Philippines: Need for higher investments to sustain growth and create more jobs

Apr. 11, 2007

In Manila: Leonora Aquino-Gonzales (632) 917-3003,
Anissa Tria (632) 917-3013,
In Washington: Mohamad Al-Arief (202) 458-5964,

MANILA, April 5, 2007 A decade after the financial crisis which devastated East Asia in mid-1997, the region is much wealthier, has fewer poor people and a larger global role than ever before, says the World Banks latest East Asia & Pacific Updatea six-monthly report on the regions economic and social health. But with this success, comes a new wave of challenges for countries trying to maintain high growth in a sustainable way, thus avoiding the middle income trap.

The report finds that growth in Emerging East Asia (China, Indonesia, Malaysia, Philippines, Thailand, Vietnam and some smaller economies + Hong Kong, Korea, Singapore and Taiwan, China) reached 8.1 percent in 2006the strongest in the past 10 years and it is likely to slow only modestly to 7.3 percent in 2007 (see Table 1).

Per capita incomes in the former crisis-affected economies (Indonesia, Korea, Malaysia, Philippines and Thailand) have significantly exceeded their pre-crisis levels and are growing steadily nearly everywhere. In China and low-income transition economies like Vietnam, Cambodia and Lao PDR, incomes have grown at exceptional rates, the report says.

The region has grappled with and overcome the crisis to return to solid growth, says the reports principal author and lead economist for the World Banks East Asia and Pacific region, Milan Brahmbhatt. The past 10 years have seen the emergence of China as a major global economic power, a doubling in the value of regional output levels, a halving in poverty rates, a jump in global and regional integration and accumulation of over $2 trillion in foreign reserves. But the report warns that new challenges are arising which could slow or even derail growth if not handled properly. The idea of a middle income trap, says Mr. Brahmbhatt, is that the strategies that allow countries to grow from low income to middle income are not enough to get them to high income. Historically, few countries have mastered the complex technical, social and political challenges that arise.

By 2010, more than nine in 10 East Asians will be living in a middle income economy. To move out of the middle-income trap, a key challenge is maintaining high growth in a sustainable way. The Philippines has experienced real GDP growth in excess of 5% for three consecutive years, for the first time since the 1970s. However, this growth needs to be sustained and broadened to translate into more jobs.

Jobs and Investments. Unemployment has remained steady in excess of 10 percent in the Philippines and underemployment has grown to 22.7 percent from 17.6 percent two years ago. Increasing investment will be key to job creation. In the Philippines, overall investment has been stagnant in real terms and has declined as a share of GDP to below 15 percent. Firms have also been facing big competitive pressures in world markets, not least from Chinas booming economy. A strong focus on strengthening the investment climate and improving labor force skills will thus be important for the Philippines. The countrys low rankings in competitiveness surveys, infrastructure comparisons, and educational achievement has appropriately stimulated efforts to simplify approval procedures and upgrade infrastructure skills. In the recent Philippines Development Forum held in Cebu, a few specific areas for reform were identified where the payoff in terms of unleashing investment and job growth through opening markets to greater competition is judged significant.

Joachim von Amsberg, World Bank Country Director for the Philippines says, “The Philippines has achieved unprecedented success in fiscal policy in a difficult political environment. If the same determination can be applied to strengthening the investment climate and competition while sound fiscal policy is maintained, higher growth would be more likely and its impact on job generation and poverty reduction would be more beneficial than witnessed to date.

Growth with equity. Another challenge is to combine growth with equity. In the Philippines, some 34 million Filipinos (or about 39.9% of the population) live below US$2 a day in 2006. Income inequality also remains high relative to other countries in the region. High inequality can hamper growth as poor people without access to credit may be unable to exploit investment opportunities, says Mr. Brahmbhatt. It can also be a source of political and social unrest that stymies investment and growth.

Preventing new crises. A third challenge is the need to manage vulnerability and prevent new crises. Since 1997, countries have built up large foreign exchange reserves as a buffer against further crises but this could have the unwanted side effectsoverheating economies and asset price bubbles, the report says. Further, while countries such as the Philippines have been gradually strengthening their financial and banking sectors since the crisis, it will be critical to pick up the pace of this effort.

The report says countries in East Asia, such as the Philippines, need to push ahead with their reform programs, especially in improving the governance and investment climate; developing more diversified capital markets including credit access for the poor; liberalizing services trade; boosting education systems to address skilled labor shortages; and emphasizing prudent macroeconomic policies.

Ten years after confronting the reforms needed to rebound from the financial crisis, East Asia must now confront a new wave of reforms, some of which will be at least as challenging as those enacted in the months after July, 1997, says Mr. Brahmbhatt.

For the Philippines, Mr. von Amsberg reiterated the World Banks continued support for the Philippine governments reforms in key areas. The reforms that the Philippine government has started will go a long way in attaining higher growth and enhancing its impact on job generation and poverty reduction, Mr. von Amsberg said. What is important is sustaining and credibly implementing these reforms to meet the challenges faced by middle income countries.


To know more about World Bank-assisted projects and programs in the Philippines,
To access the full EAP Update report, visit:

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