2009 Index of Economic Freedom

Quick Facts

Population:

• 86.3 million

GDP (PPP):

• $272.0 billion
• 5.4% growth
• 5.2% 5-year compound annual growth
• $3153 per capita

Unemployment:

• 7.3%

Inflation (CPI):

• 2.8%

FDI Inflow:

• $2.3 billion

The Philippines has an economic freedom score of 56.8, making its economy the 104th freest in the 2009 Index. Its score is 0.8 point higher than last year, primarily reflecting improvements in monetary freedom and investment freedom. The Philippines ranks 20th out of 41 countries in the Asia–Pacific region, and its overall score is slightly below the world average.

The Philippines has pursued a series of structural reform measures to develop a more vibrant private sector, generate more job opportunities, and enhance business competitiveness. Overall progress has been mixed, and the Philippines still relies heavily on remittances from abroad. The economy scores above the world average in four of the 10 economic freedoms. Fiscal freedom is only slightly above average because income and corporate tax rates are burdensome. The top corporate tax rate, however, is set to be reduced as of January 1, 2009. The average tariff rate is low, but non-tariff barriers remain significant. Government expenditures are relatively low.

The Philippines is weak in business freedom, investment freedom, property rights, and freedom from corruption. The government imposes both formal and non-formal barriers to foreign investment. Contracts can be hard to enforce. Inflation is moderate, but the government subsidizes the prices of several basic goods. The judicial system is weak and vulnerable to extensive political influence.

Background Back to the top

The Philippines returned to democracy in 1986 after two decades of autocratic rule. President Gloria Arroyo took office in 2001 and since then has weathered multiple impeachment attempts. The government has done little to liberalize the Philippines' economy or quell domestic insurgencies, thereby setting back efforts to attract much-needed foreign investment in basic industries and infrastructure. About one-third of the Philippines' annual GDP is derived from overseas remittances.

Business Freedom 49.3 Back to the top

The overall freedom to conduct a business is limited by the Philippines' regulatory environment. Starting a business takes an average of 58 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 225 days. Closing a business can be a difficult and lengthy process.

Trade Freedom 78.6 Back to the top

The Philippines' weighted average tariff rate was 3.2 percent in 2006. Import and export restrictions, quotas, services market access barriers, import and export taxes, import licensing requirements, restrictive and non-transparent standards, labeling and other regulations, domestic bias in government procurement, inconsistent and non-transparent customs valuation and administration, export subsidies, widespread corruption, and weak protection of intellectual property rights add to the cost of trade. Fifteen points were deducted from the Philippines' trade freedom score to account for non-tariff barriers.

Fiscal Freedom 75.4 Back to the top

The Philippines has burdensome tax rates. The top income tax rate is 32 percent. The top corporate tax rate is 35 percent but is scheduled to be reduced to 30 percent as of January 1, 2009. Other taxes include a value-added tax (VAT), a real property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 14.4 percent.

Government Size 90.8 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 17.5 percent of GDP. Progress in privatization, VAT reform, and fiscal prudence has helped to reduce the public debt. Over 40 percent of the power sector is privately owned.

Monetary Freedom77.2 Back to the top

Inflation is moderate, averaging 4.1 percent between 2005 and 2007. The government influences prices through state-owned enterprises and utilities and controls the prices of electricity distribution, water, telecommunications, and most transportation services. Price ceilings are usually imposed on basic commodities only in emergencies, and presidential authority to impose controls to check inflation or ease social tension is rarely exercised. Ten points were deducted from the Philippines' monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Foreign investment is restricted in a number of sectors. All foreign investment is screened and must be registered with the government. Foreign investors receiving incentives may be subject to performance and local sourcing requirements. Other impediments include regulatory inconsistency and lack of transparency, corruption, and inadequate infrastructure. Dispute resolution can be cumbersome and complex, and the enforcement of contracts is weak. Residents and non-residents may hold foreign exchange accounts subject to some restrictions. Payments, capital transactions, and transfers are subject to some restrictions, controls, quantitative limits, and authorizations. Foreign investors may lease but not own land.

Financial Freedom50.0 Back to the top

Banking dominates the growing financial sector, handling more than 90 percent of financial activity. In general, the financial system welcomes foreign competition, and capital standards and oversight have improved. Consolidation has progressed, and non-performing loans have gradually declined to about 5 percent of total loans. The five largest banks provide a full range of financial services and represent about 50 percent of the total assets of all commercial lenders. Two large banks are state-owned, and another is partly state-owned. A small government Islamic bank serves Muslim citizens in the South. Credit is generally available at market terms, but banks must lend specified portions of their funds to preferred sectors. Foreign firms may fully own insurers and set up local subsidiaries. Capital markets are centered on the Philippine Stock Exchange.

Property Rights30.0 Back to the top

The judicial system is weak. Judges are nominally independent, but some have been appointed strictly for political reasons and are corrupt. Organized crime is a strong impediment to the administration of justice, and delays and uncertainty concern investors. Despite some progress, enforcement of intellectual property rights remains problematic.

Freedom From Corruption25.0 Back to the top

Corruption is perceived as pervasive. The Philippines ranks 131st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. A culture of corruption is long-standing. Enforcement of anti-corruption laws is inconsistent, and the public perception of judicial, executive, and legislative corruption remains high.

Labor Freedom51.4 Back to the top

The Philippines' inflexible labor regulations hinder overall productivity and employment growth. The non-salary cost of employing a worker is low, but the difficulty of firing a worker creates a disincentive for additional hiring.