Economic growth tells us whether an economy has become larger. It does not necessarily tell us whether the industries within that economy have become more deeply connected to one another.
An industry can grow rapidly but purchase much of what it needs from abroad. Another may be relatively small but support an extensive network of domestic suppliers. Looking at these relationships can reveal aspects of economic development that GDP growth alone cannot show.
More than three decades ago, Henry Ong, Emma Cecelie Ligot and Wilfredo Racaza Jr. examined this question in their study, “A Structural Analysis of the 1985 Philippine Economy: Its Implication on a Multi-Sectoral Economic Development Strategy,” published in the DLSU Business & Economics Review, Vol. 5, No. 1, in 1993.
The DLSU study used input-output analysis to examine how Philippine industries were connected. Its premise was that interdependence among industries was an important part of economic development because expansion in one sector could stimulate production in others through direct and indirect linkages.
One measure the researchers examined was backward linkage, which indicates how strongly an industry draws inputs from other industries.
The stronger the backward linkage, the greater the potential for additional demand in that industry to generate production elsewhere in the economy.
In 1985, the industries with the strongest backward linkages reflected a very different Philippine production structure.
Furniture ranked first, followed by beverages, wood products, basic metals and air transport. Restaurants and hotels ranked sixth, while food manufacturing ranked seventh.
The output multiplier results told a similar story. Furniture had the highest multiplier at 2.13. Beverages and wood products were both around 2.00, followed closely by basic metals and air transport.
A multiplier of 2.13 means that an additional peso of final demand for furniture was associated with about P2.13 in direct and indirect gross output throughout the production system.
But the structure did not remain the same.
Using the 2012 Philippine input-output table to repeat the linkage analysis shows a significant reshuffling of the industries at the center of the country’s production network.
Paper and paper products had become the strongest backward-linkage sector by 2012. Transport equipment ranked second, printing third, fabricated metals fourth, electrical equipment fifth and basic metals sixth. Rubber and plastics ranked seventh, followed by chemicals.
The change becomes clearer when the same industries are followed over time.
| Industry | 1985 BL Rank | 2012 BL Rank | 2018 BL Rank |
| Furniture | 1 | 31 | 39 |
| Beverages | 2 | 27 | 36 |
| Wood products | 3 | 9 | 6 |
| Basic metals | 4 | 6 | 10 |
| Air transport | 5 | 10 | 3 |
| Food manufacturing | 7 | 23 | 16 |
| Paper | 19 | 1 | 7 |
| Transport equipment | 20 | 2 | 8 |
| Chemicals | 22 | 8 | 12 |
| Rubber and plastics* | 35 | 7 | 5 |
| Livestock | 15 | 40 | 1 |
Sector definitions changed between input-output tables, so comparisons involving combined or reclassified industries should be interpreted cautiously.
Some changes are striking. Furniture, which had the strongest backward linkage in 1985, fell to 31st by 2012 and further down the ranking by 2018.
Paper moved in the opposite direction. It ranked only 19th in 1985 but rose to first place in 2012 before settling at seventh in 2018.
Transport equipment also rose sharply, from 20th in 1985 to second in 2012 and eighth in 2018. Chemicals moved from 22nd to eighth before ranking 12th in 2018.
Basic metals proved more persistent. It ranked fourth in 1985, sixth in 2012 and remained within the top 10 in 2018.
These movements suggest that parts of the Philippine economy did become more industrially sophisticated. Industrial materials, intermediate goods and manufactured inputs assumed more important positions in the country’s production network.
But the 2018 results also contain a surprising finding.
Why did livestock become No. 1?
Livestock ranked only 15th in backward linkage in the original 1985 study. Its output multiplier at the time was 1.81, well below furniture’s 2.13.
By 2012, livestock had fallen further to 40th in backward linkage.
Yet by 2018, livestock had become the strongest backward-linkage industry among the 80 broad industries in the Philippine input-output accounts. Its output multiplier reached approximately 2.84.
