Resource information
The economy of the Philippines is open
to trade and capital inflows, and has grown rapidly since
2002. Over the last 10 years, however, domestic investment,
while stagnant in real terms, has shrunk as a share of GDP.
In an open and growing economy, why the decline? Three
reasons explain the puzzle. First, the public sector cannot
afford expanding its investment at GDP growth rates.
Second, the capital-intensive private sector does not find
it convenient to raise investment at the economy's
pace. Third, fast-growing businesses in the service sector
do not need to rapidly increase investment to enjoy rising
profits. Yet, the economy keeps growing. On the demand-side,
massive labor migration results in remittances that fuel
consumption-led-growth. On the supply-side, free from
rent-capturing regulations, a few non-capital-intensive
manufactures and services boost exports. The economic system
is in equilibrium at a low level of capital stock, where all
economic agents have no incentive to unilaterally increase
investment and the first mover bears short-term costs. As a
consequence, growth is slower and less inclusive than it
could be. To make it speedier and more sustainable, and to
reduce unemployment and poverty, the economy needs to move
to a "high-capital-stock" equilibrium. This would
be attainable through better-performing eco-zones, a
competitive exchange rate, greater government revenues, and
fewer elite-capturing regulations.
