Determinants of sectoral composition in a small open economy: Theoretical and quantitative investigations of the Philippines

The Philippine economy since the 1980s has undergone shifts of production, employment, and consumption in the direction of the greater share of nontradable sectors, despite relatively stagnant economic growth. This paper examines sources of the sectoral shifts theoretically and quantitatively based on a dynamic model of a small open economy. The theoretical analysis identifies possible factors affecting the evolution of the sectoral composition: changes in sectoral total factor productivity (TFP), the tariff rate, and the terms of trade. Then, the relative importance of these factors is examined quantitatively by conducting simulations of the model calibrated to the Philippine economy.