Are poverty and inequality changing?

One does not need the Pope to tell us this reality, since one can merely look at towering skyscrapers adorning the skyline in Metro Manila, and informal settlers that also thrive at the backdrop of these high-rise buildings to get a sense of inequality in the country.

As far as income inequality is concerned, data (see Table 1) from the Family Income and Expenditure Survey (FIES), a survey conducted by the Philippine Statistics Authority (PSA) every three years, shows that the poorest 20% Filipinos own only less than 5% of the country’s total income while in a perfectly equal society, the poorest 20%, the next 20% all the way to the richest 20% Filipinos, should own 20% of total national income. Moreover, this level of inequality has been unchanged as shown by various measures of inequality such as the Palma ratio and Gini coefficient.

Table 1. Selected Statistics on Income Inequality and (Per Capita) Income Distribution in the Philippines: 2003, 2006 and 2009

Note: Author's calculations from FIES 2003, 2006 and 2009.

Socio-economic inequality is a growing concern not just in the Philippines, but across the world.

The Gini coefficient for income/expenditure of selected ASEAN countries is listed in Table 2. When this table is seen together with the performance of these countries in reducing poverty in the last few years, it can be observed that generally, countries that have made significant improvement in reducing poverty among ASEAN economies are those with low levels of inequality, or with reduced inequality.

Table 2. Gini Coefficient across Selected ASEAN Countries: 1990, 2000, and Latest Year

Source: 2014 World Development Indicators

Inequality may threaten social cohesion and heighten tensions since it portrays inequitable distribution of economic opportunities. Some argue, however, that (income) inequality should not be immediately portrayed as a problem. As an economy expands, entrepreneurs with better command over assets and capital would be in a better position to benefit from economic growth.

As these people’s incomes grow faster than the income of the rest, the process creates inequality. But, the benefits from income growth could trickle down if the additional incomes are used as investments to create more jobs for the poor.

In a previous article, it was pointed out that we do not have clear evidence to suggest a reduction in poverty because instruments used in the two household surveys of the PSA used to generate estimates of poverty in the first half of 2012 and in the first semester of 2013 are not comparable. Poverty data from the 2006 to the 2012 FIES suggest that poverty rates have been unchanged since minute differences in the estimates are within margins of error. 

It may seem puzzling why despite the growth in the gross domestic product (GDP) per capita (at an annual rate of 3.3% over the past decade), the income poverty rates and inequality measures in the country have been unchanged. A key element to understand this puzzle is income mobility.

Income mobility in the Philippines?

Income mobility describes the ability of people to partake in socio-economic opportunities created by economic growth.

In a policy note and a discussion paper released at the Philippine Institute for Development Studies, we report on our independent work examining movements in the incomes and expenditures of households surveyed by the PSA during the period 2003 to 2009.

An estimated 75.15% of the population in 2003 was non-poor, and, of which 66.88% remained non-poor but 8.28% became poor in 2006.

In 2003, about a quarter (24.85%) of the population was poor, of which 16.95% remained poor but 7.90% became non-poor in 2006. Thus, between 2003 and 2006, poverty inflows were practically equal to outflows for the entire population. That is, the share of the population that was non-poor and that became poor (8.28%) was practically equal to the share of the population that was poor that became non-poor (7.90%).

Of an estimated 20.5 million poor persons in 2003, 6.5 million moved out of poverty, but 6.8 million moved into poverty.

A recent study by Martinez et al. (2014) on the distribution of expenditures suggests that almost half of the households experienced mobility in their expenditures from 2003 to 2009. About half (51%) of households that started in extreme (expenditure) poverty in 2003 moved up the expenditure ladder, but 77% of households that started non-poor moved down the expenditure distribution.[1]