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Poverty reduction: What we know and don’t know

By Arsenio M. Balisacan
Philippine Daily Inquirer
First Posted 19:36:00 02/16/2008

Filed Under: Poverty

WHAT EXACTLY IS THE NATURE OF OUR POVERTY PROBLEM? WHAT DO we know and don?t know about effective strategies and measures to win this protracted war against poverty? Given that the world has become increasingly globalized and competitive, what policy levers can be expected to generate high returns in terms of poverty reduction? Can the country?s governance deliver highly pro-poor development agenda? What are facts? What are fancies?

These were some of the questions that three economists attempted to answer at the University of the Philippines (UP) Centennial Lecture Series on Jan. 31 at UP Diliman.

We are featuring Arsenio Balisacan?s lecture, which provides an overview of the poverty problem and key policy issues and lessons from the ongoing study titled ?Causes of Poverty in the Philippines.? The study is jointly undertaken by the UP School of Economics and the Southeast Asian Regional Center for Graduate Study and Research in Agriculture.

* * *

ADDRESSING widespread poverty is the single most important policy challenge facing the Philippines. Not only is poverty high compared with other countries in East and Southeast Asia, but also its reduction is so slow that the country has become the basket case in the region.

Although poverty is recognized to be a multidimensional concept, income poverty in the Philippines is pervasive. Thus, the bulk of the income poor is likely to be also deprived in other dimensions such as educational achievement and good health.

Hence, we define the poor as those whose incomes fall below a predetermined income threshold. In comparing poverty across countries, it is common to use a fixed norm or poverty line (for example, the $1 a day per person, in purchasing power parity, employed by the World Bank).

Our estimates of poverty based on official poverty lines reveal that, in 2006, the latest year when nationally representative data on household incomes are available, 32 percent of our population were poor. Given the total population of 84 million Filipinos that year, there were 27 million deemed poor, or one of every three Filipinos failed to meet the official poverty line.

Owing to comparability problems, the official poverty estimates could not be used to assess the country?s performance in poverty reduction over time and across space. We have employed a consistent procedure to quantify the magnitude of absolute poverty over time and across geographic areas or population groups.

The resulting estimates for the years with available comparable household survey data (1985-2006) reveal a number of striking observations:

As a proportion of the population, poverty decreased during the period, although it tended to rise in recent years.

The number of poor people rose to its highest level in 2006.

Poverty increased between 2003 and 2006 despite the quite respectable economic performance (by the country?s historical standard), as reflected in growth domestic product (GDP) growth during this period. This observation generally holds true for other income measures of poverty, such as those that are sensitive to the depth and severity of poverty, as well as for other equally plausible poverty lines. It thus appears that the economic growth in recent years has bypassed the poor!

Poverty reduction in the Philippines has lagged far behind those of its East and Southeast Asian neighbors, particularly Indonesia, Thailand, Vietnam and China. Both China and Vietnam started with higher levels of poverty incidence than did the Philippines during the mid-1980s, but their absolute poverty soon dwindled and became much lower than the Philippines? during the early 2000s.

Both Malaysia and Thailand also had virtually eliminated absolute poverty in just 20 years. Interestingly, while the Philippines had a much higher average income ($1,129, in 2000 prices) in the mid-2000s than Vietnam ($538) and Indonesia ($942), its absolute poverty was actually much higher than either of the latter countries.

Much of what the public sees in media on the state of social development in the Philippines is the poverty in Metro Manila?s slums. Yet, the poor in Metro Manila account for only four percent of the country?s total poor population. Metro Manila?s poverty incidence is also the lowest among the regions.

The four regions with the highest incidence are Autonomous Region in Muslim Mindanao (ARMM), Western Mindanao, Bicol and Eastern Visayas. Their poverty incidence figures in 2006 were roughly four times that of Metro Manila?s. These poorest regions account for about one-third of the country?s total number of the poor.

What is quite remarkable is the very high spatial diversity of poverty and poverty reduction in the Philippines. In recent years, some regions have done quite well in attaining high per capita income growth and reducing poverty, but disturbingly others have experienced declines in per capita income and increases in poverty. Note, for example, the alarmingly substantial increase in poverty in ARMM between 1988 and 2006. During this period, poverty also increased in Central Mindanao and Caraga provinces.

Viewed from an international perspective, such disparities could breed regional unrest, armed conflicts and political upheavals, thereby undermining the progress in securing sustained economic growth and national development.

The Philippine Human Development Report 2005 shows that measures of deprivation?such as disparities in access to reliable water supply, electricity and especially education?predict well the occurrence of armed conflicts.

As in most of Asia?s developing countries and despite rapid urbanization in the past 20 years, poverty in the Philippines is still largely a rural phenomenon.

Two of every three poor persons in the country are in rural areas and are dependent predominantly on agricultural employment and incomes. Poverty incidence among agricultural households is roughly three times that in the rest of the population. While the share of agriculture in the total labor force has gone down from about one-half in the late 1980s to only a little more than just one-third by the mid-2000s, the sector continues to account for about 60 percent of total poverty.

