The following is the keynote speech of Rogier van den Brink, World Bank Lead Economist for the Philippines, during the Kusog Mindanaw 2015 Conference in Davao City on  November 28, 2015. IAG is  the secretariat of Kusog Mindanaw, a Mindanao-wide forum that brings together political, business, religious and social leaders towards a consensus in policy and action on relevant issues for Mindanao peace and development. This year's conference is in collaboration with Philippine Center for Islam and Democracy (PCID), Notre Dame University in Cotabato City (NDU), with support from the Konrad Adenauer Stiftung and the World Bank. 

 

 

My name is Rogier van den Brink, and I’m the Lead Economist for the World Bank in the Philippines. I am going to talk to you about inclusive growth, loosely translated as “making growth work for the poor”. I will argue that inclusive growth is more than growth, but it does start with growth. Fortunately, the Philippines is in a period at the moment where it is achieving very high growth rates, bucking global and regional trends, so that box is already ticked off. In addition, the country now has considerable fiscal space to fund all the programs that are necessary to achieve inclusive growth.

 

So now is the time to tackle the more difficult reforms. The intriguing issue here is that these reforms are very well known, and have been for decades. Pick up a policy-relevant analysis from, say, two or three or even four decades ago, change the date to today, and your policy recommendations will still be relevant. So it is more important for us to get a handle on the political dynamics behind this intriguing issue than to keep on parroting the same list of policy recommendations. In my presentation, I will mention a few so that we can think through what it would take to actually implement these well-known reforms. I will argue that it is coalition-building which is at stake.

 

Good leadership is necessary, but it’s not enough. You need to create broad-based coalitions in society to support these reforms. Good leaders understand this and reach out to others.

 

Inclusive growth is more than economic growth but it does start with growth.

 

Compare the decade of the 1990s, the decade of the 2000s, and the current period of the administration of President Aquino. Compare the variables that the economists call the “macroeconomic fundamentals”. On all of these variables very positive trends can be seen. Per capita economic growth is up. The current account balance is positive. The inflation rate is down. Debt service as a percentage of GDP is down. The international reserves of the central bank are at very comfortable levels. So all these look very good. These macroeconomic fundamentals explain, to a large extent, why growth is so high. 

 

In addition, you have also created the fiscal space, meaning you have the budget now to invest in programs in health, education, and infrastructure. Look at the fiscal space created since 2010. The health budget has tripled, education has doubled, and infrastructure has quadrupled. This is the twelfth country I have worked on for the World Bank. I have never seen a series of annual budget increases of this magnitude. This is quite unique.

 

So you have high economic growth, strong macroeconomic fundamentals, and you have this fiscal space. That is great. But it is not enough. How do you sustain this? And how do you make it inclusive?

 

In 2008, a group of policy makers and academics got together to figure out what was behind the success of the few countries in the world which had consistently racked up very high economic growth rates. One thing stood oud. In the findings of this Commission on Growth and Development, a.k.a. the Spence Commission, these countries kept on reforming, even though things were already going very well[1]. Because it is “easy” to do reforms when you are in a crisis. In a crisis, you have to reform. You have no other choice. But the top performers of the Spence Commission kept on reforming, also when things were going well. They kept on learning from doing and kept their vision clear: inclusive growth. Growth which benefits the majority of the population, and not just a few.

 

So let’s talk about inclusive growth in the Philippines. What needs to happen? What are the key reform areas?

 

Growth may be necessary, but it is not sufficient to ensure poverty reduction. How broadly based the growth is, how pro-poor the distribution of growth is, also matters.

 

To do that, you have to raise the returns to labor, the main asset of the poor, and you have to secure their other assets, some land, the savings that they have.

