Inclusive growth required to fight poverty, hunger and stable employment

The following is a country profile for the Philippine from this World Bank document. An interesting view is despite the growth that is expected although lower than the previous year, poverty, hunger and informal employment continues persist.

East Asia and Pacific Economic Update, May 2012 – Capturing New Sources of Growth – Philippine profile


The Philippine economy grew slower than expected at 3.7 percent in 2011, held back by weak public spending and external demand. Fourth quarter growthof 3.7 percent was slightly better than the previous quarter, with expansion continuing to be driven by remittance-fueled household consumption, which grew by 6.7 percent. The government’s Disbursement Acceleration Plan, designed to speed up spending, was partially successful, contributing 1.3 percentage points to growth, though this was not enough to reach the targeted growth level of around 5 percent. On the production side, the services sector, which includes the fast-growing business process outsourcing industry, was a key driver of growth, contributing 3.2 percentage points in the fourth quarter. Industry, and in particularmanufacturing exports, was buffeted by weaker demand, while agriculture suffered from typhoon related damage.

Despite some improvements in recent months, the labor market continues to face structural issues, and poverty, hunger, and the informal economy remain prevalent. The labor market improved markedly during 2011, with 2.1 million new jobs created between October 2010 and 2011. In January, unemployment and underemployment rates fell to 7.2 percent and 18.8 percent, respectively, from 7.4 percent and 19.4 percent last year. Around 50 percent of new jobs, however, were created in the informal sector, mostly retail trade and for unskilled workers, while real wages are shrinking. These trends, together with stubbornly high levels of poverty and hunger, reflect structural weaknesses in the labor market. In December, the self-rated hunger incidence worsened to 22.5 percent, one percent higher than the previous quarter, and an indication that around 4.5 million households experienced involuntary hunger. High levels of hunger incidence were especially pronounced in Visayas andMindanao—two island groups that were hardest hit byTyphoon Sendong in December.Robust growth in services exports and remittances helped to mitigate falling merchandise exports during 2011 and contributed to a balance of payments surplus of US$9.7 billion through December 2011. Nominal dollar remittances grew by 7 percent to US$20.1 billion in 2011 (9 percent of GDP), supporting household spending. In real peso terms, remittances have been growing since September 2011, after contracting for 12 successive months thanks to the depreciating peso. Services exports grew by 20 percent in the fourth quarter of 2011 from a year earlier, led by business process outsourcing, even as merchandise exports fell by 18 percent with a particularly sharp dip in electronics exports. Overall, the Philippine electronics sectorwas hit much harder than in neighboring countries— contracting by 22 percent in 2011—suggesting some structural challenges. In January, overall exports rebounded, growing by 3 percent on the back of arecovery of demand in the country’s top exportsmarkets. Meanwhile, international reserves amounted to US$77 billion, equivalent to 11.3 months of imports, through February. Riding on the country’s positive outlook, the Philippine government successfully raised US$1.5 billion in global bonds in early January at a rateof 5 percent (around 200 basis points above comparable US treasuries). The issuance came after Standard & Poor’s raised its outlook for the Philippines from stable to positive in December 2011.

Consumer price inflation remained manageable in 2011, averaging 4.8 percent, although this was at the high-end of the central bank’s 3-5 percent target range. Domestic food price inflation, which comprises almost 40 percent of the CPI basket, continued to ease in February to a low of 1.4 percent, as the domestic supply of vegetables and global rice stocks increased. Inflation this year is expected to be lower at 3.5 percent, given cheaper and more stable prices of food, as well as fuel, electricity, light, and water. With inflation on adownward trend, monetary policy easing, which began in January, is expected to continue if downside risks to growth persist.

Although actual national government spending was lower than originally budgeted in 2011, below target revenue collection resulted in a fiscal deficit equal to 2 percent of GDP. This still represented an improvement from the 3.5 percent deficit recorded in 2010. The implementation of transparency and accountability measures early last year resulted in slower-than-expected government spending through the third quarter. In December, disbursements grew by 43 percent, with significant increases in current expenditures and areas targeted by the Disbursement Acceleration Plan. Full year capital outlays were 12 percent lower than the previous year, despite efforts to increase spending in the fourth quarter. The tax effort improved to 12.3 percent of GDP, a 0.2 percentage point increase from 2010, largely on account of improved tax administration. However, the actual contribution of the tax administration effort is estimated to be higher, at around 0.5 of a percentage point of GDP, as the present tax system is designed to lose around 0.3 of one percentage point of GDP annually due to the nonindexation of excise taxes, and losses from various tax incentives. To support spending this year, policy reforms will be needed to plug holes in the tax system.

Should the global slowdown persist, growth of around 4.2 percent and 5.0 percent in 2012 and 2013, respectively, will hinge on robust domestic demand, investment, and government spending. Appropriate fiscal and monetary policy responses are expected to boost growth to targeted levels, assuming sustained growth in consumption and some improvements in investments and exports. To sustain such a stimulus, higher tax revenues (through the executive’s effort to strengthen tax administration and push for the immediate passage of the tobacco and alcohol excise and fiscal incentives bills) would be necessary. The country likewise needs to address the key impediments to accelerating inclusive growth through the three reform areas as follows: i) strengthening public financial management; ii) raising tax revenues efficiently and equitably; and iii) enhancing competitiveness to attract more investment. Successful public financial management reforms would not only allow the public to see more tangible improvements in governance but would also help make a better case for tax policy reforms. Successful implementation of public sector reforms would allow the country to increase public investment and pro-poor spending and take advantage of new opportunities arising from the global economic rebalancing, given rising production costs in the rest of the region, including China.

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