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Causes and Determinants of Poverty

in the Philippines
MPM RD Applied Economics
Joey Sescon
Ateneo School of Government
Main source: Philippine Development Report 2013:
Creating More and Better Jobs
The World Bank 2014

Poverty and Jobs


The lack of good jobs among low-income
earners has contributed to slower progress in
reducing poverty and inequality.
Between 2003 and 2012, poverty incidence
hardly declined.
In 2009, some 23 million Filipinos, or 26.5
percent of the population, lived below the official
poverty line, while 41.5 percent of the population
was living below the US$2 a day poverty line.

The 2012 Official Poverty Statistics


(www.nscb.gov.ph)

Annual Per Capita Poverty


Threshold (in Pesos)

Poverty Incidence Among Families (%)

2006

2009

2012

2006

2009

2012

6,703

8,448

9,385

23.4

22.9

22.3

10.8

10

10

Subsistence Incidence (Hunger)

There are about 16 million families in the Philippines

Poverty Concepts and Measurements

Poverty of Basic Sectors 2012


SECTOR
Fishermen
Farmers
Children

POVERTY INCIDENCE
39.2 percent
38.3
35.2

Employed
Unemployed

21.9
18.7

Source: NSCB 2012

Poverty of Basic Sectors 2012


SECTOR
POVERTY INCIDENCE
Self-employed
29 percent
and Unpaid Family Workers
Women
25.6
Youth
23.3
Migrant & Formal Sector
16.6
Senior Citizens
16.2
Source: NSCB 2012

Monetary Approach
Exercise: given community with 10 HH
Household Income
1
10
2
20
3
30
4
40
5
50
6
60
7
70
8
80
9
90
10
100

If poverty line = 35, then;


Poverty incidence is
30%, or P0= 3/10

Poverty Concepts and Measurements

Poverty gap
Poverty severity

Monetary Approach
Typical Income Distribution in an Urban Poor Community in
Payatas, Quezon City (Assuming Poverty Line = Php20,500)
Person

Annual Per Cap Inc (Php)

Poor (P), Not Poor (NP)

15,500

16,500

17,500

18,500

19,500

20,500

NP

21,500

NP

22,500

NP

23,500

NP

10

24,500

NP
Poverty Concepts and Measurements

Monetary Approach
Assume a Poverty Threshold of Php20,500
Person

Annual Income
(Php)

Poor (P), Not


Poor (NP)

Poverty Gap (PG)

15,500

5000

16,500

4000

17,500

3000

18,500

2000

19,500

1000

20,500

NP

Total P.G. =15,000

21,500

NP

22,500

NP

23,500

NP

10

24,500

NP
Poverty Concepts and Measurements

Monetary Approach
Average Poverty Gap (APG)
APG = Php15,000/10 = 1,500
Poverty Gap Index (PGI)
PGI = APG/Yp = 1,500/20,500 = 0.073
Poverty Severity Index (PSI)
PSI = Sum(PG/Yp)2/N = .013
Poverty Concepts and Measurements

Monetary Approach
Person Annual Inc Poor (P), Not
(Php)
Poor (NP)

Poverty Gap (PG)

Poverty Severity
Index

15,500

5000

(5,000/20,500)2/10

16,500

4000

(4,000/20,500)2/10

17,500

3000

(3,000/20,500)2/10

18,500

2000

(2,000/20,500)2/10

19,500

1000

(1,000/20,500)2/10

20,500

NP

Total =15,000

PSI = 0.013

21,500

NP

APG = 15,000/10

22,500

NP

PGIndex = .073

23,500

NP

10

24,500

NP
Poverty Concepts and Measurements

10

Monetary Approach - Measuring


Inequality
A common method to ascertain
inequality of distribution of incomes is to
divide the population into successive
quintiles (fifths) or deciles (tenths)
according to ascending income levels and
determine the proportion of the total
income is received by each income
group.
Poverty Concepts and Measurements

11

Table: Typical Size Distribution of Personal Income

Person

Annual Income
(in Php1,000)

