Creating More and Better Jobs: We Can Work It Out
Motoo Konishi, Rogier van den Brink and Karl Kendrick Chua
Presentation to the Third Arangkada Philippines Anniversary Forum
Wednesday February 26, 2014
Makati Shangri-La Hotel
Thank you for inviting the World Bank Group to speak to you at the third anniversary of Arangkada. I would like to structure my presentation along five core messages.
First, the central policy challenge facing the Philippines today is how accelerate inclusive growth, the type that creates more and better jobs and reduces poverty.
Let me make it clear from the outset what we mean by that. By “jobs” we mean “what people do to make a living”. So it includes formal work and informal work. It covers wage workers and self-employment. It covers businesses of all sizes.
By “good” jobs, we mean jobs which raise people’s real income and bring them out of poverty.
Second, you already know what reforms are needed to create more and better jobs. For instance, the Arangkada project put a long list together. And we just produced a development report on jobs for the Philippines.
Third, the reasons why these reforms are well known, but not implemented, are also well known. Reforms create winners and losers, and for decades, no centuries, the winners have been unable to convince the losers that implementing these reforms would put the country on a much higher growth path than before, which would also benefit those who would lose out in the short term. Hence, there is no simple and quick technical solution for the reform agenda. It will require a political process and agreement.
Fourth, a unique window of opportunity exists today to accelerate reforms that will help create more and better jobs.
Finally, and more importantly, seizing this window of opportunity is not just the job of the President: government, business, labor, and civil society, need to work it out with a sense of urgency and agree on an action plan on job creation.
I will also suggest that we need a crisis. The crisis is that we have 856 days left…
What is the jobs challenge? Soon, we will have the full 2013 data, but for now let’s start at the end of 2012. In the report on jobs we released last year, we calculated that we needed 14.6 million more and better jobs for the three million unemployed Filipinos, seven million underemployed Filipinos and the several million new entrants in the labor force until 2016.
What can the economy, as it is currently structured, provide? Let us assume that the current high growth rate in, say, business process outsourcing, is maintained, and growth in manufacturing is doubled. We estimate that of the half a million college graduates every year, only 240,000 would be absorbed in the formal sector. And every year about 200,000 simply leave the country and find jobs abroad.
The remaining 650,000 entrants, of which around half have high school degrees, would have no other option but to find or create work in the low-skill and low-pay informal sector. Note, it is this type of “job” which creates the bigger problem of underemployment—because if you are poor, you cannot afford to be unemployed.
In all, the formal sector would be able to provide good jobs to around 2.2 million people in the next four years, or around double the current figure. But we needed 14.6 million jobs. So that leaves us with a deficit of 12.4 million jobs for those who would be unemployed, underemployed or informally employed.
This is the crisis we need to address … with 856 days left.
With growth accelerating to historic highs, why is the economy still having difficulty in creating more and better jobs?
This is because the country’s long history of policy distortions has slowed the growth of agriculture and manufacturing in the last six decades. Instead of a thriving agricultural sector paving the way for the development of a vibrant labor-intensive manufacturing sector, and, subsequently, a high-skill services sector, the converse has taken place in the Philippines.
The agricultural sector has remained depressed, manufacturing has failed to grow sustainably, and a low-productivity, low-skill services sector has emerged as the dominant sector of the economy. This is what your scholars, such as NEDA Secretary Arsi Balisacan, mean when they speak about the Philippines’ lack of structural transformation.
And Secretary Balisacan is in eminent international company. In 1974, Gustav Ranis, professor at Yale University, at the invitation of President Marcos, led a high level mission to assess the Philippine economy. He concluded that there was no basis for sustained growth, because the economy was not backed by a strong agricultural sector and given this there was also no basis for sustained industrial growth. Moreover, manufacturing was inward looking, not focused on export markets.
Two decades later, another high level mission, led by Paul Krugman, arrived at the same assessment. Krugman concluded: “the most crucial failure of Philippine development strategy lies in its employment record.” He called for more support to agriculture and land reform, and for far more competition in the economy.
The key “brakes” on a successful structural transformation are the following: the lack of competition in key sectors, the inward-looking orientation of the economy, the lack of access to secure property rights for the majority of the population, the purposefully complex and un-transparent maze of government regulations, and severe underinvestment by the public sector in health, education and infrastructure.
This analysis is nothing new. The outcomes of the long history of policy distortions are nothing new either. Poverty reduction is very slow. Informality is pervasive. And many of the country’s best and brightest migrate overseas in search of better jobs.
Window of opportunity and a crisis
Even the reforms necessary to remove the distortions and brakes are nothing new. Many of them are contained in the Arangkada agenda.
So why do we think that “this time can be different?” Why do we think that these reforms can now be implemented, after they have stalled for so long?
First, the wind is in your sails. The country is benefiting from strong macroeconomic fundamentals, political stability, and a popular government that many see as truly committed to improving the lives of the people.
