this is the philippines in the 1950s the economy of the philippines had the second highest gdp per capita in asia alongside the continent's most modern manufacturing sector after japan though in the following decades the philippines was surpassed by the likes of south korea singapore and taiwan which although they didn't notice at the time became the first asian tiger economies whilst the philippines well it kind of fell out of the asian economic tiger race now to be fair manila has been on a more stable path since its 1980s debt default between 2000 and 2009 growth averaged over four and a half percent a year accelerating to almost six and a half in the decade to 2019 but 2020 saw the nation register the worst performance of any major southeast asian economy with its history being crucial to understanding why so what went wrong for the philippines historically if we were going to simplify things we could point to two major causes firstly high levels of political instability the nation's past has been rocked by its fair share of crises including poorly executed reforms a presidential assassination and social unrest which historically wasn't very attractive to the vast sums of foreign direct investment pouring into and between the region secondly and most importantly the philippines has had a long history of protectionism having turned to import substitution at the exact time others were opening up begging the question why well this protectionism was a consequence of importing way more than it exported following world war ii which ultimately led to a crisis in its balance of payments something which came about partly due to a wind down in u.s post-war state aid depleted banking reserves as well as the collapse of the price of a key export coconuts you see in the late 1940s coconut products accounted for over two-thirds of the philippines export income as many of its other industries had been decimated by the war though before you guys flood the comment section let's be clear here export pricing was just one factor in the post-war years and of course coconuts are no longer a dominant export despite the nation being the world's second largest producer of coconuts after indonesia fun fact the real point here though is that these post-war years can be seen as the beginning of a long relationship with protectionism initially taking the form of full-scale import substitution which unsurprisingly led to some poor results leading the country to try to open up sectors of its economy in the 1960s and 70s but ironically this led to the worst of both worlds on the one hand opening up its export sectors hurt the industries which had flourished domestically due to import substitution whilst at the same time high tariffs remained on a range of capital goods it needed to develop new export orientated industries hindering their progress by the 1970s the nation had turned to increasing levels of borrowing to try to raise growth and by the early 80s investors had caught on to this leading to the capital flight of valuable foreign currencies which made paying its foreign currency-based debts an issue following a default on its debt the philippines managed to reverse course delivering a very manageable public debt to gdp ratio today but in the process it had missed out on becoming an early asian tiger economy with protectionist trade policies never really going away having a huge impact on how the economy looks today and something which leads us nicely onto the next section how the philippines took a unique development path your typical country development model sees a trend from agriculture to manufacturing and then as incomes and costs rise to services however in the philippines case this whole transition took place much more quickly before it had properly traversed the income curve resulting in the service sector becoming the largest sector of the economy by the 1980s why well a big factor has been the general inability of the industrial sector to provide enough jobs which is partly due to its history of protectionism though to be fair to the philippines industry does account for over a third of gdp today with the nation being one of the world's largest shipbuilders but industry never really provided enough jobs to cope with the mass rural to urban migration in the 70s and 80s so a lot of those migrants traded in poor productivity agriculture for low-skilled service sector jobs instead another core reason is its geography if you viewed the philippines from space you'd see that it's essentially a collection of over seven thousand islands and as we discussed in our video on indonesia this makes the efficient transportation of goods a nightmare alongside the provision of cheap utilities such as electricity which alongside domestic protectionism a point where discuss later helps to explain why the philippines has some of the highest energy prices in the region acting as a further deterrent for manufacturers operating on thin margins likewise as an archipelago with mountainous interior land for urban development is somewhat limited which goes a long way in explaining why manila is the densest city in the world if you exclude the wider metropolitan area according to the un and it's this urban density which facilitates high levels of population interaction and with it the provision of services albeit mainly low skilled ones but that doesn't fully explain the philippines high service provision just as important as its geography is the nation's history as a former unorganized u.s territory over 90 percent of the population speaks english with a strong cultural association with the us which can still be seen all over the philippines just take a look at the nation's obsession with basketball and this cultural link is huge especially when it comes to the delivery of services as a key export as we're about to find out what sectors have helped drive the economy if you had much interaction with call centers whether that be forgetting your password at work or sorting out an online bill chances are at some point you've spoken to someone in the philippines and this is something you may not even realize as many outsourcing companies choose the nation's hard-working population for their international professionalism and that cultural assimilation with western nations that we mentioned earlier in fact the philippines has been one of the biggest global winners when it comes to outsourcing particularly business process outsourcing a sector worth over 25 billion dollars a year and employing over a million people yet this industry is newer than you may think in 2003 there were less than 10 call centers staging incredible growth rates per year to become the world's largest by the early 2010s however outsourcing goes far beyond just call centers all types of back office jobs have found their way to manila as the financials of doing so just makes sense for example if you're a company why pay someone 30 an hour on a full-time