The Philippines, under a succession of administrations since 1986, has been committed to sustained growth of income and employment, stable prices, poverty eradication, and improved distribution of income and wealth in an open economy setting. In pursuit of these development goals, the national and local governments have ushered in wide-ranging economic and social policy reform programs. Under the reform programs, real gross domestic product (GDP) doubled between 1986 and 2006—a growth rate of about 3.5% each year. However, this pace of growth leaves much to be desired when compared with that of many of the Philippines' East and Southeast Asian neighbors. In recent years, growth has picked up and in 2007 real GDP grew at 7.2%. But there is no room for complacency. Private investment remains weak, raising the question of whether the current pace of growth is sustainable. In 2006, about 26.9% of families and 32.9% of the population still lived in poverty, a reminder of the difficulties that many individuals are still going through. And inequality in the distribution of household incomes remains high by regional standards.

Moving forward, the challenge for the Philippines is to sustain the current pace of growth or even accelerate it, while making every Filipino a winner in the growth process. To meet this challenge, a key step is to identify the most critical factors that constrain growth and poverty reduction. The diagnostic approach this study adopted to identify the critical constraints is informed by basic insights from recent literature that seeks to account for international differences in the levels and growth rates of per capita income.