9 i4 �.ёц1 11-ьяц i ё йп - tn : е i а -. sаиоы.гп Ь_й й.s a й.ь 111 !12 xCL2 �1Ш й ь1 1 s _ - Сsпггвl 4,9 ].0 15 й.[ !U й5� R1 I Ь 1 д � РЬ1Агррlивв� Тига! 1дд 1дд г.и ]3 ].0 ц l!Ю 10д 100 1дд 1дд 1дд l0D 1д0 IW s. йсгивl LnJ Аrвв �1lисвгвд tu СгиУв аг 4lсвлгвд Т1д.вr Ггодисгlлп. 1815: в1111иц Авсгвгвв ......................,..,.... .., .. ..... 3.9 �.1 2.] 0.5 9.6 - " - " ц и.ид иц гы. Угаигы т.wа и! грв Соииггr'• а1 Угlисlрв! 1гl�ьггв[вд! сггц., т. clrr двг. .г. г.еиl.г.д 1п им. т.л1 У. t jj 44+гв о1 гииь а1 рвlву IrouиL гlсв) ргодиС[lли, � - . �j S1�вгв и! гы.. oI гпвllW сагц ргоJисl{УЧ. у� чывгв oI соелЧиtв У,гывгвд. � (� Y4arc о! гапв а! виивггвив hвгrввСвд, ц Уб.га и! .пьw.1 .11w.Ыs сиг lгг. сиьlс ..г.гг) гц an•а 1fи.ос.в !иг lor..гry. (�„ Ас[ив1 Сгигв Vвlивв 1Jдвд 1л 1f)] !1л 1Ч72 ргlсвв) и.га р 1] Ъ1111ли lo аигlсиlсиrв. р 33 Ь!7l1ои lu lидивггу. вп.! р]] Фгlllои 1п [ыв свrгtвгу овссиr. . � СвУвуви Чь11.У дпвв tw[ бвив . сwгиг.д сlгу. � _ � Tt�. !lиига 1ц р.т.пшг... lпсlцдв.. .пд гЧ. tlУЧr. алг 1п р.ипгы.г.. .тсlид.., С.пц, (рир, wд гыииг.цдl, гд1 !(U и.�г Увв[вгп апд L'авсггп иlввувв геврвегlvвlу иид.г [ы. 1971 гв[lилвl гlвгвlllcaCluпr. . � цW .<ctuJ.в илвllвп (vh/cA vва двсlвгвд лл 1цпУвг •<4.ггвг.J cl[у Ьу [hв гlм о! гыв 1971 С.ивп.). � (jj Tur 5ои[ы-Чsгtагп вод Члггh-[.вгггл Иlдьмо гвгресгlивlу ипдвг Сы. 1971 r.Ylunal сlвввlfгы гlииа. � T1i. 1Ч15 Jвгв оп вигlгиlwге rnd lигв.ггу вгв илг tlvвn в.рвгвгвlу !иг SоисИвrп auJ L'вп[гв1 И1[иlвпви. f! [тсlидса lЧ1.пJ Еlаывгlв• IflвP-paoda) ц01еЬ вв.lw.г ги вбоиг ]0I аг [ли1 ргадцггlип. �f е Ys.<д оо :ыв lwcr г•гlr.[a ln Чии> Т.Ь1, tl.. � - � " s�иг . ropnl.asun симиг: w1.гt.. r�..ny тил..+ п.г. .г, ыбаи [r� гы. ьч71 l..11у 1цсл.. .т егр.пдlгиг. suг,,.r.; гь. и[1ии'в ц1... !ц ислпи.lс дигриг .г. С.4лц ггь,. и. МпгопJ р1о,ь тг 1ч)и-ы , ыеиг: .г1 гы- ггаг и.га г+\Чо fги. [ав ЛСS»-w:o1 Уы111цц1ое Уа.гЬтУ, 1Ч71. г,hггЬ llггв lдв ргlв.гУ йоигавв. ANNEX TO CHAPTER VI Table 6.5: REGIONAL DISTRIBUTION OF MANUFACTURING EMPLOYMENT BY SCALE OF ACTIVITY 1960-75 /2 Region and Scal 71 of Employment, 000s Growth Rate Activity 1960a 1960b 1970 1975a 1975b 1960b-75b Ma-aila and Rizal Household and < 20 Small ill 157 156 216 4.5 > 20 130 130 207 285 285 5.4 Sub-Total 122 241 364 441 501 5.0 Luzon (Excluding Metro-`Manila and Rizal) Household and < 20 306 343 481 407 563 3.4 > 20 29 29 47 73 73 6.3 Sub-Total 335 372 528 480 636 3.6 Visayas Household and < 20 258 289 309 190 263 0.6 > 20 26 26 39 51 51 4.6 Sub-Total 284 315 348 241 314 0.0 Mindanao Household and < 20 83 94 119 118 163 3.7 > 20 14 14 40 46 46 8.3 Sub-Total 97 108 159 164 209 4.5 Whole Country Household and < 20 639 837 1065 871 1205 2.5 > 20 199 199 333 455 455 5.7 Sub-Total 838 1036 1398 1326 1660 3.2 /1 The < 20 and > 20 ranges refer to establishment size by No. of Workers. /2 Differences in definitions of employment between the four sources quoted above make it difficult to compare the estimates. Briefly, the following principles were followed: (i) The establishment censuses, establishment surveys and the labor force surveys each estimate current employment, and (as far as one can see) are comparable. (ii) The 1970 population census also consistent with (i). ANNEX TO CHAPTER VI Table 6.5: (continued) (iii) The 1975 population census used a more stringent definition of employment (a person had to have worked in the activity for more than 10 hours per week and for not less than 10 weeks per year). It was therefore adjusted to make it comparable to the data for earlier years and with the 1975 establishment census and labor force survey. (iv) The 1960 population census definitions were also consistent with (i), but there appear to have been problems in classifying women's labor as between manufacturing activities NEC, classified manufacturing activities. The data were also adjusted. The basis of the adjustments were as follows:- 1960a: The manufacturing employment in each region are the "raw" census data. The estimates for Manila and Rizal were clearly underestimated by the census since they imply no employment in establishments of less than 20 workers, and no employment in households - i.e., no "informal" manufacturing sector. They also imply that only 6.6% of the population of over ten years old in Manila and Rizal were in manufacturing in 1960, as compared with approximately 12% in 1970 and 14% in 1975. There are reasons for thinking that the share of employment in manufacturing (in Manila and Rizal) were higher in 1960 than in 1970 since import substitution had led to a high growth rate of manufacturing output in the 1950s, but a slow growth rate in the 1960s (see Chapter 5). One problem appears to be the ways in which services ahd women's labor were counted .in 1960, since the census shows high percentages in these categories, compared with those of the labor force surveys. Further the "miscellaneous" category