Inequality, philanthropy and social entrepreneurship

Our country is among the most unequal in wealth and income distribution in Asia, such that it is often associated with its more distant cousins in Latin America. World Bank data on Gini index—which goes from 0 (perfect equality) to 100 (perfect inequality)—indicate that the Philippines’ index is 43, compared with Thailand’s 40 (as of 2009), Indonesia’s 34 (2005), and Vietnam’s 36 (2008).

Comes now the front-page news (Inquirer, 3/4/13) reporting Cielito Habito’s observation that the rise in aggregate wealth of the Philippines’ 40 richest families in 2010-2011 was equivalent to 76.5 percent of the increase in the economy’s GDP during the same period. The corresponding figures were 33.7 percent in Thailand, 5.6 percent in Malaysia, and 2.8 percent in Japan. This does not mean that more than three-quarters of the Philippines’ GDP goes to the 40 families as wealth is a stock while annual GDP is a flow. The ratios merely poignantly highlight how serious social inequality is in our country.

An earlier Asian Development Bank study that we conducted on the links between economic growth and poverty reduction reveals that the growth elasticity of poverty is just above 0.5 for the Philippines compared with 0.7 for Indonesia, and closer to 1.0 for Vietnam. These elasticities imply that, say, a 10-percent increase in overall per capita GDP raises the per capita income or expenditure of the poorest by just about 5.0 percent in the Philippines, 7.0 percent in Indonesia, and close to 10 percent in Vietnam. This suggests that the higher the inequality in a country, the more muted is the effect of economic growth in terms of poverty reduction. This partly explains why the relatively high GDP growth rates in the Philippines in some years have hardly moved poverty incidence. Moreover, other studies show that high inequality, to begin with, tempers economic growth itself. In short, inequality is bad for both economic growth and poverty reduction.

The recent Forbes magazine article on the richest Filipinos against the backdrop of egregious inequality was provocative. Among others, it stimulated thinking about what philanthropy could or might do to help address the country’s age-old social problems. Philanthropy per se is nothing new and is in fact already being practiced to some degree by affluent individuals through their donations to worthwhile causes, as well as by businesses through their foundations for corporate social responsibility.

What may be a more innovative philanthropy is for the richest Filipinos to commit a bulk of their wealth to make a quantum and durable impact on the country’s chronic inequality and poverty. Such philanthropy would in effect serve to make up for the government’s failure and budgetary constraints. For instance, our annual budgets for education and health have been on the order of 2.0-2.5 percent of GDP—well short of Unesco’s and WHO’s 5.0 percent norms, to which our older Asean neighbors hew much closer. Moreover, the budget for science and technology has been a mere 0.15 percent of GDP, compared with our neighbors’ average of 0.5 percent. These shortfalls are a nontrivial reason our economic development has lagged behind so badly.

Philanthropy for health, education, and science and technology would be an investment in public goods, often also referred to as “merit goods” in that they create positive externalities for society and therefore tend to be privately underconsumed and undersupplied (i.e., the public benefit is greater than the private benefit). But it may still be in the self-interest of affluent people to address the “merit goods” deficits toward a better and more productive citizenry resulting in a more stable and safer living environment for all.

Philanthropy is not lacking of worthy exemplars. Andrew Carnegie, John D. Rockefeller, William D. Ford, and the Vanderbilt family contributed to the building of the US cultural infrastructure. More recently, “Warren Buffett and Bill and Melinda Gates established The Giving Pledge in June 2010: a public commitment by some of the world’s richest people to give away at least half of their wealth, which in turn is meant to inspire more giving. To date, 81 billionaires have signed on, with Buffett alone pledging $37 billion” (Marina Primorac, “Good Works,” Finance and Development, December 2012).

For philanthropists in the more mature countries, the philosophy it seems is to not bequeath a large inheritance to their children as it could lead to complacency and a disincentive for hard work. However, such a philosophy appears still relatively uncommon among rich Filipino parents who tend to pamper their children. Businessmen are wont to hand over their business empires to their children—a practice that not infrequently causes intersibling fights. Whether or not such a tradition is a good Filipino value to keep may require serious thought and reflection.

Philanthropy can be made more effective with social entrepreneurship. “Social entrepreneurs drive social innovation and transformation in various fields including education, health, environment and enterprise development. They pursue poverty alleviation goals with zeal, business methods, and the courage to innovate and overcome traditional practices” (Schwab Foundation for Social Entrepreneurship). A good example in the Philippines is Antonio Meloto and his coworkers running the now famous Gawad Kalinga.

Our country needs bigger philanthropy supported by social entrepreneurship to help address its formidable social challenges.

Ernesto M. Pernia, of the UP School of Economics, is a fellow of the Institute for Development and Econometric Analysis and former lead economist of the ADB.