Industrial policy revival: Can it lead to real economic transformation?

During the 63^rd Annual Conference of the Philippine Economics Society, I had the privilege of participating in a plenary session on industrial policy and shifting perspectives on development. Professor Danny Quah of the National University of Singapore observed that industrial policy today operates in two worlds: In advanced economies, it is increasingly an instrument of statecraft; in developing economies, it remains a tool of structural transformation.

The question for countries like the Philippines is not whether industrial policy is back — it clearly is. The real challenge is whether we can design and implement it in a way that leads to genuine economic transformation rather than episodic, short-lived interventions.

GLOBAL CONTEXT
We are operating in a fragmented global order, a “G-minus world” where coordination weakens and strategic competition intensifies. The US CHIPS and Inflation Reduction Acts, the EU Green Deal, and China’s Made in China 2025 signal a decisive shift: Competitiveness is no longer defined solely by efficiency. It now encompasses resilience, technological sovereignty, and economic security.

Industrial policy has thus become a form of strategic self-protection. For smaller economies, however; it cannot be about power projection. It must be about capability building.

Global supply chains are restructuring, creating new openings as firms seek trusted and diversified partners. Risk diversification is accelerating. The green transition is driving demand for batteries, electric vehicles (EVs), and clean energy systems. At the same time, digitalization and Artificial Intelligence (AI) are reshaping production models. These megatrends are redefining industrial policy worldwide.

For the Philippines, these shifts present windows of opportunity, but only if we move beyond sites of assembly toward becoming partners in value creation. This is where targeted and coherent industrial policy becomes decisive. Windows of opportunity close quickly when domestic capabilities are weak. We must, therefore, strengthen our industrial base even as we navigate an increasingly fragmentated global landscape.

THE PHILIPPINE JOURNEY
Our industrial story has been characterized by policy swings. We pursued import substitution after the war. We embarked on a rapid trade liberalization in the 1980s and 1990s, arguably before our industries were ready. Then came the services boom of the 2000s: growth accelerated, but manufacturing remained shallow. Its average contribution to GDP declined from an average of 22% in 2001 to 2005 to 18.6% in 2021 to 2023.

The East Asian experience suggests a different pattern. Korea and Taiwan built capabilities before opening fully. Vietnam linked FDI (foreign direct investments) attraction with supplier development and export upgrading. Thailand sequenced liberalization with sectoral strategies, raising its manufacturing share from an average of 22% in 1981-1985 to 31% in 2006-2010, emerging as a regional manufacturing powerhouse in automotive, electronics, and agro-processing. In contrast, Philippine manufacturing fell from 25% to 22% during the same period.

The lesson is not protectionism, the lesson is sequencing and learning: liberalize after firms have learned, not before they can compete. This means aligning investment, innovation, and skills development so they advance together.

INDUSTRIAL POLICY IN PRACTICE: THE CARS EXPERIENCE
Beginning in 2014, successive efforts were made to revive industrial policy. The Aquino administration implemented the Comprehensive Automotive Resurgence Strategy (CARS) under the Comprehensive National Industrial Strategy. CARS aimed to strengthen domestic parts manufacturing by providing time-bound, performance-based tax credits to firms investing in metal stamping and large body and plastic parts production.

Wary of the distortions with earlier import substitution policies, President Benigno Aquino III required strong private-sector commitment before approval. More than 45 Japanese firms expressed their intent to invest and support the program. The incentives were targeted, conditional, and subject to performance metrics.

Industrial policy, however, is not costless. Programs like CARS compete with education, social protection, infrastructure, and education spending. They must pass a fiscal test demonstrating expected productivity gain, production and export impact, domestic value-added expansion, and long-run tax revenue potential.

The succeeding administrations continued the same policy through the Inclusive Innovation Industrial Strategy (i3S) and later the science-, technology-, and innovation-driven framework organized around four clusters: industrial, manufacturing, and transport; technology, media, and telecommunications; health and life sciences; and modern basic needs and resilient activities.

