PHL has 16-year window to become upper-middle-income country–study

The country is likely to slow its transition into an upper-middle-income country in 16 years, if it would fail to implement the necessary policies needed to accelerate economic growth, the Asian Development Bank (ADB) said.

In an ADB Working Paper, authors Jesus Felipe, Utsav Kumar and Reynold Galope said a typical economy will spend 55 years as a lower-middle-income country before it can transition into an upper-middle-income country.

The Philippines needs to post an average gross domestic product (GDP) growth of 4.8-percent per capita to be able to increase incomes to $7,250, which is the upper-middle-income level.

However, the authors estimated that the country’s pace of growth, which is at 3.3 percent between 2003 and 2013, is lower than the ideal rate to increase incomes within the historical average of 55 years.

“There are economies whose growth rates during 2003 to 2013 were below those required to reach $7,250 within the number of years remaining before falling into a slow transition,” the authors said. “If these economies want to transition into upper-middle income within the historical median of 55 years, they should implement policies to accelerate growth.”

The Philippines first became a lower-middle-income country in 1975, and has been classified as such for the past 39 years. The ADB paper estimated the country’s average GDP per capita in 2013 at $3,429.

The authors said the concept of a middle-income trap was “problematic.” By studying the growth rates of countries and the years it took them to achieve higher growth, the authors were able to conclude that countries only undergo fast and slow transitions from lower-middle income to upper-middle income, and from upper-middle income to high income.

“The widely discussed phenomenon of the middle-income trap is problematic, because it has not been defined and because it has not been studied theoretically. It is also problematic, because the idea of a trap implies that economies are stuck, which is not what we find. All this makes discussions of this concept challenging, to say the least, and somewhat unsubstantiated for policy analysis,” the authors said.

Other Southeast Asian countries in the lower-middle-income level include Indonesia, which still has 28 years before falling into a slow transition; and Vietnam, which still has 43 years left before slowing down.

It can be noted, however, that while Indonesia and Vietnam have over 20 years left before a slow transition ensues, they require lower average growths to reach a per-capita-income level of $7,250.

Indonesia only needs to grow an average of 1 percent to attain upper-middle-income status since its current per-capita income is already at $5,548. The average per-capita GDP growth of Indonesia was higher at 4.5 percent between 2003 and 2013.

Vietnam, on the other hand, requires an average per-capita GDP growth of only 1.6 percent, lower than the actual growth of 5.6 percent in 2003 to 2013. The current average per-capita income of Vietnam is already higher than that of the Philippines, at $3,711. –Cai Ordinario, Businessmirror