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
(Second of three parts)
II. HOW FAR CAN WE GO?
We all dream of a better country as stated in Ambisyon Natin 2040: “Filipinos enjoy a strongly rooted, comfortable, and secure life. In 2040, we will all enjoy a stable and comfortable lifestyle, secure in the knowledge that we have enough for our daily needs and unexpected expenses, that we can plan and prepare for our own and our children’s future. Our family lives together in a place of our own, and we have the freedom to go where we desire, protected and enabled by a clean, efficient, and fair government” (https://tinyurl.com/249ngsr4). We need to be realistic: this will not materialize. Still in 2040, not everybody will enjoy a stable and comfortable lifestyle, not everybody will be able to meet daily needs and unexpected expenses, and we will not be an advanced nation in 2040, 15 years from today.
At a meeting in Milan in early May, the economic team announced that the Philippines’ GDP will reach $2 trillion in 2050. We beg to disagree. The presentation indicated that today’s GDP is $392 billion. This implies that to go from today’s GDP to the one in 2050 (that is, in 25 years) requires an annual growth rate of 6.7%. This will not happen. It is too high. Historically, only a few countries have grown at almost 7% for 25 years. These countries are in Asia but they did it in a different world context, and their growth was manufacturing-cum-export-led.
For years, we have worked with a model of the Philippine economy. This is a very complex structure that relates hundreds of variables and that allows us to understand how the economy operates. We used it to project our GDP in 2050 (version run at the end of 2024, before the current tariff turmoil). This will be about $1.7 trillion. Average growth during the period of 2025-2050 will be 4.8%, with a slight declining trend until 2050, when growth will be 3.6%. This is just the result of “progress.” We cannot become richer and grow as fast as today.
We also question the claim made in other government presentations, that the Philippines will be a $6.6 trillion economy by 2075, the 14th largest economy in the world. This exercise was not done by the government but taken from very suspicious estimates concocted by Goldman Sachs for a large number of countries. It is another extrapolation, in this case assuming (guessing) some figures for labor force growth, investment rates, productivity convergence, and PPP-based exchange rate adjustments. This is wrong economics and wrong thinking. Don’t we have in the country the capabilities to estimate future GDP properly without taking it from an investment bank?
Our models do not reach 2075 but we are certain that this estimate is too high. The Goldman Sachs 2075 estimate implies an average growth rate of GDP of 5.6% for the next 50 years, 2025-2075. It takes an understanding of growth to refute this claim: supposedly (according to the government rhetoric) we would be an advanced economy by then, like Japan, Korea, or the European nations. Check what their actual growth rates have been for the last decades. Much lower than in the 1970s. The reason? Their potential growth is much lower — the contribution is labor force growth zero in some cases (even negative); all growth is the result of productivity growth, but since these economies are on the technological frontier, productivity growth is low. That’s why their growth rates are so low (but they have a very high per capita income).
We could certainly be wrong, but we are willing to bet that our economy will not register an average growth rate of 6.7% for the next 25 years, or 5.6% for the next 50. Using our models, we have estimated that in 2050 the share of work in agriculture will have declined significantly (this is good news). The bad news is that our major employer will be Wholesale and Retail Trade. This means low wages. Hence, our income per capita will be much lower than the $18,000 announced in Milan last May (not clear how this figure was calculated).
Our estimate is that our GNI per capita will be about $12,500 to $13,000, three times today’s (under a very favorable scenario of no major shock in 25 years). This shows progress but much less than what the administration claims. To do better, we need a very different economy. Unfortunately, our workers will not be engineers who design (or providing consulting services for) high-speed trains, airplanes, robotics equipment, satellite systems, intelligent buildings, submarines, dams, luxurious yachts and cruise liners, or nuclear power plants; and who earn P1 million/month, because we do not have such companies. We are very far from that. The government does not create these jobs and the government cannot tell the private sector what jobs it has to create and what wages to pay. Yes, our companies hire engineers but they do not create the products mentioned above. Most of the jobs being created in our country (by firms) are in low-productivity service activities. Let’s please stop the rhetoric about “quality jobs.”
