The Philippines, under the leadership of President Benigno Aquino III and followed by Rodrigo Duterte, is slowly yet steadily emerging as a rising tiger, something that was highlighted by Motoo Konishi, World Bank Country Director, during the 2013 Philippines Development Forum. Clean governance, strong leadership, growing infrastructure and policy endeavors have catapulted the Philippines onto a path of faster growth. However, like all growing economies, the "trickle down" effect has yet to gain full momentum, and social issues that stymie growth – poverty, inequality and unemployment – need to be addressed in earnest. The future holds promise as the Philippines has a young, growing workforce that speaks English, remittances from abroad are high and household debt is among the lowest in Asia.
Although the Philippine economy grew at a mediocre pace of 3.5% over the past ~40 years (1980-2017), recent numbers project a different story. The average gross domestic product (GDP) growth rate over the past 15 years (2000 onwards) has been 5.1%, while in the past five years (2012-17) it has been 6.3%. A Deloitte Report projects that “the Philippines will grow faster than Southeast Asia as a whole over the next two decades, with overall GDP expanding by 4.8% per year in the 2014-33 period.”
(For more, see: This Asian Nation Is Poised for Steady Growth.)
The composition of the gross domestic product is broadly split among the agricultural, industrial and service sectors. According to 2017 World Bank data, agriculture accounted for 9.7% of GDP, marking the lowest contribution to GDP in the country's history. To put that into perspective, agriculture accounted for one-quarter of the country's GDP during the 1980s and almost one-third in the 1970s. Meanwhile, the industrial and service sectors accounted for 30.5% and 60%, respectively in 2017. Note that the share of industrial output has steadily fallen as well over time, while the services sector has risen substantially.
Neglected Agriculture, No More
The Philippines has gradually shifted from an agrarian to an industrial and service-oriented economy. In 1980, agriculture accounted for about one-fourth of the nation’s GDP, but that has dwindled over the years. The agricultural sector (including forestry, hunting, fishing, the cultivation of crops and livestock production according to the World Bank) now accounts for only 9.6% of the GDP. That said, it accounts for about 30% of the workforce. The main agricultural products are sugarcane, coconuts, rice, corn, bananas, cassava (manioc), tapioca, pineapples, mangoes, pork, eggs, beef and fish.
This low level of productivity and slow growth in the Philippines’ agricultural sector has resulted in a high incidence of poverty within the sector. The lack of government initiatives has been primarily responsible for the decline of the agricultural sector, which has suffered from poor infrastructure and low levels of investment. These factors got accentuated with the long seasons of drought that the country suffered.
Philippines: Agriculture Value Added (%)
Fortunately, things seem to be changing as the government is now investing heavily in this sector. The government is backing the Department of Agriculture’s (DA) programs in an attempt to improve food security, rural income and infrastructure. Some initiatives by the DA in a bid to improve the post-harvest losses, while making products less expensive as well as stabilize labor costs, are Farm Mechanization, National Organic Agriculture and Post-Harvest Development. Then there is the World Bank-supported Philippine Rural Development Project, which aims to improve rural infrastructure. Beyond these, a crop insurance scheme, which will cover the costs of devastating weather phenomena, is being rapidly expanded by the government through Philippine Crop Insurance Corporation. Given these and many more measures, the agricultural sector of the Philippines should witness a spurt in its productivity and output in the near future.
The industrial sector has made a fair and sustained contribution to the GDP of the Philippines over the years, averaging 34% during 1980-2014 and dropping to 30.5% in 2017. The industrial sector is growing slowly despite lower labor and operational costs in the region. This sector employs 16% of the country’s workforce. The government of the Philippines is making efforts to attract foreign direct investment in the country by improving its infrastructure and other paraphernalia. The country has developed a number of economic zones, which have attracted many foreign companies. There are reports that predict some companies are set to relocate their production from China, their traditional base, to the Philippines and neighboring countries in Southeast Asia. These measures will help sustain the growth of the industrial sector in the years to come.
The major industries of the Philippines include manufacturing and agribusiness. Within manufacturing, mining and mineral processing, pharmaceuticals, shipbuilding, electronics and semiconductors are the focus areas. The Philippines is one of the attractive pharmaceutical markets in the Asia-Pacific region. The Philippines is also richly endowed with metallic resources, and the country has attracted many foreign companies to its land. Anglo American plc, BHP Billiton Ltd (BBL) and Sumitomo Metal Mining Co Ltd are among them. Moreover, the arrival of foreign players has helped the country to capitalize on its shipbuilding potential. The island nation is the fourth-largest shipping country (after China, South Korea and Japan).
The Philippines’ electronic industry has been active since the mid-1970s when the companies from the West were looking to relocate production facilities to combat the issues of rising cost of production. The electronics industry in the Philippines has only grown bigger and better since then and is an important component of the nation’s economy in terms of job creation, tax contribution, exports, household income and share in the GDP.
The agribusiness is mainly composed of processed fruits and vegetables, seaweeds, tropical fruit purees and juices, fresh tropical fruits, mango seed oil, sugar plantation, bioethanol, biofuels and coco methyl ester.
BPO-Driven Service Sector
The service sector of the Philippines overtook the industrial sector in terms of contribution to the GDP during the early 1980s, increasing from 36% in 1980 to 57.5% in 2014 and 60% in 2017, according to the World Bank. The services sector now employs 54% of the country’s workforce, which is more than the agricultural and industrial sectors combined.
Within the service sector, business process outsourcing (BPO) has played a significant role in sector growth. According to Invest Philippines, “The Philippines gained considerable traction as a BPO location based on the availability of professionals with the required language skills, cultural affinity with the U.S. (the main BPO market) and strong customer service orientation of its workforce. This government openly acknowledged the industry as a key driving force for growth and employment in its Medium-Term Philippine Development (2004-2010).”
The second important segment within the service sector is tourism, which has a long history of moderate growth. Tourism in the Philippines has not been able to tap its resources optimally and has lagged behind its regional cousins (like Singapore, Indonesia and Thailand) in attracting international tourists. Inadequate infrastructure (airports, poor rail and road connectivity), insufficient tourist services and facilities are among the chief reasons for this.
Another segment is export services, which includes the services delivered by Filipinos working outside the country as permanent, temporary or irregular migrants. The remittances by Filipinos working abroad have grown substantially over the years. Their jobs have also undergone a structural change from low-end service jobs to more professional jobs that require higher education skills.
(Source: Government of the Phillipine)
Remittances from abroad continue to be strong (at 10% of total GDP), and the emergence of the BPO industry is seen as a driver of consumer spending and employment generator on the back of strong foreign earnings. This is turning out to be a good alternative mechanism for the nation. The expanding base and growth prospects of the BPO industry will not only boost the service sector in the country but could also persuade some of its people to return home while combating the threat of decline in remittances from its people abroad.
The Bottom Line
For any economy to surge ahead, a balanced and harmonious growth of agriculture, industry and services sectors is quintessential. Once these are accomplished, improvements in tertiary sectors of the economy follow quite naturally. For many decades, the Philippines has lagged behind its more affluent Southeast Asian and East Asian neighbors in terms of economic and social development. But those days are gone. The Philippines today appears to be firmly on the path of growth and sustainability.
(For more, see: Find the Top Retirement Cities in the Philippines.)