Breaking the mold: Innovation, institutions and economic transformation

Recent developments should have stripped away any lingering complacency about the Philippine economy’s post-pandemic recovery. Growth forecasts for the country have been revised downward by major international financial institutions like the International Monetary Fund, the World Bank, and the Asian Development Bank as well as by credit rating agencies. These revisions reflect a confluence of factors including weaker global demand, tighter financial conditions, lingering inflationary pressures, and heightened geopolitical uncertainty. Yet they also point inward, signaling concerns about the Philippines’ structural weaknesses and institutional capacity to sustain growth.

At home, renewed public scrutiny of corruption, accountability gaps, and governance failures has further undermined confidence in the country’s ability to translate policy intentions into durable economic outcomes. Together, these developments send a clear message: the Philippines can no longer rely on familiar policy frameworks, incremental reforms, or historical growth patterns. The moment calls for a decisive break from the existing development mold.

Today’s column distills the key insights from a colloquium we prepared as an accompanying volume to the Asian Development Bank’s forthcoming Country Diagnostic Study, Breaking Barriers, Building Bridges. Drawing from extensive dialogues on economic planning, infrastructure, transport and communications, banking, and capital markets, the discussions converged on a central conclusion. If the Philippines is to escape the lower middle-income trap and meaningfully catch up with its regional peers, it must grow beyond historical averages and do so through a fundamentally different growth model.

It’s time to break the mold.

RESILIENCE HAS ITS LIMITS
For more than two decades, the Philippine economy has demonstrated resilience. It weathered the Asian financial crisis, domestic fiscal stress, the global financial crisis, and the unprecedented shock of COVID-19. Each time, growth eventually rebounded, and macroeconomic stability was preserved. This capacity to absorb shocks is a strength. But resilience alone has not delivered transformation.

Despite average growth of nearly 5% since the late 1990s, the Philippines has remained stuck in lower middle-income status for almost four decades. In contrast, most of its ASEAN-5 peers have already transitioned to higher-income categories. The divergence is telling. It underscores that the challenge is not growth per se, but the nature of that growth.

The pandemic laid bare these limitations. Economic scarring weakened productivity, disrupted labor markets, and strained public finances. Even before COVID-19, poverty reduction had begun to slow, and income inequality remained stubbornly high. Growth was increasingly driven by consumption, remittances, and low-productivity services, sources that generate momentum but rarely transform economies. Recent forecast downgrades merely formalize what these trends had long implied: without structural change, growth will remain fragile and insufficient.

BINDING CONSTRAINTS TO TRANSFORMATION
The Philippine economy faces a set of interrelated constraints that reinforce one another and dampen long-term potential.

Infrastructure deficits remain among the most binding. Weak transport, logistics, energy, water, and digital connectivity raise the cost of doing business and fragment markets. Congested ports, inadequate airports, inefficient road networks, and uneven internet access weaken competitiveness and deepen regional disparities. High logistics costs, in particular, limit firms’ ability to scale up and integrate into higher-value segments of regional and global value chains.

Low productivity and slow structural transformation compound these infrastructure gaps. The economy has struggled to move decisively from low-productivity activities toward advanced manufacturing and high-value services. Research and development spending remains limited, innovation capacity uneven, and many industries remain locked into assembly-based or low value-added production. As a result, productivity growth has lagged that of regional peers.

Agricultural underdevelopment and food insecurity continue to exert pressure on growth and inflation. Fragmented landholdings, weak farm support systems, inadequate irrigation and storage, and poor market logistics keep productivity low and rural incomes depressed. High postharvest losses contribute to volatile food prices, complicating macroeconomic management and disproportionately affecting low-income households.

Human capital deficits further constrain the country’s long-term prospects. Despite a young and growing population, learning outcomes in reading, mathematics, and science lag behind those of neighboring economies. Even the creative thinking capacity of Filipino students is dismally low. The pandemic widened learning gaps and intensified skills mismatches. Health and nutrition challenges — particularly childhood stunting — undermine workforce quality and productivity over time.

Climate vulnerability imposes recurring economic losses as the Philippines remains exposed to typhoons, floods, earthquakes, and other natural hazards. Climate change not only amplifies these risks, but it also threatens food security, infrastructure resilience, and human safety. Adaptation and resilience are no longer optional add-ons; they are central to any credible development strategy.

Threaded through all these constraints are governance and institutional weaknesses. Fragmented mandates, overlapping agency functions, weak coordination between national and local governments, and persistent corruption concerns undermine policy effectiveness. Budget inefficiencies and weak execution dilute the impact of development programs, while accountability gaps erode public trust. These institutional shortcomings increasingly shape the cautious outlooks of international investors and credit rating agencies.

