Poverty reduction, economic growth, and income inequality

The government recently released information analyzing the latest income and expenditure household surveys which show that the country’s poverty reduction program is on track and is even partly ahead of target. 

Poverty reduction accomplishments. In percentage reduction terms, the government has planned to reduce on an annual basis by 2.23 percentage points from the existing measure of poverty, so that by 2022 the national poverty incidence would be reduced to 14 percent. 

On the basis of the 2018 income and expenditure household surveys collected by the Philippine Statistics Authority, results indicate that the incidence from poverty dropped from 23.3 percent in 2015 to 16.6 percent of the population in 2018. This set on track the target reductions expected from the economic program. 

In population numbers, 5.9 million Filipinos were lifted from the poverty level in 2018. This comes close to the target level of six million, and almost assures that the numerical targets are achieved by 2022, the end period of the current development plan. 

Most recent household income and expenditure information. The household surveys are based on sampling the population. Although they are not without errors (as statistical methods go), these periodic surveys represent the best tools for probing deep into information at the household level, supplemented of course by actual programs that are the basis of government actions in the economy.

Over time, the practice has also improved. It is, therefore, possible to have some level of trust over their predictive capability. Thus, the information we deduce from these surveys can serve as helpful guides in probing the direction and progress of the economy.

Drivers of the current poverty reduction program. The main driver of these economic developments is the sustained economic growth of the economy from year-to-year for almost 15 years now. 

The best way out of poverty is a growing economy. The size of the cake increases so that there is something additional to be shared across all groups in society.

In the past, I have described ours as a rising Philippine economy. There is much to be improved in the quality of this growth. Further reforms are needed to improve the quality and depth of the economic reforms.

In fact, the more we move forward, the more complex and sometimes troubling are the problems we generate and are faced with. But for now, the directions have been sustained and improving. 

Whereas in the past it has been fueled by a steady inflow of remittances from workers who have left the country to serve in other economic settings abroad for want of better jobs at home, the remittances that they have sent home have provided stimulus to a consumption-driven growth. 

Some sectors of the economy have also buttressed internal domestic growth and have strengthened the balance of payments. They have continued to earn foreign exchange from the exports of goods and services, including a growing and energized tourism sector. 

A major characteristic of these dynamic sectors in the export business is that they are activities that are most exposed to international competition, where the economy is essentially open to foreign economic participation. They are not the sectors that have lived on protection.

Another major change in the economics of growth is the rise in government infrastructure spending, which is fueling an investment-driven growth. There is more economic power from the Build Build Build program.

All these have helped to raise the level of incomes of the working class and the continuing increases in employment over time. There are still a lot of unemployment and underemployment, but sustained growth has helped to reduce the troubling magnitudes.

In spite of these, much greater stimulus of investments in the private sector is needed. These can come about if the forthcoming legislation on revising investment incentives is passed by Congress soon. 

Another set of drivers of the reduction in poverty are various economic transfers to the poorest income groups. In particular, these belong to the bottom income earners – the bulk of the 20 to 30 percent of the country’s low income population. 

The government’s assistance to the poor have risen (Pantawid Pamilyang Pilipino, unconditional cash transfer, Pantawid Pasada). These transfers have substantially helped some members of the poorest income classes. 

According to the transfers received by households, the bottom three deciles have witnessed a strong rise in income support from the government, ranging from 25 to 35 percent in 2018.  Such transfers have boosted their incomes.

Many of the programs of spending would not have been affordable in earlier periods. But the government’s success in reforming the tax system in early 2018 made it possible to finance the government’s development program.

The most important economic driver of this changing economic scenario was the passage of a comprehensive tax reform. This reform increased the chance of providing support to the expanded government expenditures on economic development.

Income inequality measures. A widely used measure of income inequality is the the single estimated statistic known as the Gini coefficient.

On the basis of this measure, the Philippine Gini ratio (at 45 percent) has been one of the most unequal among developing countries. Recent measures for China (42 percent), Singapore (47 percent), and Japan (46 percent) also show high inequality.

(According to this ratio, 100 percent means perfect inequality. Countries with Gini rations equal to 35 are considered to have moderate income inequality, countries with ratios close to 50, very high inequality .)

One would expect from the figures of poverty reduction reported by the government that the Gini ratio for the Philippines would fall, as a result.

A recent study undertaken by the United Nations within the Asia and Pacific countries has undertaken comparative measures of the Gini ratio comparing two decades, the 1990s and the 2010s to 2014.

This study has indicated that the Philippine income inequality has slightly fallen. In contrast, many countries (China, Singapore, Indonesia, Japan, Korea, and Vietnam, among others) during this period had experienced rising income inequality.

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