At a Crossroads: Progress or more of the same?

By Jesus Felipe, Mariel Monica Sauler, Gerardo Largoza, Susan Kurdli, Alellie Sobreviñas, and Christopher James Cabuay

(First of three parts)

IN A SERIES of articles and presentations, members of the Economic team have expressed their (the government’s) views regarding how fast the Philippine economy can grow and the prospects going until 2050. With all our deference to the Secretaries, we offer a constructive reply and comments in this letter. For reasons of space, we do not touch upon “everything.” We focus on three key themes: (i) why the Philippine economy cannot grow at 6-8% and sustain this rate; (ii) why our GDP in 2050 will not be $2 trillion; and, (iii) the role of the government.

We want to make it clear that our interests are identical to those of the Philippine administrations, the present one, as well as past and future: we want the Philippines to move forward, progress, and develop, not just from an economic point of view but also along social dimensions, as fast as possible.

We also stress that our overall assessment of the economy is that it is “doing fine.” The Philippine economy has a myriad of problems, but it is moving forward. There is no economy in the world that does not have problems, and governments are always criticized. It is impossible to please everybody.

Having said this, let’s not exaggerate the fiesta, what the government often does. Our disagreements with the administration lie in how well we are doing and in how we understand progress happens. These are important disagreements.

Our arguments do not mean that we are negative about the economy. We just believe that we need to infuse a greater sense of realism into the discourse of how the economy is doing and how far it can go. We do understand what a high-level position in government requires and the messages that have to be sent. Yet, going into irrational exuberance when it is very difficult to justify it does not do any good. Public policy is also about realism. Over-enthusiasm raises expectations. If these are not met, millions of Filipinos will be disillusioned. It is also about credibility.

Reality check 1: Today’s GNI per capita (what the Philippine Development Plan 2023-2028 uses) is about $4,300. We are still a lower middle-income economy.

Reality check 2: Our neighbors, Thailand, Indonesia, China, and Vietnam, all with significantly lower income per capita than the Philippines not long ago, have overtaken us.

I. UNDERSTANDING GROWTH

We start by noting that we raised a red flag as soon as the Philippine Development Plan 2023-2028 was published. We immediately questioned the capacity of the economy to grow between 6.5% and 8% from 2024-2028. We could not find where these numbers came from. We were told that they are not “forecasts.” We were also told that the figures are an “aspiration.” In another meeting, we were also told that they are an “assumption.” Finally, we have also been told that they are a “target.” How is this possible? Three years later we are still wondering where these numbers came from. What we know is that the growth rate range was revised to 6-8% late last year. These numbers probably come from the same oracle consulted now and again by our major banks and conglomerates.

The point is that we are still not growing at 6-8% and there are good reasons why: our potential growth, or the maximum sustainable growth rate that technical conditions allow, is about 6%. This is the rate toward which our economy gravitates in the long run. There can be deviations in either direction in the short run, but we get back to it. Growth above 6% and sustained for a long time? We do not think so. Our actual growth rate is below this figure.

It is imperative to understand that to increase actual growth significantly above 6% and sustain it, we need to increase potential growth. As long as the administration continues having a forecast, target, or assumption — whatever it wants to call it — out of sync with potential growth (i.e., significantly higher), the assessment will be that the economy is underperforming. We need to be realistic and ask sensible questions, e.g., would it be possible to reach 6.5%?

We have also concluded that the administration’s growth assessments lack depth because all they contain is analyses of growth based on writing the national income accounts in growth rates and then arguing over and over that we are a consumption-driven economy. While the algebra of the income account is correct and it is true that consumption represents about 70% of GDP (it reached this level because it grew faster than the other components of demand for a long time), this is not informative about what really drives the nation’s growth. Consumption growth is driven by income growth, mainly wages. Are these increasing or not? If yes, why? What is the effect of remittances? If wages are increasing, is it because productivity is increasing? In what sectors?

