The Political Economy of the

Philippiness Service-led
Growth
Antoinette R. Raquiza
Asian Center, University of the Philippines
From the Regions Economic Laggard
to Second Fastest Growing Economy

Puzzle

Philippine agriculture and manufacturing

suffer from low productivity while its services
sector specialize in low-value, low-skilled
activities (World Bank 2013)

Today, the country has the fastest growing

economy in the region, second only to China
What would account for the
economic turn-around?

Countrys growth is due to the dramatic

expansion of its international trade in
services (e.g., export labor and business
process outsourcing industries)

External and internal factors: (1)

reorganization of the world economy,
and (2) government policies that linked
Philippine labor to global markets
through services.
Four Parts

I. Trends in the global economy

II. Rapid Growth of the BPO Industry and
Export Labor as a product of global and
domestic factors
III. Political Economy
IV. The Work Ahead
Philippine services in
global markets

The Philippine services sector has

always played a leading role in the
economy, but only in the last decade
had its huge contribution to the
countrys gross domestic product
translated into rapid growth.
Period Services sector Annual average
contribution to growth rate of
GDP real per capita
GDP
1981-1990 75.3% -0.6%

1991-2000 51.9% 0.9%

ADB 2007

2000-2010 62.8% 4.8%

What would account for the
services sectors rise in
productivity and thus greater
impact on the Philippine economy?
Business
Process
Outsourcing
Industry
Factors for Rapid Growth

New Era of Globalization

Digital revolution and advances in information
and communication technology facilitated
further fragmentation of production and
services

For services, cutting-edge ICT enabled

corporations to outsource services to firms
in places where skilled labor is cheap
Factors for Rapid Growth

Domestic policies
Executive Order No 372, establishing a
Public-Private Task Force for the Globally
Competitive Philippine Services Industries

Board of Investment and Philippine

Economic Zone Authority
Provide incentives for BPO locators and
domestic property developers building and
operating IT parks and cyberzones
Two Characteristics of BPO Industry
1. It is dominated by multinational enterprises
MNE participation went up from US$329M in
2005 to US$6.9B in 2012

Foreign-to-total equity ratio during the same

period went up from 66.9% to 95%

2. Export receipts represent most of industrys

earnings, from 69% in 2005 to more than 90%,
starting in 2009.
 Revenue of and Foreign Direct Investment
in IT-BPO Services (BSP data)
2005 2006 2007 2008 2009 2010 2011 2012

Export 1,388 2,288 3,490 5,288 7,717 9,470 11,160 12,503

Revenue
(in US$ M)
Foreign Direct 329 376 821 1,825 2,376 4,288 5,355 6,959
Investment
(In US$ M)
Foreign-to-
Total Equity 66.9 60.4 87.9 93.3 91.8 97.6 93.2 95
Ratio
(per cent)
Export
Labor
Export labor gained from rise of
global householding
Global Householding the nurturing and
sustenance of households in both sending and
receiving countries through international
transactions

Ageing populations and changing arrangements

of households in developed countries have
created a demand for domestic help from
developing countries.
In 2013 more than one in two women OFWs
worked as domestic workers
Institutionalization of
labor migration
In the 2000s, under the Arroyo
presidency, official policy on overseas
labor shifted from one that saw it as a
temporary solution to unemployment
and foreign exchange shortfall to one that
sees it as integral to the governments
national development program
Overseas Remittances Industry
Bangko Sentral ng Pilipinas

Department of Labor and Employment

-> Philippine Overseas Employment Agency

Department of Trade and Industry

Technical Education and Skills

Development Authority (TESDA)
POEA in 2005 and beyond
Increase the number of accredited
recruitment agencies
Forge government-to-government
recruitment and placement programs
Organize international labor fairs that
brought together foreign and domestic
recruitment agencies:
Send marketing missions to abroad
Further decentralization of its services
Impact of Export Labor
2005 one million OFWs deployed
contributed to a 25% increase in remittances

2006 - OFW remittances surpassed official

development aid and foreign direct
investment flows combined

2007 - remittances jumped up to US$14.5

billion, contributing to a 6.3% increase in
private consumption for the year
Administrative Order No. 247

instructs the POEA to execute a

paradigm shift by refocusing its functions
from regulation to full-blast markets
development efforts and the exploration
of frontier, fertile job markets for OFWs

Government efforts facilitated the

deployment of 2 million OFWs in 2012
 Political Economy of
International Trade in
Services
Unceremonious Beginnings
Major government push to promote
international trade in services may be
traced back to mid-2000s, a low point in
the Gloria Macapagal Arroyo presidency
Arroyo confronted by looming fiscal and
economic crisis and challenges to its
political legitimacy

-
Steps taken by government

Imposition of expanded value-added

tax on oil and electricity
Trade in services, particularly export
labor, adopted as an integral part of
the Philippine development program
Services and Politics
That the economic turnaround could be
traced to the massive flow of remittances
puts into sharp focus the different ways in
which services connect to the domestic
economy.
Philippine case suggests that the services
sector can thrive alongside weak state
institutions than economic activities (e.g.,
manufacturing) requiring longer periods
and more resources to turn a profit
Export Labor
A major source of foreign exchange:
improves the countrys currency account
balance and raises level of savings and
investment

Eases unemployment and and poverty

Helps grow the consumer class

Incomes of remittance-receiving
households increased by an average of
six percentage points in a year
Implications
Increased mobility under globalization
allows labor to vote with their feet
(Hirschman 1978) and literally take its
business elsewhere during periods of
scarcity or uncertainty in their home
countries .

Trade in services could save a regime

even without undergoing broad-based
growth
 Labor Export Hazard
The concept points to migrant labor as a double-
edged sword: once seen as a temporary solution
to unemployment and foreign currency shortfall,
it has over time become a for state elites to be
prudent and promote productive activities

Those who benefit from these services and from

overseas remittances (i.e, the commercial elites
and growing middle class) have little reason to
push for a more responsive or responsible state

Draws on the moral hazard literature

The Work Ahead
Dynamism of the Philippine experience
derives from and ends in foreign shores.
Dualism
The most dynamic businesses are those
that are fully integrated in the global
economy, with very limited linkages to
the domestic real economy.
Dualism?
The most modern businesses are linked
to foreign capital, while the vast majority
are micro enterprises, many of which
belong to the informal sector.

Heavy reliance on trade in services, as

configured, to keep economy afloat could
worsen inequality
Recommendations include
Ensure supply of talent pool for BPOs and
push knowledge-based businesses, there
is a pressing need for government to
invest more on education at all levels.

Develop promotion programs that would

incentivize the integration small and
medium scale businesses into global
production networks an initial step
toward forging and expanding the
services-manufacturing nexus.
 Develop more accountable state
institutions, which would be go a
long way toward promoting
industries with wider linkages in the
domestic economy