This Selected Issues paper reports that the Philippines is influenced by global developments through both trade and financial channels. Weaker global growth hurts demand for Philippine exports, which in turn affects consumption and investment. The financial system has only limited exposure to Europe and little reliance on foreign wholesale funding, but contagion could still occur through pullbacks of credit by European banks to the domestic corporate sector or a retreat by foreign investors from local equity and bond markets.

Abstract

This Selected Issues paper reports that the Philippines is influenced by global developments through both trade and financial channels. Weaker global growth hurts demand for Philippine exports, which in turn affects consumption and investment. The financial system has only limited exposure to Europe and little reliance on foreign wholesale funding, but contagion could still occur through pullbacks of credit by European banks to the domestic corporate sector or a retreat by foreign investors from local equity and bond markets.

III. Building Inclusive Growth in the Philippines1

A. Introduction

1. This paper argues that in order to raise living standards across the board, a set of mutually reinforcing policies will be needed both to strengthen potential growth and to make growth more inclusive. Strengthening potential growth will require measures to build investment, total factor productivity, and job creation. Inclusive growth calls for additional considerations. A panel cross-country analysis shows that high inflation hurts the poor the most, and financial deepening needs to be accompanied by broader access to finance by the poor if it is to enhance inclusiveness. Greater productivity in agriculture, possibly through better rural infrastructure and extension services, and a shift in labor toward services, such as business process outsourcing and tourism, could help to reduce inequality. The relatively low shares of education, health, and pension spending in GDP in the Philippines also points to an important role for fiscal policy in strengthening inclusiveness.

2. The Philippines has made progress with poverty reduction in recent decades, although the progress has been smaller than in regional peers. The share of people who live on less than $1.25 per day declined from 30.7 percent in 1991 to 22.6 percent in 2006, which was a moderate reduction relative to other Asian countries (Figure III.1 Moreover, poverty has likely increased since the global financial crisis as a significant number of people live close to the poverty line.2 The relatively slow pace of poverty reduction in the Philippines owes to both relatively slow economic growth and a low elasticity of poverty reduction with respect to growth. During 1980–2010, real per capita GDP averaged 0.9 percent annually in the Philippines, compared with 5.1 percent in emerging Asia as a whole (Figure III.2). During 1991-2006, the poverty headcount ratio in the Philippines fell by 1.02 percent for every one percent change in GDP growth, compared with an elasticity of 1.12 percent in comparator Asian countries. The 1.02 percent elasticity was, in addition, somewhat lower than the level of the 1980s (Figure III.3).

Figure III.1.
Figure III.1.

Change in Poverty Headcount Ratio 1/

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Sources: PovcalNet, World Bank; IMF, Regional Economic Outlook: Asia and Pacific, October 2011.1/ At 2005 PPP prices. In parentheses, the latest available year and corresponding headcount ratio at $.125 per day and $2 per day, respectively.
Figure III.2.
Figure III.2.

Real GDP per Capita, 1980=100

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Figure III.3.
Figure III.3.

Selected Asia: Partial Growth Elasticities of Poverty Reduction

(Percent reduction in $1.25/day poverty associated with 1 percent GDP growth)

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Sources: World Bank, PovcalNet database; IMF, WEO database; and staff calculations.

3. The impact of growth on poverty reduction may be blunted by high and rising income inequality. Income inequality in the Philippines is among the highest in the region, with the Gini coefficient having risen from 40 in 1988 to 44 in 2006 (Asian Development Bank, 2009) (Figure III.4). During this period, the income of poor families (defined as the income in bottom quintile) grew only half as much as that of rich families (defined as the income in top quintile) (Figure III.5). Several factors have contributed to rising income inequality, including unequal distribution of growth and regional development, rapid population growth, declines in relative price of labor provided by the poor, and unequal access to social and financial services (World Bank, 2010).

Figure III.4.
Figure III.4.

Gini Index 1/

(Percent reduction in $1.25/day poverty associated with 1 percent GDP growth)

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Sources: World Bank, PovcalNet database; IMF, Regional Economic Outlook: Asia and Pacific, October 2011.1/ In parentheses is the latest available year.
Figure III.5.
Figure III.5.

Philippines: Per Capita Income by Quintile

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Sources: IMF, Regional Economic Outlook: Asia and Pacific.

B. Strengthening Inclusive Growth

4. In order for growth to be sustainable and effective in reducing poverty, it needs to be both faster and more inclusive.3 These two aspects of the challenge are taken up below.