Exports, another component of the demand side, are different from consumption because they are totally autonomous from domestic income (their demand is generated abroad, and they pay for their import content) and they are a key determinant (constraint) of our growth through the balance of payments. Exports are driven by price (how cheap and the exchange rate) and non-price factors (the latter being the characteristics of the products we export, bananas or machines?). Is our export basket changing? What matters for our long-run growth is not the price factor but the characteristics of the products we export (is our export structure changing?).

A proper analysis of the sources of growth requires looking into the productive structure of the economy, where incomes are generated. Hardly do we hear terms such as “productivity,” “manufacturing,” “exports,” or “firms,” in the assessment of the economy. We insist: these are the true drivers of growth, and what the analyses of DEPDev (Department of Economy, Planning, and Development, formerly NEDA) should focus on.

Looking into the productive structure of the economy, we have argued and shown that manufacturing is the engine of growth, even in the Philippines. It is true that aggregate services account for a significant portion of GDP growth ex-post and in an accounting sense (the same as consumption on the demand side). Yet, we make two clarifications. One is that most of the productivity growth of services is the result of two subsectors: Finance, and Wholesale and Retail Trade. Productivity growth in other services is low. Second, and more subtly, causality in many service sectors goes from growth of the economy as a whole to growth of the service activity, not the other way around. Think of credit card use, call centers, transportation of goods, delivery services (riders, messengers), or bank loans. Does their growth cause overall GDP growth, or does GDP growth (the overall state of the economy) cause the growth of these activities? We think it is the latter: it is the growth of the economy (possibly manufacturing — think of bank loans) that causes these sectors’ growth.

To understand the above, we have shown in our analyses (DLSU May 2025 report, section on Growth and Economic Transformation) that overall productivity growth can be decomposed into the sum of the productivity growth rates of each sector (within effect) plus another component that captures the shift of workers across sectors (structural transformation effect). Most of our aggregate productivity growth comes from three sectors: Manufacturing, Wholesale and Retail Trade, and Finance. Manufacturing registers the highest within-sector productivity growth in the country but the contribution of this effect to overall productivity growth is dampened because the employment share of the sector has declined (i.e., the economic transformation contribution effect of this sector is negative). Finance and Wholesale and Retail Trade register both positive within-sector productivity growth as well as positive structural transformation effects because their employment shares have increased.

The irony of agriculture is that while the sector registers positive within-sector productivity growth, this effect is offset by the negative contribution of economic transformation (the result of a declining employment share). The result is that overall agricultural productivity contributes zero to aggregate productivity growth. Within-sector productivity growth needs to accelerate to compensate for the negative economic transformation effect. How? Modernization and technology. Keep in mind that the transformation effect of this sector will remain negative for quite some time.

When the economy is analyzed this way, one learns a lot about our reality: where workers are employed, how much they earn, and how productive they are. It is the income structure of the economy and the income side of the economy that tells us who we are as a nation. Over 50% of our workers are engaged in low-productivity sectors (all sectors in the Philippines are low-productivity by international standards) such as agriculture, wholesale and retail trade, and construction. Nearly 88% of the workforce earns, on average, only P20,000/month. This is nowhere near what can enable people to live a decent life.

The government also claims that our future is bright because we have a young labor force. However, this is not what we want to hear. In a modern economy, what drives growth is productivity, not labor force growth. Since the mid-2000s, productivity growth accounts for about 75% of potential growth. Labor force growth, which is declining, is the other 25%. So why insist on the demographic component? We do not want an economy with many workers in low-productivity, low-wage jobs. We want a highly productive economy that can guarantee better pay and working conditions. It is not about opening new drivers of growth (whatever this means). It is about their productivity. Moreover, in an economy like ours, with almost a quarter of all workers in agriculture (about 10 million), it is clear where the low-hanging fruit of growth lies.

