Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

The Philippine economic take-off: A

myth, an elusive reality or an
anachronistic perspective?
Tereso S. Tullao, Jr.
Angelo King Institite, De La Salle University
Manila, Philippines
[email protected]

Christopher James R. Cabuay

Angelo King Institite, De La Salle University
Manila, Philippines
[email protected]

ABSTRACT

The economic takeoff was first introduced by Walter Rostow in  the  1960’s  as  
part of the five stages of growth that an economy has to pass towards full
development. These stages present an alternative perspective in analyzing the
economic performance of a country in contrast from the Marxian view. The
stages consist of the traditional society, pre-conditions for takeoff, takeoff,
drive to maturity, and age of mass consumption. In addition, they are
accompanied by distinct changes in politics, technology, society and the
economy. Economic transformations are shown by rapid capital accumulation,
development of one or more industries particularly in manufacturing, and the
emergence of political, social and institutional structures that bring about
changes towards the expansion of the modern sector, the use of capital in
business and mobilization of resources. In the light of these conditions, has the
economy of the Philippines taken-off towards sustained growth? If it has not,
what are the reasons preventing it in attaining these requirements for takeoff?
If, however, these conditions have been fulfilled why is the Philippine economy
still not considered a developed economy? Is economic takeoff an elusive goal
or a myth? Or is it an anachronistic view of economic development?

JEL Classification: O41, O47

Keywords: development, economic takeoff, Philippines,

INTRODUCTION

Modernization is a process of transforming a traditional society into a

complex socio-cultural as well as a political-technological organization that
characterizes many Western countries today. Distinction is made between

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Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

backward or traditional countries and advanced or modern capitalist

countries. The goal of modernization is to show how countries make the
transition from a simple economy into a multifaceted industrial country. The
transition to modernization is marked by sustained and higher rates of growth
caused by rising levels/rates of savings/investment.
From this arose several growth theories explaining the process of
economic transformation. The classical theory of Ricardo emphasized the role
of capital accumulation in the generation of employment. The economy
requires the necessary capital to absorb additional laborers in the production
process. However, the process of capital accumulation is done through the
generation of surplus from production. Given the diminishing marginal returns
to labor, the ability of the production process to generate savings may come
to a halt as you increase employment.
This dismal prediction of the simple Ricardian model gave rise to a
number of Keynesian models including the Harrod-Domar model which
emphasizes the role played by capital accumulation and productivity in
economic growth. However, because of the assumption of fixed coefficient
production function, the model is not realistic in maintaining economic
stability. This gave rise to a neo-classical view developed by Robert Solow. The
steady growth rate of an economy is described by the equality of the growth
in capital and growth in labor used in the production process. Assuming
perfect factor substitution between labor and capital, if labor force is growing
faster than capital accumulation, the capital-labor ratio will go down. This will
lead to an increase in the returns to capital encouraging more capital
accumulation. With an increase in capital, the growth rates of the factors
inputs will equilibrate.
Because of the irrelevance of these models to the phenomenon of
surplus labor in developing countries, the Lewis-Fei-Ranis growth model was
developed. The model stresses the need to develop employment
opportunities in the modern sector by accumulating capital and through
improvement in the productivity of the traditional sector. Other approaches
to the modernization process include the Big Push by Rosenstein, the
Strategic Push by Hirshman, and the Stages of Growth by Walt Whitman
Rostow. This paper focuses on the work of Rostow as he posits that a country
starts  from  a  traditional  society,  and  after  meeting  certain  conditions,  “takes  
off”  into  what  is  described  in  modernization  as  sustained  and  higher   rates of
growth with rising levels of savings and investment.

ROSTOW’S  STAGES  OF  GROWTH

W.W. Rostow, an American economic historian, developed a model that

gauges the economic status and dimension of a society, and then classifies
them within one of the five stages: the traditional society, the preconditions
for take-off, the take-off, the drive to maturity and the age of high mass-
consumption. The Rostowian perspective argues that economies progresses
by undergoing each stage until the last stage is reached.

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

Traditional society
When a society has an economy which is subsistent in nature it is
referred to as a traditional society. This implies that the economy is faced with
limited production functions that are heavily based on pre-Newtonian science,
technology and behavior. Since the economy is characterized by activities for
subsistence, trade in the output of production is insignificant or almost
inexistent. The production process uses traditional technology and resource
allocation is governed by non-market mechanisms. As a consequence, the
economy is predominantly agriculture using labor intensive techniques due to
low-level of capital.
Once technological and technical innovations are introduced,
productivity level can significantly rise causing the economy to undergo series
of expansions. However, there are constraints in realizing this potential
growth mainly due to the disregard for the value of modern science and the
unavailability of modern technology.

