Why Philippines is growing slower than neighbors

Katherine Visconti
The World Bank maintains its growth forecast but says strengthening public finances and overall competitiveness is needed in the long-run

FORECAST. World Bank's 2012 growth predictions.

MANILA, Philippines – The World Bank expects the Philippines to grow below the average for the Association of Southeast Asian Nations (ASEAN), with economists pointing to the need for increasing tax revenues, particularly from excise taxes on liquor and tobacco. 

In a report released on Monday, March 15, the multilateral agency said it forecasts the Philippines to grow 4.2% in 2012.

This pace of economic growth is slower than the 5.5% average forecast for ASEAN members but above the 3.4% predicted for the world. 

Country20112012 2013 
Philippines 3.7% 4.2% 5.0%
Asean 5.2 5.5 5.6
World   3.7 3.4  4.0 
China 9.1 8.4 8.3
USA 1.7 2.2 2.4

The bank’s Philippines Quarterly Update (PGU) released on March 19 pointed out that “while Philippine growth has been generally higher in the last decade, poverty, inequality, and labor market outcomes have not improved as much.”

Philippines vs neighbors 

“In terms of comparison, we are doing ok but we can do more. We should aim for 7% continuous growth for the decades to come,” said World Bank Country Economist Karl Kendrick Chua at a briefing with press on Monday, March 19. 

He explained that the Philippines is not lagging behind its neighbors but broadly in line with them, explaining that many of those countries are coming from a high base growth of 7% to 8% that was maintained over several years while,  the Philippines, he said “averaged less than 3% in the last 4 decades.”

But he acknowledged that excise taxes in the Philippines are behind many of its neighbors’ rates. 

“The Philippines has one of the lowest excise tax rates, so we are lagging in that sense. But overall, the end goal of taxes is not to raise revenue but to finance the pro poor spending.” 

He added, “Without tax revenues it would be hard for government to fund these very public goods… which is why we stress these taxes but over the medium term this will not be enough to get us to a higher path of development. Government will have to have an overall review of the whole tax system to make it simpler, equitable and more efficient, moving towards broadbased and low rates and plugging these systemic loopholes.”  

Opportunities 

Chua explained that 1 opportunity for the Philippines is in manufacturing. Compared to share of GDP, the quarterly update showed that manufacturing has remained largely flat since 1958. 

“The US and euro zone are looking for ways to reduce production costs, even China is finding ways to reduce production costs. This means that a lot of investors are moving out from these countries and looking for countries like the Philippines,” said Chua.  

The World Bank is also eyeing additional jobs for the Philippines in 2012.

Employment prospects should see some improvement this year given higher public spending and continued growth in some industries said World Bank Lead Economist Rogier J.E. van den Brink.

He said infrastructure spending would generate tens of thousands of jobs, while the BPO industry would add 100,000 jobs this year. “However, structural reforms are needed to create more and better jobs in the year ahead,” he added. 

Threats remain to employment prospects including the global slowdown’s impact on demand for the country’s chief export, electronics, as well as slower deployment of overseas Filipino workers, accordingly to the quarterly report. 

Action items

To achieve growth above 5% in the medium-term, the quarterly report identified several action items:

  1. Strengthening financial management
  2. Increasing tax revenue
  3. Enhancing competitiveness through stronger regulatory capacity 
  4. Addressing infrastructure and service delivery bottlenecks
  5. Improving workers’ skills to make them more employable

In 2011, the country experienced slower than expected growth of 3.7%, which World Bank economists attributed to lower government spending and weaker demand for exports owing to the troubled economies of the rich world, particularly Euro Zone countries, Japan and the United States. 

World Bank Country Director Motoo Konishi said, “It’s an opportune time for the country to move up to the next level.” But Konishi said greater urgency is needed. – Rappler.com