The myth of ‘inclusive growth’ in the Philippines and why GDP alone does not matter

May 25, 2014

by Libertas

Why is there no inclusive growth in the Philippines? The critical component and measurement which goes a long way in explaining why no progress is being made, and inclusive growth remains only the ‘in’ slogan/mantra of the year is the Poverty Elasticity of Growth or PEG (the multiplier effect of percent growth to percent poverty reduction). This varies significantly country to country, dependant upon their economic environment/fiscal policies, population growth, etc. Boring to most, but important to economists, and ultimately to your individual prosperity.

Do Filipinos possess the right attitude to succeed in the global race?

Closely allied to poverty elasticity is often the presence of a high level of income inequality (the Philippines has nearly the worst inequality in the world), and when both are present, as in the case of the Philippines, even high levels of growth only have a marginal impact on job generation and poverty reduction, as money generated is concentrated and sucked out of the economy, not reinvested at the necessary rate, or in key areas needing re-generation, and consequently the money cycle becomes a self contained cocoon circulating within a small group of the population, but effecting little ripple or downward benefits.

In such circumstances the double whammy (PEG and income inequality), ensures inclusive growth almost certainly will not and cannot happen without a raft of economic reforms addressing income inequality, which in turn becomes the engine of inclusive growth and driver of poverty reduction.

A look at the historical growth figures in the Philippines suggests this is precisely why there is deadlock when it comes to poverty alleviation and employment generation, since that has hardly changed despite extended periods of headline GDP growth. Under current policies the Philippines would need to achieve and sustain an impossible 9%+ annual growth year on year to have any real impact, and only then with focussed investment in key industries.

Other countries can generate jobs and achieve some poverty reduction with 2% GDP growth, (that gives a clue that there is a fundamental problem with the current system in the Philippines), so the propaganda surrounding high growth is irrelevant in itself and without being taken in conjunction with other key metrics – unemployment and poverty, which are the real composite measures of country progress and prosperity;

GDP growth x poverty elasticity of growth = reduction in poverty

For example:

Philippines – 7% × 0.1% = 0.7 poverty reduction

UK – 3% × 0.7 = 2.1 poverty reduction

Not surprisingly the Philippines has the worst poverty elasticity of growth (PEG) in Asia, and one of the worst in the world.

Economics is about balancing, often, opposing forces; rather like two weights on either end of a see-saw. The problem is that by continually adding weights to either side it simply creates fluctuations and instability (stop-go), and a web of complexities which become more difficult to manage or even understand.

For Third World countries, the issue is first to put the fulcrum in the right place. Without strong fundamentals the application of First World economics and financial instruments will create a Gordian Knot which even Keynes would be hard-pressed to unravel. The options and solutions are clearly there, but obviously not to President Benigno Simeon ‘BS’ Aquino III and his Cabinet, who continue to support an outdated and inappropriate oligarch-based economy, crony capitalism (the Philippines is the sixth highest in the world), and corresponding protectionist measures.

Expect more ‘sticking plaster’ Conditional Cash Transfer (CCT) in response, slogans and propaganda, but don’t expect structural change, as capital flight increases, the budget deficit widens, the peso declines, and, in 2015 onwards ASEAN integration will only marginalise the Philippines further if it does not fully prepare and embrace a more competitive future, a dynamic spirit, and a self-critical attitude.

Wrong diagnosis, wrong medication, unqualified doctor, result – no improvement in the patient.

Call an ambulance!

Libertas

A traveller, always learning, and hopefully still contributing. An attitude of work hard, play hard, and a love of architecture, design, and the creative spirit. A global ICT executive, who traded in corporate life for real life.