How the Philippines fell from its Industrialization Path

Like most countries, the Philippines was hard hit by Covid-19 both in 2020 and 2021. However, unlike wealthier countries, it had a severe lack of vaccines, medicines, and personal protective equipment (PPEs) needed to fight the pandemic.

• The production of vaccines is the domain of biotech which India, South Korea, and Singapore are good at.
• The production of PPEs, on the other hand, are done by manufacturing, which China, Taiwan, and even Vietnam excel in.

The Philippines has no strength in either and so its Covid response was deficient. This was made worse by the overpopulation problem caused by the Church .

Because of the lack of local biotech and manufacturing, the country had to literally beg for supplies from China and the US. When begging got nowhere, the government turned to bashing rich countries, even if it was really the fault of Philippine policy in the first place.

The nation had focused too much on services such as hospitality, food services, and tourism. It had neglected industry.

The Process of Industrialization

Compared to its ASEAN neighbors, the Philippines actually had a headstart in industrialization because of postwar American surplus equipment and materiel. This is similar to how South Korean industry got a boost after the Korean War from all the equipment left behind.

The difference is that South Korea continued to industrialize, but the Philippines did not. Why?

It takes around 40 years for a non-industrialized country to be industrialized because a lot of infrastructure and skills are needed for the switch. The locals need to be trained in science, math, mechanics, etc. and gain experience in manufacturing and sourcing raw materials.

Japan started industrializing in 1868 and achieved it in 1905. In 1890’s it was already a baby industrial country, overtaking Russia which had stayed largely feudal. Russia’s backwardness caused it to be defeated by Japan and Germany in World War I. It even led to the loss of land when Alexander II sold Alaska to the US to pay for its war debt.

Singapore started industrializing in 1963 after it got kicked out by Malaysia. By the 1980’s Singapore was the world’s leading producer of hard disk drives. The details are in Lee Kwan Yu’s book.

Parallels Between Cuba and the Philippines

The Philippines fell from its industrialization path because of US policy. It turned out that US’ plan was to make its colonies as source for raw materials instead of making them its equals. They used Cuba for sugar supply and the Philippines as hemp supply.

Cuba and the Philippines were both Americanized at the same time and both complained about this. Cuba’s solution was to switch to Communism starting from 1955-1959.

Like Cuba, the Philippines did fight back, but through legal means instead of through violence. President Quirino and Magsaysay changed the US policy with the Laurel-Langley agreement of 1955 which allowed the country to apply tariffs on US imports. President Garcia’s Filipino First policy worked well with this, as it put the country on an industrialization path.

The Empire Strikes Back

However, this was reversed by Diosdado Macapagal from Pampanga which is an agricultural province. He removed the controls on the Peso and some imports which killed off the industrialization drive. Instead of exporting manufactured goods and electronics, the country exported cash crops first, as sugar and tobacco, and then the people themselves as Overseas Filipino Workers (OFWs).

Yesterday, January 21, 1962 I approved a unanimous decision by the Monetary Board of the Central Bank, embodied in its Circular No. 133, to institute the first large measure of genuine decontrol in our foreign exchange transactions. This is both in fulfillment of our electoral pledge to the Filipino people and in compliance with the provision of the law requiring decontrol by 1963. In an atmosphere of freedom, our entrepreneurs and citizens may now achieve prosperity for themselves

Diosdado Macapagal

How did this happen?

In the 1950’s and early 60’s an American named Harry Stonehill owned a huge business empire in the Philippines exporting cash crops. A fixed peso-dollar rate, as well as import controls on processing machinery, would not make such a business too profitable. To increase profits, such businesses naturally lobbies for a weaker exchange rate and free trade, just as the current EU Common Agricultural Policy does the opposite protectionist measures* to protect itself.

Instead of lobbying, Mr. Stonehill resorted to direct bribery of Garcia, Macapagal, and Marcos*.

Bye bye Economic Sovereignty

The Philippines thus gave in to American policy (starting with Diosdado Macapagal in 1965 nearly the same time when Cuba fully implemented Communism). Based on Cesar Virata’s interview, it is clear that Filipino policymakers were ignorant (bobo, mangmang) of the effects of Macapagal’s policy shift:

• The Filipino First Policy was cancelled
• Import controls were removed
• The peso devalued
• Foreign imports came in and destroyed Philippine industry

This led to the export of cash crops and raw materials instead of manufactured goods.

• Saudi Arabia exports oil
• Indonesia exports palm oil
• The Philippines exports sugar

When sugar was killed by the high fructose corn syrup of the Americans, the Philippines started exporting people as Overseas Filipino Workers.

This trend only changed after Fidel Ramos implemented a neoliberal industrialization policy called ‘Philippines 2000*’ in 1992. Instead of Filipinos creating local companies comparable to Samsungs, Acers, Mitsubishis, they just end up as employees of outsourcing and offshoring companies which use their labor.

Should We Go Back to the Policies of 1955-1961?

To incubate any industry, a country needs to block off cheaper and higher quality overseas competition. Why would a local invest in his time and effort into making a thing that China and Japan already can make very well?

This would be very difficult now that WTO has lowered tariffs. It would even be political and economic suicide to go back to the protectionist policies of the 1950s. A recent proof is the decline in the British economy because of Brexit.

The best solution would have been for the country to nationalize its utilities which provide the base for industrialization:

• NAPOCOR and state-run Meralco are brought back and WESM and PSALM are cancelled
• PLDT is recovered from the Salims of Indonesia
• MWSS recovers control of the water system that it delegated to Maynilad and Manila water
• PNOC-Petron recovers the shares it sold to Aramco

However, it would require too much effort to undo the policies from 1987. Moreover, the lack of any new moral philosophy means that the corruption that led to the bankruptcy of the Marcos state-owned companies still exists.

Instead, the Duterte government seems to be going for neoliberal workarounds:

• It seeks to revise the Constitution to add more competition in utilities such as power and water
• It added DITO (Chinese) to counteract PLDT-Smart (Indonesian) and Globe (Spanish)
• It revised the onerous contracts by Maynilad and Manila Water
• It encouraged oil exploration by Udenna at Recto Bank
• It amended the foreign investment act by changing definitions and allowing the Negative List to be flexible

These surrender economic sovereignty, and turn the country into a nation of employees instead of being innovators and captains of industry*.