Regional growth, poverty reduction in an open economy

While globalization has been around for some time, and many countries have been part of it in one way or another, economic openness has assumed greater significance for the Philippines with the Asean Economic Community officially in full gear since end-2015. This makes the question whether and how the country’s subnational regions can benefit from an open economy relevant and timely.

Studies document the highly skewed spatial distribution of economic activity in the Philippines, with Metro Manila or National Capital Region (NCR) towering over the other regions. And such dominance has been increasing over time, approaching two-fifths of GDP (“Maritime transport critical to regional development,” Opinion, 3/1/16). While spatial concentration may be necessary and desirable initially to achieve agglomeration economies, it can become excessive and costly if left to plain market forces. The diseconomies of agglomeration are all too familiar, such as time lost to traffic congestion, health and environmental costs owing to air and water pollution, flooding and traffic accidents. A transport study by Japan International Cooperation Agency in 2014 estimated the average daily cost of traffic in NCR at P2.4 billion then, which could balloon to P6 billion by 2030 if nothing is done to fix the problem. Thus, as in most other countries, dispersed spatial development remains an important objective of the Philippine government, even as regional development policy has been in the national plans for decades now.

Calabarzon’s and Central Luzon’s relatively large shares nearing a fifth and tenth of GDP, respectively, can be attributed to their proximity to NCR besides being hosts to major special economic zones. Ranking fourth in terms of GDP share is Central Visayas, primarily propelled by Cebu, the country’s second largest city. But its spread effect to outlying island-provinces seems disadvantaged owing to physical distance by sea.

The two most developed regions (NCR and Calabarzon), not surprisingly, are magnets of foreign direct investment accounting for 75 percent of the total in 2014, with Central Luzon drawing 14 percent and Central Visayas a paltry 4 percent. As for trade, the top two regions combine for two-thirds of total exports and just under three quarters of imports. The corresponding shares for Central Luzon are

7.7 percent of exports and 14 percent of imports, and Central Visayas 7.7 percent and 4.3 percent, respectively.

It appears that interregional disparities in social indicators (e.g., literacy, education cohort survival rates, life expectancy at birth) are not as pronounced as are economic indicators, implying that social policy reflects the efficacy of local government delivery of social services. It also suggests that social policy intervention can make a difference for the lagging regions—i.e., if implemented well and in a sustained manner, it could well redress regional inequality in the long run.

Poverty rates seem to correlate more closely with regional incomes. Accordingly, poverty incidence in the Autonomous Region in Muslim Mindanao is steepest at 59 percent (2015, H1), having risen monotonically from 30.5 percent (1991), 47.1 percent (2006), and 55.8 percent (2012). In stark contrast, poverty rate in NCR is 6.5 percent —about a fourth of the nation’s 26.3 percent and just over a tenth of that in ARMM.

Econometric analysis reveals that economic openness significantly influences regional growth which, in turn, positively impacts the wellbeing of the poor. To illustrate: A 10-percent increase in trade is associated with a 2.1-percent growth in regional incomes leading, in turn, to a 2.7-percent rise in the welfare of the poorest quintile, other things being equal. But at the same time, because regional trade is highly elastic (1.8 percent) with respect to regional growth, the more developed regions tend to gain more from trade than the less developed ones. Further, regional economic growth is positively affected by local government economic expenditures and by proximity to NCR. On the other hand, the poor’s wellbeing (or poverty reduction) is boosted by electrification and negatively affected by criminality.

Economic openness has contributed to the evolution of the NCR-centered urban-industrial agglomeration that, in turn, has drawn more trade and investment at the expense of previously more buoyant regions located farther away. These include the Cordillera, Central and Western Visayas, Northern Mindanao and Davao region, as can be gleaned from their diminished shares of total GDP in recent years compared with 2000.

Overall, it seems clear that regions do gain from an open economy in terms of regional economic growth and—through growth—improvements in poverty reduction. However, it appears that the gains from economic openness are uneven, with the ex-ante lagging regions at a disadvantage vis-à-vis the leading ones; by extension, the welfare effects on the poor appear unequal as well.

It is apparent that the NCR-centered mega-urban industrial region has long been beset by diseconomies of agglomeration. It is time the government took regional development policy more seriously. It must take the lead and provide the requisite infrastructures, cut red tape, and level the playing field, thereby enabling the private sector to play a more active role. A suitable strategy may be the “hub and spokes” model that essentially focuses massive investments in or around strategic regional centers (e.g., Laoag, Benguet, Cebu, Iloilo, Cagayan de Oro, Davao, Zamboanga) required to generate spread effects over time to smaller cities, towns and rural areas.

Ernesto M. Pernia is professor emeritus of economics, University of the Philippines, and former lead economist, Asian Development Bank.