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Entrepreneurship: A Roadmap to Inclusive Growth by Prof. Antonio M. del Carmen, PHD

May 19, 2013

THE FIRST HALF of 2013 saw several positive developments in our country. The two recent credit upgrades obtained by the Philippines from Fitch Ratings and Standard & Poor’s have placed the country in the investment radar of the international community.

In fact, even prior to these upgrades, the country’s foreign direct investments (FDI) have breached the $2-billion mark last year, the first time it did so in the past five years (Bangko Sentral ng Pilipinas). This could be contributory to the continuous growth in GDP which reached 6.6% in 2012 and is widely believed to have been largely consumption-led. Economist Benjamin Diokno saw three major contributors to this GDP growth: consumer spending, government spending, and, surprisingly, net exports, contributing 4.3%, 1.1% and 2.0%, respectively.

Furthermore, the overall confidence index in the Business Expectation Survey rose to 54.9% for the April-June period of 2013 indicating the positive outlook by the surveyed companies on the economy and their own financial performance in the coming quarter (PDI). This is the highest since the central bank began the BES in 2007 surpassing the previous peak of 50.6% in the fourth quarter of 2010 and up from the 44.5% a year earlier (BusinessWorld). On the political front, the generally peaceful and orderly mid-year election has confirmed the approval ratings of President Aquino’s administrative party and is expected to strengthen the collaboration of the executive and the legislative branches of government in furthering developmental and anti-corruption programs.

Amidst these positive developments, there are several challenges that continue to persist and which, hopefully, the public and private sectors can address with more determination and focus. The unemployment rate and underemployment rates are at 7.1% and 20.9% as of January 2013 (versus 7.2% and 18.8% in January, 2012) and remain to be the highest in Southeast Asia. Similarly, the economic growth over the past six years hardly made a dent in poverty incidence in the Philippines, as the percentage of Filipinos living below the poverty line remained practically the same. Official statistics from the National Statistical Coordination Board (NSCB) showed that poverty incidence stood at 27.9 % in the first semester of 2012–“practically unchanged” from the same period in 2009 (28.6 percent) and in 2006 (28.8 percent). These twin indicators of unemployment and poverty clearly show that whatever gains or growth the country has experienced in the last few years has not been inclusive and benefited a limited sector of the society.

Two prominent economists (Habito and Diokno) have pointed to the phenomenon of the jobless growth as the major obstacle that needs to be addressed in order to achieve inclusive growth. Habito said our growth is “narrow” because it positively impacts only a few industries and only a small proportion of our population. It is “shallow” because the growth is not deeply (nor widely) linked with our total economy. And it is “hollow” because it produced little or no jobs which meant many did not benefit from the growth (Lopez, 2013).

Diokno, on the other hand, doubts the sustainability of such growth. He argues that “a 6.6% GDP growth does not mean that the economic well-being of all 100 million Filipinos improved by the same rate” and, in fact, sees the economic behavior in 2012 as a poor model for strong, sustained and inclusive growth. The cold reality, as Diokno pointed out, is that we’ve seen this kind of growth before: during the 60s when the Philippines was the second most successful country in Asia, second to Japan. But that was not sustained. In 1998 during the term of President Cory, GDP grew at 6.8% and during Mrs. Arroyo’s watch, GDP growth was 6.7% in 2004 and 7.6% in 2010. Yet, in all three cases, growth was not sustained. The economy collapsed during the waning years of first Aquino administration. It contracted by 0.6% in 1991 and was practically flat (0.3% GDP growth) in 1992. In 2011, following a strong economic rebound in 2010, the economy slowed to 3.9% growth. He suggested that in order to make growth sustainable, an increasing share of economic output should be invested in public infrastructure and expansion of private businesses.

The PNoy administration has been stepping up its infrastructure projects and has engaged the private sector through the PPP (Private Public Partnership) Program. However, in the area of enterprise development, more initiatives need to be undertaken in encouraging the expansion of private businesses. The Department of Trade and Industry (DTI) has actually developed the 2011-2016 Micro, Small and Medium Enterprise (MSME) Development Plan which aims to address the key challenges and constraints that continue to prevent the MSME sector from realizing its full potential and boosting the country’s industrial growth. However, statistics reveal that while the MSME sector accounted for 99.6% of total establishments in the country, and contributed 61.2% of the country’s total employment, it only accounted for 35.7% of total value added. It can, therefore, be deduced that the quality and sustainability of the employment generated by this sector remains to be low and unstable.

