Economic Openness and Sub-National Regional Development: A Philippine Policy Choice to Propel Inclusive Growth

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Written by Secretary Ernesto M. Pernia

While globalization has been in play for some time now, and most countries have been part of it one way or another, economic openness has assumed greater significance with the stronger push for the ASEAN Economic Community (AEC) in addition to the Asia-Pacific Economic Cooperation (APEC). This makes the question whether and how a country’s sub-national regions can benefit from an open economy relevant and timely.

There are essentially two theoretical views—both supported by empirical studies—regarding the links between openness, regional growth, and poverty. One says that economic openness fosters growth outside major urban centers where manufacturing industries locate to eschew rising land, labor and congestion costs. The other view argues that foreign direct investment and trade tend to reinforce urban agglomeration in a developing country where economic activity is often concentrated in the national capital and inter-city connectivity is inadequate. To address the question which of the two views applies more to the Philippines, an analysis of time-series data on the country’s 17 regions vis-à-vis an earlier study on 14 regions was carried out.

Skewed Spatial Development

Studies have shown the highly skewed spatial distribution of economic activity in many ASEAN and APEC developing countries, with the administrative or financial capitals towering over the rest of the economic landscape. While such spatial concentration or urban primacy may be necessary and desirable initially to achieve agglomeration economies, it can become excessive and costly if left to plain market forces.

The diseconomies of agglomeration are all too familiar, such as time lost to traffic congestion, health and environmental costs owing to air and water pollution, flooding, and traffic accidents. It has also resulted in disaffection and social disquiet among people living in neglected outlying regions or provinces.

This is the reason why the development of lagging or underperforming regions far from the primate city remains an important policy objective in national development plans, even as policy pronouncements to address the issue have been made time and again for decades now. The Philippines is just one illustrative example.

Economic growth remains highly concentrated in Metro Manila, accounting for a third of the country’s gross domestic product (GDP). Combined with the adjacent regions of CALABARZON (Cavite, Laguna, Batangas, Rizal, Quezon) and Central Luzon, this mega-urban region makes up two-thirds of GDP, leaving the balance for the 14 other regions.

Infrastructure Matters

With comparatively superior infrastructure and connectivity, this mega-urban region has been the primary beneficiary of foreign direct investments (FDIs) and international trade, thereby furthering its growth and reinforcing the country’s interregional inequality. Thus, the question is how can economic openness and strategic infrastructure improvements benefit the lagging regions?

The incumbent government’s Philippine Development Plan, 2017-2022—which is anchored on the President’s 0-10 point Socioeconomic Agenda and geared towards the people’s Long-Term Vision 2040—includes a key chapter on “Accelerating Infrastructure Development”, popularly dubbed as “Build Build Build”. It discusses a massive investment program for infrastructure designed to redress inequality by stimulating the development of the regions.

Economic openness plays an important role in this strategy. It can help to promote sub-national development, on the one hand, and it can draw external public and private capital for financing the infrastructure program, on the other hand. Ultimately, with improved infrastructure, connectivity and human capital, the country can become more globally competitive. Further, it can benefit from two-way trade and FDIs in the various economic sectors.

Empirical research suggests that sub-national regions do gain from an open economy in terms of economic growth and—through growth—reduction in inequality and poverty. As would be expected, gains from economic openness are uneven with the ex-ante lagging regions at a disadvantage vis-à-vis the leading ones; by extension, the welfare effects on the poor appear unequal, as well.

All told, economic openness coupled with sound regional policy can make a difference. Such policy should include infrastructure and human capital improvements especially in the left-behind regions to enhance their connectivity with the mainstream economy. Better integration with ASEAN and APEC will result in more opportunities from an open economy.

About the author: Dr. Ernesto M. Pernia is currently the Secretary of Socioeconomic Planning and Director General of the National Economic and Development Authority of the Philippines. He is Professor Emeritus of Economics at the University of the Philippines. He obtained his PhD degree from the University of California Berkeley.