Poverty’s end as chimera

The Philippines’ official poverty incidence at 25.2 percent (2012 average) hasn’t fallen much from 33.1 percent in 1990. Halving it to 16.5 percent by end-2015, which is the Millennium Development Goals’ target, seems well nigh impossible—short of a miracle! The number of Filipinos in absolute poverty, in fact, has risen from about 20 million to more than 25 million today.

In perspective, the share of the world’s population living in extreme poverty, which was 36 percent in 1990, was cut in half already in 2010. This also means that globally the number of poor people is down from 1.9 billion to 1 billion today.

Emboldened by that early achievement, The Economist (Feb. 28-March 6, 2015) reports that the United Nations is expected to go along with the World Bank’s aim set in 2013 for a total elimination of poverty by 2030. However, the latter’s recent “World Economic Prospects” has turned more cautious and now sets its baseline global poverty incidence at 5 percent in 2030. Closer to ending poverty may still be possible, note World Bank economists, if developing countries sustain their growth and the bottom 40 percent of their populations are able to share in the growth such that their incomes rise 2 percentage points faster yearly than the overall average—which seems a tall order!

Nearer to home, the comparative poverty rates are: Thailand’s 13.2 percent, Malaysia’s 1.7 percent, Indonesia’s 11.4 percent, and Vietnam’s 11.1 percent. Only Cambodia, Laos and Burma (Myanmar) have slightly higher poverty rates than the Philippines. Which leads to the question: Why has our country’s poverty been such a tough nut to crack, while our Asean neighbors have made significant strides coming to grips with it?

We need to look into the underlying causes of poverty besides its more proximate reasons. A plausible explanation is the Philippine economy’s taking exception to the normal growth progression from agriculture to industry and then to services. It instead pole-vaulted from an underdeveloped agriculture to the service sector, largely skipping the manufacturing phase. A major policy-induced mistake as agriculture and manufacturing are key to generating jobs and exports besides domestic goods. Of course, it did not help that our politically turbulent 1980s deterred foreign direct investments—from Japan in particular—while our neighbors were going to town riding on the investment and export waves.

Compounding the error—strangely unsaid in various explanations of poverty—was the early demise in the late 1970s of the government’s family planning (FP) program, following the demands of the Catholic hierarchy. A great pity as the program was off to a promising start, and was in fact a model emulated by other Asian countries. Enviably, our neighbors largely avoided both errors.

Thus, what we have had until recently are a lethargic agriculture, anemic manufacturing, and a bloated service sector prematurely accounting for more than half of GDP. Worse still, the dominant service sector is made up of either the financial services and BPOs that require tertiary school graduates or the unstable and low-productivity informal sector—the refuge of the unskilled or less schooled.

Meanwhile, overseas labor migration continues unabated, resulting in brisk remittances that fuel robust consumption spending, though funds go to children’s schooling as well. Our research reveals that remittances directly benefit the richer households more than the poorer ones, with the income effect rising monotonically from the bottom quintile to the top quintile. Which suggests that remittances sharpen inequality more than alleviate absolute poverty.

Another study finds that the higher the inequality, the more muted is the effect of economic growth on poverty. For instance, the growth elasticity of poverty is about 0.5 for the Philippines compared with 0.7 for Indonesia and closer to 1.0 for Vietnam. These imply that, say, a 10-percent increase in overall per capita GDP raises the per capita income or expenditure of the poorest quintile by around 5 percent in the Philippines, 7 percent in Indonesia, and close to 10 percent in Vietnam. This partly explains why our relatively high GDP growth rates in recent years have hardly dented poverty. Moreover, other studies show that high inequality, to begin with, tempers economic growth itself. In short, inequality is bad for both growth and poverty reduction.

Another reason our poverty rate remains high is that the growth rate of the poor population is much faster than the overall average. To illustrate, the bottom quintile increases at roughly 1.6 times the national norm and 2.7 times the richest quintile.

Clearly, after defenestrating the FP program in the late 1970s, the long delay in the passage of the Reproductive Health Law—and its implementation in fits and starts—have been a foolish mistake for a country long beset, and internationally embarrassed, by its chronic poverty.

In fine, what matters to poverty reduction is not only the rate (quantity) but also the quality of economic growth as defined by its sources—agriculture and manufacturing vis-à-vis services, as well as investment vis-à-vis consumption—which are key to creating employment. As well, an integral complement is RH services (a logical complement to the conditional cash transfer program) that capacitate the poor to have the number and spacing of children they want and can provide for. Together, these can enable those at the bottom to benefit more from growth than those in the upper echelons of the wealth hierarchy. Then, perhaps, the light at the end of the long poverty tunnel can begin to be visible.

Ernesto M. Pernia (ernestompernia@gmail.com) is professor emeritus of economics, University of the Philippines, and former lead economist, Asian Development Bank.