WHY THE OLD MODEL NO LONGER WORKS
Taken together, these constraints explain why incremental reforms within the existing policy paradigm are no longer enough. The global economy has become more fragmented and volatile, marked by geopolitical tensions, shifting trade regimes, and rapid technological change. Domestically, slower growth prospects, fiscal pressures, and governance concerns have narrowed the margin for error.

What the Philippines needs is not simply faster growth, but a different kind of growth, one that is productivity-driven, innovation-led, and inclusive. This requires a fundamental rethinking of how value is created, how institutions function, and how public and private sectors interact.

INNOVATION AS THE CATALYST
At the center of this new growth model is innovation. Innovation is not confined to frontier technologies or advanced manufacturing. It encompasses new ways of organizing production, delivering services, governing institutions, and deploying resources. By raising productivity and reducing dependence on ever-increasing inputs of labor and capital, innovation allows economies to grow more sustainably and resiliently, higher than historical averages. The Philippines today needs no less than leapfrogging, and innovation could be the enabling factor.

Indeed, innovation offers a pathway to overcome long-standing bottlenecks. Digital technologies and data analytics, artificial intelligence and financial technology can all raise efficiency across sectors — from agriculture and manufacturing to logistics, healthcare, and public administration. Just as importantly, innovation can strengthen governance by enhancing transparency, accountability, and service delivery.

The country’s gradual improvement in global innovation rankings suggests latent potential. But ambition must be matched by execution. Innovation cannot flourish without sustained investment in human capital, research and development, and enabling infrastructure. Nor can it thrive in an environment of weak institutions and uncertain rules that in turn, are rooted in and abet a culture of corruption and impunity.

FOUR PILLARS FOR BREAKING THE MOLD
Insights aligned with the ADB Country Diagnostic Study point to four mutually reinforcing pillars for economic transformation.

First, promote good governance that fosters innovation and entrepreneurship. A competitive business environment depends on good governance: clear rules, efficient regulation, and capable public institutions. Rationalizing government functions, accelerating digital government, and strengthening public financial management can improve the ease of doing business and attract investment. Values formation is indispensable. Outcome-based budgeting, stronger inter-agency coordination, and continuous capacity building are essential to turning plans into results.

Second, invest decisively in human capital. Education, health, and skills development form the foundation of an innovative economy. Reskilling and upskilling must be institutionalized to keep pace with technological change, while curricula should be better aligned with industry needs. Expanding access to quality healthcare and nutrition is essential to future-proof the workforce. Social protection programs should evolve beyond safety nets to become springboards for productive participation.

Third, strengthen digital and physical infrastructure. Affordable and reliable digital connectivity is critical to innovation and regional inclusion. Transport and logistics investments should prioritize integrated networks rather than isolated corridors, reducing congestion, and lowering costs. Energy security, particularly through renewable energy and transition fuels, is indispensable for sustaining industrial growth and digital transformation.

Fourth, address inequality by revitalizing agriculture and mining as well as focusing on lagging regions. Inclusive growth requires raising productivity and incomes where poverty is most concentrated. Land aggregation, farm clustering, modern farming techniques, open but environment-friendly mining, improved logistics, and better access to finance can transform agriculture and mining into competitive sectors. Targeted investments in lagging regions can broaden economic opportunities and strengthen social cohesion.

INSTITUTIONS AT THE CORE
Global experience consistently shows that institutions shape development outcomes. Inclusive, accountable, and adaptive institutions enable innovation and shared prosperity. Weak institutions, by contrast, block technological progress, entrench inequality, and undermine confidence.

For the Philippines, strengthening institutions means reinforcing the rule of law, protecting property and contract rights, ensuring fiscal and financial stability, and investing consistently in education and innovation. It also requires cultivating a political and social culture that prioritizes long-term national development over short-term gains.

The Philippine economy stands at a critical point. Its resilience has enabled it to survive repeated shocks, but resilience alone will not deliver lasting prosperity. Recent forecast downgrades and renewed governance concerns serve as a warning that the old growth model has reached its limits.

Breaking the mold demands a deliberate shift toward innovation-led growth anchored in good governance, strong institutions, and inclusive policies. The challenges are formidable, but they are not insurmountable. With its demographic potential, strategic location, and deep reservoir of talent, the Philippines has the ingredients for transformation.

Economic transformation, ultimately, is not a matter of possibility but of choice. It requires vision, discipline, and sustained commitment — to invest in people, modernize infrastructure, strengthen governance, and embed innovation at the core of development. If pursued with resolve, this path can move the country beyond resilience toward more durable, more inclusive prosperity.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.