Observers have begun to worry that the country’s widening current-account deficits will sooner or later become a problem for continued growth. Between 2003 and 2015 the country ran a succession of surpluses but finally slipped into deficit beginning 2016 under the Duterte administration. Last year’s deficit exceeded all forecasts, coming in at 2.4% of GDP. On merchandise trade alone the deficit was close to 15% of GDP, a historically unprecedented figure.

Until now the comforting explanation has been that the widening deficit is simply due to the government’s drive to catch up on infrastructure. The larger import bill, it is said, simply reflects the growing import requirements of the investment drive of both public and private sectors — all of which of course is supposed to pay off in the future.

Well, maybe. Only problem is, the deficits are not caused merely by growing imports. A more long-term reason is that exports have been diminishing in importance to the economy. This can be seen from the figure below. Goods exports have actually been declining secularly as a share of GDP, from 25% in 2005 to now just under 16% last year. Even including exports of services (read: BPOs, POGOs, and tourism) does not change the negative trend. Goods and services exports taken together were worth 50% of GDP in 2005 but now account for only 39%. Apparently the big slide occurred during the Arroyo administration, a period coinciding with the Great Recession. But notwithstanding pious rhetoric from all administrations, exports have never regained their importance and have declined in relative terms ever since. (By comparison, exports of goods and services relative to GDP are about 70% in Thailand and Cambodia and more than 100% in Vietnam.)

This is a problem in several ways: the obvious one is what short-term market watchers worry about. Widening current-account deficits can only be covered by raising debt, drawing down reserves, or both. Foreign direct investments would be nice, too, but last time we looked, these were too small (and too scared by an oncoming TRAIN) to make much difference. Simply continuing along the present path therefore risks people asking the dangerous question: up to when can this last? (Just as a benchmark, Thailand on the eve of the Asian Financial Crisis had reserves covering five months’ worth of imports, versus our current seven months; they had a current account deficit-to-GDP of 8% compared to our smaller though widening 2.4%. So not to worry — for now.)


Apart from exchange-rate volatility from a possible future speculative attack, however (hey, I said not to worry!), the longer-term issue is whether a country with such a palpable disinterest in exports can long sustain a high level of growth.

What is happening should be obvious: the domestic nontradables sector appears more profitable and attractive than the export sector. The country’s growth thus far is still built on such sectors as construction and real estate, retail, finance, utilities, and government services. These sectors have been able to grow notwithstanding the absence of a decent export sector because OFW revenues and more recently offshore business-processing, offshore-gaming provided a foreign-exchange buffer. Enriching the attraction of the home-market has been the government’s decision to pursue an expansionary fiscal policy — not just its build-build-build investment program but also such consumption- and entitlement-related items as the salary-increases for its personnel, subsidies to education, irrigation, and health and social security premiums.

As a result, established taipans and parvenu tycoons alike find it more profitable and skill-appropriate to look for Pokemons in the familiar thickets of government franchises and contracts rather than to navigate the uncertain seas of export. One might have looked to manufacturing for salvation — a potential tradable sector par excellence — but alas, even that sector has been stricken by the Great Distortion. In the much-vaunted revival of car manufacturing, for example (signed under Aquino 2 but implemented under Duterte), the government commits budgetary resources ($600 million) to subsidize the production of cars for the home market (there is no export requirement) by foreign companies — as if there was an urgent national need to worsen the EDSA gridlock. In short, the country’s growth is still gripped by the Dutch Disease my colleague Raul Fabella warned of decades ago. The big difference is that now, apart from the old exchange-rate issue, the government is adding to the distortion because it has money to waste. This is unfortunate, since a good deal of public resources — particularly those on entitlements — may have been put to better use in building an export strategy based on strong domestic technological capabilities.

For the larger development significance of a growing export sector is that it is both a cause and a consequence of a country’s technological achievement, which is ultimately the long-term basis of sustained growth. As Hausman, Hwang, and Rodrik (2007) put it: “What you export matters!” Success in world markets signifies a society’s attained ability to close the technological gap between itself and others; it is also a spur to local firms to constantly upgrade to keep pace with the competition. Using US per-hour labor productivity as a benchmark, export-oriented economies have had measurable success in reducing their distance to the technological frontier. South Korea’s per-hour labor productivity, for instance, rose from only 13% that of the US in 1970 to 50% in 2015. Thailand’s increased from 9% to 20% in the same period, and China’s from 2.5% to 18%. By contrast, the Philippines is now even farther away from the technological frontier than it was in 1970. Per-hour labor productivity today is 14% that of the US — versus 17% in 1970 (N.B. data are from the Conference Board Total Economy Database ( Given the Philippines’ mediocre export performance, it should be no surprise that the country has performed poorly in closing the technological gap.

This is not the space to discuss the design of a technology (and dare we say it: industrial) policy. This is simply to point out that beneath the froth of short-term growth and the fizz and disappointments of quarterly or annual economic performance and political events, changes are occurring at deeper levels and a longer, historical view is needed to take the full measure of our failures and omissions — and the distance still to be travelled.


Emmanuel S. de Dios is O. M. Lopez professor at the University of the Philippines School of Economics.