Raising Potential Growth

5. Rapid and sustained growth requires strengthening all three pillars of potential growth. Addressing the relatively low level of investment in the Philippines would be critical for raising potential growth (Figure III.6). The ratio of public investment to GDP declined from 5 percent in the 1990s to 3 percent in the 2000s while that of private investment declined from 19 percent to 17 percent. Raising investment would help to create more job opportunities and reduce the high prevailing rates of unemployment and underemployment, and it would also go hand in hand with structural reforms to raise total factor productivity (TFP) (Table III.1). Raising investment requires, in turn, greater fiscal revenue to support higher public investment and improvements in infrastructure, the business climate, and power supply to support private investment. Structural factors also play a role. Improving human capital and institutional quality, moving up the value chain from agriculture to industry and services, addressing inequitable access to development opportunities and inadequate social safety nets, and improving the domestic rates of return to labor can all be potentially important for strengthening growth.4

Figure III.6.
Figure III.6.

Investment

(In percent of GDP, 2000-10 average)

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Source: WEO database.
Table III.1.

Growth Contribution Under a Reform Scenario

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Sources: Ide (2011); and IMF Staff calculation.

Poverty Reduction

6. International experience suggests that achieving a high pace of growth over extended periods of time is key for poverty reduction. Kraay (2004) shows for a large panel of developing countries that growth in average incomes explains 70 percent of the variation in poverty reduction in the short run, and as much as 97 percent in the long run.5 Lopez and Servén (2004) suggest that for a given inequality level, the poorer the country is, the more important is the growth component in explaining poverty reduction.6 IMF (2011) shows that growth is in general pro-poor, with growth leading to significant declines in poverty across economies and time periods. Specifically, a 1 percent increase in real per capita income leads to about a 2 percent decline in the poverty headcount ratio. However, a 1 percent increase in the Gini coefficient more or less directly offsets the beneficial impact on poverty reduction of the same increase in income.

7. Staff estimates based on fixed effects regression using a panel dataset of 42 emerging economies confirm the importance of growth in reducing poverty but detrimental impact of inequality. The results are as follows:

Estimation results:

Log(Headcountratio)=1.79(1.30)0.48(6.65)*Log(Meanpercapitaincome)+1.23(3.62)*Log(Ginicoefficient)
Notes: Fixed effects panel regressions are conducted using data from a sample of 42 countries during 1979-2009, with 265 observations. R2 (adjusted) = 0.79. t-statistics are in parentheses.

The estimation results suggest that a 1 percent increase in per capita income leads to about a ½ percent decline in the poverty headcount ratio. However, rising inequality offsets the decline in poverty associated with higher income growth, as a 1 percent increase in the Gini coefficient leads to about a 1¼ percent increase in the poverty headcount ratio.

Building Inclusive Growth

8. The authorities’ medium-term development plan (“Philippines Development Plan, 2011-2016”) places inclusive growth at the center of the agenda (NEDA, 2011). The Plan notes that three key reasons why growth has not been inclusive in the past are: growth has been slow in comparison with other Asian countries, the benefits of economic and social progress have been shared only narrowly, and issues of corruption and governance have at times undermined the public’s sense of ownership and control over public policy.

9. The degree of inclusiveness in the Philippines is estimated to be one of the lowest among 42 emerging markets (Figure III.7). “Inclusiveness” is measured here by the ratio of the bottom quintile of the income distribution and mean per capita income. The data indicate that the income of the bottom quintile has increased significantly less than proportionately with average income. In contrast, the income of the top quintile has risen more than proportionately with average income.

Figure III.7.
Figure III.7.

Degree of Inclusiveness 1/

(In percent of GDP, 2000-10 average)

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Source: World Bank, Povcalnet database.1/ Degree of inclusiveness is measured by the b coefficient, from the regression: log (inc_q1) = a + b*log (inc), where inc_q1 is income in the bottom quintile and inc is mean per capita income.

10. The chapter uses a macro panel data approach to identify a number of determinants of inclusive growth. Using the above definition of inclusiveness, a panel of 42 countries is analyzed to identify a set of economic and social indicators that explain the degree of inclusiveness in emerging markets. The results are shown in Table III.2, and the main conclusions are as follows:

  • A higher level of mean income (represented by the constant term) leads to greater inclusiveness. The importance of higher economic growth for raising inclusiveness highlights the importance of policies to raise investment, factor productivity, and employment;

  • Higher inflation is associated with less inclusiveness. Higher inflation is often driven by food prices, which represent a greater share of the consumption basket of the poor;

  • Greater health spending is associated with greater inclusiveness;

  • Higher productivity in agriculture is associated with greater inclusiveness. Higher agricultural productivity could increase the returns to economic activity in rural areas, as well as reduce the number of workers required to sustain rural living standard and allow migration to higher-value-added sectors;