The result is not simply a curiosity. It raises a more serious question about the depth of Philippine economic development.
After more than three decades of industrialization, export growth and the expansion of services, the industry with the strongest backward linkage in the economy was a relatively traditional sector.
This does not mean livestock is unimportant. Quite the opposite. Its high backward linkage means that livestock purchases extensively from other industries, so additional demand for its output spreads strongly across its supply chain.
Nor does being No. 1 mean that livestock is the country’s most productive or highest-value industry.
Our analysis of the 2018 input-output table shows that value added represented only about 30 percent of livestock’s gross output, compared with roughly 50 percent for the economy as a whole.
Livestock’s strength comes instead from its heavy use of intermediate inputs. It buys from many other industries, which gives it a powerful multiplier effect.
Interestingly, this relationship was already visible in the original DLSU research. Ong, Ligot and Racaza observed that livestock and poultry were major purchasers of agricultural products such as palay, corn, coconut and other crops. They also identified extensive relationships between agriculture and food manufacturing.
There is nothing wrong with livestock developing deep domestic linkages. In fact, that is precisely what we would want an industry to accomplish.
The more troubling question is why many of the country’s more technologically sophisticated industries have not developed domestic production networks that are equally deep.
A problem already visible in 1985
The contrast becomes more significant when we return to the original DLSU study.
Ong, Ligot and Racaza found that electrical machinery, which included semiconductor production, was already one of the Philippines’ leading export industries in 1985.
Yet it ranked only 51st in backward linkage.
The researchers found that the sector had poor interlinkages with local industries because much of its input requirements came from abroad. They estimated its total import content at about 56 centavos for every peso of output.
This meant the Philippines could manufacture and export technologically sophisticated products without necessarily creating equally sophisticated domestic supply chains around them.
More than three decades later, the Philippine economy had developed a much larger electronics industry and a more sophisticated service economy. Yet the underlying challenge remained: many modern industries were still not supported by sufficiently deep domestic supplier networks.
The Philippines did not fail to grow. It failed to deepen.
Growth can come from producing more output, attracting foreign investment, expanding exports or developing services.
Economic deepening requires something more. It requires layers of domestic companies that supply raw materials, components, machinery, chemicals, engineering expertise, technology and specialized services to other Philippine industries.
The more of those connections an economy develops, the more an increase in demand in one industry can spread to businesses and workers throughout the country.
The original DLSU researchers themselves recognized the problem.
In their conclusion, Ong, Ligot and Racaza described import dependence as a problem for the Philippine economy. They found that although many manufacturing industries had high output and income multipliers, some also contained substantial import content.
They consequently recommended the development of ancillary industries that could produce substitutes for imported inputs, specifically citing import-dependent industries such as electrical machinery, textiles, rubber and leather. The objective was to increase the domestic content of Philippine production and exports.
More than three decades later, the Philippine economy certainly did not stand still between 1985 and 2018. It became larger, more diversified, more service-oriented and more technologically sophisticated. Several industrial sectors also strengthened their positions within the production network, but the transformation remained incomplete.
By 2018, some of the deepest domestic supply relationships were still concentrated in relatively traditional activities, while many of the country’s more sophisticated industries had yet to develop equally dense domestic supplier ecosystems.
This is important because the true benefit of industrialization does not come only from producing more goods or exporting more products. It also comes from the domestic industries that grow around them.
A semiconductor plant creates more value for the broader economy when local companies can supply its materials, components, machinery and specialized services. A transport equipment industry becomes more powerful when Philippine companies manufacture more of its parts. A chemicals industry creates wider benefits when downstream manufacturers use locally produced industrial inputs.
The issue, therefore, is not that livestock became the country’s strongest backward-linkage industry. Its extensive domestic supply chain is actually one of its strengths.
The issue is why more sophisticated industries have not developed domestic ecosystems that are just as deep.
More than three decades after the DLSU study identified import dependence and weak supporting industries as constraints to Philippine industrial development, the same structural question remains.
The Philippines grew. But did its economy develop enough?
