The Illusion of Growth: Why MSMEs Are Still Struggling in a “Recovering” Economy

Official numbers say the Philippine economy is back on track. After suffering its worst economic contraction in decades—a staggering 9.5% drop in 2020—the country bounced back with 7.6% growth in 2022 and 5.5% in 2023. That puts us among the fastest-growing economies in Southeast Asia. Even manufacturing, which took a beating during the pandemic, reportedly expanded by nearly 5% in 2023, thanks largely to the performance of large, export-driven firms.

But step outside the spreadsheets and talk to the people running small factories, and you’ll hear a very different story.

Micro, small, and medium enterprises (MSMEs)—which make up more than 99% of all registered businesses in the country—aren’t feeling the rebound. In the manufacturing sector, especially in sub-industries like cosmetics, clothing, and food, small players report fewer client orders, rising costs, and longer gaps between purchase orders. Many raw material suppliers have said that even big-name clients are scaling back or cancelling bulk orders altogether. The order books may be open, but they’re worryingly quiet.

It’s a strange paradox: the economy is technically recovering, but the businesses that form its backbone feel left behind.

This article explores that disconnect—how the numbers look good on paper, but reality on the ground tells another story. We’ll trace the evolution from pre-pandemic to post-pandemic, using the cosmetics industry as a case study to understand what’s really happening to MSME manufacturers. Along the way, we’ll touch on key factors like government spending patterns, debt burdens, inflation, geopolitical shifts (such as the pullout of Chinese investors), and how poor structural foundations in industry limit real growth at the grassroots level.

Before the Pandemic: Growth Built on a Fragile Base

In the years leading up to COVID-19, the Philippine economy was on a roll—averaging 6% annual growth and seeing a boom in services like BPOs and tourism. But beneath that progress was a weak industrial backbone. Manufacturing’s share of GDP hovered around 19% in 2019 and dipped further to 18.4% by 2022. In contrast, our ASEAN neighbors like Vietnam and Indonesia had manufacturing contributions of over 22%, with those numbers continuing to climb.

According to development theory, countries typically move from agriculture to manufacturing before evolving into service-heavy economies. That middle stage—industrialization—is critical because it creates productive jobs, builds value-added exports, and lays the foundation for resilient economic growth.

The Philippines skipped that stage. Economists call it "premature deindustrialization." Our factories began declining before we even hit middle-income status. For perspective, countries like China and Malaysia started deindustrializing at income levels twice or even three times higher than ours. So instead of building a strong base, we leapt into services without the support of a mature industrial sector.

This shortcut had consequences, especially for MSMEs. Most small manufacturers operate in low-tech sectors like food processing, textiles, or cosmetics. They’ve long battled high electricity costs, inefficient logistics, limited access to affordable raw materials, and intense foreign competition.

While major infrastructure programs like “Build, Build, Build” under the previous administration did boost construction activity, their benefits to small manufacturers were indirect at best. Little was done to improve productivity or build industry linkages that could lift MSMEs. So even before COVID hit, many small manufacturers were already running on razor-thin margins. When the pandemic arrived, it hit a sector already weakened by structural flaws—and exposed just how fragile the foundation really was.

Pandemic Collapse and MSME Scars

When COVID-19 struck, it didn’t just disrupt the economy—it shattered it. In 2020, the Philippine GDP fell by 9.5%, the steepest drop in over 70 years. The impact on MSMEs was immediate and brutal. With lockdowns in place and mobility paralyzed, around 70% of MSMEs were forced to temporarily close. For about 13% of them, that temporary closure became permanent.

The government tried to cushion the blow with emergency measures like wage subsidies, small business loans, and cash aid to households. But in practice, these programs were hampered by red tape, funding limitations, and uneven implementation. For many small businesses, help either came too late—or not at all.

Surviving the lockdown was just the beginning. By the time restrictions eased, many MSMEs were deep in debt, had lost staff, and were running on fumes. Some industries simply didn’t return to their old shape. The ASEAN+3 Macroeconomic Research Office noted that the pandemic may have permanently shaved nearly 2 percentage points off the country’s long-term growth trajectory. Private investment remained below pre-COVID levels even as consumption recovered, and many small businesses were too financially drained to restock, rehire, or reboot.

The “Recovery” That Didn’t Reach Everyone

By 2022, headline numbers suggested that the economy was bouncing back. The country posted 7.6% GDP growth that year, followed by 5.5% in 2023. Manufacturing, tourism, and consumer spending all played a role in driving the rebound. But a closer look tells a more complicated story.

