Jesus Felipe

Chapter 12 (“The Philippine Economy Toward 2050: Aspirations and Reality”) provides forecasts for the Philippine economy until 2050, focusing on the variables that define its structure: productivity, employment shares, and wages across 16 sectors. The forecasts tell a story of both progress and limitations. The chapter shows that the Philippine economy will continue to advance—wages and income per capita will increase, and poverty will decline. However, the pace and scale of change will likely fall short of the government’s ambitious claims. The share of employment in agriculture will steadily decline, but a significant proportion of Filipino workers will continue to be employed in low-productivity sectors. The implication is sobering: There will be improvements, but the economy will not be all that different from what we are observing today. Without decisive and bold reforms to transform the structure of the economy, the Philippines may once again miss the opportunity to achieve sustained growth, and becoming a high-income nation within the next 25 years will remain an aspiration rather than a reality.

Chapter 11 (“The Fiscal Deficit, National Debt, and Monetary Reality: Old Habits Die Hard”) is on the government’s finances, fiscal deficit, and national debt, the second main theme of the book. It is widely believed that government finances operate as those of a family or a firm and that the government needs to collect taxes to make payments. The authors argue the so-called “family analogy” is incorrect. Given that the government makes payments (with fiat money) by crediting bank accounts, the sovereign Filipino government may face a resource constraint, but it can financially afford the infrastructure and social programs that the country desperately needs. The chapter provides an empirical overview of the sectoral balances (domestic private sector, government, and external sector) of the Philippines. The fiscal position (mostly deficits) has a mirror image in the private sector (mostly surpluses). The chapter also explains how the Philippine central bank operates, with emphasis on why it issues so-called debt, and provides details of the PHP 300 billion operation between the Bangko Sentral ng Pilipinas and the Department of Treasury to deal with the COVID-19 pandemic in 2020—it did not cause any problems, quite the opposite.

Chapter 6 (“Why Has Philippine Progress Been Slow? I: Incomplete Land Reforms, the Role of Government, and a Weak State with a Rent-Seeking Private Sector”) focuses on three key problems that retard progress in the Philippines today: incomplete land reforms, a government very different from those of other East Asian economies during the period of high growth, and a weak state with a rent-seeking private sector. Land reform has been a perennial problem in the country since colonial days. They have been partial and slow. The reality is that the latest version, enacted in 1988, has yet to be fully implemented. The chapter also provides a comparison between the governments of the successful East Asian economies and that of the Philippines using Gerschenkron’s model. Finally, the chapter analyzes the relationship between the state and the private sector, the role of rents.

Chapter 3 (“A Primer on Growth: Facts, Constraints, and Engines”) presents stylized facts about growth, along with a discussion of the constraints to growth: the natural growth rate (which highlights the relevance of productivity and labor force growth) and the balance of payments–constrained growth rate (which highlights the relevance of the income elasticities of demand for exports and imports). It also looks into the engines of growth: economic transformation (the shift of workers out of agriculture), exports (the autonomous category of demand), and manufacturing (Kaldor’s engine of growth). The empirical analysis shows that the Philippines cannot attain a sustained growth rate above 6%. Finally, the chapter applies the Khan–Pritchett–Sen–Werker political economy framework to analyze growth. This framework is based on three variables: political settlements, rent-seeking space, and deal-making space. The authors suggest that the government empower the country’s largest conglomerates owned to engineer a process of structural transformation toward the production of tradables. This requires the commitment of the nation’s largest groups to collaborate with the government. Short of this commitment and transformation, the country will continue registering growth, but it will not become an internationally competitive economy.

Chapter 9 (“Why Is the Philippine State Weak? Spatial and Temporal Fragmentation Obstructing Structural Transformation”) explores the political factors that contribute to the weakness of the Philippine government. This weakness has hindered the government’s ability to provide the necessary public services that support structural transformation. More specifically, we propose a concept that combines political challenges on two levels, spatial and temporal. Spatial fragmentation refers to the devolution of national government powers to subnational units. Temporal fragmentation refers to the lack of strong, institutionalized political parties that can provide policy continuity. These two types of factors have complicated government efforts at designing and implementing cohesive policies that support growth. The chapter traces the origins of this fragmentation and explains its economic impact. It also compares and contrasts the cases of the Philippines, Thailand, and China to further contextualize how different forms of fragmentation manifest and the impact they have.