Second, the country stands to benefit from the global and regional economic rebalancing and the strong growth prospects of a dynamic East Asia region. China’s real wages are zooming up. The Philippines can be very much a part of a dynamic “Factory Asia”, where parts of the production value chains are looking for new places to re-locate to.
Third, the Aquino Government has demonstrated that it is not afraid to tackle vested interests in areas which had previously been too sensitive to reform. Several reforms are underway, notably in transparency, public financial management, tax policy and administration, anti-corruption, and social service delivery.
Fourth, and here is the crisis we need to “create”: many stakeholders like what they see, but they are also afraid it could all come undone in 856 days, when the President leaves on June 30, 2016. The current window of opportunity marks a critical juncture in the country’s history. A moment not to miss. So rather than gazing in the political crystal ball, it would make sense to work together with a sense of urgency, seize the moment and make sure the country’s taking the right direction at this critical juncture. We all need to come to the table now and form coalitions for reform. With a heightened sense of urgency. 856 days left.
A coalition for reform beyond this administration
Why coalitions and what would be their basis? By now, the Aquino Administration’s success in generating confidence and economic growth is providing strong incentives to an ever broader group of stakeholders to see such growth continue beyond this administration, and ensure that the pursuit of inclusive growth is sustained. Strategically forging such reform coalitions around certain themes or geographic areas should be a high priority for all who wish to see the country continue to do better. That has to be the basis for a broad-based coalition. We think such a basis is firming up more and more, in more and more areas.
There are several reasons why we need reform coalitions, rather than reform champions. First, only a coalition can increase the likelihood that reforms are sustained. The presence of a broad coalition makes it difficult for one sub-group (e.g., vested interests) to block the reforms. Similarly, without a broad coalition, reforms made under a strong champion can be reversed, as the country’s history shows.
Second, a coalition by its very nature must adopt a strategy that appeals to a wide segment of society, a strategy which is inclusive, around a package of reforms. A coalition could balance trade-offs, generate consensus around principles and also implement a far more wide reaching program than a single champion. A single champion can typically only tackle reforms one-at-a-time. And the one-at-a-time approach will generate powerful opposition from vested interests, which can drain the energy and the political capital needed for the reform.
Somewhat counter-intuitive then, to put the country on the straight and narrow, but irreversible, path of inclusive growth, a broad reform coalition — that is, a multi-sectoral group composed of many interests that can balance the trade-offs— is crucial.
In this regard, since I am from the Netherlands, allow me to talk about the Dutch disease of the 1970s. Most economists will be able to tell you what the disease is: a boom in mineral exports causing an appreciation of the exchange rate, which causes other export sectors to shed jobs massively, coupled with profligate borrowing and spending by the government.
But few economists will be able to tell you what the cure was. It was a tripartite, political agreement between government, labor and business. The tripartite body agreed to restrain inflationary government spending, safeguard the key social security systems, keep wages below those of its main competitor (Germany) and allow for more flexible labor contracts. A decade later, the Netherlands became one of the most successful economies in Europe, with one of the lowest unemployment rates. The Dutch cured themselves of the disease named after them by forming a coalition between stakeholders who had traditionally been at loggerheads with each other, but who, once they understood the cause of the disease, could form a coalition which cured the disease.
Been There, Done That
In the Philippines, would it be difficult to convince the reform “losers” that they would ultimately benefit? It shouldn’t be too difficult. During the Ramos Administration, several industries, notably the telecoms and airlines industries, were opened up to competition. The economic growth and job creation that followed these liberalizations demonstrated the economic potential that the monopolies had long suppressed.
In 2010, there were over 80 million mobile phone subscribers and over 20 million internet users. We estimate that five million new jobs were created by these reforms, including 800,000 jobs in the business process outsourcing industry. Access to the internet has helped build stronger demand for good governance and has helped improve disaster risk management, as citizens share information about flooding.
Travel costs have gone down by 50 percent. Twenty million Filipinos are now flying, up from less than five million two decades ago.
But perhaps most importantly for those who defended their vested interests in the run-up to the liberalizations: after the reforms, the economic pie in their sectors grew rapidly, making the incumbents wealthier than ever.
This Philippine experience should make it possible for those who think that their short-term interests will be affected, to nonetheless support a coalition for a far-reaching reform package. In the end, the country, and they, will be better off.
The reforms: some examples
Let me give you an example of a package of reforms which might be able to generate consensus. It is a tough one, as it involves rice policy.
Let me start by saying that I see no reason why the country should not, and could not, be self-sufficient in rice. By the way, in the interest of full disclosure, I have a PhD in agricultural economics from the University of Wisconsin and graduated as an Agricultural Engineer from Wageningen Agricultural University in the Netherlands. So I believe the country can be self-sufficient in rice. If we started to invest again in rice research (the country used to be world class in this), provided good extension and other advisory services, improved irrigation, built farm-to-market roads strategically, assisted farmers with marketing and other business services, and partnered them with agri-businesses, the country could be rice self-sufficient.