for manufacturing was quite high in the census, indicating a possible problem of classification. Taking 12%,of working age population in Manila and Rizal to be in manufacturing in 1960, gives an estimate of 217 thousand total manufacturing employment in the area, and 933 thousand for the whole country. The labor force survey gives a total employment of' 1036; the difference is probably due to seasonality and sampling errors, since the 1960 census used the same definition of employment as was used in the labor force surveys to obtain consistency with the 1970 and 1975 data, the total employment in each region is scaled up by the ratio 1036/933. This gives the estimates shown for 1960b. ANNEX TO CHAPTER VI Table 6.5: (Continued) 1970: The 1970 census used the same definitions of employed workers as do the labor force surveys. Hence they are consistent with the latter, and in fact the 1970 census estimate of total manufacturing employment is close to the estimate that would be obtained from interpolating the annual labor force surveys in neighboring years (no labor force survey was conducted in 1970). In 1975 a different and more stringent definition of employment was used which leads to lower estimates than those obtained in the labor force surveys. 1975a: Employment totals in each region are the raw census data, reclassified as far as the maps available to us would permit, according to the boundaries used for the 1960 and 1970 data tabulated above. 1975b: The differences in definitions of employment between the establishment censuses and the labor force surveys are likely to have affected mainly the census' estimates of those employed in households, since those employed in establishments of over 20 workers are mostly regular, and would meet the definition noted in (iii) above. Hence we need to adjust the residuals in 1975a. The following procedure was used. Let x. represent the adjusted and y the unadjusted:residual for each"region (that is, the y 's are 16, 407, 190, 118 and total 871, as shown under 1975a . Then 455 + Eyi = 1326 from column 1975a, and 455 + Exi = 1660 from the total in 1975b. Let xi /71 = k, the adjustment factor; k is then 1.383 from these two expressions; this is the figure used to get the x 's shown in column 1975b. /3 The 6.6% figure is for the period 1970-75 (using the estimate under 1975b), ANNEX TO CHAPTER VI Table 6.6: MANUFACTURING EMPLOYMENT BY REGION 1961-1975 Increase 1961-1975/72-- Year Yearly Growth Region 1961 1967 1972 1975 No. % Total Rate % Number Employed in Establishments with Yore than 10 Workers, 000s Metro Manila 165.5 239.5 248.0 288.2 82.5 49.7 3.8 Luzon 41.2 56.0 68.8 148.7 27.6 16.6 9.6 Visayas 33.2 42.2 49.0 60.1 75.8 9.5 4.3 Mindanao 23.2 55.9 63.4 48.5 40.2 24.2 5.4 Total 263.1 393.6 429'.2 545.5 226.1 100.0 5.3 Number Employed in Establishments with less than 10 workers, 000s Metro-Manila 27.1 26.6 43.5 n.a. 16.4 15.1 4.4 Luzon 36.4 47.8 87.5 n.a. 51.1 47.2 8.3 Visayas 18.7 28.8 35.5 n.a. 16.8 15.5 6.0 Mindanao 13.5 22.0 37.5 n.a. 24.0 22.2 9.7 Total 95.7 125.2 204.0 207.0 108.3 100.0 7.1 /l The estimates for establishments with less than 10 workers are for the period 1961-72, and for more than 10 workers, 1961-75. Sources: NCSO, Surveys of Establishments and Labor Force Surveys. The 1975 establishment data are from preliminary tabulations. ANNEX TO CHAPTER VI Table 6.7: NUMBER OF ESTABLISBHENTS BY SCALE AND BY REGION Establishment Growth Rat Region Size Range 1961 1967 1972 1975 1961-75/72 Metro Manila7- < 20 11,379 8,872 12,407 n.a. 6.9 20 - 99 897 961 1,015 1,455 5.3 > 100 474 400 452 540 3.8 - /5 /6 / Southern Tagalog- < 20 4,028 4,842 7,694 n.a.6 9.7 20 - 99 73 58 68 n.a.y/ 2.0- > 100 17 26 32 n.a.-- 2.6 /- Ilocos < 20 3,432 4,041 7,071 n.a. 6.8 20 - 99 60 32 38 40 -2.9 > 100 17 10 16 21 1.5 Cagayan Valley < 20 1,225 1,438 2,961 n.a. 8.4 20 - 99 18 23 34 36 5.1 > 100 6 9 8 14 6.2 Central Luzon < 20 3,217 4,463 6,981 n.a. 7.3 20 - 99 102 133 160 153 2.9 > 100 27 53 60 51 4.6 Bicol < 20 2,147 2,456 4,206 n.a. 6.3 20 - 99 38 41 41 52 2.3 > 100 6 10 5 12 5.1 Western Visayas < 20 3,018 4,886 6,564 n.a. 7.3 20 - 99 78 67 59 73 - 0.5 > 100 33 27 35 32 - 0.0 Central and Eastern Visayas < 20 4,079 4,884 5,349 n.a. 2.5 20 - 99 125 128 126 213 3.9 > 100 32 46 47 60 4.6 South Western Mindanao < 20 3,167 4,640 7,583 n.a. 8.3 20 - 99 77 81 84 24 -8.0 >100 35 47 45 7 - North Eastern Mindanao < 20 1,765 2,243 4,091 n.a. 7.9 20 - 99 46 46 40 46 0.0 > 100 16 36 38 31 4.8 11 The 1987 period is taken wherever the 1975 data are not available. (See f.n. 4 for other exceptions. 12 Including Rizal. /3 For the period 1967-72. 