Lessons on catch-up development

Catch-up development,” coined by economists Robert Solow and Trevor Swan in the late 1950s, describes rapid post-World War II growth in poorer nations that resulted in closing their income gap with developed countries.

In 1965, the Philippines’ GDP per capita was $211, higher than South Korea’s $108. South Korea developed rapidly and now its GDP per capita is over $30,000 while the Philippines is just at $3,460. Asean neighbors have also overtaken the Philippines in terms of GDP per capita: Thailand $7,066, Indonesia $4,333, and Vietnam $4,086. Thailand attained “upper middle-income country” status in 2011, and Indonesia recently achieved the same in 2020.

Asian peers have succeeded in catch-up development, but the Philippines has remained a “lower middle-income country” since 1987.

How did neighbors do it? They made significant improvements in competitiveness in a short period of time, adopting export-led industrialization policies.

The steel and shipbuilding industries became key to South Korea’s rapid development. Its growth was headed by conglomerate-type trading companies or “chaebols,” supported by the government through special loans, export subsidies, and fiscal incentives from the 1960s to 1980s.

Vietnam’s Doi Moi policies in 1986 saw agricultural reforms (i.e., allocating land on a long-term basis, more lending to agriculture), privatization of some state-owned enterprises, and removal of trade barriers that allowed Vietnam to excel in exporting electronic products and apparel.

Thailand began industrialization reforms in 1972 with expanded incentives for domestic industries like lower corporate income taxes and additional deductions for transport and equipment. Combined with higher public investments in logistics and infrastructure, Thailand became the region’s top exporter of automotive parts and, eventually, rice.

Indonesia is now the world’s largest producer of palm oil and a leading source of nickel and copper because it developed industries around its mineral resources instead of simply exporting them as raw materials. This allowed the country to move up in the global value chain.

These neighboring countries are now more developed than the Philippines because of their economic policies, cheaper labor, and better infrastructure. The Philippines failed to develop its manufacturing sector which would have driven export-led industrialization. We continue to have a trade imbalance, spending more on imports than what we earn from exports.

Steps to catch up. We need to remove the restrictive economic provisions in the 1987 Constitution which limit foreign equity ownership in key sectors like education, media, and land. While we recently liberalized telecommunications, transport, and renewable energy, the remaining restrictions continue to hold back economic growth. To illustrate, the Philippines only attracted $9.2 billion of foreign direct investments while Vietnam, which does not have similar restrictions, received $17.9 billion FDIs in 2022.

Economic Charter change will attract foreign investors who can bring in appropriate research and development, technology transfer, and expertise to the country. In case of changing circumstances, policy changes can be done through ordinary legislation instead of the long process of constitutional amendments.

According to Aldaba and Quejada (2022), the impact of FDIs on the performance of domestic firms in terms of “backward spillover” effects is negative because local companies struggle to compete and use new technology. To address this, the government should also improve the Corporate Recovery and Tax Incentives for Enterprises Act by offering more benefits to local businesses and making it easier for foreign companies to work with local suppliers.

Unlike South Korea’s chaebols, who concentrated on export industries aimed at accelerating economic growth, Philippine cronies focused on businesses that catered to their vested interests and personal gain (De Dios and Hutchcroft, 2003). There is also prevalent corruption from the national to local levels, further holding back economic development.

The book “Why Nations Fail” by Daron Acemoglu and James A. Robinson notes that a common feature among developed countries is their inclusive economic institutions—secure property rights, an unbiased system of law, and public services that provide a level playing field for all. On the other hand, poor countries have extractive institutions where economic gains are concentrated on a small, elite group at the expense of the public or national development. The Philippine government, with the help of active and engaged citizens, should strive to put the right inclusive institutions in place.

With countries that once lagged behind the Philippines now moving rapidly ahead, key reforms to achieve catch-up development must be done as soon as possible. We hope the new year inspires our leaders and institutions to move away from policies that don’t work and implement the ones that will enable us to unlock our full potential as a nation.

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Gary B. Teves served as finance secretary under the Arroyo administration.