But this is not the way we are going about it. Instead, there are restrictions on the importation of rice, letting the government decide when and how much rice to import. This creates uncertainty for the private sector, causing less investment than otherwise would have been the case. Once an import quota has been set, the government itself imports and issues licenses to private traders. The idea is that this scheme would make the country self-sufficient in rice.
However, what is the outcome on the ground of this policy? Rice prices in the Philippines are far above world market prices. This hurts consumers, especially the poor. Because rice is such an important consumption item for the poor, it is one of the reasons why poverty in the Philippines is stubbornly high. Related to the high price of rice: our child malnutrition rates are a tragedy. And since rice prices are so much higher than our competitors, our wages have to be higher than theirs, hurting our manufacturers. Rice producers actually benefit little, as the higher prices are by and large not passed on to them. Finally, we all know what immense opportunities for rent-seeking and corruption this sort of importation scheme offers. And at the end of the day, the country is not self-sufficient in rice. So the way we are going about it is not working.
What if the stakeholders (farmers, labor, business, government, CSOs) sit together, not bilaterally with government, but as a group, together, and discuss a reform package. Imagine that the government liberalizes rice importation and replaces it with a tariff. At the same time, it would prioritize the agricultural and rural infrastructure programs I just mentioned, so that food prices can go down without farmers’ profits falling. Falling rice prices would benefit labor and would moderate their wage increase demands. And agri-businesses would partner with farmers to assist them with marketing and processing.
Such coalitions could also form locally, focused on a particular area. The World Bank and the IFC are currently working with government and the private sector (Unifrutti) to see if we can bring agricultural jobs to Mindanao.
I have highlighted agriculture, because without it, poverty will not be reduced at a substantial scale. There are few countries in the world which have reduced poverty without the help of agriculture. And these few countries could only do so because they created export manufacturing jobs at a massive scale and rapid pace. The rest of us cannot neglect agriculture if we want to reduce poverty and take the pressure off of our cities.
Another example. Informality of labor hiring is pervasive. At the end of 2012, 21 million Filipinos were informally employed, which is 75 percent of total employment. They need be provided with better jobs.
Would it be true that insisting that all labor contracts be permanent and protected would reduce informality? Look at the evidence from Europe. The stronger the protection of permanent contracts is, the higher the share of temporary contracts. Market forces produce this correlation. Europe has learned the hard way that if you suppress temporary labor contracts, it simply goes underground. The Netherlands used to have one of the largest underground, illegal labor markets in the world—it got me through college!
In the Philippines, these same market forces are at work. Since flexible contracts are strongly opposed by organized labor, these contracts go underground and become informal.
So the coalition could agree on the following. Labor would agree to recognize valid forms of flexible contracts, making them now formal, while government would commit to providing universal social and health insurance at higher quality and co-finance, with business, training and apprenticeships programs, including for disadvantaged groups and young workers.
In return for lower rice prices and flexible wage contracts for workers, businesses could support the idea of a level playing field for all. In exchange for less pressure on wage demands and more flexibility in hiring, organized business could support the principle of a level playing field, both between large companies and small businesses. It could stop the continuous lobbying for tax breaks and subsidies, agree to make all existing and new support measures temporary, and automatically lapsing. It could propose, agree and monitor, clear, verifiable and transparent performance criteria for those businesses which receive a subsidy or a tax break. Business could support a simplified, uniform tax code and a set of business regulations to promote competition and encourage the growth of entrepreneurship for firms of all sizes. Businesses also need to fully support freedom of association and collective bargaining, commit to offering more training opportunities for workers, and improve the link between wages and productivity.
So these are three areas of reform—rice policy, informality and competition—which can be bundled into a reform package, which, in principle, should be able to be sustained by a coalition. Because its outcome—more and better jobs—would benefit all.
These reforms are not new. But now is the time to form coalitions around them and agree to implement them. Because if not now, when?
Let me end by listing a very recent example of a reform coalition which we think started a truly transformational activity, which could improve governance across sectors, government-wide. A few weeks ago, the Government launched the Open Government and Open Data initiative. On data.gov.ph 650 data sets were made public, including budget data, customs data and waterway pollution data. We would like to congratulate the coalition of government departments, business, private citizens, civil society and development partners which made this happen in less than 9 months.
Successful implementation of agreements such as the ones outlined above will allow the country to restart agriculture and revive manufacturing, and create more and better jobs for all. We know the reform agenda. The Arangkada initiative contains an exhaustive list of reforms. The World Bank report on jobs also provides a summary. Many other policy analysts have over the years come up with excellent ideas for specific reforms.
What is needed now is for all of us to build coalitions, large and small, for jobs. Such coalitions can be at the national level between the traditional tripartite members, but expanded to include other stakeholders, such as informal labor and civil society organizations. Such coalitions can also be local, in say, a municipality, bringing key government departments together with the other stakeholders in business, labor (including informal workers), and farming.
Let us engage in a practical dialogue and partnership, and agree on an agenda on job creation for all Filipinos. Because we need to seize this opportunity together and address the crisis facing us: there are 856 days left.
Thank you very much.