Philippines faces long road in quest to break free of middle-income trap

By Aubrey Rose A. Inosante, Reporter

The Philippines’ ambition to graduate from being a middle-income economy will require many years of sustained growth, with scarring from the coronavirus pandemic and global uncertainties threatening to delay its progress.

Department of Economy, Planning, and Development (DEPDev) Secretary Arsenio M. Balisacan said the country’s transition to high-income status could take “decades of sustained high growth and capacity expansion.”

“Globally, the median period required for a country to progress from middle-income to high-income status is approximately 23 years. Since 1990, only 35 middle-income countries have transitioned to high-income status,” Mr. Balisacan said.

The Philippines is currently classified as a lower middle-income economy as its gross national income (GNI) per capita stood at $4,470 in 2024, up from $4,230 a year earlier, but still far from the World Bank’s high-income threshold of more than $13,935.

GNI per capita would need to grow more than three times for the Philippines to become a high-income country, Mr. Balisacan said.

The Philippines has been stuck in the World Bank’s lower middle-income bracket since 1987. The Marcos administration is targeting to reach upper middle-income status by next year.

In Southeast Asia, Vietnam has overtaken the Philippines in terms of GNI per capita, reaching $4,490. Other economies in the lower middle-income level are Cambodia ($2,520), Laos ($2,000), and Myanmar ($1,220).

Meanwhile, Malaysia ($11,670), Thailand ($7,120), and Indonesia ($4,910) are upper middle-income countries. Singapore ($74,750) and Brunei ($36,150) are high-income countries.

According to World Bank Division Director for the Philippines, Malaysia and Brunei Zafer Mustafaoğlu, the Philippine economy must grow by 6% to 7% annually to reach high-income status.

“Regardless of these thresholds, it is important for the Philippines to continue on a path of fast, inclusive, and job-rich growth that translates into improved living standards for all Filipinos,” Mr. Mustafaoğlu said in an e-mail.

“AmBisyon Natin 2040” was conceptualized in 2015 as a 25-year plan that envisions a high-income economy, with the Philippines becoming a predominantly middle-class society while minimizing poverty and poor health.

The DEPDev has clarified that there is no specific target year for the Philippines to reach high-income status, but its long-term goals have been set back by the COVID-19 pandemic that cost three years of growth momentum, Mr. Balisacan earlier said.

Emerging domestic and global risks could also derail its progress, he said.

“Slower growth is projected across countries, including in advanced economies and emerging Asia, stemming from the escalation of trade tensions, elevated uncertainties, and intensified geopolitical conflicts,” Mr. Balisacan said.

“A further worsening of the global economic condition may also stall progress in rebuilding policy buffers and further deteriorate countries’ resilience against ongoing and future shocks.”

US President Donald J. Trump’s protectionist trade policy has caused heightened global uncertainty. Since his return to the White House in January, Mr. Trump has imposed higher duties on various goods and sectors as he looks to strengthen US manufacturing and boost investment.

The US began imposing higher “reciprocal” tariffs on most of its trading partners starting Aug. 7. A 19% tariff was slapped on goods from the Philippines, Indonesia, Cambodia, Malaysia and Thailand.

Mr. Balisacan added that delayed rate cuts in the US could also affect the Philippine economy as this could lead to a weaker peso and a potential disruption in the Bangko Sentral ng Pilipinas’ (BSP) own easing cycle.

The US Federal Reserve has kept its target rate at the 4.25%-4.5% range since December last year, with officials citing the need to assess the inflationary and economic impact of Mr. Trump’s tariffs. However, Fed policymakers said in their July meeting that they continue to see two rate cuts this year.

For its part, the BSP resumed its easing cycle in April after a surprise pause earlier this year amid the uncertainty brought by the US’ policies.

In August, the Monetary Board delivered its third straight 25-basis-point (bp) cut to bring the target reverse repurchase rate to 5%. It has now trimmed benchmark borrowing costs by a total of 150 bps since August 2024.

BSP Governor Eli M. Remolona, Jr. said the policy rate is now in a “sweet spot” in terms of both inflation and output, but he left the door open for one more reduction within the year to support the economy if needed, which would likely mark the end of its current rate-cut cycle.

Household spending and private investment also remain vulnerable to inflation-related risks, while extreme weather events and disasters pose threats to infrastructure and agricultural output, Mr. Balisacan added.

“Meanwhile, government spending could be hampered by the weak absorptive capacity of implementing agencies and local government units, as well as by the passage of tax/revenue-eroding measures.”

