Philippines: A Strategy to Fight Poverty

Poverty Profile

The Philippines has achieved only modest reductions in poverty at a national level since the economic and political collapse of the mid-1980s. In addition, severe regional disparities remain.

The proportion of households living below the official poverty line has declined slowly and unevenly from 59 percent in 1961 to below 39 percent in 1991 and around 36 percent in 1994. Urban poverty stood at around 23 percent in 1991 and rural poverty at 53 percent (by World Bank staff calculations). Food poverty (or those living below subsistence) was around 20 percent of households in 1991, but 32 percent of rural households while only 12 percent of urban households. Two-thirds of the poor are engaged in the agriculture, fishery, and forestry sectors and have an elementary school education or less. However, the depth of poverty is relatively small (with the poverty gap index only 17 percent in 1991, having fallen by 40 percent since 1961), and income disparities among the poor have declined noticeably.

Since 1971, the urban poor have become a rising share of the total poor population, but still two-thirds of the poor live in rural areas. The depth of poverty is nearly 2 1/2 times larger in rural areas than in urban areas. The urban poor are concentrated in Luzon, while the rural poor live predominantly in Mindanao and the Visayas.

Poor households in the Philippines tend to combine into extended families to conserve household assets. Thus, larger households are observed as having greater poverty than smaller households: households of 8 or more members represent nearly a third of all the poor. The incidence and severity of poverty is significantly lower among elderly and female headed households in the Philippines, in striking contrast to the evidence from other developing countries, again because these households tend to be absorbed into others. It also reflects women's strong position in the labor market in terms of relative pay and attachment compared with many other Asian countries and even relative to many OECD countries.

Incentive and Regulatory Framework

Philippine performance on poverty reduction has been disappointing compared with the rest of East Asia, but the Philippines has not been able to sustain growth long enough to reduce its incidence of poverty to the levels attained by its neighbors. GDP growth averaged only 1.1 percent per annum in the 1980s. Further, the pattern of growth in the past tended to accentuate rather than reduce income disparities. Slow growth of higher productivity sectors resulted in absorption of labor in low productivity employment in the 1970s and 1980s. The industrial sector shrank over this period, and agricultural growth slowed dramatically.

More importantly, poverty declines were modest even when the economy was growing rapidly in the 1960s and 1970s because of the distorted structure of the economy. Policies discriminated against labor, subsidized capital-intensive methods of production, and gave low priority to agriculture and exports. This resulted in growth that was narrowly based and inequitable, trapping many people in marginal, low paying occupations such as upland agriculture, rural wage labor, and informal employment in cities. Infrastructure was highly concentrated in Metro Manila. Government interventions, especially in the 1970s and early 1980s, tended to diminish the role of market mechanisms in favor of regulation by parastatals and promoted oligopolisitic control in important sectors of the economy. This inward-looking strategy was inherently unstable, and so the economy lurched from balance of payments crisis to crisis.

In the wake of across-the board structural reforms of the financial sector, agricultural pricing and marketing, the tax system, the foreign trade and investment regimes, and government corporations, the experience of the Philippines in the late 1980s showed that accelerated growth in a more liberalized economy has a positive impact on incomes of the poor and that poverty declines during periods of rapid growth. Between 1985 and 1988, when GDP growth averaged 4.8 percent, the poverty headcount fell by 1.3 percentage points each year, an achievement equivalent to Thailand's long-term rate of poverty reduction. Analysis of the economic growth of 1985 to 1988 concludes that deregulation in agriculture and greater control over inflation were likely the key factors that improved the lot of the poor. Labor market performance has also shown signs of improvement.

Public Expenditures

Public expenditures on education in 1994 were less than 3 percent of GDP compared with 4 percent in Indonesia or 7 percent in Malaysia, despite inching upwards since the late 1980s, after over almost two decades of limited investment through the 1970s and early 1980s. Public primary education remains relatively under-financed, and funding is based on pupil headcount without any compensatory mechanisms to assist the most "at-risk" areas, schools, or ethnic groups. Thus, in the Philippines, poor youth are much more likely to drop out of school or get a poor quality education.

The Philippines spends comparatively less of its resources on health than several other East Asian nations, both publicly and privately (spending 0.6 percent on GDP on health publicly and 2.4 percent of GDP on health overall). In addition, public health gains are not as great as they should be because of the poor distribution of health facilities and personnel over the country. The poor would benefit from more emphasis on primary care and the reduction of environmental risk factors (which induce disease disproportionately among the poor). In many cases, the improvement of other infrastructure such as rural roads will allow existing health facilities to be used more intensively.