Pre-conditions for take-off

The pre-conditions for take-off is the second stage of economic growth
which is referred to as the transitional stage towards economic take-off. This
is the period when a traditional society transits to a society that is now
capable of exploiting the practical use of modern science and relies on market
mechanisms in resource allocation.
Generally the preconditions for take-off include, but not limited to,
favorable geography, natural resources, trading opportunities, and changes in
the socio-political structure. However, certain exogenous factor rather than
endogenous ones stimulate the transition stage for take-off. This exogenous
factor comes in a form of an external intrusion by more advanced societies.
This produces a stimulus for the traditional society to improve. This
transitional stage implies that new production techniques in agriculture and
industry are emerging while accompanied by expansion in global trade.
During the transitional stage, the economy diversifies beyond
agriculture and focuses on other sectors including industry, communications,
trade and services. Because of these changes within the economy, the
education system adapts to suit the needs of evolving and expanding
economic activities. As a consequence, there is an increase in specialization in
production which in turn generates surpluses for trading.
Moreover, the emergence of institutions such as the banks and
financial institutions play vital roles in unlocking the preconditions for take-off
by mobilizing capital. Hence, there are significant increases in the number of
investments specifically for transportation, communication and production of
raw materials. Subsequently, the improvement in transport infrastructure
provides more support for trade.
As incomes, savings, investments and commerce expand during the
transitional stage, more domestic as well as international entrepreneurs take

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active part in economic activities. This leads to the emergence of

manufacturing enterprises and the strengthening of external linkages.
Given the backdrop the rate of investment together with the per capita
capital stock should substantially increase during this period. However, it is
necessary for the economy to have its investment rate rise up to the point
where the growth of output exceeds the growth of population. This can be
attained once modern technologies and innovations are incorporated in the
operations and productions leading to higher productivity and efficiency.
Aside from these economic factors, changes in the social structure and
political system play significant role in bringing the economy towards take-off.

Take-off
Once a society fully surmounts the constraints brought about by
traditional views, structures and processes, it undergoes a series of steady
growth known as the take-off. Normally, this occurs when there is a particular
sharp stimulus. The most common form of stimulus for take-off is
technological growth and advancement. For some countries, the stimulus
came in a form of political revolution. However, Rostow suggested that the
form is not the vital key for take-off. Quoting Rostow:

“What  is  essential  is the fact that the prior development of the
society and its economy result in a positive, sustained and self-
reinforcing response to it: the result is not a once-over change
in production functions or in the volume of investment, but a
higher proportion of potential innovations accepted in a more
or  less  regular  flow,  and  a  higher  rate  of  investment”

Take-off is generally described as a stage where growth becomes the

normal condition of an economy (i.e. sustained and steady growth rate).
Specifically, take-off is achieved when three conditions are primarily met.
First, when the rate of productive investment rises to about 10% of the
economy’s   national   income.   This   implies   that   the   economy   must   be   highly  
suitable for investments (e.g. political stability, low-risk etc.) thus attracting
numerous investors. Second, presence of one or more highly productive
manufacturing sectors that exhibit sustainably high level of growth. Third, the
existence, if not quick emergence, of political, social and institutional
structures that would enable the economy to continuously exhaust possible
means of expansion. This condition also involves the presence of a political
leader or group that is highly prepared to regard the modernization of the
economy  as  a  serious  “high-order  political  business”.    
It is during take-off phase that an influx and rapid expansion of
industries occur that brings about higher profits which are eventually
reinvested in new plants. This becomes a beneficial cycle that generates
employment and higher output. Also, this series of expansion translates to an
increase of income among some individuals who save and place their savings
in productive investments. This provides an incentive for the expansion of a

