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Inclusive Growth:

Coalitions Needed
Eminent Mindanawon Leaders Meeting
October 5, 2015
Marco Polo Hotel, Davao

Rogier van den Brink


Lead Economist and Program Leader
World Bank Group, Philippines

Overview

Inclusive growth: more than growth, need to tackle poverty and


inequality
No short cuts to getting structural transformation from agriculture
to manufacturing to services right, with a special role for
agriculture
Need inclusive economic institutions, competition
Need good governance: accountability between citizens,
politicians and civil servants
Reforms to create inclusive growth are difficult: good leaders not
enough, need coalitions
Progressive Era in the US: inspiration?

Inclusive growth:
What is it? It is more than growth, but it
does start with growth, and growth
needs macroeconomic stability

Inclusive growth challenge:


More than growth
Growth may be necessary but is not
sufficient to ensure poverty reduction

How broadly based growth isi.e.,


how pro-poor the distribution of
growth isalso matters
Raising the returns to
laborthe main asset
of the poorand
securing the other
assets (land, savings)

increasing
value-added
per worker
in
agriculture

as does how resilient growth is


and the extent to which poor and
vulnerable households are
protected from shocks

Putting in place
appropriate
social
protection
schemes

and raising
human
capital
endowments

while people move


out of agriculture to
higher value-added
activities in
manufacturing and
services
4

Growth needs macroeconomic stability:


the Philippine fundamentals
Selected macroeconomic indicators
12

120

10

100
2000-09

2010-14

80

60

40

20

-2

-20

-4

-40

-6

USD billion

Percent

1990-99

-60

Per capita growth

Current account
balance (in percent of
GDP)

Inflation rate

Debt service (in


percent of GDP)

International reserves
(USD billion, RHS)

Sources: PSA, BSP, World Bank staff computations

Inclusive Growth:
inequality is the new growth agenda

Because growth is slow


GDP growth
(Percent)

World

10

High-income countries

Developing countries

8
6
4
2
0

-2
2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

-4

Source: Global Economic Prospects, World Bank, June 2015


7

But need to reduce inequality to support growth


Relationship between national income growth and the income growth of the poorest
quintile
Average Annual Growth Rate of Real Per Capita GDP of Population in
Lowest Quintile (Period Average)

10%

8%
Thailand: 1987-92
Malaysia: 1997-04

Indonesia: 1984-90

6%

Vietnam: 2002-08

Lao PDR: 1997-02

Malaysia: 1984-92
Cambodia: 2002-07

Viet Nam: 1997-02


4%

Thailand: 1992-99

Thailand: 1999-04
Lao :2002-08
Indonesia: 2002-09

Philippines: 2000-06

2%

Malaysia: 1992-977

Lao PDR: 1992-07


Indonesia 1996-02

Indonesia: 1990-6
0%

-2%

0%

2%

4%

6%

8%

-2%

-4%
Malaysia: 2004-09
-6%

Average Annual Growth Rate of Real Per Capita GDP (Period Average)

Source: World Bank

Inequality in East Asia


If the top 10 percent is taken out, on average the Gini falls by 10 percentage points
%

Source: World Bank

GINI coefficient in selected East Asian countries

Inclusive Growth:
the special role of agriculture

Structural transformation:
China lifted 600 million people out of poverty.
Agriculture: first poverty responder
Manufacturing is the second: 300 million people moved from farms to factories

2.5

Marginal product of labor in relation to total across sectors


in China
2nd industry
to services

2
1.5
The 1st transformation
from agriculture to
industry

1
0.5

1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

Agriculture

Industry

Services

Source: Urban China 2014

11

The normal pattern of


economic transformation

Before economic transformation takes off, agriculture:


large shares in economic output and the labor force
but the share in economic output less than its share in the labor force,
lower productivity of labor than in industry and services.

Industrial growth takes off:


industry, and in particular manufacturing, increases its share in the

economy
pulls labor out of agriculture more or less rapidly.

In advanced economies, this transformation will reduce the


shares of agriculture in GDP and in the labor force to very
small numbers
This transformation is now taking longer and longer,
because manufacturing has become less labor-intensive

Sources: Kuznets and Chenery, and Timmer, 2009

During the normal pattern, there is a


special role for agriculture:
poverty reduction

Global decline in the incidence of poverty (US$1/day):


28 percent in 1993 to 23 percent in 2002

Caused entirely by rural poverty reduction, while urban


poverty has increased
More than 80 percent of the decline in rural poverty was
due to improved conditions in rural areas
Migration was not the main instrument for rural, national
and global poverty reduction
Improved rural conditions were, with agriculture as the
main source of growth

Source: World Development Report on Agriculture 2008

GDP growth originating in agriculture


benefits the poor more

Source: Ligon and Sadoulet, 2007. Background paper to the WDR 2008 (see website)
Based on data from 42 countries (1983-2003)

How does agriculture reduce


poverty economically?

