RFP Amendment 1_Appendix 2 _Philippines Jobs Diagnostic.pdf

DISCLAIMER Any and all errors and omissions remain the responsibility of the authors. The views expressed herein represent the authors’ professional views and are not necessarily those of USAID or the U.S. government.

PHILIPPINES JOBS DIAGNOSTIC

USAID/PHILIPPINES

DISCLAIMER Any and all errors and omissions remain the responsibility of the authors. The views expressed herein represent the authors’ professional views and are not necessarily those of USAID or the U.S. government.

PHILIPPINES JOBS DIAGNOSTIC

John Avila, Greg Gangelhoff, Leonardo A. Lanzona, Caroline Smith, and Leandro Tan

CONTENTS

LIST OF TABLES 1

LIST OF FIGURES 3

LIST OF ABBREVIATIONS 5

ACKNOWLEDGMENTS 6

1 EXECUTIVE SUMMARY 7

1.1 INTRODUCTION 7

1.2 METHODOLOGY 7

1.3 CONSTRAINTS TO INCLUSIVE JOB CREATION IN THE PHILIPPINES 7

1.3.1 RESTRICTIVE LABOR MARKET REGULATIONS 7

1.3.2 LOW AGRICULTURAL PRODUCTIVITY 8

1.3.3 POOR INFRASTRUCTURE 8

1.3.4 LABOR SUPPLY 9

1.4 MINDANAO AND SECTOR LINKAGES 9

1.5 SECTOR LINKAGES 9

1.6 RECOMMENDATIONS 10

1.7 ORGANIZATION OF THE PHILIPPINES JOBS DIAGNOSTIC 11

2 JOBS DIAGNOSTIC METHODOLOGY 13

2.1 METHODOLOGICAL FRAMEWORK 13

2.2 COMPARATOR COUNTRY SELECTION 14

3 ECONOMIC GROWTH AND JOBS OVERVIEW 17

3.1 ECONOMIC GROWTH 17

3.1.1 MACROECONOMIC INDICATORS 17

3.1.2 STRUCTURAL TRANSFORMATION AND ECONOMIC GROWTH 22

3.2 POVERTY 23

3.2.1 POVERTY TRENDS 23

3.2.2 PER CAPITA INCOME 25

3.2.3 INEQUALITY 26

3.3 JOBS 27

3.3.1 JOB TRENDS AND INCLUSIVITY CONCERNS 27

3.3.2 STRUCTURAL TRANSFORMATION AND EMPLOYMENT 30

3.4 REGIONAL TRENDS 34

3.5 CONCLUSION 36

4 LABOR POLICIES AND OTHER REGULATORY

CONSTRAINTS 38

4.1 BINDING LABOR MARKET REGULATIONS 38

4.1.1. MINIMUM WAGES, PRODUCTIVITY, AND INFORMAL MARKETS 39

4.1.2 HIRING REGULATIONS AND TEMPORARY EMPLOYMENT CONTRACTS 41

4.2 OTHER REGULATIONS AFFECTING THE LABOR MARKET 43

4.2.1 INVESTMENT PROMOTION LAWS 43

4.2.2 FOREIGN OWNERSHIP 44

4.2.3 MARKET STRUCTURE AND ANTITRUST LAWS 46

4.3 DIAGNOSTIC TESTS 46

4.3.1 HIGHER (SHADOW) COSTS OF LABOR 47

4.3.2 EFFECTS OF INCREASING SHADOW PRICES ON EMPLOYMENT AND

CIRCUMVENTION 48

4.3.3 DISPROPORTIONATE ADVERSE EFFECT ON DISADVANTAGED FIRMS,

PERSONS, AND REGIONS 53

4.4 CONCLUSION 59

5 LOW AGRICULTURAL PRODUCTIVITY 61

5.1 AGRICULTURE SECTOR OVERVIEW 61

5.2 CONSTRAINTS ON AGRICULTURAL PRODUCTIVITY 64

5.2.1 RICE POLICY 65

5.2.2 LAND REFORM 66

5.2.3 INFRASTRUCTURE 68

5.3 AGRICULTURAL PRODUCTIVITY AND CROSS-SECTORAL LINKAGES 68

5.4 AGRICULTURAL PRODUCTIVITY IN MINDANAO 71

5.5 CONCLUSION 73

6 INFRASTRUCTURE 76

6.1 OVERVIEW 76

6.1.1 DIRECT EFFECTS 76

6.1.2 INDIRECT EFFECTS 77

6.2 INFRASTRUCTURE AND INCLUSIVE EMPLOYMENT 81

6.2.1 IMPACT ON THE AGRICULTURAL SECTOR AND AGRIBUSINESS 82

6.3 INFRASTRUCTURE DEVELOPMENT IN MINDANAO 83

6.4 SUMMARY AND CHALLENGES 85

7 LABOR SUPPLY 87

APPENDIX A: INPUT-OUTPUT ANALYSIS: SECTORAL

RESULTS AND OBSERVATIONS 108

RESULTS AND OBSERVATIONS 108

APPENDIX B: INPUT-OUTPUT TECHNICAL ANALYSIS:

