Developing the Service Sector of the Philippines: A Study on the Strategies of ASEAN Countries’ Service Sector
A Research Paper
Presented to the Faculty
Of the College of Business and Economics
De La Salle University-Manila
In Partial Fulfillment
Of the Requirements for
CONADEV
by:
Evangelista, Marianne Joyce M.
Lim, Eric Darryl N.
Park, Michael
Rocafor, Shirley C.
Teh, Germaine Larisse Y.
September 2010
Acronyms
ADBAsian Development Bank
AECASEAN Economic Community
AFASASEAN Framework of Agreements on Services
AMAAnti-Monopoly Act
APTASEAN Plus Three
ASEAN Southeast Asian Nations
AusAIDAustralian Agency for International Development
BDMSBangkok Dusit Medical Services
BEDBBrunei Economic Development Board
BFMBoutique Fund Managers
BIMP-EAGA Brunei Darussalam – Indonesia – Malaysia – Philippines East ASEAN Growth Area
BPOBusiness Process Outsourcing
CARCapital Adequacy Ratio
CETContinuing Education and Training
CIACentral Intelligence Agency
DAtEDesign Against the Elements
DILGDepartment of Local Government
DPWHDepartment of Public Works and Highways
E-PCOElectronic Preferential Certificate of Origin
FDIForeign Direct Investment
FSMPFinancial Sector Master Plan
FTAFree Trade Agreement
FTZFree Trade Zones
GDPGross Domestic Product
GSISGovernment Service Insurance System
GNP Gross National Product
GPIFGovernment Pension Fund
IACInvestment Advisory Council
IAISInternational Association of Insurance Supervisors
IBAInternational Bankers Association
ICCInternational Chamber of Commerce
ICTInformation and Communication Technology
IMP3Third Industrial Master Plan
ISOInternational Organization for Standardization
ISTCIndustry Skills and Training Council
JCIJoint Commission International
JGBJapanese Governmental Bonds
JPBJapan Post Bank
JPIJapan Post Insurance
KPOKnowledge-process Outsourcing
LSPLogistics Service Providers
MASMonetary Authority of Singapore
MFIMicro-finance Institutions
MIDAMalaysian Industrial Development Authority
MIPRMinistry of Industry and Primary Resources
MITIMinistry of International Trade and Industry
NEDANational Economic Development Authority
NGONon-governmental Organizations
NSCBNational Statistical Coordination Board
ODREOwnership of Dwellings and Real Estate
OECDOrganization for Economic Cooperation and Development
OFWOverseas Filipino Worker
PERCPolitical and Economic Risk Consultancy
PNPPhilippine National Police
PPPPublic- Private Partnerships
R&DResearch and Development
REITReal Estate Investment Trust
RKNNational Development Plan (Brunei)
SONAState of the Nation Address
SSSSocial Security System
STEPIScience and Technology Policy Institute
SMESmall and Medium-sized Enterprises
TCSTransportation, Communication and Storage
UNCTADUnited Nations Conference on Trade and Development
UNDPUnited Nations Development Programme
USAIDUnited States Agency for International Development
VATValue Added Tax
WDAWorkforce Development Agency
WTOWorld Trade Organization
Table of Contents
PAGE
List of Tables7
List of Figures8
Rationale9
Research Objectives10
Scope and Limitations11
Review of Related Literature
Philippines: Overview and Service Sector Analysis12
Service Sector (Overview and Analysis)17
Analysis
Transportation, Communication and Storage77
Trade82
Finance90
Ownership Dwellings and Real Estate94
Private Services97
Government Services102
Conclusion106
Recommendation
References
List of Tables
PAGE
Table 1: 2008- 2009 GDP and GNP Per Capita 12
Table 2: Annual 2008 and 2009 GNP and GDP by Industrial Origin.14
Table 3: Gross National Product and Gross domestic Product by Industrial 17
Origin: 1st Quarter 2009 and 1st Quarter 2010
Table 4: Gross Value Added in Services Annual 2008 and 200919
Table 5: GDP composition by sector (%) - ASEAN Countries21
Table 6: Singapore Corporate Tax Rate (1997-2010)30
Table 7: Summary of Key Improvements in Service Sector Identified32
Table 8: Total investment per subsector in Malaysia.45
Table 9: Cambodia’s Real Economic Growth by Sector.55
Table 10: ASEAN Plus 3 GDP Composition per Sector.67
Table 11:TCS Subsector breakdown. Philippines vs. ASEAN & ASEAN Plus Three78
Table 12: Trade Subsector breakdown. Philippines vs. ASEAN &
ASEAN Plus Three83
Table 13:Finance Subsector breakdown. Philippines vs. ASEAN &
ASEAN Plus Three91
Table 14:ODRE Subsector breakdown. Philippines vs. ASEAN &
ASEAN Plus Three94
Table 15:Private Services Subsector breakdown. Philippines vs. ASEAN &
ASEAN Plus Three99
Table 16:Government Services Subsector breakdown. Philippines vs. ASEAN &
ASEAN Plus Three102
List of Figures
PAGE
Figure 1: Phils. GDP by Sector.13
Figure 2: Phil. Labor Force Occupation by Sector14
Figure 3: Liberalization of the service sector.47
Rationale
In the 1940s, the Philippines ranked as one of the richest countries in Asia, only next to Japan. Today, the country’s economic development has unfortunately lagged behind many of its Southeast Asian neighbors; this is the reason why as of 2010, it is considered as one of the poorest (
Despite having fairly rich natural resources and a large pool of human workforce, years of internal problems such as economic mismanagement and political volatility coupled with the 1997 Asian Financial crisis have led to the continued underdevelopment (Elliot, 2007). As high government spending had negatively affected the growth of the economy in the Philippines, particular sectors such as the country’s service sector and the large remittances from Filipinos working abroad played a major role in sustaining the country’s GNP. In fact, according to the country’s economy is vastly dependent on the services and manufacturing sector.