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

new class of entrepreneurs resulting in substantial increase in the flows of

investment in the private sector.
Normally, the economy concentrates its efforts on the manufacturing
sector. Although this may be the case, new techniques also introduced in
agriculture as well as in other industries in industrial sector. As a
consequence, the agriculture sector becomes more commercialized as
farmers are keen in accepting new methods and innovations that significantly
improves productivity. These radical changes in the agricultural sector are
deemed as essentials for enabling a successful take-off.
In viewing economic take-off, it is also necessary to analyze the inner
structure  of  the  economy.  Rostow  stated  “We  must  also  consider  how  rapidly  
growing manufacturing sectors emerged and imparted their primary and
secondary  growth  impulses  to  the  economy”.  The  inner  structure  of  take-off
may be observed by observing and analyzing the (1) supply of loanable funds;
(2) source of entrepreneurship; and (3) leading sectors.
Supply of loanable funds is clearly the monetary and primary source to
finance investments as well as for the take-off to proceed. Loanable funds are
sourced from income shifts (from those individuals who spend unproductively
to those who spend productively) that finance economic development. Hence,
when citizens of a country do not spend productively relative to the state
itself, taxation measures are highly suggested to induce development and
eventual take-off.  However,  Rostow  suggested,  “It  is  the  demand  side  of  the  
investment process rather than the supply of loanable funds, may be the
decisive element in the take-off”.   This   implies   that   to   induce take-off there
must  be  one  or  more  rapidly  growing  sectors  whose  entrepreneurs  “ploughed  
back   into   new   capacity   a   very   high   proportion   of   profits”.   Whereas,  
improvements in the supply side (e.g. capital supply) often fall in the
preconditions of take-off.
One very significant element in the supply of loanable funds is capital
imports. Historically, foreign direct investments and capital have led to the
take-off stage of various countries. This is because foreign capital can finance
investments for industrial purposes, and most especially investments in
utilities, transport and housing of enlarged urban populations. Most of these
investments required huge capital and cannot be financed domestically.
Aside from the supply of loanable funds, sources of entrepreneurship
have also been observed to contribute in the take-off. Certain group/s in the
society must emerge and engage in successful activities to stimulate
advancement and development in the economy. These groups must aspire
not only for growth but for a balanced and sustainable growth. However,
Rostow suggested that take-offs are usually stimulated when a class of
farmers become highly responsive to the opportunities created by the
modernization of technologies and innovations.
Based from the analysis of previous cases of take-offs, it has been
observed that there would be a sector that would lead the growth of the
economy.  According  to  Rostow,  the  leading  sector  plays  a  role  in  “accelerating  
the development of domestic manufacture of consumption goods over a wide

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range  in  substitution  for  imports”.  In  order  to  determine  the  leading  sector  of  
the economy, Rostow presented four criteria: (1) the product/s the sector
produces must accumulate significantly high effective demand resulting to an
increasing rate of growth in output overtime; (2) there must be an integration
of new yet effective production functions in the sector leading to an
expansion of capacity; (3) a high rate of plough-back by the entrepreneurs
handling the business/sector is necessary to stimulate further expansion; and
(4) the leading sector should be able to encourage series of expansion in
capacity and potentiality for new production functions in other sectors that
would benefit the economy as a whole.

Drive to maturity
The drive to maturity is defined as the stage when the systematic and
practical applications of modern technology and innovations have been
effectively applied to different dimensions of society including the economy in
its entirety. However, this is also the time when the pace of expansion may
slow down as the economy possibly experience diminishing returns.
The economy in this stage undergoes an interval of sustained (if not
fluctuating) progress due to the extensive application of modern technology
to a large portion of its economic activities. Investment at this stage levels at
10 to 20% of the GNP, and thus growth of investment will most of the time
outweigh population growth.
The occurring changes in the economy entails a rise of new industries
and the decline of older industries. Also, as the economy diversifies into new
areas and production significantly improves; products that were normally
imported are now being domestically produced. This is because technological
innovations are providing a wider range of investment opportunities which
translates to production of a wide range of goods and services; hence, this
ultimately lessens the reliance on imports.
Rostow, however, assumed three things happen during maturity. First,
alterations in the labor force occur. When take-off  hasn’t  taken  off,  the  work  
force is heavily focused on agriculture, consisting of an estimate of 75%.
However, during the maturity stage, the percentage decreases to only 20% as
workers becomes more professional and skilled they seek employment in the
industrial and services sector. Second, leadership considerably improves as
managers adapt to the improving operations and work environment. Third,
“the   society   as   a   whole   becomes   a   little   bored   with   the   miracle   of  
industrialization”.  
In view of all these, the fourth stage of growth occurs when an
economy moves beyond the original industries that powered its take-off and
push the complex modernization in technology to its limit by efficiently
applying this to its widening range of resources. This is also the time when
social improvements occur such as improvements in leadership, ideologies,
behaviour and others.

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Age of high mass-consumption

The age of high mass-consumption is a stage where the attention of
the society shifts from production problems to consumption dilemma. Due to
this immense change, society ceases to accept the further expansion and the
application of modern technology as an “overriding   objective”.   Hence,   this  
leads to the gradual phasing out of outdated machines and devices.
Furthermore, along with the shift in attention is the shift towards durable
consumers’   goods   and   services.   The   economy   adjusts   its   focus   on   the  
production  of  consumers’  durables  and  to  the  diffusion  of  services  on  a  mass  
basis. Another shift that occurs is allocation shift where society values more
the resources for social welfare and security.
As the society enters the post-maturity stage it sets three new
objectives: (1) it pursues for external power and influence, and as a result, it
increases its allocation to military and foreign policy; (2) it envisions for a
substantial improvement in the social welfare which can be achieved by
redistribute income through progressive taxation; (3) it strives for
achievement of maturity by expansion of consumption levels beyond basic
food, shelter, and clothing (e.g. into the vast range of mass consumption of
durable  consumers’  goods  and  services).
It is within the last stage of growth that the economy is geared towards
mass consumption, and the consumer durable industries start to boom. Also,
the service sector becomes increasingly dominant. Hence, this is the stage
when living conditions are exceptionally good and the economy is based on
the society and its welfare.