REFERENCE DATA 123

DATA ASSUMPTIONS 125

RAS METHODOLOGY 125

REFERENCES 142

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LIST OF TABLES

Table 2.1: Selected Economic and Demographic Criteria, Philippines and Comparator Countries Table 3.1: Philippines Merchandise Trade Partners and Products, 2015 Table 3.2: Rate of Population Growth, Philippines, LMICs, and Comparator Countries, Decade Average 1960s–2015 Table 4.1: Regulations on Use of Temporary Employment Contracts in Selected Comparator Countries Table 4.2: Estimated Employment Elasticities in the Philippines, by Methodology, Size of Enterprise, and Production Status Table 4.3: Share Firms with Agency- Hired Workers, by firm Size, June 2014 Table 4.4: Minimum Wage Elasticities on Labor Market Participation (Employment Probability), by Worker Group Table 4.5: Unemployment Rate by Gender and Age Group, 2010–2014 Table 4.6: Poverty Incidence for Self-employed and Unpaid Family Workers, by Region, 2006, 2009, and 2012 Table 5.1: Agricultural Value Added Per Worker, Philippines and Comparators, 2000–2015 Table 5.2: Agricultual Value Added, Annual percentAGE growth, Philippines and Comparators, 2000-2015 Table 5.3: Poverty in Rural Population, Agricultural and Farm Worker, and Underemployed Populations, Philippines Table 5.4: Rice Paddy Yield, Philippines and Selected Countries, 1994–2013 Table 5.5: Trends in Real Annual Sales and Employment Growth in the Philippines, by Manufacturing Subsector, 2015 Table 5.6: Measures of Production Linkage of Agriculture Table 5.7: Share of Distribution of Agricultural Production, by Region, 2015 Table 6.1: Comparative Ratings for Quality of Infrastructure, by Country Table 6.2: Logistics Performance Index, 2016 Table 6.3: Local Firms Identifying Electricity or Transport as Major Infrastructure Development Constraint, by country Table 6.4: Electricity as Constraint to Firms, by Country Table 7.1: Share of Filipinos Employed, by Sector and Subsector, October 2016 Table 7.2: Total Share of Unemployment by Age and Gender, October 2016 Table 7.3: Share of Filipinos Employed, by Sector and Subsector, October 2016 Table 7.4: Total Unemployment, by Highest Level of Educational Attainment, 2016 Table A.1: Status and Rank of Backward Global and Domestic Linkages, by IO Sector, 2006 and Table A.2: Status and Rank of Forward Global and Domestic Linkages, by IO Sector, 2006 and Table A.3: Sectoral Rank of Output Multipliers, Global Case, 2006 to 2012 Table A.4: Sectoral Rank of Output Multipliers, Domestic Case, 2006 to 2012 Table A.5: Change in Multipliers, Global Case, 2006 and 2012 Table A.6: Change in Multipliers, Domestic Case, 2006 and 2012 Table A.7: Household Income and Employment Multiplier Rankings, 2006 and 2012 Table A.8: Change in Input Coefficients, by IO Sector, 2012

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Table B.1: Aggregated Input Output Table for 15 io Sectors, 2006 (in PHP, millions) Table B.2: Projected Total Primary Input Flows for 15 IO Sectors, 2012 (in PHP, millions) Table B.3: Projected Final Demand Flows, 2012 (in PHP, millions) Table B.4: Projected versus Actual Export and Trade Flows of 15 IO Sectors, 2012 (in PHP, millions) Table B.5: Aggregation of Exported Goods to 15 IO Sectors, 2012 (in PHP, mil) Table B.6: Aggregation of Exported Services to 15 IO Sectors, 2012 (in P mil) Table B.7: Aggregation of Imported Goods to 15 IO Sectors, 2012 (in P mil) Table B.8: Aggregation of Imported Services to 15 IO Sectors, 2012 (in P mil) Table B.9: Intermediate Interindustry Flows, 2012 (in P mil) Table B.10: Forms, Features, and Uses of Open Global and Domestic Final Demand-to-Output Global IO Model Table B.11: Empirical Frameworks for Quantifying Change in Open Global and Open Domestic Employment

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LIST OF FIGURES

Figure 3.1: Average General Government Primary Surplus or Deficit as Share of GDP, Philippines and Comparator Countries. 2006–2015 Figure 3.2: General Government Revenue, 2006–2015 Average Figure 3.3: General Government Total Expenditure, 2006–2015 Average Figure 3.4: Inflation, e-o-p Consumer Prices, 2006–2015 Average Figure 3.5: General Government Gross Debt, 2006–2015 Average Figure 3.6: Current Account Balance, 2006–2015 Average Figure 3.7: Remittances Received, 2006–2015 Average Figure 3.8: Merchandise Trade, 2006–2015 Average Figure 3.9: Foreign Direct Investment Net Inflows, 2006–2015 Average Figure 3.10: Growth Decomposition Results for the Philippines, 2009–2015 Figure 3.11: Poverty Headcount Ratios for the Philippines, Lower Middle-Income and Comparator Countries, 2011 PPP Figure 3.12: GDP Per Capita in Philippines and Comparator Countries, 2001–2015 Figure 3.13: GDP Per Capita and Growth of GDP Per Capita, Philippines, 1996–2016 Figure 3.14: GINI Index of Income Inequality, Philippines and Comparator Countries Figure 3.15: Unemployment Rate for Total Labor Force, 1991–2015 Figure 3.16: Annual Growth of Average Real Monthly Earnings, Philippines and Comparator Countries, 2002–2015 Figure 3.17: Employment in Agriculture, 2006–2015 Average Figure 3.18: Employment in Services, 2006–2015 Average Figure 3.19: Employment in Industry, 2006–2015 Average Figure 3.20: Employment in Industry, 1990–2015 Figure 3.21: Total Employment in the Philippines, by Sector, 1990–2012 Figure 3.22: Growth of Labor Productivity, by Sector, 2001–2015 Figure 3.23: Population of Persons in Working Age and Younger, 2000–2015 Figure 3.24: Population Pyramids for the Philippines, by Gender and Age, 2017 Versus 2047 Figure 3.25. Poverty Incidence in the Philippines, by Region, 2012 Figure 3.26: Average Growth of Labor Productivity, by Region, 2010–2015 Figure 3.27: Average Labor Productivity Growth in Mindanao Regions, by Sector, 2010–2015 Figure 4.1: Monthly Minimum Wages and Ratio of Minimum Wage to Added Value per Worker, Selected Countries, 2016 Figure 4.2: Share of Wage Employment in Total Employment, Philippines and Selected Asian Countries, Selected Periods 2013–2015 Figure 4.3: Foreign Direct Investments, Net Inflows, Philippines and Selected Comparator Countries, 2007–2015 Figure 4.4: Real Average Daily Wages in the Philippines, 2001–2015 Figure 4.5: Wage-Rental Ratio by Manufacturing Subsector, Philippines, by Subsector, 1999–2010 Figure 4.6: Share of Key Sectors to Total Employment in the Philippines, 2001–2013 Figure 4.7: Average Share of Labor Cost to Total Cost in Filipino Firms Employing 20 or More Workers, by Major Industry Group, 2013 Figure 4.8: Incremental Capital-Labor Ratio, 2000–2014 (in thousands) Figure 4.9: Number of Agency-Hired Workers and Percentage of Total Engaged Workers in the Philippines, Selected Years