The reality is that the recovery wasn’t shared equally. The Philippine Statistics Authority reported that the industry sector, including manufacturing, grew by just 3.6% in 2023, far below the pace of the service sector. Sub-sectors like small-scale construction and consumer goods manufacturing still hadn’t caught up to their pre-pandemic output levels by 2024.

MSMEs relying on local demand, especially in niche markets, were in a prolonged slump. The cosmetics industry is a prime example. As a non-essential product category, cosmetics took a hit during the pandemic, and it hasn’t fully bounced back. While malls may be buzzing again, Filipino consumers are more cautious. Industry forecasts show the local cosmetics market growing at just 1.2% per year over the next five years. Once inflation is factored in, that’s essentially stagnant.

Some major local players have managed to adapt. A senior officer at Ever Bilena noted that the market has shifted dramatically, and brands need constant innovation to keep up. For smaller MSME cosmetics producers, that kind of agility is harder. They face rising costs on everything from imported chemicals to packaging materials. But raising prices isn’t easy—many customers are already buying less.

This slowdown isn’t unique to cosmetics. Many MSMEs from food processors to apparel makers report that clients are ordering in smaller volumes and restocking more cautiously. That’s not a sign of recovery. That’s a sign of survival mode.

We’re seeing a “two-speed” economy: one where big businesses and export-oriented industries are racing ahead, while domestic MSMEs are stuck idling behind.

Big Spending, Small Reach: When Infrastructure Doesn’t Trickle Down

Infrastructure is one of the government’s go-to strategies for reviving the economy. In 2023 alone, the national government spent over ₱1 trillion on roads, bridges, and railways—one of the highest levels in Philippine history. And it didn’t stop there. The 2024 budget allocated an even bigger sum: ₱1.51 trillion under the “Build, Better, More” program.

On paper, this sounds great. Infrastructure does create jobs and has the potential to spark growth in local economies. But here’s the catch: not all infrastructure spending is created equal.

Experts have long warned that the economic “multiplier effect” of infrastructure—how one peso spent ripples through the economy—depends on efficiency and targeting. And that’s where things get messy. In the Philippines, too much of the budget gets funneled into questionable local projects: overpriced flood control works, redundant road repairs, or construction projects designed more for political mileage than economic value.

As one economist bluntly said, “Infrastructure projects have high multiplier effects—unless they’re riddled with corruption.” Unfortunately, in our case, that caveat is all too common. Billions are spent, but instead of fueling a broad-based recovery, the benefits get concentrated in the hands of contractors or landowners, while small suppliers and MSMEs are left out.

Meanwhile, social support and MSME-focused programs have been put on the back burner. During the height of the pandemic, the government rolled out emergency cash aid and wage subsidies. But these were one-off, primarily efforts. By 2023, budget priorities had shifted to infrastructure, debt payments, and education. Social protection programs like cash transfers and farm subsidies remained underfunded or flatlined.

This matters because infrastructure spending tends to benefit the economy slowly, especially when the projects are long-term or mismanaged. In contrast, giving money directly to households or small businesses tends to move faster. A low-income family that receives ayuda will spend it immediately on food, utilities, or items at the local sari-sari store. That’s a quick injection of life into the grassroots economy. But a highway project in Luzon that imports foreign materials and takes three years to finish? That’s not helping a struggling MSME in Bacolod anytime soon.

In short, the government did spend big—but whether that spending reached the people and businesses who needed it most is another story.

Inflation and Interest Rates: A Double Whammy for Small Businesses

If government spending wasn’t enough of a challenge, small businesses also had to contend with something even more immediate: inflation.

Starting in 2022, prices began to soar. Global supply shocks, rising oil costs, and domestic shortages pushed inflation to over 8% at one point—its highest in more than a decade. On average, prices rose by around 6% in 2022 and 2023. For the average Filipino, that meant more expensive rice, electricity, fuel, and groceries.

For MSMEs, it meant disappearing customers. When utility bills and food eat up a household’s expenses, there’s less left for everything else. That means fewer snacks from the corner store. Fewer cosmetic products. Fewer optional purchases of all kinds.

But inflation wasn’t the only problem. To fight rising prices, the Bangko Sentral ng Pilipinas responded with aggressive interest rate hikes, raising the benchmark rate by over four percentage points in less than a year. That sent borrowing costs for businesses into the stratosphere.