Percentage Share in Total Income


Quintiles

15.5

16.5

17.5
18.5

4
5

20.5

21.5
22.5

10

3.2
6.8

3.6

19.5

6
8
9

Deciles

23.5
24.5

4.0
8.4

4.4
4.8

Person

12
13
14
15
16
17
18
19
20
Total

Annual Income
(in Php1,000)

40.5

Percentage Share in Total Income


Quintiles

11.9

Deciles

7.1

50.5
60.5
70.5
80.5

11.1

26.2

15.1

90.5
110.5
120.5
145.5
1,000

20.1

46.7
100

26.6
100

Measuring Inequality
Share of Total Income of the Poor Poorest Quintile and the
Richest Quintile,19852012

2012 1988 1991 1994 1997 2000 2003


Poorest Quintile 8.1

5.2

Richest Quintile 41.8 51.8

4.7

4.9

4.4

4.4

4.7

53.9

52

55.5

54.8

53.4

Poverty Concepts and Measurements

14

Measuring Inequality
Another common way to analyze personal
income statistics is to construct what is known
as a Lorenz curve.
The number of income recipients is plotted on
the horizontal axis in cumulative percentages.
The vertical axis shows the share of total
income received by each percentage of
population. It is also cumulative up to 100%,
meaning that both axes are the same length.
Poverty Concepts and Measurements

15

Lorenz Curve

Figure 1: Lorenz Curve

1.00

1.00

0.90

Percentage of Income

0.80
I

0.70
0.60
H
0.50
0.40

0.30

F
E

0.20

C
B

0.10
A
0.00
0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Percentage of Population

Poverty Concepts and Measurements

16

Poverty and Jobs

The middle class is relatively


small at around 15 percent of
the population, of which about
a third resides or works
abroad.

Poverty and Jobs


This slow progress in reducing poverty points
to deeper structural problems, which manifest
themselves in a pattern of economic growth
that makes poverty reduction stubbornly
difficult.
Moreover, inequality has worsened in the last
three decades, indicating a growth pattern
that does not benefit the poor as much as it
benefits the rich.

Jobs Creation and Employment


More and better jobs need to be created for
10 million Filipinos who were either
unemployed (three million) or underemployed
(seven million) as of 2012, and for
the additional 1.15 million Filipinos who will
enter the labour force every year in the next
four years. That is a total of 14.6 million jobs.

Job creation and employment


Every year in the last decade, only one out of
every four new jobseekers gets a good job.
Of the 500,000 college graduates every year,
around half (240,000) can be absorbed in
BPOs and in other formal sector industries
The other half has the option to find work
abroad (and most of them do in a matter of
years)

Job creation and employment


The remaining 650,000 job seekers
are without college degrees and
most end up in the informal sector in
rural and urban areas. Their jobs are
often characterized by low wages
and low productivity.

Job creation and employment


With sustained GDP growth of
seven percent per year, the
formal sector will be able to
provide good jobs to around two
million people in the next four
years.

Job creation and employment


Even so, the majority of Filipino
workers will still be left out. By 2016,
around 12.4 million Filipinos would
still be unemployed, underemployed,
or would have to work or create
work for themselves in the informal
sector.

What went wrong with the


Philippines?
Despite a head start in manufacturing
compared to its neighbours in the 1950s, the
Philippines failed to industrialize fully.
The share of manufacturing to GDP has
stagnated at around 25 percent since the
1960s
The share of manufacturing employment to
total employment hardly rose above 10
percent.

What went wrong with the


Philippines?
In manufacturing, many industries stagnated or
declined. Since the 1930s, protectionist policies
(i.e., an overvalued peso, high tariff walls,
preferential loans and tax incentives to cronies),
uncompetitive practices, and a small consumer
base, have contributed to the decline of
Philippine manufacturing.
With the exception of food manufacturing and
electronics, the rest of the manufacturing
subsectors either stagnated or declined.

What went wrong with the


Philippines?
In agriculture, these include protectionist
policies, such as the rice self-sufficiency policy,
large subsidies for inputs, and distortions in
institutions that prevent broad and secure
access to land by small landholders.
The latter is evident in high degree of
landlessness, which has not been brought
down significantly by decades of agrarian
reform.