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Figure 4.10: Informal Workers to Total Employment, Selected Regions, 2008 Figure 5.1: Employment in Agriculture Sector, Philippines and Comparator Countries, 1990–2010 Figure 5.2: Labor Use (Including Family Labor) in Rice Cultivation, Various Rice Bowls in Asia, 1994–99 Versus 2013 Figure 5.3: Titled and Untitled Parcels, per Region in Mindano Figure 5.4: Indexed Trends in Agricultural Labor Productivity and Paved Roads in Regions IX/XII and the Autonomous Region of Muslim Mindanao Figure 7.1: Rural Population as Share of Total Population, Philippines and Comparator Countries, 1967–2012 Figure 7.2: Underemployment Rate as Share of Total Employment, 2009–2016 Figure 7.3: Total Average Labor Force Participation by Gender, Philippines and Comparator Countries, 2006–2015 Figure 7.4: Share of Female Workers, Philippines and Comparators Figure 7.5: Distribution of Population Age 25+, by Educational Level, Philippines and Comparator Countries, 2010 Figure 7.6: On-The-Job Training in the Philippines and Comparator Countries, Latest Year Available Figure 7.7: Unemployment Rate by Education Level, Philippines and Comparators, 2006–2015 Average Figure 7.8: Biggest Obstacle in the Philippines and Comparator Countries, latest year available Figure 7.9: Biggest Obstacle for Manufacturing and Services Firms, Philippines, 2015 Figure 7.10: Average Daily Earnings of Wage/Salary Workers, by Educational Attainment, 2011 Figure 7.11: Average Daily Earnings of Wage/Salary Workers, by Location and Highest Educational Attainment, 2009 Figure A.1: Change in Backward Linkages, Global Case by Value of Intermediate Inputs, 2006 to Figure A.2: Change in Backward Linkages, Domestic Case by Value of Intermediate Inputs, 2006 to Figure A.3: Change in Forward Linkages, Global Case by Value of Intermediate Inputs, 2006 to Figure A.4: Change in Forward Linkages, Domestic Case by Value of Intermediate Inputs, 2006 to Figure A.5: Change in Output Multipliers, Global Case by Value of Total Outputs, 2006 to 2012 Figure A.6: Change in Output Multipliers, Domestic Case by Value of Total Output, 2006 to 2012

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LIST OF ABBREVIATIONS

ARMM Autonomous Region of Muslim Mindanao

CF capital formation

EGW electricity, gas, and water

FDI foreign direct investment

GDP gross domestic product

GFC government final consumption

GNI gross national income

GVA gross value added

HFC household final consumption

LMIC lower middle-income countries

M imports

MCC Millennium Challenge Corporation

MSME micro-, small, and medium enterprises

NCR National Capital Region

NEDA National Economic Development Authority

PSA Philippine Statistics Authority

SME small and medium enterprises

TEU tonne-equivalent-unit

TFD total final demand

TO total outputs

X exports

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ACKNOWLEDGMENTS

The authors would like to acknowledge support from USAID/Philippines, including Stephen Andoseh, Dr. Susan Brems, Gil Dy-Liacco, Leabel Jordan, Jeff Lehrer, Corazon Macaraeg, Princess Shimmadar Manaois-Battung, Mirshariff Tillah, and USAID/Washington, especially E3/EP. Additionally, we thank all who have reviewed many drafts and offered their comments, because they have improved our study immeasurably. Any errors that remain are our own.

We further thank and acknowledge the generosity of time and insight from the following organizations:

U.S. Department of State, Philippine Statistics Authority, Philippines Chamber of Commerce and Industry, American Chamber of Commerce of the Philippines, World Bank, United Nations Development Program, The Asia Foundation, Asian Development Bank, Philippines Department of Health, Philippines National Economic Development Authority, Philippines Department of Trade and Industry, International Monetary Fund, Federation of Philippine Industries, Philippines Technical Education and Skills Development Authority, Philippine Business for Education, International Labour Organization, Philippine Institute for Development Studies, and Makati Business Club.

Valuable data analysis and logistical support was provided by UPecon Foundation. We are particularly grateful to Ammielou Gaduena and Ricky Guzman for ensuring we were always in the right place at the right time.

A special thanks to Daniel Inmaculato who provided valuable editorial support for the Philippines Jobs Diagnostic.

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1 EXECUTIVE SUMMARY

1.1 INTRODUCTION

Despite strong GDP growth and significant declines in extreme poverty over the past decade, inclusive job creation remains a concern in the Philippines. Although the Philippines’ unemployment rate is low and the economy appears to be at full employment, these trends conceal issues of job quality, most notably revealed by stagnant wage growth, underemployment, and informality. Taken together, these issues illustrate the development challenges in the Filipino job market: despite many jobs, inclusive improvements in employment outcomes are lacking. Thus, underemployment persists as does the perpetuation of the working poor.

The USAID/Philippines Mission is working to meet the challenge of creating and maintaining inclusive employment in the country. To help inform this effort, USAID’s Office of Economic Policy conducted a jobs diagnostic to identify the most binding constraints to job creation. To help contextualize the array of economic data on which the jobs diagnostic relied, in May 2016, USAID staff from the Philippines and Washington held interviews in Manila with public officials, business leaders, civil society advocates, and academics.

1.2 METHODOLOGY

This analysis aims to identify the binding constraints that prevent (1) individuals from investing in their skills and (2) firms from making investments and taking risks in hiring individuals to boost growth.

