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Measuring
the
New Economy
By Michael Alan Hamlin
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.
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