Social Climate

Do stock prices affect the poor?

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Why should there be any hand-wringing over last week’s collapse of the Philippine Stock Exchange Index (PSEI)?  It didn’t hurt the poor, since poor people don’t own stocks.

And why should there have been so much trumpeting earlier this year, merely because the PSEI was repeatedly setting new record highs?  The poor didn’t benefit from that stock boom either; they simply don’t own stocks.

The PSEI is not a very meaningful indicator of the health of the Philippine economy, except for those who equate the economy with the fortunes of the uppermost few. It is only relevant for a very thin layer of individuals and institutions who have substantial financial capacity, and who are not averse to gambling on the fortunes of the companies whose stocks are traded on the exchange.

When Social Weather Stations last asked about the stock market in a national survey of Filipino adults, in June 2009, it found that only 25 percent knew of the existence of the stock market.  The 4 percent of this number who said that they owned any stocks translates to only 1 percent of Filipinos being stockowners.

Having a thin ownership is a great blessing, since it automatically insulates the Filipino masses from the bubbles and bursts of the stock market.

The opposite is true in the United States, where the majority of Americans are hostage to the vagaries of the stock market.  A Gallup survey of 2013 shows 53 percent of all Americans reporting themselves as stockowners, either directly or through mutual funds.

This was a big drop from Gallup’s peak of 65 percent stockownership in 2007, as many Americans lost the value of their stocks, and/or switched their assets from financial to other forms.  I suspect that this excludes pains still to come, as new retirees suffer the losses in value of their pension funds that companies had invested in the stock market.  Hence a general stock price index like the Dow Jones is certainly meaningful for the welfare of very many Americans.

Inflation is the great enemy of the poor. Because of their low standard of living, and their justified fear of inflation, most Filipinos prefer their assets to be primarily in real forms like family dwellings and home facilities, land to live on and/or to till, and implements and other capital goods for their own enterprises, and only secondarily in monetary forms, like cash or bank deposits, for transactional and precautionary purposes.

For those of greater means, the simplest financial instruments would be life insurance, health insurance, and other preneed devices.  Papers like bonds and stocks are only affordable for the thin layer on top.  But all things denominated in money—not only assets but also income flows like wages and salaries—are vulnerable to inflation.

Poverty in the Philippines is not static, but can quickly expand, even from quarter to quarter, due to inflationary spikes, as well as quickly simmer down when prices stabilize again.  Movements in prices of food are particularly critical.

Next to (a) consumer-price stability, econometric analysis indicates that the most dependable economic handles for fighting poverty are (b) creation of decent jobs (the types that reduce underemployment, i.e., do not require workers to seek more work), (c) improvement in agricultural productivity, and (d) expansion of inclusive-type government expenditures.   I had identified factors (a) and (b) years ago, in my early studies of the time-series of self-rated poverty.

Aside from confirming (a) and (b), the latest research by Dennis Mapa and his associates also points, not to the  Gross Domestic Product as an aggregate, but to two of its components that have really mattered.  These two components are agriculture, on the production side, and government, on the expenditure side.  (Note that government expenditures for education in particular are actually investments in human capital.)

The structure of the quarterly growth in the other value-added sectors of production, like manufacturing, mining, services, and so forth has not been inclusive, since growth in these sectors, unlike in agriculture, has not resulted in discernible dents in poverty over the quarters.  Neither has the structure of the quarterly growth in consumption expenditures and investment expenditures been visibly inclusive, unlike growth in government expenditures.

Until the structures of most production and expenditure sectors become inclusive, meaning strongly propoor, it is not the overall growth rate of GDP (from either the production side or the expenditure side) that is important to watch, but the growth rates of the agricultural sector and of government expenditures in particular.

Plus, bear in mind that the Philippine Stock Exchange Index and the foreign exchange value of the peso are not important.  Such numbers do not mean much to the wellbeing of the poor.

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For the new research, see Dennis S. Mapa, Michael Daniel C. Lucagbo, and Heavenly Joy P. Garcia, “The link between agricultural output and the states of poverty in the Philippines: evidence from self-rated poverty data,” The Philippine Review of Economics, December 2012; try not to be deterred by the mathematics, but look for the substance underneath.  The lead author is from the School of Statistics and the School of Economics of the University of the Philippines; the others are from the UP School of Statistics.

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Contact SWS: or mahar.mangahas@sws.org.ph.

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  • eight_log

    The stock market is one good indicator of the economy’s health. More often than not, when the index goes down beyond the normal fluctuations, it pulls the currency down as well. With this, oil products goes up … MAYNILAD, MANILA WATER and MERALCO will jack up their FCDA charges on top of the corporate tax they levy on the consumers!!!! Just because walang mga demonstrations ang ibig sabihin ay hindi naapektuhan ang mahihirap na mga Filipino!!!!

    Sa ngayon ay mataas pa ang rating ni Pnoy … but don’t push the people … we all know what the people can do!!!!!

  • Chloroform

    growth rates of of the agricultural sector? the government itself is using different laws to convert agricultural lands into industrial, eco-zones or highways; for every disaster that passes, the farmer has to sell parts of his land to pay the loan in banks; for every increase in salary of employees, more non-wage earners are thinking of leaving their land for better income in the city… btw, the foreign exchange value affects the price of imported oil and therefore will affect the poor.

  • Ako_Hiking

    Stock prices don’t really affect the poor much…in fact all the economic growth that the Philippines is seemingly experiencing is also not affecting the poor much. Possibly improving the agriculture sector and providing jobs and even bettering education in the poor areas can help.

  • regd

    It does! Ever heard about confidence?

  • Noel Noel Munro

    Good article.

  • vince_bugaboo

    “……and the foreign exchange value of the peso are not important. Such numbers do not mean much to the wellbeing of the poor.”

    Why not? The buying power of the peso depends on its value. And its value is determined by foreign exchange. What are you talking about?

    If you just put your feet on the ground, you’d learn that OFWs rely very much on the foreign exchange rate for the strenght or weakness of their hard-earned money.

    And when “Farmer” (below) brought up the “ripple effect” of the PSE, the phrase alone should have made it all clear to you how the PSE affects everybody, including the very poor, especially the very poor, if you are not blinkered and do not have debilitating cobwebs in your mind.

  • Julius Christopher V. Rendon

    “Plus, bear in mind that the Philippine Stock Exchange Index and the foreign exchange value of the peso are not important. Such numbers do not mean much to the wellbeing of the poor.”

    I am not sure about this sentence in your article… There are bigger reasons why Stock Market are foreign currency exchange values are IMPORTANT… they may not directly mean something to the poor, but they have big impact on your (a), (b), (c), & (d) factors you listed above… Inflation is also affected with the performance of our country’s stock market… There are a lot of problems we can list to blame for the well being of the poor. in my opinion, without any research, financial education and financial discipline are the 2 things that would make a difference to the wellbeing of the poor… but i still very much agree with your (a), (b), (c), & (d)… i do hope the government would soon increase their services to the poor…

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