In a study conducted by Bautista (2003) on the economy of the Philippines, it is said that from 1967 to 2002, the service sector has been the most stable and that only in 3 years out of the 35 (1984, 1985, 1991) did it have a negative growth rate. Moreover, since the 1960s, it has sustained higher growth rates than the growth rates in both the GDP and GNP (Bautista, 2003). With such stable growth rate and higher output contribution, the service sector was able to provide greater employment opportunities to both males and females, as compared to the other sectors (Bautista, 2003).
With such growth and positivity in the recent years, there are said to be proposals for the country to “abandon” the manufacturing sector and shift its policy to support the services sector (Trade Chakra, 2010). “This phenomenon characterized by the massive transition of labor and output share from manufacturing to the services sector is widely referred to as deindustrialization” (Trade Chakra, 2010). The country has yet to do such a decision since this will entail shifts in “education policy, infrastructure projects, trade and industrial policy, budget allocation, and other important areas” (Trade Chakra, 2010).
In order to gain a good perspective on the overall growth of the leading sector in the country, this research paper will specifically focus on the recent performance of the service sector and compare it vis-à-vis to its counterparts in the different countries in the ASEAN (Southeast Asian Nations) region. Further analysis would show the different strengths and weaknesses of the said sector that would help the country find ways to improve and maximize the potential of its service sector to the fullest. Consequently, this would uplift the continuing increase of economic development in the country.
Research Objectives
This study is aimed to accomplish the following objectives:
- To determine the status of the service sector in the country.
- To compare the similarities and differences of the service between the Philippines and the other ASEAN countries.
- To identify key improvements to the Philippines’ service sector by applying the best strategies practices of ASEAN countries for their respective service sectors
Scope and Limitations
As mentioned in the rationale, this research focused mainly on the ten (10) countries that comprise the organization of Southeast Asian Nations or ASEAN and their different service sectors. Japan, China, and Korea which forms part of the ASEAN + 3, are also included in this study to obtain more information on the best practices of their service sectors. The rank of the different countries should not affect the results. The authors acknowledge that there is huge differences in the size of the GNP of the different ASEAN countries; the rankings are there as a guide for the qualitative information.
This paper utilized statistical data as of current prices because constant 1985 prices data of the Philippines are based on a different base year for other ASEAN countries. Access to information on the base year of the different countries will proved to be unfeasible given the limited time and resources allotted for this research paper. Also, inflation is an important consideration given that the paper aims to provide a current situationer of the Philippines as well as the ASEAN countries.
As for the data on ASEAN countries, it is important to delineate that the aim of the paper is to look into how these respective countries focus on and support their service sectors. Ranking, therefore, is based on contribution to GDP of the said sector and not the base GDP of each country. The aim is to provide a linkage of analysis between the service sector support (i.e. programs, policy, laws) and actual contribution to GDP of the sector.
Review of Related Literature
Philippines Overview
Just after the World War II era, the Philippines have become one of the poorest countries in Asia. Economic mismanagement and political volatility was deemed the reason for the economic stagnation of the country. Also, a recession occurred throughout 1984 to 1985. The economy started to pick up during the 1990s but due to the Asian financial crisis in 1997, the Philippines is affected once again. President Arroyo was able to restore economic stability but weak infrastructure and education systems, and trade and investment barriers have threatened long-term growth.
