The Philippines is on track to strengthen its economic ties with Chile as the two countries celebrate their 80th anniversary of diplomatic relations this year. The Philippines is set to conclude negotiations for a free trade agreement (FTA) with Chile, which will be the country's first with a Latin American nation.
The proposed FTA aims to boost bilateral trade between the two countries, with Philippine exports to Chile reaching $43.3 million in 2024 and imports totaling $290.8 million. This agreement will also serve as a model for the Philippines to follow as it looks to escape the so-called Middle Income Trap (MIT), a phenomenon that has affected many Latin American economies.
The Philippines has made significant progress in recent years, with the country finally attaining the status of a high-middle income economy by registering a per capita income of approximately $4,850 in 2025. However, there is a danger that the country may fall into the MIT if it fails to advance its productivity, innovation, and human capital.
Countries that have successfully transitioned from growth based on cheap labor or commodities to growth based on productivity, innovation, and skills have been able to escape the MIT. One such country is Chile, which has become a high-income economy and a member of the Organization for Economic Co-Operation and Development (OECD). Chile's success can be attributed to its investment in education, technology, and export-oriented industries, as well as its effective public institutions.
Chile's economic model is a stark contrast to the Import Substitution Industrialization (ISI) strategy that the Philippines and many other Latin American countries followed in the 1960s. ISI led to the protection of domestic industries with high tariffs and strong currency and interest rate subsidies, resulting in capital-intensive industries that failed to generate employment. In contrast, Chile and other "tiger economies" such as South Korea and Singapore aggressively exported labor-intensive products to developed markets, achieving full employment and rapid economic growth.
Many Latin American countries, including Argentina, Venezuela, Brazil, and Colombia, have fallen into the MIT due to their failure to transition from resource-based or low-productivity economies to innovation-driven, high-productivity ones. These countries have relied heavily on exports of raw materials and have underinvested in high-quality education, science, and engineering. Weak public institutions, corruption, and populist economic policies have also hindered their growth.
Chile's experience serves as a valuable lesson for the Philippines as it looks to escape the MIT. By investing in education, technology, and innovation, and by promoting effective public institutions and good governance, the Philippines can follow in Chile's footsteps and achieve high-income status.
