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Why has the Philippines’ Growth Performance Improved? From Disappointment to Promising Success

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  • Felipe, Jesus

    (Asian Development Bank)

  • Estrada, Gemma

    (Asian Development Bank)

Abstract

This paper analyzes why the Philippines’ growth performance has improved significantly in recent years. As in the medium to long term actual growth adjusts to potential, we posit that the reason behind this improvement is that the country’s potential growth is increasing. We derive an estimate of the potential growth rate, defined as the growth consistent with a constant unemployment rate, through the notion of Harrod’s natural growth rate and Okun’s Law. Kalman filter estimation allows us to obtain a time series of potential growth rate for 1957-2017. Results corroborate that potential growth is increasing. It reached 6.3% in 2017, the highest value during the last 60 years. We find that in recent years, labor productivity growth (technical progress) accounts for most of the country’s potential growth rate, as the trend labor force growth displays a downward trend. A decomposition of labor productivity growth shows that the within effect accounts for 70% of it, and that most of it is due to manufacturing productivity growth. As actual growth in 2017 reached 6.7% and to maintain the growth momentum, Philippine authorities ought to focus on increasing potential growth to enable more room for growth in a stable macroeconomic environment. Finally, two key results emerge from our analysis of output and productivity growth, and employment. First, estimates of Okun’s Law indicate that the response of Philippine unemployment and visible underemployment to output growth is very small. However, the response of total underemployment is positive and significant. Second, productivity growth does not destroy employment.

Suggested Citation

  • Felipe, Jesus & Estrada, Gemma, 2018. "Why has the Philippines’ Growth Performance Improved? From Disappointment to Promising Success," ADB Economics Working Paper Series 542, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0542
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    References listed on IDEAS

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    1. Jeffrey D. Sachs & Laurence J. Kotlikoff, 2012. "Smart Machines and Long-Term Misery," NBER Working Papers 18629, National Bureau of Economic Research, Inc.
    2. Prachowny, Martin F J, 1993. "Okun's Law: Theoretical Foundations and Revised Estimates," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 331-336, May.
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    Cited by:

    1. Victor S. Venida, 2020. "Updates of Empirical Estimates of Marxian Categories: The Philippines 1961-2012," Department of Economics, Ateneo de Manila University, Working Paper Series 202011, Department of Economics, Ateneo de Manila University.
    2. Hang Pham, 2020. "Estimating the Output Gap for Emerging Countries: Evidence from Five Southeast Asia Countries," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 7(2), pages 61-73.

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    More about this item

    Keywords

    Harrod’s natural growth rate; Kalman filter; Okun’s Law; Philippines; potential growth; underemployment; unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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