Measuring the poverty effects of policies

The uproar caused by a press conference of the National Economic and Development Authority early this month remains even as Neda authorities attempt to dissipate its aftereffects. To simplify their analysis of the impact of inflation on households, the Neda used P10,000 per month as a hypothetical income figure to indicate how a typical household would allocate this amount of income across different types of expenditures.

The controversy emerged because the part of the media and then labor union leaders complained that P10,000 for a family with five children would be insufficient to live decently. Rightly so, the Neda denied making such a statement, and later added that roughly P42,000 per month would be needed for a family to enjoy a proper modest life.

However, this clarification does not eliminate the main issue, i.e., inflation, not the true decent income. What the Neda could have done was simply to admit that P10,000 is not just any hypothetical number. Based on official records, in 2015, the poverty threshold for a family of five was P9,045. Their analysis could have then focused on how inflation could affect a family that had barely escaped poverty.

The Neda missed the opportunity to show that inflation affects households differently, and that its impact on the poor is at even a larger scale. Since the goal was to examine the behavior of an average household, the Neda calculated the expenditures of various items from the average expenditure shares. As shown in the table below, the poor actually has a larger food share in total expenditures relative to the rich.

Several points are noteworthy. First, the Neda estimates presented in the conference seem to be based on the national average where the differences can be attributed to their calculated impact of inflation. Much of the effect of inflation is assumed to be felt in transport costs. Second, there is a wide difference in the expenditure shares between the lowest income classes (below P3,333 per month) and the higher income classes (above P20,833 per month). In particular, the share of food is roughly two times for poor families compared to the well-off. The transport cost, however, are two times less for the lower income class. This is a well-known principle in economics that food is not income response. As incomes increase, households would spend the additional budget to nonfood items, thus resulting in lower food shares. Third, the source of inflation may be more important than the inflation itself. If inflation is coming mostly from high food prices, then its consequence is greater for the poor. Therefore, even if oil prices were to increase, but if food prices were kept at a lower level, the poor would somehow be more insulated from the adverse effects of inflation. Fourth, even if inflation is kept low, the poor will still face difficulty in maintaining other essential expenditures, such as education and health, since much of its fixed income will be spent on food. The rich can decrease their nonessential expenditures, an option that is unavailable for the poor.

More important, the Neda could have clarified a number of issues had it focused on the poverty effects of various policies. For instance, it could have strengthened their position in favor of rice tariffication if they had presented the heavier burden on the poor imposed by high rice prices due to inflation. Also, inflation practically makes the household cash transfer under the 4Ps program (around P1,500 for those with three children or more) almost miniscule. The suggestion to convert the cash-transfer program to livelihood could have been seen as inadvisable since the funds per household would be too low to undertake an effective, equity-enhancing livelihood program. Finally, the proposal to suspend the Tax Reform for Acceleration and Inclusion program could be noted to be self-defeating since the taxes generated from TRAIN would finance two antipoverty programs: infrastructure and social protection systems, like 4Ps. In effect, a deferment of TRAIN, which allegedly caused inflation, will only benefit the rich.

In the final analysis, the Neda should focus more on measuring the consequences of all government programs and reforms on poverty. In this period of high growth, the main responsibility of economic agencies is to ensure that the poor will also benefit from this development.

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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.

 

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