THE PHILIPPINES aims to transition to an upper middle-income country over the next few years and achieve high-income status by 2050. While these goals are achievable, there are significant challenges to be addressed.
The “scarring effects” caused by the COVID-19 pandemic have impaired corporate balance sheets, curtailed investment, and hindered human capital development, inflicting lasting damage on economic fundamentals and diminishing the country’s long-term potential growth. Understanding the impact of these scarring effects on the Philippine economy and identifying effective policies to mitigate their consequences are crucial for achieving long-term goals.
SOURCES OF SCARRING EFFECTSThe Philippine economy experienced a drastic 9.5% contraction in 2020, triggered by the COVID-19 outbreak. Despite a strong rebound in economic activities since 2022, key segments including private investment and the performance of some industries such as accommodation, food services, and construction have yet to reach their pre-pandemic levels. AMRO’s latest estimates indicate that the pandemic’s scarring effects have lowered the country’s annual potential growth by an average of 1.69 percentage points for the 2022-2024 period (See the figure). About two-thirds of this decline (1.12 percentage point) is due to slower growth in physical capital. The remaining impact comes from weaker total factor productivity (TFP) — likely caused by temporary productivity drops, underutilization, and efficiency losses — as well as reduced human capital formation.
Among the different production factors of the Philippine economy, physical capital suffered the most from the pandemic due to sluggish growth in investment. Investment in the Philippines in 2020 plummeted by 34% from 2019, with modest recovery only in subsequent years. Many firms were left with weakened balance sheets due to losses incurred during the pandemic, further hampering and discouraging new investments.
Meanwhile, post-pandemic domestic infrastructure development is hindered by a challenging business environment, deficiencies in planning, coordination, and financing, as well as a decline in private-sector participation in infrastructure projects. The weak sentiment in private investment and foreign direct investment (FDI) has slowed the accumulation of capital stock.
The pandemic also reduced the TFP, which captures the efficiency and innovation in an economy. The decline is attributed to lower job quality and productivity, and ongoing structural challenges exacerbated by the pandemic. Lower job quality is reflected in the higher share of self-employment and unpaid family work, which remains at an elevated level of over 30% compared with the pre-pandemic period, although it has gradually improved in recent years.
The pandemic also has a significant impact on human capital formation. Growth in the Philippines’ human capital decelerated sharply in 2020-2021, primarily driven by prolonged school closures and lower returns on education during the pandemic. However, human capital growth is now slower than the pre-pandemic period, partly due to the high learning losses.
SECURING LONG-TERM GROWTHIn the pursuit of sustainable long-term growth, the Philippines should overcome the scarring effects of the pandemic through an increase in productive investment, productivity enhancement, and labor upskilling.
To help stimulate productive investment, the Philippines should focus on attracting more FDIs that emphasize technology and knowledge transfer. This can be achieved by enhancing infrastructure, reforming regulatory frameworks, fostering a competitive business environment, promoting digitalization and innovation, and developing a sustainable economy. Furthermore, it is imperative to introduce measures that help micro, small, and medium enterprises (MSMEs) restore their balance sheets and secure funding. Initiatives such as temporary loan restructuring incentives and the Philippine Open Finance Pilot have played a key role in improving financial access for MSMEs.
The government should also prioritize upgrading labor productivity and job quality by diversifying the economy and incentivizing investment in high-productivity sectors such as manufacturing, digital services, and agribusiness. This includes expanding the Technical Education and Skills Development Authority’s (TESDA) vocational training programs to focus on technology upgrade and digital skills. Collaboration between TESDA, industries, and educational institutions is crucial to align training with industry needs, ensuring a skilled workforce, and improving job placement opportunities for students post-training.
The scarring effects of the COVID-19 pandemic have posed unprecedented challenges to the Philippine economy, severely impacting its growth potential. Overcoming these long-term effects will depend on the country’s ability to implement effective investment and human capital policies. A comprehensive strategy — focused on digitalization, infrastructure investment, and sustainable economic development — will be crucial in enhancing competitiveness and advancing the Philippines toward its goal of achieving high-income status.
Dr. Andrew Tsang is AMRO’s country economist for the Philippines and backup economist for Cambodia. Dr. Tsang received his Ph.D. in Economics from the University of Hamburg. He also holds an M.Phil. in Economics and a Bachelor of Social Science in Economics; both from the Chinese University of Hong Kong.