THE PHILIPPINE ECONOMIC TAKE-OFF

Views of the Philippine take-off

There is very little literature on the take-off for the Philippine setting.
Most scholars conclude that the Philippines is stuck in the pre-condition for
take-off period and that the Philippines is poised for take-off however there
are many detriments in terms of its development that does not allow it to
take-off.
Higgins (1957) compared the situation of the Philippines at the time
with Indonesia and found many similarities. He argued that the Philippines
was ready for a take-off but it has not done so due to many developmental
problems it faced. He identifies four major problems. First is that the country
was having trouble maintaining past rates of growth and this difficulty may
worsen over time. Second, the rise in national income that has not been able
to alleviate the rampant poverty in the country and a larger share of
investment must be directed towards the provision of the needs of lower
income groups. Third, the import-substitution strategy has led to balance of
payments disequilibrium. And fourth, unemployment remains high and
growing despite the rise in national income and the domestic employment
and absorptive capacity created by the  nation’s  firms.  

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Brillantes (1993) studied the state of Philippines in 1992 as it was

expected that the newly elected President Fidel V. Ramos would usher in the
take-off for economy. However, he described the Philippines to be in a
“comatose”   state   with GNP growth rate of 1.2 percent. This lethargic state
was accompanied by debilitating power failures and numerous kidnap-for-
ransom incidents as well as increasing criminality and rebellions adding a
degree of turmoil and unrest to the country. In addition, the Philippines had
just been struck by a volcanic eruption and the economy was still recovering
from the havoc. The performance of the previous Aquino administration was
not also encouraging since it has been judged negatively due to President
Aquino’s  lack  of  administrative  and  political  skills.  However,  credit  is  due  her  
as she served a rallying point to overthrow the incredibly corrupt Marcos
dictatorship, and restored the structures and processes of democracy.
(Brillantes, 1993). He concludes that NGOs, cooperatives and other extra-
governmental  structures  will  play  a  key  role  in  the  country’s  efforts  to  finally  
take-off.
Hossain (1996) lauded the Ramos administration as he believed that
significant improvements were made as he was able to consolidate political
power and strengthen democratic institutions that had become the base of
recovery for the Philippines. Inflation rates had started decreasing, exports
increased greatly and import increased a little less in proportion. He identified
several areas for improvement. First, the need for improvement for the
government’s  infrastructure  development  plan.  Second,  the  need  to  shore  up  
the  country’s  low   savings  rate  in  order  to  address  the  continued  reliance  on  
foreign investment to finance trade and current account deficits. Third, the
need to strengthen sound macroeconomic policies as well as strengthen
democratic institutions, reducing dependence of politics on vested interest
groups, improving legal and regulatory systems so as to be able to design and
enforce non-arbitrary sets of rules to guide economic activity, and improving
law and order situations through reducing political conflicts.

Lessons from other countries

Sweden. Primarily, the take-off stage for Sweden took place in the
1870’s  and  was based on the modernization of the timber export industry as
well as the railway construction (Rostow, 1960). The turning point for
maturity  came  in  the  1890’  through  the  depression  marked  by  the  sagging  of  
Sweden’s  export  markets  (which  the  take-off was strongly anchored on). The
take-off is structurally a surge in output in one or a few sectors, and after this
it is necessary to reallocate the resources for the growth of the new leading
sectors. In general, there had been shifting from traditional sectors like pig-
iron, timber, grain in agriculture industries to highly refined steel, hydro-
electric power sources, and more highly productive animal and dairy farming.
By   the   1890’s,   Sweden’s   entrepreneurs   have   expanded   and   were   able   to  
facilitate the big push generated by the take-off.
Japan. Japan’s   story   is   similar   to   that   of   Sweden’s   experience   since  
there was one major industry that was instrumental in its take-off.   Japan’s  

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take-off was made possible by a series of prior and concurrent developments

in agriculture (Rostow, 1960). Agriculture provided increased food and fibres,
accelerated urbanization and accumulation of foreign exchange earnings.
Furthermore, there was a rise of productivity in the rural areas of Japan,
providing enlarged markets and encouragement for domestic industry. The
commutation of the feudal rents and the diversion of this income stream to
the government gave the Japanese modern sector an essential initial infusion
of capital. These were all made possible despite a disadvantageous
population-resource balance relative to Sweden. But these alone were not
able to lift Japan into take-off.  In  the  1890’s,  new  industries  were  established  
by government initiative and immediately converted into private enterprise.
The take-off occurred in the 1890’s  to  the  1900’s  (a  decade  after  Sweden)  by  
the building of railways, ships, cotton manufacture, silk cultivation and then
the surge of military outlays which helped build up the engineering industries.
Modern chemical industry also played its part in the take-off as the Japanese
industrial sector began to fan out chemical fertilizers, steel and electrical
equipment.

