Philippines Faces Steep Climb to High-Income Status, ADBI Warns

Asian upper-middle income countries (UMICs), including the Philippines, face a difficult climb to high-income status due to geopolitical fragmentation, digital transformation, the rise of artificial intelligence (AI), and climate risks, according to the Asian Development Bank Institute (ADBI). Bambang Brodjonegoro, ADBI Dean and Chief Executive Officer, stated that the challenges faced by UMICs today are vastly different from those encountered by countries like South Korea, Singapore, and Hong Kong in the 1990s. Current UMICs must contend with geopolitical and economic fragmentation, adapt to digital transformation and AI, and address the increasingly prominent reality of climate issues. The Philippines recently joined Vietnam in graduating to UMIC status after its gross national income per capita met the World Bank's threshold. However, Economy Secretary Arsenio M. Balisacan cautioned that this achievement does not guarantee continued progress. He highlighted that recent economic shocks, which slowed growth and increased inflation, pose risks to sustaining these gains. The economy grew 2.6% in the first six months, below the government’s 3.5%-4.5% full-year target. Headline inflation eased to 6.1% in August from 6.2% in July, bringing the eight-month average to 5.2%. Brodjonegoro explained that past success stories, such as South Korea and Singapore, relied on manufacturing backed by industrial policy and export-oriented growth. Their transition occurred during the Cold War, a period marked by U.S. investment in helping its allies develop. In contrast, today's fragmented geopolitical landscape offers no similar external impetus for middle-income Asian countries to ascend to high-income status, necessitating self-reliance. "It means there is no special interest from the bigger economies to help middle-income Asia become high-income," Brodjonegoro told reporters. "So that’s why every country needs to fight for itself." Furthermore, the advent of the digital economy and AI has reshaped the requirements for sustained faster growth. While manufacturing remains important, the service economy, particularly through digital channels, has become more relevant. Brodjonegoro advised Asian economies to transition quickly to the service economy while maintaining their manufacturing foundation to escape the "middle-income trap." "You cannot leave manufacturing just like that. Manufacturing is still the key to make sure that you can maintain certain economic growth. But in order to accelerate economic growth, you need to do more through the service economy, especially on digital transformation and AI." Climate risks add another layer of difficulty. Countries like the Philippines and Indonesia are experiencing an increase in disasters such as typhoons and floods, diverting economic resources towards relief and recovery. This diverts investment from sustainability and absorbs economic resources for disaster preparedness. Brodjonegoro concluded that the challenges for current UMICs are significantly more arduous than for their predecessors. — Justine Irish D. Tabile