East Asia and Pacific Economic Update: Services for Development

[Manuela V. Ferro ] 
Hello and welcome to the launch of the latest edition of our economic update for East Asia and the Pacific. I am Manuela Ferro, the Vice President for the East Asian Pacific region at the World Bank. I am delighted to be joined today by Secretary Balisacan of the Philippine National Economic Development Authority. Secretary Balisacan is a very influential policymaker, but also a very distinguished economist in his own right. We also have with us the World Bank's Regional Chief Economist Aaditya Mattoo, who led the report we are discussing today. Let me start with some good news for this region. With projected growth of around 5% in this current calendar year 2023 and 4.5% projected for next calendar year, this region remains one of the fastest growing regions in the world. For most countries in this region, output is now above where it was before the COVID pandemic. Now, regional growth this year will be higher than the average growth of all emerging markets and developing economies. However, it is lower than we had previously projected. We see service sectors like IT, finance continue to experience relatively strong growth, but manufacturing has slowed down in line with slowing growth in the global economy. Now, while global demand is important, several countries also have to address domestic issues and these include aging, include climate change, include growing debt, but also declining productivity growth. In this economic update, our special focus will be on the services sector, which already employs about half of the labor force. Now, this region is known for being the world's manufacturing hub. The bold reforms of the decades between 1980 and 2000 drove much of the manufacturing export growth that really generated fast growth and drastically reduced poverty in this region. We will argue in this report that services can play a decisive role in driving future growth, but require just as bold action as was introduced in the previous decades to reduce barriers to competition, improve regulation, and facilitate the diffusion of digital technologies that boost services productivity. At the same time, sustaining high growth will also require maintaining industrial competitiveness and diversifying trading partners. Let me now turn to Aaditya Mattoo, our chief economist that I introduced earlier, to present the report, after which we will hear some short remarks by Secretary Balisacan and followed by a conversation between the two of them. So, without further ado, over to you, Aaditya. 

