BREAKING NEWS: U.P. School of Economics August 24, 2010 Paper links Widespread Poverty to Gov't Corruption, other Factors

By Chanda Shahani

President Benigno S. Aquino III's controversial campaign slogan, “Kung walang corrupt, walang mahirap.” (If there is no corruption in the Philippines, then there will be no poverty), which was criticized by his critics during the May 2010 elections as being an overly simplistic diagnosis of the root causes of the country's problems of poverty, has found unexpected support from five professors from the University of the Philippines School of Economics (UPSE) and who have uploaded a discussion paper (http://tinyurl.com/3xnao73) on August 24, 2010 linking government corruption and other factors to widespread poverty in the Philippines.

Entitled, “The Philippine Economy and Poverty During the Global Economic Crisis,” and authored by UPSE Dean Arsenio Balisacan and UPSE Professors Sharon Piza, Dennis Mapa, Carlos Abad Santos and Donna Odra, the paper cited “highly inequitable distribution” of development opportunities” that “greatly muted the impact of economic growth on poverty reduction.” Contributing factors were the low economic growth rate coupled with a high population growth. However critical constraints to private investment and growth needed to be addressed by President Aquino and the national leadership in the following areas:

• Address a tight fiscal situation due largely to weak revenue generation.
• Address inadequate infrastructure, especially transportation and electricity.
• Address weak investor confidence owing to governance concerns, especially corruption and political instability.

 (UPSE Dean Arsenio Balisacan. Source: http://www.upd.edu.ph/)

The report said that the new administration of President Aquino “must marshall political support for an inclusivegrowth and development agenda,” that includes the poor because “even though the poor form a numerically large group, they are in reality a weak lobby group in the balance of political power.”

The paper, which has drawn substantially from the authors' work for the Asian Development Bank (ADB) and the United Nations Development Program (UNDP) assessed evidence and recent data of the impact of the global economic crisis (GEC) on the national economy and poverty and found that not only was it severe – but that it may linger for years to come – especially for the marginalized and disaffected sectors of Philippine society.

The Philippine poor were dealt a knockout blow by the Global Economic Crisis

It is within the context of the global economic crisis (GEC) which erupted in mid-2008 that the major economies of Asia, including China, India and Indonesia showed that they were on their way to recovery, the study said. Unfortunately, while the Philippine economy avoided recession, the impact of the GEC on poverty was widespread, as it was compounded by sharp spikes in global food grain prices in late 2007 and the first half of 2008 and poverty rose even though economic growth (4.8% a year) outstripped population growth at 2% a year, making the already vulnerable poor even more vulnerable.

The country's neighbors saw their per capita income more than doubling during the past three decades. In contrast, per capita income in the Philippines today is only roughly one fifth higher than it was 30 years ago. Even as the crisis badly hit investments and exports which wre the drivers for growth, on the other hand the philippine conomy itself has missed opportunities for economic growth in recent decades and thus the country has a rather weak capacity to cushion the impact of the crisis on the poor, whose numbers have increased substantially in recent years even before the onset of the crisis. The proportion of the population deemed poor rose from 31.3% in 2000 to 33% in 2006 despite the increase in GDP per capita of about 2.7% a year during the same period

 (The U.P. School of Economics based in Diliman, Q.C.
Source: http://www.upd.edu.ph/)

While the economy has escaped recession, substantial erosion in human welfare is likely to occur given the past failure to reduce poverty. The country's gross domestic product (GDP) fell from 7.1% in 2007 to 3.8% in 2008 and 0.9% in 2008. Considering the country's rapid population growth rate of 2% a year, thismeans the per capita GDP in the Philippuines for 2009 had a negative growth rate of 1.1%.

The study said that during previous crises, the agriculture sector was fairly resilient to shocks but the sector's growth substantially decelerated from 4.8% in 2007 to 3.2% in 2008 and then contracted sharply to 0.2% in 2009. The sharp 2009 drop was mostly due to the devastation in Luzon caused by three major typhoons in the second half ot he year; causing agricultural output to shrink by 2.5% in the fourth quarter of 2009.

