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Philippine economic summary.docx

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Country Partnership Strategy: Philippines, 2011–2016
ECONOMIC ANALYSIS (SUMMARY)1
A. Recent Development and Long–term Grow...
3
Table 1: Structural Change, 1980–2007
Output (% of GDP) Employment (% of total employment)
( ) = negative, GDP = gross d...
4
more jobs were created in the low-skill, low-wage category.6
4. Remittance-based consumption and weak investment. Suppor...
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Philippine economic summary.docx

  1. 1. Country Partnership Strategy: Philippines, 2011–2016 ECONOMIC ANALYSIS (SUMMARY)1 A. Recent Development and Long–term Growth Trends 1. Long-term growth performance. The Philippines had one of the highest per capita incomes in East and Southeast Asia in the 1950s and 1960s with an advanced manufacturing sector compared with its neighbors and well-developed human capital. From 1960 to 2008, however, real gross domestic product (GDP) grew at an average annual rate of 4.0%. With rapid population growth of 2.5%, per capita GDP increased by only 1.5%. Over the same period, neighboring economies such as Indonesia, Malaysia, and Thailand grew about 4% per capita. Although reforms in the past two decades (1990–2008) made the Philippine economy one of the most open to trade and capital inflows, its growth continued to lag. By the end of the 1990s, the Philippines’ per capita GDP had dropped below Indonesia, Malaysia, and Thailand (Figure 1). Figure 1: Real GDP per Capita 1950–2008 (constant 2005 $) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Figure 2: Unemployment Rate, 1980–2008 (% of total labor force) 14 12 10 8 6 4 2 0 Indonesia Malaysia Philippines Thailand Viet Nam PRC GDP = gross domestic product, PRC = People’s Republic of China. Source: Penn World Table (PWT 6.3). PRC = People’s Republic of China. Source: World Bank, World Development Indicators. 2. Strong economic growth in the past decade. During 2000–2010, real economic growth averaged 4.8%, which was higher than in the previous decade (2.8%). Growth during this period was accompanied by low inflation, strengthening external accounts, and a healthier and better capitalized domestic banking sector. GDP growth slowed to 3.8% in 2008 and 1.1% in 2009 when the economy was hit by global food and fuel price hikes, the subsequent financial crisis, and typhoons that caused massive floods in the capital region. Since late 2009, the economy has recovered rapidly because of a sharp rebound in exports, especially in the electronics industry and emergence of strong growth in business process outsourcing, a real 1 This summary is based on: ADB. 2007. Philippines: Critical Development Constraints. Manila; ADB. 2010. Diagnosing the Philippine Economy: Toward Inclusive Growth. Manila; N. Usui. 2011. Transforming the Philippine Economy: ―Walking on Two Legs‖. ADB Economics Working Paper Series. No. 252. Manila: Asian Development Bank; and ADB. 2010. Tax Reforms towards Fiscal Consolidation: Policy Options to the New Administration. Philippine Country Office Policy Note (July). Manila. The national income accounts have been recently revised and the base year shifted from 1985 to 2000. The figures in this report are still based on the unrevised figures (for constant prices) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
  2. 2. 3 Table 1: Structural Change, 1980–2007 Output (% of GDP) Employment (% of total employment) ( ) = negative, GDP = gross domestic product. Sources: World Bank, World Development Indicators, and International Labor Organization, LABORSTA. Figure 3: Labor Productivity, 1980–2007 (constant 2000 $) Economy-Wide Labor Productivity Labor Productivity by Sector 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 12,000 10,000 8,000 6,000 4,000 2,000 0 Indonesia Malaysia Philippines Thailand Agriculture Industry Services Manufacturing Source: ADB. 2010. Transforming the Philippine Economy. Philippine Country Office Policy Note (October). Manila. 3. Slow growth of labor productivity. Compared with ASEAN-4 economies, progress in economy-wide labor productivity in the Philippines has been weak. During 1980–2007, aggregate labor productivity increased by only 10% (the annual average growth rate was 0.4%), while labor productivity in Indonesia, Malaysia, and Thailand more than doubled (Figure 3). In the Philippines, productivity for all sectors (agriculture, industry, and services) has stagnated over 3 decades. Industry and agriculture contributed negatively to aggregate productivity growth, and only a minor contribution was made by services. The country’s overall productivity grew only slightly through a labor shift from agriculture to services. Workers have continued to move into the services sector, where self-employment is common and wages are more flexible. As a result, Sector Indonesia Malaysia 1980 2007 Change 1980 2007 Change Agriculture 24.0 13.7 (10.3) 22.6 10.2 (12.4) Industry 41.7 46.8 5.1 41.0 47.7 6.7 Manufacturing 13.0 27.1 14.1 21.6 