The burden of being ‘richer’

Our upgrade to an upper middle-income country (UMIC), announced last week by the World Bank (WB), was met with a mix of reactions, ranging from unreserved cheers to dismissive put-downs, depending on the perspectives and persuasions of those who are commenting. The announcement included Vietnam, which has likewise just achieved UMIC status with a per capita gross national income (GNI) of $4,970, just slightly exceeding our $4,850. But, adjusted for purchasing power parity, their much lower domestic prices put their PPP-adjusted per capita GNI of $16,800, much higher than our $13,800, with their income distribution also better than ours.

The numerical basis for UMIC classification is average income, measured as per capita GNI, formerly known as gross national product or GNP, and computed by dividing the total income of all Filipinos at home and overseas by the population. The more familiar term gross domestic product (GDP) measures the total value of production within the country by Filipinos and foreigners alike, technically equal to the totality of income received to produce it (think of the old GNP as “Gawa Ng Pinoy” and GDP as “Gawa Dito sa Pilipinas”). But average income is just that: an average that imagines every Filipino to be receiving an exact equal share of the total GNI (or GDP). We all know this is far from the case. Philippine Statistics Authority data show that the richest 50 percent of Filipino families accounted for more than 70 percent of total family incomes in 2023. The World Inequality Report had the richest 10 percent of Filipinos holding 60 percent of the wealth as of 2025.

Let me examine the upside and the downside of our new UMIC status from my perspective as an economist.

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On the downside, the most telling implication is the much-reduced access we will now have to cheap loans from major multilateral lenders, like the WB and Asian Development Bank, and bilateral development partners, like Japan and Germany. What exactly does this mean in terms of interest rates and loan terms? From the WB, we lose access to loans with very low fixed interest rates of only 1.25-2.11 percent (or a fixed service charge of only 1.28 percent for loans from its International Development Association arm). Henceforth, we must now pay their market-linked interest rates, currently over 4 percent. Instead of having up to 30 years to pay back, we now face maturities of only 15-20 years, with grace periods (i.e., before payments for the loan principal need to start) reduced from 5-6 years to only 3-4 years. We also lose eligibility for outright grants for technical assistance and programs for sectors with no financial returns like basic education and social welfare, which we must fund with the government budget or private capital from here on. For our other donor-lenders, the changes will be largely the same. All told, it will henceforth cost us much more to access funds to finance our development.

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This shouldn’t be a problem if being a UMIC, or having a higher income status, also means we are better able to pay such costs and fund our own needs. The problem is, it doesn’t. The economy has dramatically slowed down, reducing the base on which government collects taxes. Our national debt now exceeds 65 percent of the value of our GDP (from just 54.6 percent in 2020), breaching the internationally considered “safe” limit of 60 percent. Debt service payments for both principal and interest now nearly equal half of total government revenues (47.2 percent in 2025), up from a third (33.7 percent) in 2020 (imagine your friendly neighborhood “5-6” lender standing by the payroll window on payday, taking away half of your pay envelope before you even lay hands on it.) These numbers do not show improving capacity to pay our debts, but the reverse. Under our new UMIC status, we could actually end up refinancing previous cheaper loans with now more expensive ones.

Unlike the downside, the upside to being a UMIC is, unfortunately, not as concrete and not automatic. It is characterized as greater attractiveness to investments, on the reasoning that higher average income signals a larger domestic consumer market with growing purchasing power. It is also said to lower perceptions of country risk. But whether this would work for the Philippines hinges on our ability to overcome even larger deterrents to investments by Filipinos and foreigners alike, beyond income classification: policy stability and predictability, political environment and corruption, regulatory burden, high costs of doing business, inferior infrastructure, higher labor costs, and more.

Becoming a UMIC hinged on us breaching a numerical threshold; reaping its advantages entails so much more. Meanwhile, its direct downside effect could exert greater pressure on government finances, further threaten the growth that allowed us to attain it, and risk our falling back below UMIC status again.

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