Philippines' Economic Growth: Corruption or Industrial Policy Challenges?

Doha, Qatar Aug 27, 2026 ALN: Manila: For decades, the debate here has often treated corruption as the prime reason for the country's economic woes.

The standard explanation goes something like this: weak institutions and a culture of patronage create fertile ground for "rent-seeking" — public money gets siphoned into unproductive uses, businesses face political gatekeeping, and investment retreats in the face of uncertainty and favouritism.

The shakedown of private businesses by taxmen/regulators, and hardship (as opposed to ease) of doing business, are constants of life in these parts.

These are not unique to the Philippines. And it's not like only the government here is corrupt. It's deeply embedded in the what-are-we-in-power-for psyche.

Economic historian and University of California-Berkeley (UCB) professor Lisandro Elias "Leloy" Estrada Claudio challenges part of that conventional wisdom in his latest book, The Profligate Colonial: How the US Exported Austerity to the Philippines.

Dr. Claudio's key argument: it's not that corruption is an unimportant determinant of underdevelopment.

The 41-year-old Filipino academic and author is currently an assistant professor of Southeast Asian Studies at the UCB, and is known for his works on Philippine history, politics, and society.

A different question

Still, he asks a different question: What if there's a deeper reason?

What if the underlying thought process is that the Philippines had inherited an economic system that discouraged the state from actively promoting development?

That question has major implications for industrial policy — the government's ability to use public spending, monetary rules, exchange rates, infrastructure, tariffs, credit and other tools to build domestic industries.

What is industrial policy?

Industrial policy is essentially a government's strategy for deciding what kind of economy it wants to build.

Until now, Philippine industrial policy has arguably been skewed toward services — and toward producing a workforce that can compete for jobs abroad.

The underlying logic has been less about building factories and jobs at home than about building a talent pool capable of filling the global demand for Filipino workers.

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The Philippine Business Process Outsourcing (BPO) sector employs roughly 1.9 million Filipinos and generates over $40 billion in annual revenue. Despite rapid AI integration, continued revenue and headcount growth is projected, aiming for up to $42.3 billion by the end of 2026. The 2028 revenue and employment projections, however, have been adjusted downward — because AI automation is seen slowing down the creation of new entry-level roles even as total value rises. Source: IT and Business Process Association of the Philippines (IBPAP)

That mindset is reflected in the education system.

It's found in the emphasis on job-ready skills, and even in the creation of institutions such as the Department of Migrant Workers (DMW).

In effect, the Philippines has become exceptionally good at exporting labour, talent and services — but less successful at building the industries that can absorb that talent at home.

Industrial policy vs market forces

Instead of leaving industrial development entirely to market forces, governments can deliberately support sectors considered strategically important — such as manufacturing, semiconductors, electronics, shipbuilding, chemicals, pharmaceuticals, food processing, steel, renewable energy or electric vehicles.

The tools can include:

• tax incentives;

• infrastructure;

• research and development;

• government financing;

• tariffs and trade policy;

• export incentives;

• skills development;

• state-owned enterprises;

• preferential procurement;

• free-port | industrial zones; and

• exchange-rate and monetary policies that influence investment and competitiveness.

This is important for the Philippines: the Asian nation has long struggled to move sufficiently far up the value chain.

Case in point: government data shows the Philippines sends the bulk (up to 90% according to some reports) of its nickel and copper — both critical minerals — to China for further processing. They come back as EV batteries, stainless steel and copper wires, which are up to 20 times more valuable.

The Philippines exports electronics, minerals, agricultural products and other commodities, but much of its industrial base remains concentrated in relatively limited manufacturing activities and services.

The question, therefore, is not simply whether Filipinos are hardworking or whether government officials are corrupt.

It is also: What economic system makes it easier — or harder — for Filipino companies to become globally competitive manufacturers?

'Austerity' is a policy choice

One of Prof. Claudio's central arguments is that Filipinos came to regard fiscal and monetary restraint as almost self-evidently good.

Claudio says American policymakers helped create a system in which austerity became associated with virtue, reinforced by ideas about civilisation, currency strength and responsible economic management.

That matters because industrialisation often requires governments to spend — to capitalise — before the economic returns become visible.

Building ports, power systems, railways, industrial parks, research institutions and technical schools requires large amounts of capital.

So does helping an emerging industry — like electric vehicles, steel, processing of critical minerals — survive long enough to become internationally competitive.

A government that sees every deficit, subsidy or intervention primarily as a "threat" to fiscal discipline may be less willing to make those bets.

The peso becomes part of the industrial-policy debate

An interesting part of Claudio's argument: the exchange rate.

He cited businessman and politician Salvador Araneta, who argued in the 1950s that the Philippines should allow the peso to depreciate to create more "fiscal space".

At the time, the country had maintained a ₱2=$1 peso-dollar exchange arrangement under the Laurel-Langley framework.

Dr. Claudio argues that maintaining the strong peso after the restrictions ended reflected a colonial economic legacy, including American interests in selling goods to the Philippine market.

The industrial-policy implication is straightforward: A currency that is strong for consumers can be less helpful to manufacturers competing in international markets.

A weaker currency, on the other hand, can make exports more competitive and imported goods more expensive.

But there is an obvious trade-off: depreciation also raises the peso cost of imported fuel, machinery, food and raw materials and can increase inflation.

That is why exchange-rate policy cannot be reduced to simply “weak peso = good.” The larger question is what the government is trying to accomplish.

Why this matters