News and Events

News Release

Email this page   Print this page

MANILA, PHILIPPINES - The Philippines must raise revenues, improve infrastructure, strengthen governance to build investor confidence, expand its industrial base and improve access to employment and development opportunities to increase growth and reduce poverty, a new diagnostic study by the Asian Development Bank (ADB) shows.

According to the report “Philippines: Critical Development Constraints,” the economy has fallen behind its neighbors in East and Southeast Asia over the past five decades. The pace of poverty reduction has been slow and income inequality remains stubbornly high. Data released by the Government of the Philippines yesterday showed that 26.9% of families in 2006 were below the official poverty threshold, up from 24.4% in 2003. In 2006, the Gini coefficient of per capita income, a key measure of income inequality, was slightly above 0.45 – the highest among Southeast Asian economies.

While growth has picked up in recent years, with the economy in 2007 posting its highest growth of 7.3 percent in the last three decades, both public and private investment remain sluggish and their share in gross domestic product has continued to decline, raising the question of whether the current economic momentum can be sustained.

The report identified a number of critical constraints to economic growth and the fight against poverty in the next five to eight years for the Philippines.

“Targeting and removal of the most critical constraints will lead to the highest returns for the country. It will spur investment, which in turn will lead to sustained and high growth and create more productive employment opportunities,” says Ifzal Ali, Chief Economist of ADB. “This would ensure that the fruits of development are shared by all.”

Firstly, the fiscal situation remains tight despite the government making good progress to reduce deficits and aims to balance its budget in 2008. Much of the reduction in fiscal deficit has been driven by deep cuts in spending on social and economic services and sale of government assets. The share of government revenues as a proportion of GDP has been the lowest among major economies in East and Southeast Asia.

Secondly, declining public and private sector investments in infrastructure have led to inadequate and poor infrastructure and bottlenecks, which have raised the cost of doing business and eroded the competitiveness and attractiveness of the country to both foreign and local investors. Latest available data shows that per capita electricity consumption in the Philippines is roughly one third that of Thailand and one fifth that of Malaysia. Similarly, per capita paved road length for the Philippines is roughly one sixth that of Thailand and one fourth of Malaysia.

Thirdly, poor performance on key governance aspects, in particular, control of corruption and political stability, has eroded investor confidence. The report cites studies suggesting that the Philippines’ ranking in the control of corruption and maintaining political stability have worsened.

The report argues that governance concerns underline other critical constraints. For instance, corruption undermines tax collection, reduced resources for and quality of infrastructure development. Similarly, the political instability hinders investment and growth and reduces the tax base.

Poor infrastructure and weak investor confidence have led to weak flows of foreign direct investment (FDI). During 2002-2006, FDI flows amounted to about $1.1 billion, compared with $6.1 billion for Thailand and $3.9 billion for Malaysia. The lower FDI partly explains a smaller and narrower industrial base compared to its neighbors. In 2005, the share of manufacturing in GDP was about 23.5%, compared with 34.8% in Thailand and 30.6% in Malaysia.

The report argues that the inability of the Government to address effectively market failures of various kinds may have also hampered expansion and diversification of its industrial base. The report points to the need for the Government to play a more proactive role in overcoming coordination and information failures that could lead to underinvestment in knowledge and innovations, discourage entrepreneurship, and constrain diversification.

The report also looked at other constraints like low domestic savings, the efficiency of domestic financial intermediation, cost of borrowing and human capital issues, but found them to be less critical for now.

“In the long run, the need for higher domestic savings and improved skill and knowledge base can emerge as critical constraints to growth,” says Ali.

The report recommends the government explore ways to raise revenue generation, improve expenditure management, accelerate infrastructure development, improve governance, and support expansion and diversification of the industrial base to lift economic growth.

For growth to make an impact on poverty, the economy must create productive employment opportunities that benefit and reach all sections of society. The report highlights that the government can support its development agenda through broadening access to education, training and health services, instituting more effective and better funded development programs at local levels, and improving targeted social protection and disaster relief.

About ADB