Manufacturing Industry—Philippines

A critical goal of the Philippine economy has been an expansion of its product manufacturing base to take advantage of its labor surplus and position itself favorably in the regional economy. The Philippines is a labor-surplus country, and the government has traditionally encouraged the development of labor-intensive industries, such as textile production and the assembly of electrical and electronic equipment. However, manufacturing has made only a relatively small contribution to employment. So far, the Philippine manufacturing industry has not exhibited the same structural changes as have neighboring countries.

The roots of modern manufacturing in the Philippines can be found in the closing years of Spanish rule in the last decades of the nineteenth century. Few industrial establishments began operations in the 1880s, and most of those that did produced food, tobacco, and beverages. Over the first four decades of the twentieth century, manufacturing developed slowly and irregularly. Industrial expansion was primarily directed to the processing of agricultural products (sugarcane and coconuts), the manufacture of apparel, and the production of ceramics, cement, glassware, and wooden and rattan furniture. During the period immediately following World War II, industrial production was geared to the domestic market, and manufacturing was assisted by high levels of protection. Protection depended initially on import quotas and foreign exchange control. Later, in the 1970s, the main forms of protection became tariffs and foreign-exchange controls administered by the Central Bank.

Much industrial growth took place in the 1950s. By 1960 manufacturing accounted for 20 percent of the gross domestic product (GDP), whereas the range in the other member countries that would later join the Association of Southeast Asian Nations (ASEAN) was 9 to 13 percent. However, growth rates dropped appreciably after the late 1950s, as the main opportunities for import substitution became exhausted. The government made a mistake in not moving away from the policy of import substitution in the 1960s. The 1970s experienced some reorientation toward exports, stimulated by the floating of the Philippines peso, the Export Incentive Act (1970), and the Export Processing Zone project (1972). However, in the beginning of the 1980s, the main thrust of industrial policy continued to be the protection of domestic manufacturing aimed at import substitution.

Since the mid-1980s, the performance of nontraditional manufactured exports has shown its growing importance to the Philippine economy. Within this category are electronics, furniture, wood products, and fashion garments, shoes, and leather goods. Most of these industries depend on imported raw materials that are assembled or fashioned in some of the Philippine special economic zones: the Bataan Free Trade Zone, Baguio, and Cebu.

Manufacturing is the second most important economic sector after services, employing 9.8 percent of the labor force and contributing 22 percent of the GDP in 1998. In the 1990s, manufacturing was the most dynamic sector in the Philippine economy. According to the Asian Development Bank, the GDP of the manufacturing sector increased by an annual average of 2.8 percent in the 1990–1997 period; manufacturing GDP declined by 1.1 percent in 1998 (as a result of the 1997 Asian financial crisis) and increased by 1.4 percent in 1999.

Manufacturing is dominated by the private sector. Firms employing over 100 workers together contribute 75 percent of the added value. Concentration is most pronounced in beverages, tobacco, cosmetics, paper and paper products, and household appliances. Many factories are licensees of foreign companies or act as subcontractors for foreign firms, turning out finished products for export from imported intermediate goods. In 1997 the most important branches of manufacturing, measured by gross value of output, were food products, machinery and transport equipment, and chemicals. (See Table 1.)

Modern manufacturing production is concentrated on processing and assembly operations of the following: food, beverages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals, paints, plywood and veneer, paper and paper products, small appliances, and electronics. Heavy manufacturing contributes less than 40 percent of the total added value in the 1990s. It is dominated by the production of cement, glass, industrial chemicals, fertilizers, iron, steel, and copper and refined petroleum products. (See

Table 2.) In the 1990s the electronics industry was the fastest growing sector not only in manufacturing but also in the Philippine economy as a whole. Exports of electronic production increased from $3 billion in 1992 to $20 billion in 1998; they contributed twothirds of Philippine exports in 1998. The electronics industry is also the branch where the most employment has been gained.

Manufacturing is highly dualistic, consisting of a modern sector, which has considerable export potential, and a cottage sector, which contributes only a small amount to total added value but employs over half the manufacturing labor force.

The government's industrial strategy places high priority on the dispersal of manufacturing capacity

outside the capital. However, the industrial sector remains concentrated in the urban areas, especially in the metropolitan Manila region, and has only weak links to the rural economy. Over 60 percent of the manufacturing establishments are still concentrated in the Manila area and the southern Luzon region. The ability of the Philippines to reach a new level of industrial growth may depend on its achieving diversification outside urban areas.

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Corpuz, Onofre D. (1997) An Economic History of the Philippines. Quezon City, Philippines: University of the Philippines Press.

Kunio, Yoshihara. (1985) Philippine Industrialization: Foreign and Domestic Capital. Oxford: Oxford University Press.

National Statistical Information Center. (1999) Center Philippine Statistical Yearbook. Makati City, Philippines: National Statistical Information Center.

Vos, Bob, and Josef T. Yap. (1996) Philippine Economy: East Asia's Stray Cat? Structure, Finance and Adjustment. New York: St. Martin's Press.