Assessment of the Philippines according to the features of a take-off

Rostow’s  (1960)  stages  of  growth  state  that  the  take-off is signified by
a sharp stimulus which is usually a significant event in the course of the
country’s   history.   The   stimulus   may   be   a   political   revolution   which   directly  
affects the balance of social power and values, as well that in social
institutions, income distribution, investment patterns and the degree of
innovations in the country. Such examples are the German revolution in 1848,
the Meiji restoration in Japan of 1868, and the Communist victory in China in
1949 (Rostow, 1960). The take-off is then noted by a consistent increase in
growth and output. Furthermore, the take-off is characterized by (1) the rise
in investments of more than 5-10 percent share of GDP along with the
development   of   a   country’s   resources   through   the   supply   of   loanable   funds,  
(2) the shift of production intensity from agriculture to manufacturing, the
development of a particular substantial industry, and (3) the emergence of
political, social and institutional framework thus exploiting impulses to
expansion in the modern sector and utilizing capital from domestic sources
like entrepreneurship and savings. Using 1960-2009 data from the World Bank
and the Bangko Sentral ng Pilipinas, this study analyzes the position of the
Philippines in terms of the criteria suggested by Rostow.
Sharp stimulus. As it is known amongst all Filipinos, the Philippines has
a rich tapestry of significant events in its history particularly involved with the
wave  colonization  brought  by  the  Spaniards  in  the  1500’s.  This  was  followed  
by the American colonization at the advent of the 20th century and the
Japanese  occupation  in  the  1940’s.  During  these  periods  of  colonization  many  
other significant events had occurred: the founding of the first Philippine
government under Emilio Aguinaldo, the writing of the first Philippine
Constitution, many uprising and rebellions against the colonists, as well as the
tumultuous Pacific war. After this, the Philippines encountered a short period

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of peace and stability until Martial Law was declared during the Marcos
administration that sparked the well-known People Power Revolution in 1986
followed by a more recent People Power II during the Estrada administration.
From that time on, the Philippines had presidential regimes filled with either
progress or controversies, or both up. With these numerous disruptive events
one may not wonder whether any of these events may have triggered the
take-off. The end of Spanish colonization may be out of the question since
historical records show that the Philippines had just been experiencing the
initial touch of modernization during that time (railways, cross-country sea
transportation). Unfortunately, up to date, there are no leads as to whether
or not these events ignited a take-off for the economy. Scholars believe that
the Philippines is stuck in the pre-conditions for take-off just as much as it is
still stuck in the first phase of the demographic dividend, and is lacking a lot of
prerequisites as to experience the take-off itself. Hence, there is a need to
take a look at the economic figures of the country.
Achievement of regular growth. As indicated by Table 1, real per
capita GDP has slowly increased through the decades and has nearly doubled
in a span of almost 50 years. Although not shown in the table but the data for
the   decade   of   the   80’s   shows a large decrease in GDP mainly traced to the
lethargic last few years of the Marcos administration and the People Power
Revolution in 1986. Figure 1 shows the trend in GDP per capita as well as the
fluctuation of growth through time. Output is generally in an increasing trend
but apparently, growth has fluctuated over the years and does not revolve
around a stationary mean.

Table 1. Development  of  Growth  and  Output  per  Capita  From  the  1960’s  to  2009  (in  
constant 2000 US $)
Year Real GDP Per Capita Growth Rate
1961 626.5768377 2.392875471
1971 750.3099187 2.474636573
1981 995.3716521 0.659369009
1991 874.5184942 -2.909267283
2000 977.1290384 3.852549111
2001 974.8380573 -0.234460447
2002 998.6795875 2.445691372
2003 1028.122596 2.948193636
2004 1073.281948 4.392409253
2005 1105.552478 3.006715066
2006 1143.16396 3.402053106
2007 1201.385659 5.093031384
2008 1223.755051 1.861965923
2009 1214.754378 -0.735496253
Source: World Bank.

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

1300

1200

1100
GDP_Per_Capita

1000

900

800

700

600
1960 1970 1980 1990 2000 2010

0
GDP_PC_gr

-2

-4

-6

-8

-10
1960 1970 1980 1990 2000 2010

Figure 1. GDP per Capita and the Growth of GDP per Capita.

