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The Challenge of
Inclusive Growth:Selected Policy Notes for the Next Administration
Rogier van den BrinkLead Economist and Program Leader
World Bank Group, Philippines
Arangkada Philippines Forum
A Bolder and More Inclusive Decade
Marriott Manila
March 1, 2016
Inclusive growth challenge:
More than growth
Growth may be necessary but is not sufficient to ensure poverty reduction…
How broadly based growth is—i.e., how pro-poor the distribution of
growth is—also matters…
Raising the returns to labor—the main asset of the poor
by…
…increasing value-added per worker in agriculture
…moving workers out of agriculture to higher value-
added activities in manufacturing and services
…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
3
But it does start with growth:
the macroeconomic fundamentals
-60
-40
-20
0
20
40
60
80
100
120
-6
-4
-2
0
2
4
6
8
10
12
Per capita growth Current accountbalance (in percent
of GDP)
Inflation rate Debt service (inpercent of GDP)
Internationalreserves (USDbillion, RHS)
US
D b
illion
Perc
ent
Selected macroeconomic indicators
1990-99 2000-09 2010-15
Sources: PSA, BSP, World Bank staff computations
Note: Data for current account balance and debt service are only up to Q3 2015 and 2014, respectively.
0
1
2
3
4
5
6
7
8
9
10
1 2 3 4 5 6 7 8 9 10
Per
cen
t
Income decile
Average growth in income per decile, 2012 to 2014
Source: Philippine statistics authority
Recent income growth more pro-poor, driven
by Conditional Cash Transfers
4
Quality of jobs created is getting better:
share of formal employment is increasing
660
680
700
720
740
760
780
5
15
25
35
45
55
65
1998-2001 2002-2009 2010-2015
Tho
usa
nd
s
Per
cen
tJob creation and formal employment
Job creation (RHS) Formal employment
Source: PSANote: Formal employment is defined as the share of wage and salary workers to total employment.
5
The jobs challenge facing the poor
• Unemployment is defined to include workers who are without work but
looking for work
• Underemployment is defined to include all employed persons looking for
more work
• More educated people are more unemployed compared to the poor
• Because the poor cannot afford to be unemployed…
• That is why underemployment is the more relevant measure for the poor
0
5
10
15
20
25
30
35
40
1 2 3 4 5 6 7 8 9 10
Per
cen
t
Income decile
Underemployment rate by income decile
2012 2013
Source: PSA
0
2
4
6
8
10
12
14
Pe
rce
nt
Unemployment by educational attainment
No grade and elementary undergraduate
Elementary graduate
High school graduate
College undergraduate
College graduateSource: PSA
Philippines: a massive jobs challenge and
only slowly declining poverty rate
7
10
20
30
40
50
60
70
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2013 2014
Per
cen
t o
f p
op
ula
tio
n
1992 Methodology
2003 Methodology
2011 Methodology
2012 Methodology
2013 Methodology- H1 estimatesWB USD 1.25 a day (income)
Poverty incidence rates
Caused by decades of bad policies,
underpinned by centuries of extractive
institutions
Selected policy notes for the
next administration
Inclusive Growth:need to focus on 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
0
0.5
1
1.5
2
2.5
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Marginal product of labor in relation to total across sectors in China
Agriculture Industry Services
11
Source: Urban China 2014
2nd industry
to services
The 1st transformation
from agriculture to
industry
GDP growth originating in agriculture
benefits the poor more
12
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 farmers 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 food:• 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)
13
Philippines: incomplete structural
transformation• Long history of policy distortions has
slowed the growth of agriculture and
manufacturing in the last six
decades.
• Agricultural productivity has
remained depressed
• Manufacturing has failed to grow
sustainably (missing the labor-
intensive manufacturing export
boom of the 1980s and 1990s)
• Low-productivity, low-skill services
sector has emerged as the dominant
sector of the economy
• Need to revisit policies in agriculture
and manufacturing…
14
0
10
20
30
40
50
60 Sector share to GDP
Agriculture Industry ServiceSource: NSCB
Perc
ent
0
10
20
30
40
50
60
70
Perc
ent
Employment share by sector (detailed)
Agriculture Manufacturing Other industries Formal services Informal services
Source: LFSSource: LFS
Inclusive Growth:need rice policy reform
Rice prices in the region
16
In Jan 2015, 1kg of
rice cost PHP 35 in
Philippine markets.
