Economic tremors from Japan to PH

First published on Blogwatch.ph

The Philippines may have been spared from aftershocks or tsunamis from Japan’s most powerful quake last March 11, or from any trace of radioactive fallout from the troubled nuclear plants in Fukushima. On the economic side though, the country may actually be experiencing tremors in the days or months ahead.

The World Bank itself said in its most recent East Asia Pacific Economic Update that the Philippines, aside from China, is “more connected to developments in Japan than the rest of East Asia.” Of course, this is still an understatement. The country is more vulnerable to Japan economy’s woes than what official projections say.

How will the Philippine economy be affected by Japan’s devastation? Perhaps a look first at the damage wrought on the world’s third largest economy will help us arrive at some plausible inferences.

Government and private estimates have put the damage on Japan’s economy up to US$235 billion (P10.12 trillion at P43 = $1), or roughly 4 percent of Japan’s gross domestic product (GDP). While this estimate is still tentative, analysts agree that the damage would be higher than that wrought by the 1995 Kobe earthquake, which was around $100 billion.

Power supply disruptions due to damaged nuclear power plants have resulted to shutdown or reduced operations of manufacturing plants across the nation. Three of Japan’s biggest brands – Toyota, Sony and Honda – announced that they wil further delay normal operations due to power shortages and lack of parts. Overall, the quake and tsunami have caused a significant decline in the nation’s manufacturing activity.

Following the disaster, Japan’s government and private institutions are expected to heavily spend on reconstruction efforts, which the World Bank estimated to last up to five years. This will reasonably put pressure on the amount of foreign investments and aid being extended by Japan to other countries including the Philippines.

Local think-tank IBON Foundation said that “Japanese investments and official development assistance to the Philippines will drop or at least slow down as Japan tries to reconstruct itself.”

Japan accounts for the second biggest source of foreign direct investment (FDI) flows to the country next to US. From 1995 to 2005, Japan’s cumulative FDI to the Philippines reached US$3.16 billion, bigger than the combined total investments from Europe, ASEAN and China during the same period. Traditionally, Japan is also our largest country donor of official development assistance (ODA).

As Japan prioritizes spending at home, President Benigno “Noynoy” Aquino III’s investment mantra for supposed local economic growth would not hold at this point. It would be grossly insensitive. President Aquino and the neoliberal crusaders in his Cabinet should realize by now that aggressively wooing Japanese capital in the face of the disaster smacks of desperation and insensitivity. They should know by now that pursuing such line will only further expose the mendicant character of the Philippine economy.

The public-private partnership (PPP) program, which is at the core of Aquino’s economic policy, may also lose steam following the disaster since Japanese capital is targeted for most of the PPP projects on the drawing board. It can be remembered that early this year, the Aquino government launched its first international investment roadshow in Japan. At least 10 PPP projects worth $3 billion, which are programmed to start this year, were presented to Japanese investors during the roadshow. So far, not a single one was picked. And presumably, the chances would narrow in light of Japan’s reconstruction efforts.

Such scenario will have mixed implications. For ordinary taxpayers, that would be good news since we will be spared from additional debt burden. For President Aquino, that would certainly be a PPP blooper.

Yet Filipino workers and the people are the ones who will bear the more serious consequences from Japan’s disaster. It should be noted that Japan’s production facilities are first-tier suppliers in industries like electronics and automobile manufacturing. This means that a drop in Japan’s export of essential parts and components will lead to scaled down operations in the rest of the regional supply chain. And that includes production operations in the Philippines.

Take for instance the Philippine automobile production. Most local car assemblers are solely dependent on imported completely knock-down (CKD) parts like engine and transmission from Japan. Assuming importation of CKDs from Japan would drop, local production operations of car manufacturers would also decline due to lack of parts, portending layoffs of Filipino auto workers. If not layoffs, automobile firms may potentially implement flexible work arrangements like compressed workweek/ workhours, which will significantly cut workers’ wages and set conditions for contractual work.

The same scenario hounds Filipino electronics workers, since Japan is the top export destination of electronic and semiconductor complementary parts produced locally. Based on the Philippine Economic Zone Authority’s (PEZA) last year, two out of five factories in the country’s special economic zones are electronics firms which export to Japan. With Japan’s manufacturing activity down, demand for complementary electronic parts would also plunge.

In the face of these glaring vulnerabilities, President Aquino said yesterday that the Philippine economy will remain “resilient” despite Japan’s devastation. He said the government will capitalize on the disaster to woo production transfer from Japan to the Philippines.

Of course that is at best wishful thinking. For one, the Philippines does not have the Japan’s industrial technology for first-tier supply production. Two, Japan would not allow technology transfer to the Philippines either since technology is precisely her advantage in the global supply chain.

Shouldn’t President Aquino think more of nationalizing industries and reducing trade and investment dependence in the face of Japan’s wobbly economy? Isn’t this is a highly opportune time to plug economic vulnerabilities through genuine land reform and national industrialization? We have failed to pursue a major economic overhaul for so long that up to now, we can only send bananas as palpable aid to Japan on one hand while continue begging for finance and scrap trains on the other. Isn’t this tragic?

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