[Aaditya Mattoo ] 
Thank you very much, Manuela. I'll take a moment to share my screen. I hope you can all see the presentation now. Thanks again to Manuela and thanks again to Secretary Balisacan for participating in this launch of our update. Let me begin by affirming the good news that Manuela mentioned that most countries in the region have recovered. Some like China and Vietnam today have output, which is as much as 20% higher than that before the pandemic, but also other major countries like the Philippines, Malaysia, Indonesia have output today, which is as much as 10% higher than that before the pandemic. Of course, countries in the Pacific and Myanmar are still struggling, and a country like Palau has output 20% below where it was before the pandemic. The region is growing but growth is slowing down. We turn to trying to understand first what is shaping the performance of the region. A region which depends a lot on trade, which is open to finance, is naturally affected by the global environment. 2023 was a year in which global growth slowed down, and that meant less demand for the region's exports. At the same time, 2023 was a year where many industrial countries were struggling with inflation, and that led to a financial tightening. This combination of slowing growth and tightening financial conditions led us to make projections for 2023, which are lower than those for 2022. Looking ahead to 2024, we expect global growth to revive, and we also expect financial conditions to ease somewhat because inflation is more under control. This combination has led us to project somewhat higher growth in 2024 than in 2023, but this general picture is affected by three concerns and we also identify one big opportunity. The first concern is that across the region we see today a problem of increased debt. This is not just true in a few countries, it's in every country. It's not just true of government debt, it's true of corporate debt and household debt. Some countries, the problem is particularly acute. We don't show Mongolia and Lao PDR, which have very high levels of government debt. Corporate debt in Vietnam and China is as much as 40 percentage points higher than it was in 2010. Household debt is relatively elevated in countries like China, Malaysia and Thailand. This debt weighs on households so they spend less, affecting consumption. It also weighs on governments and the corporate sector in a way that is affecting both public and private investment. Looking at our second concern, and this is about what is happening in China, I'll pause for a minute with a blank screen, because the story of China is important for all of us to understand. China matters for the whole region. We have calculated that one percentage change in growth in China affects growth in the rest of the region as much as 0.3%. China's current performance is being shaped both by how it has grown in the past and how it aspires to grow in the future. Its past emphasis on growth through investment and infrastructure and real estate has left behind a legacy of debt which you just saw. Its aspirations to grow in future more inclusively in the sense of the fruits of growth being shared more broadly, in terms of more stably, which is to deal with the problems in the real estate sector of excessive leverage and the risks that it creates for the financial sector, more sustainably by moving away from the emissions intensive sectors, and finally, also more autonomously in terms of reliance on its own technologies. That has led increasingly also to an emphasis on growth through consumption and innovation. China was prepared to give up some short-term growth to ensure longer-term quality of growth. The problem is the instruments that were chosen to engineer this transition were not always very efficient, and the changes in the policies exacerbated uncertainty both for consumers, which led to a significant decline in consumer confidence when combined with declining real estate prices, and also led to a decline in investor confidence and because of the economic policy uncertainty. If you see in this chart, this is econometric work which demonstrates that the sectors that were most affected, like education and internet-based services, were the ones which are subject to the greatest policy changes. If this is the problem in one of the largest markets and trading partners for the region, the other problem is more general. The world is tending to retreat from openness, but in particular, US trade and industrial policies are beginning to affect the exports of the region. We saw that when the United States imposed tariffs on China in the middle of 2018, export shifted away from China towards other ASEAN countries, notably Vietnam. But more recently, the introduction of the United States Inflation Reduction and Chips Act, and in particular the provisions in these agreements which attach local content requirements to the subsidies granted under these acts has now been followed by a decline in exports from the region, both the ASEAN countries and China. Now, if you look at other countries which have a free trade agreement with the United States like Canada and Mexico, they were exempt from these local content requirements and their exports have continued to grow. This difference in performance helps us to disentangle the implications of the Chips and the Inflation Reduction Acts from the broader economic slowdown and creates a strong presumption that the provisions in these acts are in fact adversely affecting exports of the region. Now these were our concerns. We turn now to what we see as a big opportunity for the region, which is the services sector and a sector which is at this time being transformed through the digital revolution. Now to begin with, I would like us to acknowledge and recognize that services are already important. They account for as much as at least half of employment and half of value added in most economies in the region. The productivity pessimism with which services are regarded is not justified because over the last decade, services have in fact contributed more than manufacturing to labor productivity in the region. Third, even exports and foreign investment services have grown faster than exports and foreign investment in goods. Finally, services tend to be more skill intensive, more female labor-intensive, and less carbon intensive than manufacturing. Evidence we have collected just for this report, and thanks to the transparency with which the Philippines government shares data and the Vietnamese government shares data helps us to substantiate and argument that I present for you now. This is that these new technologies when combined with the services policy reforms that have already been implemented and which are still incomplete are increasing productivity in services sectors like communications, finance, transport, and business services. They're also changing the nature of jobs. These changes and benefits in terms of productivity are not just limited to the services sectors. They're also being transmitted to agriculture and manufacturing and other services which use communication, finance and transport. The consequences increased opportunities, especially for people with skills. That's one part of the story. The good news is the same policy reforms and technologies are also transforming education and health in a way that is equipping people with the capacities to take advantage of these enhanced opportunities. That is why we see services reform and these new technologies potentially creating a virtuous cycle between economic opportunity and human capacity. Now to the evidence, first from the Philippines. Firm level data shows that services firms in fact are using these digital technologies more than manufacturing firms, even though there is heterogeneity across services sectors. The use of these technologies is associated with higher total factor productivity, whether it is data and software, information technology or eCommerce. Now, data from Vietnam shows that removing barriers to entry and competition increased labor productivity of services firms as much as 3% and not just of services firms, but also of manufacturing firms which use these services, and especially the small and medium enterprises. In effect, services reform is powerful industrial policy. Turning now to the question of what kind of jobs are being generated in these new digital services. We have evidence from Indonesia which reveals that digital workers do tend to have a higher share levels of education than non-digital workers. These digital workers dominate the more technical services like professional services, finance, and ICT services. The good news is that in other big employers like retail and transportation, there remains significant non-digital jobs which employ less skilled workers. These are the transformations in the demand side. On the supply side, digital technologies and reform are helping improve outcomes in education through EdTech being combined with well-trained, well-motivated and well-selected teachers, and are improving healthcare through making it possible to provide integrated care as this example from Henan province demonstrates. That is the sense in which we see this interactive relationship of opportunities and capacity that is at the heart of development, but this will not happen automatically. We emphasize in the report that countries need to liberalize a step that the Philippines has taken, the remarkable Public Service Act has recently been enacted, but we also need to strengthen regulation to deal with the problems that are associated with digital services, concentration and misuse of data. We need to invest in skills and also in infrastructure. It is shocking that in many countries in the region learning poverty is extremely high. The basic foundations of education are weak as we have demonstrated in the report we released recently. But even in a country like Vietnam where the foundation is strong, there is a cliff, because the quality of tertiary education is weak. In infrastructure, mobile revolution has improved connectivity, but the broadband access which is crucial for the deployment of these technologies is still unequal. Finally, while there's much that countries can do on their own, they also need to cooperate. For example, different countries have different approaches to data regulation for privacy, for cybersecurity. We need to find ways in which data, which is the lifeblood of this new services economy, can flow across borders while respecting legitimate concerns with privacy and cybersecurity. Let me stop here now and I would be very happy to hear what Secretary Balisacan has to say. Thank you very much. 

