The noisy and persistent demand for higher minimum wage rates could not have come at the worst time. Most economic indicators point to a slowing economy. Exports growth fell sharply. Manufacturing, a major source of last year’s record growth, has shown signs of contraction. Foreign direct investments (FDIs) into the country, already puny compared with its ASEAN neighbors, plummeted by 70%. Government spending in the first quarter of the year was way below target, especially in the much-needed public infrastructure.
Sadly, the government’s response to these threatening clouds does not exude confidence. Stung by declining popularity and approval ratings, both here and abroad, the President and his men have decided to take popular, though economically unsound, moves.
He admonished employers for not sharing the fruits of their enterprise and ordered the regional wage boards to convene and act of wage hike requests pronto. Brave words. He effectively diffused the blame for workers’ woes away from him and on to firm owners.
But little did the President realize that perhaps he’s talking of a different period in a not-too-distant past when some industries were making obscene profits, partly because of redundant fiscal incentives. For example, telcos use to make huge profits. Not anymore, with rising costs, slowing demand and keener competition from alternative means of telecommunications. Even the BPOs are faced with falling margins as power rates rise and the peso appreciates in value.
Now, except for a few large private firms, many enterprises are hurting. Prices of oil and electricity have skyrocketed, transport costs have doubled, the costs of other inputs have risen, demand has dwindled because of hard times, and as a result profit margins have thinned.
Of course, some industries that continue to make profits should raise their workers’ pay to keep up with rising prices. That’s a good strategy for keeping their workers happy, loyal, and productive. And it’s also part of their corporate responsibility.
Another government move that does not exude confidence is the delay in the adjustment of MRT and LRT rates. "We’re looking for the right time," according to government authorities. The right time was six months ago; no, correction, six years ago.
Don’t get me wrong. I agree that urban transport, as in most urban centers, should be subsidized. There is a strong economic argument for subsidizing public transport. An efficient urban transit system is one way of reducing pollution. It is also one way of making obsolete the inefficient, gas-guzzling, and pollution-ridden bus system in Metropolitan Manila.
But subsidizing MRT ride up to three-fourths of its cost is mindless. Why should farmers from the Cagayan Valley, traders from Davao, and fisherfolks from Tawi-Tawi subsidize the MRT ride of Metro Manila residents? Where’s fairness in this arrangement?
In the meantime, MRT and LRT facilities continue to deteriorate as evidenced by frequent breakdowns and accidents. And government authorities are still waiting for the right time to adjust MRT rates!
Higher wages and exports performance
Exports growth decelerated to 4.05, its slowest in 17 years. For the first quarter of 2011, exports grew by 8.0%, a sharp drop from 43.5% growth in the first quarter a year ago.
The fall in Philippine exports can be explained largely by base effects, Japan’s triple tragedy, and depressed demand for electronics products.
The recent COLA adjustment in the NCR and its rippling effect on other regions have no effect yet on export performance. But once higher wages start working through the system, it may slow further expansion in exports.
Labor-intensive exports such as woodcraft and furniture, articles of apparel and clothing accessories, and others may have a hard time competing with other countries exporting the same products.
With the peso appreciating, higher wage costs could just be the tipping point that would render labor-intensive Philippine exports uncompetitive.
Higher wages and foreign direct investments
Net foreign direct investments plunged by 70% in February: from $326 million in February 2010 to $97 million in February 2011. For the first two months of the year, net FDIs was only 304 million, 38.7% lower than a year ago. The Philippines appears to be on its way to another year of low FDI yield, much lower than its neighboring ASEAN-5 counterparts.
Admittedly, FDIs respond to a lot of non-wage factors: strong growth prospects, policy consistency and credibility, superb public infrastructure, rule of law including sanctity of contracts, peace and order, ease of doing business, fiscal health, and others. But wage policy and industrial peace are also important.
For firms which are capable of choosing where they want to operate, wage rates and likelihood of industrial peace could be a deal breaker. Hence, the current stance of the government on wage setting is crucial. Other things equal, firms will choose a country where labor cost is competitive, workers are productive, and industrial peace is guaranteed.
The recent decision by the National Capital Region wage board to increase the cost of living allowance by P22 will reverberate in the discussions in other regional wage boards in the days ahead.
The foregoing discussion should be food for thought for the men and women who will decide on the appropriate wage levels in their respective regions. Their decisions are not trivial. Rather they have a deep and wide-ranging impact on employment, exports growth, foreign direct investments, and overall economic activity. They have an impact on the future of those who today, and in the future, continue to have difficulties finding gainful employment at home.
The members of the regional wage boards should look at the big picture.
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To view the original article by Benjamin E. Diokno published in BusinessWorld Online on May 11, 3011, click here.
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