4 For the period 1967-75. /5 Excluding Rizal. /6 The preliminary tabulations give the number of establishments in these size ranges for Southern Tagalog, but appear to be unreliable (the counts are very low compared with all previous years). Sources: NCSO, Census of Establishments (1975 data are preliminary tabulation). ANNEX TO CHAPTER VI Table 6.8: GROWTH RATES OF PRINCIPAL CITIES IN PROVINCES Population 000s Growth Rate Region and City 1960 1975 % per Year I. Ilocos - Baguio 50 97 4.54 - San Carlos 64 91 2.39 - Dagupan 63 90 2.42 - Laoag 50 63 1.56 227 341 2.72 II. Cagayan Valley (No Chartered City) - - - III. Central Luzon - Angeles 76 151 4.71 - Olopango 45 147 8.25 - Cabanatuan 70 115 3.38 - San Jose 38 53 2.25 - Palayan 3 12 9.33 232 477 4.92 IVA. Metro Manila 2,462 4,970 4.79 IVB. Southern Tagalog - Batangas 83 125 2.78 - San Pablo 71 117 3.40 - Lipa 64 106 3.44 - Lucena 49 92 4.31 - Cavite 55 82 2.71 - Puerto Princesa 22 46 - - Tagaytay 7 13 4.23 - Trece Mortires 4 7 3.34 355 588 3.42 V. Bicol - Legaspi 61 88 2.49 - Naga 56 88 3.07 - Iriga 75 76 0.09 192 252 1.83 VI. Western Visayas - Iloilo 151 255 3.55 - Cadiz 88 128 2.54 - Silay 60 105 3.82 - San Carlos 125 100 1.48 - Bago 59 89 2.79 483 677 2.28 ANNEX TO CHAPTER VI Table 6.8: (continued) Population 000s Growth Rate Region and City 1960 1975 % Per Year VII. Central Visayas - Cebu 251 413 3.36 - Bacolod 119 223 4.30 - Lapu Lapu 48 79 3.39 - Toledo 64 76 1.16 - Mandaue 29 76 6.67 - Dumagete 35 53 2.82 - Bais 27 46 3.63 - La Carlota 57 41 - 2.18 - Tagbilaran 20 37 4.21 - Calaon 23 29 1.57 Total, excl. Cebu 422 660 3.03 Total, incl. Cebu 673 1,073 3.16 VIII. Eastern Visayas - Calbayog 78 103 1.88 - Ormoc 63 90 2.42 141 193 2.11 IX. Western Mindanao- - Zamboanga 132 265 4.78 - Pagadian 41 66 3.24 - Dipelog 32 50 3.04 - Dapitan 28 48 3.68 232 429 4,18 X. Northern Mindanao - Cagayan de Oro 68 165 6.12 - Cadiz 88 133 2.81 - Ozamis 44 72 3.35 - Gingoog 53 67 1.58 - Surigao 37 66 3.95 - Tangub 21 40 4.41 311 543 3.78 XI. Southern Mindanao /9 - Davao 102 215 - 484-- 5,09 - 10.94-- - General Santos 53 91 / _2 3.71 155 306 - 575-- 4.64 - 9.13 XII. Eastern Mindanao -fligan 58 119 4.93 - Cotobato 38 67 3.87 - Marawi 27 63 5.84 123 249 4.81 /1 Excludes Basilan (no longer a chartered city). /2 The estimate in the 1975 census is the second and higher figure; it seems unusually high, since the population was Qnly 177 in 1970. There may have been some boundary changes. The first figure is the one given in the 1977 Philippine Statistical Yearbook, which appears to have used consistent boundaries. Source: Population Censuses for 1960 and 1975. NCSO. rable 6.9: ANNUAL OUTPUT AND YLELD IN TIlE MAJOR CROPS 1N W.0 PRODUCTI1N 1960-76 Annual Output Annu l Yields Quantlty Year Play Corn Sugar valay Corn Sugar (Rough RLce) (Shelled) Cuconut Cane&Ocgs (Rouglice Shelledt coit Cank-- Output/YIeld 1960 3740 1165 1117 1810 6315 1.131 0.631 l 055 7.472 Unit (In 000s) tons cons bons C.M. ton li tons 'ha lons 'ha Ions 'ha Levels of OLtput/Y1eld Relative to 1960 tprcene) 1960 100,0 100.0 100.0 100.0 100.0 100.0 100.0 100 0 l00 0 1961 99.1 103.8 101.2 94 4 104.5 102 4 93.7 89 3 98.5 1962 104,6 108.7 127.0 105.1 107.2 I08.8 99.5 104 7 100 0 1963 106,1 109.2 139.2 112.2 121 4 1110 103 5 1059 05.0 1964 102-.6106.7 110.9 138.7 117.8 103.5 110.1 107.9 99 1 105 7 1965 106.7 112.6 137.3 112.4 97.18 110.3 108.2 90 6 27.7 1966 108,9 118.4 139.4 101.0 127.4 115,8 103 8 91 7 77 6 1967 109.5 127.9 149.0 152.0 124.2 116.0 109.4 86 6 87.') 1968 122,0 139.0 143.0 119.4 176.0 122 0 114.1 84.2 80.9 1969 118.9 148,7 140.1 119.7 183.4 117.9 121.7 80 4 14 5 1970 140,0 172,3 154.5 143.4 174.3 148.l 131.5 8.8 94.11 1971 142,9 172.1 150.3 164.7 169.4 151.7 132.8 72.7 90.3 1972 136,4 172.7 162.3 141.1 133.3 138.9 131.2 80 9 77.5 1973 118.1 157.1 160.9 176.3 165.4 125.5 124.7 79.8 93.8 1974 149.6 196.4 161.1 190.6 161.4 143.9 131.2 77 3 94,1 1975 151.4 220.4 243.7 i! 181.7 n.a. 141.4 133.0 113.21/ 82.1 1976 164.7 237.4 305.7 L-. 197.6 136.9 152.2 134.5 128..3/ 89.8 1977 172.7 244,1 u.a. L.a. n.a. 160.9 140.3 n.a, n,a, 1978 184.4 245.1 422.5 18_1 11na . 17- . -4, -n.U32. n_.a I. Data for 1975 onward, are not comparable to those for earlier years. since Lhey ikelude umore by-prducit s In ile output figures than*previously. Souret Original source Is Depnrtmienc of Agriculture and Commerce. Figures here are taken frow the st,uiuaries provided In the 1978 Philippine Statistical Yearbook, NEDA, 1978. ANNEX TO CHAPTER VI Table 6.10 REGIONAL DISTRIBUTION OF MANUFACTURING EMPLOYMENT BY INDUSTRIAL SECTOR, 1977 Consumer 1 Intermediate Durable Region Goods Goods Goods Metro Manila 45.0 56,8 79.5 Luzon 30.5 16,7 10,6 Ilocos 5.1 3.0 .5 Cagayan Valley 1.7 2.2 .2 Central Luzon 9.3 4.3 4.2 Southern Tagalog 11.3 6.6 5.4 Bicol 3.1 .6 .3 Visayas 15.4 6.6 7.5 Western 8.3 1.8 1.0 Central 5.2 4.3 6.3 Eastern 1.9 .5 .2 Mindanao 10.3 15.1 2.4 Western 1.3 1.7 .6 Northern 3.1 7.0 .6 Southern 4.1 2.4 .9 Central 1.8 4.0 .3 Total- 100.0 100.0 100.0 Total Number 494,225 207,387 76,519 /1 Food, beverages, tobacco, textiles, apparel, furniture, printing, leather, miscellaneous. /2 Wood, paper, rubber, chemicals, petroleum and coal, non-metallic mineral products, basic metals, metal products. /3 Machinery, electrical machinery, transport equipment. 