Philippine Institute for Development Studies
Policy Notes October 1999
Philippine Trade Policy: Reflecting on its Effects on the Environment
Erlinda M. Medalla*
T
he environment has increasingly gained attention over the past decade. Which is rightly so. In recent years, questions about possible tradeoffs between economic growth and the environment, and perceived conflicts between trade and the environment, have become key areas of concern. If good environmental policy were in place and adequately enforced, whatever trade and industrial policy adopted should not impose undue burden on the environment. The problem is that the state of environmental management in the Philippines is still far from adequate. Thus, debates continue to abound about the possible impact arising from the seeming conflicts between trade and the environment. ———————— * The author is Senior Research Fellow at the Institute. She wishes to acknowledge the support of the United Nations International Development Organization (UNIDO) for her study entitled "Philippine Industrial Policy and the Environment" from where this short note is based on.
No. 99-10
Undoubtedly, the countr y’s trade and industrial policy regime, and the resulting trade and production patterns, ultimately impact on the environment and environmental costs. The question is—does our trade and industrial policy lead to increased environmental degradation? At the same time, environmental regulations could alter comparative advantage and ultimately impact on trade and production. Another question, therefore, is— do they seriously erode our competitiveness, enough to unduly suppress growth and reduce overall welfare? This Policy Notes issue is concerned mainly with the first question. How have our trade and industrial policies affected the environment? This question becomes particularly critical if the government’s capability to implement environmental policy and manage the environment is severely constrained.
Insights from the past Trade and investment policies have been the major policy tools which shaped the Philippines' industrial policy. Before major reforms started in the 1980s, trade policy made liberal use of tariffs and import licensing requirements to protect local industries. The Philippine investment policy, meanwhile, has been largely embodied in the investment incentive system—the Omnibus Investment Code (OIC)—which is mainly administered by the Board of Investments. Investment policy has basically
PIDS Policy Notes are observations/analyses written by PIDS researchers on certain policy issues. The treatise is wholistic in approach and aims to provide useful inputs for decisionmaking. The views expressed are those of the author and do not necessarily reflect those of PIDS or any of the study's sponsors.
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been effected through the promotion of selected activities in the Board's Investment Priorities Plan (IPP) via the granting of fiscal incentives. Through the years, it has been trade policy which has had the most per vasive and profound impact on industrial policy. It was also in the area of trade policy where the major reforms were implemented whereas in terms of investment policy, ver y little has changed, with only some shifts in emphasis, e.g., industrial estates. In view of this, this Notes focuses on trade policy in particular. To go back to our question: Does our trade and industrial policy lead to increased environmental degradation? Does it have biases which could have contributed to increased degradation? For sure, these are difficult questions to answer. We can only surmise from what theor y suggests and from whatever indicators we could use. Trade theor y tells us that the inherent bias against exports resulting from our past trade protectionist regime made the countr y heavily dependent on just a few exports where it had huge comparative advantage. These were in primar y products, particularly agricultural crops and other natural resourcebased commodities like mining and forestr y, which generally impose greater burden on the environment. Thus, the countr y's resulting dependence on these primar y exports has had adverse impact on the environment. In addition, the highly protectionist regime promoted an inward-looking industrial strategy where investments in new machines proceeded slowly. This was due, to some extent, to the limited domestic market it ser ved and to the lack of competition. For example, up to the late 1980s, the textile industr y had to contend with old technology and capital equipment. The sluggish re-investment in new machines in general ver y likely had a negative impact on the environment.
October 1999
In the 1980s, however, trade reforms had started to be implemented. These reforms eventually brought down protection on almost all sectors—from the most pollutive to the least pollutive. And while there is no correlation between the change in protection and pollution intensity, there is some reason to believe that the reforms have likely had, on the whole, a positive impact on the environment. For one, the reforms resulted in a more open regime that is more export-promotive. Export industries in turn tend to be more adaptive since they have to compete in the world market. They also need to be abreast with global developments, technological and otherwise, which increasingly demand for a cleaner and greener environment. At the same time, the liberalized trade regime tends to lower the cost of pollution abatement and other similar equipment. All these insights thus indicate some positive impact of these trade reforms, which began in the 1980s, on the environment. Such a favorable assessment of the impact of said trade reforms is supported by empirical obser vations on the trend of the share in value-added of the different sectors classified by their pollution potential.