Compounding the these effects were the continued aftereffects of the sharp food price shocks in late 2007 and the first half of 2008. For example domestic rice prices rose by about 40% during the period. Since rice accounts for about 25% of fod expenditures of the poorest 30% of the population, the price shock created a significant negative impact on the well-being of poor Filipinos, including small rice farmers, most of whom are net buyers of rice for household consumption.

Citing the quarterly household survey of the Social Weather Stations, the U.P. study said households experiencing hunger reached an unprecedented high of 23.7% in the last quarter of 2008 ever since SWS started monitoring the series in July 1998.

While the country avoided recession, the impact of the GEC on the economy was nevertheless severe. GDP growth rate was pushed down from its long term potential of 4.7% a year by 1.0 percentage point in 2008 and 3.8 percentage points in 2009.

The study also said that if the crisis had not occurred,average per capita income in 2009 wuld have been PhP 43,489 or about PhP 1650 more than the actual estimated income. This means a foregone income growth of almost four percent which can be attributed as an aggregate impact of the crisis.

Other effects of the Global Economic Crisis

• The collapse of global demand and industrial production growth has resulted in a sharp drop in the country's exports of goods and services, especially electronics and semiconductors. While posting a robust growth of 5.4% in 2007 exports plunged in 2008 (-1.9%) and 2009 (-13.9%). Among the sectors, industry was the hardest hit, contracting by 2% in 2009 – a reversal from a quite respectable growth of 6.8% in 2007 and 5.0% in 2008. 
• Of all the affected industries, manufacturing suffered the most unemployment, especially in the electronics and garments sectors, with the share of new entrants among those employed decreaing from 2.4% before the GEC to 1.5% in 2008 and further down to 1.3% in 2009.
• On the other hand, formal sector employment rose during the crisis with its share from 50% on average in 2004 to 2007, to 51% in 2008 and to 52% in 2009. In comparison, less educated and less skilled workers, who made up the bulk of the self-employed and unpaid family workers and accounted for the bulk of the informal sector employment, declined from about 45% on average in 2004 to 2007 to 44% in 2008 and to 42% in 2009.
• Gains in reducing poverty over the past three years have been negated by the GEC with the result that nearly two million Filipinos have been pushed to poverty.

Rent-seeking behavior by the Government corrupts the chances of the poor for a better life

The UPSE team also suggested that the country's comparatively high growth rate until the the advent of the GEC was an anomaly since there were problems in the "governance structures" which are basically structural and policy constraints which had they been positively addressed, would have provided a "high-growth path" and consequently the same kind of GEC-cushioning such as India, China and Indonesia;  which enjoyed torrid growth rates despite the GEC.

Citing other studies, they said that:

•   Savings and investment rates are very low by the standards of the East Asian countries leading to lower available capital levels, resulting in low infrastructure development, especially in transport and power, and poor provision of key social services, especially basic health and education.
• The country's governance structures, namely the judiciaryu, legislative and the executive branches of government have collectively created an environment of policy instability and fostered corruption as well as "all forms of rent-seeking activities across branches and layers of the government." Rent-seeking is the use of one's official position in government to benefit oneself in a material or financial way.

TheAdministration of former President Gloria Macapagal-Arroyo tries to pump-prime the economy to address the GEC but loses its way

The administrationof former President Gloria Macapagal-Arroyo responded to the GEC by launching several programs and other interventions. While some of these were new programs designed to address the impact of the crisis, others were existing ones that were either expanded or intensified in terms of area of beneficiaries. However, the study focused on the Arroyo administration's foremost response which was its Economic Resiliency Plan (ERP).

With a total budget of PhP 330 billion (US $ 7 billion) or an estimated 4% of GDP, the ERP aimed to stimulate the economy through tax cuts, increased government spending and public-private sector projects that would pave the way for the country to participate in the global economic recovery. The ERP was a mixture of stimulus activities from off-budget and in-budget sources. Off-budget sources are those funded from resources of government-owned and controlled corporations. The in-budget sources are those identified by government agencies from projects and programs within their regular budget.

