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Asia-PacificSeptember 4 2005

Movement of jobs, people and capital

Jaime Augusto Zobel de Ayala II says that demographics mean that exporting jobs or workers is becoming a vital part of doing business in a global economy.
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Of the forces driving change in the world economy today, the global redistribution of jobs bears profound significance to developing economies. Aside from capital flows and the movement of goods and services, the engagement of workers of developing nations in the international service economy vividly illustrates their integration into the world economy.

Two forces are driving the redistribution of jobs. One is the shifting world demographic profile. The other is globalisation, which has encouraged the movement not only of goods and capital, but also of human resources – which has not been fully appreciated.

Demographic forecasts by the United Nations see populations of many developed nations shrinking and ageing rapidly. This implies fewer productive people to meet their labour needs, which must be fulfilled by workers from countries with sizeable young and productive populations.

Another major factor driving work redistribution is the new cost dynamics in business and industry brought about by information technology. In a study by the management consultant group McKinsey & Co, it was noted that 70% of the costs of a typical company in the developed world come from labour and 30% from capital. In contrast, labour is cheap and capital expensive in developing countries.

Faced with these realities, advanced societies export the jobs or import the workers. They outsource jobs they can locate overseas and for those they must maintain at home, they bring in the workers.

Filipinos are becoming more actively engaged in both ends of this phenomenon. Today, Filipino workers constitute a major component of the new global economy. They are highly prized not only for their industry and flexibility, but also for their skills and proficiency. At home, Filipino workers are also doing more work for the global economy, as companies from the US, Europe and Japan outsource manufacturing and service work. Much like India, the Philippines is rising as a major outsourcing destination for call centres and business process outsourcing (BPO) services in accounting, human resources, logistics and insurance processing, software applications, development and maintenance, legal and medical transcriptions, animation as well as design and engineering services.

Demographics

The Philippines has entered an important stage in its demographic structure. Filipinos of working age – from 15 to 64 – now outnumber those of dependent age (children and the elderly). In 2005, the country’s working age population is estimated to constitute 61.8% of the population. This is projected to rise to 63.9% by 2010 and 68% by 2025.

To economists and demographers, this presents opportunities for economic development. Nations with such populations may enjoy a boost in income because of the higher share of the working population; accelerated accumulation of capital; and reduced spending on dependents. This phenomenon, known as “the demographic dividend”, when combined with effective public policies, can stimulate economic growth.

In his study, The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change, David Bloom of Harvard University says some countries were quicker to reap their demographic dividend than others. East Asia created its economic miracle in part because of the dividend. Rapid demographic transition from 1965 to 1990 was matched by real per capita income growth averaging 6% annually. Now the same transition is pushing China and India to the forefront of economic development. The next 10 to 15 years could be the turn of Southeast Asia, particularly Indonesia, Thailand, Malaysia and the Philippines.

However, reaping the demographic dividend is not automatic and could easily become problematic. The ability to seize the opportunity depends on whether countries have good government institutions, functioning markets and effective education and health programmes. Failure on these fronts brings with it the danger of massive unemployment.

In the case of the Philippines, it is beginning to move in the right direction by putting in place the right policy environment to make its demographic transition work. Education and health programmes are keeping literacy and life expectancy at high levels. Through more focused programmes, the government is trying to bring down the country’s 2% population growth rate (although more should be done on this front). Both the private and public sector are working to develop industries that promote its strengths in the services sector. In both labour migration and offshore outsourcing, policies and programmes are expanding.

Overseas workers

Last year, the International Labor Organization reported that the Philippines is the second largest source of migrant labour in the world, next only to Mexico. Some eight million Filipinos, nearly a tenth of the population, are working overseas, officially remitting more than $8bn annually – informally, this is estimated closer to $14bn.

Observers of this exodus wonder whether this is a foolhardy strategy. Newsweek reported: “Some experts worry the trend may, in the long run, hurt the Philippines more than help.” But there may be greater reason for a positive perspective. Wired Magazine articulated it well in 2002 when it wrote: “The Philippines is the forerunner of tomorrow’s distributed economy in supplying nurses, doctors, teachers, engineers, techies and sailors to the global village… With advances in transportation and telecommunications barrelling ahead, it’s only a matter of time before the Philippine miracle becomes a standard for the new mobile global order, with skilled and unskilled labour commuting over multiple time zones to fill in labour gaps, zapping their wages homeward through space, re-entering for a new assignment.”

The Philippines has been supportive of this movement since 1975, when the overseas workers programme was launched. What is new is its greater strategic role and importance in its overall global strategy. Overseas workers and expatriates constitute the country’s biggest comparative advantage in an increasingly borderless world and it has moved ahead in proactively training its workers for jobs overseas. Today, the contribution of overseas workers to the economy represents a significant part of GNP. And this great diaspora is creating vital connections and networks for the country, resulting in a more dynamic economic relationship with the world.

Offshore outsourcing

Parallel to the movement of Filipino workers overseas are moves to make the Philippines a choice destination for the outsourcing of work by multinational companies. BPO and call centre operations are emerging as a high-growth industry in the country.

In a report on outsourcing, The Economist cites the Philippines as one of a few countries that multinationals are looking at as demand for offshore IT and call centre workers grows. While India remains the leader, the Philippines is moving up in line. The attractiveness of the Philippines as an outsourcing destination is due to a variety of factors:

  • Labour costs in the Philippines are one-fifth of US rates.
  • A high 94% literacy rate with about 400,000 new graduates annually, of which more than half hold IT, engineering and commerce diplomas.
  • High proficiency in American English with English language skills second to none in the developing world.
  • Shared cultural, business and legal practices with the West, which allows quick understanding and adjustment for MNCs.
  • Telecommunications and property infrastructure that support extensive outsourcing operations and are on par with world-class standards.
  • An explicit policy of encouraging outsourcing businesses through fiscal and tax incentives extended to foreign and outsourcing firms.

The influx of call centres and BPO firms is boosting revenues, employment and consumption. Last year, the call centre industry posted revenues of nearly $850m. Call centre agents, paid more than double the minimum wage, have their disposable income generally allocated to personal consumption and savings.

The country’s engagement in this sector has only touched the surface. With the declining cost of transportation, accessibility to reliable and efficient telecommunications services and internet connectivity, the outsourcing trend is likely to persist. McKinsey sees possible shifts in global employment patterns in various service industries, including software engineering, banking and IT services with just as much potential in insurance, market research, legal and medical services.

Notwithstanding protests about the loss of jobs as a result of labour migration and outsourcing, the global redistribution of jobs will continue because they produce greater economic efficiency. The trend toward labour migration and outsourcing will accelerate as populations of developed nations age and as companies search for ways to become more competitive. The Filipino work force is primed for this unfolding tide of change. Its growing presence in the global economy will have a profound and far-reaching impact on the modernisation and sustainable development of this country.

Jaime Augusto Zobel de Ayala II is president and CEO of Ayala Corporation and chairman of Bank of the Philippine Islands.

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