Philippines: Accelerating investment in infrastructure, health, and education to sustain growth that benefits the poor

August 7, 2014

MANILA, AUGUST 7, 2014 – The Philippine Economic Update (PEU) released today expects the Philippines to continue to grow strongly at 6.4 percent in 2014 and 6.7 percent in 2015.

“This projected growth remains one of the fastest in the East Asia region, second only to China among the major economies,” said World Bank Country Director Motoo Konishi.

These numbers are a slight revision from the previous projections of 6.6 percent and 6.9 percent in 2014 and 2015, respectively.

The revision reflects the slow start of the economy in the first quarter of 2014 given the effects of Typhoon Yolanda, lower government spending in the second quarter, and monetary policy tightening in the first seven months of the year.

However, recent data trends suggest that higher growth has now begun to translate into significant poverty reduction.

“After many years of slow poverty reduction, poverty incidence declined by 3 percentage points from 27.9 percent in 2012 to 24.9 percent in 2013, lifting 2.5 million Filipinos out of poverty. And in April this year, the economy created 1.7 million jobs,” said Rogier van den Brink, World Bank Lead Economist for the Philippines.

The World Bank Group estimates that the country needs to spend an additional 5 percent of GDP on health and education to raise labor productivity and competitiveness of Filipino workers. This is on top of the Government’s planned doubling of infrastructure spending to 5 percent of GDP.

“Going forward, the Philippines can sustain high growth by accelerating structural reforms and increasing investments in infrastructure and in the health and education of the Filipino people,” said Karl Kendrick Chua, World Bank Senior Country Economist for the Philippines.

In the last four years, the Government has doubled spending on social services and has provided more money for developing the country’s infrastructure. Sustaining these efforts will close the remaining gaps brought about by decades of lagging public investment:

• The country’s spending on roads, bridges, ports, airports, as well as machines and equipment has generally been declining since the 1970s, and is now well below that of its peers.
• The Philippines spends 30-50 percent less in infrastructure, health and education compared to its fast-growing neighbors.

According to Chua, financing the increase in investments will need to come from a combination of tax policy and administration reforms to make the tax system simpler, more efficient, and more equitable. In particular, in the interest of job creation, the tax burden and cost of compliance for small businesses need to be reduced.

“The government has successfully raised tax revenue equivalent to 1.2 percent of GDP in the last three years through the sin tax reform, improved tax administration, and higher growth. Accelerating the current reform momentum would help the country yield additional tax revenues to further expand growth that can benefit more poor Filipinos,” said Chua.

In addition, accelerating key reforms to secure access to land, promote competition, and simplify business regulations will also help create more and better jobs and bring more people out of poverty.

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