Breaking the Poverty Trap

Ronald U. Mendoza, Ph.D. Associate Professor of Economics

Possible definitions of development

Alteration of the structure of production and employment so that agri share declines and industry/services share increases (measured by economic output or GDP growth) Enhancement of human life and the freedoms people enjoy (measured by, among others, human development indicators)

Source: Sen (1999).

Snapshot of Global Poverty

Source: http://go.worldbank.org/WE8P1I8250

Theories of Development

Theory Harrod Domar Growth Model Lewis 2 Structure Model of Development

Summary Savings is needed to boost investments and growth Structural transformation from a low productivity primary/agricultural sector to a higher productivity industrial sector Underdevelopment due to highly unequal international capitalist system Free markets and dismantling of inefficient government intervention necessary 1940s

Context

1950s-1960s

Dependency Theory

1970s

Neoclassical Growth Framework

1980s-1990s

O-ring Theory of Development

High complementarity of parts so that one weak part has knock-on effects on other parts/inputs and the final output/outcome.

Industrial Structure Matters

Chinas Product Space (2007)

Source: Felipe et al (2010).

What you export matters

Export Sophistication

Source: Felipe et al (2010).

Export Diversification (Number of products exported with revealed comparative advantage)

Source: Felipe et al (2010).

Source: Schott (2008).

Source: Mayer et al (2004).

Trade Openness and Growth

Source: Mendoza (2010).

CASE OF THE PHILIPPINES

+AMDG

Poverty in the Philippines

24.5 24.0 23.5 23.0 22.5 Millions 22.0

40.0 35.0 30.0 25.0 20.0 Percent

13

21.5 21.0 20.5 20.0 19.5 19.0 1991 1994 1997 2000 2003 % of poor 2006 2009 No. of poor 5.0 0.0 15.0 10.0

Source: Balisacan (2011) drawing on data from the FIES (various years).

Imbalanced poverty reduction across regions

60

1991
50

2009

40

30

20

10

14

Source: NSCB.

Rising hunger incidence despite recent high growth

30

25

20

15

10

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Overall Moderate hunger Severe hunger
15

Source: SWS (July 1998-Dec 2011).

Upper class (0.3% or 53K familiesc) Php 1,738,211 p.a. (cut off)

Private insurance

Middle class (22.8% or 4.2M familiesc)

PhP 256,564 p.a. (cut off)

Philhealth Lower class (76.9% or 14.2M familiesc)

4Ps: 2.3M familiesa, Philhealth for indigents

PhP 16,841 p.a. (cut off)

Income poor only (13.0% or 2.4M familiesa)

PhP 11,686 p.a. (cut off)

Food poor (7.9% or 1.5M familiesa)

Why is poverty persistent?

Economic growth is weakly translated into poverty reduction

Percent change in poverty incidence arising from 1% change in mean income

0

World Bank (2009), East Asia 1990-2006 1990

World Bank (2009), Thailand 1990-2006 1990

World Bank (2009), Vietnam 1990-2006 1990

World Bank (2009), Philippines 1990-2006 1990

-0.5 -1 -1.5 -2 -2.5 -3 -3.5 -4 -4.5 -5

At 3% growth, and at 1.5% poverty elasticity of growth,growthtake the Philippines 360 years5% At 10% it will (approximating Chinas) and to eliminate poverty.of growth (approximating poverty elasticity Thailands), it will take 24 years to eliminate At 8% growth, Philippines. poverty elasticity of poverty in the and at 1.5% growth, it will still take the Philippines 130 years to eliminate poverty.
18

Source: Figure adapted from Balisacan (2011). Scenarios based on authors calculations.

Balisacan and Fuwa (2004), Philippines 1988 1988-1997

Balisacan (2007), Philippines 1988-2003 1988

Ravallion (2001), 41 Developing Countries

World Bank (2009), Indonesia 1990-2006 1990

The poor face a poverty penalty in the market economy

More expensive (and lower quality) goods and services for the poor: Example of Credit Access

19

Source: Mendoza (2011, page 5).

The poor get hit harder by crises and shocks

Example: Food price shocks hit the poor harder because it constitutes a large share of their spending
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

East Asia and the Pacific

Cambodia

Indonesia

Lao PDR

Philippines

Thailand

Vietnam

Population Average

Among extreme poor

20

Source: Data adapted from De Joyos and Lessem (2011).

