181 (Canlas, Khan, Zhuang)

Diagnosing the Philippine Economy:

Toward Inclusive Growth

BustamanteMarella

D. CanlasM.E. KhanJ. Zhuang

Diagnostics Approach

• adopted from Hausmann, Rodrik, Velasco (2005)

• provides a framework for identifying the most critical or "binding“ constraints to growth

• helps in discerning priority policies and sequencing these in such a way that they will ignite and sustain growth

• country-specific policies and reforms

Diagnostics Approach

• unlike the Laundry List approach promoted by the Washington Consensus wherein there exists a strict set of must-do's in order to achieve sustainable development

Methodology

• starts with proximate determinants• investigates which of these pose as

impediments to growth• figures out specific distortions behind

the impediments

Methodology

WHAT KEEPS THE LEVEL OF PRIVATE INVESTMENT AND ENTREPENEURSHIP LOW?

• low social returns to investment• inadequate private approbability of

social returns• high cost of financing

Methodology

• look at signals to determine which is present in the Philippines

1.price signals: ie returns to investment, interest rate, costs of transport

2.non-price signals: when a constraint is binding, it results in activities designed to get around it, ie underreporting of income in tax forms, high demand for informal mechanisms of conflict resolution

Development Performance and Policy(Context)

“Why was the Philippines not part of the East Asian economic miracle?”

• Philippine GDP grew by an average of 4.4% each year

• but growth rate was not smooth– contraction in ‘84-’85, ’90, ‘98


• from 1981-1990, average annual change of Philippine per capita GDP was -0.6%

• 1983: moratorium on foreign debt servicing• 1984-’85: first recession of the post war era• 1986: slow recovery but not enough to be

sustainable

• 1980’s as a “LOST DECADE” for Philippine Growth


• from 1990 to 2006– natural shocks (like the eruption of Mt.

Pinatubo in ‘91)– electrical power crisis– financial/economic crises (like the Asian

Financial Crisis of ‘97-’98)– terrorist threats and international

scrutiny– public health shocks (like SARS)– among others

Accounting for Sources of Growth

• SUPPLY SIDE (Three Major Sectors)– Agriculture

:rapid rate of deforestation explains decrease in share of real GDP:crops as biggest subsector fell from 23% to 18.6% between ‘86 and ‘06


• SUPPLY SIDE (Three Major Sectors)– Industry:expected to develop over time as Agriculture

share decreases:increased with Import Substitution and

protectionist policies of 60s and 70s (which did not last)

:Industry growth rate fell from 7.9% in the 70s to .6% in the 80s

:only 33% share of GDP in the 2000s, while others had it at 45-46%


• SUPPLY SIDE (Three Major Sectors)– Services:high growth rates helped it overtake

Industry in share of GDP:Retail and Wholesale Trade as biggest

subsector:save for government services, all service

subsectors part of economic expansion


• DEMAND SIDE– high Private Consumption driving GDP

growth– low contributions of Investment to GDP

growth– Investment to GDP growth: -7.2% during

2000-2006– Government Spending share less than

other countries, below 10% of GDP

Regional Contributions to GDP

• National Capital Region (NCR) as largest contributor

• Region IV (Southern Tagalog) and Region III (Central Luzon) as a close 2nd and 3rd

• 2001-2006: Philippine annualg GDP growth rate at 4.6%– 75% of this contributed by only 5 of the 17

regions

Total Factor Productivity

• TFP is the residual of growth after accounting for the increases of labor and capital

• captures factors like technological progress and efficiency gains

• TFP growth is the main-source of long-run growth

• very low TFP share (compared to share of labor and capital growth)

• Philippine TFP as weak and volatile over time

Poverty

• poor eradication of poverty (compared to other countries)

• increase in poverty incidence from 26.9% to 32.9% in ’06

• poverty a predominantly rural phenomenon

Poverty

• large variations in poverty incidence across regions

• ARMM (63.9%), Western Mindanao (48.2%), Bicol (45.7%) || NCR (4.9%)

• variations due to gaps in infrastructure and access to social services across regions and islands

Poverty(Multidimensional Deprivation)

• manifested in– low incomes– inadequate human capabilities– limited access to the means to achieve

capabilities

• addressing access to productive assets would improve efficiency which raises economy’s subsequent income growth rates