In contrast, the Thai
and Vietnamese are
paying the
equivalent of PHP 15.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
US
D/K
G
Philippines Thailand Vietnam
Source: FAO
Rice and the poor:The poor spend over 20% of expenditures on rice
17
Other
expenditure
Other food
expenditure
Rice expenditure
Expenditure breakdown of
the poor, Philippines
(2012)
If the price of rice fell to
the world price…
Other
expenditure
Other food
expenditure
Savings
Source: World Bank staff calculations using Family and Income Expenditure Survey (FIES) 2012
Rice expenditure
While Filipino children continue to suffer
malnutrition
Rice Policy in the Philippines 18
33.6
0
10
20
30
40
50
60
70
Prevalence of stunting among children, 2011
Pe
rcen
t
Source: World Bank 2011 for countries who report stunting data
High rice prices are pushing up wages and
reducing competitiveness
19
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8 Ratio of minimum wage to value-added per worker
Sources: Doing Business Database (2012), WB staff estimates using National Wages and Productivity Commission (NWPC) dataNotes: The first 5 countries either have no minimum wage or have minimum wages close to zero.
"PHL" stands for "Philippines." "NCR" stands for "National Capital Region."
41.5
0
20
40
60
Malaysia China Thailand Indonesia Vietnam Philippines
Share of food expenditure to total household consumption (%)
Source: US Department of Agriculture, Economic Research Service
Source: Doing Business Database (2012), WB staff estimates using National Wages and Productivity Commission (NWPC) data
Farm gate prices increased much less than marketing:
rents are mostly captured by traders, not farmers
20
0
5
10
15
20
25
30
35
40
45
PH
P/k
g
Source: FAO and Philippine statistics authority
Farmgate and retail prices of rice
Farmgate price Retail price
Is current rice policy achieving its
objectives?
21
Self sufficiency in rice production
“Buy high” from farmers
“Sell low” to the poor
Stabilize prices
Develop the rice marketing system
A significant gap remains between
production and consumption
Purchases are too small-scale to
make a significant impact
Only 11.5% of rice purchases by
the poor was NFA rice
Stabilization comes at the cost of
much higher rice prices
The widening gap between farm
gate and retail prices suggests
increasing inefficiency
Policy objectives Performance
From “rice” to “farmers”
Rice Policy in the Philippines 22
• Remove the state’s import monopoly (quantitative import
restrictions) and replace with tariffs
• Progressively reduce the tariffs over time
• Increase agricultural productivity of farmers (a “classic”
agricultural agenda):
• Invest in research and development;
• Revamp agricultural extension;
• Build rural infrastructure: roads, irrigation and electrification
• Secure farmers’ property rights
• Improve farmers’ health and education
Inclusive Growth:need to focus on SMEs
24
Starting and maintaining a small business…
still not easy
25
• The number of procedures required to start a corporate
business in the Philippines, at 16, barely improved and is
substantially higher compared to neighboring countries.
