[Puso at diwa] Beyond the World Bank’s reclassification of PH as upper-middle income

Within days of the Philippines’ elevation by the World Bank to upper-middle-income status, the country entered one of the most politically consequential periods in recent years. The impeachment proceedings against Vice President Sara Duterte formally commenced, while plunder allegations against Senator Rodante Marcoleta added to public scrutiny of political accountability. At roughly the same time, business confidence softened amid growing uncertainty over both domestic and global developments.

The timing is striking. Just as the international community recognized the country’s economic progress, Filipinos were reminded that whether the country remains an upper-middle-income economy will depend less on its income statistics than on the strength of its institutions.

Effective July 1, the World Bank reclassified the Philippines from a lower-middle-income economy to an upper-middle-income economy after nearly four decades. The decision reflects sustained growth in the country’s Gross National Income (GNI) per capita, measured using the World Bank’s Atlas methodology, under which nominal national income has expanded significantly faster than population growth in recent years.

The milestone represents years of relatively sound macroeconomic management, economic expansion, and structural reforms. It also serves as an external affirmation of the economy’s resilience despite the pandemic, recurring natural disasters, and repeated episodes of self-inflicted political uncertainty.

Yet the reclassification has generated understandable skepticism. Some economists have dismissed it as little more than a statistical milestone that bears little resemblance to the daily realities faced by many Filipinos. Their caution deserves serious consideration, but perhaps for reasons different from those they emphasize.

The World Bank’s decision neither declares the Philippines a developed economy nor suggests that poverty, inequality, or inadequate public services have been overcome. National income averages conceal enormous disparities across regions, industries, and households. Millions of Filipinos continue to face limited access to quality education, healthcare, infrastructure, productive employment, and economic opportunity.

The more important implication of the reclassification is that the country’s principal development challenge has changed.

For decades, rapid population growth was viewed as one of the major constraints on development because it continuously strained public services, employment generation, and social infrastructure. Today, slower demographic growth should provide the country with some opportunity to concentrate on the factors that increasingly distinguish successful upper-middle-income economies from those that remain trapped there for decades: productivity, innovation, human capital, infrastructure, competitive industries, efficient financial markets, and above all, effective governance and institutions.

This is precisely why the coincidence between the World Bank’s announcement and the country’s current political developments is so significant.

Governance challenge

As countries become wealthier, investors, credit-rating agencies, and development institutions place increasing weight not simply on economic growth, but on the quality of governance. Macroeconomic stability remains essential, but institutional credibility becomes equally important. Predictable public policy, impartial enforcement of laws, an independent judiciary, effective public administration, and transparent government increasingly determine whether private investment continues to expand. No amount of media hype could bring in investment capital.

Viewed from this perspective, the impeachment proceedings against the Vice President and the criminal allegations involving other senior political figures present both risks and opportunities. They inevitably introduce another round of short-term uncertainty as political attention shifts toward constitutional and judicial processes. Businesses naturally become more cautious when the policy environment appears uncertain, a concern reflected in the recent decline of various metrics of business confidence.

True, mature democracies are not defined by the absence of political conflict or corruption allegations. Rather, they are distinguished by institutions capable of resolving such disputes peacefully, transparently, and according to the rule of law. If these proceedings are conducted fairly, impartially, and with full respect for due process, they may ultimately strengthen rather than weaken confidence in Philippine institutions. Accountability, when exercised through credible institutions rather than political expediency, enhances rather than diminishes economic confidence.

That distinction is becoming increasingly important because the Philippines now occupies a different position in the global economy.

Upper-middle-income status brings opportunities, but it also raises expectations. The country may gradually lose access to concessional financing and other forms of development assistance previously available to lower-income economies. Investors will demand greater policy consistency. International markets will scrutinize fiscal management, regulatory quality, infrastructure delivery, governance standards, and institutional effectiveness more closely than before.

Many countries have entered the upper-middle-income category only to remain there for decades. The so-called middle-income trap reflects not a shortage of economic growth but an inability to improve productivity, diversify industries, strengthen innovation, upgrade workforce skills, and build institutions capable of supporting sustained private investment. Growth alone is rarely sufficient to escape it.

For the Philippines, preserving its new status and eventually attaining high-income status will therefore depend less on maintaining respectable growth rates than on improving the quality of growth itself. Raising productivity, expanding higher-value industries, modernizing infrastructure, strengthening education and human capital, deepening financial markets, and improving governance are no longer desirable policy objectives. They have become economic necessities.

The World Bank’s reclassification should therefore be understood neither as a mere statistical curiosity nor as proof that the country’s development challenges have been solved. Rather, it simply marks the beginning of a more demanding stage of national development.

The World Bank has recognized what the Philippines has already achieved. Whether the country remains an upper-middle-income economy, and eventually becomes a high-income one, will depend on something that no income classification can fully capture: the quality of its institutions.

Economic growth can elevate national income. Only credible governance, sound public policy, productive investment, and the rule of law can sustain it. The real challenge facing the Philippines is therefore no longer simply to become wealthier, but to become better governed. Only then will higher national income translate into lasting improvements in the lives of all Filipinos. – Rappler.com

Diwa C. Guinigundo is the former deputy governor for monetary policy and other aspects of central banking. He was a former alternate executive director at the IMF in Washington, DC in 2001-2003. He is the author and editor of several books on political economy, regional crisis and cooperation, debt and economic growth and public policy agenda.

He serves as independent director of several corporate and financial institutions with focus on corporate governance, risk oversight and audit.

He also serves as principal advisor for New York-based GlobalSourcePartners. He remains in the advisory board of ASEAN Macroeconomic Research Office and Singapore Management University’s Sim Kee Boon Institute for Financial Economics.

He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.