Of the earmarked budget for infrastructure-related projects, PhP 160 billion was to be usedto fund some 4000-5000 small projects geared toward quick job creation in 2009. Awards of contracts for long gestation projects was to be deferred while small community-scale projects that were labor intensive and with high local-value added was to be scaled up. Infrastructure spending was to be front-loaded in the first half of the year. After 2009, PhP 100 billion of the budget was intended to fund big ticket items under Public-Private Partnerships.

In fact, government spending accelerated in 2009, the study shows, with the growth of government expenditures as a proportion of GDP significantly higher by 2.8 percentage points than its long-term trend, with the acceleration occuring in the third and fourth quarters of 2009 with a likely spillover effect into 2010 and 2011.

The outgoing Arroyo administration directed all government agencies at the local and national levels to implement emergency employment schemes in all regions in order to pump-prime the economy, the study says. But results of Asian Development Bank (ADB) sponsored field studies conducted by Dean Balisacan and other authors in 2010 show that the “menu of interventions was very limited and implementation was heavily top-doqwn and unresponsive to local needs.”

The study noted that the Arroyo administration's response to pump-priming the economy during the GEC by government spending to generate more employment “did not seem to consider that the GEC negatively affacted the regions in different ways and extents. That is, given the country's very high spatial diversity, a location-specific, targeted approach to addressing the GEC effects could have delivered better outcomes.”

The UPSE team, referring again to the ADB field survey, noted that the pump-priming expenditures of the Arroyo administration "tended to be mere dole outs and did not build productive asserts that would form the foundation for a faster but more inclusive recovery and growth. The government's impulse to aspend on projects regardless of quality was doubtless made stronger by the fact that the May 2010 national and local elections were just months away."

Policy implications for the Aquino administration

The bottom-line for the Philippines as a nation is that poverty reduction remains one of the biggest challenges facing the national leadership, according to the study. Poverty remains very high and is widespread, while the pace of its reduction is very slow, compared to the performances of other Asian countries with roughly similar income levels. The low rate of economic growth  is a main contributor to the high levels of poverty, the study said and it is therefore of absolute importance for the national leadership to "a higher growth path" by continuing with or adopting policies that work and disregarding those that do not.

According the study, a serious attempt has to be made to address governance concerns, such as government corruption and political instability, which degrades investor confidence (both local and foreign) which could actually be at the forefront of creating more jobs. Additionally, the government needs to improve its revenue collection efforts which once again are stymied by by institutional corruption which results in a hemorrhaging of funds intended for the National Treasury and into the well-lined pockets of corrupt bureaucrats. This needs to be stopped decisively and rigorously. Also, government money needs to go into long-term infrastructure projects that will ensure sustained economic growth and not short-term politically expedient projects.

The study said that various social programs need to be reviewed in order to improve governance in order to reduce administrative costs, funds leakages and eliminating redundancies and overlaps. the study cited cited numerous assessments of the rice subsidy program, "which accounted for nearly 70% of the total government budget for social protectionin 2008, has not only been very costly to society but has also failed miserably in achieving its objectives. remarkably, tehre has not been a decision to reform the program in relation to social protection objectives," it said.

On a positive note, however, the study said the previous administration's Conditional Cash Transfer (CCT) initiative under its Pantawid Pamilyang Pilipinong Program (4Ps) appeared to be effective as a vehicle for addressing short-term poverty and long-term human capital development impliedly suggesting that the new
administration should consider continuing it.

The study said CCT programs are widely implemented in many developing countries, particularly in Latin America and more recently in Asia. The World Bank says CCTs "provide money directly to poor families via a “social contract” with the beneficiaries – for example, sending children to school regularly or bringing them to health centers. For extremely poor families, cash provides emergency assistance, while the conditionalities promote longer-term investments in human capital" (http://en.wikipedia.org/wiki/Conditional_Cash_Transfer).

 The UPSE study said that assessments of these programs show significant positive impacts on nutritional intakes, schooling performance,and reduction in poverty and inequality. "Of all the government's current subsidy programs, the CCT initiative holds perhaps the most promise for breaking the vicious cycle of poverty and, hence, is a good candidate for upscaling toward a national anti-poverty program.

(Chanda Shahani is the Editor of the Diliman Diary)