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11:20 PM June 28th, 2013

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By: Mahar Mangahas, June 28th, 2013 11:20 PM

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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