Initially modeled strictly off World Bank methodology as well as the “growth diagnostics” framework of Ricardo Hausmann, Dani Rodrik, and Andrés Velasco, USAID jobs diagnostics have shifted to become a more flexible analysis that can be customized on the basis of USAID Mission needs, incorporating differential diagnosis when it is possible to concretely link the tests to job creation, rather than to private investment or growth. The jobs diagnostic treats labor market outcomes as the result of the interaction of changes in labor supply and labor demand.

For the Philippines, the universe of possible constraints to inclusive job creation has been refined on the basis of in-country interviews, a literature review, and survey results of firm-level constraints.

Differential diagnostic tests were then applied to this shortlist of possible constraints to confirm their bindingness. To ensure that the diagnostic meets the needs of the Mission, analysis of each constraint includes considerations of inclusivity, particularly on how findings relate to the agribusiness sector, especially for the island of Mindanao, and the presence or absence of cross-sectoral linkages (see section 1.4, Mindanao and Sector Linkages).

The analysis in this report is not intended to identify specific interventions, but rather to provide a framework that identifies the most pressing constraints to job creation. Using this framework as a reference point, policy makers can identify projects to ease binding constraints and stimulate job creation.

1.3 CONSTRAINTS TO INCLUSIVE JOB CREATION IN THE PHILIPPINES

1.3.1 RESTRICTIVE LABOR MARKET REGULATIONS

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Philippine labor market policies and their interaction with other policies that lead to imperfect market structures constitute a major constraint on productive job creation. Based on its review of relevant literature, this section makes the following conclusions: First, labor market regulations were fundamentally binding. This is particularly valid for minimum wage laws that, on average, are higher relative to labor productivity in the Philippines than in most of its comparator countries. Second, dominant firms with market power can avoid the effect of regulations and reduce average labor costs by utilizing more capital. Such actions allow these firms to maintain or even increase their market power.

Small firms, by contrast, have no other option but to bear the full brunt of these regulations. Ultimately, labor regulations reinforce the existing labor market structure that favors capital-intensive industries and discourages labor-intensive industries. Third, larger firms circumvent minimum wage laws by hiring additional workers on short-term or temporary contracts, allowing these employers to withhold other costs, such as benefits and training, in the face of stringent labor regulations. In contrast, because they are less able to exploit legal loopholes, smaller firms, especially in low productivity sectors such as agriculture, resort to operating in the informal economy; this practice leads to lower productivity and poor-quality jobs. Additionally, disadvantaged workers, that is, young, untrained, and female workers, have a lower probability of being productively employed.

1.3.2 LOW AGRICULTURAL PRODUCTIVITY

On the basis of the evidence presented by data, external research, and in-country interviews, it is posited that stagnating agricultural productivity is a constraint to inclusive employment generation in the Philippines. Distortive rice policy, serious land reform issues, and a lack of infrastructure are three of the underlying causes of slow agricultural productivity growth in the Philippines. The rice policy artificially inflates the price of rice, resulting in inefficiencies in the value chain, and in farmers struggling to improve yields in a crop for which the Philippines has little comparative advantage. Restrictions on tract size and land transfer by beneficiaries of agrarian reform mean that farms cannot take advantage of economies of scale in production; thus, they are unable to buy, sell, or use land as collateral in accessing financing.

Inadequate rural infrastructure makes transporting both inputs to and outputs from farms more expensive, affecting both food prices and farmer incomes.

Unless progress can be made on these three fronts, it is unlikely that agricultural productivity in the Philippines will improve. Broadly speaking, improvements in agricultural productivity allow for the more efficient use of labor elsewhere in other, higher value sectors of the economy. These efficiencies would also raise the income of farmers in the short-term. Equally important, they would have longer term impacts on declining food costs, which in turn, would limit pressure on minimum wages and encourage the use of local inputs in food processing, a low-skill, high-labor manufacturing subsector whose growth should lead to more and better jobs for many Filipinos.

1.3.3 POOR INFRASTRUCTURE

Lack of efficient infrastructure is a major constraint to inclusive growth in the Philippines. Employment generation is constrained by the inefficient provision of infrastructure. Although the direct effects on employment of infrastructure investment may be small, the indirect effects on job creation may be much greater. In particular, transport and power infrastructure play a significant role in achieving inclusive economic growth. The need for more infrastructure investment is especially evident for promoting agricultural productivity and, in terms of location, for Mindanao.

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The Philippines’ infrastructure needs are estimated at PHP 8 trillion over the next five years (for a discussion of the Philippine Development Plan 2017–2022, see Philippines, NEDA 2017). The primary implication of the need for more infrastructure investment will be on the ability of the government to create enough fiscal space to finance these public goods. Additional opportunities exist for expanding private sector participation in infrastructure development. Building the capacity to effectively plan, design, procure, implement, and monitor these large-scale infrastructure projects is also critical.

1.3.4 LABOR SUPPLY

Overall, the evidence leads us to conclude that labor supply issues do not appear to constrain job creation in general—but may be constraining the creation of better jobs in specific cases. To adequately examine the Philippines’ labor supply, it is crucial to examine human capital, or productivity-enhancing skills, often acquired through education and training. The education system in the Philippines covers as much or more of the population through secondary education than in other regional or peer countries, with levels of tertiary education at the median for our comparator group. Furthermore, employment is correlated more strongly with economic growth in the Philippines than elsewhere, indicating that supply is adequate to meet labor demand from firms. For their part, firms do not report workforce education to be a significant constraint on doing business, even though many firms offer on-the-job training. High levels of outmigration and remittances suggest an excess of labor, not a deficit. These findings are bolstered by in-country interviews, which revealed some niche deficiencies but broad adequacy of labor supply.

However, available data on the returns to education suggest a shortage of skilled labor in specific sectors. Of relevance to the pursuit of inclusive job creation, enterprise surveys and data on the returns to education suggest there is pent-up demand for better-trained workers in the manufacturing sector and the food and beverage processing subsector. This represents an opportunity for currently unskilled Filipinos to attain better jobs in higher-paying fields once they receive the appropriate training.