[Arsenio Balisacan ] 
Good morning, everyone. Good morning from Manila. I want to thank the World Bank for inviting me to share my insights in this virtual lounge of the October 2023 East Asia and Pacific Economic Update. The report offers robust data and insights from the region and the positive impacts of digitalization and services reform in particular, as well as increasing productivity and jobs creation. Let me focus my remarks on the reports insights and the services sector in the interest of time. In recent years, the services sector has become an important driver of economic growth in the East Asia and Pacific region with its increasing share of employment, contribution to labor productivity growth and foreign direct investment. All over the region, as the report has shown, economies are competing vigorously, seeking to address or attract greater levels of investment and human resources, especially in advanced technologies, adapt the latest technological trends and innovations, but are sometimes limited by policies and regulations restricting entry and competition. As mentioned in the report, the Philippines passed a landmark reform with the amendment of the Public Services Act in 2022 in the publication of its implementing rules and regulations in 2023, thereby allowing full foreign ownership in sectors such as telecommunications, domestic shipping, airports, railways and expressways, sectors which I should note constitute an economy's infrastructure backbone. As the report pointed out, this game changing amendment complements other reforms such as the amendments of the Retail Trade Liberalization Act in 2021, the Foreign Investment Act of 2022, and the implementing rules and regulations of the Renewable Energy Act among others. Such reforms compliment the country's initiatives to boost investment and trade, joining for example, the Regional Comprehensive Economic Partnership or RCEP, amending the Build-Operate-Transfer law or IRR and issuance of the revised guidelines for joint venture projects. These hard-won reforms initiated by dedicated advocates in the public and private sectors are expected to greatly improve the Philippine economic prospects in the medium to long term. With increased market competition in the country services sector, which historically has been highly protected, leading to the prohibition of lower priced and higher quality services, the cost savings from which are expected to be ultimately passed on to consumers, most especially the poor. However, formidable challenges remain and more are emerging. In digital services in particular, there are new concerns related to data security, privacy and consumer protection. High restrictions and the use of personal or consumer data may adversely affect innovation and investments in the digital market by the lack of regulation of the same may engender data exploitation and other security risks. Market competition remains at risk in the digital sector as costs of entry remain high due to network effects, self-regulation and data collection. However, getting the ecosystem of the country's services sector right is perhaps one of the most critical endeavors we must embark on. The past two decades have seen the sector as the main driver to output and employment growth, again, as shown by the report. The sector's growth can spark growth as well in other sectors of the economy. For example, building services ecosystem around manufacture activities to raise value added, as well as enabling a dynamic innovation ecosystem within a well-functioning digital economy are just some of the cross-cutting strategies identified by the Philippine government in its development blueprint for the medium term. These strategies will be key to enabling the adoption of new technologies and processes and raising the economy's productivity significantly. Indeed, the report simulates how returns or reforms in upstream services results in significant positive downstream productivity gains in the industrial sectors. A promising outcome which for many emerging economies in the region, including the Philippines, can hope to realize. As we know, this is the crucial ingredient for raising long-term economic growth potential and sustainable welfare gains. Indeed, the digitalization and services reforms go hand in hand in increasing the accessibility of the following key social sectors, wherein the Philippines must do better, education, health and finance. Better access to these services would lead to the multiplication of economic and social opportunities, lower learning inequality, healthcare lives and higher access to capital for Filipinos. The World Bank's EAP Update report is therefore a welcome piece that is both timely and relevant. Government agencies and legislative champions as well as members of the private sectors and civil society must do its share in shaping the policies and actions that will ensure the availability of better services as we work together toward attaining the country's long-term vision, where in our case, every Filipino will enjoy a firmly, rooted, comfortable and secure life. On that note, I congratulate the team once again for this update report and I look forward to the discussion at hand. Thank you. 