28.0 6.4 Services 34.3 39.5 5.1 36.3 42.0 5.7 Philippines Thailand 1980 2007 Change 1980 2007 Change Agriculture 25.1 14.2 (10.9) 23.2 10.7 (12.6) Industry 38.8 31.6 (7.2) 28.7 44.7 16.0 Manufacturing 25.7 22.0 (3.8) 21.5 35.6 14.1 Services 36.1 54.2 18.1 48.1 44.6 (3.4) Sector Indonesia Malaysia 1980 2007 Change 1980 2007 Change Agriculture 56.4 41.2 (15.2) 37.2 14.8 (22.4) Industry 13.1 18.8 5.7 24.1 28.5 4.4 Manufacturing 9.0 12.4 3.4 16.1 18.8 2.7 Services 30.5 40.0 9.5 38.7 56.7 18.0 Philippines Thailand 1980 2007 Change 1980 2007 Change Agriculture 51.8 36.1 (15.7) 70.8 41.7 (29.1) Industry 15.4 15.1 (0.3) 10.3 20.7 10.4 Manufacturing 10.8 9.1 (1.7) 7.9 15.1 7.1 Services 32.8 48.8 16.0 18.9 37.6 18.7 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
  3. 3. 4 more jobs were created in the low-skill, low-wage category.6 4. Remittance-based consumption and weak investment. Supported by remittance inflows, consumption has been the main driver of aggregate demand in the Philippines. Private consumption, accounting for about three-fourths of GDP, has been financed in part by soaring remittances from Filipino workers abroad (10% of GDP in 2010). Reflecting the structural changes in favor of services, which are less capital-intensive and more labor-intensive, the country’s share of fixed investment in GDP decreased from a high of 25% in 1997 to 14%–15% in 2005–2009, contrasting with the recovery in investments in its neighboring countries after the Asian financial crisis (Figure 4). 5. Revisiting the growth strategy. To attain more inclusive economic growth, the Philippines may have to revisit its strategies in lagging areas of the economy.7 The chronic problems of the economy—high unemployment, slow poverty reduction, and stagnant investment— reflect the slow industrialization process. The economy's real growth potential remains untapped and the slow pace of employment generation despite growth hinders inclusiveness. The Philippines’ biggest need is to create domestic jobs for the growing working-age population. Figure 4: Gross Fixed Capital Formation, 1980–2008 (% of GDP) 50 40 30 20 10 0 PRC Republic of Korea Indonesia Malaysia Philippines Thailand Viet Nam GDP = gross domestic product, PRC = People’s Republic of China. Source: World Bank, World Development Indicators. B. Key Constraints to Inclusive Growth 10. Weak revenue generation and public expenditure management. Persistent fiscal imbalances and a lack of sustainable fiscal management have severely constrained growth for a long period. Fiscal deficits result from weaknesses in tax revenue mobilization and poor public expenditure and financial management. After reaching a peak of 17% of GDP in 1997, total tax revenues declined steadily to below 13% in 2002 and 2003, contributing to a fiscal deficit of 5.3% of GDP in 2003. Fiscal measures introduced in 2005, supported by development partners, including ADB, broadened the value-added tax (VAT) base and increased the VAT rate from 6 H. H. Son. 2010. Growth, Inequality, and the Labor Market: The Philippines. In J. Zhuang, ed. Poverty, Inequality, and Inclusive Growth in Asia: Measurement, Policy Issues, and Country Studies. Manila: Asian Development Bank. 7 N. Usui. 2011. Transforming the Philippine Economy: ―Walking on Two Legs‖. ADB Economics Working Paper Series. No. 252. Manila: Asian Development Bank; A. M. Bocchi. 2008. Rising Growth, Declining Investment: The Puzzle of the Philippines. Breaking the "Low-Capital Stock" Equilibrium. Washington, D.C; and World Bank. 2011. Philippine Discussion Notes: Challenges and Options for 2010 and Beyond. Washington, D.C. 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
  4. 4. 5 10% to 12% and the corporate income tax rate from 32% to 35%.8 As a result, the tax-to-GDP ratio increased to 14.3% in 2006, with the budget deficit declining to 1.1% of GDP. However, fiscal pressure has been growing since 2009. While stimulus spending and post-calamity restructuring costs contributed to the larger deficit, the country's weak revenue mobilization capacity has exacerbated the problem. The combination of accelerating spending and weak revenue collection drove the fiscal deficit to 3.9% of GDP and the debt-to-GDP ratio to 57.3% in 2009. Tax revenues fell to 12.8% of GDP in 2009 (Figure 5), the lowest since the 2005 and 2006 tax reforms. It was also the lowest among neighboring members of the Association of Southeast Asian Nations. Figure 5: Tax Revenue Trends, 1997–2009 (% of GDP) 20 15 10 5 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Figure 6: Tax Productivities 0 1997 1999 2001 2003 2005 2007 2009 CIT PIT VAT Excise tax Others CIT = corporate income tax, GDP = gross domestic product, PIT = personal income tax, PRC = People’s Republic of China, VAT = value-added tax. Source: ADB. 2010. Tax Reforms towards Fiscal Consolidation. Philippine Country Office Policy Note (July). Manila. 