As a result of the fiscal decentralization enacted in 1991, most traditional poverty alleviation programs except education have become the responsibility of local governments, limiting the ability of the central authorities to implement programs of national priority. At the same time, the current revenue sharing arrangements with local governments (set by a legal formula) do not redistribute resources towards poorer provinces.

Also, by devolving functions and whole institutions to local government, expertise and efficiency in many areas has been (at least temporarily) lost and likely is weakest in poorer provinces. The variation in capacity and resources calls for continued attention by central authorities--for technical assistance, capacity building, and incentives to raise revenues locally.

Safety Net

The Philippine Government has implemented a number of safety net programs, ranging from cash and in-kind income transfers (such as food subsidies and nutrition interventions) to wage employment programs and livelihood creation programs. In response to natural disasters, the National Food Authority distributes assistance to affected areas in the form of subsidized rice. In addition, the private sector, NGOs, and foreign donors have been actively assisting in the planning, financing and execution of many of these programs.

However, the government's set of programs do not constitute an efficient and equitable social safety net: (i) they are fragmented and not a consistent or adequate response to the problem; (ii) they have generally failed to mobilize communities to help themselves; and (iii) recent changes of institutions and strategies are creating problems of transition that tend to obscure priorities in the government's delivery of social services or make additional demands on an ill-equipped bureaucracy and cadre of field workers.

Poverty Strategy

Policymakers must not waver in keeping the economy outward-oriented and geared towards competition, because an East Asian-style economy is far more likely to be able to sustain the rapid and smooth rate of growth that is fundamental to improving the welfare of the poor. To reach the government's target of reducing the number of families living below the poverty line from 39 percent in 1991 (by official measures) to 30 percent by 1998, it is estimated that GNP will need to grow by about 6.5 percent annually for 1996 to 1998. Many of the urban poor will be helped directly by growth, as employment opportunities respond to increased demand. Even a good number of the rural poor will find their incomes rising, as demand for agriculture-based products, especially exports, expands. However, significant reduction of rural poverty will require improvements in health and education and infrastructure (especially roads, markets, and agricultural extension).

Access to the means of production by the rural poor is crucial. It is time to revisit how to accomplish the goals of rural land reform so that the intended beneficiaries--the poorest of farmers and landless agricultural workers--can benefit. The Comprehensive Agrarian Reform Program, which has accomplished a number of its original goals, is getting too expensive and complicated. Tenancy should be allowed once again, as a useful interim state between landless labor and owner-cultivator status. A market-assisted land reform program should be studied to explore options for reducing costs. Investments with the greatest impact on the poor, e.g., rural infrastructure, should be a priority for use of scarce public funds

In urban areas, the scarcity of affordable housing (a problem aggravated by skyrocketing land prices) and threats to environmental health must be addressed. It is now urban, rather than rural, land reform that should be a priority for government action. Tax and regulations on land ownership and development need to be revised. A commission should consider options to balance the rights of dwellers in irregular settlements with the legal owners of urban properties. Water and sanitation services must be extended to poor urban areas. The government should hesitate to spend more money on housing since little of it helps the truly poor.

Investment in human capital must be increased by improving the quantity and the quality of primary education and access to primary education in rural areas. Primary health services must be strengthened, especially immunization and prevention of water-borne and respiratory diseases. The social safety net must be consolidated and targeted. General food price subsidies should be stopped, in favor of targeted income subsidies or food stamps and supplementary feeding programs. The National Government should redirect resources formerly used for government livelihood programs towards creating an enabling environment for private institutions to provide credit to the poor successfully. To foster the growth of a healthy microfinance sector, government financial institutions should focus on wholesale lending, ensuring adequate capital is available to reach the poor.

Statistical System

The key survey for poverty data in the Philippines is the Family Income and Expenditure Survey, conducted every three years. The survey questionnaire is of standard form, more or less comparable to an LSMS format. An important limitation on the relevance of these data for policy purposes has been the long delays for processing, e.g., the 1991 results became available only in early 1995. Also, the household survey sample is not large enough to allow provincial indicators to be calculated for the smaller provinces. This basic dataset is not integrated with the social sector and other data (surveys on health, demographics., labor force and occasional censuses of population and housing) or with government expenditure information.

Monitoring of poverty and the relative performance of the provinces and cities is an important continuing role for the National Government, even after fiscal decentralization. The report recommends that the government expand the household survey and integrate and improve existing statistics and program information so as to provide crucial assistance to the provinces in setting priorities and in raising awareness down to the community level of how well the government is meeting the minimum basic needs of the people. The World Bank has provided technical assistance and grant funding for training and equipment for the government agencies involved (as well as generating interest by other donors) and will continue to do so.