IT MAY TAKE more than two decades before the Philippines can escape the “middle-income trap,” Nomura Global Markets Research said, citing the need to implement key reforms to boost investment-led growth.
“The countries that continue to reap the benefits of the demographic dividend include Vietnam, Indonesia and the Philippines, and all have brighter prospects than Thailand on breaking free of the trap,” it said in a report.
“However, this is still a long-term challenge. Assuming strong potential growth is sustained (i.e., 5% for Indonesia and 6% for the Philippines and Vietnam), these countries may escape the trap by 2050.”
The Philippines remained a lower middle-income country despite an increase in its gross national income (GNI) per capita to $4,230 in 2023 from $3,950 in 2022, according to the World Bank’s latest income classification data.
To become an upper middle-income country, the Philippines would need a GNI per capita of $4,516 to $14,005.
The Philippines has been stuck in the lower middle-income bracket since 1987, according to the latest available data.
In its report, Nomura created a Middle-Income Trap Escape Index (MITEI), which assesses the ability of countries to break free from the middle-income trap.
Countries are ranked on a scale where a score of 100 is the sample average, with anything higher or lower than 100 indicating an above or below average score, respectively.
The Philippines garnered a score of 85 under the MITEI Index, the lowest among Southeast Asia. It scored lower than Malaysia (103), Thailand (98), Vietnam (94) and Indonesia (87).
Nomura said the Philippines is considered in a “tight spot,” which is defined as “traditionally poorer countries that continue to trail middle-income league tables.”
“Vietnam, Indonesia and the Philippines are catching up fast, propelled by strong investment growth, but breaking free of the trap is a long-term challenge.”
There is a need to implement structural reforms to drive investment growth through infusion and innovation, it added.
The Marcos administration is targeting to reach upper middle-income status by this year. The World Bank usually releases the income classification data in July.
Nomura said “business-as-usual” growth is not enough to escape the middle-income trap.
“In the Philippines, the government’s continued push for infrastructure investment will be supportive of medium-term growth,” it said.
The government is targeting 6-8% economic growth from this year until 2028. It has also committed 5-6% of gross domestic product on infrastructure annually.
However, Nomura noted that increased geopolitical tensions, particularly between the Philippines and China, could hinder foreign direct investment from entering the country.
“The underperformance during the latest supply-chain reconfiguration could therefore limit the boost to investment relative to peers,” it added.
Nomura said the process of graduating to a higher income class will be a long and challenging process.
“To escape the middle-income trap, a country cannot continue to rely on cheap labor and rapid urbanization. The move from investment-led growth to innovation-led growth, however, is complicated,” it said.
“It needs the combination of policies to attract and adopt foreign technologies, an adequately skilled workforce, increases in human capital and more deep-rooted reforms of the economic and business climate.”
Adapting technological innovations such as generative artificial intelligence will also be critical, it added. — Luisa Maria Jacinta C. Jocson