1.4 MINDANAO AND SECTOR LINKAGES

Relative to the rest of the country, Mindanao is poorer and more dependent on agriculture. Most rural agricultural workers in the region are poor or near poor. Though most regions in Mindanao have seen labor productivity growth of between 4 and 5 percent between 2010 and 2015, the Autonomous Region of Muslim Mindanao (ARMM) has experienced only 0.5 percent productivity growth. Mindanao faces largely similar constraints as the rest of the Philippines regarding inclusive job creation, though some characteristics unique to Mindanao vary the importance of these constraints. For example, despite substantial increases in paved roads in some Mindanao regions, gains in labor productivity in the agricultural sector have been almost flat, suggesting that other factors like peace and security may be of greater importance. Additionally, Mindanao-specific land laws have exacerbated issues regarding land rights relative to other parts of the Philippines, with some 50 percent of land parcels remaining untitled.

Nevertheless, Mindanao presents an opportunity with respect to inclusive job creation because the high poverty rate and large number of poor agricultural workers in the region make any jobs created here more likely to be inclusive.

1.5 SECTOR LINKAGES

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According to the World Bank’s 2015 Enterprise Surveys,1 annual employment grew faster in food processing than in any other manufacturing subsector. Real annual sales growth in the food processing sector was also strong, at 6.5 percent. Food manufacturing relies heavily on raw agricultural materials, and only 10.6 percent of total inputs in this industry are of foreign origin, much lower than in any other manufacturing subsector. This makes food manufacturing, in particular, and agribusiness, in general, an ideal focus for improving agricultural productivity and employment generation.

An input-output analysis conducted in support of this diagnostic shows that food manufacturing has high levels of backward linkages relative to other economic sectors. However, forward linkages are weak, which dampens value creation in sectors high up in the value chain. Increased productivity and expansion of the agroprocessing sector would have strong positive effects on the agriculture sector and vice versa, spurring inclusive job creation. Expanding the markets for this sector would result in even greater improvements. Additional results from the input-output analysis reveal that employment multipliers have been worsening for agriculture and industry. Despite improvements in the service sector multiplier between 2006 and 2012, its magnitude also remains low.

1.6 RECOMMENDATIONS

In addition to identifying constraints to inclusive job creation, the Philippines Jobs Diagnostic also uses the resulting evidence and analysis to provide recommendations that may inform the strategy and programming of USAID/Philippines and the Philippine government.

Recommendations relevant to each section regard regulatory constraints, agricultural productivity, infrastructure, and labor supply.

REGULATORY CONSTRAINTS

• Improve the design of investment promotion incentives to reward performance in job creation and flexibility while complying with the regulations set in the labor code.

• Strengthen Social Security and other social protection systems to ensure workers a stable income and to reduce administrative burden and compliance costs for micro-, small, and medium enterprises.

AGRICULTURAL PRODUCTIVITY

• Reform agriculture sector initiatives to balance the Philippines’ current food security strategy based primarily on domestic rice production with initiatives to increase agriculture sector productivity through diversification to higher value sectors.

• Strengthen the agriculture sector and agroprocessing value chains that enable increased participation of farmers groups in increased production.

1 SEE THE WORLD BANK’S ENTERPRISE SURVEYS, AVAILABLE AT HTTP://WWW.ENTERPRISESURVEYS.ORG.

http://www.enterprisesurveys.org/

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• Improve the delivery of infrastructure services to enhance connectivity of rural areas with growth hubs.

• Strengthen land rights to incentivize agriculture investment by removing ownership restrictions on agricultural patents and allowing land consolidation.

INFRASTRUCTURE

• Boost infrastructure investments, most critically in transport- and power-related infrastructure, particularly those that improve the connectivity to and from Mindanao.

• Strengthen the capacity of line agencies to plan, design, procure, implement, and monitor large-scale infrastructure projects.

• Improve the regulatory framework to allow more private participation in infrastructure development.

LABOR SUPPLY

• Improve the targeting of public and private job training programs to facilitate the movement of the underemployed and unemployed into higher-productivity sectors, most notably manufacturing and the subsector of food and beverage processing.

• Develop training programs that respond directly to the needs of the manufacturing and agribusiness sectors as a means of reducing the labor costs of firms that must now offer on-the-job training in the Philippines more than elsewhere.

1.7 ORGANIZATION OF THE PHILIPPINES JOBS DIAGNOSTIC

The organization of this report applies the differential diagnosis questions to the Philippine economy, as appropriate, thus providing the underlying evidence summarized above in this executive summary. The topics addressed in this report are as follows:

• Section 2, Jobs Diagnostic Methodology, outlines this methodology, differential diagnostic tests, and comparator country selection.

• Section 3, Economic Growth and Jobs Overview, provides country context for the Philippines.

• Section 4, Labor Policies and Other Regulatory Constraints, presents the regulatory obstacles to job creation facing firms, and it demonstrates tests to show these constraints are binding.

• Section 5, Low Agricultural Productivity , provides an overview of agricultural productivity in the Philippines and evidence for land and rice policies contributing to low agricultural productivity, which further inhibits structural transformation in the Philippines.

• Section 6, Infrastructure, assesses the direct and indirect effects of infrastructure on inclusive job creation.

• Section 7, Labor Supply, presents the labor obstacles to job creation and presents the analysis of tests to determine if the constraints are binding.

In addition, two appendices, accompanying the report, detail an updated input-output analysis for the Philippines.

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2 JOBS DIAGNOSTIC METHODOLOGY

2.1 METHODOLOGICAL FRAMEWORK

Jobs are an essential source of economic growth, as well as the major conduit through which the benefits of growth are transmitted to individuals and their families. Most people earn the bulk of their income from employment; the emergence of better-paying jobs has played a central role in raising living standards, allowing more than 1 billion people worldwide to escape from extreme poverty since the early 1990s.

