Early last month, the Philippine Statistics Authority (PSA) released its most recent estimates of poverty. The data presented a dramatic decrease in poverty incidence from 27.6 percent in the first semester of 2015 to 21 percent in the same period in 2018. For the Duterte administration, this development is seen as a vindication of the economic programs that it has managed and supervised since the time it took over the reins of government in 2016. This significant decline in poverty has emboldened the economic managers to claim that President Duterte’s promise of reducing poverty incidence to 14 percent by the end of his term is feasible.
In the midst of the celebrations, a few points need clarification regarding the causes of this observed decline in poverty. First, the estimates are based on new measures of food thresholds as the PSA updated its collection of market basket, which forms the basis for the computation of the consumer price index (CPI). This adjustment meant that the original first-semester poverty incidence that was recorded at 26.3 percent in 2015 had been scaled up to 27.6 percent under the adjusted new estimates, suggesting more poor people than originally measured. This makes the decline in poverty in 2018 even more impressive. In light of the upcoming election, this development comes at a fortuitous time for the administration candidates.
Second, given the revisions in the market basket, can we assert that those who have obtained incomes above the threshold are truly out of poverty? This issue is known as Micawber Problem (in reference to a Charles Dickens character). If people just above the poverty line are already considered nonpoor, then should someone just below the poverty line also be considered nonpoor?
Third, because of the superficiality of the poverty-incidence measure, the PSA included other indices of poverty: the income gap (the average income required by the poor in order to get out of poverty, expressed relative to the poverty threshold), the poverty gap (the income shortfall defined in proportion to the poverty threshold of families with income below the poverty threshold, divided by the total number of families) and the severity of poverty (or square of the poverty gap which gives a higher weight to households that are far from the threshold).
In the case of the income gap, the achievement is not too dramatic. In the first semester of 2018, on the average, incomes of poor people were short by 26.9 percent of the poverty threshold (estimated at roughly P12,600 per month in 2018) compared to 29.5 percent in the same period in 2015 (with a threshold of about P11,300 per month). While the ratios significantly changed, the average income discrepancy for poor households remains at roughly the same amount, ranging from P3,500 to P3,300 per month between the first semesters of 2015 and 2018. In absolute terms, the incomes of poor households are not significantly closer to the poverty threshold.
The difference between the income gap and the poverty is the denominator. For the former, the total poor households are used; for the latter, it is the total number of households. The poverty gap can be interpreted as the total amount of resources needed to bring all the poor to the poverty threshold in the first semester of 2018, the poverty-gap is down to 4.3 percent from 6.6 in 2015. With a lower poverty incidence and a greater population, the country is thus more able to bring the poor households out of poverty.
Nevertheless, the poverty-gap index overlooks the effect of inequality between the poor. It does not capture differences in the severity of poverty amongst the poor. By placing a greater weight on the households where income shortfall is greater, the severity of poverty index is able to consider inequality. Here, the data also shows a significant improvement as the index is brought down from 2.8 in 2015 to 1.8 in 2018. Because of the Conditional Cash Transfers and other support services, the differences in incomes among the poor has been reduced as these programs seem to favor the poorest households.
However, the issue can be clarified if we analyze the severity index by location. The figure below presents the correlation between the 2015 and 2018 severity indices across provinces. Note that there is a positive trend, indicating those with lower (or higher) severity in 2015 have lower (or higher) severity in 2018. Moreover, the provinces with higher poverty severity in 2018 are mostly in chronically poor Mindanao with very dismal records of growth. Poverty is thus more severe in the much poorer and less-developed provinces.
The argument is that aside from support services and growth, the distribution of resources will be crucial in further reducing the depth and severity of poverty. If the goal is to reduce poverty incidence, it is possible for a malevolent government to take away money from the poorest of the poor, and give it to those who are just below the poverty line. In this way, more people are moved out of poverty, thus achieving government targets, but at the expense of the poorest sector of the population, thereby placing them deeper into poverty.
***
Leonardo A. Lanzona Jr. is professor of economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.