Inequality

• relatively high level of inequality compared to neighboring countries– from 1994-2003, Gini coefficient rose by

7%suggests worsening income distributions of the period

– despite increases in average per capita GDP, benefits of growth not shared equally

• improvements in human capital could promote pro-poor growth

Development Policy

• PRE-1986– focused on a strategy based on Import

Substitution– advocated replacing foreign imports with

domestic production– initially raised level of capital per worker in the

1950s to 6.4%– with the same policies, sank to 4.9% in the 1960s– kept with the policies despite the change to

export-led industrialization in the Newly-Industrialized Economies

Development Policy(Pre-1986)

• fixed or managed exchange rate regime collapsed from time to time

• collapse usually accompanied by balance-of-payment crisis

• Central Bank took on increasing foreign debt and fiscal deficits

• CB monetary management was inconsistent, inflation increased, foreign capital reserves eroded

Development Policy(Post-1986)

• monetary and fiscal reforms• trade, industrial, and financial reforms• governance reform and

decentralization• social policies and programs for

fighting poverty, improving income distribution and achieving the Millennium Development Goals

Development Policy(Post-1986)

• trade liberalization, tariff reduction• fiscal consolidation and tax reform• creation of independent Central Bank

(inflation-targeting as key policy)• privatization of several government-owned/-

controlled corporations• comprehensive agrarian reform• power sector restructuring and reform• devolution of government service deliveries

to LGUs

Development Policy

• Pre-1986– public sector deficit at 6%– external debt close to 100% of GNP– inflation hit 50% in ‘84 and remained at

23% in ‘85– real GDP experienced negative growth (-

7% in ‘84 to ’85)– Central Bank with massive liabilities

Development Policy

• Post-1986– GDP growth at 4.6% (the highest in 2

decades) during ‘01-06– GDP growth at 7.2% (the highest in 3

decades) in ‘07– inflation under control and at the lowest

in 20 years– external payments position now more

sustainable

Development Policy

• still remains a long list of policy and structural reforms

• more difficult reforms not yet implemented

• domestic investment remains low and its share in GDP continues to decline

• high growth rates may not be sustainable• poverty reduction still slow• Gini coefficient remains high

Critical Constraints To Growth(Summary)

• Critical Constraints to Growth are:– tight fiscal situation– inadequate infrastructure (especially in

electricity and transport)– weak investor confidence due to

governance concerns– inability to address market failures

leading to a small and narrow industrial base

Critical Constraints To Growth(Summary)

• Critical Constraints to Poverty Reduction are:– lack and slow growth of productive

employment opportunities– inequitable access to development

opportunities (education, health, infrastructure, productive assets)

– inadequate social protection and social safety nets

Critical Constraints To Growth(Investment)

• overall investment rate in Philippines lagging behind other countries

• BUT GDP growth continues to pick up (partly due to rising remittances)

• possible explanation: growing share of service sector in total output


• assumed that service sector requires much less investment than industry

• but service subsectors (transport, communications, storage) are also the highest credit users after manufacturing (industry subsector)


• could be because of Excess Capacity• in 2004, half of large Philippine

establishments in manufacturing operating at less than 70% of their installed capacity

• 20% of small establishments operating at less than 70% of capacity

• declining investment met with increased capacity, close to 81% in 2007

Critical Constraints To Growth(Domestic Savings)*

• domestic savings needed for high and sustainable long-run GDP growth

• domestic savings hit a low 13% of GDP in 1998

• improved to 20% of GDP in 2006• still the lowest among ASEAN

countries

Critical Constraints To Growth(Domestic Savings)*

• closer to Latin American countries facing periodic recessions and crises

• in 2006, overtaken by those of Argentina and Chile

• high domestic savings rate not critical to investment and growth due to overseas remittances

• but if investment were to pick up, a more modest domestic savings rate would be needed

Critical Constraints To Growth(Domestic Financial Intermediation)*

• Philippine financial system dominated by banks

• of total corporate domestic financing in 2006– 44% from bank credit– 55% from equity– 1% from corporate bonds

• since the 1997 Asian Financial crisis, declining returns on assets and on equity

Critical Constraints To Growth(Domestic Financial Intermediation)*

• actually much like the situation of some of its neighbors (Thailand in particular)

• likely not to be a critical constraint to growth

• but still has some serious room for improvement to be as efficient as those of developed countries

