Not so long ago, the mantra of mainstream economists, including those in the local academe and bureaucracy, was the “trickle down” doctrine, meaning that if the rich got richer the wealth would “trickle down” to the poor classes.
Money supposedly would drip in the form of investments that the rich would make in new ventures that would create more jobs.
According to this theory, the wealth dribble would result in the expansion of the middle class, and the elevation of the lower classes to the next level of prosperity. Globalization and deregulation would release the pent-up energies of business and “lift all boats.” But the global financial meltdown of 2008-2009, which caused millions of common folk to lose their jobs, incomes and homes, shattered this theory. In the United States, the recession underscored the gap between the 1 percent rich and the 99 percent poor.
The Inquirer, in a prescient editorial titled “Not worth the brag” (9/2/14), graphically described the consequences of the growing disparity between rich and poor in our country, as follows: “With one in every four Filipinos living in poverty and the working class struggling to cope with the ever-increasing cost of living, the administration’s brag about having so many billionaires in the Forbes’ list or having Asia’s fastest economy sounds nothing more than vapid talk to most Filipinos.”
While the Great Recession does not seem to dent the ossified brains of our local economists, the recession, which is now in its fifth year, is changing the thinking of other economists, including those in the International Monetary Fund and the World Bank. In an article last Aug. 5, titled “IMF study finds inequality is damaging to economic growth,” the influential Time magazine reported:
“The International Monetary Fund has backed economists who argue that inequality is a drag on growth in a discussion paper that has also dismissed rightwing theories that efforts to redistribute incomes are self-defeating. The Washington-based organization, which advises governments on sustainable growth, said countries with high levels of inequality suffered lower growth than nations that distributed incomes more evenly.”
IMF managing director Christine Lagarde said the income gap risked creating “an economy of exclusion, and a wasteland of discarded potential,” rending “the precious fabric that holds our society together.”
According to a study by the Stratbase Research Institute, “the gap between rich and poor is most pronounced in the Philippines as compared with neighboring Southeast Asia countries.” The study noted that the Philippines registered a Gini coefficient of 44 percent in 2010, higher than those of Thailand, 42.5 percent; Indonesia, 39.4 percent; Malaysia, 37.9 percent; and Vietnam, 37.8 percent. (A zero coefficient is complete equality.)
A study by the Asian Development Bank “showed vast inequalities, not only in income, but also in land distribution, welfare and human development.” It said that the richest 10 percent of Filipino families were “raking in more than a third of the country’s total income.”
The increasing divide between rich and poor, according to the renowned British economist John Maynard Keynes, was the cause of the Great Depression of the 1930s. With the masses losing their purchasing power, factories and farms stopped producing and stopped hiring, businessmen stopped investing, and the world economy ground to a halt, with one of every four able-bodied men in the United States and the world jobless.
The populist US President Franklin Delano Roosevelt, a Democrat, revived the US economy by redistributing wealth through massive government spending on public works projects. He introduced “progressive taxation,” in which tax rates imposed on personal income rose as the income increased. Before FDR died after serving four unprecedented terms as president, the highest tax rate on individual income tax had risen to 91 percent.
Our 1935 Constitution, drawn during FDR’s incumbency, when our government was still a US commonwealth, adopted this system. It is still carried over by our 1987 Constitution, which provides that “the Congress shall evolve a progressive system of taxation.”
On the other hand, the Marcos dictatorship lowered the personal income tax rates from 75 percent on the highest bracket to 33 percent, making it necessary to raise sales taxes, like the value-added tax (now 12 percent), to make up for lost revenue. Indirect taxes impact more on the poor. The government became more dependent on foreign debt, further draining our revenue through continuous interest payments to foreign creditors.
The dictatorship weakened labor unions that protected living wages by “contractualizing” jobs. The “contractualization” abolished job security, while the minimum wage, a strong concern of the New Deal and Commonwealth President Manuel L. Quezon’s social justice program, was
effectively sabotaged.
With a population of 100 million, we should have the strongest purchasing power in the Asean. But with about 50 percent of our people food-hungry, with practically no cash to satisfy their longing for decent housing, education and culture, our capacity to absorb the modern products of industry and technology is severely limited. So why should foreign investors, who seek profits, come to the Philippines and its tiny market?
According to the 2014 World Investment Report of the Unctad (United Nations Conference on Trade and Development), among Asean countries the Philippines attracted the lowest foreign direct investment (FDI), amounting to a measly $3.8 billion in 2013. Singapore, with a population of just over five million, obtained $63.7 billion in FDI; Malaysia (30 million), $12.3 billion; Thailand (66 million), $12.9 billion; and Vietnam (89 million), $8.9 billion.
So how come Singapore, with just 5 percent of our population, got over one-half of total FDI to the Asean? The reason is that its purchasing power per capita based on GDP amounted to a whopping $64,584 (nominal per capita, $54,584), while that of the Philippines amounted to only P4,682 in PPP (purchasing power parity) and P2,790 in nominal GDP.
FDI does not come in any meaningful amount to our country, not because foreign investors are not given enough incentives, but because our market is so small that investors do not expect enough returns to justify their efforts and risks. The opportunity to earn profits is the best incentive to investments, and not tax exemptions.
So the solution to our poverty is to increase our people’s purchasing power, learning from Roosevelt’s redistributive policies and Quezon’s social justice program.
Manuel F. Almario is a semiretired veteran journalist and spokesman of the Movement for Truth in History (Rizal’s Moth).