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Rising Growth, Declining Investment:
The Puzzle o the Philippines
 Alessandro Magnoli Bocchi 
The World Bank East Asia and Pacic RegionOce o the Chie Economist January 2008
WPS4472
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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 afliated organizations, or those o the Executive Directors o the World Bank or the governments they represent.
P
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eseaRch
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4472
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 cannotaord 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 prots. 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 Oce o the Chie Economist o the East Asia and Pacic Region—is part o a larger eortto 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 manuactures 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-perorming eco-zones, a competitive exchange rate,greater government revenues, and ewer
élite 
-capturingregulations.
 
 
Rising Growth, Declining Investment:
The Puzzle
of the Philippines
Breaking the “
 Low-Capital-Stock
 Equilibrium
 
Alessandro Magnoli Bocchi
1
 
The World Bank 
JEL Classification:
F-43, E-22, D-72, H-54, O-11, C-70
Key words:
Economic Growth, Investment, Capital Stock, Remittances, Rent-capture
 
1
The findings, interpretations, and conclusions are my own and should not be attributed to the World Bank,its Executive Board of Directors, or any of its member countries. I thank Jehan Arulpragasam, Deepak Bhattasali, Shubham Chaudhuri, Karl Kendrick Tiu Chua, Sanjay Dhar, Indermit S. Gill, Homi Kharas,Antonio M. Ollero, Lant Pritchett, Jamele Rigolini, and Vera Songwe for their inputs and comments. Theusual disclaimers apply.
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