Poverty and Economic Policy in the Philippines

• Author: Philip Gerson
• Position: Economist in the IMF's Fiscal Affairs Department

Past economic policies that hampered growth, and the resistance of powerful elites to much-needed reforms, were largely responsible for the high incidence and persistence of poverty in the Philippines. Recent policy changes have spurred growth, but additional reforms could accelerate the reduction of poverty.

POVERTY is both more widespread and more persistent in the Philippines than in neighboring ASEAN (Association of South East Asian Nations) countries. While the poverty rate has decreased in the Philippines over the past 25 years, the decline has been slower than in other ASEAN countries. Some of the blame for the Philippines' slow progress in reducing the incidence of poverty can be attributed to past economic policies that retarded growth by discriminating against agriculture and discouraging investment in human capital. These policies, in turn, sustained powerful interest groups that blocked or delayed economic reform.

The Philippines began to undertake political and economic reforms in the late 1980s and early 1990s, however, and GDP growth has accelerated to about 5 percent a year since 1994. With faster growth, the percentage of Filipinos living below the poverty line is decreasing, but agricultural reform and increased investment in human capital would allow a more drastic reduction in the poverty rate.

Income distribution and poverty

The incidence of poverty in the Philippines was not unusually high in the early 1970s, compared with a representative sample of Asian countries (Table 1), but very slow subsequent progress in reducing the rate of poverty meant that by the early 1990s, the poverty rate was dramatically higher in the Philippines than in its neighbors. (It is worth noting that comparisons of poverty rates across countries are complicated because poverty thresholds are calculated differently in every country. Poverty rates in these countries have also been affected by the recent economic downturn in the region.) In addition, income distribution in the Philippines, as measured by the Gini coefficient (a ratio of income inequality, with 0 representing absolute equality and 1 representing absolute inequality), is extremely unequal. Moreover, the Gini coefficient barely changed during 1957-94, varying only between 0.45 and 0.51 (Table 2). In 1994, the richest 20 percent of the population received 52 percent of the country's total income, nearly 11 times the share of the poorest 20 percent. These figures had changed little since the 1980s and had even become slightly worse: in 1985, the richest 20 percent of the population received the same share of national income as in 1994 and their average income was about 10 times that of the poorest 20 percent. The distribution of assets has also shown little improvement over the last few decades. Between 1960 and 1990, for example, the Gini coefficient on landholding worsened slightly.

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

Although an improvement in income distribution is often accompanied by a decrease in the poverty rate (absent a sharp decline in national income), the two are not necessarily linked. It is quite possible for poverty rates to fall even when the distribution of income becomes more unequal. In fact, while progress in fighting poverty in the Philippines has been slow by Asian standards, the country's disappointing experience in improving income distribution is not unique in Asia. None of the countries cited in Table 1 as being more successful in reducing poverty rates over time has experienced a large decline in its Gini coefficient in recent decades (Table 3). Instead, these countries seem to have lowered their poverty rates by increasing incomes for all income groups. This suggests that decades of very slow growth, rather than inequality, may have been the most important cause of the persistence of poverty in the Philippines. Indeed, between 1970 and 1995, real GDP in the Philippines grew at an annual rate about half...