The Failure of Philippine Capitalism

By: Aerone Justin T. Valerio

As a fledgling nation, the Philippines has spent the better part of the past century going down the usual path: democratic and republican government, paired with a capitalist, free-market economy. In all fairness, there has yet to be a better alternative since the fall of the Berlin Wall. 

Since the 1820s, the global transition to a capitalist economy has helped eliminate nearly 90 percent of the world’s extreme poverty. Electricity and clean water have gone from the privilege of the few to the reality of the many. Life expectancy has more than doubled. Child mortality has plummeted. Literacy, once rare, is now nearly universal.

Developing and former communist nations alike have taken pains to replicate the achievements of the West; they’ve cut budget deficits, floated their currencies, privatized industries, welcomed foreign investment, and removed tariffs. The Philippines went a step further by adopting a government blueprint bearing an uncanny resemblance to that of the United States, and by enacting mountains of Republic Acts that would make a California lawyer nostalgic should they take the Philippine bar. The results have been unremarkable at best.

Up until the recent slump caused by a surge in foreign wars and their attendant supply chain disruptions, the Philippine economy boasted a steady annual GDP growth of about 6%, making it one of the fastest-growing economies among its fellow ASEAN neighbors, and was recently anointed by the World Bank with an upper-middle-income status. For Juan Dela Cruz, however, these figures are barely worth the paper they’re written on.

Consistent with pre-EDSA I levels, nearly 50% of Filipino families still consider themselves poor, with nearly 64% being a hospital trip away from crippling debt and extreme poverty. The nation’s brightest are flocking en masse to Singapore, Hong Kong, Saudi Arabia, or wherever else pays a humane wage, while millions of us left behind struggle to make ends meet as incomes can’t keep pace with the monthly Meralco bill and the regular stop at gas stations. 

Whatever economic miracle Adam Smith’s invisible hand works elsewhere seems to have stopped short of Philippine shores despite our best efforts to make good on capitalism’s promise of prosperity and abundance. We’ve taken all the advice the first world has had to offer; why then have we been repaid, time and again, with bitter disappointment? Why doesn’t Philippine Capitalism work?

The Filipino poor aren’t lazy. If you walk the streets of Manila, you’ll quickly find that they are among the most industrious people on Earth. The sidewalks teem with the entrepreneurial spirit of tusok-tusok vendors skewering fish balls and kikiam, pedicab drivers tirelessly pedaling through traffic, sari-sari store owners open from sunrise to well past midnight, boys wading through cars to wipe windshields clean, and jeepney barkers hustling passengers into the last available seat. It is nothing short of astonishing how they can conjure up a profit from practically nothing. 

The Filipino poor aren’t helpless beggars either. By the early 2000s, after decades spent under the travails of poverty, the urban and rural poor had amassed a combined wealth of ₱14.3 trillion, roughly four times the market value of every corporation trading on the Philippine Stock Exchange combined at the time, and roughly fourteen times the value of all foreign direct investment the country had received at the time since the start of martial law. Today,  they generate an estimated ₱10 trillion in annual economic activity — dwarfing the ₱361 billion in foreign direct investment we received last year by several orders of magnitude. 

Clearly, Filipinos at the bottom ring of society aren’t wanting in enterprise, wit, and capital needed to rise above the blight of poverty. The problem is, most of it is unusable.

Tens of millions of Filipinos, and their trillions of pesos in assets, remain outside the formal economy. By United Nations and government estimates, nearly 3.7 million Filipino families live in urban informal settlements, holding no legal claim to the land they occupy, while another 500,000 live in slums. Those figures are almost certainly conservative; factor in rural areas where informal land occupation goes largely undocumented, and the true number climbs much higher. 

We would be mistaken to think that remaining outside the system comes without its own taxes. Without official addresses, informal settlements virtually don’t exist, effectively putting millions off the grid. For utilities like electricity, settlers have taken it upon themselves to fill the gaps the system has left unaddressed. 

In Metro Manila alone, 37% of surveyed households rely on group connections, sharing a single formal connection through a formal intermediary, rather than maintaining one of their own. That arrangement, as all things do, comes with its own markup. Residents of Manila’s North Cemetery reportedly pay 20% to 25% above the regular bill for sub-metered electricity passed on through a legally connected neighbor. 

For those who can’t afford this premium, there’s always the jumper cable: 14% of the metro’s surveyed households—and 21% in Manila—reported tapping a neighbor’s line illegally, through makeshift wiring like twisted telephone wires, often installed without proper safety equipment, exposing the installer and the people below to electrocution and fires. 

The story is much the same for water and sanitation. Where formal connections are unavailable due to the lack of official documentation, residents resort to informal sources that cost more and offer less reliable service. In one Manila community, residents reportedly paid ₱15,000 to ₱20,000 for water connections, roughly two to two-and-a-half times the official cost of less than ₱8,000. 

Those unable to secure a connection at all often had to fetch water themselves: in another community, a third of residents did so daily, spending an average of 90 minutes each day collecting water, effectively a tax on time which could’ve been spent at work, or by operating a small business, a cost further compounded by the poor roads and infrastructure that make transporting water through these communities even more difficult. 

