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Is our services sector too big?

By: Cielito F. Habito, PhD

Once upon a time, we had a prominently agricultural economy. Some limited industrialization took place in the postwar years, in the form of import-substituting industries fostered by protective trade barriers such as import controls and high import tariffs. But such inward-looking industrial growth has its limits and appeared to have hit the ceiling by the 1980s and 1990s, hampered by a domestic market whose otherwise large population base was negated by limited purchasing power. By then, industrial growth was overshadowed by a zooming services sector, which now comprises well over half of the economy. In the succeeding two decades to the present, agriculture’s share took a steep dive, as industry’s share likewise slipped in a seeming de-industrialization.

Over the last half-century, our economy has seen a restructuring quite unlike that of our more industrialized neighbors. In 1950, the agriculture, fishery and forestry (AFF) sector was larger than industry, with a 31 percent share of output against the latter’s 30 percent. Services accounted for the rest (39 percent). From the postwar period until the mid-1970s, agricultural and forestry products were our top exports, making up two-thirds of our total export earnings. Coconut products, sugar and bananas were our top three exports in 1975, and my undergraduate thesis as an agricultural economics major at UP Los Baños then was on the export marketing of these three crops. Manufactured products accounted for less than a tenth of our total exports at the time, and one could rightly say then that ours was largely an agricultural economy.

Some measure of industrialization took place between 1950 and 1970. Industry’s share rose to 35 percent as AFF’s share went down to 26 percent, while services stayed at 39 percent. Industry’s share appears to have peaked at 36 percent in 1980. By then, manufactured products had already quadrupled their share to 38 percent of total exports, driven by electronics. Meanwhile, coconut, sugar and forestry exports were down to only one-third of export earnings, only half of their aggregate two-thirds share before. In 1990, AFF’s output contribution further dropped to 22 percent, industry’s share remained at around 35 percent, while the services sector was taking off with a growing share (more than 42 percent). By the turn of the century, services’ share had ballooned to 52 percent as industry’s share slipped to 34 percent and AFF’s share took a dive to 14 percent. As of last year, the share of services had risen further to 57 percent, industry’s share slipped anew to 33 percent, and agriculture’s share slid further down to 10 percent.

What happened? Those who see this somewhat unique story in a positive light describe it as “leapfrogging” into a services-dominated economy. Others see it negatively as our unfulfilled industrialization. The former view gained credence in the 1990s, as observers extolled the country’s abundant human resources (translation: high population resulting from rapid population growth) as a logical base for a strong services sector. But there were at least three things wrong with this picture. One, even as the human resource pool was abundant in quantity, its quality had been compromised by government’s difficulty with keeping educational and health services in step with population growth over the years. Thus, we may have ample human resources, but it’s largely of the low-productivity kind—those who either find employment in low-level services in the informal sector (vending, appliance or motor vehicle repair, or transport such as pedicabs and tricycles), or swell the ranks of the unemployed and underemployed.

Two, the fastest-growing services industries— banking and finance, real estate development, telecommunications, and business services like call centers—require skills not possessed by the bulk of the millions of unemployed. Statistics show that around two-thirds of unemployed Filipinos had not gone beyond high school, with about half not even completing it. Thus, the rapid growth of the services sector has done little to alleviate our high unemployment rate, or help reduce poverty. It’s not surprising, then, that the mostly services-propelled growth in the past decade was accompanied by rising poverty.

Three, it is remarkable that the most prominent lines of business of those topping the Forbes list of wealthiest Filipinos are the same fastest-growing services industries listed above. Their biggest money-makers include banks, insurance and finance companies; real property development firms; power and water utilities; telecommunication and media empires; air and water transport (including port) services; and gaming facilities. Moving forward, inclusive growth would be better served if more investments were made by the biggest names in business in job-creating ventures in manufacturing and especially in agriculture/agribusiness. And when they do, they would do well to deliberately adopt a business model that consciously involves small firms and farms in an inclusive value chain.
Is our services sector too big? Not at all. Agriculture and manufacturing are just not big enough. A rapidly growing services sector need not be a bad thing, especially if more inclusive services such as tourism and personal services could drive it. But our economic history suggests that government’s neglect of the investment environment in agriculture and manufacturing, whether as cause or effect of our “leapfrogging” into services, led us down the path of noninclusive growth. Now is the time to change all that.