By raising agricultural profits and labor income


By raising non-farm profits and labor income via multipliers:
Agricultural growth multipliers generally vary from around 1.5 to 2.0
And consumption linkages even larger than production linkages

By causing lower prices of non-tradable foods:


Consumption basket of the poor gets cheaper
Also leads to lower real wages in other sectors, which then grow faster

And under tightening labor markets and higher unskilled wages,


economy-wide, by effectively setting the minimum wage for the
entire economy
the agricultural minimum wage is often the reservation wage for

unskilled laborers
Sources: Johnston and Mellor (1961), Delgado and Alfano (1994), WDR 2008, Delgado et al.
(1998), Block and Timmer (1994)

Family farms: efficient in production


and in creating inclusive institutions

Family farms with little hired labor benefit from the superior
incentives of family members to work hard, save, and
investthis makes them efficient
However, family farms are at a disadvantage in access to
markets, credit, technology, but these disadvantages rarely
offset the advantages from better incentives
Inverse farm size productivity relation literature
demonstrates this effect
But there is morealso a link from family farms and their
property rights to land to institutions which generate broadbased economic growth
Take rural land distribution and its impact on overall
economic growth
Sources: On superior efficiency of family farms: large body of literature, see Berry and Cline,
Stiglitz, Hazell.

More equal rural land distribution cause


countries to grow faster, permanently
8

Average GDP
growt h, 1960-2000

T aiwan (China)
Korea

6
T hailand
Viet nam

Colombia
Paraguay
2

Japan

Malaysia

Dominican
Republic

China

Indonesia
Sri Lanka

Egypt
India

Brazil

Mexico
Cost a Rica
Guat emala
Kenya
Argent ina
Sout h Africa
Peru
Honduras
El Salvador
Venezuela
Nicaragua
Init ial land dist ribut ion

-2
0.9

Source: Deininger and Squire, 1997

0.7

0.5

0.3

Family farms vs plantations


(same crop, climate, soils, etc.)
Indicators
Land privatization
Farms < 10 ha (%)
Farms > 50 ha (%)
Coffee in exports (%)
1900
1929
GDP pc
Adult literacy (%)
1900
1910
1930
1980
HDI (rank)
Democracy since

Colombia
Costa Rica
Structural characteristics
187080
182040
61.0
42.2
14.0
37.5

Guatemala

El Salvador

1870s
13.1
79.5

1870s
13.5
57.1

49
76
56
55
58
77
Social and economic development
6,130
5,850
3,340
34
40
52
85
51
1958

36
50
67
91
33
1948

12
13
18
54
117
1996

83
93
2,610
26
26
27
64
112
1992

Initial agricultural conditions


and institutional traps

Once a country locks into bad institutions it can hurt


economic growth and poverty reduction for a very long
time
Compare the development of North America with South
America:
South America started out as the richer continent
But then stagnated for centuries
Due to bad institutions, which diverted economic rents to the

elites and prevented the rise of institutions necessary for broadbased economic growth:

Education, health, infrastructure, rule of law, property rights for the poor,
accountability in public service delivery, etc.

with unequal land ownership as a major factor


And until today, all South American countries have seen unrest

around land.

Sources: Acemoglu and Robinson. Economic Origins of Dictatorship and


Democracy.; WDR 2003, Sustainable Development in a Dynamic World, authored
by a team led by Zmarak Shalizi.

North America did better


.except for the South of the US
Bad institutions (bad for broad-based economic growth
and poverty reduction) in the South of the US, even long
after slavery was abolished:
De landlord is landlord, de politician is landlord, de judge
is landlord, de shurf is landlord, everbody is landlord, en
we ain got nothin.
Testimony of a Mississippi sharecropper to an official of
the Agricultural Adjustment Administration in 1936

Source: Schulman (1994, p. 6) as quoted in James A. Robinson, 2006. The Political


Economy of Equality and Growth in Mexico: Lessons from the History of the United
States.
http://www.people.fas.harvard.edu/~jrobins/researchpapers/unpublishedpapers/jr_Mexico.pdf

