Philippines’ BPO sector seen to shrink  amid shift to AI

The business process outsourcing (BPO) industry in the Philippines is likely to shrink as the shift to artificial intelligence (AI) in the workplace accelerates, Fitch Solutions’ unit BMI said.

“In the case of the Philippines, BPO is a key source of foreign currency, and this vital sector will probably shrink as AI adoption ramps up, since it would allow firms to reshore call centers to even developed economies cost effectively,” BMI Head of Asia Country Risk Darren Tay said in a webinar on Thursday.

“Put bluntly, AI could invalidate the Philippines’ current economic strategy,” he added.

The Contact Center Association of the Philippines (CCAP) expects contact center and BPO industries’ revenue to jump by 9% to USD 32.16 billion this year.

In 2023, CCAP members’ revenue stood at $29.5 billion, accounting for the bulk or 83% of the USD 35.5-billion revenue posted by the Information Technology and Business Process Management (IT-BPM) industry.

BMI said the Philippines is also among the countries that are less likely to benefit from the transition to AI.

According to BMI, lower-income countries are “much slower to adopt AI at a meaningful scale and the developmental gap between these countries and the rest in Asia will probably widen.”

“The Philippines, Indonesia and Thailand are in a worse position compared with the high-income group,” Mr. Tay said.

A quarter of these countries’ workforces are involved in high exposure and low complementarity jobs, such as elementary sales positions, he said.

“And they have a much smaller proportion of workers that are in high complementarity jobs, leaving them less able to benefit from AI-driven productivity gains” he added.

In 2023, the Philippines ranked 65^th out of 193 countries in the Government AI Readiness Index by Oxford Insights.

The National Economic and Development Authority (NEDA) earlier said that the Philippine economy could generate PHP 2.6 trillion annually if local businesses adopt AI.

BMI said workers in developed economies are more exposed to AI versus developing countries.

“The International Monetary Fund (IMF) argues that lower income countries could eventually leapfrog older technologies using AI and catch up developmentally with richer countries,” it said.

“However, we think the high cost of building the required infrastructure and highly skilled labor force makes achieving such a feat highly unlikely,” it added.

WIDER INCOME INEQUALITY

Generating the necessary investments to aid in the transition to AI may be increasingly difficult if AI “cuts off existing development paths,” BMI said.

“Furthermore, the proportion of workers who could benefit from AI is much smaller than those who stand to lose in these economies, which means there could well be strong public opposition to adopting AI,” it added.

BMI also noted how AI adoption can lead to a wider income inequality.

“AI will increase income and wealth inequality much like previous disruptive technologies like the internet,” Mr. Tay said.

Though AI has the capacity to boost productivity and incomes, the gap between the rich and the poor will likely widen as a result, BMI said.

This potential widening inequality can also hinder coordination and cooperation between countries.

“Social stability and international cooperation will probably deteriorate insofar as intra-country and inter-country inequality rises because of AI adoption.”

Inter-country inequality makes regional cooperation difficult, BMI said. It cited the challenges to climate change efforts due to the inequalities among countries.

“And in Asia, widening inter-country inequality can impede greater integration under such organizations as ASEAN (Association of Southeast Asian Nations). The counterargument is that developmental differences already exist and even if AI widened these gaps, the impediment to international cooperation may not increase appreciably.”

“However, the income gaps between middle-income and low-income countries tend to be much narrower, and we think that widening those (between Thailand and the Philippines for example) will have a material impact on international cooperation.” — Luisa Maria Jacinta C. Jocson