Philippines: More Infrastructure Investments to Boost Inclusive Growth amidst Global Slowdown

May 23, 2012

MANILA, MAY 23, 2012— Amidst weakening markets for exports, the best prospects for the Philippines to maintain high growth rates, create more jobs, and reduce poverty are through greater investments in productivity-enhancing infrastructure and further economic integration with its trading partners, says the World Bank in its latest East Asia and Pacific Economic Update released today.

The report entitled “Capturing New Sources of Growth” projects that 2012 annual growth in the East Asia and the Pacific region will moderate to 7.6 percent with slower expansion in China pulling down the regional aggregate. Excluding China, growth will increase to 5.2 percent as Thailand returns to normal levels of production. Commodity exporters, which experienced a boom in 2011, may be vulnerable in the event of a faster than anticipated slowdown in China, which could trigger an unexpected drop in commodity prices.

In 2011, East Asia and the Pacific Region grew by 8.2 percent (4.3 percent excluding China), a sharp decline from the nearly 10 percent growth rate recorded in 2010 (7.0 percent excluding China). In the same year, growth was about 2 percentage points higher than the developing country average world-wide, and poverty continues to fall.

“The number of people living on less than US$2 a day is expected to decrease in 2012 by 24 million. Overall, the number of people living in poverty has been cut in half in the last decade in East Asia and Pacific,” said Pamela Cox, World Bank East Asia and Pacific Regional Vice President. “Despite this success, about one-third of the people in the region, roughly half a billion men, women and children still live in poverty. In an uncertain global environment, more needs to be done to create new sources of growth that provide opportunities for all.”

The slowdown in 2011 was largely due to lower than expected growth in manufacturing exports as well as supply disruptions in the wake of the earthquake and tsunami in Japan, and severe flooding in Thailand. Domestic demand and investment were generally strong, aided by loosening of monetary policy in some countries.

The EU, along with the US and Japan, accounts for more than 40 percent of the region’s exports, and European banks provide one-third of trade and project finance in Asia.

As external demand is likely to remain weak, countries in developing East Asia and Pacific need to rely less on exports and more on domestic demand to maintain high growth. Already, many countries are moving in this direction, but there is further scope for rebalancing.

“Some countries will need to stimulate household consumption. In others, enhanced investment, particularly in infrastructure, offers the potential to sustain growth provided this does not exacerbate domestic demand pressures,” said Bryce Quillin, World Bank Economist and lead author of the report. “With a changing financial sector in the aftermath of the financial crisis, new ways to finance higher levels of infrastructure investment need to be developed. Governments would need to focus on accelerating the preparation of infrastructure projects.”

The report says that the Philippines needs to address the key impediments to accelerating inclusive growth through strengthening public financial management, improving tax revenues efficiently and equitably, ramping up investments in infrastructure, and enhancing competitiveness to attract more investments.

“Successful implementation of these key reforms would allow the Philippines to take advantage of new opportunities arising from the global economic rebalancing, given rising production costs in the rest of the region,” said World Bank Lead Economist for the Philippines Rogier van den Brink.

In East Asia and the Pacific Region as a whole, more investment will enhance productivity and drive growth through higher value-added activities and innovation in the medium-term. Although large gains have been made in labor productivity across the region since the Asian financial crisis of 1997-98, there is still large room for further gains.

Policies to support the movement of labor among countries can also be improved, suggests the Report. Improved regional migration policies could enhance the gains from regional economic integration and allow countries with declining working age populations to meet labor demand.

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