4 Totals do not add up due to suppresion by data in original, unpublished source. Source: NCSO. ASM, 1977 Unpublished tabulations. ANNEX TO CHAPTER VII Table 7.1: WAGE RATE INDEX OF LABORERS IN INDUSTRIAL ESTABLISHMENTS IN MANILA AND SUBURBS, 1948-78 (1972=100) Money Wage Rates Real Wage Rates Skilled Unskilled Skilled Unskilled Year Laborers Laborers Laborers Laborers 1949 61.0 47.0 142.2 109.6 1950 60.9 41.2 137.8 93.2 1951 57.2 44.4 119.7 92.9 1952 58.1 47.5 129.7 106.0 1953 59.3 48.8 137.3 113.0 1954 59.7 48.3 140,1 113.4 1955 59.7 49.7 141.5 117.8 1956 59.8 50.5 138.1 116.6 1957 59.7 49.9 135.7 113.4 1958 61.7 50.2 135.6 110.3 1959 62.9 50.6 139.5 112.2 1960 62.7 50.7 133.4 107.9 1961 62.6 51.9 131.2 108.8 1962 63.4 53.5 125.5 105.9 1963 65.2 56.3 122.3 105.6 1964 66.4 56.9 115.1 98.6 1965 68.2 60.8 115.2 102.7 1966 71.7 65.4 114.9 104.8 1967 75.0 68.4 113.1 103.2 1968 81.1 76.1 119.4 112.1 1969 85.3 79.7 123.3 115.2 1970 90.6 88.4 114.4 111.6 1971 95.3 94.4 105.1 104.1 1972 100.0 100.0 100.0 100.0 1973 105.3 102.6 92.4 90.0 1974 115.1 110.8 75.6 72.8 1975 119.7 120.1 72.7 72.9 1976 124.4 126.2 71.2 72.3 1977 137.5 132.9 72.9 70.4 1978 154.4 138.4 76.1 68.4 Source: Central Bank of the Philippines, Statistical Bulletin, Vol.XXX, 1978. Basis of Estimates. Sample survey of Large Establishments in the Metro-Manila Area, conducted monthly. Money Wage Rates are deflated by the consumer price index for Manila. (For 1972 and. afterwards, the sample covered 777 firms.) ипiгт то с�лгг=_а �л1 ^_абlе i.2• ;DH6q ;1lФ дрдL iL1iCC НА2?s ЕОа sEL°CTED XI:ФS о8 la3t7a ?У Т_EФUSi.WiLL 2sьdBLZSffiiEms гЧ ЧA2IIIA .1![D n"i1Ж7aBS, 193t-;a tP250s 'Еа oAr} Сотоа Тв+т 31+eicaitha Сагрваита Drlvвrf Е2встт1сlва+ Lагliwa ?l+sans .`�лeh+aiea PeiaCera ?lumbвra Cabarвra ёагвт.а � Эва1 Wк+ Зиа� (1а 1972 Ртiевв) . � 1931 11.84 L3.35 12.26 ц.SL 16,19 12.49 ц,36 12.бб 14.71 9.69 1В.77 1932 13.90 i4.49 1Э.04 16.79 17.39 ц.39 16.79 13.33 16.38 11.05 20.11 1953 14.41 ц.Э0 1Э.б1 17.д7 18.43 13.G0 17,62 14.28 L7.04 11.78 ?1.50 1934 15.од 14.74 '4.27 17.36 19,J9 1Э.00 18.12 ц.�..2 i7.18 !2.д1 73.10 -. 1953 :5.05 ц.40 .4.55 ii.44 19.ЭЬ !3.01 18.36 ц.03 17.51' ц.27 2Э.°4 1956 14.78 14.27 14.69 17,33 18.б4 ц.26 18.54 14.71 15.84 12.:5 2Э.50 ' 1957 14.50 14.07 ц.Эб 17.55 16.80 L2.34 18.3Z 14.57 16.75 . .2В ?З.д9 I930 U.9б 14.07 ц.25 17.12 18.13 1Z.33 17.д9 14.31 17.87 11.44 ?3,б7 1959 1Э.88 14.66 15.50 17.76 18.34 12.64 1В.04 14.19 18.59 11.о9 24.48 1960 17.о4 14.;у7 ц. ц 1Т.66 17.5Э 12.09 17.21 13.77 17.+3 11.23 2Э.89 - 19Ь1 13,71 17.54 14.74 17.04 16.OZ 12.10 16.90 ц.54 16.83 11.34 24, ц 1962 ll.23 13.21 ц.Ь2 16.31 14.89 11.17 16.44 1Э.02 16.20 11.0Э 23.05 196Э i2.93 12.91 13.11 16.7' 14.47 1д.92 16,33 12.д3 16.79 11.01 22.51 . 1964 12.29 ц.06 12.43 ц,75 1Э.34 1А.24 L5.29 12.06 ц,дб 10.?8 21.77 19b5 12,31 12.ll 12.Э1 ц.ВЬ 13.43 10.22 ц.27 12. ц 13.20 10.71 22.1Э 1966 12.10 11.94 12.05 1Ь.41 ц.44 9.д6 ц.'J. 12.29 14.65 20.91 21.94 1967 12.04 11.Э2 12.04 16.24 17.86 9.41 ц.ЭS ц.62 13.38 10.75 ?0.90 1968 12,14 1Э.68 22.27 17.Э8 1Э.89 1Э.5Э 16.1Э 13.$6 l3.дб 11.68 21.д9 :969 12.47 U.77 , 12.34 18.ц L3.92 14.7L 16.71 14.86 ц.19 11.99 22.79 ' LЭ70 11.88 ц.59 L2.39 16.81 12.55 ц.16 ц.бй 13.88 14.Ьб 11.53 20.91 1971 10.90 11.Эб 12.22 14.67 11.98 11.61 14.81 1Э.31 ц.18 10.95 19.29 � L472 11.?6 10.б6 11.51 1Э.Э9 11.26 L0.71 14.00 12.34 11.71 10.42 18.Э4 197Э 10.8Э 9.62 11.04 11.8Ь 14.92 9.79 L2.67 11.д8 10.66 9.Э8 17.25 � l474 9.бд 7.53 8.36 9.80 9.29 7.06 10.72 10,01 д,38 7.58 14.61 1975 9.42 7.?3 8,39 9.б0 8.82 6.78 i0.59 9.6Э 8.08 7.60 14,Э4 � 1476 9.17 7.07 8,31 4.29 8.81 6.77 l0.4Э 9,53 '.70 1.33 14.Э8 1577 4,д0 8,ц 9.01 9.92 8.47 7,В3 10.37 9.11 д.4Ч 7,Э4 14.01 1978 1о.г�ь 8.ьs 4.z9 9.в4 8.Эь в.гт ц.7а 9.68 s,sз 7.1г 1Э.п iloney Vаке flyeea, 1951 3.64 6.Э8 3.86 7.4Э 1.74 5.97 1.�+ 6.03 7.0Э 4.63 8.97 1932 ' S.79 6,49 5.84 7.52 7.19 3.Ь4 7.52 5.97 1.Э4 5.49 9.01 � ' t9sз Ь,Э; Fы£г. 3,ав 7.72 7.эб 3.79 г.ы 6,17 7,Э6 s.o9 9.29 19sL 6,6g б_�гд 6,08 7.48 8.26 5.34 7,72 5.44 7.Э2 5,03 9.84 1935 6.35 b,i0 6.14 7.3Ь 8.17 5.й9 7.73 6.Э5 7.39 5.18 10.06 !456 6.4D 6,i8 6,36 7.60 Э.07 5.Э1 8.03 6.Э7 7.29 5.26 10.Э3 1937 b.38 6,19 6.76� 7.72 7.79 5.4Э 8, ц 6,41 7.Э7 5.34 10.51 1958 5.35' 6.40 6,94 7,79 9.ц 5.62 8.14 6,54 8.1Э 5.23 Ф.77 1959 6.26 6.b1 6.99 8,01 8,27 3,70 9.1б 6.40 5.43 5.27 11.04 1960 6,41 b.6k 7, ц 8.30 д.24 3.68 8.09 б.47 д.19 S.ZS 11.2] 1% 1 6,34 6,46 7.03 8.1Э 7.64 5.77 6.05 4,4Ь д,0Э 3.41 11.55 i9б2 6.68 6,6Т 6,88 8.34 7,32 3.64 8.30 6.57 8,18 5,37 11.64 � 1963 о,90 6,88 6.99 д,9Э Т.71 5,82 S.д2 6.85 9.95 3.87 12.00 19Ь4 7.R9 6.4b 1,17 4.09 1.81 5.91 8,82 6.96 9. ц 3,9Э 12.39 � 1965 7.29 1,18 7.29 9,39 7.93 б.03 9.04 7.19 8.94 6,Э4 13.10 i9bб 7,35 7.43 7.5п io,24 В,42 Ь.ц 9.51 7.67 9.ia ь.а1 1Э.