Development happens in firms, in the productive sphere of an economy. This is what allows citizens to consume as wages increase. Our “industrial policy” initiatives should focus on the creation of the companies that will eventually manufacture such products, not on giving tax breaks. This industrial policy requires firm-level effort, especially crucial for developing organizational capabilities, as this process requires continuous adjustments in firm structure, entails adjustment costs, and often encounters internal resistance. We insist: this requires an industrial policy centered on firms’ learning so that they reach international standards and can compete by exporting high-quality products.
The government highlights tourism and Artificial Intelligence (AI) as new sources of growth. Yet, the reality is that neither one will be a game changer. Tourism, like any other activity that contributes to the nation’s GDP, is certainly welcome. But this will not be the “industry” that will make us a first-world nation. Advanced nations are not high-income economies because of this sector, which is a “follower” service of low productivity by its own nature (very labor intensive). The predictions about the sector are far-fetched and unrealistic: we have read that the government expects the value added of the sector to reach 20% of GDP — really? This is a very large share.
It is important to understand that tourism is a business of the advanced economies: with a few exceptions, virtually all major tourist destinations in the world, by country and by city, are advanced economies. Think of Paris, London, Rome, New York, Madrid, Bangkok, or Istanbul. People do not travel there because of their beaches (which many countries have too) but because of the “package” these places offer: culture (monuments, museums, opera), parks, restaurants, and public transportation to commute. We do not have these.
Likewise, people do not travel to those cities as tourists because receptionists and waiters smile. We need much better infrastructure but, more importantly, we have to upgrade our tourism package to compete with Thailand or Mexico first… then think about competing with the world’s largest tourist destinations, France and Spain. Let’s get the story right: tourism can be a springboard to develop infrastructure, to bring in foreign income, and to help create decent employment — hotel managers, receptionists, accountants, and chefs. This will help us reach upper middle income. High income requires much more than tourism.
We have also read as we finish this letter that the government, together with local industry groups, is aiming to boost sales of sari-sari (sundry) stores in the country to P2.4 trillion by 2030 as part of a strategy to develop the country’s wholesale and retail sector. If this is true, we are wordless. First, because this is incompatible with the objective of becoming an advanced economy. These stores (of low productivity and low wages) will have to disappear from our streets, the same as jeepney drivers, and the still large number of domestic helpers and security guards, amongst other professions that still exist in the Philippines. Why? Sari-sari stores are inefficient places to shop, the graphic sign of the nation’s poverty. People in developed countries shop in well-organized, very large, and cheap, supermarkets. And to become an advanced nation, wages will have to increase dramatically, for everyone. Who will hire a helper or a guard when their salaries reach P70,000/month (of course, these will have to be formal jobs, and with a contract that includes benefits, paid holidays, etc.). There is a second reason why this objective does not make any sense: P2.4 trillion in 2030 would represent, depending on whether this figure refers to nominal or real pesos, between 5% and 8% of our GDP in five years, a ridiculously large percentage.
Summing up: at least 25% of our GDP will come in the next few years from tourism and sari-sari stores. We implore the Economic team to put some order here.
Artificial Intelligence (AI) matters but it will not be either the game changer of the Philippine economy at large because we are very far from the technological frontier, because 10 million workers are still employed in backward agriculture, and because 19 million Filipinos are functionally illiterate. Certainly, many of our companies (surely the large ones) will use it and see some benefits. Indeed, using AI in chatbots, to detect fraud in banks, as voice assistants, to generate text and images, or to manipulate big data, is a step forward and important in order not to be left behind. At this level, AI is already being used everywhere. AI can also help companies in manufacturing. Yet, we doubt this will revolutionize the Philippine economy, as long as we do not have the capabilities to generate the advanced technologies of the so-called Fourth Industrial Revolution, including robotics.
What we should care about is aggregate productivity, and this is much more than using ChatGPT to summarize meetings or to do a quick search. For a particular technology to have a significant impact on society, including an improvement in productivity, it has to become a general-purpose technology (GPT), that is, it has to be used across a wide range of industries and activities, it evolves over time, it leads to complementary innovations, and it alters how people live, work, and interact. Electricity, indoor plumbing (the best invention ever), penicillin, and airplanes are examples of GPTs of the 20th century that changed our lives.
Time will tell us if AI becomes a GPT. Recall what economist Nobel Prize winner Robert Solow said in 1987: “You can see the computer age everywhere but in the productivity statistics.”
(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.
