Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017

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Some Fallacies in Economic Reasoning

          One of the most intellectually satisfying activities is to respond to arguments trying to dispute one's statements coming from people with clearly good intentions and interested only in pursuing the truth.  That is why I readily respond to commentaries and blogs I receive as reactions to various columns on economic, social and other issues.  I have received a good number of feedback comments on a recent article I wrote about agricultural development spelling the difference between the success of Thailand, Vietnam and Indonesia in reducing their rates of poverty compared to the failure of the Philippines that continues to suffer from high poverty incidences of some 30%, two to three times higher than those of its ASEAN peers. I would like to respond to some of these comments, without the need to mention names.  What are important are the issues, not the personalities.

          The first issue raised is that agriculture is not driving the growth of countries like Indonesia, Thailand and Vietnam since the composition of the Gross Domestic Product (GDP) in these countries shows that the industrial sector accounts for the much larger share (more than 40%) while agriculture accounts for 20% or less of the GDP.  Fortunately, in the very same issue of the Philippine Daily Inquirer in which these views were expressed, Dr. Mahar Mangahas of the Social Weather Station captioned his column with a most relevant title:  "Economic growth isn't 'development.' "He was downplaying the fuss about the GDP growing only at 3.4% in the second quarter of this year.  He pointed out that, despite this slow growth, hunger dropped from 20.5 to 15.1 percent and self-rated poverty dropped from 51 to 49 percent, between Quarter 1 and Quarter 2 of 2011.  The point I have always raised about focusing on helping the small farmers to be more productive and, therefore, earn more income, is not directly related to increasing economic growth.  Even if agricultural contributes 20% or less to GDP, its impact on a more equitable distribution of income is much greater than the very capital-intensive industries that predominated in the 1950s and 1960s when our leaders were obsessed with inward-looking, import-substitution and protectionist industrialization.  In fact, these industries contributed very little to generating employment and, therefore, did not lead to what is now called inclusive growth.  This type of industrialization is now referred to derisively as the Latin American formula for economic disaster.

          The success stories of Thailand, Indonesia, and Vietnam have more to do with how they helped their small farmers to get richer than with their national economies attaining high rates of growth.  In the 1950s and 1960s, the Philippines had one of the highest rates of GDP growth.  But because we neglected agricultural development, these high rates did not lead to a more equitable distribution of income and wealth.  In fact, the poor got poorer and the rich richer.  Only an industrialization that is based on the rise of numerous small and medium-scale industries--such as happened in Taiwan and South Korea--can lead to inclusive growth.  Indonesia, Thailand and Vietnam are still struggling, with little success, to emulate this type of industrialization.  If they have brought down their poverty rates to levels lower than the Philippines, the main explanation is their enlightened focus on countryside and rural development.

          Another mistaken notion about the focus on agriculture is that it is opposed to industrialization.  On the contrary, Thailand's example shows that making the farmers more productive had tremendous multiplier effects in the "industrialization" of the countryside.  Other members of the farm households started obtaining employment in rural-based industries and services such as food processing, handicrafts, furniture making, bed-and-breakfast facilities, and a host of businesses making use of the raw materials coming from the farms.  It must be repeated again and again that farming is just one component of the wider sector called agribusiness which must be assigned the highest priority by policy makers in a country with abundant agricultural and fisheries resources.  Agribusiness goes beyond farming to include post-harvest, processing or manufacturing, wholesale and retail.  We have to get rid once and for all of the antedeluvian notion that to focus on agricultural development is to keep the Philippines as a "hewer of wood and a drawer of water."  There are very advanced countries such as Australia, France, Germany and New Zealand where agriculture can use even more modern and scientific technology than many standard industries like textile, garments, steel, cement, and wood processing.

          Another point raised in the critique of my article on agricultural development refers to my view that population control does not explain the economic success stories of the three ASEAN countries I mentioned.  The lower fertility rates of these countries were matched with their corresponding lower poverty incidences, as compared to the Philippines' figures.   Even the most elementary student of statistics would know that this is a classical case of the wrong use of statistical inference.  One of the humorous examples cited in the introduction to statistics book I used in college was a study which correlated the yearly increase in the number of lawyers in a country and the yearly increase in alcoholics.  There was almost perfect correlation.  Needless to say, the lawyers in that country would have felt slighted if the researcher dared to infer that the lawyers were the ones getting drunk.  One cannot infer a cause-and-effect relationship from a high correlation between two sets of figures.  Someone still has to prove to me that the lower rates of poverty were due to the lowering of birth rates by population control measures.  There are many other measures to lower poverty rates and there are many other socio-economic conditions that lower fertility rates such as later marriages, urbanization, and education of women.

          Then, finally there was that comment from a friend about the reduction of poverty being a forest with many trees. Agricultural development is only one of the trees.  There are other trees such as quality basic education, microcredit, technical training of out-of-school youth, social housing, etc.  Birth control is just one of the trees. From all my writings about artificial contraceptives, I am sure my friend already knows my reply to his clever metaphor.  Birth control in the forest of poverty eradication is a tree that I would compare to some species of ipil-ipil planted in the 1970s that became a pest in the forest, harming the other trees and the physical environment itself.  A birth control mentality inexorably leads to a demographic winter and to what social scientists in the West have identified as social evils:  more abortion, divorce, unwed mothers, fatherless children, etc.  Introducing birth control as one of the trees in the forest of poverty reduction can also be compared to the janitor fish that was introduced in Laguna Lake to clean the bottom but eventually led to the spread of a destructive species that endangered the very environment of the lake. Thus, for the good of future generations, it would be advisable to exclude birth control as on the trees in the forest of poverty reduction.   I hope to get continuing feedback about my views about how to combat poverty in the Philippines.  For comments, my email address is