Bad institutions in the South

Cautionary tale from the US: the failure to do land reform


after the abolishment of slavery plunged the region into
nearly a century of backwardness
Labor repression to keep labor uneducated and cheap
continued after slavery, blacks not allowed to purchase
land or engage in trade, etc.
Old plantation elite grabbed political power back and
instituted an apartheid system when the Union armies left
in 1877
No public investments in health, education, infrastructure
Income per capita in the South remained about half that of
the rest of the United States from the Civil War (1861-65)
until the 1940sonly then did it slowly start to converge

Source: James A. Robinson, 2006. The Political Economy of Equality and Growth in
Mexico: Lessons from the History of the United States.
http://www.people.fas.harvard.edu/~jrobins/researchpapers/unpublishedpapers/jr_Mexico.pdf

Better institutions in the North

Whereas in the North, family farmers not only produced a


much more dynamic agricultural sector..
but they also often successfully lobbied for economic
reforms:
Farmers were the key reformers attacking the monopolies of the

Robber Barons
Interstate Commerce Act, federal regulation of industry, Sherman
Ant-Trust Act, regulation of railroads

Helped by a vocal free press (the muckrakers)


Halted earlier concentration trend in industry, reduced
inequality, sustained economic growth

Source: James A. Robinson, 2006. The Political Economy of Equality and Growth in
Mexico: Lessons from the History of the United States.
http://www.people.fas.harvard.edu/~jrobins/researchpapers/unpublishedpapers/jr_Mexico.pdf

So land reform became


cornerstone of US foreign
policy after WWII

Following World War II, peaceful country-wide land


reforms were implemented in Japan, Korea and Taiwan,
under strong external pressure from the United States.
US foreign policy position at the time: Dr. Lubin, its
Ambassador to the United Nations, introduced a resolution
which would make land reform a global economic program
of the United Nations:
A nation of insecure tenants and rootless laborers, who
see little hope to better their lot, is an unstable society,
subject to sporadic violence and easily persuaded to
follow false leaders.

Source: W.L. Lissner. American Journal of Economics and Sociology, Vol. 11, No. 1 (Oct.,
1951), pp. 53-54

Inclusive Growth:
inclusive economic institutions,
competition

Philippines: from monopolies to a booming


services sector, with 5 million jobs
but contested at every step of the way
Telecommunications revenues

Mobile phone subscriptions

250
100
80

150

Millions

PHP billion

200

100

60
40

50

20

Sources: Securities and Exchange Commission (SEC)

BPO sector total revenues

Source: WDI

ndicatorsAir transport, passengers carried


25

16
14

20

10
8
6
4
2
0

Source: Business Processing Association of the


Philippines (BPAP)

Millions

USD billion

12

15
10
5
0

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

25

Despite significant unilateral liberalization,


services protection persists - including in
some of the most dynamic countries
World Bank Database covers 18 services sectors of 103 countries (of which 79 are developing)

Source: Borchert, Gootiiz and Mattoo (2013)

26

Philippines at the bottom of


international shipping indexbut strong opposition against
cabotage liberalization
Component: International shipping
(2014 Liner Shipping Connectivity Index [LSCI])
160
140
120
100
80
60
40
20
0

Not ready for competition?


A quarter of the worlds seafarers is Filipino and exports of
skilled marine engineers increasing
Seabased OFW deployment
380,000
370,000
Others

360,000

Engineer officer

12,701

11,855

OFW deployment

21,976
350,000
11,695

340,000
330,000
11,307
320,000
310,000
300,000
290,000
2009

2010

2011

2012

2013

Source: POEA

28

Filipinos build and export ships


Philippines' Shipbuilding Statistics
3000

3.5

2500

2
1500
1.5

Share (%)

Gross Tonnage

2.5
2000

Gross Tonnage
Market Share (%)

1000

1
500

0.5

0
2006 2007 2008 2009 2010 2011 2012 2013 2014

Year
Source: IHS (Former Lloyds Register) World Fleet Statistics. World Shipbuilding Statistics.
The Shipbuilders Association of Japan Shipbuilding Statistics March, 2013.
The Shipbuilders Association of Japan Shipbuilding Statistics March, 2015.

