Bernardo M. Villegas
Recent Articles
Agriculturally Awesome
published: Aug 07, 2017




Chinese Appetite for High-Value Crops
published: Aug 18, 2017


Articles  >> more topics
Growth Needed to Fight Poverty

           The Philippine economy expanded at the highest growth rate in Asia in the first quarter of 2013 at 7.8 percent.  That should have been a cause for celebration for most Filipinos.  There were, however, the usual kill joys.  Their complaint is that despite the high growth, the poor continue to be poor and the rate of unemployment even increased.  These critics tend to pooh-pooh growth as irrelevant or even misleading.  I beg to disagree.

          From the experiences of all economies that have significantly reduced poverty in the last fifty years--starting with the tiger economies of the last century and more recently the  emerging markets like China--GDP growth rates of 10 per cent or more annually for two to three decades are necessary for  success in combatting mass poverty.  Let me quote extensively from a very insightful article that appeared in The Economist (June 1, 2013) about how growth decreases poverty:  "In 1990-2011 the driving force behind the reduction of worldwide poverty was growth.  Over the past decade, developing countries have boosted their GDP about 6% a year--1.5 points more than 1960-90.  This happened despite the worst world-wide economic crisis since the 1930s.  The three regions with the largest numbers of poor people all registered strong gains in GDP after the recession:  at 8% a year in East Asia; 7% in South Asia; 5% in Africa.  As a rough guide, every 1% increase in GDP per head reduces poverty by around 1.7%..."  The empirical evidence is overwhelming.  GDP growth is an indispensable, though not sufficient condition for the eradication of poverty.  Those who are interested in helping the poor in the Philippines should actually encourage the government and the private sector to accelerate the growth rate to even 9%, if possible, so that there will be a greater probability of reducing poverty over the next twenty years.

          True enough, as the same article in The Economist pointed out, there must also be policies that will reduce inequality:  "Growth alone does not guarantee less poverty.  Income distribution matters, too. One estimate found that two thirds of the fall in poverty was the result of growth; one-third came from greater equality.  More equal countries cut poverty further and faster than unequal ones."  The experience of China over the last thirty years or so is very enlightening:  "The country that cut poverty the most was China, which in 1980 had the largest number of poor people anywhere.  China saw a huge increase in income inequality--but even more growth.  Between 1981 and 2010 it lifted a stunning 680 million people out of poverty--more than the entire current population of Latin America.  This cut its poverty rate from 84% to about 10% now.  China alone accounts for around three quarters of the world's total decline in extreme poverty over the past 30 years."  What should give us Filipinos hope is that there are other countries in the world that also succeeded in reducing poverty by achieving high growth over the last twenty years:  "Between 1980 and 2000 growth in developing countries outside the Middle Kingdom (China) was 0.6%.  From 2000 to 2010 the rate rose to 3.8%--similar to the pattern if you include China.  Mr Ravallion calculates that the acceleration in growth outside China since 2000 has cut the number of people in extreme poverty by 280 million."

          The skeptics should not train their guns on economic growth but instead focus on socio-economic policies that reduce inequality.  The most important strategy to do this is to spend a larger share of the government budget on rural infrastructures, improving the quality of basic education for the poor and delivering improved health services to the lower-income groups. A recent commentary in the International Herald Tribune of Nobel laureate Amartya Zen of Harvard University pointed out that China has been more successful in reducing poverty than India because the Chinese Government spent more public funds on education and health services for the poor.  Over 75% of those living below the poverty line of $1.50 per capita in the Philippines  are in the rural areas.  They are poor because they have no access to roads, irrigation systems, post-harvest facilities and agricultural and financial services. These inadequacies cannot be addressed by market forces.  Only the State can efficiently address them.  Other infrastructures like toll roads, airports, railways and seaports can be privatized and can be made available through Public-Private Partnerships (PPPs).  It is, therefore, ill-advised for ODA funds to be used for these infrastructures, as some Cabinet officials have recommended.  ODA funds should be used exclusively to complement government funds in non-marketable rural infrastructures and other public services for the poor. Since rural infrastructures take time to improve, we should not expect that high growth of 7 to 9% will have an immediate impact on poverty.  At least ten years of consistent high growth will be needed before the so-called trickle down can happen.

          In the meantime, we should fuel high growth by relying more on market forces for those parts of the economy that can respond to market incentives.  As The Economist commented in its editorial:  "The world now knows how to reduce overt.  A lot of targeted policies--basic safety nets and cash-transfer schemes, such as Brazil's Bolsa Familia--help.  So does binning policies like fuel subsidies to Indonesia's middle class and China's hukou household-registration system that boost inequality.  But the biggest poverty-reduction measure of all is liberalizing markets to let poor people get richer.  That means freeing trade between countries (Africa is still cruelly punished by tariffs) and within them (China's real great leap forward occurred because it allowed private business to grow).  Both India and Africa are crowded with monopolies and restrictive policies."

          What about the issue of "jobless growth"?  I am glad Emmanuel Esguera, Deputy Director-General of NEDA, has shed some light on this controversy (Business World, June 27, 2013).  He rightly pointed out that  1.6 million additional jobs were generated in 2011 and another 200,000 in the first quarter of 2013.  Economic growth has been generating more jobs.  The problem is that one million or more workers are added to the workforce annually.  It may seem, then, that no jobs are being generated.  To make matters worse, there are farmers or farm workers--especially from the most impoverished coconut regions--that migrate to the urban areas to look for work but are not qualified for the many jobs opening that are looking for such skills as plumbing, carpentry, masonry, and electro-mechanic skills, not to mention the BPO/KPO industry in which demand for manpower is growing double-digit yearly.   These workers  who used to be in the farms were not considered as unemployed but belonged to the army of underemployed which can constitute as much as 30 percent of the labor force.  The moment that they start looking for work in the cities, they join the unemployed force.  This is another explanation why even growth of 7 to 9% for less than ten years will not immediately address the problem of unemployment.  The conclusion, however, should not that high growth is irrelevant or even undesirable. The logical  response of the critics should be to encourage even higher growth for a much longer period than two or three years.   Growth is good.   Let us not knock it.  For comments, my email address is bernardo.villegas@uap.asia.