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)

Ateneo Center for Economic Research and Development Director gives overview for 2010 R.P. economy under PNOY

U.P.-AyalaLand Technohub at Diliman, Q.C.

BPOs and call centers only benefit a few and

not the broadest segments of society, says 

Dr. Cielito F. Habito

By Chanda Shahani

The rosy descriptions of a growing Philippine economy, by the government's economic managers and planners under the previous administration, fueled by call center growth and overseas foreign workers remittances in 2009 did not reflect the realities in the countryside and squalid urban areas where the people have become even poorer and hungrier, by their own description, said Dr. Cielito F. Habito, Director of the Ateneo Center for Economic Research and Development in a briefing before members of the public and the media at the Ateneo Professional Schools in Rockwell, Makati City on August 20, 2010.

Dr. Habito, speaking in a presentation entitled, “The Economy under PNoy: An Overview,” said that the new administration of President Benigno S. Aquino III could tackle the problems of uneven and equitable distribution of wealth; but that it was important to first understand many of the underlying conditions causing these imbalances in the first place before implementing any remedial measures.

The Economy has grown while the Poor have become even Poorer

Citing a March 19 to 22, 2010 pre-election national survey of the Social Weather Stations (SWS), he said that 43% of Filipinos felt poor in 2010 compared to 78% in 1984. While this might seem to be an improvement on the surface, in reality it was not, he said. He said that the same SWS survey also showed that a sampling of respondents nationwide showed that the degree of total hunger in households increased from nine percent in 1998 to 21.2% in 2010.

He said that of the four million households reporting hunger in March of 2010 only 2.6 million rated themselves as poor.

A significant 1.4 million who suffered from hunger did not consider themselves to be poor, he said. Dr. Habito, a former Director-General of the National Economic Development Authority (NEDA) said that living standards had dropped so low since 1984 that the standards of poverty had dropped, resulting in a seemingly lowered feeling of poorness figure that was contradicted by the actual increase in self-reported hunger levels.

He said official statistics showed that the average annual family income is down from PhP 148,000 in 2003 to PhP 144,000 in 2006 keeping both figures in constant 2003 prices. Meantime the net elementary school participation rate is down from 97% in 2001 to 85% in 2008 while the net high school participation rate is down from 66% to 62% while the malnutrition incidence is up.

“In 1960, the income of the Philippines was twice that of Thailand but now it is Thailand that has an income double that of the Philippines,” he said, adding that much of the growth was “top heavy,” but the needs of the broad sectors of the population were “bottom heavy,” causing a mismatch in the allocation of capital in favor of those who needed it least.

He said that broad-based growth was really necessary if the national leadership really wanted to tackle the issue of poverty once and for all. “Broad-based growth takes into account the sectors, geographic growth and is also temporal or time-bound,” he said, adding that assessing the economic performance of the country based on key yardsticks such as price stability, jobs and incomes were the criteria that were important.

In Republic Act 8425, or the Social Reform and Poverty Alleviation Act, it was declared that the State should adopt an area-based sectoral and focused intervention to poverty alleviation. Section 3 of RA 8425 defines 14 basic sectors as the disadvantaged sectors of Philippine society (for more information on the definition and breakdown of the 14 basic sectors, please click on this link: http://tinyurl.com/35cv748).

Dr. Habito said that the results of the 2009 poverty survey which the National Statistical Coordination Board (NCSB) did not release yet shows that 35% of Filipino live below the poverty line and that in prior years the poverty level was only 33% in 2006 and 30% in 2003 which means that the growth in the economy did not put a dent in poverty levels which even grew during the same time period.

Citing more statistics, Dr. Habito said that the Filipino people, in their entirety, were not doing so well, after all. For example, in 2009 price increases slowed, but this was due to the slow economy. Moreover, job creation fell behind in both quality and quantity. For example, while 972,000 new jobs were created in 2009, 1.2 million new workers entered the workforce creating a net deficit. Additionally, the newly created jobs were in low-level areas such as vending, minimally skilled repair services for appliances and household help services. Overall incomes also barely grew in the country resulting in 0.9% GDP growth in 2009, he said.

Oligarchies are holding back the rest of the country from benefiting from overall growth

Dr. Habito said that 80% of the country's gross domestic product (GDP) could be accounted for by a mere 150,000 of the country's population, whom he described as an "oligarchic structure."

The country's small and narrow industrial base highlighted overall growth in the first quarter of 2010 with manufacturing at 20.7% and  media, which benefited by election spending at 31.4% and real estate, which he described as mostly speculative, at 10%. But it is the agricultural sector, made up of mostly unskilled farmers who have suffered the most from the El Niño phenomenon resulting in in a -3.2 % growth rate in Q1 of 2010 compared to a 1.6% growth rate in Q1 of 2009. Communications also shrank from 9.2% in Q1 of 2009 to -1.3% in Q1 of 2010.