 

Raising the returns to labor of the poor invariably starts in agriculture. That’s where most of the poor are. That’s where most people will typically start. You have to work on increasing the value added per worker in agriculture. And that means raising the profitability of smallholder agriculture. Put some money in their pockets. Because when that happens, they can further invest in agriculture, but also in their education and their health. Investing in education is also important, so that when household members move to the cities they are well-prepared. Hopefully, in the cities, they can then find jobs in higher-value-added manufacturing, first, and services, later. This process of labor moving from one sector to the other, as productivity goes up and incomes are rising, is called “structural transformation”. I’ll get back to that a bit later, because to get this process right is very important for inclusive growth.

 
But it also matters how resilient growth is and the extent to which the poor and vulnerable households are protected from shocks. You need to put in place an appropriate social protection scheme, and you need to raise the human capital endowments of the poor so that they can weather these shocks.

 

The inclusive growth challenge is a jobs challenge. It is a big challenge for the Philippines. You look at the number of new entrants into the labor market every year, you look at the people that are unemployed and more importantly, you look at the people that are underemployed, and you look at the people who leave the country for temporary jobs elsewhere, and you will realize what a massive challenge the country faces. This jobs challenge also explains why poverty is has only slowly been reduced.

 

Why has inclusive growth been so difficult to achieve for the Philippines?

 

There are four factors: lack of competition, complex regulations, insecure property ownership for the majority of the people, and lack of investments both from the private and the public sector. Those four factors have led to low agricultural productivity and a weak manufacturing sector. These are typically the sectors where you can create labor-intensive growth that is pro poor. The outcomes: informality is widespread, poverty is reduced only slowly, and out-migration, many Filipinos simply leave the country in search of better opportunities.

 

Let me talk about structural transformation first. This is basically the process in which economic growth moves from agriculture to manufacturing and then to services. In every phase, productivity and wages start out low, then they rise, and at some point labor moves to the next sector, with higher productivity, and then the process repeats. Growth moves up from gear to gear, employment is high, wages keep rising, and productivity keeps growing.

 

Now you are in a region with several countries which are managing this process very well. That includes China. China has been one of the most successful poverty reducers in the history of the world. Overall in recent times, it moved 600 million people out of poverty. The first phase of the transformation was purely based on agricultural growth, and not on migration to the cities. Raising the returns on agricultural labor in the countryside meant that about 300 million people were lifted out of poverty. The second phase was the move from the farms to the factories. Another 300 million people were moved out of poverty in that way. So that’s a very important process, starting in agriculture, then moving to manufacturing and then, hopefully, on to services.

 

Why does agriculture have such an important role to play? The World Bank produces a World Development Report every year. Each year it tackles a particular topic and summarizes what we know about it and its relation to development. In 2008, it was on agriculture. The research we did for that report found that GDP economic growth that originates in agriculture benefits the poor more than growth emanating from any other sector.

 

How does that happen?

 

First of all, if you have agricultural growth, farmers' agricultural profits go up and the labor income is up. That is a very direct impact of agricultural growth on their incomes. But it also raises non-farm profits and labor income via what the economists call the “multipliers”. They're very high. Agricultural growth multipliers (input supply, output processing, marketing) generally vary from around 1.5 to 2. Agriculture is a very connected sector. And the consumption linkages are even larger than the production linkages. Why is this? This is simply because once farmers have some money in their pockets, they typically spend it locally, and that produces a stimulus to the local economy. Furthermore, if agriculture does well, the price of food will go down and that makes the consumption basket, especially of the poor, cheaper and that benefits many, many people. And it also leads to lower real wages in other sectors which then grow faster.

 

And in tightening labor markets, even as the economy moves from a low income status to a middle income status, you'll typically see that agriculture will continue to play a very important role in providing livelihoods for the poorest people in the country. So even if you're doing very well and basically economic growth has moved to other sectors, you still need to worry a lot about agriculture because it will continue to have an oversized impact on economic growth and it is effectively the sector that'll provide livelihoods for the poorest people, effectively setting the minimum wage for your entire economy. That’s the special role of agriculture.