Some empirical support The Environmental Management Bureau (EMB) classified manufacturing sectors (at 4-digit level) in accordance with how pollutive and hazardous they could be. This ranged from nonpollutive1 to extremely pollutive and nonhazardous to extremely hazardous, based mainly on the sectors' associated effluents. The shares in valueadded by pollution potential classification of sectors are then computed, using the available census data for 1972, 1975, 1983, and 1988 and the annual sur vey data for 1992. A summar y of results is presented in Table 1.
———————— 1 Of course, one could argue that there is some misnomer in the "nonpollutive" classification as there really is no industry which is pollution-free. Hence, this classification would probably be more aptly termed as "least polluting."
Policy Notes
As shown in the Table, the share in value-added of nonpollutive industries was much lower at less than 20 percent than the pollutive industries in the early '70s.
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No. 99-10
Table 1. Share in Value-Added by Pollution Classification (In percent)
Pollution Classification
1972
1975
1983
1988
1992
Extremely hazardous/Highly pollutive Hazardous/Highly pollutive Nonhazardous/Highly pollutive Extremely hazardous/Pollutive Hazardous/Pollutive Nonhazardous/Pollutive Hazardous/Nonpollutive Nonhazardous/Nonpollutive ALL INDUSTRIES
7.06 30.63 5.51 3.90 27.88 9.33 8.90 6.78 100.00
16.07 28.74 3.39 3.39 22.86 13.49 4.79 7.26 100.00
16.44 25.40 6.03 4.25 19.34 10.66 5.86 12.03 100.00
8.61 27.97 6.35 5.52 18.57 11.51 7.14 14.33 100.00
9.22 24.99 6.03 5.09 18.79 13.35 5.70 16.83 100.00
Nonpollutive Pollutive Highly pollutive TOTAL
15.68 41.11 43.21 100.00
12.06 39.74 48.20 100.00
17.89 34.24 47.87 100.00
21.47 35.59 42.94 100.00
22.53 37.23 40.24 100.00
Nonhazardous Hazardous Extremely hazardous TOTAL
21.62 67.42 10.96 100.00
24.15 56.39 19.46 100.00
28.73 50.59 20.68 100.00
32.19 53.68 14.13 100.00
36.21 49.48 14.31 100.00
69.48
71.06
65.42
60.67
58.09
Pollutive and hazardousa
includes pollutive and highly pollutive which are also hazardous and/or extremely hazardous a
However, the share of nonpollutive industries, after going down between the period 1973 and 1975 (trade restrictive, protectionist years), has consistently risen thereafter, reaching around 23 percent in the last obser vation year, 1992. Thus, the share of nonpollutive industries during the period after 1983 was generally higher than the earlier, pre-trade reform period. Furthermore, the share of nonhazardous industries steadily rose—from 22 percent in 1972 to around 36 percent in 1992. Conversely, the share of pollutive and highly pollutive/hazardous and extremely hazardous industries consistently went down from around 69 percent in 1972 to a little over 58 percent in 1992. Care should of course be taken in interpreting the resulting trend. Is it an indication of the merits or demerits of trade and/or environmental policies? What is the ideal trend in the first place? While industrial policy influences the level and composition of industrial activity, one cannot attribute the trend to industrial policy alone. Equally important is the effectiveness of environmental policy.
One cannot readily separate their effects. Still, the trend nonetheless provides a good summar y indication of the overall impact of policy reforms since the mid-1980s. Moreover, if there had been a weak or lax enforcement of environmental laws, it is safe to say that the improving trend most likely comes from a favorable impact of policy reforms. This is because ineffective environmental measures imply non-internalization of environmental costs, thereby ser ving as implicit subsidies to pollutive industries. This should have encouraged an increasingly higher share of the more pollutive type of industries. The fact that it did not may ver y well indicate that the source of the favorable trend is the impact of the policy reforms.
