Thursday, 20 May 2010

Another look at poverty reduction

The change the Philippines needs is to maintain some continuity of long-term economic policy
By John Mangun
Outside the Box
Business Mirror

The question plaguing the majority of the world’s nations is understanding why economic growth does not automatically mean a reduction in poverty. We talk in the Philippines that poverty would be reduced if only economic growth could reach a certain level. You can pick your own number here because there is no analysis that says there is a magic number for economic growth that equals a reduction in poverty.

Look at India, for example. Economic growth is expected to reach nearly 9 percent for this year. Yet, poverty-reduction in India has always been an elusive goal. In fact, the incidence of poverty in India is comparable to the Philippines and we have a record of weak growth in comparison to India over the last decade.

Studies on nations that have successfully seen poverty reduction where growth has “trickled down,” give some answers.

An interesting paper in 2002 from the International Monetary Fund compared the performance of Pakistan and Malaysia. These two countries obtained independence at around the same time and showed long-term economic growth that was similar. Malaysia saw its economy grow at slightly over 6 percent through four decades, while Pakistan had a growth of slightly under 6 percent. Yet Malaysia was able to reduce its poverty rate to 8 percent from 50 percent, while Pakistan saw its poverty rate fall only slightly.

The conclusions of this study may have some answers for the Philippines. They key word here is “may.”

One factor that seems to be significant in allowing growth to go down to the poorest of a society is political stability. While you could argue that the Philippines has not had political stability for more than 20 years, even during these last two decades that stability has not realized a significant reduction in poverty. The key element, though, is not really political stability in terms of a lack of unrest and turmoil because Thailand even now could not qualify under that definition as a country with political stability. The stability that matters is a continuity of economic policy that changes, not with a change of leadership, but changes as the needs arise to adapt to new domestic and global situations.

Here, the Philippines is very unstable as each succeeding administration virtually rewrites the game plan as soon as new leadership assumes power. Each new administration comes into office promising to hold the answers to poverty reduction and it is very possible that each of the last four Philippine governments have had the magic answer to the problem. But we will never know because each administration’s policies were changed as a new occupant came to Malacañang. Unfortunately we expect quick results and perhaps poverty reduction requires that policies be in place for a longer time than we give them to work. Poverty reduction is a process, a journey, not an event triggered by a policy change.

Another factor in poverty reduction, as shown by the Malaysian experience, is the realization that if poverty reduction is the goal, then that must be the primary objective—and other priorities that interfere with that goal must be discarded.

No one disagrees with the idea that ultimately the best way to reduce poverty is to create jobs for people who do not have jobs. During Malaysia’s march to an 8-percent poverty level, job creation became the primary objective and anything that stood in the way of job creation was put aside. It was the effective policy of the Malaysian government that job creation took precedence over worker’s rights. These included the right to strike, bargain for wages and the worker’s right to benefits of tenure. A low-paying job was thought more important than the notion that there should be a minimum wage.

The result was that more people were gainfully employed. And as economic growth continued and improved over the years, the benefits to the worker increased dramatically as the labor market became tighter and employers competed for even unskilled workers by raising wages and benefits.

In truth, strong labor laws such as in the Philippines that give tough protection to existing workers tend to limit the opportunities of those without jobs. Every business can only allocate a limited amount of capital for wages. If you could hire two workers for the same price as one, it would make sense to do that. Imagine a large company hiring twice as many low-skilled workers like janitors and messengers for the same total expense. Granted, each individual worker would not make as much but there would be twice as many in the work force and, ultimately, the economic benefits of twice as many people working would generate enough activity to force wages to increase for everyone.

Malaysia ’s government benefited, too, from having more people working as it was less dependent on borrowing as more employment meant a larger revenue base through taxes. While tax-collection efficiency was important, the increase in the overall tax base was more important.

Another critical aspect to Malaysia’s poverty reduction was domestic savings by individuals. Although foreign investment was important, equal emphasis was placed on Malaysians saving their money that could then be used for investment.

The Philippine economy, in contrast, is very consumer driven. There is nothing particularly wrong with that because this is cash rather than credit-driven buying. But an economy that lacks capital for investment must find that money someplace and it is better to raise it domestically instead of relying on foreign money or worse, foreign borrowing.

Finally, economic planning as such was given to local government authorities. If the government of a small area believed that a certain type of economic activity was feasible and growth creating, then the role of the national government was to provide the infrastructure to support that industry. Specific economic planning took place at the local, not the national level. Broad policy was formulated at the national level but eventual downstream implementation was a local function.

The new Aquino administration promises change. That may be a good idea. But maybe the change the Philippines needs is to maintain some continuity of long-term economic policy.

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