 

I realized this in South Africa, when I worked there. Agriculture as a share of GDP was minuscule—less than 5 percent or so. But whenever there was a drought, the Central Bank raised the alarm bell. And forecasts for growth and inflation were quickly, and significantly, revised. If you just looked at agriculture’s share in GDP, that would make no sense. But agriculture was a very “connected” sector and what happened there mattered a lot.

 

So getting that process of structural transformation right is very important. Let’s look at the Philippines. Look back, say, to the last 5, 6 decades. Try to assess how that structural transformation process has worked out……well, it’s not a pretty picture. Growth in agriculture has been slow. Manufacturing never really took off. And at the end of the day, a lot of people basically had to search for a living in a low productivity, low wage skill services sector. And that services sector, most of it informal, has now emerged as the dominant sector of the economy. But, except for the business process outsourcing sector, this is nothing to write home about. It looks superficially like structural transformation, but is not. People were not moving from sectors with lower productivity to sectors with higher productivity. They were moving from low productivity agriculture to low productivity services. That’s not the structural transformation which is at the heart of development.

 

So the conclusion of the story is: if you want to achieve inclusive growth, you have to get back and rethink what you're doing in agriculture. This is the sector where a lot of poor people or lesser skilled people should find their jobs. And this is of particular relevance to Mindanao.

 

In this process of structural transformation, it is also very important to look at small businesses. We usually look at how big firms work, and they're very important. They bring technology, they bring knowledge of international markets, but it’s really the small firms that work with these big firms, which supply them, which provide services to them. The big job impact of well-functioning large export-oriented firms is the impact they have on job creation in all the small businesses that are linked to them.

 

But in the Philippines, the environment for small businesses is very, very difficult. If you just look at the costs and the fees and the time it takes to set up a business, maintain a business, and trade across borders. These costs in the Philippines are very high, and this explains why so many small businesses have difficulties creating jobs.

 

So this is the first reform area. There is no shortcut to getting the structural transformation of the economy, from agriculture to manufacturing to services right. There's a special role for smallholder agriculture there, and there's also a special role for small businesses.

 

Both smallholders and small businesses need, first of all, a very rudimentary and basic issue resolved: securing property rights. They need to know that when they invest, the fruits of their labor are theirs.

 

However, unfortunately, the situation has been, for decades now, that there is considerable uncertainty about property rights for smallholders in general, as well among the 4 million beneficiaries of the decades-old agrarian reform program.

 

Similarly, also for decades now, it is difficult for small businesses to set up, keep up to date with the avalanche of licenses, pay their taxes, go through customs, etc. So there is a similar issue of basic security of property rights here, too. Rights to the fruits of your business.

 

Now let us ask ourselves “why has this not been resolved?” Is it a lack of know-how? Because this is not rocket science. It is about setting up transparent and clear rules and operating systems.

 

Now it cannot be a lack of capacity. I sometimes hear this argument, but it is nonsense. Filipinos all around the world know how to do resolve issues like this. And recently, they can do it while staying in the country, working in a business process outsourcing center. So can it really be a technical issue? Or is there something else going on here? Why is there this lack of transparency, clarity and consistency? What could explain the lack of solutions to problems which have been known for decades? I think we all know the answer…There are vested interests in keeping these systems unclear and contradictory. These issues remain unresolved on purpose.

 

It is the same reason why policy analysts have argued for decades that the economy needs more competition and openness to markets. I do not need to explain in detail how any proposal for more competition always and immediately runs into vested interest. Vested interest will immediately line up against more competition.

 

However, there are many good stories that you can tell about the Philippines when it did actually liberalize sectors. If you look at the struggle it was to liberalize telecommunications, to liberalize the air transport industry, and you look at what this produced now, it’s amazing. These monopolies were liberalized, and they have now resulted in a booming services sector with about 5 million jobs. Remember, these reforms were heavily contested, every step of the way. But without those reforms, which happened about two decades ago, you would not have seen the emergence of this very competitive business process outsourcing in the Philippines today. And guess what? The incumbents, those who opposed liberalization vehemently, are now wealthier than ever. Because that is the point of these stories: in the long run everybody is much better off. But in the short run, some will lose. So it takes all the stakeholders to take a step back and think hard about the long run and what will make everybody better off. If you have read the book “Why Nations Fail” by Acemoglu and Robinson, you will recognize this idea of a “critical juncture”. When stakeholders have the wisdom to take a step back and focus on what will make everybody better off in the long run, they take the right direction. But if they focus on their short-term interests thereby undermining the opportunities for the majority, they, and their nations, fail.