Conclusion Finally, with the above reser vations taken into mind, the findings seem to support the view that the trade policy reforms undertaken in the past decade have had some positive effect on the environment or, at the ver y least, not led to further environmental degradation than would have been in a more protectionist, inward-looking policy regime. The classification of industries could of course be subject to errors, especially considering the level of aggregation, but these findings bode well for the reforms. 4 For further information, please contact The Research Information Staff Philippine Institute for Development Studies NEDA sa Makati Building, 106 Amorsolo Street Legaspi Village, Makati City Telephone Nos: 8924059 and 8935705; Fax Nos: 8939589 and 8161091 E-mail: emedalla@pidsnet.pids.gov.ph, jliguton@pidsnet.pids.gov.ph The Policy Notes series is available online at http://www.pids.gov.ph
Policy Notes
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October 1999
List of Discussion Papers for 1999* 99-01
Toward the Sustainable Development of the Fisheries Sector: An Analysis of the Philippine Fisheries Code and Agriculture and Fisheries Modernization Act Danilo C. Israel and Ruchel Marie Grace R. Roque
99-02
Determination of Basic Household Water Requirements (Under revision) Arlene B. Inocencio, Jose E. Padilla and Esmyra P. Javier
99-03
Governance and Urban Development: Case Study of Metro Manila Rosario G. Manasan and Ruben G. Mercado
99-04
Indicators of Good Governance: Developing an Index of Governance Quality at the LGU Level Rosario G. Manasan et al.
99-05
Scenarios for Economic Recovery: The Philippines Mario B. Lamberte and Josef T. Yap
99-06
Total Factor Productivity: Estimates for the Philippine Economy Caesar B. Cororaton and Ma. Teresa D. Caparas
99-07
Recent TFP Policy Agenda for the Philippines Caesar B. Cororaton and Socorro Zingapan
99-08
The Philippine Tariff Structure: An Analysis of Changes, Effects and Impacts Caesar B. Cororaton
99-09
Impacts of the Southeast Asian Financial Crisis on the Philippine Manufacturing Sector (Revised) Mario B. Lamberte et al.
99-10
Currency Crisis: Where Do We Go from Here? Mario B. Lamberte
99-11
Policy Adjustments to Exploit Opportunities in WTO, APEC and AFTA: Tradable Goods Sector Myrna S. Austria
99-12
Trade, Competitiveness and Finance in the Philippine Manufacturing Sector, 1980-1995 Josef T. Yap
99-13
Regional Economic Growth and Convergence in the Philippines: 1975-1997 Rosario G. Manasan and Ruben G. Mercado
99-14
Social Impact of the Regional Financial Crisis in the Philippines Celia M. Reyes, Rosario G. Manasan, Aniceto C. Orbeta, Jr. and Generoso G. de Guzman
———————— * The Discussion Papers constitute studies that are preliminary and subject to further revisions. They are unedited and unreviewed and not for quotation without permission from the author(s) and the Institute. These are available online at http://www.pids.gov.ph.
Policy Notes
99-15
Study on Public and Private Expenditures on Research and Development: An Integrative Report Caesar B. Cororaton
99-16
R&D Gaps in the Philippines Caesar B. Cororaton
99-17
Research and Development in the Philippine Fisheries Sector Danilo C. Israel
99-18
Agricultural Technology Acquisition, Development and Dissemination in the Private Sector Saturnina C. Halos
99-19
Private Sector Activities on Research and Development Tristan H. Macapanpan
99-20
Housing Policy, Strategy and Recent Developments in Market-based Housing Finance Gilberto M. Llanto and Leilanie Q. Basilio
99-21
Productivity of Philippine Manufacturing Caesar B. Cororaton and Rahimaisa Abdula
99-22
Population Growth and Economic Development in the Philippines: What Has Been the Experience and What Must Be Done? Aniceto C. Orbeta, Jr. and Ernesto M. Pernia
99-23
A Second Look at Credit Crunch: The Philippine Case Mario B. Lamberte
99-24
Rates of Return to R&D Investment in the Philippines Caesar B. Cororaton
99-25
Research and Development: A Review of Literature Caesar B. Cororaton
99-26
An Institutional Analysis of R&D Expenditures in the Public and Private Sectors Epictetus E. Patalinghug
99-27
Identifying Areas of Support in Research and Development for the Manufacturing Sector Liberty Nolasco
99-28
Population and Development Planning (PDP) Model: The 1998 Update Aniceto C. Orbeta, Jr., Edith Laviña and Mildred Belizario
99-29
Regional Budget Determination and Allocation: A Policy Revisit Ruben G. Mercado
99-30
Impact of the Financial Crisis on Social Services Financing and Delivery Virginia S. Pineda