Foreign Investment, the Manufacturing Sector, and Poverty: The Philippine Case

Historically, economic transformation has been driven by the manufacturing sector. The latter has also been an important source of higher-paying jobs because of higher productivity. In the Philippines, the service sector employs more college graduates whereas the manufacturing sector employs more high school graduates. It can be argued that a more dynamic manufacturing sector would have provided more higher-paying jobs to the less-educated workforce, thereby making poverty reduction faster in the Philippines. A major reason why the manufacturing sector stagnated is the inability to participate more intensively in regional production networks. This can be traced to lower inflows of foreign direct investment into the Philippines. At this juncture, the key policy issue is whether policymakers should focus on attracting more FDI. Unfortunately, the Philippines does not compare favorably to its neighbors in terms of factors that attract FDI, particularly physical infrastructure. However, it would be important to address some of these factors, especially those described as "supply-side constraints" since they would also benefit other aspects of the economy including domestic investment.