The Philippines now has a chance to eradicate poverty in a generation, if it can sustain a strong economic growth that will lead per capita income to rise 11 times in 30 years, according to the World Bank.
In a 78-page Philippine economic update, the Washington-based multilateral lender says sustaining a growth of 6 percent or higher and making it inclusive over the long term “will enable the country to eradicate poverty and boost shared prosperity within a generation.”
“The Philippines has what it takes to sustain this high level of growth for many years,” says World Bank country director Motoo Konishi during the launching of the report titled Making Growth Work for the Poor.
“The country is benefiting from low and stable inflation, its finances are healthy, and debt levels are declining. It has a dynamic private sector that is seizing global opportunities. Now is the time to move the economy decisively onto a path that reduces poverty and creates more and better jobs,” says Konishi.
The World Bank says growth in 2014 likely reached 6 percent, lower than the previous estimate of 6.4 percent, owing to slower government spending and lower farm production.
It expects growth to bounce back to 6.5 percent in 2015 and 2016. The country can even grow beyond 6.5 percent if the government can fully utilize its budget as planned and accelerate reforms, the report says.
More spending
The report says “sustaining government spending in the near-term will require significant improvements in budget planning and execution as the current 28-year old system, already at capacity, is hard pressed to support higher spending.”
The World Bank says sustained growth in recent years has started to translate into gains in job creation and improvement in the lives of the poor.
More than a million jobs were created in October from the same month the previous year, it says. As a result, unemployment fell from 6.4 percent a year ago to 6 percent, the lowest in 10 years.
Government data also show that the real wage income of the poorest 20 percent of the population grew by almost 10 percent compared to only 2.4 percent for the upper 80 percent.
Underemployment among the poor declined significantly in 2013, coinciding with the improvement in poverty incidence.
“If growth is sustained at 6 percent per year and the current rate at which growth reduces poverty is maintained, poverty could be eradicated within a single generation,” says World Bank lead economist Rogier van den Brink.
Growth elasticity
The World Bank says between 2012 and 2013, the growth elasticity of poverty, or the rate at which economic growth reduces poverty, improved significantly to -2.02 from -0.24 between 2006 and 2012.
If these trends are sustained, the government’s target of reducing the incidence of poverty to a range of 18 percent to 20 percent by 2016 is attainable, it says.
The bank says over the long-term, if growth is sustained at 6 percent per year, per capita income can double within a decade, grow five times in two decades, and reach 11 times in three decades.
“If the growth elasticity of poverty remains high, this means that poverty can be eradicated within a single generation. However, this requires a more aggressive approach to addressing the stubbornly high overall rate of underemployment,” it says.
A bank’s survey confirms that the government’s conditional cash transfer program is well targeted and reaching the poor, as indicated in the substantial growth of domestic cash transfers to the bottom 20 percent.
However, the bank says eradicating poverty will require sustaining and speeding up structural reforms. “Going forward, the Philippines needs to accelerate reforms that can translate higher growth into more inclusive growth—the type that creates more and better jobs—so that poverty can be reduced massively and prosperity shared by more people,” it says.
Key reform areas should include increasing investments in infrastructure, health, and education; enhancing competition to level the playing field; making regulations simpler to promote job creation, especially for micro and small enterprises; and protecting property rights.
Over the medium-term, putting more money in infrastructure as well as in people’s education and health will require tax reforms to generate adequate resources, it says.
More roads
It says in the last decade, Metro Manila experienced high and sustained economic growth, but infrastructure deficits have led to worsening road congestion. “This costs the economy around 8 percent of GDP annually,” the report says.
It also cites the need to improve power supply, as Luzon may suffer power shortages between April and May of 2015, brought about by aging generation plants, lack of reserve capacity, and the deficiency in alternative sources of power, such as natural gas.
Another crucial step is reviving Philippine electronics exports. The report says between 1980 and 2008, Philippine electronics exports grew exponentially, becoming the key export product in the 2000s.
However, since the 2008 global financial crisis, electronics exports have not fully recovered. It says regaining the country’s position as a leading exporter of electronics products require a concerted effort to improve power cost and reliability, raise infrastructure and human capital investment and reduce non-tariff trade barriers.
Overall, the country has an investment gap (both physical and human capital) of around 6.8 percent of GDP as of 2014, the bank says.
The report also highly recommends rationalizing tax incentives by making them more targeted, transparent, performance-based and temporary, as well as adjusting tax rates and valuations to keep pace with inflation so that the tax system becomes more equitable.
Tax reforms
“A more equitable, efficient, and simpler tax system should be the aim of any tax policy reform,” the report says.
World Bank senior country economist Karl Kendrick Chua says both tax administration and tax policy reforms are needed to generate the revenues required to finance the decades-old investment deficit in infrastructure, health and education.
Only when revenues improve should policy makers consider further reforms, such as lowering the top marginal income tax rate to 25 percent, reducing the gap between regular and special corporate income tax rates, and simplifying the tax system for micro and small enterprises, he says.
“For these reforms to succeed, strengthening tax administration and improving transparency and accountability of government spending are essential,” Chua says. “These would allow the Filipino people to see a better link between taxes and services and convince them that the taxes they are paying are being spent wisely.”
The report says governance reforms should include institutionalizing Open Data, particularly passage of the Freedom of Information Bill; enhancing budget reporting to allow the public to track spending; and simplifying tax procedures to improve compliance.
The report also recommends further reforms to enhance competition, including enacting and implementing a clear competition policy; liberalizing key sectors of the economy that directly impact poor Filipinos; further opening up the economy to more foreign competition; and strengthening regulatory capacity.
“These reforms can provide firms of all sizes and origins the incentives to invest and massively create good jobs for all Filipinos,” Chua says.