Rising prices of basic commodities and the gradual erosion of purchasing power
90 80 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 21

Average prices (before 2003): Galunggong Php31 Rice Php 16 Diesel Php 9

Average prices (after 2003): Galunggong Php57 Rice Php 27 Diesel Php31

Galunggong (per kg)

Well Milled Rice (per kg)

Diesel (per liter)

Source: Bureau of Agricultural Statistics, Department of Energy

About 1.2 million young workers will join the labor force each year from 2010 to 2040
160

140

120

100

80

60

40

20

0 2010 2015 2020 2025 Total Population Working Age 2030 2035 2040

Source: Mahurkar and Mendoza (Forthcoming) using data from BLES.DOLE.GOV

22

Yet job creation remains anemic and favors the skilled

GROWTH OF JOBS BY IMPLIED SKILL LEVEL, 2001-2009

10

PERCENT

2001

2002

2003

2004

2005

2006

2007

2008

-2

High

Medium

Low
23

Source: Mahurkar and Mendoza (Forthcoming) using data from BLES.DOLE.GOV .

2009

Starting (and growing) a business in the Philippines is still tough Entrepreneurs in Thailand, on average, take 7 procedures, 32 days, 5.6 % GNI per capita to start a business. Vietnam: 9 procedures, 44 days, and costs 12.11 % GNI per capita to start a business. Philippines: 15 procedures, 38 days, and 30.3 % GNI per capita to start a business.

24

Source: World Bank (2010).

REPRODUCTIVE HEALTH POLICY

PUBLIC GOODS

POVERTY REDUCTION POLICIES (POLICIES TO EMPOWER)

INFRA AND PPPs

SOCIAL SAFETY NET (POLICIES TO PROTECT)

Do dynastic politicians keep people poor? Or do poor people keep on voting for dynasties?
Percentage of Dynastic Legislators LUZON VISAYAS MINDANAO ARMM CAR 64% 80% 66% 75% 43% Actual Count 81 of 126 37 of 46 37 of 56 6 of 8 3 of 7

70% of our legislators belong to dynastic families; and almost 80% of our youngest legislators (aged 26-40) belong to dynastic families. Dynastic legislators are richer by PhP 10 million, on average, compared to non-dynastic legislators (after removing one outlier). On average, a dynastic legislator has net wealth of about PhP 50 million this is 255 times larger than the annual mean family income in the country (PhP 195,000). Dynastic legislators hail from the poorest parts of the countrydistricts with dynastic legislators have 5 percentage points more poverty incidence.
26

Source: Mendoza, Beja, Venida and Yap (2012).

How representative is your Representative?

Growth in Wealth between 2010 and 2007
(Sample of 101 Legislators from the 15th Congress)

300.0% 250.0% 200.0% 150.0% 100.0% 50.0%

Magsaysay Belmonte Mendoza Amatong Datumanong Balindong Lagdameo Salimbangon Crisologo Miraflores Gonzales Villafuerte Mercado Aggabao Del Rosario Fernandez

Over half of the sample experienced SALN growth that beat the Philippine Stock Exchange average growth during the period.

0.0% -50.0% -100.0%

Angping

Enverga

Arago

Arroyo

Kho

Campos

Remulla

Valencia

Source: Authors calculations based on data from Mendoza, Beja, Venida and Yap (2012).

Almario

Durano

Ungab

Cajayon

Alvarez

Jalosjos

Roman

Lazatin

Umali

Golez

San Luis

Ortega

Garcia

Garcia

Garcia

Fua

Ong

Emano

Romulo

Lagman

Suarez

Arnaiz

Bravo

Cagas

Asilo

Go

Robes

Increasing possibility of a conflict trap: Conflict is recurrent

100 90 80 70 60 50 40 30 20 10 0 1960s 1970s 1980s 1990s 2000s

Conflict onsets in countries with no previous conflict (%total) Total number of conflict onsets

Conflict onsets in countries with previous conflict (%total)

28

Source: World Bank (2011, page 58).

Factors Behind Conflict and Violence: Links to Poverty and Inequality

29

Source: World Bank (2011, page 74).

