MANILA - Despite the much-publicized success of the services sector in keeping the economy afloat, the World Bank considers the boom in the sector a failure on the part of the government to develop sectors that would have been effective in reducing poverty in the country.

The bank said that while the services sector in the Philippines was larger than that of China and Indonesia, the growth is not that inclusive considering that one of the biggest components of the services sector, business-process outsourcing (BPO), focuses only on employing educated and skilled individuals.

World Bank-Philippines chief economist Eric LeBorgne said the government should invest more in improving the country’s business climate, infrastructure, education and fiscal consolidation.

“In contrast to China and Indonesia, the service sector in the Philippines is large, but that reflects a failure to boost economic activity more generally, rather than a mark of success in diversifying the structure of growth,” the bank said in its East Asia Update.

“The Philippines was the most developed country in developing Asia in the 1950s, but subpar rates of growth, coupled with policies protecting inefficient manufacturing based on excessively capital-intensive technology in the subsequent three decades, caused living standards to stagnate to levels that are now below all other middle-income countries in the region,” it added.

The bank explained that with underinvestment in sectors like industry or agriculture through the lack of public investment for infrastructure like agriculture and transportation, many Filipinos made services their employment safety net.

The Washington-based lender also said the services sector also covers high underemployment and low productivity among employees in urban areas.

“Industry was unable to absorb the rapidly growing labor force, including migrants from the rural areas, leaving the service sector as the safety valve. Services account for 65% of the gross domestic product and nearly half of employment, but anecdotal evidence suggests that the bulk of the service sector simply masks severe urban underemployment with very low productivity,” the World Bank said.

LeBorgne said employees in the BPO sector, which is the flagship subsector of Services, belong to families who cannot be considered poor or even near-poor. While BPOs provide a strong impact on GDP, this is an indirect one in making GDP more inclusive.

He said that employees of the BPO sector only contribute to poverty reduction indirectly through tax collection, which makes the government’s social-spending programs like conditional cash transfer and other health and education programs possible.

“A ray of hope has been offered by the success of the business-process outsourcing service sector, which in less than a decade has risen as a formidable global competitor to companies in India—still the preferred destination for BPO. [But] more will need to be done to help BPO boost employment from 1% of the total in the country, however, and policies to be pursued will also facilitate the emergence of other higher value-added and high-productivity services and manufacturing,” the bank said.

However, even with the success of BPOs in the country, LeBorgne said that improving education is still one of the biggest medium-term challenges in the Philippines. He said that even BPOs will benefit greatly if education is improved in the country.

LeBorgne stressed that the recruitment process these days is not as easy. For every 100 applicants, only a small percentage is ready for hire and most applicants will need to be trained in English or technical matters.

“The education level of these applicants does not make them readily trained for BPO sectors. The government needs to improve the quality of the education system,” LeBorgne said.

Earlier, the World Bank said that despite its upward revision of the country’s GDP growth in 2009 and 2010 to 1.4% and 3.1%, respectively, this will not be enough to prevent at least 1.4 million Filipinos from being thrust into poverty next year.

The country’s poverty rate is estimated to be higher compared with a scenario without any global crisis, the bank said. The poverty rate is seen to be 0.9 percentage points and 1.5 percentage points higher in 2009 and 2010, respectively.

The World Bank said the effect of the crisis on urban areas, the manufacturing and services sectors, as well as for female-led households, will be “particularly high.” This will be largely due to reduced employment and labor earnings that will slow down economic activity in the country.

Further, the massive flooding and landslides caused by typhoons Ondoy and Pepeng affected many families through loss of life and livelihoods. With the loss of jobs, the bank expects poverty and hunger incidence to increase.

Typhoon Ondoy alone is estimated to have pushed 150,000 to 250,000 near-poor into poverty, which could increase the national poverty incidence by 0.1% to 0.3 percentage points. The typhoon also dragged a considerable number of urban poor further into poverty.

As of October 20, 2009, the bank said the flood left at least 902 people dead and affected about 8.7 million people; around 1.5 million of this number were displaced either in camps or forced to seek temporary residence from relatives.