USAID’s standard jobs diagnostic assesses the structural dynamics of a partner country’s labor market and identifies constraints to job creation in the short- to medium-term, specifically those that prevent

(1) individuals from investing in their skills and (2) firms from making investments and taking risks in hiring individuals to boost growth. USAID jobs diagnostics were initially modeled strictly off work done by the World Bank, as well as the growth diagnostic methodology as put forth in 2005 by three Harvard economists—Ricardo Hausmann, Dani Rodrik, and Andres Velasco (collectively “HRV”)—that assumes that private investment and entrepreneurship are the key drivers to sustained economic growth.

USAID jobs diagnostics have shifted to become a more flexible analysis that can be customized on the basis of USAID Mission needs, incorporating HRV-style differential diagnosis when it is possible to concretely link the tests to job creation, rather than to private investment or growth. The jobs diagnostic treats labor market outcomes as the result of the interaction of changes in labor supply and labor demand.

To identify if a constraint is binding, HRV introduced four differential diagnostic tests, which have been augmented for use in the jobs diagnostic:

• Is a constraint causing labor to be relatively more expensive than other inputs to production?

• When the constraint is relaxed, is there significant movement in a jobs-related objective function?

• Are economic actors taking observable steps to circumvent the constraint in a way that makes job creation more or less likely?

• Are firms flourishing if they are better-suited to a domestic business environment, particularly if they are less labor-intensive?

Usually, a jobs diagnostic focuses primarily on job creation. In contrast, this analysis primarily focuses on assessing the extent to which the economy is creating better and more inclusive jobs. The rationale for this focus is the abundance of recently completed analyses by the World Bank, ILO, and the Millennium Challenge Corporation (MCC) that focus exclusively on job creation and economic growth, current indicators suggesting that job quality is of greater concern than job quantity in the Philippines—and USAID/Philippines’ focus on inclusivity and equity.

For the Philippines, the universe of possible constraints to inclusive job creation has been refined on the basis of in-country interviews, a literature review, and survey results of firm-level constraints. The

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differential diagnostic tests outlined above were then applied to this shortlist of possible constraints to confirm their bindingness. To ensure that the diagnostic meets the needs of the Mission, analysis of each constraint includes considerations of inclusivity, particularly how findings relate to the agribusiness sector, Mindanao, and the presence or absence of cross-sectoral linkages.

2.2 COMPARATOR COUNTRY SELECTION

To apply the principles of differential diagnosis, the team benchmarked the country of interest against other comparable countries, or “comparators.” Comparator countries play a central role in applying the principles of differential diagnosis by controlling for common characteristics (e.g., geography, demography, colonial history) among country peers, as well as in benchmarking progress on various socioeconomic indicators.

To ensure consistency in the choice of comparator countries, the team systematically compared long-term averages (from 2006–2015) of several indicators—based on their perceived importance in describing the Philippine economy from economic, demographic, and geographic perspectives, including but not limited to those in Table 2.1. The identified countries were then reviewed and discussed by the team, and compared with peer countries used by previous diagnostic studies. On the basis of these criteria, the team selected the following comparator countries: Bolivia, Guatemala, Indonesia, and Vietnam. Thailand was also included as an “aspirational” country in terms of development level.

Wherever useful and possible, the Philippines was compared to World Bank aggregate measures for lower middle-income countries (LMIC) and the East Asia Pacific Region, excluding high-income countries. The final list of comparator countries and regional and income group averages was used consistently throughout the analysis.

15 | PHILIPPINES JOBS DIAGNOSTIC USAID.GOV

Note: Italics denote aspirational comparators. These indicators are a subset of those used to determine the final comparator list. N.A. = not available; PPP = purchasing power parity.

TABLE 2.1: SELECTED ECONOMIC AND DEMOGRAPHIC CRITERIA, PHILIPPINES AND

COMPARATOR COUNTRIES

G D

P PER

C

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(2011 PPP, %

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PU

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PU

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Philippines ● 5778 11 33 34 70 21 38 55

Bolivia ● 5602 5 28 34 73 14 19 33

Guatemala ● 6853 11 34 39 68 19 25 50

Indonesia ● 8693 1 38 29 73 24 48 50

Thailand ● 13633 1 40 19 33 29 3 55

Vietnam ● 4621 7 46 24 68 15 28 69

Lower middle-income countries 5095 5 45 32 N.A. 17 52 63

East Asia Pacific region countries, excluding high-income

9283 1 36 21 N.A. 30 N.A. 52

USAID.GOV PHILIPPINES JOBS DIAGNOSTIC | 16

U

SA

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17 | PHILIPPINES JOBS DIAGNOSTIC USAID.GOV

3 ECONOMIC GROWTH AND JOBS OVERVIEW

3.1 ECONOMIC GROWTH

Many institutions have written about economic growth and the labor market in the Philippines, including the Asian Development Bank, International Monetary Fund, and World Bank.2 Thus, this section will focus on the facts and factors necessary to understand the rest of this report.

3.1.1 MACROECONOMIC INDICATORS

Overall, macroeconomic indicators for the Philippines are strong, and macroeconomic risks to growth appear minimal. Much of this macroeconomic success occurred under the administration of Benigno Aquino III (2010–2016), who championed economic reforms and cooperated with the U.S. government through the Partnership for Growth. Annual growth of real gross domestic product (GDP) averaged 5.4 percent between 2006 and 2015, on par with Indonesia and Vietnam and well above growth rates in Guatemala and Thailand. During the Aquino III administration, the average GDP growth rate was 6.2 percent.3 The country is firmly in the lower middle-income group, as defined by the World Bank, with per capita gross national income (GNI) of $3,550 in current U.S. dollars as of 2015.4 As noted below, this economic growth has not always translated into improved employment outcomes for Filipinos across the income spectrum.

The Philippine government has maintained an average budget surplus of roughly 2.5 percent of GDP since 2006 (Figure 3.1), owing mainly to restrained public expenditure—the country’s revenue collection levels are lower than in peer countries (Figure 3.2 and Figure 3.3). This constitutes an improvement in both the country’s fiscal space and the investment climate.

