IN my article on rice self-sufficiency last week in this column, I made an unqualified assertion that moving workers from agriculture to industry is the means of achieving growth and reducing poverty. As a follow-up, I would like to point out that this goal of migrating workers across sectors will require a series of other reforms, such as a progressive tax system, to achieve the desired objectives.
In contrast to the rice self-sufficiency policy, the reasons for pursuing an effective industrial transformation can be readily presented. First, the share of agricultural workers to the total work force is still disproportionately higher compared to the more productive sectors. In 2014, although the share of agriculture to total output is only 11.3 percent, 30.53 percent of the total labor force are still found in agricultural sector. While the percentage of workers in agriculture has been declining over time, one can still consider this proportion of agriculture workers to be substantial, given the limited productivity in the sector.
Second, there are technological reasons favoring industry. Typically, industry as a sector exhibits faster growth than agriculture. It is less handicapped by land, an input that is fixed in supply. Capital is the main input complementary to labor in industrial production and, unlike land, it can be accumulated over time. This creates a greater potential for absorbing even more labor.
Third, there is greater scope in industry than in agriculture to improve production efficiency through acquired experience (learning-by-doing). Economies of scale can be more developed in the industries since its technology can allow greater flexibility in the use of labor and capital, as opposed to land and labor.
The industrialization argument is so prominent in the economics literature that it forms the basis of the so-called Kuznets inverted-U curve between inequality and growth. According to his hypothesis, inequality initially rises with growth, but as growth continues, inequality declines. Accordingly, the industrialization and the associated technological progress are likely to benefit first those who have initiated these changes, i.e., the capitalists, but in the long run, should benefit the workers, as well. This hypothesis has also often been referred to as the trickle-down effect, and has been used as basis of many economic policies in less developed countries, including the Philippines.
Unfortunately, despite the comfort that this hypothesis gives to growth-oriented policy-makers, no empirical support for it can be found both here and in other countries. In our case, despite several attempts at industrialization, inequality has not decreased despite producing growth. For most of our history, incomes of the top 10-percent income class have increased at much faster rate that the rest of the population.
But it is not about inequality; the main issue is poverty, which causes the persistent inequality. While recent evidence show that both rural and urban real wages have increased, with lower observed poverty rates, a substantial segment of the population remains in dire need of basic services. More important, as seen in the country’s previous attempts at industrialization, there is a question of sustainability. Even as we further push for industrialization and greater equality, low rural, agricultural wages may disappear but these may just be offset by the emergence of low urban, industrial wages. Eventually, these poor, urban workers will return to the rural areas, thereby causing rural wages to decrease once again.
The main problem is that industrialization, though necessary, may not be sufficient in reducing poverty for a longer period of time. Its main weakness lies in the assumption that industrialization also leads to an improved income-earning capacity of poor individuals. Unfortunately, there is nothing about the argument that explains how household capacity improves. Pushing people toward the industrial sector is no guarantee that they are going to be hired and that their skills will be enough to satisfy the labor demands of the industry.
In other words, the industrialization argument per se may not address the true nature of poverty. Beginning with Amartya Sen, economists have defined poverty as an intrinsically dynamic characteristic of being locked into a low level trap of capability or asset deprivation, resulting in social and economic exclusion. Thus, it is not low incomes that cause poverty. It is the poor’s inability to acquire and develop capabilities and assets that will allow them to invest in themselves or in their children, thereby leading to the persistence of poverty.
In summary, policies that promise income growth and industrialization alone may not affect poverty at all. For example, the proposed massive infrastructure program—the so-called Dutertenomics—may bring about substantial growth and energize industrialization. However, unless investments are made to the poor households in nutrition, education, clothing and housing, as well in preconditions for participating in labor and credit markets, and in functioning as a social and political citizen, only well-off households will benefit from this program. The dilemma here is that the significant costs of infrastructure will diminish the funds needed to invest in poor households. In which case, the government should enforce a progressive tax system that will force the rich to finance the key social investments for the poor.
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Leonardo Lanzona Jr. is a professor of Economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.