Inequity, initiative and inclusive growth

It is not correct to say that the 40 richest Filipino families own 76 percent of our nation’s gross domestic product (GDP). I have recently been widely misquoted as having said so. What I did say, and had first explained in this space nine months ago (“Economic growth for all,” 6/26/12), was that the growth in the aggregate wealth of our 40 richest families in 2011—which Forbes Asia reported to have risen by $13 billion in 2010-2011—was equivalent (in value) to 76.5 percent of the growth in our total GDP at the time, which official data show to have risen nominally then by P732 billion, or around $17 billion. I found that this ratio was only 33.7 percent in Thailand, 5.6 percent in Malaysia, and 2.8 percent in Japan—suggesting that our income inequality is much worse than in our neighbors.

My observation, misquoted as it was, evoked two kinds of reactions. One audience, mostly fellow economists and business people, balked at my supposed assertion that the bulk of our national income was in the hands of only 40 families (the reporters’ mistaken inference from the misquote). They took me to task for the improper comparison between the billionaires’ wealth, mostly held in the form of stocks in various companies, and GDP, which measures total incomes earned for productive activities in the economy. The former went up because the stock market saw record highs, inflating the value of stock holdings. The latter went up because of greater economic activity; “valuation income” resulting from rising stock market values is not counted here. The former is certainly not part of the latter, and I never said that it was. My point was this: Relative to rise in total incomes, the wealth gain of our billionaires that year dwarfed those in our neighbors (who had seen similar stock market surges), suggesting much more skewed distribution in our country.

The other group was the general audience, for whom the technical clarification above is of little interest. Their reactions were borne out of unhappiness over the way our economic growth has been too “exclusive,” benefiting only a few while bypassing the wide majority of Filipinos. For them, whatever indicator of inequality we use doesn’t change the fact that our country stands out with an income gap wider than seen in most of the region. The clear imperative is to pursue more inclusive growth. This is in fact the theme and mantra of President Aquino’s Philippine Development Plan.

I’ve said it before, and I’ll say it again: I do not fault our billionaires for being rich, particularly those who gained their riches through hard work and superior initiative. (But I can’t say the same for those who have employed less than fair or ethical means—and not a few believe that some in the Forbes list did.) Neither do I favor a socialist approach that would take from the rich to give to the poor.

An anecdote making the rounds of the Internet aptly illustrates why this cannot be the way to go. As the story goes, a professor known to have never failed any student in the past suddenly found himself failing an entire class. The class had proposed a grading system based on the socialist ideal where no one would be poor and no one would be rich. The professor thus adopted a system where all grades will be averaged, with everyone receiving the same grade. This way, everyone thought, no one would fail and no one would stand out and get an A. After the first test, the grades were averaged and everyone got a B. The students who studied hard were upset, while those who studied little were happy. For the second test, the lazy students studied even less, and the better students decided it wasn’t worth studying as hard as before. The average grade for the second test was D, and no one was happy. By the time of the final test, the average grade had dropped to F, and everyone flunked the course. As the tests proceeded, it became clear that students were unwilling to put in effort that would only benefit someone else. In like manner, an economic system that takes from the rich to give to the poor for the sake of equality is likely headed for overall decline.

A thriving economy rests on initiative. Initiative, in turn, rests on proper incentive. Take away the incentive of commensurate rewards for one’s efforts, and the initiative to achieve more disappears. (Without “carrots,” the alternative is for the state to wield a “stick” and force production quotas on its citizens—at the cost of freedom and happiness.) In a democratic society, then, pursuing inclusive growth is not about redistributing wealth and income to equalize it; rather, it’s about providing genuinely equal opportunities for all.

As I have argued before, inclusive growth is about ensuring that all are equipped with or can readily access needed human, natural, physical, social and financial capital to be able to pursue opportunities to uplift their lives. This entails ensuring quality education and health services for all; correcting historically lopsided access to land and natural assets; equitable access to credit by small and large borrowers alike; a justice system that is blind to people’s social and economic status; and a competition policy that levels the playing field for big and small enterprises so that the latter can thrive along with the former. In other words, it calls for correcting our social, political and institutional flaws, in all their obvious and subtle forms, that perpetuate unequal access to economic and political power.

What worries me is that there is so much yet to be done, and the job would take much more time than remains for this particular President to do it. –Cielito F. Habito, Philippine Daily Inquirer

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E-mail: cielito.habito@gmail.com

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