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Abstract
The Policy Research Working Paper Series disseminates the fndings o work in progress to encourage the exchange o ideas about development issues. An objective o the series is to get the fndings out quickly, even i the presentations are less than ully polished. The papers carry the names o the authors and should be cited accordingly. The fndings, interpretations, and conclusions expressed in this paper are entirely those o the authors. They do not necessarily represent the views o the International Bank or Reconstruction and Development/World Bank and its afliated organizations, or those o the Executive Directors o the World Bank or the governments they represent.
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The economy o the Philippines is open to trade andcapital infows, and has grown rapidly since 2002. Overthe last 10 years, however, domestic investment, whilestagnant in real terms, has shrunk as a share o GDP. Inan open and growing economy, why the decline? Threereasons explain the puzzle. First, the public sector cannotaord expanding its investment at GDP growth rates.Second, the capital-intensive private sector does not ndit convenient to raise investment at the economy’s pace.Third, ast-growing businesses in the service sector do notneed to rapidly increase investment to enjoy rising prots. Yet, the economy keeps growing. On the demand-side,massive labor migration results in remittances that uelconsumption-led-growth. On the supply-side, reeThis paper—a product o the Oce o the Chie Economist o the East Asia and Pacic Region—is part o a larger eortto investigate the sustainability o growth in East Asia. Policy Research Working Papers are also posted on the Web athttp://econ.worldbank.org. The author may be contacted at amagnoli@worldbank.org.rom rent-capturing regulations, a ew non-capital-intensive manuactures and services boost exports. Theeconomic system is in equilibrium at a low level o capitalstock, where all economic agents have no incentive tounilaterally increase investment and the rst mover bearsshort-term costs. As a consequence, growth is slowerand less inclusive than it could be. To make it speedierand more sustainable, and to reduce unemployment andpoverty, the economy needs to move to a
“high-capital-stock”
equilibrium. This would be attainable throughbetter-perorming eco-zones, a competitive exchange rate,greater government revenues, and ewer
élite
-capturingregulations.
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