PER CAPITA: GROSS DOMESTIC PRODUCT, GROSS NATIONAL PRODUCT
Annual 2008 and 2009
AT CURRENT PRICES, IN PESOS
(%)
A. Estimates in current pesos
1. GROSS DOMESTIC PRODUCT / 81,910 / 83,261 / 1.6
2. GROSS NATIONAL PRODUCT / 91,330 / 95,525 / 4.6
Table 1. 2008- 2009 GDP and GNP Per Capita
According to the National Statistical Coordination Board (NSCB.gov.ph), the country’s GDP per capita has increased by 1.6 percent from 2008 to 2009 at 83,261 pesos (in current pesos).
The CIA World Factbook (2010) estimates that as of 2009, the services sector of the Philippines contributes the most income to the country’s GDP at 55.1 percent (Figure 1). Coming in second is the industry sector at 29.9 percent and last is the agricultural sector at 14.9 percent.
Figure 1: Phils. GDP by Sector. Source: CIA The World Factbook (
GROSS NATIONAL PRODUCT AND GROSS DOMESTIC PRODUCT
BY INDUSTRIAL ORIGIN:
Annual 2008 and 2009
AT CURRENT PRICES, IN MILLION PESOS
INDUSTRY/INDUSTRY GROUP / At Current Prices2008 / 2009 / Growth Rate
(%)
Agri. Fishery, Forestry / 1,102,756 / 1,144,615 / 3.8
Industry Sector / 2,349,426 / 2,295,126 / -2.3
Service Sector / 3,971,031 / 4,229,402 / 6.5
GROSS DOMESTIC PRODUCT / 7,423,213 / 7,669,144 / 3.3
Net factor income
from the rest of the world / 827,036 / 1,031,679
GROSS NATIONAL PRODUCT / 8,250,249 / 8,700,822 / 5.5
Table 2. Annual 2008 and 2009 GNP and GDP by Industrial Origin. Source: National Statistical Coordination Board (NSCB)
The data from the table above shows the actual figures of the Agricultural Sector (1,102,756), Industry Sector (2,295,126) and Service Sector (4,229,402). From 2008 to 2009, the growth rate of the Service Sector (6.5%) places itself higher than the Agriculture Sector at (3.8%) and definitely different from the Industry Sector at (-2.3%).This would imply that the value-added production of the Service Sector to GNP.
The high labor force participation in the services sector reflects the same lead among the sectors at 51 percent. Agriculture comes second at 34 percent and industry at 15 percent. Though Agriculture employs more employees in the Philippine Labor Force, the Industry Sector is earning more at 2,295,126 compared to the GNP of the Agricultural Sector at 1,144,615 for 2009.
Figure 2: Phil. Labor Force Occupation by Sector (nscb.gov.ph)
Agricultural
The agricultural sector in the Philippines is rich in agricultural potential, but has inadequate infrastructure, lack of financing, and the existence of government policies have limited productivity gains. The agricultural sector employs one-third of the work force (35% as of CIA 2008) but provides less than a fifth of the GDP (19% as of CIA 2009). Due to deconstructive fishing methods, lack of funding, and inadequate government support, the future of the industry is unclear. Though 40% of the total land area of the Philippines is arable farmland, limited productivity exists. Due to adverse weather conditions, the industry is expected to slow further.
Industrial
In 1981, the government proposed the industrialization strategy which stressed the development of exports and the implementation of 11 major industrial projects which includes copper smelter, phosphate fertilizer plant, aluminum smelter, diesel-engine manufacturing plant, expansion of the cement industry, cocochemical complex, integrated pulp and paper mill, petrochemical complex, heavy engineering industries, integrated steel mill, and the production of alcogas (Encyclopedia of Nations, 2010). The Philippines is a labor-surplus country with over 37.73 million people in the Labor Force (CIA), and the government has traditionally encouraged the development of labor-intensive industries, such as textile production and the assembly of electrical and electronic equipment (CIA). However, manufacturing has made only a relatively small contribution to overall employment, taking in only 15% (CIA). Electronic shipments declined by 3% in 2008 from the previous year whereas there was a 23% decline in the fourth quarter revenues compared to the previous year’s fourth quarter. There is a great potential in mining wherein the country has reserves in chromate, nickel, and copper. The country has reserves for geothermal, hydro, and coal energy. The industry’s decline has been caused by low metal prices, high production costs, and lack of investment in infrastructure. In 2004, the court allowed up to 100% foreign-owned companies to invest large-scale exploration, development and utilization of the minerals, oil and gas.