What went wrong with the


Philippines?
Insecure property rights have undermined private
investment incentives and, combined with low
public investment, has reduced agricultural
productivity and increased food prices.
High prices of food and agriculture inputs (e.g.,
corn and sugar) have in turn contributed to high
statutory minimum wages and high production
costs in downstream agribusiness,
manufacturing, and services.

What went wrong with the


Philippines?
Decades of underinvestment also contributed to
the slow growth of agriculture and
manufacturing. From close to 30 percent of GDP
in the 1970s, investment in physical capital
declined to about 20 percent of GDP in the last
decade.
In the public sector, low tax effort and weak
public investment management limited public
infrastructure spending to less than 2.5 percent
of GDP annually.

What went wrong with the


Philippines?
The private sectors reluctance to invest and
create jobs also reflects the countrys weak
investment climate. Among the investment
climate constraints, corruption has been
viewed as the biggest concern, followed by
infrastructure deficiencies, and inefficient
government bureaucracy. Costly business and
labor regulations have also contributed to
weak investment and job creation.

What went wrong with the


Philippines?
Among business regulations, the most
problematic issues are in starting, operating,
and closing a business, paying taxes, and
accessing finance. Philippine business
regulations are complex and are among the
costliest in the East Asia region. Cumbersome
regulations and procedures in starting and
operating a business deter new firm entry and
business expansion.

How development happens?


Economic development involves a
gradual transformation from activities
with low productivity to activities with
higher productivity. In most countries,
this involves a structural transformation
from agriculture to manufacturing and
then to high-skill services.

How development happens?


The process can start with growth in the
urban manufacturing sector (e.g., during
the Industrial Revolution in England), or
with growth in agriculture (e.g., when
China abandoned collective farming in
favor of household farming in the late
1970s).

How development happens?


It involves large-scale movement of workers
from one sector to another, from rural to
urban, and from one type of business to
another. In each movement, different skills are
required.
Key factors of a successful and relatively rapid
transformation are the development of laborintensive and productive agriculture, and the
growth of export-oriented manufacturing.

How development happens?


This combination creates jobs for the majority
of the population, keeps food prices relatively
low, allows workers to acquire new skills, and
can successfully accommodate large
migrations from rural to urban areas. Without
this combination, as history has shown, rapid
economic development will not be sustained.
This has been the case in the Philippines

How development happens?


Successful transformations are typically one of
two scenarios. In one scenario, urban
manufacturing growth leads to higher wages
that trigger labor migration from rural
agricultural areas to urban areas. The resulting
urban population growth leads to higher food
prices, making agriculture more profitable for
the remaining rural workers.

How development happens?


Over time, farm output prices decline relative
to farm input prices. Nonetheless, agriculture
continues to grow through the efficient use of
costlier inputs, wider adoption of modern
technologies, and a more diversified output
structure that includes higher value-added
products. The process continues until urban
productivity and rural productivity are
equalized.

How development happens?


In the other scenario, increased profitability in
agriculture increases farm income, which,
through the same multipliers and linkages,
promotes growth of the non-farm sector. The
basic local manufacturing capacity that is
created in this process is then well-positioned
to exploit the export markets, which provide a
new source of sustainable growth.

How development happens?


In most cases, it is agriculture that reduces
poverty. However, both sectors are needed
for a successful structural transformation. The
exception in which the urban export sector
creates jobs at such a rapid and massive scale
that agriculture does not need to fulfill its role
as the sector that provides the poor with jobs
and effectively sets the minimum wage for the
economy. But such cases are rare.

How development happens?


Well-known unsuccessful transformation are
the forced industrialization in the former
Soviet Union in the first half of the 20th
century, and the collectivization of
agricultural production in China before 1978.
This led to initial rapid economic growth that
was followed by long periods of stagnation
and eventual collapse.

How development happens?


A successful transformation hinges on
i) rural incomes rising, so that the more
enterprising households or household
members can acquire the necessary basic
education to make the transition to non-farm
sectors, particularly urban manufacturing,
ii) agricultural productivity increasing in
response to higher prices,

How development happens?


