Philippines’ growth problem: Is it corruption — or industrial policy?

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 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.

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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That mindset is reflected in the education system.

It's found in the emphasis on English and 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.

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 the 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 for manufacturing

Suppose the Philippines wants to develop domestic production of batteries, electric vehicles, steel, chemicals or advanced electronics.

Most of those industries initially require imported machinery, components and technology. A strong peso makes those imports cheaper.

But once domestic production begins, Filipino manufacturers have to compete with producers from countries that may have larger domestic markets, cheaper electricity, stronger supply chains or more aggressive industrial policies.

This creates a dilemma at the policy level.

Cheap imports can help consumers and manufacturers buying machinery. But persistent dependence on imports can also make it harder for domestic suppliers to develop. Industrial policy tries to manage that transition.

The objective is not necessarily to permanently protect inefficient companies. Ideally, government support gives firms enough time and scale to become competitive.

The central bank question

This is where Claudio's argument moves beyond conventional industrial policy. He distinguishes between a competently managed institution and policies that one might disagree with.

He says he does not blame individual central bankers, pointing instead to the institutional framework within which they operate.

The Bangko Sentral ng Pilipinas (BSP) has responsibilities that include price stability (i.e. keeping inflation in check), financial stability and maintaining a safe and efficient payments system.

Claudio argues that the country's post-1986 reforms deliberately removed the central bank's developmental function because of the abuses associated with the old Central Bank of the Philippines.

The result, he says, was an institution structurally inclined toward monetary restraint. He proposes reconsidering that framework and points to the US Federal Reserve's dual mandate of price stability and employment as one possible model.

Why Marcos Sr.-era experience still matters

There is an important historical irony. The Philippines' experience under Ferdinand Marcos Sr showed the dangers of giving government institutions too much discretionary power over finance.

Claudio acknowledges that history. The old central bank was effectively bankrupted after being used to finance the Marcos regime, eventually leading to the creation of the BSP as a new institution.

That experience produced a powerful institutional lesson: Never again give politicians unlimited control over the country's monetary system.

But Claudio's argument raises a second question: Did the reaction to that abuse go too far in the opposite direction?

In other words, did the Philippines move from an excessively interventionist state to a state that became too reluctant to intervene?

That is at the heart of the industrial-policy debate.

Beyond the corruption narrative

Corruption clearly matters. A corrupt government can distort competition, discourage investment, inflate project costs and divert resources away from productive uses.

But corruption, by itself, cannot explain why countries with similarly serious governance problems have sometimes managed to industrialise faster.

East Asian economies such as South Korea, Taiwan and China used varying combinations of state intervention, directed credit, trade policy, infrastructure investment, export promotion and industrial targeting.

Their governments did not simply wait for markets to determine which industries would emerge.

That does not mean the Philippines should copy those models wholesale.

It does suggest that economic development is partly a question of institutional design and policy choices — not simply morality.

What would a sustainable industrial policy look like?

If Dr. Claudio's argument is taken seriously, industrial policy would require more than attracting foreign investors through tax incentives.

It could involve a coordinated strategy linking energy, infrastructure, finance, skills, technology, local suppliers and exports.

For example, instead of simply attracting a foreign electronics manufacturer, the government could seek to develop the suppliers that provide components, packaging, testing, engineering services and specialised machinery.

The same logic applies to nickel.

The Philippines is a major producer of nickel ore, but the bigger economic prize is moving further into processing, battery materials and eventually higher-value manufacturing.

And the same applies to silicon: volcanic ash and lahars from Mount Pinatubo, for example, contain a high amount of silicon, mainly in the form of silica (SiO₂) and silicate minerals. Why not make full use of it?

The goal would be to capture more of the value chain domestically. That is industrial policy. That is job creation on steroids.

But there is a danger

A more interventionist state is not automatically a better state.

The Philippine experience also demonstrates the risks of political favouritism, crony capitalism, protectionism and poorly-designed incentives|subsidies.

Industrial policy can become a vehicle for politicians to reward allies.

The challenge is therefore not simply: “Should government intervene?”

It is: “How can government intervene without allowing intervention to become corruption?”

That requires transparent rules, measurable targets, competition, "sunset" clauses, independent oversight and policies that reward firms for actually becoming productive and competitive.

Key highlights

• Corruption may not be the whole story. Prof. Claudio challenges the tendency to treat corruption as the primary explanation for Philippine underdevelopment.

• Austerity became institutionalized. He argues that American-era economic thinking helped establish a preference for tight budgets, low inflation and monetary restraint.

• A strong peso was treated as a virtue. Claudio traces the preference for currency strength to American-era ideas that associated a strong currency with economic and even moral strength.

• Exchange-rate policy can affect industrialization. He points to Salvador Araneta's argument in the 1950s that a weaker peso could have created greater fiscal space and supported domestic economic activity.

• The BSP's structure matters. Claudio argues that the removal of the central bank's developmental mandate after the abuses of the Marcos era left monetary policy heavily focused on price stability rather than development.

• His proposed direction: reconsider whether the central bank should have a broader mandate incorporating employment and development alongside price stability.

The bigger lesson

Dr. Claudio's argument challenges a deeply-rooted Philippine assumption that economic discipline and economic development are naturally aligned.

Not always.

A government can have balanced budgets, low inflation and a stable financial system while still failing to build the productive capacity needed to raise wages, boost jobs and living standards.

Conversely, aggressive government spending and intervention can generate growth — or produce inflation, debt and corruption, if badly managed.

The real policy challenge is finding the balance: The Philippines does not necessarily need to abandon fiscal discipline. It may need to redefine what "discipline" means.

Instead of asking only whether government is spending too much, policymakers could also ask: Is the government spending enough on the things that make the country more productive?

That is the industrial-policy question at the center of The Profligate Colonial. And it shifts the Philippine economic debate from “Why are Filipinos poor?” to a more consequential question: “What economic system have we built — and is it designed to make the Philippines an industrial power?”