• As a result, this costs the country more than PHP 100 billion
annually in opportunities foregone…
• See “Philippine Economic Update Oct. 2015”:
http://www.worldbank.org/en/country/philippines/publication/philippi
ne-economic-update-october-2015
Philippines 2005 2010 2016
Starting a business rank 102 out of 145 162 out of 183 165 out of 189
Number of procedures 17 18 16
Number of days 49 42 29
Cost (as a percent of per capita
income)
24.1 21.6 16.1
Cost (in current pesos) 14,587 18,918 22,000
Progress in starting a business indicator
Make it easier to do business
Philippines (DB Rank: 103) EAP Average Rank: 96
Taiwan
China (DB Rank: 84)
Malaysia (DB Rank: 18)
Hong Kong
Singapore (DB Rank: 1)
Thailand (DB Rank: 49)
Mongolia
Lao PDR (DB: 134)Indonesia (DB: 109)
Cambodia
Vietnam (DB: 90)
New Zealand
Japan
Korea
Australia
Stronger legal institutions and less
expensive regulatory processes
Stronger legal institutions but more
expensive regulatory processes
Weaker legal institutions and more
expensive regulatory processesWeaker legal institutions but less
expensive regulatory processes
Complex and
expensiveSimple and
inexpensive
Complexity and cost of regulatory
processes
Str
on
ge
rW
ea
ker
Str
en
gth
of
leg
al
insti
tuti
on
s
Pacific Islands
Bubble size reflects population
Source: Analysis of Doing Business Report Findings
Strong coalition is needed:
to push reform across agencies and spheres of government
Topics Potential Reforms
Starting a
Business
Philippines rank:165 of 183
Average EAP: 103
• Further propagation and effective implementation of one-stop-shops, such as the
newly Go Negosyo Centers
• Use of information technology to allow automation of business name registration,
payment, information access, etc.
• Introduce risk-based approaches to business registration
• Eliminate the minimum capital requirement to establish a limited liability company
Getting CreditPhilippines rank:109 of 183
Average EAP: 80
• Create a central repository of credit information
• Establish a sustainable credit information ecosystem
Construction
Permit
Philippines rank:99 of 183
Average EAP: 78
• Simplification of the procedures and documentation required for securing
construction permits.
• Use of information technology to allow automation of the process, such as filing and
obtaining application forms, payment, information access, and other requirements for
construction permitting.
• Reforming the legal framework for construction permits, support for the
implementation of the law
• Implementation of a risk-based approach
Enforcing ContractsPhilippines rank:140 of 183
Average EAP: 104
• Map processes at the courts to identify sources of delay
• Investigate expanding the scope of the existing commercial courts
• Introduce case management in the courts
Inclusive Growth:need to focus on shipping
International shipping: not easy
0
20
40
60
80
100
120
140
160
Component: International shipping(2014 Liner Shipping Connectivity Index [LSCI])
Ready for competition:A quarter of the world’s seafarers is Filipino and exports of
skilled marine engineers increasing…
30
11,307
11,695
12,701 11,855
21,976
290,000
300,000
310,000
320,000
330,000
340,000
350,000
360,000
370,000
380,000
2009 2010 2011 2012 2013
OFW
dep
loym
ent
Seabased OFW deployment
Others Engineer officer
Source: POEA
Sources: POEA and Amante (2003)
Filipino’s build and export ships…
31
0
0.5
1
1.5
2
2.5
3
3.5
0
500
1000
1500
2000
2500
3000
2006 2007 2008 2009 2010 2011 2012 2013 2014
Share
(%
)
Gro
ss T
onnage
Year
Philippines' Shipbuilding Statistics
Gross Tonnage
Market Share (%)
Source: IHS (Former Lloyd’s 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.
32
Policy Recommendations
• In July 21, 2015, the President signed the Foreign Ships Co-
Loading Act (RA 10668) into law.
• This is also known as the ‘The Foreign Ships Co-loading 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
• The Act specified that he Implementing Rules and Regulations
should have been promulgated by Sep 22, 2015.
• Still waiting…
• And reforms need to continue…domestic shipping is still
protected… and “not ready for competition”…
• While ports, export processing zones and transport infrastructure
need to be much better planned and coordinated
Combining overseas –
domestic routes
33
• 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
Inclusive Growth:need to focus on labor market reform
Philippine labor market: high informality and
lack of bargaining power• Over 70 percent of employees have at least one aspect of informality
• They have one or more of these informal aspects: no written contract, no social insurance, or no protection
from dismissal
• Rotating people from company to company on 5-month contracts is prevalent
• Bargaining power is low, as evidenced by stagnant wages, despite rising productivity
• Also indicative of lack of competition between firms
• More flexible, valid forms of contracts need to be negotiated
• Workers should be allowed to organize themselves
35
60
70
80
90
100
110
120
130
140
150
160
Indices of real output per worker, and realminimum and average wages (2002 = 100)
Real output per worker
Real ave. wage
Real min. wage
Source: NWPC, PSA
Inclusive Growth:need more tax revenues
0
1
2
3
4
5
6
Pe
rce
nt o
f GD
P
Education
0
1
2
3
Pe
rce
nt o
f GD
P
Health
0
1
2
3
4
5
Pe
rce
nt o
f GD
P
Infrastructure
Public Expenditure
Source: WDI and ADB estimatesNotes: Education and health figures are from 1995 to 2012 (Some countries have missing values for certain years.). Infrastructure data is from 2008 to 2012.