[Aaditya Mattoo ] 
Thank you very much, Secretary Balisacan. It is most reassuring to hear you agree with at least some of the main conclusions of this report. If I can use the few minutes that you've kindly agreed to be with us to try and dig out some lessons for other parts of the region at least, because as you said, we recognize Philippines' achievement in passing the Public Service Act after trying for a long time to implement similar reforms. But other countries in East Asia and Pacific, a region which has thrived through openness to trade and investment and goods still is struggling to remove barriers to competition and services. Can I ask you what made these reforms possible? It's not just the technical detail of how the provisions of the Constitution were interpreted. A little bit more on understanding how the difficulties other countries face in terms of both poor people who might suffer or very rich people who are influential and benefit from protection, how were those political economy obstacles to reform overcome in a way that might hold lessons for other countries? Also, how is the risk that the bold vision of the reform will become diluted in the tortuous process of framing the implementing regulation? How is that risk averted? 

[Arsenio Balisacan ] 
Thank you. Indeed, it took us almost a quarter century to get this reform passed, but I think I can attribute to at least two factors. One was the increasing recognition that investment is so crucial to sustaining the gains that we have made in recent years. An FDI is very crucial to that. We needed to open the economies, but of course that has been raised many times in the past too. But I think what is also evident or so helpful was there have been many studies that support this advocacy both from government, from our development partners, from the academe, that strongly show that it is this highly protectionist regime that has contributed to the slow economic performance, relatively poor economic performance of the economy relative to our neighbors in the past three to four decades. I think with those two combination that Filipinos, especially with their access to the internet, they can now compare their state of well-being with those of our neighbors. They can see without even traveling what's happening in these countries. At the same time, research, evidence shows that it is this highly protectionist regime that has contributed to this low progress in increasing opportunities for employment, quality employment and productive sources of income or livelihood. [Aaditya Mattoo ] 
If you could also say a word about the challenges of framing the implementing regulation in a way that does not dilute the vision of the act. 

[Arsenio Balisacan ] 
Yeah. In our system, the implementing rules and regulations often involve the different agencies that implement the law. Sometimes that's good, sometimes not, because as you said, that might involve the agencies that will implement the law and those agencies are captured by the regulatory in a rent-seeking game that might not be helpful. I'm not saying this for the Philippines only, but for other countries as well. But in this particular case of the Public Services Act, the burden of leading the formulation of the Public Services Act was not an implementing agency. It is the NEDA, the National Economic and Development Authority, which coordinates and advances the policies and recommends the policies for government and for the executive brand. In a sense, it is the agency that's not directly involved in implementing regulations or is the one leading the formulation there. I think that helps. Also, the other factor also is involving the stakeholders, particularly the private sector, the academe, and those affected by such reforms to be part of the consultation process. The documents and discussions are open so that people can participate directly or indirectly in the formulation of the IRR. 

