Protectionism and the Phillipine Class War

(March 16, 2008) – An op-ed in today’s Manila Times (OK, so I read unusual newspapers) talks about the link between protectionism and poverty in the Phillipines. Click here to read the full article, Poverty in the middle of plenty.

Americans may notice similarities between the themes of the article and those of our current Presidential campaign. Note especially, the role of protectionism in keeping poor people poor and its counterpoint, the existence of prosperous globalized enclave economies in the midst of falling real incomes for low-skilled, low-income families. It is this dual economy, the author argues, that is responsible for the class war that has paralyzed the Philippine society. Like Disraeli’s England of the 1850s, Filipinos still are divided into two nations, “between whom there is no intercourse and no sympathy.”

There are important parallels with the current US situation.

1) Class war leads to punitive, growth-destroying tax, trade and regulatory policies.

2) Class-war driven tax policies can drive offshore exactly the valuable resources needed to crete jobs and improve family incomes.

3) Protectionism is extremely destructive for growth and incomes. It can permanently mire an economy in poverty.

4) Once started, protectionism is hard to stop because it creates vested and well-funded political interests that want it to continue forever.

5) Labor unions are not the only vested interests that argue for protectionism. Owners of favored businesses or industries–the oligarchs of the article–are powerful supporters of protectionism. Witness the steel, lumber and agricultural protectionist policies in recent years. (We are subsidizing corn farmers and ethanol producers at the same time we are restricting lower cost ethanol imports from Brazil.)

6) Trade increases overall real incomes but rapid changes that accompany trade cause real pain and fear for large numbers of people. A government that does not acknowledge that pain and fear, pretending that everything is just fine, angers voters and feeds class war politics.

7) Solving the problem for those left behind is a matter of education, training and understanding. Doing so is important for holding a nation together. But attempting to do so with protectionist policies will hurt the very same people they are trying to help.

I have posted excerpts below.

JR

Poverty in the
middle of plenty

Can poverty worsen in an expanding economy? That’s what is apparently happening. Not only have everyday Filipinos not felt the supposed growth of the economy. Between 2004 and 2006, 700,000 families (3.5 million people) have actually fallen from the lower middleclass into downright poverty—as their incomes failed to keep pace with living costs. Why has this happened?

…Our economy still is as fragmented as our geography and our politics. Virtually alone among our neighbors, we still have two economies existing side by side—modern industries, haciendas, plantations and mines together with a subsistence sector.

We still have a “dual economy”—a relatively modern half based in Metro Manila and its satellite regions, and a traditional one, based on peasant agriculture, in the rest of the archipelago. And because there are only the weakest linkages between the two, the industrial economy can grow without substantially benefiting the people outside it.

In much of East Asia, rapid growth over these past 40 years has unified dual economies left over from the colonial period. Suharto’s Indonesia had a particularly good record in balancing interregional development between Java and the outer islands. But because we have been slow to ease mass poverty, we Filipinos still are divided—like Disraeli’s England of the 1850s—into two nations, “between whom there is no intercourse and no sympathy.”

On gaining independence after World War II, the new countries sought initially to industrialize behind protective walls, financing development through the export of agricultural products. But in our country, the weak state lost control of the processes of the protectionist trade regime to the political and economic elite.

Consequently, when the global economy opened up again, it could not switch to labor-intensive exports as easily as its neighbors were able to do—because oligarchic interests had clustered around the protectionist strategy. Because its economy remained closed, the Philippines missed the “East Asian economic miracle” that set our vigorous neighbors on the road to prosperity.

Our basic policy mistake was to carry on import-substituting industrialization long after it had outlived its usefulness. By so doing, we reduced the linkages between agriculture and industry, constricted job opportunities, and concentrated the benefits of growth on the landowning, industrial, and political elite.

…The economy’s fastest-growing components—overseas contract work and its domestic counterpart, business-process outsourcing (BPO)—are “enclave economies,” without organic linkages with the domestic economy. So is electronic-components assembly, which has become our predominant export industry.

While agriculture still employs over a third of all our workers, generates 15 percent of GDP—and nearly 70 percent of all the poor—it contributes less than a 10th of yearly growth. In 2004, the average farm household had only 1.8 hectares. It yields an average P16,650 in income—only a fifth of what the poor family needs to keep its head above water.

Our biggest problem is how to employ 2.8 million undereducated and largely rural young people unable to fill the jobs the modern economy generates. Out of every 10 Filipinos who can’t find jobs, eight are between 15 to 34 years old, and most of them live in the countryside. Right now, their only hope lies in “make-work” programs in government projects, which local politicians dispense. Yet raising the poor from poverty is the only way of incorporating their families into the modern economy.

…Meanwhile, the deployment of overseas contract workers is slowing down—although higher-skilled workers are leaving. More and more of them are computer professionals, doctors, nurses, engineers and architects. And already they send home the equivalent of almost 15 percent of our entire GDP.