Deindustrializing?

Observers of the Philippine economy often highlight the lack of a robust industrial sector, which is crucial for economic prosperity. Concerns persist over the shallow manufacturing base and its failure to drive sustained growth compared to regional peers.

Following the COVID-19 pandemic, manufacturing now accounts for 18.4 percent of gross domestic product (GDP) and 7.7 percent of employment, down from 19.3 percent and 8.4 percent, respectively, in the previous decade. In contrast, Indonesia, Thailand, and Vietnam averaged 22.7 percent of GDP and 14.5 percent of employment, with an upward post-pandemic trend.

Economic development typically follows a transition from agriculture to industry before services dominate. This sequence fosters productivity and quality employment, especially for unskilled and semi-skilled labor shifting from agriculture. In advanced economies, services contribute the largest share of GDP and employment.

Stable food prices and efficient agricultural markets drive this transformation, historically reducing poverty across East and South Asia.

A deviation from this natural progression occurs when deindustrialization happens prematurely—when manufacturing stagnates or declines before a country has achieved significant industrial development. In such cases, an economy risks losing potential productivity gains and missing a pillar of sustainable poverty reduction and wealth creation.

The Philippines exhibited premature deindustrialization, with industry shrinking at much lower income levels than its East Asian counterparts. While China, Malaysia, and Thailand deindustrialized at per capita incomes above $3,400, $7,100, and $4,200, respectively, the Philippines saw this shift at only $1,700. (All values are in 2015 constant US dollars.)

This premature shift meant that the country was losing out on a crucial stage of economic development, missing the opportunity to fully harness the benefits of industrialization, particularly in terms of productivity growth, high-quality employment generation, and poverty reduction.

The Philippine experience resembles that of India. Both economies shifted to service dominance at relatively low-income levels. Industry’s share in India’s economy began to decline to about $1,200 per capita.

Despite this, India’s transition to a service-driven economy over the past quarter-century has not prevented rapid growth and remarkable poverty reduction. Its poverty reduction in recent decades has been as significant as China’s, which was primarily driven by industry-led, export-oriented development. This suggests that other factors, particularly the nature of the services sector’s growth, played a crucial role.

Technology advances and robust global trade in high-value services—finance, health care, transport, and digital services—have created employment with higher productivity than traditional mass-production manufacturing and services like tourism and brick-and-mortar retail.

Like India, the Philippines developed a thriving business process management industry, leveraging information and communication technology to drive economic growth. While this sector has contributed significantly to employment and GDP, concerns remain about its ability to absorb the large pool of underemployed workers who would have found opportunities in industry.

A critical question is whether the Philippines can sustain productivity growth and inclusive development along a service-oriented path. While opportunities exist, the country’s dependence on external markets for service exports makes it vulnerable to global economic shifts and rising competition from emerging economies. Moreover, artificial intelligence (AI) is reshaping labor markets, creating new challenges for workers.

To remain competitive in an increasingly digital economy, those transitioning from agriculture and manufacturing must undergo training, retraining, and upskilling. At the same time, strong investments in human capital, innovation, and research are essential to complement a service-driven economy and ensure long-term competitiveness. Without these investments, the economy risks stagnation, as low-value service jobs may fail to deliver broad-based prosperity.

Additionally, reinvigorating manufacturing and boosting agricultural productivity remain vital. For decades, inadequate investment in essential infrastructure—transport, digital networks, energy, water, and logistics—has hindered structural transformation. These deficiencies have widened opportunity gaps, increased business costs, and discouraged investment. While recent improvements have helped, further efforts are needed to catch up with rapidly transforming East Asian economies and secure long-term economic prosperity. There must be no let-up in pursuing efficiency-enhancing policy and governance reforms.

Views are the author’s and do not necessarily represent those of the institutions with which he is affiliated.