Furthermore, the number of micro enterprises that eventually succeed to become small or medium sized has been limited. DTI’s data showed that the share of medium enterprises remained miniscule at 0.4% while that of small enterprises was almost unchanged at 8.6%. Overall, the growth of the MSME sector has not been vigorous enough to propel the economy.

It is in this regard that the government, in partnership with industry and the academe, should develop innovative approaches that would help transform the Philippines from a largely managed economy (an economy controlled by large companies with a limited capacity to generate new employment opportunities) to an entrepreneurial society (Audretsch, 2009). As of 2011, there are 3,496 large enterprises out of the total 820,255 business establishments in the Philippines (or 0.4%) and these enterprises account for 39% of total jobs generated.

DTI statistics also show that the 3,287 medium enterprises (0.4%) contributed only 7.1% of job generation. The remaining 53.9% of the jobs were generated collectively by the 70,222 small enterprises (8.6%) and 743,250 micro enterprises (91.0%). Given these statistics, the Philippines can be considered as mainly a managed economy. On the other hand, a strong entrepreneurial society can prevent the boom and bust cycle that the Philippines has been experiencing over the past decades. Because of the Filipinos’ preference for or preoccupation with employment, boom cycles often benefit the big multinationals or big industries which account for less than 1% of the countries population. Thus, the trickle down effect of economic development happens at a very limited scale and inclusive growth is not experienced.

In a study on Global Entrepreneurship and Development Index (GEDI, 2010), it was concluded that large numbers of new businesses do not also automatically translate into rapid growth. There is a need to examine the quality of the jobs that are being created particularly in the micro and small enterprises and correlate this to the jobless growth and the increasing underemployment rate that our country is experiencing. In fact, stable job creation does not flow from the creation of numerous micro businesses. The bulk of sustainable jobs are instead the result of a small number of extraordinary high-growth entrepreneurial ventures, or “gazelles”. While there are many societal benefits to micro and new firms, the real economic impact is generated by “gazelles” which are often the medium and small sized enterprises. The focus of program strategies, therefore, should not be on increasing the quantity of entrepreneurship but on the quality of enterprise development. This is where the entrepreneur’s level of education becomes another important feature of a venture with high growth potential (Bates, 1990) and where programs of mentoring micro businesses to become small and medium enterprises can have a bigger impact on economic development and inclusive growth.

In the entrepreneurship index of GEDI, the Philippines scored 0.13 and ranked 70th out of 71 countries ahead of Uganda and behind Syria and Guatemala. Denmark, Canada and US were the top 3 countries scoring 0.76, 0.74 and 0.72, respectively. The primary attributes used in the index were entrepreneurial attitudes, entrepreneurial activities and entrepreneurial aspirations. Thus, if we were to transform the Philippines into an entrepreneurial society, we need to change the attitudes, mindsets and aspirations of the Filipino entrepreneur. This is where the whole-brain thinking system is more effective in training entrepreneurs as it aims to develop not only the entrepreneur’s mastery of the enterprise and the environment but more importantly, the mastery of the self. In order to develop high-growth and high impact enterprises, entrepreneurs need to incessantly undertake product and process innovation. This is similar to Joseph Schumpeter’s (1942) creative destruction where he views that increasing the pace of restructuring (creative destruction) of the economy and adapting to a changing environment are likely to be beneficial.

If we, therefore, want to have inclusive growth, we should not only encourage the establishment of enterprises but prepare and train Filipinos to be true entrepreneurs. . . entrepreneurs who are deliberate and purposive in their strategizing; entrepreneurs who are innovative and have the capacity for creative destruction; entrepreneurs who are whole-brained and have mastery of the self. If the current positive developments are accompanied by an increase in entrepreneurial activities, there is a bigger chance for inclusive growth to happen and thereby expanding the benefit of economic progress.

Link to the Article: http://www.bworldonline.com/content.php?section=Beyond&title=Entrepreneurship:-A-roadmap-to-inclusive-growth&id=71837