For years, the Philippines has often been described as a service-led economy. Business process outsourcing, retail, tourism, finance, real estate and telecommunications have become important sources of growth and employment.
Economist Dr. Jesus Felipe believes that this development model has limits.
Speaking during the launch of The Philippine Economy Toward 2050 at De La Salle University on August 26, 2026, Felipe argued that the historical path followed by today’s advanced economies points to one recurring pattern: countries industrialized before they became rich.
He put the argument plainly:
“Manufacturing was and still is today the engine of growth.”
For Felipe, manufacturing is not simply one sector among many. He sees it as a major source of productivity growth, technological progress and organizational innovation.
Why manufacturing matters
Felipe argued that the importance of manufacturing goes beyond the number of factories or the value of goods produced.
Manufacturing tends to create large supply chains. It requires logistics, engineering, transportation, finance, software, research, marketing and professional services. As manufacturing firms become more productive, they can also support higher-value service activities around them.
He told the audience that manufacturing is a major source of technology-driven productivity growth and that many high-productivity services depend heavily on manufacturing firms as customers.
This is why he believes a country cannot simply assume that services can replace the development role once played by industry.
Every advanced economy industrialized
Felipe repeatedly returned to economic history.
“There is no single advanced economy, no single advanced nation today that attains such a status… without industrializing.”
He cited the United Kingdom, France, the United States, Japan and other developed economies as examples.
At different points in their development, manufacturing accounted for a much larger share of employment than it does in the Philippines today. Felipe noted that manufacturing employment in many advanced economies once reached around 30 percent of the workforce, with some economies going even higher.
Their economies eventually became more service-oriented, but only after they had already built substantial industrial capabilities.
The Philippines has a very different structure
The Philippines, he said, never developed manufacturing on the same scale.
“Only 7% of all our workers are in manufacturing, unfortunately.”
He contrasted this with Vietnam, where industry accounts for a much larger share of employment.
The difference matters because much of Philippine employment remains concentrated in sectors with relatively low productivity.
Felipe pointed to agriculture, wholesale and retail trade, and construction, which together account for roughly half of employment.
“Fifty percent of all employment are in these three sectors.”
He linked that structure directly to the country’s low wages and low income per capita.
In his view, the Philippines does not primarily suffer from a lack of workers. It suffers from too many workers being concentrated in activities that do not generate enough output per person.
Why wages remain low
This is where Felipe’s industrialization argument becomes particularly relevant to ordinary workers.
If workers remain employed in low-productivity sectors, wages are also likely to remain low.
“That is why our wages are so low, that is why our income per capita is so low.”
Higher wages cannot be sustained simply by decree if productivity does not rise alongside them.
Manufacturing matters because it can move workers from lower-productivity activities into industries where technology, capital and scale allow each worker to produce more value.
This transition was a major part of the development process in economies such as Japan, South Korea and later China.
Services still matter
Felipe’s argument should not be interpreted as saying that services are unimportant.
Services already make up a major part of the Philippine economy and will almost certainly become even more important over time.
In fact, Felipe’s own projections suggest that the Philippines will become an even more service-oriented economy by 2050.
A country can become more service-oriented without necessarily becoming substantially more productive.
The type of services matters.
Advanced economies tend to have large sectors in finance, technology, professional services, logistics, healthcare and research. These activities often grew alongside sophisticated manufacturing sectors.
A service economy dominated by retail, basic commerce and other low-productivity activities may not generate the same gains.
The Vietnam comparison
Felipe repeatedly used Vietnam as a warning and an example.
He noted that Vietnam has expanded its industrial base much faster than the Philippines and now has a significantly larger share of workers employed in industry.
“No wonder why Vietnam has overtaken us.”
The comparison is uncomfortable because both countries were once seen as competing for similar investment and export opportunities.
Vietnam, however, became more deeply integrated into global manufacturing supply chains.
The Philippines developed strengths in services, particularly BPO, but did not achieve the same scale of industrial expansion.
Felipe believes that difference helps explain why Vietnam has been able to catch up economically.
Industrialization requires industrial policy
Felipe also rejected the idea that successful industrialization simply happens when government stays out of the way.
“Governments were behind all this understanding that manufacturing matters in the form of what? Industrial policy.”
He acknowledged that not every industrial-policy intervention succeeds.
“Not all the interventions succeeded by the government.”
But his broader point is that virtually every advanced economy used some combination of protection, state support, infrastructure, financing or targeted policies while building its industrial base.
He also referred to the idea of countries later “kicking away the ladder,” where developed economies discourage poorer countries from using some of the same policies they once relied upon themselves.
For Felipe, the lesson is not that government should protect every company indefinitely. It is that industrial development requires deliberate strategy rather than the assumption that markets alone will create internationally competitive industries.
A difficult challenge for the Philippines
Felipe did not suggest that the Philippines can simply copy South Korea’s industrial strategy from the 1970s or China’s manufacturing model from the 1990s.
Global competition is different today. Technology has changed, supply chains have evolved and automation means factories may employ fewer workers than they once did.
He nevertheless argued that abandoning industrialization altogether would leave the country with limited options.
“Either we make a serious industrialization effort… or all we’re going to do in the next 25 years is most of the same.”
The Philippines can continue growing through services, consumption and construction. But if productivity does not rise substantially, the country may find it difficult to achieve the level of income enjoyed by advanced economies.
Felipe’s presentation at the launch of The Philippine Economy Toward 2050 therefore placed manufacturing at the center of the country’s long-term development debate.
His argument is not that services should disappear. It is that the Philippines may need a much stronger industrial base if it wants the higher productivity, wages and technological capabilities that historically accompanied the transition from a middle-income economy to a high-income one.
