Decades of tax perks for investors cost billions, but failed to build industries – BSP study

By Francis Allan L. Angelo

The Bangko Sentral ng Pilipinas has released a 402-page research volume concluding that the Philippines’ chronic trade deficits will not correct on their own and that decades of fiscal incentives for investors — costing the government hundreds of billions of pesos — failed to build the industrial base they were designed to create.

The book, Current Account Dynamics and the Philippine Economy: Developments and Prospects, was launched at the BSP’s Manila head office on March 2, 2026, and its digital edition was made publicly available on June 9. The BSP published the full text on its website, making it the most comprehensive research volume the central bank has devoted to diagnosing the structural roots of the country’s current account problems.

The timing matters. In 2022, the Philippines recorded a current account deficit of US$18.3 billion — equivalent to 4.5 percent of GDP and the largest on record — as goods imports surged amid post-pandemic demand recovery and elevated global commodity prices driven by the Russia-Ukraine conflict. While the deficit narrowed in subsequent years, the book makes clear that the structural forces behind it remain unresolved.

BSP Governor Eli M. Remolona, Jr. framed the book’s stakes at the launch. “Understanding current account dynamics is central to sound policymaking,” he said, describing the publication as designed to support “rigorous, evidence-based, and forward-looking policy decisions” on the country’s external position.

Incentives ‘redundant,’ study finds

Among the book’s most pointed findings is an assessment of the Philippines’ long history of using fiscal incentives — tax holidays, duty exemptions, reduced corporate rates — to attract investment into prioritized industries.

The verdict, drawn from a study cited in Chapter 8 of the book, is blunt: the incentives were “redundant,” costing the government PHP 44.6 billion in tax and duty exemptions and PHP 16 billion in income tax holidays. By 2017, foregone revenue from tax incentives ballooned to PHP 441 billion in a single year. Even after the passage of the Corporate Recovery and Tax Incentives for Enterprises Act in 2021 — designed to rationalize and time-bound the incentive regime — foregone revenue still reached PHP 68 billion in 2021 and PHP 80.4 billion in 2022.

The book identifies the core failure: while incentive recipients contributed to employment and wages, they maintained “weak backward and forward linkages within the country.” In plain terms, the factories and service firms that benefited from tax breaks continued to import most of their inputs rather than sourcing them locally — perpetuating rather than reducing the very goods trade deficit the incentives were partly intended to address.

That import dependence is documented in granular detail. More than 70 percent of total Philippine imports consist of raw materials, intermediate goods, and capital goods essential for manufacturing and production — a pattern that has persisted across four decades. Consumer goods imports, meanwhile, rose from an average of 14.9 percent of total imports in the 2000s to 24.6 percent in the 2010s, fueled partly by remittance-driven purchasing power.

Manufacturing in reverse

Underlying the fiscal incentive failure is a broader manufacturing decline the book tracks across decades. The sector’s share of GDP averaged 23.6 percent in the 1990s and has contracted to 19.1 percent between 2010 and 2023. Its share of total employment fell from 10.1 percent in the 1990s to 8.3 percent today.

Among the five major ASEAN economies the book examines — Indonesia, Malaysia, Thailand, Vietnam, and the Philippines — the Philippines is the only one where a persistent deficit in trade in goods drags down the current account. The four peer countries built goods export surpluses through industrialization. The Philippines did not.

The study traces this to what it calls an “atypical” structural transformation. As labor exited agriculture, it moved into services — not manufacturing, as happened in East and Southeast Asian economies that successfully industrialized. The result: a services sector accounting for 62.3 percent of GDP by 2023, up from 49.9 percent in 1990, but one whose growth reflects the stagnation of manufacturing rather than a deliberate developmental strategy.

The book traces the origins to the 1970s and 1980s. An overvalued peso suppressed exports while encouraging imports. The current account deficit reached 7.5 percent of GDP in 1982 — described as the largest in Philippine history at that time — as external debt hit US$24.4 billion, or 57.8 percent of GNP. The book cites academic research attributing the Philippines’ failure to attract sufficient Japanese foreign direct investment during the post-Plaza Accord manufacturing boom of the late 1980s to what that research characterized as “extreme rent-seeking” that discouraged investors.