Critical Constraints To Growth(Real Domestic Credit)*

• post-1997 crisis, stagnation in real domestic credit

• declining ratio of domestic credit to GDP over the last 10 years

• due to weak borrowing of the corporate sector

• instead, banks holding more government bonds

Critical Constraints To Growth(Real Domestic Credit)*

• share of loans to bank assets has fallen

• bulk of excess reserves accounted for by investments in Treasury bills

• 10% of business establishments surveyed by ADB-WorldBank indicated that access to financing was a major constraint

Critical Constraints To Growth(Borrowing Costs)*

• high lending rates associated with low per capita GDP growth rates

• historically, Philippines has had very high lending rates

• since 2003 though, significant decline in nominal lending rates

• may not be a critical constraint to investment and growth

Critical Constraints To Growth(Access To International Finance)*

• access to financial markets poor in the past based on comparative sovereign spreads

• recently, significant improvement• not a critical constraint to growth

Critical Constraints To Growth(Financing of Small and Medium-Sized Enterprises)*

• not critical to GDP growth• still, small and medium-sized

enterprises (SMEs) make up 97% of country’s enterprises and 49% of employment in enterprise

• 25% of SMEs claimed limited access to credit and high costs for borrowing (such as production of collateral)

Critical Constraints To Growth(Investment Summary)

• Critical Constraints to GrowthX Domestic SavingsX Domestic Financial IntermediationX Real Domestic CreditX Borrowing CostsX Access to International FinanceX Financing of SMEs

Critical Constraints To Growth(Social Returns to Investments)

• diminished or enhanced depending on investments made in complementary factors of production

• could be underprovided if left with the market

• in need of public intervention• Human Capital augments labor• Social Overhead Capital supports

production

Critical Constraints To Growth(Human Capital)*

• high level of unemployment among educated workers

• declining returns to education although gap between tertiary and primary&secondary remain large

• unemployment rate decreased from 10.2% in ‘02 to 7.3% in ’06

• suggests that lack of human capital not a critical constraint to growth

Critical Constraints To Growth(Skilled Requirements of Emerging Industries)

• human capital may be a constraint only to emerging markets– earnings of professional workers in

emerging industries like IT and Call Centers earned 4 times as much as those by unskilled workers

– earnings of professional workers in established industries such as manufacturing and construction were only 2-2.5 times as much

Critical Constraints To Growth(Skilled Requirements of Emerging Industries)

• human capital may be a constraint only to emerging markets– earnings of professional workers in emerging

industries like IT and Call Centers earned 4 times as much as those by unskilled workers

– earnings of professional workers in established industries such as manufacturing and construction were only 2-2.5 times as much

• scarcity of skilled workers in emerging industries

Critical Constraints To Growth(Out-Migration)*

• majority of migrant workers employed in low-technology occupations (about 80% of newly hired migrant workers)

• less than 4% of investors considered brain drain as a problem in the Philippines

• out-migration may not be a critical constraint to growth

Critical Constraints To Growth(General Infrastructure)

• Philippines investment in infrastructure as a percentage of GDP has been low and erratic

• from a peak of 4% of GDP in 1994 to 2%

• private investment even more erratic• from less than .5% in the early 1990s

to between 2-4%


• in 2005, 2.4% of GDP in the Philippines as compared to 8.6% in Vietnam, 5.3% in Malaysia, and 3.0% in the Republic of Korea

• major development partners of the country urging government to raise infrastructure investment to at least 5%

• current infrastructure unable to help the growing needs of the populous

• investment falls short of required level to maintain existing structures


• availability of key infrastructure skewed away from regions

• one of the highest length of roads but lowest length of paved roads

• per capita power consumption is 1/3 of Thailand and 1/5 of Malaysia


• ‘07: 86 of 150 in adequacy of infrastructure (among the lowest in the region)

• ‘04: 66 of 102 in Growth Competitiveness Index due to poor infrastructure

• ‘04: 88 of 125 in Infrastructure Quality• ‘07: 49 of 61 in Adequacy of

Infrastructure• ‘07: post-1997 crisis, lowest FDI inflows

in the region


• low levels of investment and poor conditions of current infrastructure causing – increased cost of doing business in the

country– adverse impact on perception of

competitiveness and attractiveness of the Philippines as investment destination


• increased cost of doing business and inability to attract investors hampering growth at the national and sub-national level