Output faces a generally increasing trend despite the sudden drop in

the   1980’s   (left)   however   output   growth   has   fluctuated   over   the   years   with  
the occasional negative growth (right).
Rise in investment rates (Gross Domestic Capital Formation). In 1952,
the Philippines was already considered by Rostow (1960) as an economy
ready for a take-off, where apparent savings and investment rates, including
limited net capital imports have risen over 5 percent of net national product.
The US Department of State then estimated that the Philippines had about 8%
net capital formation and was considered attempting to take-off or perhaps
passed into a stage of regular growth. As seen in Table 2 and confirming the
trend in Figure 2, domestic capital formation has  increased  from  the  1960’s  to  
the  late  70’s,  but  began  to  decrease  wildly  in  the  80’s  (this  may  be  attributed  
to the events in the Marcos regime as well), and has increased again in the
90’s  but  has  slowly  decreased  again  from  2000  up  to  2009.  It  has  succeeded in
passing the 10% of national income mark, however, the Philippines fails to
maintain a consistent growth in gross domestic capital formation.

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Table 2. Data on Gross Domestic Capital Formation (in constant 2000 US$)
Gross Domestic Capital Gross Domestic Capital
Year
Formation Percent GDP Formation
1961 20.3354702 2938810624
1971 21.01872062 4779089141
1981 27.46274805 11132948042
1991 20.21833141 9614840150
2000 21.1663423 16067907730
2001 18.97433384 14896156430
2002 17.66500028 14254929595
2003 16.83371548 14680464929
2004 16.74991184 15732574326
2005 14.58456663 14348253037
2006 14.51379385 15075467020
2007 15.38219328 16938056520
2008 15.33379861 17325633198
2009 14.64586857 16336615030
Source: World Bank

34

32

30

28
GDCF_percentGDP

26

24

22

20

18

16

14
1960 1970 1980 1990 2000 2010

Note: Relative to GDP, Gross Domestic Capital Formation has fluctuated over
the years, and although it has exceeded the 10% mark, it does not maintain a
steady average over time.
Figure 2. Philippine Gross Domestic Capital Formation as percentage of GDP
over time.

Supply of foreign capital. The inner structure of the increase in

investment rates entails an increase in the supply of loanable funds and thus
the redistribution of the flow of income into more productive activities. It also
entails the expansion of banking institutions which can increase the supply of
working capital. Another possible mechanism for inducing a high rate of

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

return on productive investment is the rapid expansion of demand for

domestically manufactured goods which give entrepreneurs an increasing
proportion   of   households’   income   flows   that   allow   them   to   expand   further.  
Another important element in the supply of loanable funds is the amount of
capital import. Table 3 shows a BOP perspective of the FDI flows in the
Philippines. The figures follow no specific pattern and tend to fluctuate
randomly. This is shown by Figure 3 and in spite of the fluctuations there does
not seem to be any trend in the data.

Table 3. Net Foreign Direct Investments (in BOP terms, current US$)
Year Foreign Direct Investment
1980 -106000000
1990 530000000
2000 2115000000
2001 335000000
2002 1477000000
2003 188000000
2004 109000000
2005 1665000000
2006 2818000000
2007 -620000000
2008 1285000000
2009 1589000000
Source: World Bank

3e+009

2.5e+009

2e+009
Foreign_direct

1.5e+009

1e+009

5e+008

-5e+008

-1e+009
1980 1985 1990 1995 2000 2005

Figure 3. FDI flows in the Philippines

Development of a leading sector (Shift from agriculture to

manufacturing). The next qualification for the take-off is the development of
a leading sector in the economy. But implicitly, as characterized by the first
stage of growth, the traditional   society   entails   heavy   intensity   in   a   country’s  
agricultural sector, and the pre-conditions dictate that there is a shift from
agriculture to a more advanced sector such as the manufacturing sector. Table
4 shows the activities in the various sectors of the Philippine economy by

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Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

decade since 1961. It shows that agriculture has been steadily decreasing over
the years and in recent decades it has registered the lowest valued added
relative to all other major economic sectors. The same trend can actually be
said for the manufacturing sector. It follows decreasing values added over the
years but the decreases in the activities are less pronounced than in
agriculture. Turning to Figure 4, it can be seen that despite the decreases in
the value added for both agricultural and manufacturing sector, but because
of the drastic decrease in agriculture in the 1980s, manufacturing has
overtaken agriculture. This can be considered as a shift from agriculture to
manufacturing but in reality the shift is towards the services sector.

