Two weeks ago, when the Philippine second quarter of 2016 GDP results were announced, the usual question—“Why is it that I did not feel the growth”—has again propped up. The GDP growth in the six years has been good, averaging at about 6 percent. This is at least 2 percent higher than the generational (40-year) average of just about 4 percent. Indeed, why is it that if GDP growth has been higher why is it that a number of people remain poor? I came across a Facebook post saying the reason people do not feel the growth is because they do not invest. It would seem that the issue is not just that people do not feel growth, but people have a misguided understanding of how GDP is computed.
I have always explained that the GDP can be likened to a person’s monthly budget. Every month, you earn an income (a salary) and within that same month you also spend. When everyone’s income in a particular period is added then that approximately is the GDP for that period. The income comes from the sector where you derive it. Broadly, the grouping is agriculture, industry and services. In the last decade, the sector that has been contributing the most to GDP is services. Agriculture is contributing the least. From here, we can already have an idea how people can participate in the growth. If someone is in a sector that has less contribution to GDP, it is likely that incomes are not growing in that sector and, therefore, they will not feel the growth. Apart from sectors, it is also important to know what part of the country is contributing to income growth. Based on the recent data released by the Philippine Statistics Authority (PSA), contribution of growth per region in the Philippines is concentrated among four regions, i.e., National Capital Region (36 percent), Cavite, Laguna, Batangas, Rizal and Quezon or Calabarzon (17 percent), Central Luzon (9 percent) and Central Visayas (6 percent). The rest of the country contributes a little over 3 percent. It definitely shows that if you are not coming from these regions, there is a probability that you did not feel growth. Hence, to feel income growth, you must be in the sector and the area that are growing.
With such condition, the challenge of the government (and private sector) is how to distribute this growth into different sectors and different areas of the country. These require different sets of approaches and will involve a number of processes and reforms to implement. In regard to improving growth impact by area, the government has already proposed to consider fiscal federalism. We will consider this in another column. In the meantime, we can look at how the government is currently responding to distributing growth via different sectors. The Department of Trade and Industry (DTI), in particular, has been in the forefront of finding ways to connect the growing sectors, particularly manufacturing and services to agriculture. It has finalized a number of roadmaps in specific industries, which can help identify backward support sector and forward receiving sectors in a complete value chains of jobs, resources and markets.
Within the framework of creating more jobs, the DTI is currently looking at inclusive business (IB) as a key strategy. IBs are strictly defined as businesses whose intention is to create opportunities to those belonging to the bottom of the pyramid or the poor. These are not social responsibility type of intervention, but for profit businesses that are commercially viable. According to a 2013 Asian Development Bank (ADB) study, IBs engage the poor “through provision of affordable and relevant goods and services, and through income and decent work opportunities” that could lead to a measurable improvement in their living standards. Key examples of IBs are mostly in the agricultural sector, such as the program of Jollibee’s Farmer Entrepreneurship Program and Gandang Kalikasan for Human Nature products. In both cases, large companies source their inputs from small farmers or communities, making them part of their value chain.
The IB model effectively connects the poor by making them part of the productive sectors, which are contributing significantly to the economy. In effect, the poor who are connected to growing sectors will immediately feel the impact of growth. In this context, the government’s role is minimal, primarily creating the environment for partnership and matching. It is private sector that needs to be proactive in sourcing their inputs from poor communities. Beyond agriculture, there are a lot of opportunities, as well, to link it to tourism and small manufacturing. These are sectors that have significant forward and backward linkages to human resources and basic skill dependents. The probabilities for job generation are high without need for huge capital resources.
Making GDP growth inclusive, therefore, requires not just a nurturing environment and support from the government but a significant capital participation by the private sector. When everyone works together and see the need from a broader perspective, economic growth will eventually be inclusive, aiming to not leave anyone behind.