Many MSMEs rely on loans to restock inventory, pay suppliers, or keep payroll running. A business that took out a loan at 6–8% interest pre-pandemic suddenly found itself facing rates of 10–12% or more. For struggling entrepreneurs, that difference was devastating. Some had to divert funds away from operations to meet rising interest payments. Others shelved plans to expand or reopen entirely.

The result? Many small businesses were caught in a double bind: their costs and sales went down, and borrowing money became too expensive even to consider.

Indeed, inflation has since cooled to about 3.9% by the end of 2023. The central bank also paused its rate hikes. But the damage was already done for MSMEs during those two crucial years when recovery should’ve been gaining traction. And with global energy prices and import costs still elevated, the pressure on small manufacturers hasn’t gone away.

Cosmetics producers, for example, continue to feel the pinch. Most of their ingredients and packaging materials are imported, and more expensive. But raising their prices risks driving away already price-sensitive consumers. It’s a vicious cycle: higher costs force tighter margins, but pushing prices too far triggers even lower demand.

That’s the story for a lot of MSMEs right now. And it’s why many still feel they’re stuck in survival mode, despite what the economic indicators say.

Foreign Investment Is Drying Up—And It’s Hurting the Small Enterprises

Another piece of the puzzle behind MSMEs’ struggles lies in foreign direct investment (FDI). While the Philippines continues to court international investors, some of the most anticipated funds, particularly from China, have never arrived. Chinese capital has been quietly pulling out.

During the previous administration, there was a lot of fanfare about deepening ties with China. Big-ticket infrastructure projects and trade deals were expected to follow. But between 2020 and 2023, China’s share of FDI in the Philippines dwindled to just 0.9%—a far cry from the 4.4% it averaged in the previous years. Much of the promised money never materialized. And in 2023, the Philippines officially backed out of China’s Belt and Road Initiative.

This retreat wasn’t just political. China itself is slowing down. Faced with its economic challenges, Chinese companies have scaled back overseas investments. The impact? MSMEs in the Philippines who once supplied or serviced Chinese-backed projects, like local packaging firms or construction subcontractors, have seen demand vanish almost overnight.

Nowhere was this more visible than in the collapse of the Philippine Offshore Gaming Operators (POGOs). These Chinese-run firms were once a booming sector—renting massive office spaces, driving up condo demand, and propping up ecosystems of restaurants, laundromats, and transport services. But after the government ordered a shutdown of POGOs in 2024 due to security and legal issues, entire micro-economies that depended on them collapsed. Office vacancy rates surged, condo units emptied, and MSMEs that had latched onto the POGO ecosystem—whether as suppliers, landlords, or food service providers—were left scrambling.

This chain reaction shows why foreign investment matters beyond headlines. When a major investor leaves, it’s not just big business that gets hit. It's the ripple effect—the sari-sari stores, service providers, and manufacturing MSMEs in the value chain that feel the shock.

To be fair, other countries like the U.S. and Japan have expressed interest in investing more in the Philippines. But these tend to be long-term projects in infrastructure or technology, not the kind that immediately create orders for small-scale manufacturers. And unlike places like Vietnam, which built robust supply chains around foreign factories, the Philippines has yet to develop the kind of industrial base that connects local MSMEs with big global players.

A Fragile Foundation: The Case of Local Manufacturing

The challenges MSMEs face in the manufacturing sector reflect a deeper issue: the Philippines missed the industrialization phase that most developing economies use as a springboard before moving into services.

Traditionally, economic development follows a stepwise path—agriculture to manufacturing to services. In industrialization, many countries generate middle-class jobs, develop domestic suppliers, and create value-added exports. But the Philippines skipped that middle stage. As of 2022, only 7.7% of employment came from manufacturing, far behind regional peers like Thailand and Indonesia, where it’s closer to 14%. Meanwhile, the service sector dominates at around 60% of GDP.

This imbalance matters. Manufacturing isn’t just about factories—it’s about ecosystems. When MSMEs make food, clothing, or construction materials, they create ripple effects across logistics, supply chains, and community employment. Those linkages are weak without a strong industrial core, and growth remains shallow.

Look at food processing, one of the most common MSME manufacturing sectors. Many of these businesses rely on imported ingredients, specialized packaging, or machinery—all of which became more expensive post-pandemic due to global supply chain disruptions and a weakening peso. For small producers, price hikes in essentials like cooking oil, flour, or plastic film eat directly into margins. And because they serve cost-sensitive consumers, they can’t always pass on the increase through higher prices.