• robust relation between economic growth and infrastructure is highly significant

• infrastructure investment has a positive effect on growth in regional outcomes

Critical Constraints To Growth(Electricity Supply and Transport Network)

• within infrastructure, the two are the most critical constraints to growth

• 62% of firms rated public infrastructure and services as somewhat inefficient to very inefficient

• poor shipping services led to a 4.7% loss in production

• 52% of firms viewed public works as unsatisfactory

Critical Constraints To Growth(Transport Network)

• more than half of the country’s road network in poor or bad condition

• vehicle operating and freight costs higher than other regions by more than 50%

• highest cost in the ASEAN for exporting a container due to inefficiencies in port handling

• firms experience delays in picking up goods or delivering supplies 5.6% of the time

Critical Constraints To Growth(Electricity Supply)

• power tariffs for businesses in Manila were 20-80% higher than tariffs in 9 other Southeast Asian cities

• poor reliability of electricity supply• loss of up to 8% of production due to

frequent power disruptions for firms– 6% loss for large firms– 8-11% loss for SMEs

Critical Constraints To Growth(Social Returns to Investments Summary)

• Human CapitalX Education Gaps! Skilled Requirements of Emerging IndustriesX Out-Migration

• Infrastructure! General Infrastructure! Transport Network! Electricity Supply

Critical Constraints To Growth(Approbability of Returns to Investment)

• lower probability of capturing the returns to an investment discourages investors

• may be rooted in government or market failures

Critical Constraints To Growth(Approbability of Returns to Investment)

• risks from government failure:–macro risks: fiscal crisis, financial crisis–micro risks: bad governance, weak rule

of law, overly burdensome taxation, labor-capital conflicts

• risks from market failure:– reflects information and learning

externalities– reflects coordination failure

Critical Constraints To Growth(Macro Risks – Macro Instabilities)

• Philippine macroeconomic instabilities from:– persistent fiscal and current account deficits– overborrowing and overlending in the

banking sector– excessive exposure to short-term external

debt

• depresses investor confidence• leads to capital flight, sharp currency

depreciation, economic recession

Critical Constraints To Growth(Macro Risks – Macro Instabilities)

• major recession or low growth in 1960, 1970, 1982-85, 1991-93, 1998, and 2001

• macro instability remains a key investor concern

• 40% of firms considered macroeconomic instability as a major or severe constraint

• medium-sized establishments the most affect, 52% considered it as a major or severe constraint

Critical Constraints To Growth(Macro Risks – Fiscal Deficits)

• Philippines recorded fiscal deficits for most of the last 2.5 decades

• fiscal and public debt distress in 2002-2005, resulting in credit downgrade

• deficits due to weak revenue generation

Critical Constraints To Growth(Macro Risks – Tax Collection)

• declining tax effort from 1999-2005– due to the crisis of ‘97 and tax exemptions

to big corporations and wealthy individuals

• in 2003, tax effort problem was somewhat arrested

• government lowered fiscal deficits at high costs– deep cuts in social and economic services

(including infrastructure)

Critical Constraints To Growth(Macro Risks – Fiscal Deficits)

• 2006: public debt at 64% of GDP– interest payments reached 5.5% of GDP

and 31.1% of the ‘06 budget

• Philippines vulnerable to increases in interest rates which may rise with high inflation or currency risks

Critical Constraints To Growth(Macro Risks – Monetary Management and Financial Reform)*

• monetary and financial market reforms post-’97 crisis renders possibility of new crises low

• success in BSP’s inflation targeting– in ‘07, average inflation at 2.8%, below the

target 4-5%

• recent mergers and acquisitions helped major commercial banks raise their capitalization

• right now, not a critical constraint

Critical Constraints To Growth(Micro Risks – Governance and Political Stability)

• several studies indicated poor governance affects approbability of returns for private investors

• governance outcomes– scored well in voice and accountability and

regulatory quality– scored average in government effectiveness– scored ambiguously in rule of law– scored poorly in political stability and

control of corruption

Critical Constraints To Growth(Micro Risks – Governance and Political Stability)

• rule of law, political instability, and control of corruption having significant negative effects on investment

