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Rising growth, declining investment : the puzzle of the Philippines

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  • Magnoli Bocchi, Alessandro

Abstract

The economy of the Philippines is open to trade and capital inflows, and has grown rapidly since 2002. Over the last 10 years, however, domestic investment, while stagnant in real terms, has shrunk as a share of GDP. In an open and growing economy, why the decline? Three reasons explain the puzzle. First, the public sector cannot afford expanding its investment at GDP growth rates. Second, the capital-intensive private sector does not find it convenient to raise investment at the economy's pace. Third, fast-growing businesses in the service sector do not need to rapidly increase investment to enjoy rising profits. Yet, the economy keeps growing. On the demand-side, massive labor migration results in remittances that fuel consumption-led-growth. On the supply-side, free from rent-capturing regulations, a few non-capital-intensive manufactures and services boost exports. The economic system is in equilibrium at a low level of capital stock, where all economic agents have no incentive to unilaterally increase investment and the first mover bears short-term costs. As a consequence, growth is slower and less inclusive than it could be. To make it speedier and more sustainable, and to reduce unemployment and poverty, the economy needs to move to a"high-capital-stock"equilibrium. This would be attainable through better-performing eco-zones, a competitive exchange rate, greater government revenues, and fewer elite-capturing regulations.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4472.

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Date of creation: 01 Jan 2008
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Handle: RePEc:wbk:wbrwps:4472

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Keywords: Economic Theory&Research; Debt Markets; Political Economy; Access to Finance;

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Citations

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Cited by:
  1. Llanto, Gilberto M., 2012. "Philippine Productivity Dynamics in the Last Five Decades and Determinants of Total Factor Productivity," Discussion Papers DP 2012-11, Philippine Institute for Development Studies.
  2. Briones, Roehlano M., 2009. "Asia's Underachiever: Deep Constraints in Philippine Economic Growth," Discussion Papers DP 2009-04, Philippine Institute for Development Studies.
  3. Michael R. Cabalfin & Josef T. Yap, 2008. "Sustainable Development Framework for Local Governance," Development Economics Working Papers 22624, East Asian Bureau of Economic Research.
  4. Arsenio Balisacan & Sharon Piza & Dennis Mapa & Carlos Abad Santos & Donna Odra, 2010. "The Philippine economy and poverty during the global economic crisis," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 47(1), pages 1-37, June.
  5. Pisit, Puapan, 2014. "Assessment of FDI impact on Thailand's production sectors : implications for investment promotion activities," IDE Discussion Papers 443, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  6. Yap, Josef T. & Majuca, Ruperto P., 2013. "Aspirations and Challenges for Economic and Social Development in the Philippines Toward 2030," Discussion Papers DP 2013-27, Philippine Institute for Development Studies.
  7. Maureen Ane D. Rosellon & Josef T. Yap, 2010. "The Role of the Private Sector in Regional Economic Integration : a View from the Philippines," Governance Working Papers 23107, East Asian Bureau of Economic Research.
  8. Krist Dacharux & Pornnapa Leelapornchai & Manop Udomkerdmongkol, 2009. "Thailand’s Investment in the Post-Crisis Era: Issues and Challenges," Working Papers 2009-08, Economic Research Department, Bank of Thailand.
  9. El Achkar Hilal, Souleima & Sparreboom, Theo & Meade, Douglas, 2013. "The Philippines employment projections model employment targeting and scenarios," ILO Working Papers 480601, International Labour Organization.
  10. Manop Udomkerdmongkol & Sra Chuenchoksan & Nutthikarn Vorasa-ngasil, 2010. "Investment in Thailand: How to unleash the new investment cycle?," Working Papers 2010-05, Economic Research Department, Bank of Thailand.
  11. Willa Boots J. Tolo, 2011. "The Determinants of Economic Growth in the Philippines," IMF Working Papers 11/288, International Monetary Fund.

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