Investment deficit…
37
• Overall levels of spending on health, education and infrastructure are
low
• So weak health outcomes, poor quality of education, and transport
congestion.
• Substantially more revenues needed to sustainably ramp up spending
• Political economy difficult: e.g. “sin” tax and corporate income tax
38
The Philippines high corporate income tax
… but low collection
0
5
10
15
20
25
30
35
Malaysia Vietnam Thailand Indonesia Singapore Philippines
Tax
rate
(p
erce
nt)
Corporate income tax rate
Sources: USAID, KPMG, PWC, and Botman, Klemm and Baqir
0
1
2
3
4
5
6
7
8
9
Malaysia Vietnam Thailand Indonesia Singapore Philippines
Pe
rce
nt
of
GD
P
Corporate income tax revenue
Sources: USAID, KPMG, PWC, and Botman, Klemm and Baqir
Source: IMF
Tax reforms
39
Raising tax revenues efficiently and equitably
First phase: raising tax revenues
Rationalize tax incentives to reduce
redundancy;
Enact a tax expenditure ceiling
Reduce the number of VAT exemptions;
use “Listahan” targeting system to protect
vulnerable Filipinos (not patronage)
Centralize the valuation of real properties
(richest LGUs do not update) and, if
needed, levy a national surtax to enhance
equity
Raise and index petroleum excise taxes
now that prices have fallen
Second phase: lowering tax rates and
further broadening the base
Reduce the corporate income tax rate
while increasing the gross income
earned to enhance equity
Reduce the highest marginal tax rate for
personal income tax and reduce the
number of brackets
Consolidate all laws and regulations on
tax incentives into one code
Simplify the tax regime for micro and
small firms into a single tax on turnover
to reduce compliance cost
Inclusive Growth:need budget reform
Fiscal space created since 2010: education (more than doubled), health (more than tripled), social
protection (more than quadrupled)
41
37.9 38.6 49.9 57.7 98.9 56.9
132.7
235.2 271.7 309.0 329.4
389.5
327.0
547.3
101.0
133.0 104.5
169.3
214.9 328.2
425.8
0
200
400
600
800
1,000
1,200
2010 2011 2012 2013 2014 2015 2016
PH
P b
illio
n
Health, education, and social welfare budgets, 2010-2016
Health Education Social welfare
Source: DBM
Fiscal space created since 2010:
infrastructure (almost six fold)
42
134.0
228.5 269.9
328.2
411.6
562.4
766.5
0
100
200
300
400
500
600
700
800
900
2010 2011 2012 2013 2014 2015 2016
PH
P b
illion
Infrastructure budget, 2010-2016
Infrastructure
Source: DBM
But systems cannot cope:
need comprehensive budget reform
43
-
50
100
150
200
250
300
2010 2011 2012 2013 2014
PH
P b
illio
ns
Government spending gaps by sector
Health Education Social welfare Infrastructure Others
Source: DBMNote: Spending gaps refer to the difference between what was budgeted and what was actually disbursed.
Inclusive Growth:need transparency and accountability
Citizens will demand more transparency
in return for paying more taxes
45
data.gov.ph – 3,500 government
data sets are now public
Philippines Open Government
• Open Data initiative by Office of the President and Department of Budget and Management
• Contains 3,500 datasets from 35 national government agencies.
• Disclosure of budget, procurement, and customs data in accessible open formats (e.g. spreadsheets, not pics)
• Over 680,000 unique users of the platform.
