RP growth-poverty link: An Asian anomaly

Published by rudy Date posted on April 7, 2009

MANILA, Philippines — Around the world, the general experience is that economic growth is accompanied by falling poverty. And nowhere has this been truer than in Asia, where data clearly show that poverty reduction associated with economic growth has actually been stronger than elsewhere in the world.

Except, as it turns out, in the Philippines. Sadly, we have been an “odd man out” in this observation, with our experience having gone against the normal trend. It is not a matter of our poverty rate falling more slowly with economic growth vis-à-vis our Asian neighbors. It’s far worse: The official poverty rate actually went up, and at a time when our economic growth was claimed to be the fastest in 30 years.

It may be small consolation that we are not without company in this anomalous situation. We share that dubious distinction with Sri Lanka, but there, the rise in poverty rate had been slight (less than 1 percentage point, when ours was 3).

1990s were better

It had not always been this way.

In the 1990s, the Philippines did well on this growth-poverty linkage. Poverty reduction largely kept pace with economic growth, with poverty falling at about the same rate the economy was growing. Our poverty elasticity of growth (PEG) had a value close to one (translation: For every 1.0-percent GDP growth, our poverty rate fell also by about 1.0 percent).

This put us among the better performers in the neighborhood at the time, behind only Indonesia and South Korea, which both had a PEG of 1.3, and Bangladesh (1.5). Remarkably, we were actually doing better than Malaysia, Thailand and India, who only managed 0.7-, 0.3- and 0.1-percent reductions in poverty, respectively, with every 1.0-percent growth in their GDP.

In Thailand, the rather weak poverty reduction accompanying the brisk rates of economic growth enjoyed by that country then (with annual GDP growth averaging more than 8.0 percent at the time) worried the government so much that they reoriented their five-year development plan to put primacy to social development over economic development.

They began with their 8th National Economic and Social Development Plan (for 1997-2001)—the Thai counterpart to our own Medium Term Philippine Development Plan (MTPDP), and starting with their 9th Plan, they reversed the order of “social” and “economic” in the plan’s name to stress the point.

Beyond lack of income

Our perverse experience drove me to research this growth-poverty linkage across Asian countries, and examine possible factors leading to the variation among their experiences. But first, I sought to enrich the measure of poverty used in the analysis by not confining the definition of poverty to its economic dimension, i.e., as lack of income.

This comes out of the widely accepted notion that poverty has multiple dimensions and must thus be assessed holistically. Thus there are also environmental, political, cultural and spiritual dimensions to poverty that must be considered.

A person may have enough income and yet still feel deprived when she does not have adequate health and education, lacks a healthy physical environment or the freedom to assert her cultural identity and spirituality.

A readily usable poverty measure that incorporates non-income dimensions is the United Nations’ Human Poverty Index (HPI), which has been tracked by the UN for its member countries for over 10 years. Sparing the technical details, the HPI adds measures of health, education and a decent standard of living in the composite index used as yardstick for a more holistic notion of poverty. I then calculated the PEGs based on this more complete measure of poverty.

What we’re missing

Thailand’s efforts spurred by their unfavorable 1990s experience have clearly paid off. Along with Malaysia and Vietnam, the three countries top the list with around 6.0-percent improvement in the HPI for every 1.0-percent growth in GDP in the period 2000-2008. Singapore is close behind with 4.0 percent, followed by Nepal, Mongolia, China and Pakistan (with PEGs in the 2.0-3.0 range).

The Philippines, unfortunately, is a conspicuous bottom-dweller, with its PEG even having the wrong sign: HPI actually worsened almost 1.0 percent for every 1.0-percent growth in GDP in the period.

I then examined statistical correlations between the PEG and likely determinants of the strength of the growth-poverty linkage. These included sectoral composition of GDP growth; public expenditures in health, education and mass housing; and quality of governance (measured using the World Bank’s Global Governance Indicators system).

Not surprisingly, government social expenditures had a strong influence on the growth-poverty linkage. Quality of governance also clearly exerted a significant influence. The analysis also revealed that in Southeast Asia, the contribution of the manufacturing sector to growth was more significant than that of agriculture in achieving faster poverty reduction with economic growth.

It would appear from analysis of the Asia-wide experience, then, that these are what we’ve been missing in recent years: Adequate public investments in health, education and mass housing; good governance; and manufacturing growth.

It’s time to do some serious thinking—and doing—the way the Thais did in the late 1990s.–Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu

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