Given our productivity and labor force growth rates, the characteristics of the products we export, and the growth rate of the world economy (barely 3%), our potential growth rate is about 6%. What this means is that if actual growth exceeds 6% and this persists (this is the meaning of sustained), import growth shoots above export growth and we run a trade deficit. This situation cannot be sustained for a long time, and it is corrected (GDP growth decreases and import growth decelerates) with the result that we go back to about 6%. Even without the tariff war, we would find it very difficult to grow significantly above 6% for a long time. The structure of our economy does not allow a growth rate much higher than 6%. And on how “sustainable” a high growth rate can be, there is work that shows that very high growth rates do not last for decades.

The government needs to understand the potential of the economy and its determinants. These lie in the structure of the economy. We do not have an 8% growth-rate economy. The reason? Look at the products that we produce and export — and take into account the growth rate of the world economy. To grow faster, we need a “different economy.” We need a manufacturing sector that makes quality products that can compete in the world economy. To do this, we need firms. Reality? We do not have them. Though there are pockets of excellence (e.g., though we have not seen it, we have read good things about our steel industry, solid progress), most of our firms have low organizational capabilities and hence they cannot produce products that meet international standards and compete.

Since independence in 1946, we have grown above 6% (which is very high growth in any country) in only a few instances. The first stretch was between 1946 and 1972. This long period spanned the Administrations of Presidents Roxas, Quirino, Magsaysay, Garcia, Diosdado Macapagal, and Marcos Sr. (pre-Martial Law). The average annual growth rate was 7.25%. Then we had the long period (1972-2000) of low growth during the Administrations of Presidents Marcos Sr. (during Martial Law), Corazon Aquino, Ramos, and Estrada, with average growth rates slightly above 3%. Things started picking up during the 10 years of Gloria Macapagal, 5.02%, and Benigno Aquino, 6.22%. High growth continued with President Duterte but the pandemic derailed the good run. Actually, growth peaked at 7.1% in 2016 but then it came down in the next three successive years: 6.9% in 2017, 6.3% in 2018, and 6.1% in 2019. Yes, growth was above 6% for several years but it then came down to about our potential. Now (President Marcos Jr.) we live under the uncertainty caused by the tariff war with growth rates below 6%. Claiming that we can go back to the days of higher growth rates is tantamount to not understanding that those days are gone with the wind because the conditions that led to higher growth are no longer here.

The government’s magic pill to attain higher growth is a series of initiatives (the ones recently passed…) in the form of tax breaks for our firms. These won’t be a game changer if the objective is to transform the economy: most of our firms will do “more of the same” (MOTS) although it is true that they will be more profitable.

Simply “giving” without significant “effort” is unlikely to result in meaningful change. These recent measures will not lift our potential growth.

The same goes for the 207 major infrastructure projects the government highlights, which include roads. Of course, we need them, by all means. Yet, roads alone without trucks transporting products to ports to be exported will not do much in the long run (creation of more productive capacity) to increase wages and income per capita. This will not propel growth to 8% for 20 years. The problem we have is that we do not have enough factories to employ productively the labor force. This is why we have a low capital-labor ratio. This is a form of underemployment, where people are willing to work but cannot find productive employment — not because machines are idle, but because there simply aren’t enough of them.

And finally, the same goes for initiatives like the Maharlika Investment Fund… which has absolutely nothing to do with development…. despite what its proponents claim. Don’t bait and switch. Development is not anything that sounds popular. Investment banking ain’t development.

We have checked every single Philippine Development Plan (PDP) since independence and concluded that these documents tend to be cheerleading exercises instead of decisions about which potential priorities have to be sacrificed in the current plan period. This mode of planning permits private interests to justify almost any project as being consistent with the current development plan. The PDP 2023-2028 contains over 350 objectives, many of them without quantitative targets. Either many of the targets are meaningless or they will not be attained. We need to focus.

(To be continued.)

Jesus Felipe, Mariel Monica Sauler, Gerardo Largoza, Susan Kurdli, Alellie Sobreviñas, and Christopher James Cabuay are Faculty at De La Salle University (DLSU). This letter represents the views of the authors and not necessarily those of DLSU.