An industrial policy for economic upgrading and achieving desirable social outcomes

The fourth industrial revolution will bring radical changes—both positive and negative—in the economy and in society. Convenience and ease of carrying out tasks are among those that new technologies such as the internet of things (IOT), artificial intelligence (AI), blockchain, and automation, also considered disruptive technologies because of their impact on consumer and producer behavior. Consumer welfare increases because these new technologies facilitate consumption by reducing costs, and such is the case of online shopping where consumers realize huge savings in terms of time spent on shopping. Firms also benefit from better information and analytics brought by machine learning and artificial intelligence, and lower cost of production due to automation. However, the changes brought about by the fourth industrial revolution have serious drawbacks particularly for economic activities and jobs that will be destroyed. In the long run, huge returns accruing to the owners of technology and capital can reinforce existing income inequality. High levels of inequality can cause social division that can negatively impact the economy.

Although the impacts of technological change on jobs and income inequality have been explored in the literature, it is likely that these foreseen effects will occur unless insights on how to address the negative effects of technological changes are translated into actual policies. However, most policies that seek to address the negative implications of automation and disruptive technologies assume the inevitability of job destruction and focus on encouraging workers to acquire new skills. Skills upgrading of workers is important to keep them employed. However, a policy that mainly involves supply side approach that only responds to anticipated technological shocks will likely serve business interest more and put most of the burden on labor. For instance, although facilities for skills upgrading exist, it remains costly to undergo specialized trainings especially when it is left to market. Workers who cannot afford to undergo trainings will certainly be left behind by technological change. A better approach to the fourth industrial revolution involves the state intervening to influence firms to create jobs where technology complements labor rather than substitute for it, and encourage investment of firms on their workers through skills upgrading.

This policy note surveys existing government policies on the fourth industrial revolution and discusses insights on how the government can address employment challenges created by rapid technological change. This policy note also argues that social outcomes must be incorporated in industrial policies to ensure that 4IR does not lead to welfare losses for workers.

The first explicit government policy direction in response to the fourth industrial revolution is documented in the Department of Trade and Industry’s ‘Inclusive Industries Innovation Strategy” (I3S). Based on the said document, the government’s strategy is oriented toward harnessing the possibilities of the 4IR, with the twin aims of (1) elevating priority industries’ position in the global value chain and (2) generating more and high-quality jobs for Filipinos via innovative technologies as key motivations.

According to de la Cruz (Forthcoming), skills development appears to be the most developed component of the government’s fourth industrial revolution response to date. The transition to 4IR is the major theme in the Technical Education and Skills Development Authority’s (TESDA) 2018-2022 National Technical Education and Skills Development Plan (NTESDP). Now that TESDA has been attached as an office directly under DTI, its skills development policies must now be closer to firms and industries. One of the NTESDP’s principal objectives is to “prepare the Philippine workforce for the challenges of the 4IR”, chiefly via the increased adoption of enterprise-based training and Skills Needs Anticipation mechanisms and stronger alignment of national TVET regulations to international standards (TESDA, 2018). Beyond the existing TESDA scholarships and job-specific apprenticeships, however, the issue of funding for inclusive worker re-/upskilling efforts remains in question. This uncertainty is exacerbated by inconsistent government support for such programs, as illustrated by the lack of government funds allocated to TESDA’s “Tulong Trabaho” initiative in 2020, which was supposed to provide free TVET training and related financial assistance to qualified beneficiaries, including those displaced by technological unemployment (CNN Philippines, 2019).

To realize its other goal of generating more formal and stable employment for Filipino workers, the i3S promotes the advancement of technology-driven growth and increased industrialization. Apart from the establishment of an innovation and entrepreneurship ecosystem, a crucial element of the i3S is thus the revitalization of the Philippine’s manufacturing base (e.g. electronics, automotive), given the sector’s greater capacity for job generation and stable working conditions compared to the services industry (Usui, 2012; Aldaba, 2013; Llanto and Ortiz, 2015). A major example of this support to the manufacturing industry is the Comprehensive Automotive Resurgence Strategy (CARS) program. First launched in 2015, CARS aims to position the Philippines as a regional automotive manufacturing hub by drawing new investments, stimulating domestic demand, adjusting relevant government regulations, and providing time-bound and performance-based fiscal incentives to domestic vehicle and parts manufacturers (Rosellon and Medalla, 2017). A more recent initiative is the Securing Manufacturing Revitalization and Transformation (SMART) program, which was announced by DTI in December 2019 (Manila Bulletin, 2019). The SMART program is set to provide financial support to priority projects in manufacturing such as electronic vehicles and rural industrial development, with the aim of encouraging the industry’s adoption of innovative technologies that will enhance its position in the global value chain and translate into job-creating growth.

Social outcomes must be integrated in industrial policies so the transition toward 4IR does not reduce welfare of workers. First, while awareness of the impacts of technological change is important in the transition toward 4IR, policies that provide support to firms and workers must be adequately funded. The government’s skills development plan is an important policy. However, unless such program is funded, training of workers will only have limited reach and produce suboptimal outcomes such as the mismatching of skills, or the outright shortage of workers that possess the appropriate skills for work.

Second, skills training must be matched by income support for workers. The government recently enacted unemployment insurance (UI) for workers in the private sector. UI, especially when adequately funded, can provide an income bridge especially for workers who are undergoing skills upgrading. Moreover, UI can also motivate unemployed workers to undergo skills trainings because they are assured of income despite not being able to work.

Lastly, employment creation must be part of industrial policies. Policies like CARS and SMART have the potential of generating employment by influencing firms’ decision toward adoption of labor-complementing technologies. However, the state must still ensure that firms that enjoy fiscal support indeed generate employment. To this end, an explicit employment target can be set for firms that will avail of fiscal support.