• political instability manifested in the 1980s, 2000, ‘05-’06, 2007

• increasing perception of worsening corruption

• a critical constraint to growth

Critical Constraints To Growth(Micro Risks – Tax Administration)

• corporate income tax rate highest in the ASEAN region

• pointed out the inefficiencies in tax administration and lack of transparency

• high tax rate and poor tax administration are critical constraints to growth

• 97 of 102 in irregular payments in tax collection

Critical Constraints To Growth(Micro Risks – Business Procedures)

• cumbersome business procedures and overregulation induces firms to engage in corrupt activities to avoid formalities

• 59 days to register a business– compared to 8 in Singapore, 11 in HK, 31 in

Malaysia, 42 in Thailand

• regulatory burden more severe in the country, measured 98 of 102

• burdensome procedures and overregulation are constraints

Critical Constraints To Growth(Micro Risks – Contract Enforcement and Property Rights)*

• contract enforcement in the country fared better than in others

• average of 164 days to enforce– compared to 575 in Thailand, 270 in

Malaysia, 225 in Indonesia, 180 in HK

• 80% confidence level in the legal system upholding contract and property rights– compared to 90% in Malaysia, 82% in

Thailand and 42% in Indonesia

Critical Constraints To Growth(Micro Risks – Contract Enforcement and Property Rights)*

• BUT gradual erosion in business confidence due to worsening of business environment and issues from high profile cases like the NAIA III terminal

• right now, not a major constraint but remains as a constraint nonetheless

Critical Constraints To Growth(Micro Riks – Labor Market Regulation)*• labor costs higher than in most regional

neighbors• minimum wage about 4-5 times higher than in

Indonesia and Vietnam despite labor productivity not being that proportionally higher

• market rigidities: difficulties to hire and fire employees

• Philippine labor market as very rigid and a constraint to investment

• but not considered a constraint

Critical Constraints To Growth(Market Failures – Narrow Industrial Base)

• 2005: share of manufacturing to GDP was 27.5%– compared to 27.5% in Indonesia, 30.6% in

Malaysia, and 34.8% in Thailand

• manufacturing exports grew at about 1.4% per year– compared to 6.4% in Indonesia, 7.6% in

Malaysia, and 11.8% in Thailand

• caused by information and learning externalities and coordination failure

Critical Constraints To Growth(Market Failures – Narrow Industrial Base)

• information externalities: – successful introduction of products and processes yield

benefits to a country which spill over to third parties without giving due recognition to the originating party

• learning externalities:– investing in developing the capacity of the workforce

benefit third parties after switching employers post-training

• coordination failure:– failure to recognize that a firm’s productivity depends

not only on its own efforts and present economic conditions but upstream and downstream links, access to infrastructure, regulations, and other public goods

Critical Constraints To Growth(Market Failures – Narrow Industrial Base)• manufactured exports are slow to diversify

and innovate• domestic manufacturing has low technological

and scale quality, and upgrading is slow• research and development very low in the

Philippines• weak links between university systems and

industries’ R&D requirements• few incentives to pursue higher education in

Science and Technology

Critical Constraints To Growth(Approbability of Returns to Investment Summary)• Macro Risks

! Macro Instabilities! Fiscal Deficits! Tax CollectionX Monetary Management and Financial Reform

• Micro Risks! Governance and Political Stability! Tax Administration! Business ProceduresX Contract Enforcement and Property RightsX Labor Market Regulation

• Market Failure! Narrow Industrial Base

Critical Constraints To Poverty Reduction(Access to Economic Opportunities)

• Lacking Employment Opportunities– lack and slow growth of productive

employment– critical constraint to poverty reduction– unemployment fluctuating within the 8-

12% range, compared to 1.5-4.4% in Thailand, 2.5-5.0% in Malaysia

– underemployment at a very high 22.7% in ‘06 compared to 4.0% in 2000

– low productivity of jobs

Critical Constraints To Poverty Reduction(Access to Economic Opportunities)

• Unequal Access to Employment Opportunities– unequal between the rich and the poor– average hourly wage in the bottom 20%

was 86% lower than those from the top 20%

– workers in poor households worked 15% less hours per week

Critical Constraints To Poverty Reduction(Human Development)

• Primary and Secondary Education– access to Primary education near

universal levels but lower and inequitable Secondary education

– enrollment rate at around 96% in primary drops to 73% in secondary

– school attendance varies between significantly between regions (Mindanao and some regions in Visayas below national average)


