Philippines’ income upgrade hides grim reality for most Filipinos

[MANILA] The World Bank’s decision to classify the Philippines as an upper-middle-income country was a long-awaited milestone for Manila after it missed the mark by a mere US$26 last year.

The upgrade, announced last week, was largely due to a multisectoral expansion that lifted its gross national income (GNI) per capita to US$4,850.

While the Marcos administration touted the income graduation as a validation of the country’s macroeconomic resilience, beneath the upgrade lies a less rosy reality. Persistent inflation, slowing productivity and a fragile labour market suggest that the country’s ascent on the income ladder has yet to translate into broad-based gains.

The new income status “isn’t the good news we think it is”, said Russell Stanley Geronimo, founder of Geronimo Law and a public policy expert.

The World Bank’s classification framework is a reminder that such status changes are technical, not transformative. Income graduation is based on average national income, not on whether most households are earning enough to live comfortably, build savings, or escape vulnerability.

And while regional peers such as Vietnam have scaled the same income ladder on the back of a booming export-led industrial engine, the Philippines arrived at the threshold via a consumption-heavy path sustained by overseas workers’ remittance inflows.

Same threshold, different paths

Vietnam and the Philippines are the only South-east Asian countries to be upgraded to upper-middle-income status this year, but they “reached the same thresholds through very different paths”, the World Bank said.

As an industrial powerhouse, Vietnam’s export sector surged by more than 15 per cent across both 2024 and 2025, driving real gross domestic product growth of 7 per cent and 8 per cent, respectively, and expanding its GNI at a staggering annual average of 10 per cent over five years.

The Philippines, in contrast, advanced through a broad-based but noticeably slower 5.8 per cent average GDP growth rate over the same five-year stretch, “reflecting gains across all major industries, not a single sector boom, but an economy-wide shift”, the World Bank said.

Crucially, the Philippines’ GNI figures are padded by the earnings of overseas Filipino workers (OFWs), which reached an all-time high of US$35.6 billion last year and accelerated the income graduation.

But while OFW remittance inflows provide a reliable consumer spending floor for roughly 360,000 households, they also mask vulnerabilities in domestic productivity.

Manufacturing growth, for one, remains muted. The S&P Global Philippines Manufacturing Purchasing Managers’ Index, which measures the health of the local manufacturing sector, inched up from 50.8 to 50.9.

But the near-flatline performance suggests the country’s industrial base is idling as it faces ongoing pressure from an appreciating real effective exchange rate, elevated energy costs and rapid technological changes.

Shifting away from these higher-productivity, export-oriented sectors, however, “poses a structural constraint on income growth and, by extension, on the sustainability of consumption”, said Deepali Bhargava, regional head of research for Asia-Pacific at ING.

The slowdown in productivity gains and OFW remittances – the latter’s growth rate slowed to 2.8 per cent – has caused the Philippines to fall behind its Asia-Pacific peers in terms of household consumption recovery, Bhargava explained.

“Too wealthy” for foreign aid

In a country with nearly 18 million individuals (15.5 per cent) living below the poverty line, a financing and human capital crisis is now looming.

The income upgrade has rendered the Philippines “too wealthy” to qualify for the concessional foreign aid and development loans that have long bankrolled its public works.

Yet, the country remains unequipped to fund its massive development agenda at commercial market rates, analysts say.

The immediate consequence of this graduation is the premature loss of Official Development Assistance (ODA) loans – cheap, low-interest, long-maturity credit lines from multilaterals and foreign governments that have helped the Philippines build out its infrastructure.

“Whereas previously, the country enjoyed access to highly concessional ODA loans, now it will have limited access to cheap financial aid. At the same time, it is not yet wealthy enough to comfortably self-fund its massive development agenda at commercial rates,” Geronimo added.

The classification will force the government to lean on public-private partnerships and international commercial credit, exposing future infrastructure builds to higher market-based interest rates and volatile global financing terms, he said.

The state apparatus remains poorly designed for this transition. Decades of reliance on global donors have embedded an institutional dependency within the bureaucracy.

“Every line agency in the country has a dedicated foreign-assisted projects office, and almost every rural infrastructure or initiative is financed by multilaterals or foreign governments,” said Henry Custodio, a sustainable development specialist for the United Nations Industrial Development Organization.

As the safety net of concessional lending disappears, state agencies must rapidly learn how to generate revenue independently, attract private capital and deploy complex financing structures – capabilities they currently lack, he said.

A disconnect with the microeconomy

Still, economic managers of the Marcos administration view the World Bank’s income upgrade as a cause for celebration.

Arsenio Balisacan, the economic development secretary, believes the new status would strengthen the country’s credit profile and ultimately expand its access to higher-quality commercial financing.

But despite these purported wins, lived realities remain deeply troubled.

Domestic headline inflation reached a stubborn 6.4 per cent in June, keeping household purchasing power under pressure. To rein in consumer prices without crushing economic activity, the Philippines’ central bank anchored its benchmark interest rate at 4.75 per cent.

The quality of domestic employment is also deteriorating. The number of unemployed Filipinos rose to 2.5 million, pushing the unemployment rate higher at 4.8 per cent in May, up from the 3.9 per cent in the same period last year.

Meanwhile, underemployment at 12.2 per cent translates to over six million Filipinos trapped in low-hour, low-wage, or informal roles.

Geographic disparities also continue to mask the country’s broader progress, with daily floor wages ranging from a low of 411 pesos (US$6.70) among the poorest regions in the Southern Philippines to a high of 780 pesos in Metro Manila. Labour advocates warn these rates are failing to keep pace with basic household requirements.

Sonny Africa, executive director of the think tank Ibon Foundation, offered a grim reminder.

“The World Bank’s country classifications really aren’t meant to measure progress – from the beginning, they were designed as a simple standardised way to classify countries for the bank’s operational purposes, particularly for determining eligibility for concessional lending and its other development finance tools,” he said.

“Can the arithmetical result still be used as a measure of progress? Maybe, if they didn’t conceal more than they revealed. In the Philippines’ case, they do,” he added.