The Role of Power Prices in Structural Transformation: Evidence from the Philippines

The Philippines provides a leading example of Rodrik’s Rule that developing countries experience deindustrialization at lower levels of per-capita income than did developed countries. Previous studies point to the role of protectionist policies, financial crises, and exchange rate overvaluation as explanations for the shrinking share of industry sector. We complement this literature by looking at how power prices influence the growth and composition of manufacturing in the Philippines, in comparison to OECD countries and Indonesia, Thailand, Malaysia, and Singapore. We find that higher power prices are associated with industry’s share turning downward at substantially lower levels of per capita income and that the decline is somewhat steeper. We find similar evidence for the movement of industry’s share in different regions of the Philippines. The composition of Philippine manufacturing, which stagnated in labor-intensive subsectors, provides supporting evidence that high power rates is likely to be a causal factor behind the structural transformation of the economy.