New taxes have helped increase funding for the additional spending of the government on social services and infrastructure. In 2004, approved in legislation were the adjustments in the excise tax rates for tobacco and liquor products until 2011. In 2005, an amended value added tax (VAT) was increased from 10% to 12%. In January 2005, a performance based rewards system was enacted in the government’s revenue collecting agency. In contrast to the annual population growth rate of 2.04%, population living below the national poverty line increased between 2003 and 2006 from 30% to 33%.
The Philippine economy is equipped to endure in the short term the global financial crisis. The Philippine banking sector, has limited direct exposure to the distressed financial institutions overseas. Available also are the conservative regulatory policies (prohibition of investments in structured products, and shielded insurance sector from exposure to financial firms). Though direct financial exposure to investments and financial institutions is limited, problems with economic growth, poverty alleviation, employment, remittances, credit availability, and overall investment prospects are a growing concern.
In 2007, GDP grew by 7.3% due to increases in government and private construction expenditures, information communications industry, post-drought agricultural harvests and strong private consumption. Also, it is due to 14.4bn dollars in remittances (10% of GDP).
GDP growth slowed to 3.8% in 2008 from impact of high food and fuel prices and global financial uncertainties. Increase of remittances of 13% in 2008 (16bn dollars) helped the domestic economy.
It is notable that the growth rate of the service sector reached 10.5% compared to the difference to the 18.3 growth rate of the industry sector at current prices. Moreover, the table below shows that the service sector was able to attain 1,056,410 compared to the lower figures for industry (601,338) and agricultural (278,443).
GROSS NATIONAL PRODUCT AND GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN
At Current Prices
INDUSTRY/INDUSTRY GROUP / Q1 2009 / Q1 2010 / Growth Rate(%)
AGRI.FISHERY,FORESTRY / 270,653 / 278,443 / 2.9
INDUSTRY SECTOR / 508,234 / 601,338 / 18.3
SERVICE SECTOR / 956,355 / 1,056,410 / 10.5
GROSS DOMESTIC PRODUCT / 1,735,242 / 1,936,192 / 11.6
Net factor income
from the rest of the world / 234,212 / 303,188
GROSS NATIONAL PRODUCT / 1,969,454 / 2,239,380 / 13.7
Table 3: GROSS NATIONAL PRODUCT AND GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN: 1st Quarter 2009 and 1st Quarter 2010. (nscb.gov.ph, May 2010)
Service Sector (Overview and Analysis)
According to a report by the Asian Development Bank (ADB) and the Department of Interior and Local Government (DILG) of the Philippines (2009), national urban growth has been driven by the service sector, as far back as the 1980s. The said sector has been expanding at an annual average rate of 4.0 percent, while both the industrial and agricultural sectors’ growth were slower paced, both at 1.9 percent. From 1980 to 2005, the share of the service sector to the Philippines’ gross domestic product (GDP) has increased from 36.0 percent to 48.2 percent. The largest subsector is the wholesale and retail trade which accounted for almost 35% of gross value added in the service sector in 2005. The fastest growing subsectors of the sector are trade, communication and storage together with private services were at 5.2% and 5.0% per annum, respectively.
The share of the service sector compared to the other has increased over the past few years. As of 2006, the services sector contributed to 48.3 percent of the total GDP of the Philippines. Industry had 32.8 percent while agriculture only stood at 18.8 percent. (Yap & del Prado, 2007)
In recent years Asia has been experiencing major growth in the service sectors of its many countries. The Philippines grew by only 1.9 percent in the first three months of 2009, but ended the first quarter of 2010 with a growth of 6.1 percent, thus validating the proposals made in the past for the country to “abandon” the manufacturing sector and shift its policy in support of the services sector (Yap & del Prado, 2007). Also according to Yap & del Prado (2007), the transition of labor and output share from manufacturing to the services sector is widely referred to as deindustrialization. This follows the traditional development models of human societies’ sequential pattern of economic development—from agricultural to industrial and to services-oriented economies. The share of the services sector to total Gross Domestic Product (GDP) in the Philippines has increased steadily in the past three decades. As of 2006, it stood at 48.3 percent compared to 32.8 percent for industrial manufacturing and 18.8 percent for agriculture. Then in 2009, it grew to comprise 54.2% of the total GDP and employs 50% of the labor force (CIA).
The service sector is typically broken down into the following: a. Transport, Communication and Storage; b. Trade; c. Finance; d. Ownership of Dwellings & Real Estate; e. Private Services; and f. Government Services. The private services performed strongly as seen in the percentage contribution and growth rate in the tables below with the trade subsector following closely.