Chapter 14 (“Poverty and the Cost of a Decent Basket: Who Can Afford It?”) provides an estimate of the cost of what we refer to as a decent basket in the Philippines. This includes food, health care, education, housing, water and electricity, clothing and footwear, transportation, communication, insurance, recreation, and unforeseen expenses. Based on the definition of living income used in this book, the cost of a decent basket in 2024 ranges from PHP 735,000 to PHP 1,200,000 per year, for a family of five, depending on location. Although the official poverty rates among families remained below 14% in recent years, the proportion of Philippine families with income below our estimated living income is above 80%. Across all regions, the National Capital Region (NCR) appears to perform better, although it is still evident that the distribution is skewed toward a lower income. The study highlights the significant income gaps in the Philippines as family incomes remain below the minimum income necessary to meet a decent standard of living.

Chapter 4 (“The Structure of the Philippine Economy”) discusses why the Philippines has struggled to match the economic performance of its East Asian neighbors. It does so by analyzing the structure of the economy and how this has evolved, particularly the shift of workers from low-productivity into high-productivity sectors. The chapter starts with a quick look at how structural transformation led to rapid growth of East Asia. It then focuses on the Philippine economy, breaking it down across three areas: (1) productivity and output growth; (2) employment, wages, occupations, and education; and (3) Philippines’ firms and global value chains. Three hard truths emerge: (1) that our largest employers are sectors of low productivity, (2) that manufacturing continues to be a driver of growth but remains small in terms of employment share, and (3) that Philippine exports remain globally uncompetitive. Together, these insights point to what the economy has been missing all along: the structural shifts needed to achieve and sustain high economic growth.

Chapter 5 (“Philippine Development Plans: Development Misunderstandings”) discusses the current administration’s Philippine Development Plan (PDP) 2023–2028 in the context of the country’s ongoing efforts to narrow the gap with its neighbors. The Philippine economy finds itself in a paradoxical situation: It must pursue goals ambitious enough to catch up, yet these goals must also be realistic and attainable. Using the DLSU ANIMO econometric model and a high-frequency model, we show that many of the targets outlined in the PDP 2023–2028 will be achieved only years later than planned. A review of past PDPs shows a similar pattern, as targets for growth and poverty reduction were often missed. A comparison with the development plans of Malaysia and Vietnam highlights weaknesses in Philippine planning: both a misunderstanding of and the failure to prioritize the key drivers for development and long-term growth. The chapter emphasizes the need to strengthen the government’s understanding of economic development and to set goals that are both attainable and needed for the transformation of the economy’s structure.

Chapter 8 (“Innovation, Firms, Capabilities, and Modern Industrial Policy”) discusses four intimately related themes: innovation, firms, capabilities, and industrial policy. First, the chapter argues that implementing a modern industrial policy is possible by using the existing institutions and mechanisms it has. These are not worse than those South Korea had in the 1970s. Next, the authors discuss the type of innovation that takes place in developing nations, behind-the-frontier catch-up, not product innovation. Finally, the chapter provides an in-depth discussion of modern industrial policy, with a focus on increasing the organizational capabilities of firms, defined as how the flow of work in both a manufacturing shop floor and in an office is organized and managed, and the skills of workers and managers refer to their capacity to operate specific machines and technologies. In the Philippines, like in many other developing countries, the most important constraint to the development of modern sectors is the absence of a broad base of firms with the technological and organizational capabilities to adopt, adapt, and use available technologies. These develop through experimentation and the gradual acquisition of tacit knowledge via intensive learning-by-doing.

This chapter provides a succinct account of Philippine economic history since it was colonized in the 16th century.¹ We focus on those factors that, as a result of being colonized for over 400 years, have conditioned Philippine development until today: agrarian problems (the causes of poverty and inequality), an underdeveloped manufacturing sector, and an excessively thrifty government. This is because development is a path-dependent process. These three issues are widely discussed throughout the book. We start with the colonization period (first by Spain, then by the United States), then decolonization and independence after World War II. This is followed by a discussion of the American influence and how this has shaped the Philippine development thinking.