2 FOR MORE DETAILS ON THE COUNTRY’S ECONOMIC GROWTH AND LABOR MARKET TRENDS, REFER TO THE SOURCES IN THE REFERENCE LIST FOR THIS SECTION: ASIAN DEVELOPMENT BANK (USUI 2011; USUI 2012); INTERNATIONAL MONETARY FUND (IMF 2016); AND WORLD BANK (CHUA ET AL. 2013, WORLD BANK 2016; WORLD BANK 2017A).

3 SEE THE INTERNATIONAL MONETARY FUND’S WORLD ECONOMIC OUTLOOK DATABASE (APRIL 2017 UPDATE, HTTPS://WWW.IMF.ORG/EXTERNAL/PUBS/FT/WEO/2017/01/WEODATA/INDEX.ASPX).

4 THE AVERAGE GNI PER CAPITA FOR LOWER MIDDLE-INCOME COUNTRIES IN 2015 WAS USD 2,028.90 (CURRENT DOLLARS). SEE WORLD BANK COUNTRY AND LENDING GROUPS, WORLD BANK (HTTP://DATA.WORLDBANK.ORG/ABOUT/COUNTRY-AND-

LENDING-GROUPS).

http://data.worldbank.org/about/country-and-lending-groups http://data.worldbank.org/about/country-and-lending-groups

USAID.GOV PHILIPPINES JOBS DIAGNOSTIC | 18

Figure 3.1: Average General Government Primary Surplus or Deficit as Share of GDP, Philippines and Comparator Countries.

2006–2015

Source: World Economic Outlook, IMF (April 2017 edition) (https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx).

Figure 3.2: General Government Revenue, 2006–2015 Average

Source: World Economic Outlook , IMF (April 2017 edition) (https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/i ndex.aspx).

Figure 3.3: General Government Total Expenditure, 2006– 2015 Average

Source: World Economic Outlook, IMF (April 2017 edition) (https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/i ndex.aspx).

However, in-country interviews and research suggest that low public spending levels are driven by a weak capacity to execute the government’s budget, not a formal restraint on spending (World Bank 2017a). Thus, efforts to improve budget execution should be paired with revenue improvements and monitoring so that deficits do not grow along with spending.

In addition to maintaining a budget surplus, the Philippine government has also been successful in curbing inflation (Figure 3.4) and public debt levels (Figure 3.5). Between 2006 and 2015, inflation averaged 4 percent year-on-year, and public debt averaged 42 percent of GDP. Both averages are near the average levels for peer countries. The low and well-managed level of public debt, along with consistent budget surpluses, strongly suggest that the government is not crowding out private investment with excessive borrowing. As further evidence of sound macroeconomic policy, Moody’s, Fitch Ratings, and Standard

-3%

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2%

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G en er al g ov er nm en t pr im ar y ne t le nd in g/ bo rr ow in g (p er ce nt ag e of

G D

P

0%

5%

10%

15%

20%

25%

30%

35%

40%

G en er al g ov er nm en t re ve nu e

(p er ce nt ag e of G

D P

0%

5%

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15%

20%

25%

30%

35%

40%

G en er al g ov er nm en t to ta l ex pe nd it ur e (p er ce nt ag e of

D P https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx

19 | PHILIPPINES JOBS DIAGNOSTIC USAID.GOV

and Poor all rate the Philippines’ sovereign debt as investment grade, albeit barely. Moody’s justifies its investment grade rating by citing “(1) robust economic growth amid macroeconomic stability anchored by well-managed inflation, (2) a strong external payments position, and (3) a stable and resilient banking system” (Moody’s 2017).

Figure 3.4: Inflation, e-o-p Consumer Prices, 2006–2015

Source: World Economic Outlook Database, IMF (April 2017 edition) (https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/in dex.aspx).

Figure 3.5: General Government Gross Debt, 2006–2015

Source: World Economic Outlook Database, IMF (April 2017 edition) (https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/in dex.aspx).

In the external sector, the Philippines has run a current account surplus since 2003, driven by remittances and a positive balance for services, since 2003 (Figure 3.6 and Figure 3.7). Remittances have been particularly important to the Philippine economy since 1990, and the country receives more remittances as a share of GDP than any other country in East Asia (Figure 3.7). Most remittances come to the Philippines from the United States and the Middle East.5 The positive balance for services reflects the structural transformation trends discussed below. Also, the high level of remittances reflects an array of labor market factors that include a lack of employment opportunities for highly educated Filipinos (see below) and explicit government support for overseas Filipino workers through institutions like the Philippine Overseas Employment Administration.

5 SEE MIGRATION AND REMITTANCES DATA, WORLD DEVELOPMENT INDICATORS, WORLD BANK

(HTTP://WWW.WORLDBANK.ORG/EN/TOPIC/MIGRATIONREMITTANCESDIASPORAISSUES/BRIEF/MIGRATION-REMITTANCES-

DATA).

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

10%

In fla ti on

, e -o

-p c on su m er p ri ce s

(p er ce nt c ha ng e)

0% 5%

10% 15% 20% 25% 30% 35% 40% 45% 50%

G en er al g ov er nm en t gr os s de bt pe rc en ta ge o f G D

P https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx http://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data http://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data

USAID.GOV PHILIPPINES JOBS DIAGNOSTIC | 20

Figure 3.6: Current Account Balance, 2006–2015 Average

Source: World Development Indicators, World Bank (http://data.worldbank.org/data-catalog/world-development-indicators).

Figure 3.7: Remittances Received, 2006–2015 Average indicators).

Although the Philippines maintains a current account surplus, the country has imported more goods than it has exported since the 1990s, and trade in goods constitutes roughly half of GDP, slightly more than in Indonesia but in line with the average for lower middle-income countries (Figure 3.8 andFigure 3.9). Trade in services constituted 18 percent of GDP in 2015, more than in Indonesia (6 percent) and Vietnam (14 percent) but less than the aspirational peer country of Thailand (26 percent).6 In addition, the rate of foreign direct investment (FDI) into the Philippines is lower than in most of its peer countries when measured as a share of GDP (Figure 3.9), which may reflect the poor investment climate discussed most recently by the MCC (forthcoming).7 Together, these trends illustrate that the Philippines is underperforming in the production of export-quality goods and, through either a lack of incentives or other structural features of the economy, this is unlikely to change in the near term through foreign investment.

