By Gonzalo Varela and Kevin Cruz
OVER the past 15 years, the Philippines has been one of East Asia’s most dynamic economies. Growth was fast, inclusive, and spatially balanced. Public investment in infrastructure surged, and reforms attracted private capital. As highlighted in the Philippines Growth and Jobs Report launched by the World Bank earlier in July, investment (or capital accumulation) accounted for nine out of every 10 dollars of GDP growth.
But the pattern of structural transformation that accompanied this expansion brings important questions for the future. Growth has leaned increasingly inward. Domestic, non-tradable sectors — construction, retail, and local services — boomed. In contrast, the tradable sector — those activities that compete internationally or could — has shrunk in relative terms and now contributes less than in many peer countries with similar endowments.
Three out of every four new jobs since 2010 were created in non-tradables. Manufacturing employment stagnated at around 8% — the lowest among major East Asian economies, and just one-third the share seen in Vietnam. Credit and asset growth were also faster among non-tradables than tradable sectors. The number of merchandise-exporting firms fell, and merchandise exports as a share of GDP declined. These trends matter because tradables — such as manufacturing, agribusiness, tourism, and digital exports — typically drive long-term productivity growth.
WHY TRADABLES MATTERTradables are sectors that either compete in global or regional markets or face potential exposure to international competition. They include industries where performance is shaped by international prices, standards, and technologies. These sectors matter not only because they help countries expand exports and grow faster, but because they’re typically more dynamic and innovative.
Across countries, tradables are associated with higher productivity, greater scale, and exposure to competition and learning from global best practices. In the Philippines, exporting firms are roughly 20% more productive than comparable non-exporters. And because they are more productive, they tend to create better paying jobs. The benefits don’t stop there: technology and organizational know-how acquired in tradables often spill over to non-tradable sectors — through supply chains, labor mobility, and the diffusion of practices. A vibrant tradables sector doesn’t just benefit exporters — it lifts capabilities across the entire economy.
Why did tradables fall behind in the Philippines?
The answer lies in a challenging investment climate and limited domestic competition in key enabling services. Firms in tradables rely heavily on inputs like power, transport, and logistics — sectors that until recently faced limited competition. Unlike protected domestic sectors, tradables operate under tight international price constraints and cannot simply pass high input costs on to consumers. Thus, high input prices squeeze their margins. Compounding this, the Philippines has seen a gradual real appreciation of the peso, supported by large remittance inflows, booming IT-BPO exports, and portfolio inflows. While these inflows are a strength, they increase the pressure on tradables to raise productivity just to stay competitive. In this environment, investors naturally shifted toward non-tradables, where returns were higher and risks lower.
WHY THIS MATTERS NOWBecause the structure of the economy matters for future growth. Tradables are the economy’s high gear. They help countries climb the value chain and avoid getting stuck in low-productivity traps. In a world of accelerating technological change, firms exposed to global competition are more likely to adopt new technologies, upgrade their operations, and develop the workforce skills needed to stay ahead. These changes benefit not only tradable firms but also their suppliers, workers, and the broader economy.
Rebalancing toward tradables is not about turning away from domestic services. It’s about unlocking the productivity engine of the economy and ensuring that both tradable and non-tradable sectors benefit from competition, innovation, and learning.
What can be done? Three priorities stand out:
1. Keep bringing more competition into key enabling services. Tradables cannot thrive when energy, transport, and digital connectivity are unreliable or costly. Recent reforms — like amendments to the Public Service Act, the opening of renewable energy sectors to foreign investment, and efforts such as Konektadong Pinoy — are steps in the right direction. Implementation must accelerate. Setting up a renewable energy project, for instance, can require over 300 separate interactions with government — many of them duplicative. These frictions raise input costs and discourage investment in tradables.
2. Combine market access with firm-level support. The Philippines is in the process of signing key trade agreements. But to translate these into export growth, firms — especially small and mid-sized ones — need help connecting to regional and global value chains. Countries that benefited from increased outward orientations did not rely on trade agreements alone. Chile paired trade agreements with practical support. Its export promotion agency helped small firms identify viable markets, connect with buyers, and meet product standards. Slovakia’s integration into EU value chains was aided by programs to bring their firms up to the level required to supply larger and more sophisticated multinationals. The Republic of Korea’s export success rested on a comprehensive industrial and export strategy, that also included a capable cadre of trade attaches across the globe that helped their firms connect to opportunities abroad.
3. Stay the course on macroeconomic stability. A stable macroeconomic environment is essential for long-term investment in tradables. The Philippines has maintained investment grade status since 2013 — a reflection of sound fiscal management, anchored inflation expectations, and a market-based exchange rate regime. Preserving this hard-earned stability is critical. It reinforces investor confidence and lays the groundwork for the steady, forward-looking investments that tradable sectors require.
With the right reforms, the payoff is significant. As the Growth and Jobs Report notes, getting back to a 6.8% growth path would mean millions more jobs and higher household incomes. Tradables offer a path to not just faster, but better growth: more sustainable, more competitive, and more inclusive.
Now is the time to shift gears. The foundation has been laid — what’s needed next is focus, follow-through, and a bold push outward.
Gonzalo Varela is the lead economist and program leader for the World Bank’s Prosperity Unit covering the Philippines, Malaysia, and Brunei. He specializes in growth, trade, and open macro, with more than 15 years of experience in policy advisory, policymaking, operations, and research. Kevin Cruz is the country economist for the World Bank’s Macroeconomics, Trade, and Investment Global Practice. He currently leads the macroeconomic monitoring program of the World Bank Philippines and is working on fiscal policy issues for the Philippines.