Yes, the IT-BPO sector can play a major role in economic development

The story of development is one of the oldest stories of economic lore.

It has been told and retold across think tanks and universities. After all, it is a pretty convincing, straightforward story.

An economy starts out in subsistence, until one day out of nowhere, technological improvement allows the economy to produce enough surplus to trigger a period of rapid industrialization.

Idle and less productive resources, particularly in the rural and agricultural sector, shift to the growing industries, where their productivity skyrockets, resulting in higher wages and eventually higher standards of living.

Soon, demand for business and consumer services from thriving industries builds up, and the local services sector begins to flourish.

Experiential learning

An interesting take on the old development story explores how technological change actually happens—how economies learn to do things better.

In the 1960s, economist Kenneth Arrow, who later won the Nobel Prize in Economics, borrowed ideas about experiential learning from the fields of education and psychology to explain how innovation and technological improvement actually takes place.

“Learning,” Arrow wrote, “is the product of experience.” But it isn’t economies that actually learn how to do things better, it’s people and organizations that do. The knowledge and skills that people learn and accumulate in time make up what economists call human capital.

Later, another Nobel Prize economist, Robert Lucas, adopted this concept of learning by doing and developed a model describing the role of human capital in economic development, and how accumulation of such human capital can have increasing returns to scale in contrast to physical capital, the marginal productivity of which is constant.

In other words, as more machines are added to a factory, the additional benefit of adding one more remains the same as the one that preceded it.

In contrast, as more knowledge and skills are learned, the additional benefit of such additions to human capital are greater than the previous gains. New learning builds on top of old learning, and the returns are greater each time around.

And if learning comes from doing things, then the total amount of learning gained or the “human capital accumulated” would be a function of what kinds of things people and organizations actually do.

If producing different goods leads to different learning experiences, then people learn different things depending on the goods produced and activities made.

From this realization, present-day economists like Ricardo Hausmann, Jason Hwang, and Dani Rodrik have argued (as the title of their popular work sums up), “what you export matters.”

Exporting goods to the world market not only speeds up economic development by allowing the local economy access to richer markets, but also changes the quality of such development as it allows people and organizations to learn more and accumulate more human capital by doing more.

What workers and managers learn from planting bananas and pineapples can be very different from what they would learn from making semiconductors and airplane parts.

This thinking suggests further that one way to accumulate human capital to match those of more developed economies, and thus become as productive, is to learn what they know by doing what they do.

Indeed, Haussmann, Hwang, and Rodrik’s (2005) work showed that “the income level of a country’s exports” predicted its subsequent growth.

Countries that produce rich-country goods become richer.

For many economies—Japan, South Korea, Taiwan, Hong Kong, Singapore, and to a certain extent, China—this idea seemed to be at the heart of their development stories. These economies started producing things for export, which they didn’t use to produce for their own local markets due to limited local demand.

In the process of producing for export, they had to learn how to produce export-quality “rich-country goods” to satisfy rich-country needs.

This, in turn, elevated their levels of productivity, and enriched their human capital.

Put simply, exposure to global markets forced their industries to level up.

Different context

The challenge for developing countries today is that they face a very different context from the ones in which the Asian miracle economies thrived.

As Dani Rodrik himself noted in an opinion piece back in 2014, “manufacturing is no longer as it used to be.”

It has become much more capital-intensive, and its potential to absorb large amounts of labor from the countryside has greatly diminished.

More efficient, labor-cost saving technologies have made export manufacturing jobs more difficult to rely on for large-scale job creation.

Add to this a highly competitive global market for manufactured goods, dominated by China, which enjoys both relatively low-cost inputs and plenty of economies of scale.

Unsurprisingly, many developing countries have become more dependent on services to fuel their domestic growth.

Fortunately, advances in information and communication technologies have remarkably broadened the possibilities of trade in services in the post-globalized world, making more services “tradable” across national boundaries.

Trade in services now account for 13 percent of world GDP, and as much as 46 percent of total global exports in value-added terms.

Business process outsourcing has allowed many developing countries to expand and diversify exports beyond agricultural commodities and manufactured goods.

As value chains are globalized both horizontally and vertically, a wide range of service components and processes from low-value to high-value activities are now being traded. Activities range from contact or call center services, transcription, animation, software development, backroom operations, data processing, and consultancy services.

In the Philippines, the IT-BPO sector has rapidly grown into a $22-billion revenue industry.

From about a hundred thousand jobs in 2004, the industry now provides well over 1.1 million well-paying jobs.

The IT-BPO boom has also triggered multiplier effects across the local economy, spurring commercial real estate development, and of course consumption spending.

Despite plausible threats of job repatriation due to Donald Trump and job replacement due to automation, the industry is expected to continue growing remarkably fast as market forces work in favor of cost-efficiency, which is still the industry’s main competitive advantage.

While very few thought leaders would refute the benefits of a thriving IT-BPO sector in terms of short-term economic gains, not very many seem to be as enthusiastic when looking at its longer term impact.

The criticism is often either that the BPO phenomenon is fleeting or that those employed by the sector are trapped in dead-end jobs that are less-than-ideal.

Value-added services

The activities engaged in are supposedly of “low value” and access to employment in the sector is limited to college graduates in large cities.

While it is true that a large majority of BPO sector jobs in the country are in lower value activities, such as contact services and transcription, most development stories do start out with low value-added exports anyway.

The challenge is to help the sector start producing higher value-added services.

In the meantime, employment in the sector, regardless of value-added provides a good opportunity for learning by doing.

On one hand, voice services comprise just one set of activities under IT-BPO, even if they do make up the bulk of employment and revenue from the sector.

BPO firms do offer jobs in activities horizontally and vertically across the value chain, providing different paths to human capital development within the sector.

Although jobs at higher levels of the chain may provide more opportunities to learn new and more valuable skills, learning can happen at all levels.

Workers, especially those at the lower end of the chain, are incentivized to develop competencies such as communication skills, language proficiency, computer software skills, and basic problem solving.

As workers progress, they learn both technical and thinking skills through both experiential learning and formal training.

Workers and firms alike are incentivized to develop their competencies given the highly fragmented nature of the global services trade.

Firms and their employees are constantly under pressure to keep up with client demand for quality and cost-efficiency. As such, local providers must produce rich-country components of the value chain at rich-country standards.

Workers that serve sophisticated global markets must acquire skills through training and experience that a purely domestic service market would neither have exposed them to nor have demanded of them. Management practices, administrative processes, governance, and quality assurance among BPOs have had to be raised to international standards to survive in the competitive global market.

Evolving technologies

At the same time, constantly evolving technologies have kept firms agile and innovative.

The increasingly global trade in services has opened an opportunity for the Philippines to do more learning by doing outside the traditional route of export manufacturing.

BPO service exports may never match manufacturing exports in terms of wide-scale employment potential—arguably, it is still more difficult to put as many workers in contact centers than in factories, given the higher educational and technological requirements of the former.

But it certainly can be a great second best. And the challenge of moving up the value chain in the BPO sector is not very different from the challenge of moving up in the manufacturing sector.

Neither sector guarantees a sure path to higher levels of the chain. Both require continuous investment in human as well as physical capital, market innovation, and best management practice to level up. There is no justifiable reason to prioritize one over the other.

The Philippine IT-BPO sector has the potential to provide long-term gains to Philippine national competitiveness. Workers and firms alike have a coveted opportunity to learn rich-country service components of the value chain, which could raise productivity as it enriches human capital.

The next question will be how do we put this learning to good use.

(The article reflects the personal opinion of the authors and does not reflect the official stand of the Management Association of the Philippines or the M.A.P.)