News and Features

APEC’s globalization hurts local SMEs


Among the supposed aims of this year’s Asia Pacific Economic Cooperation (APEC) meetings is getting the little guys – the small and medium enterprises (SMEs) – on board the bandwagon of economic integration.

In particular, APEC is pushing for a greater role for SMEs in the global production and distribution systems of multinational and transnational corporations. Through the SMEs, economic growth is supposed to trickle down to the smallest players in the value chain.

In a sense, this is APEC’s way of addressing the highly inequitable distribution of wealth that globalization has fostered. It is an admission that trade and investment liberalization policies pushed by APEC, in connivance with the World Trade Organization (WTO), International Monetary Fund (IMF) and World Bank (WB), have benefited mainly the big global firms at the expense of the rest of the world, including the small and medium-sized producers in developing economies like the Philippines.

As host of this year’s summit, the Aquino Administration plays a big role in APEC’s posturing of concern for the weak and small. The Philippine government has even injected Pres. Aquino’s hollow slogan of “inclusive growth” into APEC’s mix of feel-good jargons, with the SME sector as one of its poster boys.

Philippine SMEs nearing extinction

But first we have to ask: What impact did three decades of trade and investment liberalization have on our SMEs? And will APEC’s newfound advocacy for SME’s do any better?

Economic liberalization policies since the late 1980s have caused the demise of our manufacturing sector notably garments and textiles, footwear, rubber products, furniture, appliances, food and beverage, steel, chemicals, drugs and pharmaceuticals, many consumer goods and even agro-industrial products. Left by government to fend for themselves, Filipino manufacturers and farmers have been decimated by the deluge of cheap imported goods and raw materials brought about by government’s policy of slashing tariff rates to one of the lowest in ASEAN, not to mention toleration of rampant smuggling.

The numbers bear this out: from 1999 to 2010 alone, around 3,000 manufacturing firms closed shop, resulting in 214,000 jobs lost. At 22.6% average share of GDP, manufacturing is at its lowest levels in 60 years while agriculture, at 10.8% share of GDP, is the lowest in history.

Worst hit and still unable to recover from globalization’s disruptive impact on manufacturing since the late 80s are our SMEs that used to produce consumer goods for the local market or supply materials and services for larger, integrated local industries. Trade and investment liberalization has allowed this traditional role to be taken over by foreign suppliers and their local distributors.

Such problems were not unexpected. In the debates prior to Philippine ascension to the WTO, government officials were insisting that there were adequate “safety nets” for globalization’s victims, namely billions of special funds for competitiveness enhancement measures. However, affected sectors have been constantly complaining that said funds, like the Department of Agriculture’s Agriculture Competitiveness Enhancement Fund (ACEF) and a similar fund under the Department of Trade and Industry (DTI) are not being strategically used for SME development but instead have become notorious sources of corruption and political largesse.

Instead of integrating with local industries or graduating into large enterprises themselves, our beleaguered SMEs have in fact been shrinking into the equivalent of economic microorganisms. An overwhelming majority – 697,077 or 91.5% of Filipino firms – is categorized as micro-enterprises, with a miniscule asset value of PhP3 million or less each and having just 1-9 employees. Of these, 51% are into wholesale and retail trade, meaning they don’t even produce anything.

This is probably why the Philippines insisted that APEC change its nomenclature – from SME to MSME (M for micro) – so as to include food carts, cellphone repair kiosks, sari-sari stores, tricycle and pedicab operators, kakanin and pasalubong makers, pasa-load retailers, and the otherwise informal economy that comprise the vast majority of Filipino enterprises.

Unfortunately, these micro-enterprises, which contributed a mere 4.9% of value-added to the economy and whose productivity is a mere 10% of large industries, are too small and inefficient to compete for a piece of the global or even regional value chain. Take note the average life of such businesses is only 3-5 years.

Our real SMEs, which are supposed to benefit from APEC’s action plans, are already nearing extinction, with small firms comprising just 7.6% of all businesses and medium-sized ones accounting for an even lower share at 0.4%. Thus our economy has a hollow middle, with bulk of employment and business activity coming from micro enterprises and large firms.

Disjointed industries

Unlike in other industrialized economies, our SMEs have become orphans in their own country. They have little relation to our large industries, most of which source their equipment, parts and materials from abroad. Thus there are hardly any forward or backward linkages with local SMEs, creating minimal value added to the economy. Such linkages are crucial to maintaining a robust and sustainable SME sector and building a truly industrial economy. Without it, one ends up with enclaves of import-dependent, assembly-type factories; a service sector that serves industries in other shores; and a massive trading sector dumping cheap, often smuggled consumer goods from abroad. This in turn translates to low-paid, contractual jobs, if any.

Any serious effort to strengthen and develop SMEs should be premised on a strategic program of national industrialization, keeping in mind that SMEs are not the end in itself but the means by which to establish large-scale, integrated industries on a national scale. This means focusing on local value chains with SMEs as the building blocks, providing the raw or semi-processed materials, supplies, parts or services needed by large industries. They should serve as a bridge between our largely undeveloped agricultural sector and relatively modern industries. With this role in mind, government should then equip the SMEs with all the credit, technology, research and development that they need; facilitate their access to local and global markets; reduce red tape and the cost of doing business.

It was APEC’s globalization agenda, zealously implemented by previous and present administrations, that caused the mass destruction of our SME sector and discouraged the development of large-scale, integrated Filipino industries. Now here comes APEC again, claiming to provide yet another false solution to our problem of joblessness, mass poverty and underdevelopment. It is time we wisened up and pursue an alternative way of developing our SMEs and Philippine industries as a whole.#

This article was originally published in an abridged version of which also came out in the Commentary section of the Philippine Daily Inquirer’s Oct. 30 issue.



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