Transforming the Philippine Economy: "Walking on Two Legs"

With a strong recovery from the global crisis, the Philippines’ policy focus will shift again to a long-term development agenda. Despite favorable initial conditions, the Philippines’ long-term growth performance has been disappointing. Over the decades, the economy has suffered from high unemployment, slow poverty reduction, and stagnant investment. Why could the Philippines not enjoy high growth as its neighbors? What are the main causes of its chronic problems of unemployment, poverty, and underinvestment? This paper argues that the Philippines’ poor growth performance is to be attributed to low productivity growth due to slow industrialization, especially in manufacturing. The chronic problems of high unemployment, slow poverty reduction, and low investment are reflections of slow industrialization. Initial success in electronics had enabled the economy to accumulate capabilities for productive diversification. However, incentives to utilize the accumulated capabilities have been weakened by persistent underprovision of basic infrastructure and weak business and investment climate. The paper also analyzes the growing services sector, in particular the booming business process outsourcing industry, in terms of its impact on job creation. The key conclusion is that, instead of “leapfrogging” over industrialization, the Philippines needs to “walk on two legs,” to develop both industry and services, to generate job opportunities for the growing working-age population.