STAR SCIENCE: PRO-POOR PROGRAMS OR PRO-POOR GROWTH?

MANILA, March 15, 2006
 (STAR) STAR SCIENCE By Ernesto M. Pernia, Ph.D. - Malacañang recently announced that the government would fund substantial programs for the poor, such as the provision of subsidized rice, instant noodles and medicines, among others. Funding would come from the putative P35-billion "budgetary savings" – the difference between the programmed and actual budget deficit in 2005. This announcement has attracted comments from some quarters but arguably not enough for an informed public debate on an issue as crucial as poverty alleviation involving a non-trivial amount of fiscal expense. Should the government be doing pro-poor programs or focus instead on raising economic growth? This question is not unimportant especially for a country that is under a serious fiscal strain and where poverty is chronic and widespread.

One of the most robust results of empirical research in development economics is that rapid and sustained economic growth leads to significant and long-term poverty reduction and that direct pro-poor programs are inefficient and unsustainable. The much-heralded dynamic development-cum-poverty reduction of our East and Southeast Asian neighbors is living testimony to this. For example, South Korea, Taiwan, and Malaysia have been able in two decades to bring down their poverty to levels close to those of Western countries. Similarly, Thailand and Indonesia, which had poverty rates of above 40 percent – comparable to that in the Philippines – in the early 1980s, have reduced those rates to less than 10 percent and below 20 percent, respectively, by the early 2000s, while the Philippines’ poverty incidence remains at around 33 percent.

Several observers and analysts have characterized the economic development of our Asian neighbors as "pro-poor growth." So, what is pro-poor growth? Simply put, it is growth that enables the poor to actively participate in and significantly benefit from economic activity. This is a departure from "trickle down" which was the dominant development concept in the 1950s and 1960s. Trickle down means that the benefits of economic growth go to the rich first and the poor gain only indirectly through a vertical flow. Poverty could diminish but only slowly at best, as has happened, unfortunately, in our country.

In contrast to trickle-down development, pro-poor growth requires a strategy that is biased in favor of the poor so that the poor benefit proportionally more than the rich, thereby allowing faster poverty reduction. Key to the definition of pro-poor growth is the joint consideration of growth and the distribution of such growth, i.e., a concern about not only how fast the national pie expands but also how the increment to the national pie is distributed. In other words, pro-poor growth requires that the proportional income growth of the poor exceeds the overall average income growth. For instance, if the Philippines’ GDP per capita growth rate in 2005 were 2.7 percent (overall GDP growth of five percent minus population growth of 2.3 percent), average GDP per capita growth rate for the poor should appreciably exceed 2.7 percent, and such excess sustained, for the country’s poverty incidence to go down significantly over time. Analysis of historical data, however, reveals that the poor tend to gain less than 60 percent of overall average per capita income increase. This explains our country’s mediocre poverty reduction record.

In general, for a given increase in average incomes, poverty falls fastest if growth results in lesser inequality, meaning that the poor are benefiting proportionally more than the non-poor. The opposite situation obtains if growth results in greater inequality, i.e., the distribution of the increment to the pie favors the non-poor. A neutral outcome is when growth keeps inequality unchanged.

What policies promote pro-poor growth? A growth strategy that makes efficient use of labor – the poor’s principal asset – and makes the required investments in education and health, is good for both growth and distribution. Sound macroeconomic management that emphasizes fiscal prudence and good tax administration results in manageable deficits and public debt, and facilitates physical and social investments that benefit the poor besides ensuring long-term growth. Economic openness, underpinned by a realistic exchange rate, promotes exports and foreign direct investment, creates employment, lowers prices of consumer goods, and facilitates the adoption of advanced technology for the economy to move up the global value chains. Private sector development, stimulated by a favorable investment climate, generates jobs, raises productivity, and reduces the strain on the public sector, thus allowing it to concentrate on the provision of public goods and services, including social safety nets. Efficient financial intermediation lowers the cost of capital, eases access to credit, and spurs investment and employment growth. Labor market deregulation facilitates labor mobility and the efficient use of production factors, contributing to output growth.

Pro-poor growth also entails the removal of institutional and policy-induced biases against the poor. Discrimination on grounds of class, gender, ethnicity, and religion hurts the poor more than the rich; the same is true of artificial barriers to entry into certain trades and occupations, or into the formal sector in general. Big-city-oriented industrial location policies and public infrastructure spending for urban areas tend to be biased against smaller towns and rural areas where there are large concentrations of poor and disadvantaged people. Similarly, there are micro policies that work against the poor, such as monopoly enjoyed by some firms that result in high prices, subsidized public utilities (e.g., low water fees) and state universities (low student fees) that benefit primarily the non-poor, and housing policy (rent control) that limits housing supply. Removal of these biases is likely to enhance market efficiency besides promoting social equity.

The foregoing policies can be reinforced by direct pro-poor policies. These include, among others, adequate public spending for basic education, health and family planning services, easier access to micro-credit, promotion of small and medium enterprises, and targeted infrastructure investments in bypassed or underserved rural areas. Human and physical capital investments favoring the poor will improve their productivity and contribution to the economy.

The above are examples of policies that would promote efficient and equitable growth. Earnest implementation of such policies would result in mean incomes of the poor rising faster than overall average incomes and sustained poverty reduction. Our government already has some of these policies on the drawing board but falls short of consistent and sustained implementation. Thus, rather than get its attention and resources distracted by unsustainable pro-poor programs, it would be better for the government to relentlessly pursue a policy reform agenda that fosters pro-poor growth.

Fish or fishing skills? We all know from the old adage that the poor will be better off with the latter.

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Ernesto M. Pernia is a professor of Economics at the University of the Philippines at Diliman, and a former lead economist of the Asian Development Bank. He is a member of the Philippine-American Academy of Scientists and Engineers. E-mail to empernia@zpdee.net.


Chief News Editor: Sol Jose Vanzi

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