Making growth work for the poor

A window of opportunity to eradicate extreme poverty and boost shared prosperity within one generation

Louie LimkinThe World Bank Group in the Philippines

June 9, 2015

Contents

1. Jobs challenge

2. Underlying causes

3. Window of opportunity

4. Growth is becoming more inclusive

5. Working it out

An enormous jobs challenge.

Caused by decades of bad policies, underpinned by centuries of extractive institutions

Strong macroeconomy: instead of short-term stabilization, we can now focus on the long-term

-10

-5

0

5

10 Real GDP per capita (2000 prices) growth

Per

cen

t

Sources: National Statistics Office (NSO), WDI, World Bank staff estimatesNote: Red line at 2.5 percent (long run average)

-9

-6

-3

0

3

6Current account balance

Per

cent

of

GD

P

Sources: WDI, Department of Budget and Management (DBM)Notes: The red line is at -3 percent. Current account balance has a series break in 1977 and in 2005.

0

5

10

15

20

Perc

ent

CPI inflation

Sources: Philippine Statistics Authority, Bangko Sentral ng PilipinasNotes: The red line is at 5 percent.

5.2 5.3 5.45.0

6.0

6.5

0

1

2

3

4

5

6

7

Per

cent

GDP growth rate (average, 2000-2012)

Source: PSA

A history of successful reforms that made a big difference = 5 million direct jobs

0

50

100

150

200

250

PHP

billi

onTelecommunications revenues

Sources: Securities and Exchange Commission (SEC)

0

2

4

6

8

10

12

14

16

USD

bill

ion

BPO sector total revenues

Source: Business Processing Association of the Philippines (BPAP)

0

5

10

15

20

25

Mill

ions

Air transport, passengers carried

Source: WDINote: Data include passengers of both domestic and international flights.

0

20

40

60

80

100

Mill

ions

Mobile phone subscriptions

Source: WDIndicators

Growth is becoming more inclusive.Sustained economic growth has begun to translate

into stronger job creation and faster poverty reduction.

Sustained one million job creation from April 2014 to January 2015.

Unemployment declined to 6.6 percent from 7.5 percent a year ago.

Stronger impact of growth on poverty, from a historical growth elasticity of poverty of -0.24 to -0.9 in 2012-2014.

In the long-term, sustaining growth of 6 percent per year is enough to double per capita income within 1 decade, raise it by 5 times in 2 decades, and multiply it by 11 times in 3 decades, but only if reforms are accelerated.

This means poverty can potentially be eradicated within one generation!

Covers 4.4 million poor households

Uses a household survey, National Household Targeting System (NHTS), to identify the poor: 11.9 mill households enumerated; second round about to commence with 15.3 mill households to be enumerated (75% of all households).

Meant to address intergenerational poverty

Incentivizes and expands access to health and education services by the poor

Fiscal cost: 0.5% of GDP in 2015

Example: CCT Program

Meeting the poverty target is achievable.From 2012 to 2014, growth elasticity of poverty improved

significantly to -0.90 from -0.24 in the previous decade.

If this trend is sustained, with high growth, the government’s 2016 poverty target of 18-20 percent is attainable.

In the long-term, sustaining growth of 6 percent per year is enough to double per capita income within 1 decade, raise it by 5 times in 2 decades, and multiply it by 11 times in 3 decades, but only if reforms are accelerated.

This means poverty can potentially be eradicated within one generation!

0

5

10

15

20

25

30

35

40

USD

thou

sand

s

Per capita income projectionat 6 percent growth

Sources: WDI, WB staff computations

3.3k in 2013

7k by 2023

16k by 2033

35k by 2043!

15

17

19

21

23

25

27

2012 2013 2014 2015 2016

Pove

rty

inci

denc

e

Poverty projections through 2016

2016 poverty targetPer capita growth at 4.2 percentPer capita growth at 5.7 percent

Sources: PSA, WB staff estimatesNote: Ɛ refers to the growth elasticity of poverty.

Non pro-poor growth

Pro-poorgrowth

Ɛ = -0.24

Ɛ = -0.90

Ɛ = -2.02

Low spending and investments are consequences of weak absorptive capacity

and ultimately revenue collection

1010

2.5

4.3

Investment deficit (percent of GDP)

Infrastructure Social services

3.8

3.0

Tax revenues needed to fund the investment deficit (percent of GDP)

Tax administration reform Tax policy reform

Therefore, increasing investment requires raising tax revenues efficiently and equitably,

and improving spending efficiency

11

Financing these investments would have to come from a combination of tax policy and administration reforms.

Reforms should aim to broaden the tax base and reduce tax rates to make the tax system simpler, more efficient, and more equitable.

Higher revenues do not necessarily mean higher tax rates as tax administration can be improved substantially.

Improving transparency and accountability of public spending is crucial if people are to contribute more in taxes.

Fiscal reforms need to be complemented by economic reforms, particularly those that

enhance competition

12

Essential reforms to lower prices, raise productivity, and create more jobs include:

Continuing to liberalize the key sectors of the economy that

directly impact poor Filipinos, such as rice and shipping

Further opening up the economy to foreign competition

Strengthening regulatory capacity

Crafting and implementing a clear competition policy

13

But only if we all work it out.

Thank you.