Breaking Free from the Middle-Income Trap A Roadmap for the Philippines' Economic Growth This title accurately reflects the content of the post, which discusses the concept of the lower-middle-income trap and offers suggestions for how the Philippines can escape it and achieve economic growth. The use of a roadmap as a metaphor adds a sense of direction and guidance to the title, which is fitting given the post's focus on providing a plan for achieving economic growth.

Breaking Free from the Middle-Income Trap A Roadmap for the Philippines' Economic Growth

The Lower-Middle-Income Trap Understanding the Stagnation of the Philippine Economy

In January, the World Bank Institute of Economic Development published its flagship World Development Report in a condensed format. This simplified version, courtesy of the Korea Development Institute (KDI) School of Public Policy, the University of Chicago, and the Growth Academy, aimed to provide policymakers with clear and easy-to-follow guidelines.

Reflecting on this report, I will explain why the Philippines is stuck in the lower-middle-income trap and what we can do to break free from it.

The KDI studied South Korea's rapid economic development from low-income to high-income country over three decades. The 1960s marked the beginning of this Korean miracle. By the 1970s, the country had become an upper-middle-income economy, and by 1995, it transitioned to a high-income economy.

Philippines' Stagnation A Brief History

I recall a conversation with an executive from Hanjin Heavy Industries and Construction Corp. at its Bonifacio Global City headquarters over 10 years ago. We discussed the opportunity of setting up a power plant in Subic to support their shipyard. I asked him why Hanjin decided to open its first global branch in the Philippines in the 1970s.

His response The Philippines was then considered second only to Japan in terms of economic prospects, making it an attractive destination for investment.

History shows that the Philippines had achieved economic growth in the 1960s, but this was hindered by political instability and a reliance on primary commodity exports. Today, the country has shifted to a service-oriented economy, with business process outsourcing (BPOs) and remittances from overseas Filipino workers (OFWs) playing crucial roles.

The Philippines' Lower-Middle-Income Trap

What exactly is this trap? This is a situation where a country does not transition from a middle-income to a high-income economy due to structural inefficiencies, governance issues, human capital weaknesses, and external economic pressure. According to the World Bank, countries in the lower-middle-income bracket have a gross national income (GNI) per capita between $1,146 and $4,515 as of 2023.

The report highlights that the Philippines has a GNI of $3,950, trailing Vietnam ($4,010), which overtook us in 2020. Indonesia ($4,810), Thailand ($7,280), and Malaysia ($11,970) also seem to be stuck in this trap, but are better positioned to improve their standings.

Why the Philippines is Stuck

The country remains dependent on low-value service businesses instead of high-value manufacturing or innovation-driven industries. Our governance and institutional weaknesses hinder progress. Bureaucratic inefficiencies and corruption cases dominate the news. Policy inconsistencies and a weak political system are responsible for the fiasco that is the 2025 national budget.

Furthermore, our focus on OFW remittances leads to a loss of talent, weakening local industries and innovation capacity. Additionally, there's a mounting global trade war, making it difficult for us to compete with more industrialized Asean neighbors like Vietnam, Thailand, and Malaysia.

A Pathway to Escaping the Trap

Before we can implement the World Bank 3i formula (attracting capital investments, infusion of technology by global investors, and innovation), basic reforms are necessary

1. Enhanced transparency and accountability in government
2. Consistent and long-term economic policies to draw investments
3. Human capital development, aligning the education system with industry needs

These are achievable targets – but only if we are resolute as a nation in pushing for reforms and moral transformation.

Conclusion Breaking Free from the Middle-Income Trap

As we strive to escape this trap, it is essential that we prioritize reforms, innovation, and human capital development. With determination and collective effort, we can create a brighter future for ourselves and our children.

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Keywords lower-middle-income trap, economic growth, Philippines, World Bank, KDI, South Korea, business process outsourcing (BPOs), remittances from overseas Filipino workers (OFWs).

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Edward Lance Arellano Lorilla

CEO / Co-Founder

Enjoy the little things in life. For one day, you may look back and realize they were the big things. Many of life's failures are people who did not realize how close they were to success when they gave up.