бЭ 1967 7.9В 7.40 7.98 10.77 9.19 6,37 10.18 8.]7 . 9.20 � 7,1� L1.86 1468 д,24 9,29 8,ЭЭ 11.80 9.43 9.19 10,45 9.42 9.41 7.93 14.86 1969 8.6Э 9,50 8,34 12,6Э 9.63 10.1В 11.3б 10.28 ID.51 8.30 ц.77 , 1974 9.41 9.97 9.В1 1Э.Э1 10,02 10,42 12.Э9 10.99 11.61 9,21 16,56 1971 8,99 10.Э0 11.08 13,31 10,87 10.5Э 17.4Э 12,07 11.59 9.84 17.30 1972 11.26 10,66 11.51 13.74 11,26 i0.71 14,00 12.34 11,71 10.42 18.34 1977 12.3i 10.97 12.58 13.32 12.43 10,70 14.44 t3.34 1L 71 10.69 19,бб 1974 14,73 11.46 33.48 14.92 14,14 10.Т3 16,Э2 ц.24 12,76 11,54 22.24 . 1973 ц.51 11.74 14.1b ц,80 1k,51 11,26 17.44 ц.8б 1Э,31 L2.51 23.62 - 1976 16.оЭ 12.33 14.51 1б.2Э ц.38 11.87 L8.23 16.ЬБ 13,45 U.16 25,13 � 1977 18.49 15.37 17,00 16,81 13.97 14.76 20.31 17.20 ц.92 1Э.84 26.4Э _. ._. << .,, ,. ,_ 1у78 . 21.24 17.53 18.83 i9.98 16,44 16.77 23.90 29.64 17.90 14.42 27.84 3ацпв: А'в Ьат Ада.z'LвЫв 1. ,�,е. �;::......,... .„., �. . ANNEX TO CHAPTER VII Table 7.3:11 AVERAGE DAILY WAGE RATES-L-- FOR AGRICULTURAL LABOR, 1956-78 (PESOS) Consumer Price Index Outside Real Wage Average Manila, 1972 Rate, 1972 Crop Year Wage Rate 100 Prices 1956-57 2.49 42.2 5.90 1957-58 2.66 40.9 6.50 1958-59 2.56 42.)l 6,08 1959-60 2,62 41.2 6.36 1960-61 2.65 43.3 6.12 1961-62 2.62 45.6 5.75 1962-63 2.75 46.8 5.88 1963-64 2.74 50.9 5.38 1964-65 2.78 55.5 5.01 1965-66 n.a. 57,3 n.a. 1966-67 3.26 59.9 5.44 1967-68 3.29 63.2 5.21 1968-69 2.94 64.4 4.57 1969-70 n.a. 65.3 n.a. 1970-71 3.55 75.0 4.73 1971-72 3-.72 92.8 4.01 1972-73 4.40 100.0 4.'40 1973-74 n.a. 117.0 n.a. 1974-75 6.27 157.0 3.99 1975-76 n.a. 167.3 n.a. 1976-77 9.45 183.5 5.15 1977-78 9.97 192.7 5.17 /1 These are wage rates 'without meal' (i.e. payment in kind). A separate series is provided by Baecon on wage rates with meals, which are about 30% lower. Source: The wage rates are provided by the Buareu of Agricultural Economics' (Baecon) quarterly Surveys an Farm Wages. The figures q-aoted here for wages up to 1974-75 are taken from the summaries provided in the 1977 Yearbook of Labor Statistics. The consumer price indices are provided by NEDA. ANNEX TO CHAPTER VII Table 7.4: AVERAGE WEEKLY EARNINGS OF EPLOYED AND SALARY WORKERS IN PRIVATE AND GOVERNMENT EMPLOY FOR SELECTED INDUSTRY GROUPS, 1977-76 Industry Group 1969 1970 1971 1972 1973 1974 1975 1976 Money Earnings, pesos per week: All Industries 37 - 49 47 51 57 67 78 Agriculture 21 - 33 25 30 37 37 45 Manufacturing 38 - 48 48 57 57 70 75 Construction 38 - 56 49 50 54 66 75 Utilities 59 - 72 76 85 87 115 123 Commerce 46 - 53 53 60 71 90 97 Transport, etc. 46 - 52 53 56 63 73 86 Government & Community 59 - 71 78 80 90 97 110 Domestic Services 11 - 13 12 14 16 17 20 Other Personal Services 32 - 43 39 40 45 52 65 Price Index for the Philippines (1972=100): 66.0 75.8 92.4 100.0 114.0 152.2 164.6 188.6 Real Earnings, 1972 pesos per week: All Industries 56 - 53 47 45 38 41 41 Agriculture 32 - 36 25 26 24 33 24 Manufacturing 58 - 52 48 50 38 43 40 Construction 58 - 61 49 44 36 40 40 Utilities 89 - 78 76 75 57 70 65 Commerce 70 - 57 53 53 47 55 51 Transport, etc. 70 - 56 53 49 41 45 46 Government & Community 89 - 77 78 70 59 59 58 Domestic Services 17 - 14 12 12 11 10 11 Oiher Personal Services 48 - 47 39 35 30 32 34 Source: NCSO Surveys of Hauseholds, May series except for 1975-76, which are for April. ANEX TO CHAPTER VII Table 7.5: AVZRAGZ WEEKLY EAPNINGS OF SELECTED OCCLPATIONS IN SEIECTED CITIES, 1973 AND 1976. (PESOS ?ER 40 hCUR HEE.) Nominal Real,, - Change 1973 1976 197&L- In Real Clerks Philippines 93 118 76 - 18 Metro Manila 101 126 82 - 19 Ilcgau (Northern Luzon) 73 86 55 - 25 Naga (Bicol) 44 77 48 + 9 Cebu (Central Visayas) 72 93 64 - 11 Iloilo (Western Visayas) 62 99 62 0 * Cagayan de Oro rN. Mindanao) 35 1s 72 -1 Davao (S. Mindanao) 73 86 59 -19 Laborers Philippines 63 83 53 - 16 Metro Manila 59 84 53 - 7 1ligau 50 68 43 - 14 Naga 39 69 43 + 10 Cebu 67 82 57 - 15 Iloilo 84 78 69 - 42 Cagayan de Gro 78 76 46 - 41 Davao 66 65 44 - 33 Drivers Philippines 83 110 71 - 14 Metro Manila 85 116 76 - 11 ligau 54 83 53 - 2 Naga 43 72 45 + 5 Cebu 78 99 68 - 13 Iloilo 103 97 61 - 41 Cagayan de Oro 89 62 38 --57 Davao 83 84 57 - 31 Carmenter Philippines 99 100 64 - 35 Metro Manila 58 102 66 + 14 Iligau 56 82 52 - 7 Naga 44 78 49 + 11 Cebu 69 91 67 - 9 Iloilo 76 72 45 - 41 Cagayan de Oro 95 81 50 47 Davao 77 71 48 - 38 Field Electrician Philippines 96 115 74 - 23 Metro Manila 88 123 80 - 9 Iligau 70 98 63 - 10 Naga 42 77 48 + 14 Cebu 70 97 67 - 13 Iloilo 75 96 60 - 20 Cayagan de Oro 82 100 61 - 26 Davao 92 84 57 - 38 /1 1973 Pesos. Price indices for the regions were as follows (1972-100). For 1973: 117, 114, 115, 116, 128V 120,115 and 127 respectively for the Philippines, Metro-Manila, Northern L-on, Bical, Central Visayas, Western Visayas, Northern and Southern Mindanao; and for 1976, 182, 175, 180, 186, 185, 191, 188 and 186 respectively, Source: 1978 fEDA