Mapping feasible routes towards economic diversification and industrial upgrading in the Philippines

Abstract

Using time series data from 1961 to 2023, we estimate econometric models to answer the following questions: 1) What factors drive economic diversification in the Philippines? 2) What role does industrialization play in broader-based diversification? and 3) What are the benefits of economic diversification in the country? The empirical results suggest that re-industrializing the domestic production base can significantly enhance economic diversification. Strategies that accelerate the growth of local industries, especially to catch up with the dominant services sector, are vital. Effective policies should focus on developing physical and human capital, improving connectivity, and fostering domestic innovation. This push for greater diversification is justified by its potential benefits on output and growth stability, and diversification and growth of exports. The paper also explores various routes towards economic diversification and industrial upgrading in the Philippines using the product space approach. The first route is directed towards leapfrogging to a more sophisticated economic structure in the product space. The second route points at climbing the value ladder within global value chains. The third route leads to the strengthening of the local industrial base that is heavily populated by small and medium-sized establishments.

JEL classification: L16, O14, O25, O33