Sustained increases in national income?that is, economic growth?are required for poverty reduction. Recent developments present clear evidence that every country that has chalked up significant achievements in poverty reduction and human development has also done quite well in securing long-term economic growth. Indeed, viewed from a medium- to long-term perspective, there is an almost one-to-one correspondence between growth in the incomes of the poor and the country?s average income growth.

This correlation is not unexpected: economic growth is an essential condition for the generation of resources needed to sustain investments in health, education, infrastructure and good governance (law enforcement, regulation), among others.

Viewed from a long-term perspective, the country?s economic growth has been quite anemic, barely exceeding the population growth rate, which has continued to expand rapidly at 2.3 percent a year for most of the past two decades. Economic growth has quickened in the past three years, but questions linger on its sustainability.

Even at the present pace (per capita GDP growth of 4 percent per year in 2004-2007), it can hardly be argued that the Philippines has come close to the growth trajectories of its dynamic neighbors. It is thus not surprising that serious students of Philippine development contend that shifting the economy to a higher growth path?and keeping it there for the long term?should be first and foremost on the development agenda.

The obvious question is: How? What reforms in policies and institutions can bring about an economic climate conducive to high growth and sustained development?

That achieving economic growth should be at the forefront of policy agenda does not at all imply that there is nothing else apart from growth that can be done to lick the poverty problem. On the contrary, developments abroad indicate that much can be done to enhance the poverty-reducing effects of growth. For example, some countries have been more successful than others in reducing poverty, even after controlling for differences in income growth rates.

Studies indicate that the response of poverty to economic growth in the Philippines, especially in recent years, is greatly muted in relation to Indonesia, Thailand and Vietnam. Partly explaining this is the comparatively high inequality in incomes and productive assets, including agricultural lands, in the Philippines.

Key to achieving pro-poor growth, or what operationally amounts to the same thing??inclusive growth,? is expansion in access to economic opportunities, human development, social services and productive assets, particularly by the poor. The underlying weakness of the Philippine economy lies in its inability to create productive employment opportunities for its fast-growing labor force.

Even among those who are employed, productivity is low compared with the country?s neighbors. Furthermore, access to available, productive employment opportunities favors the rich (typically skilled) more than the poor (typically unskilled).

In recent decades, the experience of other countries suggests a strong connection between agricultural and rural development, on the one hand, and poverty reduction, on the other. Fostering productivity growth in agriculture is thus key to lifting rural inhabitants out of poverty. However, for many of today?s rural poor, the route out of poverty often leads out of agriculture altogether.

Rural income diversification and migration to productive nonfarm sectors, including overseas migration, offer important pathways out of poverty. Enhancing the efficiency of the labor market is thus essential to ensuring that migration is a boon rather than a bane to the poor.

Inadequate human capabilities have often been the underlying cause of poverty and inequality. In recent years, economic growth has favored the highly skilled and educated. Even in agriculture, which has been the reservoir of low-skilled labor, growth is increasingly anchored on higher levels of human capabilities.

Yet, the country?s public spending in basic infrastructure, education and health, whether in terms of its share in GDP or in expenditure per person, has been lagging well behind those of its East Asian neighbors. To catch up with these countries in terms of poverty reduction and human development outcomes, the government has to simply prioritize spending on infrastructure and the social sector, especially in basic education, health and family planning services and environment.

The reform effort has to go beyond simply raising the level of public investment in basic infrastructure and social services, particularly education and health. It has to be made pro-poor as well. The data indicate that the poorest groups in society have the least access to health, education and family planning services. Targeting of public spending must be improved so that poorer individuals would receive proportionately more opportunities for publicly funded social services and infrastructure.

Reforms have to likewise include deepening of our participation in the global marketplace. Contrary to fears expressed in various circles, globalization, defined broadly to mean interconnectedness of markets and communities across national borders, has been beneficial to the poor.

Evidence indicates that in cases where globalization (in the more limited sense of openness to international trade) has hurt the poor, the culprit is often not globalization per se but the failure of domestic governance to secure policy and institutional reforms needed to enhance the efficiency of domestic markets and ensure a more inclusive access to technology, infrastructure and human development.

The big challenge for the Philippines, therefore, is to pursue a strongly pro-poor development agenda in a regime in which institutions are initially weak and governance is fragile. Many past, costly programs (e.g. credit programs, food subsidy programs, etc.) were christened in the name of the poor and equity, but in practice, these benefited disproportionately the nonpoor, including politicians, bureaucrats and the elites. It cannot be overemphasized that the quality of our institutions has to be upgraded so that they become more responsive to the needs and aspirations of those in the lowest rung of the social ladder.

Researchers and policy reform advocates need to identify win-win solutions to the inequity problem, clearly specifying the winners and losers as well as the means or options to pacifying or compensating the losers, or designing social contracts that enable actors in society to make credible commitments.

Do those aspiring to be national leaders in 2010 have what it takes to meet this challenge?

* * *

(Balisacan is the executive director of Southeast Asian Regional Center for Graduate Study and Research in Agriculture. He delivered this paper on Jan. 31 at the Centennial Lecture Series at University of the Philippines in Diliman, Quezon City.)

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