Yearbook. Source: Wage and Salary Survey in the Philippines, Office of Compensation and Position; reproduced here from the 1977 Yearbook of Labor Statistics. l ANNEX TO CHAPTER VII Table 7.7: WAGE'S OF COIR ION IABORERS AM MINIU14 WAGES IN MANILA ri MONEY AND REAL, 1951-1978. PESOS/DAY (REAL IN 1972 PRICES)- Maney Wages Real Wages Common Minimum Common Minimum Year Laborers Wage Laborers Wage 1951 4.6 4.0 9.7 8.4 1952 5.5 4.0 1111 8.9 1953 5.1 4.0 11's 9.3 1954 5.0 4.0 11.8 9.4 1955 5.2 4.0 12.3 9.5 1956 5,3 4.0 12,2 9.2 1957 5.2 4.0 11.3 9.1 1958 5.2 4.o 11.5 8.8 1959 5.3 4.0 11.7 8.9 1960 5.3 4,0 11.2 8.5 1961 5.4 4.0 11,3 8.4 1962 5.6 4.0 11.0 7.9 1963 5.9 4.0 11.0 7.5 1964 5.9 4.0 10.3 6.9 1965 6.3 6,0 10.7 10.1 1966 6.8 6.0 10.9 9.6 1967 7.1 6.0 10,8 9.0 1968 7.9 6.0 11.7 8.2 1969 8.3 6.0 12.0 8.0 1970 9.2 6.0 11.6 7.6 1971 9.8 6.0 10.9 6.6 1972 10.4 6.0 10.4 6.0 1973 10.7 6.0 9.4 5.3 1974 17.5 6.0 7.6 3.9 1975 12.5 6.0 7.6 3.6 1976 13.2 10.0 7.5 5.7 1977 13.8 10.0 7.3 5.3 1978 14.4 11.0 7.1 5.4 11 Deflated by the Consumer Price Index for Manila. Sources: Central Bank, Statistical Bulletin 1978; Unpublished data from wages commission. ANNEX TO CHAPTER VII Table 7.8: AVERAGE EARNINGS RATE IN VERY SMALL MANUFACTURING ESTABLISHMEiNiTS 1961-1975 10 or Less Workers Unit 1961 1967 1972 19751/ Number of Enterprises 000s 33 41 63 71 Total Number of Workers 000s 95 125 204 207 Paid Workers 000s 43 59 94 109 Family Workers and Owners 000s 52 66 110 98 - - - - - - - Current Prices - - - - - Value Added Pm 129 206 438 834 Wage Bill Pm 36 57 149 221 Owners Share of Value Added Pm 93 149 289 613 Paid Workers' Wages - Annual P 884 966 1,585 2,027 - Per Day P 2.9 3.2 5.3 6.8 Owners' Share of Value Added t No. of Fadly Workers (including Owners): - Annual P 1,788 2,258 2,627 6,255 - Per Day P. 6.0 7.5 8.8 20.9 Enterprise Earnings - Annual P 2,818 3.634 4,587 8,634 - Per Day P 9.4 12.1 15.3 28.8 Daily Rates, Constant 1972 Prices GDP Deflator P 0.49 0.67 1.00 1.67 Wage Rates for Hired Labor P 5.9 5.1 5.3 4.1 Averages Family Earnings: - Per Enterprise p 18.4 19.2 15.3 17.2 - Per Family Worker P 12.2 11.9 8.8 12.5 1/ Preliminary estimates from unpublished data from the 1975 Census of Establishments. Sources: NCSO, Census of Establishments; NEDA, National Income Accounts. Notes: Daily rates are estimated from annual rates assuming 300 working days per worker per year. The owners' share in net value added (after expenditures on fixed assets) is taken to equal their net earnings, on the assumption that tax payments and loan repayments are negligible for small enterprises; small manufacturing establishments in the Philippines are eligible for tax exemptions for six years after registering with NACIDA. 州 ANMV TO CELPT-IR 11111 Table 7,10: DISTRIBUTIIC Zi 0-' ZL IILY IN S I.N -iHE L956 TO 1975 Family Income Group (Ranked From Lowest to Highest) 1956-57 1961 1965 i971 1975 Percentage Share of Total Family Income lowest 20% 4.5 3.5 3.6 5.5 Second 20% 8.1 7.9 8.1 8.1 9.2 Third 20Z 12.4 12.1 12.3 13.3 12.9 Fourth 20% 19.8 19.3 20.1 21.0 19.i Top 207 55.1 56.5 53.3 54.0 33.3 Total 100 i0O 100 iOO 100 Top IOZ 39.4 41.0 40,1 37.1 37.IL' Top 5% 27.7 29.0 23.7 24.8 n.a. ELP_ 2 Average Family Income Within Grouv (Conscanc I ,c..IL Z Change 1936-75 Lowest 207 807 808 755 744 1.141 + 41 Second 207' 1,439 1,502 1,723 1,648 1,951 + 34 rhird 20% 2,217 2,300 2,755 2,6;3 2,707 + 22 Fourth ZOZ 3,644 3,667 4,328 4,247 4,000 10 Top 20% 5L-sis 10,747 11,899 iOI908 11,240 15 Average 3,588 3,806 4,292 4,043 4,197 + 17 Top 10% 14,146 15,605 17,193 14,989 12,3821-1 Top 5% 19,859 22,068 24,637 20,041 n.a. I Top 10.8%; the upper income group range in the 1975 Survey was P 10,000 and over, which covered 10.8% of the families. /Z The price deflator for personal consumption expenditure was used (see NEDA Yearbook for 1978, Table 4.8 row 1) which was 427" for 1956-57, 47.' % for 1961, 59.2% for 1965, 92.41 for 1971 and 165.0% for 1975. Source- The primary sources are the NCSO surveys of households on family incomes and expenditures. 0 The XMA Yearbook for 1978 has the data summarized for the years up to 1971. The 1975 data were taken fr= a Special Release No.191 ol the NCSO's preliminary tabulations o! the Surveys, dated April 21, 1977. ANNEX To CHAFTE. VII Tabla 7.11: YEmCS OF CEAGn-MT=E Ur a =.£ar ON-FAHILY N S A NDLcDtE DISTRI TION. 1956, 1976 nc~ Group by ?ad.ly ercanr. Distribution of Xain Incm garners 1/3/ Escimaed Nuober Incom-, pacc./Year 2/ EsCIrmad Discriburions of nnrtpreneur al Aaccivitie 7amilifts /0006) å/ Colu- (5), (6) 4 .7) Wage and Salary/ radingj å Earnra Transport manufaccurins Agriculcure 1965 1971 1976 1965 1971 1976 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Und~r P500 1.9 3.1 5.6 8.9 260 300 360 5.4 5.0 4.9 P500 - 2999 5,3 7.7 14.2 20.3 619 716 863 12.8 12.0 11.7 21000 - P1499 7.6 9.2 12.2 18.1 618 729 886 12.8 12.2 12.1 P1500 - ?1999 9.6 10.1 13.7 14.7 589 709 863 12.2 11.9 11.7 22000 -2499 9.4 8.2 10.7 10.2 470 575 707 9.7 9.6 9.6 22.500 - 2999 9.7 8.6 6.1 6.6 389 489 606 8.0 3.2 8.2 73000 - 23999 16.6 13.5 11.7 8.7 604 768 955 12.5 12.9 13.0 '4000 - 94999 10.2 8.4 6.6 4.7 356 455 568 7.3 7.6 7.7 ?5000 - F5999 6.9 6.2 5.6 2.6 233 299 374 4.8 5.0 5.1 76000 - 27999 9.6 7.9 5.6 2.4 289 377 474 6.0 6.3 6.5 ?8000 - 79999 4.9 5.3 2.0 1.4 156 205 255 3.2 3.4 3.5 710000 and over 8.3 11.8 6.1 1.5 262 344 435 5.4 5.8 5.9 TOtal 100.0 100..0 100.0 100.0 4843 5966 7346 100.0 100.0 100.0 Discribution of ?aeilie. Ln 1965. 