Bernardo M. Villegas
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It`s in the Regions Stupid!
published: Aug 13, 2019






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How to Attain Inclusive Growth (Part 3)

          The World Bank study of the causes and cures of Philippine poverty identified three major causes of what has been holding the Philippines back compared to many other East Asian countries.  These are:  a) The lower pace and less pro-poor pattern of growth than in many other East Asian countries; b) High inequality of income and wealth; and c) The adverse impacts of natural disasters and conflict. 

         The annual growth rates of GDP and GDP per capita in the Philippines—around 5.5 percent and 3.6 percent, respectively during the 2006 to 2015 period—place the Philippines tenth in the East Asia Region, with annual growth rates 4 to 5 percentage points lower than in China, the leader in the region.  It was also pointed out that household surveys show even slower growth in household income per capita, which indicate that less than 10 percent of the country’s population has made it to the global middle class, and more than 10 percent of Filipinos remain vulnerable to falling into poverty as a result of fortuitous events like natural calamities or loss of employment.  In the East Asian region, nearly two-thirds of the population in 2015 belonged to the middle class as contrasted with only 44 percent in the Philippines.  This failure to build a middle class can be traced to erroneous industrialization policies in the past.  Whereas high-performing East Asian countries built booming manufacturing sectors that provided large numbers of labor-intensive jobs in the last century, the Philippines adopted the “Latin American” formula for economic disaster, i.e. inward-looking, protectionist,  capital-intensive, import-substituting and inefficient industries that absorbed very few workers.  This flawed industrialization model lead to very high underemployment rates. The Philippines missed the export-oriented boom that greatly explained the phenomenal successes of the East Asian tiger of the last century.

         To quote the World Bank study: “The Philippines has not developed a manufacturing base, which has placed it at a significant disadvantage.  Workers moving out of agriculture generally end up in low-end service jobs, which limits the gains for labor from structural transformation.  Wages are a major source of income for most households, so the 4 percent increase overall in real wages (for those reporting wages) over the past decade indicated by the Labor Force Surveys helps explain the limited progress with poverty reduction compared to other countries in the region.  Furthermore, the even more limited real wage growth for the better educated, a mere 2 percent for the college educated, probably hindered the increase in the middle class and, worse, contributed to expatriation of highly educated and skilled workers.”  The unintended consequence of this ‘brain drain” has been the phenomenon of Overseas Filipino Workers (OFWs) who have contributed to sustain the growth of the economy and the reduction of poverty in the countryside where most of the relatives receiving the OFW remittances reside.  There should, however, be efforts to bring back a good number of these OFWs especially in the construction sector and in manufacturing, which is now finally growing faster than services thanks to both a larger domestic market for manufacturing, especially food and beverage, and a shift of manufacturing investments from China to Southeast Asia as a result of the rapid increases in wages in China over the last decade or so.

         As far as I am concerned, the real root of Philippine poverty is found in the following commentary found in the World Bank Study:  “For many other East Asian countries faster growth in agricultural productivity has also been a key driver of poverty reduction.  Agriculture, which employs most people in the Philippines has experienced minimal growth in the past decade, contributing to GDP growth by an average of 0.2 percentage points (compared to 1.9 percentage points for industry and 3.4 percentage points for services) over the period 2006 to 2015).”  As I have always maintained, the utter neglect of countryside and agricultural development (coupled with massive corruption in both the public and private sectors) can be mainly blamed for the failure of the Philippines to eradicate poverty in the past.  It is no coincidence that 75 percent of the Philippine poor are in the rural areas.  They are poor because they have not been provided with the necessary infrastructures (farm to market roads, post-harvest facilities, irrigation, and other support services) after the large landed estates were fragmented by a necessary agrarian reform program.  This failure contrasts starkly with the experiences of Taiwan, Thailand, Malaysia and Vietnam who have significantly improved agricultural productivity through the strong support given to the small farmers  by their respective governments in the building of rural infrastructures.

          As I mentioned above in Part 2 of this series, things are looking up for agriculture because we now see the Duterte government focusing on the countryside in the use of public funds in the Build Build Build program. Because of what they see in improved rural infrastructures, there is increased interest in the business sector to invest in the production of high-value crops like palm oil, coffee, cacao, rubber and fruit trees.  With better infrastructures in the countryside  and a more enlightened agrarian reform strategy which will allow the reconsolidation of small farms into bigger units through cooperatives, corporatives or the nucleus estate model of Malaysia, we can witness larger inflows of funds into the countryside as what used to be paid by financial institutions as penalties for not investing in agri-agra projects can now by channeled to agribusiness projects in such areas as Mindanao, Palawan, Eastern and Western Visayas.  Even more promising is the inclusion of the vast coconut sector into the category of high-value crops as integrated coconut plantations (as those now arising in some areas in Palawan and Quezon Province) benefit from the nucleus estate model.  A more productive approach to the growing and processing of coconut products will go a very long way in reducing poverty in the Philippines because the poorest of the poor in our country have always been the coconut farmers. 

         Finally, I would like to point out that it has been very difficult to break the hold of the Filipino elite on the Philippine economy because of the “Filipino First” policy that is enshrined in our very Constitution.  This protectionist approach, especially to industrialization, has actually entrenched the very rich in many strategic sectors of the economy, fostering monopolies and oligopolies.  Only the rich could actually take advantage of these protectionist measures since the poor do not have the capital to invest in the strategic industries which are by nature capital-intensive.  This policy has actually widened the income and wealth gaps that have long been the bane of Philippine society.  As I have pointed out many times, “Filipino First” actually has resulted in “Rich Filipinos First and Damned the Poor.”  By subjecting the rich Filipinos to more competition from abroad, we can break their monopolistic hold on important industries.  For these reasons, I am supporting the amendment of the provisions in our Constitution that unduly restrict the participation of foreign equity in the strategic industries of the Philippines.  For comments, my email address is bernardo.villegas@uap.asia.