Iii) manufacturing serving as a major source of
growth, generating employment and skills and
industrial capacity, and sustaining aggregate
demand, and
iv) avoiding inappropriate policy responses to the
initially widening and politically sensitive gap
between the rural and urban sector, such as
unsustainable agricultural subsidies or
uncompetitive practices, which are invariably
captured by better-off farmers and agricultural
corporations

How development happens?


This successful structural transformation
began in Japan, South Korea, and Taiwan,
China in the 1950s. It has been
replicated, albeit less successfully, by
Indonesia, Malaysia, and Thailand since
the 1970s. These economies grew by an
average of 7.3 percent annually or 5.3
percent in per capita terms.

How development happens?


The average share of agriculture to GDP fell
from 35 to 10 percent, while that of
manufacturing increased from around 10 to
30 percent before declining as high-skill
services took over. This structural change is
also evident in the pattern of employment by
sector. By the 1980s, the first group of
industrializers began to shift toward hightech manufacturing and high-skill services.

How development happens?


In these successful East Asian economies,
raising the profitability of smallholder
agriculture, the core farming structure in the
region, was the first step in the transformation
process. These countries had either
substantial landholdings from traditional small
family ownership patterns (e.g., Indonesia) or
had an effective land distribution program
(e.g., Japan, South Korea, China, and Taiwan,
China).

Summary of failure of the economy to


create productive jobs
This is because the countrys long history of
policy distortions slowed the growth of
agriculture and manufacturing in the last six
decades.
Agricultural productivity has remained
depressed, manufacturing has failed to grow
sustainably, and a low-productivity, low-skill
services sector has emerged as the dominant
sector of the economy.

Summary of failure of the economy to


create productive jobs
Lack of competition in key sectors, insecurity of
property rights, complex regulations, and severe
underinvestment by the government and the
private sector has led to this growth pattern,
which is not the norm in the East Asia region.
This anomalous growth pattern has failed to
provide good jobs to majority of Filipinos and has
led to a substantial outmigration of many of the
countrys best and brightest people.

Government, business, and labor need


to work together
There is no simple and effortless way to
resolving the problem of creating more and
better jobs, as this is linked to deep-seated,
structural issues in the economy.
Only a comprehensive reform agenda
implemented across sectors can foster a
business environment conducive to private
sector job creation by firms of all sizes.

Window of opportunity
A unique window of opportunity exists today.
The country is benefiting from strong
macroeconomic fundamentals, political stability,
and a popular government.
However, the extractive nature of some of the
countrys political and economic institutions
that concentrate power and opportunity in the
hands of a very small subset in society poses
significant challenges to achieving lasting
inclusive growth.

Window of opportunity
The Aquino Government has demonstrated that it is
not afraid to tackle vested interests in areas that had
previously been too sensitive to reform. Several
reforms have successfully started, notably in public
financial management, tax policy and administration,
anti-corruption, and social service delivery.
The government now needs to maximize the chances
that the country will follow a more inclusive growth
path and meet the jobs challenge

Exercise
You have $100
Asset A will give you back 5% return
Asset B will give you 10% return of
total investment divided by total
investors

Workshop 1
Give an example of externality (either
positive or negative) and one example
of public good in your province/region.
Discuss the issues and solutions/
policies of the externality and the
public good. (Use demand and supply
graphs.)

Workshop 2
Identify one example of market failure and one
government failure (related or not) in your
province/region. Discuss the issues and
proposed solution/policies to these market and
government failures. (Use demand and supply
graph to illustrate). Examples of market failures
are existence of monopoly, in some degree also
oligopoly, absence/ shortage of suppliers of a
good, presence of negative externalities and
tragedy of common resource goods (but do not
include these two).

Session Tomorrow, Sunday, Dec 6


Workshop 2 Group Reports in the
2 sections shall start at exactly 10
a.m. and will be finished at 12
noon.
There will be NO more session in
the afternoon.

Regarding Missed Online Tests


There will be an essay writing assignment
(for each missed online test) to be given
through OVLE. The score or grades of
these essays will be much lower and noncomparable (non-substitutes) to the
missed online test.