[Aaditya Mattoo ] 
Thank you very much, Secretary Balisacan. It is reassuring that the power of economic arguments can sometimes move policy and encourage reform. You alluded to the fact and the argument we make in the report is that mechanical liberalization is often risky. It needs to be complimented by sound regulation to deal with market failures. In this new digital economy, you spoke about the concerns about data. You spoke about the concerns about concentration. I know that you are a former chair of the competition commission. How do you think that these concerns about concentration, about platforms and concerns about data are best addressed? Is there a particular stage of development? Is there a risk that the state intervenes too early and inhibits the development or too late where these monopolies go so strong that they can lobby for weak regulation? So is there a sweet point where the regulatory need is stronger? And, also how much can be done alone? Because a lot of these platforms transcend national boundaries. Data flows across boundaries. How much scope? I know there are certain initiatives about trying to think about ways that data can flow, but what is your sense of what needs to be done within individual countries at different stage of development and where is the need for greater cooperation? [Arsenio Balisacan ] 
I think that's a very interesting question. Many of the countries in our region, almost all the countries in our region have already competition law and policy. But enforcing, implementing competition law and policy, particularly for developing economies particularly is very challenging, partly because of the novelty of competition law in many of these countries and also the lack of experience in what we may call well-informed regulatory and competition policy processes. The digital economy is even more challenging, particularly digital platforms, true, because of these powerful, very strong network effects and data concentration. Competition authorities, like in our case in the Philippines when we established and when we were quite new, had difficulty initially. The way we handled the difficulties, we reached out to many jurisdictions, particularly in our neighbors. We have sought for coordination and cooperation in our understanding of how digital platforms work in our respective economies and how we can share not only tools of enforcement, but also data and information about these platforms. In our first landmark case, for example, and the Grab-Uber merger, which the region is so familiar with, when Uber moved out in the market that led to now a monopoly, a virtual monopoly of ride hailing services in the Philippines. Of course, that was a very serious concern for us and we had to do something about it. We collaborated with competition authorities in our region to share information data. That allowed us to pursue this case and do some remedies to ensure that the competition in the ride hailing services will remain robust. I think that in this particular enforcement, competition enforcement, countries, particularly within the region, particularly our own developing countries should afford, say, cooperation, coordination, so that they will be more effective in enforcing the regime, also to ensure that the competition policy that they put in place, or any regulation for that matter, is sensitive and compatible with their states of development, because what happens sometimes is that as we try to put in competition regime, we look at what developed countries do. EU and the US and there are of course strong pressures to similarly adapt those measures in our setting, but I think developing countries, the Philippines in particular had to be a little bit more aggressive and be informed that what works for other environment may not work for them if the conditions that prevail in those other environments do not apply to them. That’s the kind of thing that we have to navigate. It's a complicated issue, that's why sharing information, having this regular conversation among peers is very important. I think that in ASEAN, we have that platform in the Association of Southeast Asian Nations where the member countries can exchange information and data. [Aaditya Mattoo ] 
Thank you very much, Secretary Balisacan, for this thoughtful response, and I hope this is a conversation we can continue. If I can ask you one final brief question, and that's about inequality. The digital transformation is uneven across sectors, locations, firms, workers. Not everyone has skills, not everyone has broadband access. My question is how can we achieve these goals? How can the governments in the region work with the private sector? For example, fixed line telephony had gone out of fashion when mobile democratized access, but the best access we can get to broadband is through fixed line. Also, basic education is weak, but tertiary education even in a country like Vietnam is weak. How do you see the public and private sectors working together to remedy these huge limitations and inequalities in both skills and infrastructure which are crucial to engage in the digital economy? 