ESCAPING THE ‘MIDDLE-INCOME TRAP’
The World Bank describes the “middle-income trap” as a situation where a country is able to achieve middle-income status but then reaches a plateau and sees a deceleration in growth as it is unable to ramp up the sophistication of its economic structure to further increase productivity.

Mr. Balisacan said the government is exerting all efforts to avoid a boom-bust cycle, wherein an economy experiences rapid growth and then suddenly contracts.

The Philippines’ demographic dividend, which he said is expected to last until around 2060 to 2070, offers a window of opportunity.

“The country has a 20-year window to leverage its young population by investing in education and health and bridging the gap between human skills and labor market demand.”

He added that investment in critical infrastructure, reforming business regulation, and opening more sectors to competition could lead to higher and sustained economic growth.

The government is “strengthening efforts to manage public debt responsibly, keep the fiscal deficit within prudent limits, address inflationary pressures, and safeguard overall financial stability” in its quest for sustained and stable economic growth, Mr. Balisacan said.

ASEAN+3 Macroeconomic Research Office Country Economist Andrew Tsang said the Philippines has a “long way” to go before it reaches high-income status, with the fragile global environment expected to hit investment sentiment and trade.

This is why overcoming the scarring effects of the pandemic and boosting competitiveness are of paramount importance.

“This means attracting more investment and improving access to financing, especially for MSMEs (micro, small, and medium enterprises) whose balance sheets have been impaired, and upgrading productivity, job quality, and workforce skills,” Mr. Tsang said, adding that many MSMEs still rely on informal lenders like loan sharks due to banks’ reluctance to extend credit to the sector.

“At the same time, the government should prioritize improving labor productivity and job quality in the services sector, as well as in high-productivity sectors such as high-end manufacturing, digital services, and agribusiness,” he said.

Former Finance Secretary Margarito “Gary” B. Teves said reaching high-income status would also require the government to strategically allocate its funds to support productive economic activity.

“It is a tough task that requires sustained commitment and strong leadership on the part of the government to mobilize its limited resources productively into programs and projects that would provide opportunities to all Filipinos,” Mr. Teves said.

The country must diversify growth sources by investing further in agriculture, supply-chain improvements to manage food inflation, and addressing hunger and malnutrition, he said.

Boosting foreign direct investment inflows should also be a priority, he added. As a way to attract investments, the government must continue to improve the country’s physical and digital infrastructure.

“This would facilitate a smoother flow of goods and people across the archipelago, as well as unlock growth potential in the countryside. Enhancing internet access, especially in far-flung communities, is crucial in enabling information sharing such as in education, healthcare, and even skills development,” Mr. Teves said.

“Escaping the middle-income trap is not about doing more of the same but about moving up the value chain,” Mr. Mustafaoğlu added.

Citing the World Bank’s World Development Report 2024, he said middle-income economies like the Philippines should apply the sequenced strategy of investment, infusion, and innovation or “3i.”

“In short, to achieve more sophisticated economies, middle-income countries need two successive transitions. In the first, investment is complemented with infusion, so that countries focus on imitating and diffusing modern technologies. In the second, innovation is added to the investment and infusion mix, so that countries focus on building domestic capabilities to add value to global technologies, ultimately becoming innovators themselves.”

The Philippines needs to recalibrate the mix of the three drivers of economic growth —investment, infusion, and innovation — as it moves through middle-income status, he said.

“In secondary cities like Cebu or Davao, it’s also about helping firms better integrate into global supply chains. In more advanced areas, where sophisticated firms are emerging, building a strong innovation ecosystem becomes critical.”

Mr. Mustafaoğlu said there is no one-size-fits-all formula, but countries like South Korea, Poland, and Chile, which successfully escaped the middle-income trap, share key traits. These include sustained investment, strategic openness, and targeted support for firm capabilities and workforce skills that are adapted to their respective development stages and institutional context.

“Long-term success depends on investing in people… Boosting foundational learning, reducing stunting, and scaling up digital and technical skills — especially through flexible, lifelong learning — are essential to prepare workers for a rapidly changing global economy.”

In the face of rising global uncertainty, the Philippines must double down on reforms that strengthen competitiveness and resilience, such as eliminating barriers that keep firms small and unproductive, and tackling high costs related to doing business. Mr. Mustafaoğlu said. It must also put in place trade and investment policies to help firms meet international standards and connect to value chains.

“In short, global headwinds make reform more urgent — not less. By deepening competition, investing in capabilities, and helping firms connect to global markets, the Philippines can move up the ladder towards a sophisticated high-income economy.”