In the garments and textile sector, MSMEs struggle to compete with cheap, mass-produced imports from China and Bangladesh. Local tailors and sewing shops—once mainstays of the neighborhood economy—now face shrinking markets, outdated equipment, and limited access to affordable raw fabric. They’re caught between rising input costs and falling demand.

Construction-related MSMEs, such as small-scale makers of hollow blocks, tiles, or fixtures, face a different challenge. While the government has been pouring money into infrastructure, these small players rarely benefit. Big-ticket projects often go to large contractors with their own supply chains, bypassing local producers entirely. So even as cranes dot the skyline, many small manufacturing firms are still waiting for the boom to reach them.

The point is: across multiple sectors, MSME manufacturers are running into the same walls—import dependence, lack of scale, tight credit, and weak support structures. And all of this is happening in a country that shifted to services before fully developing its industrial base.

Economic theory would suggest that the Philippines should have nurtured its manufacturing backbone before moving too far into BPOs and retail. Instead, we vaulted ahead—and MSMEs are now bearing the brunt of that leap.

Yes, the Philippine Development Plan 2023–2028 does acknowledge the need to revitalize industry and support small producers. But policies take time, and execution is always the harder part. Until these reforms truly take root, MSMEs will continue to navigate a business environment that’s tilted against them—trying to survive in a system that hasn’t fully built the foundation they need to grow.

Undermining the Multiplier: Why MSMEs Aren’t Feeling the Growth

Across all the issues we’ve explored—government spending, inflation, foreign investment, and industrial development—one theme stands out: inefficiency. It’s not that the government isn’t spending. It’s that it’s not spending in the right places—or in the right way.

Economists often talk about the multiplier effect: the idea that one peso spent can trigger several rounds of economic activity. MSMEs are one of the most powerful engines of that effect. Give a small construction firm a contract, and its workers spend their wages at local stores, which then buy from neighborhood suppliers, and so on. The cycle spreads prosperity quickly.

But that’s not what’s happening. Too many government projects go to overpriced, low-impact infrastructure—or worse, never get completed at all. Corruption, inefficiency, and poor targeting break the multiplier chain before it even starts. Billions get spent, but little reaches the small players who could actually circulate that money locally.

The same goes for inflation. When prices soared in 2022 and 2023, there was little targeted support to help MSMEs cope. Large companies had buffers, hedges, and access to capital. Small businesses didn’t. Their already-thin margins disappeared, and many were forced to raise prices, cut staff, or delay purchases. That’s not the formula for recovery. It’s a slow bleed.

On the investment front, the Philippines also missed chances to tap into global supply chain shifts. Other ASEAN countries positioned themselves to attract manufacturers leaving China. They offered incentives, industrial zones, and smooth logistics. The Philippines, burdened by restrictive policies and infrastructure gaps, fell behind. As a result, local MSMEs missed out on supplier contracts, technology transfers, and capacity upgrades that could have strengthened the economy from the bottom up.

The bottom line? MSMEs could be the foundation of a strong and inclusive recovery. But policy gaps and structural flaws have blocked them from playing that role.

Conclusion: It’s Time to Back the Backbone

By now, the headlines say the Philippine economy is recovering—and by some metrics, it is. However, that recovery feels more like a mirage for many small business owners nationwide.

You won’t feel the rebound if your clients aren’t ordering. You won’t see the growth if you pay off pandemic-era debts with today’s inflated prices. You can’t hire or innovate if borrowing costs are sky-high and your raw materials come with import premiums.

This disconnect is a red flag. A proper, sustainable recovery must include the businesses that employ most of our workforce and serve our everyday needs—MSMEs.

Small firms are the bedrock of local economies, from cosmetics labs in Laguna to food processors in Cebu. But to thrive, policymakers must rethink the country’s growth strategy. That means prioritizing quality government spending that flows into communities, not just concrete. It means balancing inflation control with access to credit. It means attracting investments that link directly to domestic supply chains. And most of all, it means treating industrial development not as an afterthought, but as a core path to national resilience.

The Philippines has strengths: a young and talented population, entrepreneurial grit, and a strategic location. However, none of that will matter if the small businesses that drive grassroots growth remain behind.

It’s not enough for the economy to grow. It has to grow for everyone.

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