Table 4. Value Added of Philippine Sectors as % of GDP (in constant 2000 US$)
Year Agriculture Industry Services Manufacturing
1961 26.77652168 31.64851189 41.63222122 24.84936333
1971 30.30767293 32.36022498 37.33210208 25.86047683
1981 24.89097857 39.17278655 35.93623489 25.50781971
1991 20.98282788 34.01444378 45.00272834 25.31532174
2000 15.76485955 32.26584458 51.96929586 22.23301628
2001 15.12093987 31.64334923 53.2357109 22.89968206
2002 15.10767754 31.82834864 53.06397381 23.08815724
2003 14.64112596 31.94488559 53.41398845 23.26020068
2004 15.07057091 31.7014037 53.22802539 23.04970857
2005 14.29765195 31.87244759 53.82990046 23.23000732
2006 14.15511373 31.65946031 54.18542596 22.84057481
2007 14.19606708 31.5662494 54.23768352 21.94628877
2008 14.87933611 31.68694242 53.43372147 22.33109892
2009 14.82414461 30.19803111 54.97782427 20.40311428
Source: World Bank

Growth in a leading sector. Turning once more to Figure 4, it is

apparent that a leading sector has arisen over the years. This may be what
Rostow considers being a primary growth sector where possibilities for
innovations or for the exploitation of more efficient, unexplored resources
and processes yield a high growth rate and sends expansionary movements
across the economy. Above all sectors, the services sector appears to be the
primary   driver   of   growth   in   the   Philippines   all   these   years.   Since   the   1960’s,  
the services sector has already contributed greatly to output, and despite
decreases  in  the  1970’s,  it  began  increasing  from  the  1980’s  up  to  the  present  
quite steadily and rapidly. This is attributed greatly to the increased trade in
services across borders.

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

55
Agri_percent
Ind_percent
Serv_percent
50 Mftg_percent

45

40

35

30

25

20

15

10
1960 1970 1980 1990 2000 2010

Note: As required by the take-off, there is a shifting from the agricultural

sector to the manufacturing sector; although the sector that leads growth the
most is the services sector.
Figure 4. Development of Philippine Industries over time

Emergence of frameworks and institutions (Establishment of a

Central Bank). In the history of the Philippines, the most notable institution
that was established was the Central Bank, or the Bangko Sentral ng Pilipinas
(BSP). The first draft of the Philippine Central Bank was submitted to the
Congress on February 1948. This charter became known as the Republic Act
265, or the Central Bank Act of 1948 that was signed by President Manuel
Roxas. The Republic Act was able to list the objectives of the Central Bank as:
a) to maintain stability in the Philippines; b) to preserve the international
value of the peso and the convertibility of the peso into the freely convertible
currencies; c) to promote a rising level of production, employment and real
income in the Philippines. The emergence of this institution and with this its
independence has allowed price stability that is intertwined with economic
growth.
Increase in the number of financial institutions. Aside from the
establishment of the BSP, the take-off requires an increase in the number of
entrepreneurs that are able to capitalize on the redistribution of income. This
entails the financial institutions that are able to manipulate the supply of
loanable funds to create employment and facilitate growth. Table 5 shows the
number of financial institutions in the Philippines which includes banks and
even brokerage firms, investment firms and portfolio managing institutions.
Clearly, the number of financial institutions has increased steadily across the
years ensuring that the savings of consumers are being circulated in the
economy to spur growth.

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Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

Table 5. Number of Financial Institutions in the Philippines (including both bank and
non-bank institutions)
Year Number of Financial Institutions
2004 19,337
2005 20,108
2006 20,954
2007 21,537
2008 23,214
2009 23,821

The Supply in loanable funds and an increase in the resources of the

financial system. The supply of loanable funds itself should increase genuinely
with the increase in investment and the expansion of institutions and firms.
Table 6 shows that the resources of the Philippine Financial system have
increased over the years signifying that the supply of funds available to the
financial system are growing, implying that money is circulating in the
economy and that funds are being capitalized upon to ensure growth and
stability in the country.

Table 6. Resources of the Financial System (in billion pesos)

Year Financial Resources Resource Growth
2003 5,175.85 6.8
2004 5,619.47 9.8
2005 6,257.12 8.6
2006 6,613.79 11.3
2007 7,475.29 5.7
2008 7,475.29 11.8
Source: Bangko Sentral ng Pilipinas

Other indicators (Population growth). Implied in the growth of

investment is the rate of investment should be able to account for the growth
in population. However, it is apparent in the previous section that gross
domestic capital formation has decreased in recent years. This trend becomes
problematic on whether it can outweigh the growth of population. Aside from
this, an implicit requirement in the pre-conditions for take-off requires that
people should shy away from having children so as to facilitate greater
economic performance. Figure 6 shows that the population growth rate has
declined over the years due to women getting more education and
employment opportunities. This can be inferred since the death rate has
decreased due to better healthcare and nutrition and at the same time the
birth rate has decreased as well. Despite these developments, the Philippines
could not realize the opportunities provided by the demographic dividend.

