Investment and sustained economic growth

The Philippine economic community is anticipating a rapid growth in the flow of new investments in the country, encouraged by the Aquino administration’s vigorous efforts at eliminating corruption and making the rules and regulations in which businesses operate clear and transparent.  These would result into bringing down “the cost of doing business” in the country and an even playing field.  However, in order to ensure that the economic growth that will be spurred by investments shall result into a sustainable and balanced growth, the flow of investments need to be guided into the appropriate industries.  A brief background on the relationships between investments and output should be useful to appreciate this statement.

The fundamentals of investment and growth 

Investments and economic growth are generally seen as moving together like a horse and a carriage.  In the simple relationship between capital, labor and output, new investments result in new or additional capital to produce more output. Hence, we have the equation capital combined with labor equals output and the measure of the amount of capital required to produce a unit of output is the capital-to-output ratio.  The measure of the amount of capital required to employ a unit of labor is the capital-to- labor ratio.  These ratios have policy implications for the Philippines based on its array of resources or factor endowments.

Implications for the Philippines

The Philippines is obviously endowed with substantial labor or more appropriately human resources.  This is obvious from the number of overseas Filipino workers, implying a surplus of workers compared to the jobs available at home.  Less obvious is the relatively low productivity of human resources in important sectors of the economy as implied by the low income and poverty incidence.  This implies a human resource surplus in spite of the big number of Filipinos working abroad. 

The obvious thing to conclude is that investments should flow into labor-intensive industries because of the available human resources at relatively low costs.  However, investments need to be profitable and in order to be profitable, they need to go into globally competitive industries.  Therefore, investments are also needed to go into infrastructure such as roads, ports, power and telecommunications that require a great amount of capital.  No less important are the investments that need to be made in the education and training of human resources. 

This is where the Public- Private Sector Partnership (PPP) initiative would prove most useful- to address the infrastructure bottlenecks that hinder growth on a national scale and with emphasis on the poorer regions.

Growth with Development        

In discussions of Economic Development, we encounter distinctions between economic growth and development.  “Inclusive growth” was mentioned by Ayala Corp. CEO Jaime Augusto Zobel de Ayala in his speech on national competitiveness at the Finex General meeting last Jan. 12. A short definition of inclusive growth is quite apt in making a distinction between growth and development: For growth to be sustainable in the long run, it should be broad-based across sectors, inclusive of a large part of the labor force accompanied by rapid and sustained poverty reduction (What is “inclusive growth,” yahoo search).  As a Finex advocacy it is also apt to mention “financial inclusion”as a key ingrediate of inclusive growth and and economic development.  It is defined at the Center for Financial Inclusion at Accion International as “a state in which all people who can use them have access to quality financial services at affordable prices…” (

By: Val Araneta

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