Article No. 3
Measuring the New Economy
by Michael Alan Hamlin
The Philippines' worth as an information technology Intellectual oasis is routinely underestimated (February 5, 2001) The announcement last year by the Meta Group that the Philippines ranks No 1 in the world ahead of Australia, the United States, Canada and France in knowledge jobs in its latest Global E-Economy Index confirmed what multinational technology executives have known for years: the Philippines is a bountiful source of scarce, world-class intellectual capital.
With 800,000 information technology (IT) jobs likely to go unfilled this year in the United States alone, that makes the Philippines a strategic human resource for many of the world's top technology companies. But although the Philippines appears to be a thriving exporter of intellectual value added, that is hard to fathom from official export revenues and economic growth indicators.
Given the recent political turmoil surrounding the replacement of president Joseph Estrada, the country might appear an unlikely target for overseas investment in such cutting-edge industries. But appearances can be deceptive in this high-technology underground economy.
In fact, the Philippines has been the fastest-growing importer of hi-tech manufacturing equipment from the US for the past decade as chipmakers such as Texas Instruments and Intel have expanded their operations and local semiconductor assemblers have prospered.
But the real story is in software and back-office support services.
In recent years America Online, TrendMicro, James Martin and other new economy enterprises have established or enhanced support and product development offices in the country. A unit of Andersen Consulting has been writing software solutions for offices around the world for the better part of two decades. Each employs hundreds of Filipino software engineers and technicians.
Lower-end but still skilled, value-added jobs are being created in the Philippines by a wide range of multinationals that locate administrative processes units and call centres in the country. A subsidiary of DaimlerChrysler, debis IT, hosts the servers and applications of some group companies and non-group clients from the Philippines. At least one US-based Internet and technology incubator tells prospects that one of its chief advantages is its capacity to set up development staff in the Philippines. Indeed, a tour of almost any office building in Metro Manila's sprawling commercial centres will turn up software development units of start-up companies based in the US, Taiwan, Europe and Australia.
But if the Philippines is such a thriving development centre, why are not all these value-added exports showing up in the economic statistics? According to official counts, the Philippines exports just US$200 million a year in software. It exports seven times that amount of electronics and components every month. And India exported US$6.3 billion in software services and products in its last fiscal year, up 57 per cent from US$4 billion the year before. Unlike most Southeast Asian economies, the Philippines is expected to grow at a relatively paltry 3.4 per cent this year.
The difference between India's and the Philippines' software exports has to do with more than the size of their populations the population of the Philippines is less than 10 per cent of India's 984 million. It also has to do with the structure of the software industry. In India, software exports are dominated by three companies: Infosys, Wipro, and the National Institute of Technology. These companies develop software on spec for companies in developed markets. A good deal of that work last year - although the market leaders limited the amount they would do - was Y2K-related and will not come around again soon, obviously.
In contrast, the Philippines has no major, indigenous software powerhouses. Major software exporters such as NEC, Andersen, TrendMicro, and James Martin, like the Philippine development units of US and other start-up companies, send their products over the Internet to overseas headquarters for actual packaging, markup, and sale.
To understand why that is important, first remember that it has not been many years since the US determined the value of software exports by the value of the floppy disks programs and systems they were stored on. The major value-added component of the export the applications residing on the disks did not figure in export volumes.
That is still an issue because software is exported and imported in the new economy over the Internet and older Electronic Data Interchange networks, making it virtually impossible to monitor the real value of exported software that is zapped to Singapore, for instance, and put on CDs and other media there for regional distribution.
What this means for the Philippines by implication is this: more jobs are being created every year as the number of unfilled technology jobs in the US increases. And those jobs are vitally important to the Philippines. But and this is a major but the country is receiving little of the total return on its intellectual capital because the exports produced cannot or will not be measured and profits are booked elsewhere.
Only operating expenses remain in the Philippines.
The irony is that the Philippines has turned a major part of its economy to high-value added creation, which most other Asian nations have had a hard time doing.
But what shows up in local economic indicators is merely the value of the direct labour that went into creating the product, rather than the profit accruing from the intellectual input.
The bottom line is that no one knows the true value of Philippine software exports, and it is likely that the total value is significantly - perhaps wildly - greater than US$200 million a year. To add to the humiliation, when Filipino engineers who generally do not receive stock options like their US-based counterparts are sent overseas to install and troubleshoot the business applications they create, they are paid local rates.
However, their employers' charge going international rates, another huge differential.
It is a painful paradox for a country internationally recognised for the value of its intellectual resources to suffer the indignity of being on the tail end of growth in Asia on the basis of traditional measures of performance.
(Mr. Hamlin is managing director of the Manila-based consultancy TeamAsia and the author of two books on Asian economies and managing in Asia.)
South China Morning Post, 2001
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