6 SEE TRADE IN SERVICES (% OF GDP), WORLD DEVELOPMENT INDICATORS, WORLD BANK,

(HTTP://DATA.WORLDBANK.ORG/INDICATOR/BG.GSR.NFSV.GD.ZS?END=2015&START=1960).

7 FDI APPEARS IN THE FINANCIAL ACCOUNT, NOT THE CURRENT ACCOUNT, IN THE BALANCE OF PAYMENTS. THUS, IT WOULD NOT BE INCLUDED IN A CALCULATION OF THE COMMONLY REPORTED CURRENT ACCOUNT BALANCE. HOWEVER, FDI IS INCLUDED HERE BECAUSE OF ITS POTENTIAL LINKAGE TO AGRICULTURAL AND INDUSTRIAL PRODUCTION.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

C ur re nt a cc ou nt b al an ce

(p er ce nt ag e of

G D

P

0%

2%

4%

6%

8%

10%

12%

R ec ie ve d pe rs on al r em it ta nc es ce nt ag e of G

D P http://data.worldbank.org/data-catalog/world-development-indicators http://data.worldbank.org/data-catalog/world-development-indicators http://data.worldbank.org/data-catalog/world-development-indicators http://data.worldbank.org/data-catalog/world-development-indicators http://data.worldbank.org/indicator/BG.GSR.NFSV.GD.ZS?end=2015&start=1960

21 | PHILIPPINES JOBS DIAGNOSTIC USAID.GOV

Figure 3.8: Merchandise Trade, 2006–2015 Average

Note: LMICs = lower middle-income countries.

Figure 3.9: Foreign Direct Investment Net Inflows, 2006–2015 indicators).

Note: LMICs = lower middle-income countries.

The most important destinations and origins of merchandise trade for the Philippines are nearby countries and the United States, with its most important exported and imported good being integrated circuitry (Table 3.1). This indicates the importance of the global value chain for high-value technological products to the Philippines. Further support for this conclusion comes from the OECD’s Trade in Value-Added database, which shows that the amount of value added to exports within the Philippines as a share of exports grew from 62 percent in 2005 to 76 percent in 2011. This data places the country in line with the ASEAN average, above Thailand and Vietnam but lower than Indonesia, in terms of its integration into global value chains, according to the OECD’s database. These data also illustrate the relatively higher concentration of firms involved in global value chains, as fewer Filipino firms directly or indirectly export goods and services than in many peer countries (World Bank 2017a).

TABLE 3.1: PHILIPPINES MERCHANDISE TRADE PARTNERS AND PRODUCTS, 2015

EXPORTS IMPORTS

Country Share of goods (exports) (%) Country Share of goods (imports) (%)

China 21% China 20%

USA 13% Japan 10%

Japan 13% South Korea 8%

Hong Kong 10% United States 8%

Singapore 6% Thailand 7%

Product Share of goods (exports) (%) Product Share of goods (imports) (%)

Integrated circuits 26% Integrated circuits 12%

0%

20%

40%

60%

80%

100%

120%

140%

160%

M er ch an di se t ra de (p er ce nt ag e of

G D

P

0%

1%

2%

3%

4%

5%

6%

7%

Fo re ig n di re ct in ve st m en t, n et in flo w s

(p er ce nt ag e of G

D P http://data.worldbank.org/data-catalog/world-development-indicators http://data.worldbank.org/data-catalog/world-development-indicators

USAID.GOV PHILIPPINES JOBS DIAGNOSTIC | 22

Computers 8% Petroleum products 10%

Semiconductor devices 5% Cars 3%

Office machine parts 4% Wheat 1%

Bananas 2% Packaged medication 1%

Source: See Philippines, MIT Economic Atlas of Complexity webpage, “OEC - Philippines (PHL) Exports, Imports, and Trade Partners” (http://atlas.media.mit.edu/en/profile/country/phl/).

Note: Product categories are HS4 designations. The Harmonized System (HS4) is an international nomenclature for classifying products on a common basis for customs purposes. An HS4 code designates both the chapter of a good and its specific grouping within that chapter. For more information on the Harmonized System, see https://unstats.un.org/unsd/tradekb/Knowledgebase/50018/Harmonized-Commodity-Description-and-Coding-Systems-HS.

Philippines exports are poorly diversified, with nearly two-fifths of all exports represented by electronics, as suggested by Table 3.1. As documented by Usui (2011), exports from the Philippines became less diverse between 1985 and 2008 as industrial policy and private investors failed to foster strong linkages forming between the high-value electronics manufacturing sector and other segments of the economy.

3.1.2 STRUCTURAL TRANSFORMATION AND ECONOMIC GROWTH

Structural transformation refers to the movement of labor, as a country develops, from agriculture to the more productive manufacturing sector, then from manufacturing to the more productive services sector (Dabla-Norris 2013). Structural transformation tends to be accompanied by urbanization and shifts in labor force demography, from a preponderance of younger workers to a larger share of older workers (Timmer and Akkus 2008).

Although the Philippines economy is experiencing the increase in urbanization and the decrease in fertility rates that tend to accompany structural transformation, it has not experienced the industrialization that played a key role in the development story of many East Asian economies (World Bank 2017a). Instead, the economy appears to be shifting toward services and, more recently, high-value manufacturing while agricultural productivity declines and lower value manufacturing stagnates. The government has supported these shifts through, among other measures, fiscal and nonfiscal incentives provided to foreign investors in the business process outsourcing field (Usui 2011).

Services and manufacturing drive economic growth in the Philippines and have accounted for the majority of the country’s GDP growth over the past seven years (Figure 3.10). During this time, agriculture has contributed a negligible share of GDP growth, ranging from 0 percent to 0.3 percent since 2010.