  • Indeed, a greater share of employment in services is associated with greater inclusiveness. In this context, greater labor market flexibility could facilitate a move away from low-return occupations to those where opportunities are better (Table III.3 and WEF, 2011). Measures to increase labor market flexibility and active labor market measures, such as job training and search assistance, would facilitate job creation and transition to higher paying jobs in the BPO and tourism sectors. A shift toward the BPO and tourism sectors would also require broader access to education and improved infrastructure; and

  • Financial deepening, measured by the credit-to-GDP ratio, has a negative relationship with inclusiveness. This conclusion may reflect the fact that financial deepening, if it does not entail improving access to finance by the poor, may benefit relatively richer groups.7 In the Philippines, the poor have relatively little access to the financial sector (Table III.4). The authorities’ ongoing efforts to promote financial inclusion, including rural finance and microfinance, can play a helpful role in improving access and building inclusiveness.

Table III.2.

Estimation of the Model, Full Sample 1/

(Dependent variable: Ratio of the income in the bottom quintile to mean per capita income)

article image
Source: IMF staff calculations.

t statistics are in parentheses. The asterisks *, **, *** denote significant at the 10 percent, 5 percent and 1 percent level, respectively. All data is from World Bank, World Development Indicator (WDI), EDSS-IMF, except for the share of lowest 20 percent income in China, India, and Indonesia. Due to limited sample in WDI, we use the simple average of rural and urban data in those three countries from the World Bank, PovcalNet.

Table III.3.

Labor Market Efficiency

article image
Source: World Economic Forum, Global Competitiveness Report 2011-2012.

1=impeded by regulation, 7=flexibly determined by employers.

Scores on a 1-7 scale, with 7 being the most desirable outcome.

Table III.4.

Distribution of Poor and Non-Poor Households by Access to Financial Market 1/

article image
Source: ABD (2009), NSO Family Income and Expenditure Survey

Financial markets comprise loans, savings and investments

11. The relatively low share of education, health and pension spending to GDP in the Philippines points to an important potential role for fiscal policy in strengthening inclusiveness (Figures III.8-III.11). A World Bank (2011) study found that the level, rather than the efficiency, of spending is a key constraint to achieving better health and education outcomes in the Philippines. Cross-country experience suggests that countries with relatively higher spending on human capital, health care, pensions, and other aspects of the social safety net tend to have more inclusive growth.

Figure III.8.
Figure III.8.

Inclusiveness and Education

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Figure III.9.
Figure III.9.

Inclusiveness and Health

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Figure III.10.
Figure III.10.

Public Education Spending

(In percent of GDP, 2005-09 average)

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

Figure III.11.
Figure III.11.

Public Health Spending

(In percent of GDP, 2005-09 average)

Citation: IMF Staff Country Reports 2012, 050; 10.5089/9781463939748.002.A003

12. Against this background, the ongoing reorientation of fiscal expenditure toward social priorities, as well as the emphasis in the Philippines Development Plan on strengthening infrastructure, governance, human capital, and social safety nets, are well focused and appropriate. Their implementation will be important for raising the pace of growth in the Philippines as well as for ensuring that the benefits of higher growth are shared widely across the population.

References

  • Ali, I., and H. H. Son, 2007, “Measuring Inclusive Growth,” Asian Development Review, Vol. 24, No. 1, pp. 11-31 (Manila: Asian Development Bank).

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  • Asian Development Bank, 2009, Poverty in Philippines: Causes, Concerns and Opportunities.

  • Asian Development Bank, 2002, “Growth and Poverty: Lessons from the East Asian Miracle Revisited,” ADB Institute Research Paper No. 33 (Manila).

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  • Asian Development Bank, 2007, “Philippines: Critical Development Constraints,” Country Diagnostics Studies, Economics and Research Department (Manila).

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  • Commission on Growth and Development, 2008, Growth Report: Strategies for Sustained Growth and Inclusive Development (Washington: World Bank).

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  • Dollar, D., and A. Kraay, 2002, “Growth is Good for the Poor,” Journal of Economic Growth, Vol. 7, No. 3, pages 195-225.

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  • International Monetary Fund, 2011, Regional Economic Outlook: Asia and Pacific, October (Washington).

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1

Prepared by Yoga Affandi and Shanaka J. Peiris.

2

Based on the World Bank, PovcalNet data, the share of the population that live on less than $2 per day was 45 percent (as of 2006).

3

This point was reinforced in the findings of the Commission on Growth and Development (2008), see also World Bank (2010).

5

Most of the remainder of the variation in poverty reduction is accounted for by changes in income distribution.

6

Raising growth will not only benefit for poverty reduction but also improve social indicators such as life expectancy, infant mortality and adult literacy (ADB, 2002).

7

NEDA (2011) reports that the current geographical distribution of financial service providers shows a growing concentration in high income and urbanized areas.

Philippines: Selected Issues
Author: International Monetary Fund