contract to do accounting or it support when the internet allows you to outsource this same job for a fraction of the price and that makes perfect economic sense and is quite frankly good business to give you an indication of just how important the sector is to the economy outsourcing companies were given the same level of priority as pharmacies and grocery stores in being one of the only businesses allowed to remain open during the great lockdown but at the same time it's only fair to say that artificial intelligence is a huge threat to large parts of the outsourcing sector such as those very call center jobs with companies across the world increasingly trending towards adopting chatbots or amazon alexa star cybertrons threatening to replace vast segments of this workforce now just as outsourcing serves businesses overseas another key source of income occurs from activity which doesn't even happen in the country remittances a staggering 1 in 10 of the population work abroad accounting for nine percent of the economy making the philippines the fourth largest remittancy market in the world after china india and mexico as sectors so important that each december is celebrated as the national month for overseas workers but why do so many of the nation's population work abroad an immediate answer to this would be higher wages but that's true of many countries a fundamental reason is because of the country's education system institutions and vocational schools act as a funnel for overseas work giving their students the likely skills to get jobs abroad whether that be nursing schools merchant marine academies or hospitality centers now focusing more domestically one of the philippines greatest resources is its miles of sandy beaches crystal blue waters and just generally beautiful scenic views with tourism accounting for about 12 percent of gdp but many economists see tourism as a future key growth area for the country take this chart for instance which shows how the nation compares against the other big regional economies lagging way behind and remember this is a country which is ideally located to take advantage of asia's huge middle class whether that be japan korea or china a fundamental reason for this underwhelming tourist performance is the nation's poor transport infrastructure an underdeveloped sector which is at the core of the country's economic challenges what are the philippines key economic challenges a good place to start would be to look at how easy it is to do business in the country especially given the negative impact this has had on the nation's economic history as well as the transformative role foreign direct investment has played time and time again across the region and on this metric the nation doesn't do too well ranking 95th in the world for the ease of doing business according to the world bank's annual index bureaucracy and regulation is still a huge problem though to be fair to the philippines it has jumped up the rankings 29 places because of government reforms but for context this graph shows how it compares against other southeast asian economies crucially a fundamental reason why the philippines scores so poorly is to do with its constitution under the constitution of the philippines foreign investors are banned from operating or managing sectors like utilities whilst the government publishes a negative list of sectors foreign investors are outright banned or heavily restricted in not to mention that the philippines corporate tax rate at 30 percent is the highest in southeast asia now critics have stated that the protectionist measures work to the benefit of wealthy families who own controlling stakes in a lot of domestic industries and this is part of a wider challenge as the country grapples with one of the highest levels of income inequality in the region based on the genie coefficient scoring nearly 43 according to the world bank slightly down on its previous score yet family wealth isn't the only cause of this inequality one of the main drivers is the wide disparity between the philippines rural and urban populations the non-urban population is significant standing at over half of all people in the country declining rapidly until 1990 and then actually rose after that as shown the point being that this inequality between rural and urban areas and to be honest even within urban areas does still matter at the macro level but to be fair huge progress has been made in lifting people out of extreme poverty if not relative poverty though putting these factors aside for one moment perhaps the philippines greatest challenge lies in the here and now the nation suffered the largest estimated fall in economic activity of any major southeast asian economy in 2020 and the world's greatest loss in long-term growth potential according to the imf something which is unsurprising once you consider its services-based economy and that it experienced one of the world's longest lockdowns after argentina and make no mistake about it lockdown imposed isolation was a real problem for a country which relies on face-to-face human business interaction at least in the domestic economy for example just half of one percent of retail transactions occur online highlighting the nation's weak consumer infrastructure with 7 out of 10 filipinos still receiving their wages in cash and the majority lacking a bank account making the impact of government intervention just that little bit harder to reach those who may require it most so overall we've seen that the philippines has been on quite the economic journey as globalization started to take off the nation was poised to take full advantage of the asian tigers sweeping the region but a host of factors held it back including protectionist trade policies and instability since reopening its economy over the last few decades it has fared much better being on the cusp of becoming an upper-middle-income country but the philippines has taken an unconventional approach compared to its neighbors focusing more on services particularly outsourcing as a core economic driver in the immediate term the country is set to suffer the world's worst loss in economic growth potential but with a young outlooking population perhaps the nation can prove the forecasts wrong either way the philippines economy will definitely be one to keep a close eye on over the next few years and now it's over to you do you think the philippines is an asian tiger economy or does it still have some way to go will it be able to become one of the leading economies again in asia or does its future lie elsewhere honestly there was so much to write we simply couldn't include at all like the nation's really strong demographics which we've covered in so many other videos so we didn't want to sound like a broken record but let us know what your thoughts are in the comments below if you've enjoyed this video please consider 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