11. Low tax productivity.9 The Philippines’ tax productivities, in particular for VAT and corporate income tax, are far below the region's averages (Figure 6). The low productivities signal the presence of significant tax loopholes and weak tax administration. From 1997 to 2008, the tax collection fell about 2.9 percentage points, with about two-thirds accounted for by the decline in excise tax revenues (on tobacco, alcoholic products, and gasoline), mainly because of the lack of inflation adjustments. Personal income tax compliance is low and taxing self-employed professionals is difficult. Tax incentives for investors distort economic activity by 8 The new tax legislation included a sunset clause whereby the corporate income tax rate would be cut to 30% starting 1 January 2009. The rationalization of fiscal incentives that was meant to compensate for the revenue loss did not take place. World Bank. 2011. Philippine Discussion Notes: Challenges and Options for 2010 and Beyond. Washington, D.C. 9 Tax productivity is a conventional index to measure how effectively tax authorities produce revenues from available tax bases. For each tax, the productivity is measured as the ratio of the tax revenue to GDP divided by the tax rate, i.e., (tax revenue/GDP)/(tax rate). It can be regarded as a ratio of actual tax revenue to the hypothetical tax revenue (GDP*tax rate), which reflects the extent to which existing revenue generating capacity has been exploited by tax collection authorities. ADB. 2010. Tax Reforms towards Fiscal Consolidation: Policy Options to the New Administration. Philippine Country Office Policy Note (July). Manila. 0.49 0.20 0.18 0.11 VAT CIT PIT East Asia and the Pacific (2006) PRC (2006) Republic of Korea (2007) Malaysia (2006) Philippines (2009) Thailand (2007) Viet Nam (2007)
  5. 5. 6 imposing high effective tax rates on companies that are not eligible to receive the incentives.10 The local governments’ lack of revenue generation capacity is also a concern. 12. Shortfall in provision of basic infrastructure and social services. The country’s lagging outcomes both in physical and human capital accumulation can be explained mainly by shortfalls in the size of public spending rather than shortfalls in the quality or efficiency of public spending.11 Because of the tight fiscal position, the scope for increased physical and human capital accumulation through public spending has been limited. As a result, the provision of these services has been inadequate. Government capital expenditure was equivalent to 2.7% of GDP (2002–2008 average), lower than in neighboring countries (Table 2).12 There are also public spending gaps in key social sectors (Table 3). Public spending on education averaged 2.5% of GDP compared with 4.0% of GDP in other Asian countries in 2002–2007. In 2006, overall government spending for health was even lower at 1.3% of GDP. The impact of public investments can get further reduced because of inefficient spending programs.13 Low and inefficient public spending on social services results in insufficient and unequal access to opportunities.14 Table 2: Central Government Capital Expenditures and Net Lending (average annual percent of GDP) 1996–2000 2002–2008 Philippines 3.6 2.7 Malaysia 6.0 7.3 Thailand 5.4 3.5 Viet Nam 6.9 9.2 Sample Mean 6.1 6.6 GDP = gross domestic product. Source: World Bank. 2011. Philippine Discussion Notes: Challenges and Options for 2010 and Beyond. Washington, D.C. Table 3: Government Spending on Education and Health (% of GDP) Education Health Country 1990–1995a 2002–2007a 2000 2006 Philippines 3.0 2.5 1.6 1.3 Indonesia n.a. 3.5 1.7 1.9 Malaysia 4.4 4.6 1.9 2.3 Thailand 3.2 4.3 1.6 2.1 Viet Nam 2.9 n.a. 1.7 1.9 Sample Mean 3.5 4.1 1.7 2.0 GDP = gross domestic product, n.a. = not available. Source: World Bank. 2011. Philippine Discussion Notes: Challenges and Options for 2010 and Beyond. Washington, D.C. a latest year in period 10 An ADB study found that tax incentives are mostly "redundant", which means that firms that were granted the tax incentives would have invested irrespective of receiving the incentives. ADB. 2010. Philippines: Strengthening Investment Climate and Competitiveness. TA report prepared under ADB. 2007. Technical Assistance to the Republic of the Philippines for Strengthening Investment Climate and Competitiveness. Manila. 11 A World Bank study examined the main causes of the country’s underperformance in education, health, and transport. It found that, while spending efficiency is a problem in transport, shortfalls in the size of public spending is the key cause of the underperformance in all these sectors. World Bank. 2010. Philippines: Public Expenditure Review: Strengthening Public Finance for More Inclusive Growth. Unpublished. 12 Footnote 8, p. 5. 13 S. Jha and A. Mehta. 2010. Inclusiveness through Food Security: The Philippines' National Food Program. In J. Zhuang, ed. Poverty, Inequality, and Inclusive Growth in Asia: Measurement, Policy Issues, and Country Studies. Manila: Asian Development Bank. 14 Education Sector Assessment Summary, and Health and Social Protection Sector Assessment Summary (accessible from the list of linked documents in Appendix 2
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