• Access to Health Services– low and not equitable– average access to services at the

bottom 20% is a little over 30% while close to 45% in the top two percentiles

– private healthcare facilities were used by patients from higher income groups (around 15%) than those in lower ones (around 5%)


• Access to Health Services– more use of poor healthcare facilities in

rural areas by those of lower incoming groups

– access also varying across regions– NCR infant mortality rate of around 20

(close to the norm in developed countries) compared to about 100 in Mindanao

– decentralized healthcare facilities cause municipalities running own facilities not to be able to access better staff and facilities

Critical Constraints To Poverty Reduction(Access to Basic Social Services and Productive Assets)

• Access to Basic Infrastructure and Services– 2004: 50% of the population did not

have access to safe drinking water and 20% with no access to electricity

– great variations across income groups– access to electricity, safe drinking

water, safe sanitation• lowest 10 percentile: 35%, 25%, 40%• top two 10 percentiles: 100%, 80%, 100%


• Access to Finance by the Poor– poor infrastructure and seasonality of

agricultural production makes lending to farmers and fishers costly and risky

–majority of poor families in poor regions still do not have access o microfinance services


• Access to Land– highly inequitable and gradually worsening– Gini coefficient on land distribution was a

terribly high .53 in 1960 and .57 in 2006– most of East Asia and the Pacific experienced

a decline from .47 to .41 in the same periods– between 1960 and 2002, average farm size

shrank by 44% and land-labor ratio by 48%

Critical Constraints To Poverty Reduction(Social Safety Nets)

• Social Protection Programs– Philippines actually has a wide scope of

programs for social protection– but ‘97 crisis exposed the weakness of

the social protection system– low coverage due to lack of funding– poor targeting– not well-coordinated: many overlaps

and redundancies


• Disaster Relief–major source of poverty and

vulnerability in he Philippines– average of 20 typhoons with strong

winds, intense rainfall, and flooding every year

–most vulnerable areas are Eastern Visayas, and Southern, Central, and Northern Luzon


• Disaster Relief– only about half of the afflicted receive

support from the government– the support is miniscule, less than 1% of

the average income during normal times for the poorest 30% of the population


• Major Anti-Poverty Programs– Program-Related Issues: programs are

weak and short-lived, poorly targeted, lacking accountability, not well coordinated, lacking in key components

– Institutional Issues: institutions administering these programs plagued with high staff turnover, politicization, and redundancy

Critical Constraints To Poverty Reduction(Access to Economic Opportunities Summary)• Access to Economic Opportunities

! Lacking Employment Opportunities! Unequal Access to Employment Opportunities

• Human Development! Primary and Secondary Education! Access to Health Services

• Access to Basic Social Services and Productive Assets! Access to Basic Infrastructure and Services! Access to Finance by the Poor! Access to Land

• Social Safety Nets! Social Protection Programs! Disaster Relief! Major Anti-Poverty Programs

Human Capital

• Microeconomics– positive relationship between education of working individuals and their labor earnings and productivity

• Philippines – high attendance rates; social interest in education is widespread HOWEVER growth performance of the economy is poor

• Are human skills and education major obstacles to attracting private investment?

• Is human capital a major contributor to growth compared to other countries?

• Does human capital matter over time?• To what extent is per capita productivity

able to explain per capita labor earnings?• Does higher education give rise to higher

earnings in the labor market?

• Philippines GDP grew 3.8 percent per year between 1961-2003; labor force expanded at an annual rate of 2.8 percent – 1 percent growth in GDP per capita

• Conclusion: discrepancy was not due to educational attainment or growth of human capital

• ADB Report says that constraints to attracting investment have more to do with macroeconomic instability, corruption, and institutional quality (e.g., security and regulatory uncertainty)

• Is labor productivity an important factor in explaining the earnings and productivity of employed people in a household?

• To what extent does labor productivity contribute to growth in real wage income?