The Foreign Ships Co-loading Act


In July 21, 2015, the President signed RA 10668
into law.
This is also known as the The Foreign Ships Coloading Act
Move in the right direction: foreign ships can now
load and unload imports and exports along
domestic routes
It will help reduce costs for importers and
exporters and it will also aid in decongesting ports
within the country
But reform is incompletedomestic shipping is
still protectednot ready for competition
30

Need to allow combined overseas


domestic routes

Philippine flagged vessels are not allowed to run combined routes


without special permits

Creation of a single registry to facilitate overseas-domestic routes

Philippine shipping companies could partner with international


companies and enter regional and international markets
31

Rice trade:
strong resistance to reform
Comparison of rice prices
1
Philippines

0.9

Thailand

Vietnam

In Sept 2015, 1kg of


rice cost PHP 34 in
Philippine markets.

0.8
0.7

USD/kg

0.6
0.5

In contrast, the Thai


and Vietnamese are
paying the
equivalent of PHP 14.

0.4
0.3
0.2
0.1

Sep-15

May-15

Jan-15

Sep-14

May-14

Jan-14

Sep-13

May-13

Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

Sep-10

May-10

Jan-10

Source: FAO

Source: FAO GIEWS Price Tool

32

Rice and the poor:


The poor spend over 20% of expenditures on rice
Expenditure breakdown of
the poor, Philippines
(2012)
Rice expenditure

If the price of rice fell to


the world price
Savings
Rice expenditure

Other food
expenditure

Other food
expenditure

Other
expenditure

Other
expenditure

Source: World Bank staff calculations using Family and Income Expenditure Survey (FIES) 2012
33

Inclusive Growth:
good governance

Good governance:
Accountability between citizens, politicians and civil
servants

Strengthening the Arc of Accountability:


Amplifying citizen voices, increasing transparency and enhancing accountability

Fiscal space created since 2010:


health (3x), education (2x), and infrastructure (4x)
Health, education, and social welfare budget, 2010-2016
1,200
Health

Education

Social welfare

1,000
425.8

PHP billion

800

600

214.9
328.2
169.3

400

133.0

104.5

547.3

101.0
200

389.5
309.0

329.4

327.0

235.2

271.7

37.9

38.6

49.9

57.7

98.9

2010

2011

2012

2013

2014

56.9
2015

132.7
2016

Source: DBM

36

Systems cannot cope, lack of trust:


need budget reform, plus scaling up of CCT and CDD
Government spending gaps by sector
300

Health

Education

Social welfare

Infrastructure

Others

250

PHP billions

200

150

100

50

2010

2011

2012

2013

2014

Source: DBM
Note: Spending gaps refer to the difference between what was budgeted and what was actually disbursed.

37

Need tax reforms


Raising tax revenues efficiently and equitably
First phase: raising tax revenues

Second phase: lowering tax rates and


further broadening the base

Rationalize tax incentives to reduce


redundancy;
Enact a tax expenditure ceiling

Reduce the corporate income tax rate


while increasing the gross income
earned to enhance equity

Reduce the number of VAT exemptions;


use Listahan targeting system to protect
vulnerable Filipinos (not patronage)

Reduce the highest marginal tax rate for


personal income tax and reduce the
number of brackets

Centralize the valuation of real properties


(richest LGUs do not update) and, if
needed, levy a national surtax to enhance
equity

Consolidate all laws and regulations on


tax incentives into one code

Raise and index petroleum excise taxes


now that prices have fallen

Simplify the tax regime for micro and


small firms into a single tax on turnover
to reduce compliance cost
38

The Philippines high corporate income tax


but low collection
Corporate income tax revenue

Corporate income tax rate


9

35

Percent of GDP

Tax rate (percent)

30
25
20
15

7
6
5
4
3

10
2

1
0

0
Malaysia

Vietnam

Thailand

Indonesia Singapore Philippines

Sources: USAID, KPMG, PWC, and Botman, Klemm and Baqir

Malaysia

Vietnam

Thailand

Indonesia Singapore Philippines

Sources: USAID, KPMG, PWC, and Botman, Klemm and Baqir

39

Citizens will demand more transparency


in return for paying more taxes
data.gov.ph over 600 government
data sets are now public

40

Philippine Government Electronic Procurement System:


7 million records released from 2010-2015

Inclusive growth:
good leaders not enough, coalitions
needed

For reforms to continue:


need coalitions
Structural reforms, say increased competition, often face strong
opposition from vested interests
And the public needs to develop trust in public institutions
The challenge is in fostering a broad coalition of stakeholders,
led by committed leaders, which supports a reform package,
because they anticipate that inclusive growth makes everybody
better off in the long run, even if some will face losses in the
short run

These coalitions can form at many levelssectorally, regionally,


and locallyand around many themes
This can be done..but it needs the stakeholders

43