1971. and 1976 (Columnå (1> to (4> aa abov ) Tocal (1) (2) (3) (4) 1965 (No In 0008) 1966 456 192 2229 4843 1971 (so. Ln 0001) 2729 584 197 2456 5966 1976 (No. La 000c) 3436 797 204 2909 7346 1965 (,) 40.6 9.4 4.0 46.0 100.0 1971 (1) 45.7 9.7 3.3 41.2 100.0 1976 (7) 46.8 10.8 2.8 39.6 100.0 1_ Theca correpond Co:the 1971 discribucion an calculared by ahe FIMS. 2/ The Lnco distr.ibuion ahon i n columne (1) to (4) are for 1971; It followa that all calculatins and incom rangs are Ln 1971 price. o3:/ Ecludem famtlie vboe inco~ are from onarship of property and capital, or from giftt. 4 / rimced using eh. percn"age4 obtLn.in ta Colts (1) to (4). With the ~..pcion of 1971, chere are not actual distribution» (see gorca notas). $ources and 3aUis of Ustimates. The -ain source is the ?~ly Income and Eenditure Survey (r=ES), 3CS Survey of oauseholda Bulledin, Serie* 34, 1971 Table 60. The Distribution of Fami s n 1965 and 1971 are aln taken from this sourct. For 1976, the eri~aces vera m"e a folloe. The 1977 Labor Yearboo, Departent of Labor, 3iveå the aumbers of indusC'rial aorker fog- k965 thru 1976 . (see AnnT: table 14). The perene chag.& in ehe number of familis primarily dcpendent o enrtprenurial activicy vera then aumea'to be the ~ aj the percoa~n eca a self-emploed iorkar (bu noc of unpaid family workr&) Ln the za xector. Tho percentage imnrease (between 1971 and 1976) tn the mäer of familias dependenr on wage and slarsy vork as ascit^ad In the a vay. To ecimae the d.iscributiona, percentaga and numbaere of famiies for the threm years, the 1971 percentage diztributions avn In colu~n (1) through (4) ere applied to rhe total mber of facillan clasasfied according ro tsre of incom for the repective years. Thu col n (5), ro (1) for 1965 equala (1. 9x 1966 + 3.1 x 456 + 5.6 x 192 + 8.9 x 2229)1100 - 260; etc. Using the procedur, the figurs in colu=n* (6) and (9) are actual data, v.ile thots in (5), (7), (8), and (10) ar eatiated effeta of the coange t occupecionalj xcrucure, holding rhe distribution of income contante vithin each occupational catgorT. Suplementar Calulations (1) Zscimtem of the inaxme range of the botm to quintile for 1971. From colum (9), the percentag. of families with Incoe of up ro ?1500 i (5.0 + 12.0 + 12.2) - 29.2% and with tazom of up co P2000 Is (29.2 + 11.9) - 41.1%. Thoce with tncome~ Ln the rmnge 21500 to 2000 are then dirided Lnto fasile abov., snd familie bhelo the ~baccom 40% limit on a srraighr line baaia. The dividing line for the bortom 40% is hean 1500 + 500(40 - 29.2)/(41.1 - 29.2) - 1958 p~*,a. (2) 19tläsca of the effects of changea in tsompLo7~ åtructure (bulding the incom diaribution curves within each occupational catagory conätanc) on the averoge real incoma of the bottom 40%. Ustng 4he linear mcthod given In nota (1) abve, the Lncome range of the botto 40% is eacnited to be 71869 Or belw tn 1965, and P1964 or below to 1976. Uning thee figures,the data - Lm columma (8) and (10), and eaking mid-poirm' on each block of the iLaogram, givea the following everag real Lncome for 1965 and 1976 ree*wctively. 0.054 x 250 + .128 x 750 + .125 x 1250' 1-0.09(1500 + 1869)/2 - MO0 0.049 x 250 + .117 . 730 + 4121 x 1250 + .113(1500 + 1964)12 - P436 The iocrease *vrage real i s La then 9%. -There te a don~ard bia in o of the aversge incoe estimca for the botto 40% on account of the limear approximcions involved, (3) The change for rhoee familias vbo moved wo'uld be 9.0L.'Xa(No',' Ln tšio @ iles) ~ (3r,o aoed). this equate 9.O r-4E1(.6.3-39.6 - 56. ANNEX TO CHAPTER VII Table 7.12: OCCUPATIONAL STRUCTURE AND ESTIMATED WAGES OF WAGE LABOR, 1960 TO 1970 Percentage Share of Wage Labor Wages/Day (1972 Pesos) /1 1960 1970 Change 1960 1970 Change Occupation-- (1) (2) (3) (4) (5) (6) Farm Labor 32.2 20.8 - 11.4 5.8 3.8 - 2.0 Production Workers intlanufacturing and Trades- - Large Establishmentsl 10.1 14.4 4.3 13.8 13.9 + 0.1 - Small Esta lishments'- 3.6 6.6 3.0 5.7 5.7 - Households'L 6.5 5.4 - 1.1 5.8 3.8 - 20 / '4 Sales Workers- 11.2 12.0 0.8 12.7 10.5 - 2.2 Stevedores and freight 8.3 6.3 - 2.0 10.0 9.5 - 0.5 Land Transport 6.1 11.7 5.6 10.0 9.5 - 0.5 Service: - Housekeepers 14.8 14.7 - 0.1 7.5 7.1 - 0.4 - Other - 7.2 8.1 0.9 8.3 9.5 1.2 Total Weighted Average 100.0 100.0 0.0 8.7 8.2 - 0.5 No. of Workers, 000s 2,222 3,835 1,613 /1 