The Philippines can no longer afford to mistake economic growth for economic transformation. The International Monetary Fund in 2024 reported that Philippine labor productivity remained below its prepandemic trend, while medium-term potential growth was revised downwards from 6.5 percent before the pandemic to 6.0-6.3 percent.
The 2024 Bangko Sentral ng Pilipinas study on total factor productivity (TFP) supports these findings, indicating that Philippine productivity was below its prepandemic level, with estimated TFP growth in 2022 ranging from -1.9 percent to 0.8 percent, depending on the trend estimate.
A critical question can be raised: Did the Philippines restore its productive capacity after the pandemic, or merely resume activity without rebuilding its foundations and making it resilient to external shocks?
The economy contracted by 9.5 percent in 2020, rebounded 7.6 percent in 2022, then slowed to 5.5 percent in 2023.
Yet, a recovering gross domestic product (GDP) does not necessarily mean a recovering productive potential. Growth has gone downhill since then.
During the pandemic, businesses closed, investment collapsed, workers lost jobs and firms’ accumulated knowledge, supplier relationships and production routines were disrupted.
These losses may have shifted the country’s production possibility frontier (PPF) inward, thereby reducing the economy’s productive capability.
As proof of this weakened productivity capability, the Asean+3 Macroeconomic Research Office initially reported that Philippine investment fell by about 34 percent in 2020 from the 2019 level. Pandemic scarring is later seen to have cut annual potential growth by an average of 1.69 percentage points from 2022 to 2024, with roughly two-thirds due to slower physical capital accumulation.
These losses compounded long-standing weaknesses. The Philippines has struggled to build a broad industrial base and move agricultural workers into higher value-added activities.
Consumption, supported partly by overseas Filipino workers’ remittances, stays central to domestic demand. Remittances are indispensable to households, but consumption cannot substitute for a productive economy generating technological progress, sustained productivity gains and better-paying jobs.
The missed opportunity in 2022
The strong GDP growth in 2022 offered an opportunity to rebuild the economy’s productive capacity. Instead of chanting growth, the government could have pursued a coordinated industrial strategy to restore investment, upgrade technology, develop skills and reconnect domestic suppliers to production networks.
Technology is central since machinery alone is insufficient. Productive capacity depends on firms’ ability to acquire, operate, adapt and improve technology, which decides whether investment raises productivity and enables more sophisticated production. Without it, the country risks being trapped in lower value-added activities despite participating in global markets.
A capability-driven industrial policy could have found and subsidized functionally upgraded industries that specialize in nonroutine jobs and produced incomes according to their ability to develop technological change, create domestic value and generate productive linkages.
To do this, public support must be conditional, transparent and time bound, tied to measurable improvements in productivity, technology adoption, workforce skills and export performance.
Crucially, these capabilities could have spread beyond large enterprises. Supplier development programs could have trained micro, small and medium enterprises to adopt technology, meet quality standards and become reliable suppliers to advanced firms.
Assistance could have been judged by capability improvements, not the number of beneficiaries. Investment, education, trade, innovation, development finance and infrastructure could have been coordinated to support this transformation.
The cost of misguided policy
Reforms beginning in 2022 required costly public investment, but wrong policies carried costs as well. Early intervention could have preserved viable enterprises, skilled workers and supplier relationships before deterioration made rebuilding harder. It could have accelerated productive investment and strengthened domestic firms before subsequent headwinds intensified.
A stronger industrial base would not have insulated the Philippines from global commodity price shocks, tighter monetary conditions or weaker external demand. However, more productive firms, diversified production and deeper domestic supply chains could have provided greater capacity to adapt, sustain output and protect employment. Better paid productive jobs would have strengthened household welfare and confidence.
Appropriate reform would necessarily have increased immediate government spending. Its potential advantage however, was lowering the longer-term cost of rebuilding lost capabilities while expanding the productive base from which future income and public revenue could grow.
This required disciplined support for viable firms, measurable performance targets, withdrawal of aid from persistent underperformers and safeguards against indiscriminate subsidies and corruption.
Rebuilding productive capacity
The pandemic did not cause all the structural weaknesses, but it exposed and deepened them. Not pursuing capability-building reforms decisively during the recovery left the country vulnerable to subsequent shocks and allowed further erosion of its productive potential.
The government must urgently move beyond managing the economy’s immediate pressures and commit to a disciplined industrial policy that builds productive capabilities, upgrades technology and diffuses them across domestic firms.
Every year of delay risks widening the gap between what the Philippines produces today and what a stronger industrial base could produce. Without decisive action, economic stagnation will no longer be merely a looming risk. It could become this administration’s defining legacy.