Trang Nguyen is a Senior Economist in Poverty Reduction and Economic Management, the World Bank
The Philippines is not the typical East Asian miracle story. While the region's share of population living in extreme poverty (on less than US$1.25 a day) has declined by 75 percent since 1990, the speed of poverty reduction in the Philippines over this period was the slowest in East Asia — in fact, the official poverty headcount rate has remained at around 26.5 percent since 2003. Similarly, the Philippines has experienced slower per capita growth — averaging 1.5 percent between 1960 and 2012, well below the 5.6 percent that East Asia has enjoyed. Moreover, the jobs picture is quite bleak, with 75 percent of employment in the informal sector, which is associated with low incomes, high risks, and no formal contracts or benefits.
Market vendor at outdoor street stall selling baked goods in Cebu City, Philippines. Photo credit: TomFullum.
What's gone wrong in the Philippines? The answer is important not only for putting the Philippines on a better job path but also for agrarian economies that are trying to industrialize, like many countries in Sub-Saharan Africa. A recent report titled Philippine Development Report: Creating More and Better Jobs" offers new insights by analyzing the country's development challenges through the lens of jobs. It argues that failure to generate large-scale shifts of employment and output from agriculture to first manufacturing and later services — known as the process of structural transformation — has been the main obstacle to greater job creation and poverty reduction.
Not enough jobs, let alone good jobs
Despite the Philippine's widely accepted image as an outmigration powerhouse — roughly 200,000 new job seekers a year migrate for work — the lack of good jobs at home is a key reason for its slow progress in inclusive growth relative to its neighbors.
||At 7 percent, its unemployment rate isn't outrageous by global standards but it is higher than in other East Asian countries. |
||Among youth (aged 15-24), about 20 percent of Filipino men and 32 percent of women are inactive (that is, not in employment or education) — the highest rate in developing East Asia. |
||Although the share of employment in agriculture has been decreasing, many Filipinos are employed in low-quality jobs. |
||Even with an educated workforce, only 25 percent of entrants to the labor market (1.15 million a year) find employment in the formal sector. |
||Half of those with a high school degree end up in low-skill, low-pay services jobs in the informal sector (such as selling fruits on the street or driving tricycles). |
Unsuccessful structural transformation
Why is the economy still having so much difficulty in creating more and better jobs? The answer seems to lie in an unsuccessful structural transformation. Instead of rising agricultural productivity paving the way for a vibrant labor-intensive manufacturing sector and eventually a high-skills services sector, the opposite has happened. Agricultural productivity has remained depressed, manufacturing has failed to grow sustainably — despite a head start (see Figure 1) — and a low-productivity, low-skill services sector has emerged as the dominant sector of the economy. This is in sharp contrast to nearby countries such as China, Indonesia, and Vietnam, where labor reallocation across sectors, particularly toward light manufacturing for exports, has made large contributions to labor productivity growth. Instead of rising labor-intensive manufacturing driving up job creation and real wages, Filipino workers have moved out of agriculture to become increasingly concentrated in low-skill, low-pay, informal service sector jobs (see Figure 2).
Source: World Development Indicators
Figure 2: Majority of workers are found in agriculture and low-skill services.
Source: World Bank 2013. Philippine Development Report: Creating More and Better Jobs.
In addition, the policy environment hasn't been all that conducive to advancing agriculture and urban manufacturing. The report argues that several policy distortions are at fault: unsuccessful land reforms and agricultural subsidies, early protectionist policies and uncompetitive markets, low investments by the government and the private sector, and costly regulations. For example, the Philippines is known for a poorer investment climate than most East Asian countries, ranking 138th on the World Bank's ease of doing business indicator. Its statutory minimum wages as a ratio of average wage is the highest rate in the East Asia region, even higher than the ratio in Belgium and France.
A jump-start for agriculture and manufacturing
For the Philippines, the need to restart a proper structural transformation process is clear. The report calls for a comprehensive reform agenda to boost agricultural productivity and revive manufacturing. At the top of the list are tackling the policy distortions to secure property rights; increasing competition; streamlining business regulations; and investing in education, health, and infrastructure. Agrarian economies that are now trying to industrialize would do well to take note.