Excluded are wage labor in mining, quarrying, fishing, logging, hunting and occupations NEC, as data were not readily availhble. Also excluded are professional, administrative and clerical, as these are mostly salaried and higher paying occupations. /2 Such as building, masonry and the repair and installation services (plumbers, carpenters and electricians) outside manufacturing. These add about 17% to what would be the totals if production workers in manufacturing alone were considered. /3 Establishments with 10 or more workers are here described as large following the terminology of the NCSO in the 1961 and 1972 Censuses, and those with less than 10 workers as small. /A Working proprietors and family workers not included; also professional, administrative and clerical workers in production and sales are excluded (see f.n. 1). /5 The services here are mostly in restaurants and hotels, recreation, entertainment, barber shops etc., repair and installation services, and other wage labor. Source: See Annex Table 14 for data sources and basis of estimates. ANNEX TO CHAPTER VII Table 7.13: EFFECTS OF CHANGING WAGES AND OCCUPATIONS ON AVERAGE WAGE LEVELS YOR WAGE-LABOR, 1960-70 Contribution to Average Effect 1 on Average Wage (P/day '72 prices) Wage Changes in; Occupation 19 /2 1 2 Chae Occmtior- gs_5 Farm Labor 1.9 0.8 - 1.1 - 0.7 - 0.6 Production Workers in - Large Establishments 1.4 2.0 + 0.6 + 0.6 0.0 - Small Establishments 0.2 0.4 + 0.2 + 0.2 0.0 - Households 0.4 0.2 - 0.2 - 0.1 - 0.1 Sales Workers 1.4 1.3 - 0.1 + 0.1 - 0.2 Stevedores, etc. 0.8 0.6 - 0.2 - 0.1 - 0.0 Land Transport 0.6 1.1 + 0.5 + 0.6 - 0.0 Service: - Housekeepers 1.1 1.0 - 0.1 - 0.0 - 0.1 - Other 0.6 0.8 + 0.2 + 0.1 + 0.1 Weighted Average 8.4 8.2 - 0.2 + 0.7 - 0.9 /1 These two items do not always add up to the change shown in the third column because second order terms are ignored (i.e. the change in wages times the change in occupations). /2 Col. (1) bf AnnexTable 12 times Column (4). /3 Col. (2) of Annex Table 12 times Column (5). 4 Col. (3) of Annex Table 12 times Column (4), (Approx. see f.n. 1). /5 Col. (6) Annex Table 12 times Co. (1). (Approx. see f.n. 1). /6 See also footnotes 2 and 3 of Annex Table 12. Source: Calculated from_Annex Table 12, .. . . . . . ANNEX TO CHAPTER VII Table 7.14: DISTRIBUTION OF WAGE AND SALARIED, SELF EMPLOYED AND FAMILY WORKERS BY SECTOR, 1965-1976 Percentage Distribution of Workers Industrial Sector No, Employed Wage & Self Family Total and Year /1 000s Salary Employed Workers Total Agriculture: 1965 5,725 15.8 50.8 33.4 100/2 1976 8,126 15.7 46.7 37.3 100-- Manufacturing: 1965 1,101 53.9 37.4 8.6 100 1976 1,680 65.8 26.0 8.1 10o-= Commerce: /2 1965 1,114 25.7 57.6 16.7 100-- /2 1976 1,864 29.6 54.5 15.5 100-- Personal Services, (Other than Government, Community and Domestic) 1965 227 51.6 41.4 7.0 100 1976 276 n.a. n.a. n.a. 100 Transport Etc.: 1965 339 83.5 14.7 1.8 100 1976 550 81.6 17.0 1.3 100 /3 All Other:- 1965 1,549 96.3 3.5 0.2 100 1976 2,886 97.1 2.7 0.2 100 Total: /3 1965 10,101 36.5 41.2 21.9 100--- /3 1976 15,427 41.2 35.8 22.6 10O-- /l October Series for 1965 and August Series for 1976. /2 The totals do not add up to 100 in these cases because a small percentage of the sample, varying between 0.1% and 0.4% were classified as "not reported." /3 Mining, quarrying, Construction, Domestic Services (over 99,5% of which are classified as wage labor in the Censuses), and Government Community, Business and Recreational Services. Source: 1977 Labor Yearbook Table 3.9. 引 kiNNEX TO CdkPTER TT_T Table 7. 16: /1 /2 MANUFACTURING: M'TD ASSETS PER WORKER AT 1972 PRICES, 1971 Sector 20 - 49 50 - 99 100 - i99 200 - 499 300- Total Food 13.2 11.8 19.0 24.7 25.3 23.5 Beverages 11.6 29.0 11.6 8.3 17.7 12.9 Tobacco 2.8 - - 2.6 5.1 7.0 Textiles 10.6 15.0 13.2 13.7 13.6 13.6 Clothing and Footwear 5.2 3.3 6.7 5.0 2.1 3.8 Wood 10.1 10.0 7.6 8.4 11.4 10.5 Furniture 3.4 15.3 7.4 3.4 - 6.9 Paper 14.1 11.0 26.8 72,0 24.3 35.0 Pririt4 n- 8.2 7.1 7.5 - - 8.2 Leather 4.3 4.9 15.5 - 9.7 Rubber 7.9 18.3 8.9 lo.4 11.8 10.7 Chemicals 26.7 22.2 18.6 24.8 35.9 26.5 Petra! and Coal 8.7 - - - - 299.8 Non-Metallic Minerals 44.4 7.8 13.L 119.8 39.7 62.1 Basic Metals 6.6 16.6 11.4 38.8 131.4 73.2 Metal Products 8.1 14.4 16.2 - - 10.0 Machinery 11.1 11.4 - - - 16.0 Electrical'Machinery 12,1 6.6 12.0 11.9 7.7 9.8 Transport 9.5 4.3 18.5 120.1 14.8 Miscellaneous 14.1 8.8 10.0 10.3 Total 12.0 12.1 14.9 31.7 20.6 20.3 Total/3 9.9 12.2 11.3 12.0 15.1 17.1 /I original data defiated througk, the fixed capital formation index for GNP. /2 A dash indicates data supressed in original source. /3 Total excludes paper, petroleum and coal, non-metallic minderals and basic metals. Sources: NCSO, Annual survey of Establsihments 1971 (founded in "Appraisal of a small and medium industries development project", 1975) and, statistical yearbook, 1978, Table 4.8.