 

There are many unresolved competition issues in the Philippines. But let me turn to a competition issue dear to Mindanao: shipping. Competition is limited because of the country’s “cabotage” law. Foreign shipping is for foreign ships. Domestic shipping is for domestic ships. And never the twain shall meet. As a result, domestic shipping is protected from foreign competition and shipping costs are very high. That includes the sector’s safety record. So islands like Mindanao are really suffering from very high shipping costs. If you compare the international shipping index and you look at the rank of the Philippines, it's really at the bottom.

 

Fortunately, recently there's been work done on shipping reforms in the Philippines. The administration saw the Foreign Ships Co-loading Act pass. It’s a good step. It's a move in the right direction. Foreign ships can now load and unload imports and exports along domestic routes. So to put it very simply, when they enter Manila harbor, they no longer have to unload all of their goods—the imports into the country. They can just unload part of it and move on to Cebu, say. And on their way back they can take in exports along the way. This new act will reduce the cost for importers and exporters and also aid in decongesting the ports within the country. But the reform needs to go further. The job is half way done. Domestic shipping is still protected. And of course the argument was the same as it usually is: “the domestic shipping industry is not yet ready for competition: let's wait until it is ready…”.

 

Not yet ready? Well, a quarter of the world's seafarers is Filipino. They include skilled marine engineers, whose exports from the Philippines are increasing. So basically, Filipinos are very well-versed in running international shipping fleets.

 

And it is not just the manpower. In the latest years, you are building these ships here! So Filipinos are building ships at world class standards. 

 

So when the argument comes that Filipinos are not ready for competition, for opening up to international markets…..Really? You have the people, you have the ships, you know how to do this. Why not allow Philippine companies to run combined domestic and foreign routes between for instance the Philippines, and China, and Singapore? I think the Philippine shipping companies, just like what happened in other sectors, could on their own, or as partners with international companies, enter regional and international markets and do very well.

 

Rice trade is another sector where the competition doesn’t exist because the state has a monopoly over it. As a result, consumers in the Philippines, easily pay 2, 3 times more than their counterparts in other countries such as Thailand and Vietnam. But the resistance to reform is very, very strong. And has been so for decades.

 

Resistance is strong, but the benefits of more open and more competitive rice trading regime would be immense. The poor spend about 20 percent of their expenditures on rice. If the price of rice fell to the world price, we will have an immediate poverty reduction impact by having their purchasing power go up by 10 percent. That's a very substantial amount of poverty reduction, which you could basically achieve by the stroke of a pen.

 

This trade restriction is there because, or so the argument goes, it will help achieve the country’s self-sufficiency in rice production. Now I am an agricultural economist and I have a degree in agricultural engineering. I see no real technical issue in the country becoming self-sufficient in rice production. This can be done. Invest in agricultural extension, research and development, rural infrastructure, irrigation, health, education—that is how it can be done. But the current strategy—restricting imports and driving up the price of rice—is not working. And when I looked at child malnutrition rates the other day, it was quite a shock. So I think we can all agree that the current strategy is not working. Let’s reform it. And let’s help rice farmers become more productive.

 

These reforms, and many others, we analyzed and recommended in a report called the Philippines Development Report on Jobs. Please go on line and download a copy. You will find about 70 reforms or so. You probably know most of them. Most of them have been around for a long time. The real question to ask is why they do not get implemented. So the issue is not what to do. It is how to get it done. And, again, this is not a technical issue. Invariably, the how will require from the stakeholders to strike a deal. It is usually a deal which they feel makes them worse off in the short run, but will make everybody better off in the long run.