• As the labor force is becoming more educated, job opportunities for those with less education become scarce

• Demand for jobs requiring secondary and tertiary education has increased

• Declining labor productivity is probably due to the educated labor force displacing the less educated

• College graduates have been taking low productivity jobs like driving public transpo; mismatch between labor market and education sector

• Rate of return to education: though classified as developing, the country’s rate of return for education approximates that of a developed country; 1 year of schooling = 15 percent increase in wages

Conclusions

• Good investment climate involves lifting constraints like macroeconomic instability, corruption, and institutional quality

• Cross-country difference in growth attributed in change in physical capital and TFP over time

• Major concern: education sector does not supply the right kind of skills demanded in labor market; expanding aggregate supply of skills is not sufficient and has even depressed labor productivity.

Equity and the Social Sector

• GDP is an inadequate measure of welfare; excludes nonmarket production

• Sometimes, adversity of GDP is also overlooked (e.g., spending for air and water quality are part of GDP but not necessarily adds to welfare)

• Households decide on schooling, health care, and labor force participation. These decisions relate closely to well-being

• Development policy in RP has favored “Imperial Manila” and discriminated against Visayas and Mindanao

• Poverty problem rooted in spatial income disparities; channeling physical infrastructure investments (roads, communications, and irrigation) to less developed areas, or rural areas, may improve productivity of private investments, promote “social capital”, mitigate erosion of urban life brought about by rural-urban migration

• However, if spatial income disparities come from variations in human development within each region of the country, a different approach is needed

• Systematic differences in human capital between high and low-income groups would warrant expansion of access of low-income groups to social services and infrastructure

• Gini coefficient as a measure of inequality

• Between 1994-2003, income inequality has worsened

• Disparity in average welfare and human achievement within each of the regions is the major problem; arises from differences in possession of both physical and human capital, including public goods

• Public investment has fallen short of creating highly favorable environment for capital formation

• Inequality between 1994-2003 stemmed from difference within geographical boundaries and sectors

• Poverty is most severe in southern regions like Bicol, Mindanao, and Visayas.

• Spatial disparity could be a binding constraint to sustainable and equitable growth; must address inequality within and not across regions

• Poverty depends on two factors: 1) ave level of mean income or

expenditure and;2) extent of inequality in the income or

expenditure distribution

• Basically, both growth and equitable distribution will help alleviate poverty

• Pro-poor growth: benefits the poor proportionally more than the non-poor; when growth reduces poverty

• East Asian tigers reduced poverty because of rapid but sustained economic growth; poverty in the Philippines was due to slow and short-duration of economic growth

Growth and Human Development in Health and Education

• Access education = greater income equality; more broad-based education permits poorer people to seek economic opportunities

• Education had the strongest impact on income equality (Psacharopolous et al. 1992)

• Education and health, along with quantity of investment (domestic and foreign), together with overall policy environment are important for economic performance; yet health and education affects the other variables too

• Decline in primary school participation from 90 percent in 2001-2002 to 84 percent in 2005-2006; drop is more pronounced in urban areas

• Lack of interest results from inadequate curriculum, unqualified teachers, lack of learning materials

• Correlation between school attendance and poverty across regions (Bicol, ARMM)

• Manasan (2001) found that the poor have much lower access to education than non-poor and disparity is greater at higher levels of education

• In terms of equity of access to education, children at the bottom income groups have lower access to primary and secondary

• RP has achieved almost universal primary education but not secondary; disparities in access prevail across regions

• Need to reallocate resources to the most needy

Quality

• Low quality is more visible in poor areas and regions

• Quality improves learning outcomes; World Bank (1996) showed that better teachers led to better completion rates

• Survival rate in education is lowest in poorer regions – 32.2 percent in Western Mindanao

• Experienced school admin, innovative teaching methods, remedial classes reduce absenteeism in Grade 1

Government Resource Allocation

• Education spending as a share of GDP fell from 4 percent to 2.4 percent

• Low quality of education has resulted from lack of clear priorities in allocating public resources; when public spending declines, households have to compensate for the shortfall

• Requires a sound institutional environment to implement effective educational reform

• Accountability mechanisms, increase teacher salary, strengthen capabilities

Health

• Regional disparity: child mortality in ARMM twice that in NCR

• Maternal mortality in ARMM is 320 per 100,000 live births compared to NCR which is 162

• Access to primary healthcare may be limited by geography or conflict; risk of dying is double than where healthcare is available

Health: Access and Equity

• Gov’t hospital, private hospital, private clinic, rural health unit (RHU), barangay health station (BHS) – inequitable in that services are largely used by people in top end of income distribution

