Widening and narrowing gaps

Good news: Inequality among countries has improved, as poor countries have managed to narrow their gap with the rich ones in recent decades. Bad news: Income inequality within individual countries has generally worsened. Good news (for us): The Philippines has been an exception to this, with evidence showing income gaps to have narrowed since 2000. Poverty incidence has also lately declined faster than it has in decades, especially after it actually increased in the last.

The government think tank Philippine Institute for Development Studies’ (PIDS) recent “Understanding the New Globalization” report discusses and documents these trends. While rising average incomes with associated improvement in various measures of health and well-being have been generally observed worldwide, what has been deeply contested, PIDS notes, is the fairness and inclusiveness of humanity’s progress. Since the 1980s and 1990s, disparities in average incomes across countries have been observed to decline, with rapid economic growth in China and India having been dominant drivers of this positive change. However, the pace of catch-up is observed to have faltered after the 2008 global financial crisis.

More disturbing is the way income inequality has been worsening within large or small economies alike. PIDS notes that in 2016, the richest 10 percent of households captured over 40 percent of national income in the case of China, India, Russia, and United States-Canada, while this share was 35 percent or below in all these regions in 1980. Meanwhile, the share of the bottom 50 percent remained unchanged at 9 percent. The report also notes that the share of economic growth captured by the top 10 percent worldwide is 57 percent, whereas the bottom 50 percent of the world population received only 12 percent. All these imply that the richer segments of society have captured the bulk of the gains of economic growth.

What is it about the new globalization that is driving the trend toward greater inequality? PIDS cites four key factors: greater capital mobility, technological change, changing labor market institutions, and financial deepening. The easier flow of capital across borders has made it easy for companies to “export” lower-skilled jobs via foreign direct investments from rich to poorer countries where wages are low, taking jobs away from lower-skilled workers in the origin country. At the same time, machines and increasingly sophisticated software continue to take jobs away from workers everywhere. The resulting labor surpluses have induced greater flexibility in the labor markets, with low-skilled workers put at a disadvantage with greatly reduced bargaining power. Meanwhile, innovations in finance have tended to benefit households already with higher incomes, as there are high transaction costs in dealing with diverse “bottom of the pyramid” households with generally lower levels of education and access to markets.

Interestingly, the Philippines has defied this general trend seen elsewhere. In our case, data show that income distribution has actually been improving, with the share of the richest one-fifth (20 percent) of Filipinos having fallen from 54.8 percent in 2000 to 45.5 percent in 2015. At the same time, the income shares of the lower 80 percent increased from 45.2 percent to 54.5 percent in the same period (look up FIES data). The poorest 30 percent increased their share of national income from 7.9 to 12.5 percent.

Hard to believe? The bulk of this improvement actually happened after 2010, when the economy found new dynamism from a combination of factors that included a more open, hence more competitive, economy; better business confidence that led to hiked rates of job-creating investment; and improved government finances that led to greater economic stability. The gains have transcended the Aquino and Duterte administrations, and show what could be achieved with sustained economic growth, which has averaged 6 percent and above for eight consecutive years now, and counting.

The challenge for us, then, is to sustain our economy’s growth momentum, with more growth coming from agriculture and manufacturing, which could create the most jobs.

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