[Arsenio Balisacan ] 
Good question. It's a very interesting question and it's a question that has interested me over the years. One is I think that the recognition that technologies, including those emerging ones and the internet, the IT can be potentially income unequalizing. I think that was very evident during the pandemic now, but addressing the inequality, particularly inequality opportunities, particularly in health and education and access to finance will require a lot of resources to address. Coming out from the COVID-19 period where as you have shown in your report, you are saddled with high debt, relatively high debt, increase in debt. Having enough resources that you could use to directly address inequality opportunities while at the same time not deviating for the medium-term, long-term essentials of promoting and sustaining economic growth. That's the main concern. Our approach is to involve the private sector aggressively in our investment programs, realizing that the fiscal space is quite limited, particularly coming from the COVID-19. We need to open up our public infrastructure programs in particular to private sector. We developed and have been developing, improving the framework for public-private partnership regime, so that the private sector can be incentivized to come in and provide infrastructure, including tollways, railways, airports, even hospitals and so on. The whole idea is that if you can get many of these strategic, big, profitable public infrastructure projects funded by the private sector, of course, you have to address the risk also there, but then whatever limited resources we have cannot be used for the social sector, particularly health and education, so that we can ramp up the investments in health and education. Last year, the World Bank also shows learning poverty in the country is high. The social cost of the pandemic has been so high in the Philippines, and we need to ensure that that is addressed so that the long-term potential growth of the country is not sacrificed. That's essentially my long response there, that addressing these inequities and opportunities, particularly in the social sector like health and education, requires resources. We are looking at the entire fiscal framework to ensure that as we move resources to the social sector, we're not sacrificing the massive buildup in our physical infrastructure. This has been a crucial element in the slow performance of the economy in the last three decades. 

[Aaditya Mattoo ] 
Thank you very much, Secretary Balisacan. These are brief but insightful answers. You're an inspiring figure as an economist practitioner, and it has been a huge pleasure to engage with you. I now turn over to our Vice President Manuela Ferro for some closing remarks. Thank you. 

[Manuela V. Ferro ] 
Thank you very much. Thank you both for contributing to a very interesting event. I would like to particularly thank Secretary Balisacan. Can you hear me? I want to thank you both for your insights and for this very interesting conversation. We do hope that this update contributes to economic policy priority setting in the region and outside the region. I'm sure that our chief economist and his team will be keen to engage with those that are listening online and that would like to learn more, but also provide feedback to this analysis. Now, this is a very dynamic region. It has a remarkable record of sustained growth over decades where many countries are now on the cusp of becoming high income countries. This report highlights a set of policies, and actually the conversation we just heard highlights a set of policies and actions that can help generate another wave and another wind of growth in the region. I'll just highlight three main points. One is that as we heard from the experience in the Philippines, countries will need to continue open the services sector to new entrants, but at the same time need to also regulate these sectors, especially dynamic sectors in IT and the like. Countries could benefit from opening barriers to entry and competition in services. They're still countries with opaque licensing or limits in foreign ownership. These are all reforms that will be introduced and are being introduced actually in some countries as we speak. In parallel, countries are also updating their regulations to address the new challenges that arise, for example, from digitalization such as market concentration and data misuse. A second bucket of topics is a need to assess the extent to which the state needs to compliment the action of private firms to ensure wider access to the digital infrastructure that is required for the digital services economy and at the same time invest in cross-border action to facilitate, for instance, data flows and services trade. A third set of items is because countries that have been growing and generating prosperity in the region will in the future not just be competing on the basis of low-skilled, low-wage work, but will need to be competing on the basis of high-value services and innovation in the areas of FinTech, digital economy. All of this will require stronger education and skills, and this means that the region will also need to compliment these services reforms with the human capital that is going to be necessary to be able to drive innovation and value added in these sectors. These are all areas in which this region is already taking action at differential rates. This downturn that the global economy presents to this region is actually an opportunity to retool the region, to give it another boost in the services sector that is already employing so many people and has already demonstrated that it can generate value added across the economy. We hope that this report makes a contribution to illuminate the path and generate debate and hopefully action at the country level, but also as I mentioned, across borders. Let me end here and thank you all for joining. I thank Aaditya and Secretary Balisacan for joining us today. Thank you all for joining us and bye-bye.

00:00 Opening remarks: Manuela V. Ferro, Vice President, East Asia and Pacific, World Bank

03:33 Presentation of the report: Aaditya Mattoo, Chief Economist, East Asia and Pacific, World Bank

18:15 Remarks by Secretary Arsenio Molina Balisacan, Secretary of the National Economic and Development Authority (NEDA) 

25:31 Conversation between Aaditya Mattoo and Secretary Balisacan 

44:40 Closing remarks: Manuela V. Ferro, Vice President, East Asia and Pacific, World Bank