• Lower quality gov’t hospital cater to poor because of low cost of treatment, cheaper medicine and supplies, and flexibility in paying health bills

• RHU and BHS are generally perceived to be low quality health services; diagnosis is poor resulting in repeat visits

• People in Mindanao under-use health services; the wide gap in health status here calls for an effective system of health service delivery that will reach the disadvantaged areas and regions

• Disparity exists due to fragmented administration as well as high cost of operating public hospitals; lack of referral networking among healthcare providers

• RHU and BHS run by municipalities, provincial and district hospitals by provinces

• Less capable centers have difficulty getting services of hospitals that have well-trained doctors and facilities

• Higher costs of operating public hospital if adjusted for quality

• Inequitable access leads household to pay out of their own pockets (almost 47 percent! Of total healthcare spending)

• Although LGU spending on health has increased, devolved healthcare functions has led to uncoordinated and fragmented health services

• Need to shift financial burden of families to societal risk pools (Nat’l health insurance program); health insurance should be extended to the poor

Social Protection

• Policies and programs designed to reduce poverty and vulnerability by promoting efficient labor markets, diminish exposure to risks, enhance capacity to protect themselves against hazards and interruption or loss of income

• Aims to provide welfare-enhancing opportunities for poor groups, households, communities, wage and non-wage earners, formal and informal sectors

• Adequate coverage BUT weak programming and limited outreach lacking clarity about target beneficiaries: who are the poor, how are they determined, where located

• Monitoring and evaluating is difficult; duplication and overlaps

• Heavy dependence on government funding but not on community-based, non-government institutions

• Short-lived and coterminus with President’s tenure• Accountability, differentiation between chronic and

transient poverty, scholarship for the poor, population management policy, weak institutions because of staff turnover, politicization, and redundancy

• Coverage of social security is low because of fiscal constraints; need to reach the poorest of the poor

• Beneficiary base needs to expand to achieve economies of scale to offer more benefit and coverage

• Questions of governance and equity

• Insurance for farmers requires community social funds through microcredit programs

• Employment generation and labor protection depend on gov’t finance and job placements/searches

• During 1997 crisis, Philippines experiences job losses and diminishing work prospects for younger and less educated workers

• Insufficient funding and poor targetting – lack of reliable poverty measures at the local level

• Programs lack built-in monitoring and evaluation schemes

• Need sustainable funding and not just rely on foreign grants or funding

• Not well coordinated and on a piecemeal basis

Poverty Reduction: Trends, Determinants, and Policies

• Need to shift the economy to a higher growth path and keeping it there for the long term

• Long-term economic growth = poverty reduction and human development

• Poor in the Philippines are chronically poor

• Moreover, multidimensional deprivation (low income, inadequate human capabilities, poor health, low educational attainment, limited access to means to achieve capabilities) is closely linked to agriculture

• Targeting agriculture will address mutlidimensional deprivation

• High inequity in incomes and assets, combined with imperfection in financial markets, inhibits poor’s access to profitable investments and human capital formation; since physical assets are considered collateral, poor are unable to access credit and take advantage of income-enhancing technology and production processes

• Poverty reduction can be done through changing distribution of economic pie (redistribution channel) or by expanding economic pie (growth) or both

• Important classification of variables:– (i) initial economic and institutional conditions-- initial

mean provincial per capita income, initial distribution of per capita income, initial human capital stock, political “dynasty” and ethnolinguistic fragmentation

– (ii) time-varying policy variables-- simple adult literacy, agricultural terms of trade, access to infrastructure, and CARP

• Some of the variables do not directly alleviate poverty, but act indirectly through higher income growth; growth elasticity of poverty reduction– Philippines – 1.3– PRC – 2.9– Indonesia – 3.0– Thailand – 3.5

Conclusions

• Weakness in transforming income growth to poverty reduction

• Poverty has a spatial dimension; HDI for NCR is comparable with Thailand, province of Rizal to Ukraine while ARMM comparable with Ghana, Myanmar, and Sudan

• Go beyond raising level of public investment in basic infrastructure and social services, particularly health and education; must be made pro-poor

• Programs afflicted by high leakages to non-poor, administratively costly implementation, unintended rent-seeking (KALAHI-CIDSS and CARP)

181 (Canlas, Khan, Zhuang)

Documents

Transcript of 181 (Canlas, Khan, Zhuang)