Other developments in the economy

Dr. Habito also highlighted the following developments to round off the picture of the national economy:

•  In 2003 net inflows or remittances grew by 12.8% in 2004 but tapered off to only 5.6% in 2009
• The government's fiscal balance worsened with a budget deficit of PhP 153.4 billion between January to June 2009 and which increased to PhP 196.7 billion for the same period in 2010. He said the government's official target was 280 billion in 2010 but that the newly-installed Aquino administration has now revised this to PhP 302 billion.
• The Philippines' GDP shrank in 2008 and 2009 in the following four regions: National Capital Region, Regions I, III and IVA while Bicol grew the fastest.
• Inflation was 3.2% in 2009 but is expected to reach 4.2% in 2010. Nevertheless, this is still an overall trend improvement over 2006 inflation levels which reached 6.2% and 2008 inflation levels which reached 9.3%.
• External threats to the national economy are the realization of a double dip recession in the United States and economic instability coming from European countries such as Portugal, Ireland, Greece and Spain which would slow down exports and foreign currency remittances back to the Philippines.
• The Philippine government, the Asian Development Bank (ADB) and Dr. Habito himself all project at least a five percent GDP growth in 2010.
• In 2010, there has been a surge in investment of 24.3% with government spending also increasing by 18.9%
• Exports have increased by 43% in dollar value terms or 17.9% in real terms.
• Consumption has increased to 5.9% in 2010 compared to three percent in 2009.
• At current rates of per capita income growth, it would take the Philippines more than 200 years to reach the average per capita income of the OECD or developed countries.

Dr. Habito proposes a model for economic development under the PNOY Administration

Although the country "may take generations" of consistent economic growth to catch up with European countries or even more progressive Association of Southeast Asian (ASEAN) member countries such as Malaysia and Singapore, the trick is actually for the Philippines to compete against itself, and more comparable neighbors such as Vietnam or Thailand where we have a better chance of doubling up our efforts in order to catch up with them, he said.

PNOY needs to leverage his "trust capital"

Dr. Habito said that President Benigno S. Aquino III and his administration needed to "leverage his trust capital" in order to attain the development goals of the government. He said that the power of the large vote he enjoyed in the May 2010 election and which accounted for 46% of the vote as well as the power and prestige of his office would improve tax compliance and cause corruption within government institutions to decline, which would help improve the country's deficit as well as overall confidence from investors and the general public alike.

The no "wang-wang" policy was a good symbolic start he said, saying that the presidential ban on almost all vehicles being able to traverse the nation's roads with impunity using over-the-counter sirens meant that there should be no special treatment for those who have more in life. However, he needed to back this up with more concrete actions to impress the public about his seriousness over genuine reform. At this juncture, Dr. Habito mentioned the issue of genuine compensation to the residents of Hacienda Luisita in Tarlac, where the Cojuangco family owns shares in the company managing this estate, Hacienda Luisita, Incorporated. Although President Aquino has since divested himself of his shares in the company, the public itself still has the perception that Aquino is still linked to this unresolved issue. He did not elaborate.

President Aquino's policy of no-frills governance such as fewer foreign travels was good in that it set the tone for less waste of government resources. Another positive note is Aquino's move to create more participation by and among the people by bringing the government to the people and the people to government. However, he needed to be serious about not giving cronies special favors and to shun giving special treatment to the oligarchic class, said Habito.

Bright spots in the economy

Dr. Habito said that the sectors that will bring further growth to the economy in 2010 and beyond are the following:

• Agriculture and agribusiness. However, budget reform is necessary such that the national government provides more guidance and less hands-on intervention, especially with respect to the Department of Agriculture (DA). It is necessary for the DA to empower and train Local Government Units to act on their own without waiting for the Metro Manila-based central government to act on many initiatives.
• Tourism. However, focused investments are needed as well as opening the skies to foreign and other air carriers under liberalized aviation policies because the more available seats there are out there, the lower will be the per ticket cost of flying to the Philippines which will create more jobs by encouraging the arrival of more tourists, as the average tourist spends $ 1500.00 per stay in the Philippines, which is equivalent already to the per capita income of the average Filipino.
• Business Process Outsourcing. However, the government needs to address through training and education the dwindling pool of skilled applicant to BPOs.
• Construction. This sector will grow because of the need of government to fill in the infrastructure gap coupled with unmet housing demand.
• Manufacturing. Food based manufacturing remains strong as well as design-based manufacturing which Filipino excel in. Despite the fact that China is now the factory of the world, Filipino designers are world-class and despite the penchant of Chinese companies to engage in industrial espionage and produce copy-cat designs at a lower cost, Filipinos can nimbly stay ahead of the competition by constantly innovating new designs.

Where to push

Dr. Habito said the government needed to push strongly in the following areas:

• Revenues. At a 12% of GDP so far, the government needed to restore the tax effort to its previous metric of 17% of GDP, mostly from collection and compliance boosts, trimming tax perks and collecting from sin taxes such as taxes on alcohol and tobacco.
• Infrastructure. A massive catch up program is needed as well as better Build-Operate-Transfer (BOT) rules otherwise dubbed as "Private-public sector partnerships" by President Aquino.
• The savings levels now exceed investment levels.What is needed is a boost in confidence for savings money to spill over into investments, he said.
• Growth needs to be democratized into the sectors through asset reform, revised anti-trust policies and giving small and medium enterprises and entrepreneurs a boost.
• The national government need to allow more development from below and not from above. This means that they should allow local government units to take on more work because they "can do things better." In fact, there are many award-winning local government initiatives to emulate, he said.
• He also said transparency and accountability by government institutions was a must, citing the experience of former Naga City Mayor Jesse M. Robredo (now Department of Interior and Local Governments Secretary) who posted the official budget of Naga City online at the Naga City government website where the average citizen can see how public monies are programmed for disbursement, and where it remains posted to this day at: http://www.naga.gov.ph/cityhall/2009/

(Chanda Shahani is the Editor of the Diliman Diary. He has a master's degree in entrepreneurship (M.E.) from the former Asian Center for Entrepreneurship (ACE) at the Asian Institute of Management)