Quicker economic growth sets the stage for wider fiscal space through greater investments in infrastructure, conditional cash transfer (CCT) and micro-lending programs, which, in turn, accelerate poverty reduction and spell financial inclusion, according to a Department of Finance (DOF) study.

This study by the DOF—its first major research paper for the year and led by Finance Undersecretary Gil Beltran—noted that higher remittances by overseas Filipino workers (OFWs) also foster economic inclusion because many of these remitters’ beneficiaries in the country end up lending cash to microenterprises if not becoming micro-entrepreneurs themselves.

Also, this DOF paper batted for reforms in the rice sector that would lead to a more stable and affordable supply because unwarranted spikes in retail prices of this staple, which accounts for a sizable share of the consumer basket of the poor, drive up food inflation that could eventually shove households back to poverty.

“We are submitting our first major research paper for 2017—on the factors that determine movements in poverty incidence,” Beltran, who is also the DOF’s chief economist, said in a report to Finance Secretary Carlos Dominguez III.

Beltran said that based on an analysis of poverty incidence movements between 1985 and 2013 plus pertinent policy reforms initiated over that 28-year period, this DOF research project made the following conclusions:

Ø Gross Domestic Product (GDP) real growth, wider fiscal space (through higher CCT and infrastructure) and higher microfinance coverage contribute positively to poverty reduction;
Ø Higher OFW remittances lead to more micro-entrepreneurs and more lending to microenterprises, which contribute to poverty reduction; and
Ø Food inflation worsens poverty; better food production and reforms in the rice sector are necessary to preserve the gains from rising incomes.

“At higher levels of GDP growth, the economy becomes more inclusive as more families emerge from poverty and acquire bigger shares in the economic pie,” said the DOF paper.

“Inclusive development programs are most effective if supplemented by higher microfinance coverage and broader and effectively targeted CCT coverage. These two programs, if implemented effectively, can reduce poverty,” it said.

Moreover, the research paper stressed that, “Food inflation needs to be tamed to avoid its adverse impact on poverty. High food inflation drives households back to poverty.”

Added the DOF study: “The rice sector, which accounts for a significant proportion of the consumer basket of the poor, should be reformed to make it contribute more effectively to poverty reduction. Enhancing food supply thru food production and timely importation, if natural disasters destroy the harvest, will go a long way in preserving the gains from good GDP growth and financial inclusion programs.”

Last month, Dominguez and the rest of President Duterte’s economic team held two forums at the Conrad Manila Hotel on “DuterteNomics,” which is the government’s economic strategy of an aggressive expenditure program—on infrastructure, human capital formation and social protection—to sustain the growth momentum, attract more investments and create enough jobs, drastically reduce the poverty rate and transform the Philippines into an upper middle-income economy by 2022.

The DOF is pushing the congressional approval of its Comprehensive Tax Reform Program (CTRP) that is meant to help raise sufficient funds for this ambitious inclusive-growth strategy anchored on a “Build, Build, Build” program to usher in a “golden age of Philippine infrastructure,” which aims to finally close the country’s yawning infrastructure gap by investing P8 trillion in roads, bridges, railways, airports and other major infra projects over the medium term.

Alongside infrastructure development, Dominguez said that a hefty part of the higher revenue take from the proposed CTRP reforms will be dedicated to programs on education, health, skills training and other forms of human capital formation; as well as on direct cash transfers and other social protection initiatives for the benefit of sectors vulnerable to the initial impact of the would-be tax rate adjustments.

Dominguez was a signatory to the Implementing Rules and Regulations (IRR) of Republic Act No. 10693 or the Microfinance NGOs Act, which provides poor families with easy access to microfinance services and operations.

“The continuing drop in poverty incidence is due to a combination of positive economic developments and policy reforms that made economic growth more inclusive,” it said.

It said these developments include the following:
Ø Positive economic growth averaging 3.94 percent from 1985 to 2016 (except for negative growth in 1985, 1991 and 1998);
Ø Wider fiscal space that enabled the government to expand expenditures for infrastructure, health, education and CCTs, which reached 4.3 million poor households in 2016; and
Ø The rise in microfinance coverage reaching 11.2 million poor households and microinsurance access covering 37 million individuals as of end-2016.

“Regression analysis confirms that GDP growth, microfinance coverage, CCT coverage and OFW remittances are significant variables contributing to poverty reduction,” Beltran said.

Citing study findings, Beltran said that a rise of one percentage point in GDP growth reduces poverty incidence by a range of 1.43 percent to 1.5 percent of families, while an increase of one million families in the number of households covered by microfinance services also reduces poverty incidence by 1.42 percent to 1.45 percent.

An increase of one million families in the number of households covered by the CCT program reduces poverty incidence by 1.47 percent, he added, while every increase of one percentage point in the GDP share of OFW remittances reduces the poverty rate by 0.127 percent to 0.132 percent.

“However, the impact of both microfinance coverage and OFW remittances are not immediate as they are lagged by two years,” Beltran said.

He said that, “Regression analysis also confirms that rising food prices erode the impact of policy reforms. A rise in food inflation by a percentage point pushes 0.262 percent to 0.267 percent of families below the poverty index.”

This was most evident in 2010, he said, when rising food prices over the 2008-2010 period slowed down the drop in poverty incidence by 0.8 percentage point.

“OFW remittances are highly correlated with microfinance coverage (0.64 correlation ratio). It is apparent that family members of remitters eventually end up as micro-entrepreneurs and the funds deposited in the banks by remitters boost the level of funds available for microlending,” he said.

“Likewise, microfinance coverage is also highly correlated with CCT coverage (0.89 correlation ratio),” he added. “Both microfinance and CCT are concentrated at the lowest decile of the population.”