• Open Data disclosure included in proposed Freedom Of Information Bill
Philippine Government Electronic Procurement System:
7 million records released from 2010-2015
Transparency in Procurement Reform2+ million Procurement Records 2010-2015: Bid #, Funding Source, B.C., F.M., Approved Budget,
Contract Amount, Bid Status, Awardee and #No. of Bidders
Open Budget
Budget
Open Budget Partnership (OBP) Survey - Philippines Ranking #2 in Asia and #21 in the
world
Customs Declarations
Real-Time Sin-Tax Monitoring
Collecting Tax Stamp Using Crowdsourcing
30
35
40
45
50
55
60
65
70
75
80
85
90
Pri
ce/K
G
Customs Declared Weighted Ave. Unit Price of Plastic Resins, Jan 2013 - Sept 2014
3901
3902
3903
Commodity Highlight: Valuations of plastic resins
improved by up to 60% Year-On-Year in 3Q 2014
Reform Period
Pre-Reform Period Reform Period Reform Period HS Code 4Digit Description 2013 Q1 2013 Q2 2013 Q3 2014 Q1 2014 Q2 2014 Q3 Q1 YoY Q2 YoY Q3 YoY
3901 Polymers of Ethylene 47.87 46.06 41.62 61.71 71.90 72.49 29% 56% 74%
3902 Polymers of Propylene 46.35 41.09 36.88 63.20 72.03 74.20 36% 75% 101%
3903 Polymers of Styrene 56.88 41.07 50.01 66.20 79.10 78.63 16% 93% 57%
15.00
17.00
19.00
21.00
23.00
25.00
27.00
29.00
31.00
2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3
Pri
ce/K
G
Customs Declared Weighted Ave. Unit Prices of Iron and Steel, 2013 Q1 - 2014 Q3
7209
7211
7213
Commodity Highlight: Valuations of iron and steel
improved by up to 47% Year-On-Year in 3Q 2014
Pre-Reform Period Reform Period Reform Period HS Code 4Digit Description 2013 Q1 2013 Q2 2013 Q3 2014 Q1 2014 Q2 2014 Q3 Q1 YoY Q2 YoY Q3 YoY
7209Cold-rolled iron or non-
alloy steel 26.65 28.02 27.17 29.49 28.82 28.02 11% 3% 3%
7211Rolled iron or non-alloy
steel, not plated 18.02 21.30 21.70 22.74 27.88 26.55 26% 31% 22%
7213
Iron/steel bars and rods, hot-rolled, in irregularly
wound coils18.73 21.53 19.18 25.01 25.89 28.15
34% 20% 47%
Reform Period
Institutionalize budget transparency and
accountability
• Pass the Freedom of Information Bill to lock in the
dramatic improvements in transparency achieved during
this Administration
• Institutionalize “Open Data”
• Institutionalize “geo-coding”
• Adopt a single, unique identifier for each budget item, so
that the budget can be tracked by officials and citizens
alike, as it moves from approval to planning, procurement,
disbursement, execution, and auditing
• Adopt government-wide, automated public financial
management system, after completion of budget process
reform54
Inclusive Growth:the “what” is well-known….
But “how”?
http://www.worldbank.org/en/country/philippin
es/publication/philippine-development-report-
2013-creating-more-and-better-jobs
Philippine Development Report
56
Philippines: Strongly contested reforms in the
1990s… but now… booming services sector,
with 5 million jobs
57
0
50
100
150
200
250
PHP
bill
ion
Telecommunications 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: WDI
ndicators
Need coalitions to seize the window of
opportunity on July 1, 2016
• A change of administration provides a unique window of opportunity:
the first 100 days, the first six months, the first year…
• However, any particular reform, say increased competition in a
particular sector, often faces strong opposition from vested interests
• This can sap the energy out of the reform process…
• The challenge lies in fostering a broad coalition of stakeholders, led
by committed leaders, which supports a reform package for inclusive
growth…
• 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 levels—sectorally, regionally, and
locally—and around many themes
• This can be done…..but it needs the stakeholders…YOU!
58
We can work it out
Rogier van den BrinkLead Economist and Program Leader
World Bank Group, Philippines
Thank you