 

For instance, take labor market reform. Many Filipino laborers work in informal sectors, because formalization is costly and cumbersome. Or, even if they have a formal job, they're being moved around from company to company every 6 months, because the market is finding a way around the various rules and regulations which try to protect permanent workers. When I grew up in the Netherlands we had the same situation. I worked my way “informally” through college. There was a huge informal market for labor. And lots of formal unemployment. Today, as part of a give-and-take between government, business and labor, we have a balance between the protection of permanent workers and flexible labor contracts. We have one of the lowest unemployment rates in Europe.

 

The current situation in the Philippines faces similar challenges: if the protection of permanent workers leads to everybody being moved around every six months, is this what we want? Companies don’t invest in their labor, and laborers have jobs which last 6 months? After which they enjoy a “cooling off period”? Everybody loses here.

 

So the stakeholders need to come together and work this out. Work out, between government, business and labor unions, a system in which you have legitimate flexible labor contracts, so that everybody can become part of the formal sector and benefit from social security, pensions, etc.

 

But don’t focus on this reform alone. Focus on a package, so that it is easier to strike a deal. Combine it with other reforms: more competition, reduce the price of rice, etc. Approach these reforms in a way that people can see the trade-offs, and let them trade them off one against the other. Because if you just focus on one reform, you will encounter strong resistance. You will not get a lot done. As the history of the Philippines shows.

 

Finally, you need to invest in health, education and infrastructure. If you compare the public investments in these sectors to the investments made in your neighboring countries, probably Philippines does about half of what countries like Thailand and Malaysia do. You have an investment deficit that explains a lot why the health outcomes are poor, why the quality education is poor, and why the transport infrastructure has such a difficulty dealing with all the traffic. To do that, to invest more in health, education and infrastructure, you'll need to raise taxes. But of course nobody wants to pay taxes…

 

If you ask people to pay more taxes, they will ask more transparency. If they feel otherwise, they will resist or find ways around the system. Take the corporate income tax: highest in the region. But lowest collection rate…

 

Fortunately, in recent years, and with new technology, the transparency of government dealings has gone up. Budgets are on the internet. On a site called data.gov.ph, there are now over 600 government datasets public and the people could look where the money goes, how the budget is being spent.

 

Similarly, procurement, the Philippine government electronic procurement system has now released over 7 million records. You can got to that website, you can click at a particular contract and you can see how the bidding process was done and who eventually won it. The data are there. Now people need to query them. Yesterday, I was at a training event for journalists, where this was exactly what was happening. Government officials and journalists working together on exploring the stories behind these data. This is often painful, because the data show issues and problems, which some in government might not like to be exposed. But that is the nature of the reforms needed.

 

Let me end on good news and a way forward.

 

I've said that inclusive growth has been a perennial challenge for the Philippines. Fortunately however, in recent years, recent growth does seem to be more pro-poor.

 

If we look at the average scores in income per decile from 2012 to 2014, we see that the poor, their income has been growing faster than that of the richer deciles. That's good news. Now, arguably, this is a recent phenomenon and this would have to be sustained over, say, a decade. At the moment, one program which makes a strong contribution to these better income trends that we see for the poor people is the conditional cash transfer program. It's now one of the biggest in the world and is very effectively targeted.

 

But it is not just transfers. We also see that underemployment is being reduced. And not only are there more jobs, there are more “better” jobs. Formal jobs are going up.

 

If these patterns continue, and like I said this is only a very recent pattern, but if this is continued and the programs that drive these growth are maintained and accelerated, inclusive growth will strengthen and be sustained. Remember you are now economically growing at 6 percent a year. If you have sustained 6 percent of growth a year, mathematically, it will double per capita income within a decade. It will raise it 5 times in two decades, and 11 times in three decades. So if this growth and the reforms underpinning it are sustained, poverty in the Philippines will be eradicated within one generation.

