Can the Philippines eradicate poverty?

(Part III)

We have examined the major reasons why the poverty incidence in the Philippines has remained exceptionally high in the context of the East Asian development experience. First, the sustained high economic growth that is a conditio sine qua non for eradicating poverty had not been attained by the Philippines, except only in the five years. Second, the inward-looking, import-substitution strategy followed for several decades limited the number of jobs generated because the industries that were established were very capital intensive and had a very limited domestic market, in contrast with what our neighboring countries that first focused on labor-intensive industries targeting export markets abroad before moving to more capital intensive industries. Third, fiscal constraints seriously limited the ability of the Government to spend what was necessary for poverty reduction, i.e. rural infrastructures, public education and public health. Fourth, and most fatal of all, there was an utter neglect of countryside and rural development as the already meagre investments in infrastructures were mostly concentrated in the National Capital Region and a few urban centers like Metro Cebu. It is no surprise that 75 percent or more of those living below the poverty line are in the rural areas, where both landed and landless farmers were left to their own devices to eke out a meagre living, especially in the coconut regions. Finally, massive corruption, especially facilitated by the pork barrel system, siphoned off huge amounts to the pockets of dishonest government officials and their accomplices in the private sector. These stolen funds could have been invested in improving the quality of public education and public health, the two most important needs of the poor.

As we look into the next ten to twenty years, are there enough significant reversals of the failed strategies and policies for us to expect success in our efforts to eradicate poverty or at least to bring it down to levels that are comparable to our neighboring countries whose poverty incidences are at single-digit levels? The first optimistic trend is the onset of growth rates of 6 to 7 which have been maintained at least for the last five years. There is a strong probability that such rates can be sustained and may even be improved to the range of 8 to 10 percent annually as the Build Build Build Program of the present Government takes greater traction. A minimum of 6% is guaranteed by the current engines of growth which are the remittances from the Overseas Filipino Workers; the earnings of the BPO-IT industry; the renaissance of Philippine manufacturing as a result of strong domestic demand and the increased interest of our Northeast Asian neighbors in relocating their operations from China to Southeast Asia; and the expanding sector of domestic tourism being stimulated by the larger number of middle class households and the recent improvement of the purchasing power of this middle class resulting from the first phase of the tax reforms.

Of course, a relatively high GDP growth rate does not guarantee that it will trickle down to the poor. What developments favor the attainment of inclusive growth? For one, there is a reversal of the inward-looking, protectionist policy of industrialization in the past. Especially as a result of the Philippine membership in the ASEAN Economic Community (AEC), our leaders are now more committed to the free flow of goods, services, capital, investment and skilled workers among our ASEAN neighbors. This greater openness to free trade of goods and services is spilling over to our trading relations with the rest of the world. Our trade officials are exploring more bilateral free trade agreements following our experience with Japan (JPEPA). We may soon have an FTA with South Korea with whom we already have very strong cultural and educational exchange relations. Exports can become another engine of growth in the coming years, generating much needed jobs.

In the Build Build Build program, the Government is spending the greater part of its increasing infrastructure budget (6 to 7% of GDP) in the regions outside of the National Capital Region, including more farm-to-market roads, irrigation systems, post-harvest facilities and other rural services that help farmers to increase their productivity. Even before the 2017-2018 tax reforms that are expected to significantly increase government revenues for infrastructures and social services for the poor, the Philippines already had been less constrained fiscally to expand its budget. This bigger fiscal space has been made possible by the falling debt-to-GDP ratio and the interest to total National Government Expenditure ratio. These favorable circumstances had been the result of greater fiscal discipline that started with the Administration of President Gloria Macapagal Arroyo. This ability to spend more will definitely benefit the rural areas in which much of the infrastructure spending of the Government is focused.

The research of leading agribusiness economist, Dr. Rolando Dy of the Center for Food and Agribusiness of UA&P, clearly shows that increased farm productivity is one of the most direct means of reducing poverty. This is dramatically illustrated by his recent findings that regions with high dependency on agriculture income have high poverty incidence while regions with a low dependence have low poverty. But a paradox exists in two regions, i.e. Cagayan Valley and Ilocos. Most families in these regions have strong dependence on agricultural income and yet farmers’ poverty levels are very low: 8.8% and 12.2% respectively in 2015, compared to the over-all rate of rural poverty of 34.2%. The paradox is explained by the high farm productivity in Cagayan Valley and Ilocos. Increased investment in rural infrastructures augurs well for attaining lower poverty incidences. In fact, this is the universal lesson in the agricultural economies of Indonesia, Thailand, Vietnam and Sri Lanka. These countries have done a much better job endowing their small farmers with better infrastructures. Their poverty incidences are much lower than ours.

The two most important sectors that complement higher farm productivity as a means of reducing poverty are the OFWs and the BPO-IT industry. More than 10 million OFWs remitting some $30 billion (2017) and increasing without fail at 3 to 5% annually over the last twenty years, albeit with serious social costs, are cutting down poverty incidences in both urban and rural areas of the Philippines. In the more urbanized (“urban”) districts the more than 1.1 million workers of the BPO-IT industry are also a significant contribution to poverty reduction. Enterprises in this sector are present in 21 provinces and are hiring 70,000 additional employees every year, many of whom are from the D and E households. Five years from now, the sector expects to employ 1.8 million direct workers and will benefit 5.1 million indirect employees through the support products and services that some 5,000 SMEs will be selling to the industry. These bright expectations of the industry leaders can only be met, however, if there are major efforts to improve the skills of BPO workers so that they can be upgraded to more knowledge-intensive work rather than the repetitive and low-quality jobs now found in voice-oriented call centers. Much can be done in this regard if the schools take advantage of the senior years (Grades 11 and 12) in the K to 12 Curriculum to produce graduates with the higher skills that will be needed in the Knowledge Processing Industry. With a close coordination between the academe and industry, we can benefit from our young, growing and English-speaking population to become the data science and analytics center of Asia in the future, as we became the leading BPO country in the past.

Another reason why we can expect greater success in reducing poverty incidence is the minimization of leakages resulting from rampant corruption occasioned by the former pork barrel system. There is greater transparency, at least at the higher levels of government, in the use of public funds, especially in such departments as public works, education and health, which account for the bulk of government expenditures, both capital and operating. At the DPWH, there is greater accountability at the national and regional levels, thanks to the good governance being followed by the current Secretary as well as the former Secretary of Public Works who has been so unjustly accused of graft. I can personally attest to the fact that former Secretary Rogelio Singson was one of the most honest government officials ever in the Department of Public Works. I admit, however, that at the district levels, certain NGOs committed to fighting graft and corruption are getting feedback that there is still widespread corruption in the bidding process. The Duterte Administration is addressing this sticky problem.

There is no doubt in my mind that we can lick the problem of mass poverty over the next decade or so if we are able to build on the strong foundation of the OFWs, the BPOIT industry, the greater fiscal space to invest heavily in infrastructures (especially in the rural areas), the improving governance situation in the public sector, the heightened sense of social responsibility of the private business sector, and most important of all the attainment of higher productivity in the agricultural sector through adequate public and private investments. The rate at which we can reduce poverty can even be faster if are able to accelerate our GDP growth to a range of 8 to 10% as a result of amending the Constitution to allow for greater participation of foreign investments in the strategic industries that are now limited to foreign ownership and to significantly reduce corruption at the lowest levels of the government bureaucracy, such as the districts of the DPWH.

For comments, my email address is bernardo.villegas@uap.asia.