Yet, the initiatives faltered due to weak coordination, limited resources, and the lack of a durable governance framework. The CARS experience illustrated both possibility and fragility. Funding uncertainties, leadership transitions, and budgetary classification under unprogrammed appropriations undermined continuity. Industrial policy requires institutional architecture that survives political cycles.

GOVERNANCE: THE BINDING CONSTRAINT
Industrial policy is difficult not because the strategy is unclear, but because governance discipline is demanding.

Its implementation requires sustained political commitment, ideally led at the highest level. In Korea, President Park Chung Hee personally monitored firm performance. In Thailand, the National Committee for Industrial Development, chaired by the Deputy Prime Minister, coordinated ministries, business, and academe in implementing industrial restructuring.

For the Philippines, key governance principles should include:

• Clear performance benchmarks tied to productivity, exports, and technological upgrading;

• Time-bound incentives with sunset clauses;

• Transparent monitoring and reporting systems;

• Independent technical evaluation capacity; and,

• Automatic review mechanisms for continuation or termination.

Support must be conditional, not permanent, and discipline must accompany incentives.

INDUSTRIAL POLICY AS CAPABILITY AND CREDIBILITY
The Tatak Pinoy Act, authored by then Senator, now DepEd Secretary Sonny Angara, provides an opportunity to rebuild our productive base and to compete not on cost, but on sophistication, credibility, and quality.

Modern industrial policy is not about shielding firms from competition. It is about enabling them to learn, innovate, and scale. The Act seeks to link human capital, infrastructure, and innovation within a unified framework — aligning education, technology, and enterprise development so that Philippine industries can move up the value chain.

In semiconductor and electronics assembly and testing, where the Philippines has established strengths, the challenge is to move toward higher value functions such as integrated circuit design, advanced materials processing, automation integration, AI-driven production systems, and mineral processing linked to clean energy supply chains.

Industrial policy must therefore be tightly linked to skills transformation, deepening of Science, Technology, Engineering, and Mathematics (STEM), AI capability development, university-industry Research and Development (R&D) partnerships, and supplier upgrading programs.

This is our own form of economic statecraft, which is demonstrated not by projecting power, but by building trust and credibility. “Made in the Philippines” should signal reliability, creativity, and excellence.

To strategically implement the Tatak Pinoy Act, the Tatak Pinoy Council could evolve into a Presidential Industry Council that aligns programs, integrates education and industry policy, tracks measurable upgrading outcomes, coordinates with fiscal authorities, engages the private sector in structured dialogues, and ensures policy continuity across administrations.

True industrial transformation occurs when institutions learn together.

REINDUSTRIALIZATION THROUGH SERVICIFICATION
Manufacturing today is no longer defined by smokestacks. With automation, digital design, and AI, goods now embed services — software in hardware, intelligence in machines, data in production systems. This convergence, known as “servicification,” integrates manufacturing and services into smart, knowledge-driven industries.

Servicification offers developing countries a potential pathway to leapfrog towards their goals, but only if institutional coordination, skills systems, and innovation ecosystems are aligned.

The Tatak Pinoy Strategy should therefore lead toward building smart, service-rich manufacturing that competes in technology and trust.

CLOSING REFLECTION
Big economies use industrial policy for power; smaller ones must use it for empowerment. Our form of statecraft is not coercion, it is capability.

Industrial policy for the Philippines should aim to deepen domestic value creation, increase export sophistication, build technological capability, enhance supply chain resilience, and raise productivity sustainably.

Modern industrial policy begins with a clear economic rationale. It is justified where markets systematically underprovide learning and innovation, coordination across sectors, long-term risk capital, and skill formation aligned with frontier technologies.

In a fragmented global landscape where national security increasingly intersects with economic security, our competitive advantage must rest not on low cost but on credibility, innovation, and trust. Industrial policy is not about shielding weakness. It is about building capability and resilience.

Rafaelita Mercado Aldaba is a strategic advisor at the Department of Education Philippine Qualifications Framework Secretariat and Education Center for AI Research. She is an emeritus research fellow at the Philippine Institute for Development Studies, and a fellow at Action for Economic Reforms.