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Poverty,
Urbanization and
Development
Policy
A PHILIPPINE PERSPECTIVE

UP SE LIBRARY

SEØO1 936

Arsenio M. Balisacan
University of the Philippines Press
 3OVERTY,
UR13ANIZATI ON
AND
DEVELOPMENT
POLICY

A Philippine Perspective

ARSENIO M. 13ALISACAN

14vj4
University of the Philippines Press
Diliman, Quezon City
1994
 to
Mars and Ethel
Copyright 1994 by Arsenio M. Balisacan

ISBN 971-5424341-9

Cover Design by Weena Soberano-Espardinez

Distributed outside the Philippines by the

University of Hawaii Press

Printed by KAYLJMANGGI PRESS

 Table of Contents

Preface Ix

1 Introduction 1
Urbanization Patterns 2
Policy Issues with Respect to Urban Poverty 5
Development Strategies and
Industrialization Policies 5
Unemployment and Underemployment 8
Access to Basic Needs and Social Services 9
Organization of the Volume 10
2 Poverty Comparisons and Characteristics 12
Poverty Measurement Issues 12
Choice of Poverty Indicator 13
Poverty Norms 13
Unit of Analysis 17
Aggregating the Data on the Poor 19
Data for Poverty Comparisons 21
Aggregate Poverty Profile 26
Characteristics of Urban Poverty 32
3 Labor Markets and Earning Differences 43
The Overall Picture of Employment 43
Characteristics of Urban Labor Markets 54
Earning Differences:
An Econometric Analysis 68
Access to Basic Needs and Services 77
Health and Nutrition 78
Education 88
Housing and Environment 95
vi'
viii / POVERTY, URBANIZATION AND POLICY DEVELOPMENT

Development Policies,

Adjustment, and Poverty 103
Long-Term Growth and Industrialization Policies 103
Technology Choice and Employment Creation 110
Adjustment Policies and Urban Poverty 112

6 Political Economy of Poverty Alleviation 123 Preface

Interest Groups,Ideas, and Economic Controls 124
Policy Research, Policy Advice and
Development'Policy Formation 131
Public Agency, Incentive Compatibility, The 1980s can be aptly characterized as lost decade" for the
poor. This is true for the Philippines as well as other developing
and Pro-Poor Policy 133
countries that failed to adjust to—or ignored the need to adjust
7 Conclusions and Further Implications 136
despite of—adverse global and domestic shocks. In contrast, the
Appendix A: Robustness of present decade offers an opportunity for sustained economic
Poverty Comparisons 141 growth and poverty alleviation. The Philippines can seize this
Appendix B: Poverty Indicators
for opportunity.
Fixed Physical Areas 143 Poverty and (under)development are the subjects of this book.
Appendix C: An Econometric Model of While the focus is on urban poverty, the principal themes running
Occupational Choice 145 throughout the book apply as well to rural poverty. The book is an
Appendix D: Measuring the Welfare Impact offshoot of a study entitled Critical Issues and Policy Measures to
of Adjustment Policies 148 Address Urban Poverty in the Philippines supported by the Asian
Appendix Tables 152 Development Bank (ADB). Drafts of the study—a sequel to an

References 159 earlier study by the same author ehtitled Priority Issues and Policy

Index 171 Measures to Alleviate Rural Poverty in the Philippines also supported
by ADB—were presented in two conferences held in Manila at
ADB in August 1992 and March 1993. A shorter version of the
study was also presented in a research utilization seminar organ-
ized by the Integrated Population and Development Planning
Project of the National Economic and Development Authority in
June 1993.
At various stages of the research work, Ernesto Pemia pro-
vided helpful comments and suggestions. A number of colleagues
likewise provided constructive comments on earlier drafts of the
study. They included Dante Canias, Edita Tan, Alejandro Herrin,
Socorro Veloso, Paul Gertler, David Green, Dipak Mazumdar,
Edwin Mills, Peter Nijkamp, and En-del Wegelin. Critical com-
ments were also received from Romulo Virola, Ernesto Bautista,

ix
X / POVERTY, URBANIZATION AND POLICY DEVELOPMENT

Diogenes Osabel, and other participants in the aforementioned

conferences and seminar. I am grateful to all of them.
I am also thankful to Rhoda Theresa Bacawag, Angelita Cortez,
and Macrina Lazo for research assistance and the National Statis-
tics Office, particularly Tomas Africa, for providing the Family
Income and Expenditures Survey data used in Chapters 2 and 5 of Chapter 1
this book.
This book would not have seen the light of day without the,
support of Sylvia Ventura and her U.P. Press staff, especially Nelia
Gahol and Linda Bulong. I am thankful to all of them.
The views expressed herein are those of the author and do not Introduction
necessarily represent those of ADB or the University of the Philip-
pines.