What the formal system provides through pipes, cables, and roads, the informal settlements must often obtain through middlemen, makeshift networks, and hours of manual labor.

In the wake of the legal uncertainty surrounding the land informal settlers have taken over, the formal system sees little reason to develop. Roads, bridges, and transportation deteriorate into increasing impassability, driving businesses away, toward better prospects elsewhere. For those living outside the formal system, reaching job opportunities becomes a more costly and arduous burden than it’s worth, forcing millions to find work in the informal economy, accounting for 42% of the workforce, at 20.6 million people today. 

Yet even success in this underground world caps out at a low ceiling. A vendor who saves enough to buy a motorcycle, a family that adds a second floor to their home, a carinderia owner who finally saves enough for a new stove? None of it compounds as easily as it should. Every peso earned in the informal economy carries a burden: the cost of operating outside the law, without credit for expansion, and without insurance when things go wrong. To break through the ceiling, one must cross the Rubicon to legality, starting with formalization. 

Formalizing micro businesses under the Barangay Micro-Business Enterprises (BMBE) Act of 2002 necessitates 13 different business registration procedures, takes a little over a month to finish, and costs 23.3% of annual per capita income. In contrast, Vietnam has 8 procedures, takes 16 days, and incurs compliance costs equivalent to 5.6% of annual per capita income for formalization, while the Philippines remains among the most burdensome in ASEAN.

After all is said and done, registration doesn’t automatically translate to entry into the formal economy in any meaningful sense. In a survey, only 46% of BMBEs had availed of the income-tax exemption, only 49% had availed of the minimum-wage exemption, while 27% had received none of the incentives under the law. The special credit window and programs for technology transfer, production, management training, and marketing were even less accessible, with only 8% of BMBEs availing of each. The income-tax exemption was particularly difficult: businesses reported instances in which some offices of the Bureau of Internal Revenue didn’t recognize the BMBE exemption. 

Even more startling is the lack of coordination among implementing agencies. A study found that BMBE certificates were not universally recognized across agencies, and that some government offices were completely unaware of the BMBE law. Entrepreneurs likewise reported insufficient information and support from government agencies and local government units. For businesses operating on narrow profit margins, with little administrative capacity, these are major costs that can make remaining informal the more rational choice.

The challenge is all the greater when it comes to formalizing the land beneath their businesses and homes. The legal purchase of land by an informal settler in the Philippines is one of the world’s most cumbersome processes. 

If an informal settler in Manila’s dense shanty towns decides to legally buy the land they’re living on, they would first have to assemble their neighbors, ranging from dozens to hundreds of households, into a community association registered with the Department of Human Settlements and Urban Development’s Homeowners Association and Community Development Bureau. This task alone could take upwards of 6 months, not to mention the time required to register and onboard each and every member without the requisite legal documents, valid IDs, and other supporting documentation.

From there, the community would have to secure multiple affidavits, beneficiary certifications, hire geodetic engineers to survey and map the property, obtain zoning and land-management approvals, negotiate the purchase with the landowner, and then pass the Social Housing Finance Corporation’s due-diligence process involving title checks, inspections, appraisals, and subdivision plans.

Finally owning a parcel of land could take nearly 60 steps, involving nearly 20 different agencies, hiring several engineers, lawyers, and mobilizers, taking nearly 5 years and hundreds of thousands of pesos in fees. Contested or stalled cases can take 10-30 years; in one extreme case, 133 Antipolo families waited nearly 38 years before receiving individual titles in June 2026. 

The difficulty in obtaining land tenure impedes access to the rest of the economy. Without a title, a family can’t take out a mortgage, so they turn to 5-6 lenders. Without a title, property can’t be split or pledged. Without verified addresses, informal communities stay invisible to employers, banks, and utility providers. Without a harmonized registry system, a claim can’t be verified in minutes,  land gets sold twice, and disputes drag on for decades. Without protected transactions, speculators buy up undocumented land for centavos on the peso, certain its value will jump the moment the state finally titles it. 

Eight decades of independence and thousands of regulatory statutes later, a quagmire of bureaucracy has enveloped the institutions meant to provide credit, financial services, social security, legal protection, and the production of capital, inhibiting widespread development of economies of scale among the vast majority of businesses in the country, making Philippine capitalism a small club for the elite. 

The consequences of this exclusion are visible in drone shots of skyscrapers in Manila, Makati, or Taguig, rising above and alongside densely packed settlements and slums. The juxtaposition is a literal snapshot of the country’s economic disparities and of the barriers that prevent trillions of pesos in capital, and Filipino enterprise from entering and fully participating in the economy.  

Untangling the gigantic apparatus of red tape is a tall order for the Philippines, yet it must be done to unlock the full potential of the nation’s wealth, and the millions of Filipino entrepreneurs aching to produce more of it. This task requires a rapid, wholesale overhaul of the formalization process instead of force-feeding foreign policies meant for already developed, functional systems. 

It falls on the laps of Congress and the upper echelons of the executive to get this done. It requires the political will of those at the top to confront the benefactors of the status quo and dismantle longstanding barriers. As the president himself put it, Filipinos are a noble, kind, gracious, and great race. A people of such dignity deserve a government that doesn’t stand in its way.