Selected References

Balisacan, A. 2011. What does it really take to move the Philippines out of poverty? Presentation to the Mindanao Bridging Leaders Program, 21 July 2011. Collier, P. 2007. The bottom billion: Why the poorest countries are failing and what can be done about it. Oxford: Oxford University Press. Department of Social Welfare and Development. Pantawid Pamilyang Pilipino Program Program Implementation Status Report, Q2 2011. [Available at: http://www.dswd.gov.ph ]. De Joyos, R and R Lessem. 2011. Food shares in consumption: New evidence using Engel curves in the developing world. Mimeo. [Available at: https://mywebspace.wisc.edu/rlessem/web/engel.pdf]. Habito, C. 2010. An Agenda for High and Inclusive Growth in the Philippines. Manila: ADB. [Available at: http://www.adb.org/documents/reports/agenda-high-inclusive-growth/agenda-high-inclusive-growth.pdf]. Mahurkar, P and RU Mendoza. 2012. Anatomy of Anti-Poor Growth: Insights from Recent Employment Trends. Mimeo. AIM Policy Center. Mendoza, R.U. 2011. Why do the poor pay more? Exploring the poverty penalty concept. Journal of International Development 23(1):1-28. World Bank. 2011. World Development Report 2011: Conflict, Security and Development. Washington, D.C.:World Bank. National Statistical Coordination Board (NSCB). 2009. 2009 Official Poverty Statistics. [Available at: http://www.nscb.gov.ph ]. Sen, A. 1999. Development as Freedom. New York: Knopf. Virola, Romulo, et. al. 2010. The Pinoy Middle-Income Class is Shrinking: Its Impact on Income and Expenditure. Paper presented during the 11th National Convention on Statistics (NCS), EDSA Shangri-La Hotel, October 4-5, 2010.

ADDITIONAL SLIDES
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Policies and Reforms to Promote High and Inclusive Growth

Habito (2010): 1. Quality appointments to government posts and zero tolerance for corruption;

2. Strong and credible transparency and accountability systems; and intensified decentralization; 3. Wider and deeper public participation in governance; and streamlined government procedures to lower cost of business and speed up public services; 4. Democratization of the economy through asset reforms and competition policies;

5. Boost tax revenues by improving ICT systems in BIR, prosecuting tax evaders and reforming excise taxes on alcohol and other products; 6. 7. Narrow the infrastructure gap; Enterprise development with a focus on MSMEs.

Policies and Reforms to Promote High and Inclusive Growth

Balisacan (2011): 1. Create productive employment opportunities, including through Infrastructure to promote connectivity, especially between leading/urbanizing & lagging/rural areas; and Institutions facilitating transactions in the marketplace (in order to lower the cost of doing business) 2. Reduce the high inequity in access to opportunities (i.e. High priority on education, health, including family planning services) 3. Rebuilding institutions, including civil service, & good governance in pursuit of inclusive growth

0.5 1.5 2.5

Indonesia (2002-2005)
-1.652

Poverty Elasticity of Growth

Source: Habito (2010) Pakistan (2002-2005)

-1.636

China, PR (2002-2005)
-1.306

Malaysia (1997-2004)
-0.806

Thailand (2002-2004)
-0.755

Viet Nam (2002-2006)

-0.643

Sri Lanka (1996-2002)

-0.586

Bangladesh (2000-2005)
-0.469

Cambodia (1994-2004)
-0.158

Philippines (2003-2006)
0.154

-1.5

Nepal (1996-2004)
-0.515

India (1994-2005)
-0.157

-0.5

-2 0 1 2

-1

Poverty Elasticity of Growth Based on Income Poverty Headcount and Average Annual GDP Growth, 2000-2006

34

Mongolia (2002-2005)
1.855

Poverty elasticity of growth

Poverty Elasticity of Growth Based on Human Development Index and Average Annual GDP Growth, 2000-2006
0

Bangladesh

Singapore

Mongolia

India

Cambodia

Philippines

Viet Nam

Indonesia

Myanmar

China, PR

Malaysia

Thailand

Pakistan

Nepal

Sri Lanka

-0.13

-0.2

-0.32 -0.37

-0.29

-0.28

-0.4

-0.37 -0.49

-0.6

-0.58

-0.8 -0.9 -1 -1.02 -1.19 -1.18

-0.79

-1.2

-1.23

-1.4 -1.46 -1.6

Source: Habito (2010)

35

Food shares for selected Asian countries

0.9

0.8

0.7

0.6

0.5

Population Average
0.4

Among moderate poor Among extreme poor

0.3

0.2

0.1

East Asia and the Pacific

Cambodia

Indonesia

Lao PDR

Philippines

Thailand

Vietnam

Source: De Hoyos and Lessem (2008)

36

Food shares per region

0.8

0.7

0.6

0.5

Population Average
0.4

0.3

Among moderate poor Among extreme poor

0.2

0.1

East Asia and Eastern Latin America Middle East the Pacific Europe and and the and North Central Asia Caribbean Africa

South Asia

Sub-Saharan Africa

Developing World

Source: De Hoyos and Lessem (2008)

37