Mathematics and economic pie

Ronald U. Mendoza, PhD

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Growth targets are not enough. We need a more inclusive market economy.

Ronald U. Mendoza, Ph.D.When we hear about the country’s economic growth performance, targets and forecasts, I wonder whether everyone fully understands what these figures really mean for the poor and the jobless youth in the country. So let’s do the math on the proverbial “economic pie.”

While many in the business sector are still quite optimistic, some have begun to wonder about the feasibility of the 7-8 % growth target of the Philippine Development Plan. Based on first estimates, Philippine economic growth last year was closer to 3-4 % and it missed the target by a wide margin.

To illustrate what’s at stake, let’s run some scenarios here in terms of possible catch up with Thailand, a country that once upon a time the Philippines was often compared to.

Philippine economic performance at 4% means that it will take the country about 16 years to double its gross domestic product (expressed in 2000 US dollars). At 4% average growth, the Philippines will find it difficult to catch up with Thailand, which has an average growth of about 6%.

So what if we managed the 8 % growth per year as targeted by the PDP? If Thailand continues to grow as it has, the Philippines will actually catch up with that country by 2044.

This will happen only if the country manages to grow at 8 % on average in the next 32 years.

Sharing the pie

While growth does matter, economic growth per se does not necessarily translate to improved incomes for everyone (nor, if ever, to an equitable degree).

This is how real economic growth of over 4.6% on average during the 2001-2010 period – very respectable by Philippine historical growth standards – could still be accompanied by persistent poverty (poverty incidence remained at about 20-26% during that entire period based on different estimation methods), and a tripling of hunger incidence indicators as measured by the Social Weather Stations (SWS).

The prices of rice, galunggong and diesel rose by 70%, 46% and 150%, respectively during the 2003-2010 period.

Income increases among poor and low income households are unlikely to have matched this. Indeed recent studies by the ADB and others point to stagnating average real incomes (and real wages) for the poorest Filipinos, even during periods of respectable growth.

Another way to gauge the equity of growth is through the jobs linkage.

Job creation in the economy is insufficient to absorb the Philippines’ surplus labor. Due to our forthcoming youth bulge, we can expect an average of 1.2 million young workers entering the labor force every year for the next 30 years. Little surprise, then, that the number of Overseas Filipino Workers (OFWs) has been growing in number.

Who benefits?

In addition to the sheer number of jobs, the nature of these jobs also matter, as they relate to who could benefit from the types of jobs the economy creates.

In our recent study at AIM of the 2000-2010 period of formal sector jobs creation, we found that growth translated to an increase in the number of high- and middle-skilled jobs (like managers, engineers, technicians, and other professionals). However, growth during this period translated to fewer lower skilled jobs across the different Philippine industries.

Is this necessarily bad?

For a modernizing economy, it may be a healthy sign—the economy is creating more (and relatively better paying) employment for high skilled and educated young workers. 

However, lower skilled and less educated workers could be taking a beating in 2 ways.

First, job creation for the low skilled in the formal sector is abysmal. Second, the numbers suggest that workers are not being funnelled upwards into the better paying jobs—rather, less skilled workers appear to be funnelled downwards into the informal sector, due to the lack of opportunities in the formal economy.

The informal sector is where the vast majority of our population—millions of low income and poor households—are relegated.

Eliminating poverty necessarily means that more people benefit directly from economic growth—that everyone gets at least a minimum amount of the economic pie.

Economists sometimes gauge this using the “poverty elasticity of growth,” a rough measure of how effectively an economy transforms every single percentage point of growth into poverty reduction. Various studies indicate how the Philippines has a very weak poverty elasticity of growth at only about 1.5.

Growth not enough

If we assume this doesn’t change (read: very minimal structural reforms in the way the economy engages and empowers the poor), and given a 3% growth rate (roughly what the country posted in 2010), then it will take the country a whopping 585 years to eliminate poverty!

These calculations are illustrative, of course, yet they put into perspective the two main angles for policy attention—improving the growth rate to decent levels, and making sure that economic growth more forcefully translates into poverty reduction. (Growth alone is insufficient to get the job done!)

Even if the Philippines manages a growth rate of 8%, but if the poverty elasticity of growth remains the same, it will still take the country over 150 years to eradicate poverty.

If the Philippines manages a poverty elasticity of growth of about 5 (roughly the estimate for the Thai economy), and if the Philippines also achieves an economic growth rate of 10 % (roughly what China has managed to achieve in the last several decades), then the country will eliminate poverty in about 25 years.

Indeed, the Philippines needs an impressive growth target. But that is not enough.

We need an equally ambitious reform agenda to make our market economy much more inclusive for the vast majority of our population. Under-ambition on both fronts is something the country cannot afford given the size of our population and its growing impatience for rapid progress.

This impatience will increase, I predict, if growth remains anaemic, while the bulk of its benefits continue to be so overtly skewed in favor of the few. The only thing worse than poverty is poverty amidst plenty. –

(The author is an associate professor of economics at the Asian Institute of Management)

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