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

3.2

2.8
Population_Grow

2.6

2.4

2.2

1.8

1.6
1960 1970 1980 1990 2000 2010

Figure 6. The Rate of Population Growth.

Savings rate relative to capital formation. The conditions for take-off

also requires (but not up to the same extent as that of the three major
criteria) that the percentage of investment should be increasing with the level
of savings in an economy. This ensures that the amount of savings is being
utilized to invest in companies so as to create greater productivity and supply.
As can be seen in Figure 7, in earlier years savings and gross domestic capital
formation (GDCF) move with each other, but recently in 2000 savings have
rocketed significantly, creating a large gap with capital formation. The
motivations behind the dramatic increase in savings are still quite problematic
and whether there is an explanation for the large gap or not is still unknown
as well.

45
GDCF_percentGDP
Savings_percent

40

35

30

25

20

15

10
1960 1970 1980 1990 2000 2010

Figure 7. Savings Percent of GDP and Gross Domestic Capital Formation

Openness and FTAs. It   is   also   implied   that   a   country’s   development  

opens its borders to other countries, thus shifting from regional and national
relations to that of international relations. This degree of openness is evident
in the amount of trade that a country engages, and more recently in regional

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Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

integration via the preferential trade agreements that a country establishes

with other countries. The Philippines certainly has its share of international
relations where the most significant would be the ASEAN established in
August 1967 due to political instability and regional security issues during that
time. The ASEAN aimed to accelerate growth and social progress along with
cultural development in the region, as well as to address the original
motivations to its establishment via the promotion of peace and stability in
the region.

Table 7. Common Effective Preferential Tariff of the Philippines

Year Common Effective Preferential Tariff
1993 12.45
1994 11.37
1995 10.65
1996 9.55
1997 9.22
1998 7.72
1999 7.34
2000 5.18
2001 4.48
2002 4.13
2003 3.82
Source: ASEAN Secretariat

The amount of trade contributed by the Philippines has increased over

the years, and it is indicative in Table 7 that this is so due to the overall
decrease in the preferential tariff. The degree of openness of the Philippines
has also increased but relative to the other members of the ASEAN, especially
Singapore, the Philippines is contributing very little to the overall trade and
invesment that the ASEAN is engaging. With regards to the Free Trade
Agreements that the Philippines has established, aside from the ASEAN, there
is also the American Free Trade Agreement (AFTA) and the Japan Philippines
Economic Partnership Association (JPEPA). Through the ASEAN, they are
establishing closer economic partnership with AFTA, Korea, China, and Japan.

CONCLUSION

Looking at the figures and indicators for the Philippine economy, it seems that
the Philippines may or may not be ready for take-off. The economy has been
able to achieve the levels and requirements that are needed for the take-off;
however, it cannot take-off since there are many constraints to its growth and
development efforts. Higgins (1957) and Hossain (1996) were able to identify
several limitations that are preventing the Philippines to initiate its take-off.
Reviewing the figures, the Philippines has been able to reach those needed for
the take-off, but problems occur when it cannot sustain these levels
consistently. The situation for growth in output as well as capital formation
confirms this. The Philippines may be well on its way for its take-off, but just

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 Asia Pacific Business & Economics Perspectives, 1(2), Winter 2013

like its take on reaping the demographic dividend, the Philippines has its
resources, but it still cannot capitalize on its competitive advantages.
There are instances when the conditions have been fully met but these
were not sustained over time. Whether or not these conditions have been
met, it is still possible for the country to experience underdevelopment. For
example, poverty persists in the country for decades even if these conditions
for take-off have been met. Thus, economic take off may be an inappropriate
framework of analysis since there is a need to address the pressing problem of
poverty. In this case I guess we are asking the wrong question on whether the
Philippine has taken-off economically. There is a need for a paradigm shift in
viewing development beyond economic take-off. Aside from investment in
physical capital, what is important is the investment in human capital that can
address poverty, give employment opportunities and create income
enhancing opportunities for those that where displaced by the non-inclusive
growth through the traditional neo-classical perspective

REFERENCES

Brillantes, A.B. (1993). The Philippines in 1992: Ready for Take Off? Asian
Survey, Vol. 33, No. 2, A Survey of Asia in 1992: Part II (Feb., 1993).
University of Cambridge Press.
Higgins, B. (1957). Development Problems in the Philippines: A Comparison
with Indonesia. Far Eastern Survey, Vol. 26, No.11 (Nov. 1957).
Institute of Pacific Relations.
Hossain, M. (1996). Economic Development in the Philippines: A Frustrated
Take-Off? International Rice Research Institute. Philippine Review of
Economics and Business, Vol. 33, No.1, June 1996.
Rostow, W.W. (1971). The Stages of Economic Growth, 2nd edition. New York,
NY: Cambridge University Press.

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