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President Donald Trump has a lot to learn from the former “sick of man of Asia,” the Philippine economy. His “America First” policy that naively considers imports are bad and exports are good and that blames imbalances in trade as the cause of the loss of jobs in the United States is a recycling of the inward-looking industrialization strategy that was a major cause of the failure of the Philippine economy to join the “economic tigers” in the last century to First World status, despite the initial advantage it had as one of the most developed economies in Asia after the Second World War. The Filipino First policy that is still enshrined in the Philippine Constitution resulted in a double whammy. First, it helped the Filipino elite to monopolize strategic industries in the Philippines because of the equity restrictions imposed on foreigners, thus handing control of the economy to the few rich people in the Philippines who had the capital to put up the remaining 60 percent majority ownership. That is why, Filipino First resulted in “Rich Filipinos First and Damned the Rest.”
Secondly, the import-substitution mindset wrongly assumed that imports are necessarily bad and that exports are necessarily good. The important question is what types of imports do you have and what do you do with them. Trade deficits are not necessarily bad for the economy if the bulk of imports are machinery and equipment as well as raw materials that can fully employ a growing population. This was the case of the Asian tiger economies of the last century that capitalized on their demographic dividend that they enjoyed temporarily by going into labor-intensive, export-oriented industries. That is what the Philippine policy makers failed to realize and instead embarked on an import-substitution strategy that in reality increased the volume of semi-finished raw materials to supply the so-called “beauty parlor” industries of the past, i.e. industries that were just adding “curls and frills” to the goods that were really manufactured abroad. This was one of the causes also of the general failure of Latin American economies who had the same obsession with import-substitution strategies in the last century.
Today, even advanced countries like the United States can still be infected with this mistaken notion of world trade. As Peter Goodman wrote in the New York Times International Edition of April 7, 2017, President Trump has an erroneous view of trade deficits: “In his accounting, international trade is a zero-sum affair, as if every country were jockeying for a share of forever limited amounts of business. An auto part made in Mexico and later included in a finished vehicle destined for a suburban driveway in California represents jobs hijacked from the Midwestern factory that should have employed American hands to build everything.” This view misses the important truth that trade is not a zero-sum game. The rapid expansion of trade over the last two decades has stimulated economic growth everywhere. What President Trump fails to consider is that “American factories have increased production over the years, in part by drawing on a global supply chain to get what they need. A construction machinery plant in Illinois may buy ball bearings from China, glass displays from South Korea, computer chips from Malaysia and other parts from Mexico, some of them forged with American-made steel….Obsessing over the balance of trade with any single country misses all of that.”
The root cause of unemployment in the United States is not trade deficits. It is rapid automation, especially in manufacturing. Indeed factory laborers have been the losers as their jobs have been taken over by machines. A recent study done by economists Daron Acemoglu of M.I.T. and Pascual Restrepo of Boston University concluded that robots are increasingly taking the place of human workers in manufacturing. They analyzed the effect of industrial robots in local labor markets in the United States. The researchers found out that robots are to blame for up to 670,000 lost manufacturing jobs between 1990 and 2007. They concluded that number will rise because industrial robots are expected to quadruple in the near future. In some specific areas they studied, each robot per thousand workers decreased employment by 6.2 workers and depressed wages by 0.7 percent. Nationally, the effects were smaller, because new jobs were created in other places. Some optimists, however, argue that machines will complement rather than replace humans. Robots cannot replicate human traits like common sense and empathy. For example, machines can increasingly replace human labor in health services but they can never replicate the tender and loving care that endear Filipino nurses and other health workers to patients in the U.S., the U.K. and other countries where they are employed.
It must also be pointed out that trade cannot be judged on the basis of its impact on jobs alone. Trade has allowed American consumers, including the low-income households, to have access to a wide range of products such as shoes, clothing, appliances, cell phones, computers with much lower prices without sacrificing quality. As Mr. Goodman concludes: “The only thing one can say with certainty is that the deficit reflects how Americans have consumed more than they have been willing to save purchasing from foreigners who have in turn invested in the United States. To the degree that this is a problem—and opinions vary—most economists suggest that it is best addressed with tax policies and incentives to save, rather than by impeding trade.” To address the impact of automation on joblessness, the solution may be found in restructuring the educational system in the United States to channel more of their youth to the technical skills that are in short supply and to upgrade their knowledge workers to higher levels of learning that are opening up in an increasingly digitalized world.
Although the circumstances facing the Philippines are substantially different from those prevailing in the United States, these considerations should also motivate our leaders and policy makers to address the skills mismatch between what our schools are producing and what industries at our present level of development are demanding, especially in the construction sector that is suffering from extreme shortages of skilled workers like carpenters, plumbers, electricians, mechanics, etc. In the knowledge industries, we should be producing more graduates who can think critically, communicate effectively and relate various disciplines to one another in looking for solutions to professional problems. This upgrading of knowledge workers will be especially crucial in the BPO sector where automation is proceeding at a breakneck speed. The same can be said for our health and education sectors where health workers and teachers should be increasingly familiar with digital technology. For comments, my email address is email@example.com.