Insufficient import substitution industrialization in the Philippines
Last week we saw how the first industrial revolution changed the level of development of the different nations of the world from being almost equal and constant for thousands of years to a level where some countries have managed to propel themselves towards development. faster and higher. This happened when England and some countries in mainland Europe, including North America and later Japan, stole a march on the rest of the world with huge production gains over a relatively short period of time. through industrialization.
Now we are seeing more countries catching up, but many are still being left behind, like the Philippines and other non-industrialized countries in Asia.
It should be noted, however, that after Japan in the second half of the 19e century, it was not only after World War II or more than half a century that the four newly industrialized economies (NIS) of Asia (South Korea, Taiwan, Singapore and Hong Kong) then joined the world. industrial developed.
Why was the Philippines left behind when it was one of the first former colonies to become free just after the last world war?
In their book, The Process of Development, James Cypher and James Dietz emphasized the need for industrialization as a structural means of accelerating the pace of economic growth and development. They also pointed out that the nature of the structural transformation from primary production to secondary and tertiary production is part of the process of economic growth and development and that structural changes, that easy import substitution industrialization (ISI) can help initiate, are the first step in industrialization.
I also wrote last week that according to Yoshihara Kunio during the second half of the 19th century, when other developing countries lay dormant, the Philippines under Spain received the first impetus to modernize, but that unlike in Japan, which began to industrialize at this time, the first phase of the development of the Philippines was mainly limited to the export and processing of agricultural products in high demand in the West.
According to Kunio, the lack of progress outside of processing agricultural products was appalling as not only sophisticated machinery but also simple manufactured goods were imported, which is why after independence, the Philippine government went straight for it. in import substitution industrialization or ISI as Cypher and Dietz mentioned above.
As Kunio cited, the immediate result of the Philippine foray into the ISI was an increase in value added in manufacturing by 12% per year during the first five years of the 1950s. Growth fell to 7 percent per year over the following years, but since it was still higher than the rest of the economy, the share of manufacturing in the country’s total output continued to increase, reaching around 20 percent in the early 1970s.
Unfortunately, since then and until now, the same level of manufacturing share remains more or less at the same level. This shows that, while not necessarily a failure, the ISI was not enough to propel the Philippines to a faster and higher level of development.
The four NISs also entered the ISI early on, but soon afterwards also followed it with an industrialization of exports to overcome the limitations of the domestic market for their manufacturing output and to earn the foreign exchange needed to increased imports resulting from the raw material needs of their expanding export industries and other needs of their prosperous people.
Indeed, the industrialization of Philippine exports also began immediately before and after martial law under Marcos. He pushed the industrialization of exports with the Export Incentives Law and by creating export processing zones, first in Bataan, then in Cebu, Baguio and Cavite later. In Mindanao, Marcos also created the 3,000 hectare PHIVIDEC industrial zone located in Misamis Oriental (PIE-MO). I personally witnessed the creation of the PIE-MO while I was still at NEDA Region X based in Cagayan de Oro in Misamis Oriental where I also conducted a study on its impact five years later.
Despite the presence of export processing zones and industrial zones, however, foreign investors, flocking to Asia and other emerging countries of the world, were somewhat reluctant to come to the Philippines, with martial law and unrest caused by Communist insurgents in many parts of the country and Muslim separatists in Mindanao.
Regardless, the Philippines, dependent on importing oil, was also hit hard by the first oil crisis of 1973, followed by slowing exports of sugar and coconut products later. These, along with the growing external debt to be repaid, revealed the weakness of the Philippine economy unlike the four NIS and even Thailand and Malaysia.
The Philippine problem was compounded by the failure of industrial projects undertaken by the President’s cronies to prosper due to reported corruption and the cronies’ lack of proven business ability other than to be loyal to the president who bestowed favors on them. .
Such was the poor state of development of the Philippines under Marcos, which ended in the collapse of the economy in its last two years in 1984 and 1985 when the Philippine GDP fell by more than 7 percent a year. or 15 percent more or less. in two years.
What’s next then? How will the Philippines find its way to a faster and higher level of growth and economic development? I will continue this series next week.
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