Upper-middle income status is not the finish line

MANILA, Philippines – The Philippines has finally crossed the threshold into upper-middle income country (Umic) status.

While this is a much-awaited event, it is not a cause for celebration.

If anything, this is the moment when policymakers should become even more cautious.

Article continues after this advertisement

READ: Philippines reaches upper-middle income status, World Bank says

FEATURED STORIES

BUSINESS

BUSINESS

BUSINESS

Countries do not become prosperous because they are declared upper-middle income; they become prosperous because they possess the institutions and productive capabilities needed to sustain that status.

Without these foundations, the Philippines risks mistaking a mere statistical milestone for genuine economic transformation.

The danger is that the Philippines has reached upper-middle income status faster than its institutions have developed the capacity to sustain it.

The declaration of Umic status may create the impression that the country’s development challenges have largely been solved, presumably validating existing half-baked policies and reducing the urgency for difficult institutional reforms.

Article continues after this advertisement

Yet many of the structural weaknesses that have long constrained Philippine development remain firmly in place: fragmented industrial policies, weak coordination across government agencies, uneven implementation of public programs, regulatory uncertainty, and persistent barriers to productive investment.

These institutional shortcomings—not the income threshold itself—pose the greatest risk to sustaining the country’s new status.

Article continues after this advertisement

Unless governance improves, today’s milestone could easily become tomorrow’s missed opportunity.

The World Bank’s income measure is based on Gross National Income (GNI) per capita, an average that says little about how income is distributed among Filipino households.

Average income can rise while inequality remains high and millions continue to struggle.

More importantly, GNI includes income earned abroad by overseas Filipino workers (OFWs).

READ: OFWs want more say over how remittances are spent

Their remittances were tipping point that pushed the Philippines across the income threshold.

While this reflects the enormous contribution of OFWs, it also means that part of the country’s new status rests on income generated outside the domestic economy rather than on jobs created within it.

The upgrade therefore reflects national income, not purely the strength of domestic employment or productivity.

The World Bank’s explanation of the country’s graduation to Umic status is thus incomplete.

Its narrative focuses on the drivers of economic growth, whereas the income classification is determined by a different metric.

Conflating the two leads to overstating the extent to which domestic structural transformation alone explains the country’s graduation, thus diminishing the importance of overseas income.

There is an even deeper vulnerability.

The Philippines has not yet demonstrated that its productive capabilities are sufficiently upgraded to make this transition permanent. As economists such as Ricardo Hausmann and Dani Rodrik have argued, sustained development depends on building productive capabilities that allow an economy to continually move into more sophisticated activities.

Whether the Philippines has reached that stage remains an open question.

The country’s new classification is particularly fragile because the World Bank’s threshold is denominated in US dollars. Exchange rate movements therefore matter enormously.

In fact, the Philippines narrowly missed attaining Umic status in 2024 by only $26 per capita, partly because of peso depreciation.

A single year of significant currency weakness could once again push the country below the threshold despite continued growth in domestic output.

An economy whose international classification can change because of exchange rate movements has not yet fully escaped structural vulnerability.

The upgrade also changes the country’s financing landscape.

As economies move into the upper-middle income category, concessional financing from development partners gradually tapers. Low-interest official development assistance may become less available, preferential tariff arrangements for exports could diminish, and scholarship and subsidized training opportunities reserved for lower-income countries may shrink.

The Department of Economy, Planning and Development (DepDev) acknowledged these conditions.

The expectation is that these losses will be offset by greater access to private capital markets.

A Umic classification strengthens the country’s macroeconomic narrative and may improve investor perceptions, potentially lowering market borrowing costs.

But this outcome is far from automatic.

Credit-rating agencies base their assessments on fiscal discipline, institutional quality, debt sustainability, inflation and governance—not on income classification alone.

Without continued reforms, the financial benefits of graduation may never fully materialize.

To be sure, the Philippines met the World Bank’s objective criteria for upper-middle income status.

The country’s broad-based growth and rising national income justified its statistical reclassification.

However, income thresholds measure economic outcomes rather than the institutional and productive capabilities needed to sustain them. The country’s graduation therefore reflects what it has achieved, but not necessarily what it has built.

For ordinary Filipinos, meanwhile, nothing changes overnight.

The designation does not increase salaries, reduce food prices, or create jobs by itself. Inflation remains elevated at 6.8 percent as of May 2026, well above the Bangko Sentral ng Pilipinas’s target range, while underemployment has risen to 15.2 percent.

Government itself has acknowledged that many Filipinos continue to experience economic hardship despite sustained growth.

Umic status certifies the country’s macroeconomic trajectory; it does not certify that prosperity is being widely shared.

The value of this statistical milestone, therefore, lies not in the announcement itself, but in what follows.

The Philippines must ensure that investment incentives generate quality employment rather than merely larger capital inflows.

Success should be measured not only by the amount invested but by the number of productive jobs created for every peso of investment.

If investment remains concentrated in capital-intensive activities with limited employment effects, the benefits of Umic status will accrue primarily to firms rather than workers.

Crossing the upper-middle income threshold is not a validation of the existing programs and policies, but only the beginning of a more difficult journey.

Without stronger institutions, deeper productive capabilities, and policies that generate broad-based, job-rich growth, the country’s new status could prove temporary—and any celebration premature.

The challenge is no longer reaching upper-middle income status. It is building an economy that is deserving of this recognition and thus capable of staying there. —CONTRIBUTED INQ

Your subscription could not be saved. Please try again.

Your subscription has been successful.

Leonardo A. Lanzona Jr. is a professor of Economics at the Ateneo de Manila University.