The automation threat to BPO

If the failure to industrialize is the country’s chronic wound, the book identifies a new acute one: the information technology and business process management sector — the engine of services exports — faces an automation threat it is not yet equipped to absorb.

The book cites Bloomberg data projecting that approximately 300,000 jobs in the Philippine BPO sector will be lost to artificial intelligence from 2024 to 2029. Roles most at risk are concentrated in data entry, routine customer inquiries, and telemarketing — precisely the lower-value functions that constitute the bulk of Philippine call center employment.

The study draws a pointed comparison with India, which transitioned from low-end BPO services to high-value knowledge process outsourcing — legal research, financial analytics, medical services — beginning in the early 2000s. The Philippines has begun a similar shift, but the book warns it has “fewer prospects than India for regaining jobs due to the lack of home-grown companies that could benefit from new jobs created by automation.”

A competitive indicator reinforces the concern. The Philippines dropped out of the top 10 potential locations for outsourcing activities in the Global Services Location Index starting in 2023, scoring particularly low on “digital resonance” — a composite measure of digital innovation capacity, labor force digital skills, and infrastructure. India, China, and Malaysia occupied the top three positions.

Five conglomerates at the core

One of the more striking findings comes from Chapter 6, which applied network analysis to corporate ownership among the country’s top 500 companies by revenue. The study found the corporate network is “fragmented” — a single prominent cluster surrounded by disconnected smaller groups — and that five conglomerates, three banks, one telecommunications company, one energy generation corporation, one real estate company, and one mining company sit at its core.

Network centrality correlates directly with revenue ranking: capital flows toward the largest conglomerates. Small and medium enterprises sit at the “fringe” of the network with limited access to capital and supply chain integration. The study’s concluding chapter calls this “uneven connectedness” and recommends policies specifically favoring smaller companies at the fringe.

The book’s final chapter, written by technical editor Mario B. Lamberte — Scientist-in-Residence at De La Salle University and Emeritus Research Fellow at the Philippine Institute for Development Studies — issues the volume’s starkest verdict on policy history: “formulating fragmented economic policies will no longer be sufficient.” The country needs, it argues, “a systematic, integrated, and comprehensive policy architecture” — explicitly and emphatically “not a piecemeal policy visioning.”

A six-pillar agenda

The book lays out a six-thematic policy agenda covering: macroeconomic stability and investment climate reform; revival and diversification of productive sectors including manufacturing and agriculture; development of services sector potential; human capital investment and innovation; intensifying “servicification” — the integration of services into manufacturing to boost productivity; and governance reform with stronger global engagement.

Specific proposals include maintaining fiscal discipline to widen the tax base and free up resources for public investment; adopting “forward-looking exchange rate management” to prevent currency appreciation from eroding export competitiveness; leapfrogging into high-value manufacturing through targeted R&D investment; and raising national R&D spending to at least 1 percent of GDP — the UNESCO-recommended minimum — from current levels well below that benchmark.

On agriculture, the book calls for transitioning from low-value staples — particularly the long-standing policy emphasis on rice — toward high-value, export-oriented commodities such as fruits, vegetables, coffee, cacao, and fish. It also recommends re-evaluating agrarian reform programs that have, it argues, inadvertently reduced agricultural productivity by restricting land market flexibility.

The study was originally initiated by former BSP Governor Felipe M. Medalla. Contributing to the launch were Monetary Board Member Romeo L. Bernardo, BSP Assistant Governor Maria Margarita D. Gonzales, and Department of Education Strategic Advisor Rafaelita M. Aldaba.

“The Philippines stands at a crossroads,” the book concludes, “with an excellent opportunity to transform its economic structure and become a more resilient and prosperous nation.” Whether that opportunity is seized — or deferred again, as it has been through successive administrations — is the question the 402 pages leave pointedly unanswered.