Philippines needs productivity boost to sustain UMIC status — World Bank

By Justine Irish D. Tabile, Senior Reporter

THE PHILIPPINES must shift from capital accumulation to productivity-driven growth to sustain its economic expansion and eventually achieve high-income status, according to the World Bank.

In an exclusive interview with BusinessWorld, World Bank Senior Country Economist for the Philippines Jaffar Al-Rikabi said capital accumulation has been the main driver of Philippine economic expansion since the global financial crisis, accounting for more than 90% of growth during the period.

He noted that the country’s gross domestic product (GDP) has doubled since the global financial crisis, while 9.1 million jobs have been created and the employment rate has increased by nearly seven percentage points.

However, sustaining economic growth as an upper-middle income country (UMIC) would require greater improvements in productivity rather than continued reliance on capital accumulation, Mr. Al-Rikabi said.

“The challenge becomes harder because to sustain growth as an upper-middle income [country] and to aspire to high income, this is where you need to shift to sustaining productivity growth,” he said.

The World Bank’s latest country income classification showed the Philippines posted a record gross national income (GNI) per capita of $4,850.   

This lifted the country into the upper-middle income country category — for those with GNI per capita ranging from $4,636 to $14,375. High-income countries are those with GNI per capita above $14,375.

Mr. Al-Rikabi identified competition, human capital development and infrastructure connectivity as key areas the Philippines must address to drive growth in productivity.

On competition, he noted the Philippines has relatively strong laws and policies but faces issues on implementation.

“There’s an implementation gap,” he said, citing lengthy business registration and licensing procedures as barriers to investment and competition.

Mr. Al-Rikabi said easing regulatory bottlenecks would help improve competition and attract more foreign and domestic investments in the country.

The country must also step up efforts to strengthen foundational learning and workforce skills to address learning losses caused by prolonged school closures during the pandemic.

“The Philippines closed schools longer than most during the pandemic, and the result has been a deterioration in foundational learning,” Mr. Al-Rikabi said.

He cited the government’s Academic Recovery and Accessible Learning Program as an important initiative in addressing learning losses, noting early results indicating improvements in learning recovery.

“We’d want to see the foundational skills improving because… you need artificial intelligence (AI) skills combined with the traditional kind of skills of basic mathematics, reading, and other literacy,” he added.

Also, Mr. Al-Rikabi said the Philippines must continue prioritizing infrastructure investments to narrow the gap with regional competitors.

Despite improvements in public infrastructure, the country’s capital stock remains substantially below that of Southeast Asian peers such as Malaysia and Thailand, he noted.

“We do need to bridge that infrastructure gap. Investments in roads, in bridges, in ports, in digital infrastructure, they’re going to be key, and they can help unlock sector-specific drivers of growth,” he said.

Mr. Al-Rikabi cited tourism as an example, noting that Philippine tourist arrivals have yet to recover to pre-pandemic levels, while Vietnam has recorded substantial increases in visitor arrivals.

He said high transportation costs make the Philippines a relatively expensive destination for tourists, compared to other Southeast Asian countries.

The World Bank expects Philippine GDP growth to ease to 3.7% this year from 4.4% in 2025.

This is below the 4.5% growth forecast for East Asia and the Pacific for 2026.

DOMESTIC SOURCES OF GROWTH
For her part, World Bank Chief Economist for Asia Franziska Ohnsorge said Asian economies would increasingly need to develop domestic sources of growth amid population aging and a more challenging global trade environment.

While trade openness has supported the region’s economic resilience, she said economies would need to complement export-led growth with stronger domestic drivers.

“Going forward, it will probably be important across the region… to increase the contribution of domestic resources to growth, not to lower the contribution of external sources,” she said.

Ms. Ohnsorge said boosting domestic growth would require improvements in productivity through technological adoption and more efficient allocation of resources.

“And there are only two ways of doing it. One is with new technologies, and that’s why we focus so much on AI,” she said.

“But the other way of raising total factor productivity is through reallocation of resources.”

Ms. Ohnsorge said stronger competition would allow workers, capital and land to move toward more productive economic activities.

The World Bank chief economist for Asia also cited the need to create a level playing field where smaller firms can effectively compete with larger enterprises.

For emerging economies such as the Philippines, she said the greatest productivity gains would likely come from adapting AI to local needs rather than developing frontier technologies.