 

But for that to happen, you need people to work together. All the examples I cited involve people trading off pro’s and con’s in the short run, to make everybody better off in the long run. Remember the story I told about the liberalization of telecommunications? In the end, the economic growth that emanated from it made everybody richer and much richer than they were before, including the incumbent firms.

 

So this is inherently a political process. For this to work, you need coalitions. These coalitions can form at many levels, locally, sectorally, regionally, and they can form themselves around many things. It can be done, other countries in history have done it. The US in the late 19th century had democracy, but a weak state. Corruption and vote buying was rampant. Then, starting at the local level by citizens in alliance with reformers inside government, reforms were made. As these coalitions multiplied and reforms happened, a momentum was built, which started reinforcing itself. Better business regulations and less corruption, led to stronger businesses. Which demanded even more reforms. Etc. So that by the time Teddy Roosevelt came along and broke up the big monopolies of the oligarchs, he was riding a wave of successful reforms, which would go down in history as the Progressive Era.

 

But let me stress that it's important that you focus on a package, so it can be give and take and the people can see, okay I might have to tighten the belt on one area, but in return for that, I get something else that would make me better off. So it needs to be a package. Single reforms in a country like the Philippines—a democracy with a political economy that is very challenging—single reforms will face enormous resistance and it will sap the energy out of the reform process. People simply have to get together and agree on a package of reforms.

 

In conclusion, inclusive growth, is making growth work for the poor. It is more than growth but it does start with growth. Fortunately, your current economic growth rates are very high, and you're bucking both international and regional trends. You also have the fiscal space that will allow you to invest in health, education and infrastructure. So now is really the time for the more difficult structural reforms.

 

You just have to get back to agriculture, what went wrong, fix it. Get back to manufacturing, how can we improve it? Because without labor-intensive growth in these two sectors you simply will not be able to generate the number and the types of jobs you need to achieve inclusive growth.

 

You need competition domestically and you need competition with the international markets. You need more taxes to invest in health, education, and infrastructure. And for people to be willing to pay those taxes, you need good governance, you need a capable state, you need transparency and accountability between citizens, politicians, and civil servants.


All these reforms are really essential to create inclusive growth and they're all difficult and will not be resolved overnight. But as the reforms start feeding on each other, they will accelerate. In that process good leaders are necessary, but they're not enough. This is a democracy, this is a political economy which has a history of very strong vested interests resisting reforms, so you need people to work together for the greater good.

 

That sounds idealistic, but there is really no other way. Other countries have done it. My own country, the Netherlands, cured itself from the Dutch Disease between labor, business, and government by forging a pact around a package of reforms. We are not romantic people. We are very down-to-earth. In the middle of the 19th century, the US was plagued by vote-buying, corruption, monopolies, environmental destruction. But coalitions of reformers inside and outside of government changed the rules of the game during an era known as the Progressive Era. It can be done.

 

So if that working together can happen, then people can tackle the structural reforms, which have been on the books so long. Securing property ownership for the majority of the population. Establishing fair competition both from within and with respect to the outside world. If the investments in health, education, and infrastructure can be ramped up, and if businesses of all sizes can face simpler regulations and face lesser cost of doing business, then if this can be worked out, inclusive growth is in reach. And poverty can be eradicated in one generation.

 


 

This was one of the lesson from the 13 success story economies which had grown at an annual average of 7 percent or more for over 25 of the last 60 years. The Commission on Growth and Development, launched in 2006, was an independent body chaired by American economist Michael Spence that brought together 22 policy-makers, academics, and business leaders to examine various aspects of economic growth and development. The Commission’s goal was to explain what made for consistently high growth, culminating in two influential reports: “The Growth Report: Strategies for Sustained growth and Inclusive Development in May 2008” and the Special Report on Post Crisis Growth in Developing Countries in October 2009. This was the lesson from the 13 success story economies have all grown at an annual average of 7 percent or more for over 25 of the last 60 years.