Arsenio M. Balisacan rbanization and urban poverty have increasingly become

major development policy concerns in less developed coun-
tries (LDCs). In Asia, urbanization is proceeding at an unprece-
dented rate and shifting the burden of poverty from rural to urban
areas (Wegelin 1993). The Philippines is not an exception to this
phenomenon, although its level of urbanization is higher than in
most other Asian countries at a similar stage of development.
Urban poverty increasingly accounted for a substantial proportion
of its otal poor population, rising from 28 percent in 1961 to 41
percent in 1991. Moreover, the absolute number of poor urban
families rose from 0.68 million to 2.09 million during the same
period.
Urbanization and urban poverty make up a multi-faceted
problem that includes unemployment and underemployment, in-
adequacy of infrastructure, shortage of housing and basic services,
and environmental degradation. In turn, these aspects invoke
further questions concerning the macroeconomic and political en-
v ironment for overall economic growth, the character of spatial
and industrialization policies, taxation and provision of infrastruc-
ture, access to human capital development (particularly education,
health services, and family planning services), land tenure and
housing, and environmental management.

2/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY
Urbanization Patterns
Urbanization is a well-known stylized aspect of economic
development, reflecting a shift in the economy's dynamic com-
parative advantage from one initially based on agriculture to one
based on industry and services. A large variation exists, however,
among less developed countries, suggesting that the pattern is not
only an income phenomenon. It is influenced as much by "histori-
cal and geographic parameters, internal and international market
forces, macroeconomic and sectoral policies, and explicit spatial
policies" (Pernia 1991, p. 118) as by income level.
The urbanization pattern in the Philippines does not appear to
fit the stylized mold. The country recorded a high level of urbani-
zation, rising from 30 percent in 1960 to 38 percent in 1980 and 49
percent in 1990 (Table 1.1), but this has not been matched by a
Correspondingly high per capita income as well as by a significant
shift of labor employment from low to high productivity areas.
Gross Domestic Product (GDP) per capid at the turn of the 1990s
was not much different' from that in the mid-1970s. The share of
the industrial sector in total employment remained virtually un-
changed at about 16 percent during the last three-and-a-half dec-
ades. The employment share of the manufacturing sector, the hub
of dynamic growth in fast-growing neighboring countries, even
contracted from 12 percent in the mid-1950s to 10 percent in the
early 1990s.
The level of urbanization accelerated in the 1980s, rising from
an annual percentage increase of only 0.7 percent in the 1960s and
1.8 percent in the 1970s to 3.0 percent in the 1980s. The acceleration
took place at a time when overall economic performance was
mediocre, going by the standards of East and Southeast Asian
countries. GDP per capita contracted by an average of 13 percent
a year during the 1980s. Correspondingly, the rate of urban popu-
lation growth was substantially higher than that of the total popu-
lation growth. Urban population grew at a rate of about 3.7 percent
• year in the 1960s, 4.4 percent a year in the 1970s, and 5.0 percent
• year in the 1980s. In contrast, the rural population grew at a
slower rate of 2.7 percent a year in the 1960s, 1.8 percent a year in
the 1970s, and 03 percent a year in the 1980s. The higher rates for
urban population reflect natural increases in urban population, net
NTRODUCTION /3
rural-urban migration, and reclassification of initially rural to ur-
ban areas.
Metro Manila has at least thirty times more people per square
kilometer than any of the other regions of the country (Table 12).
Metro Manila's population rose at an annual average of 2.7 percent
in the 1980s; about 12 percent of its population in 1990 were new
migrants from the provinces.
Prior to 1960, migrants to Metro Manila, the man urban center,
and Cagayan Valley were largely from Luzon regidnsand Eastern-
Western Visayas, while migrants to the frontiers of Mindanao were
' frontierward
from the Visayas. In the 1960s, the trend shifted frm
to urbanward migration. This period saw the increasing bias of
industrial policies and infrastructure in favor of urban areas, par-
ticularly Metro Manila. This bias induced the concentration of
manufacturing establishments in Metro Manila and, gradually,
also in the Southern Tagalog Region. The trend continued in the
1970s and 1980s, with Central Luzon and Southern Tagalog becom-
ing a more functional part of the "urban-industrial core." Cebu in
the Visayas also emerged as an industrial center, and, sub-
sequently, Cagayan de Oro and Davao in Mindanao.
Policy Issues with Respect to Urban Poverty
Widespread poverty, unemployment and underemployment
have been persistent characteristics of postwar Philippine devel-
opment. The three are interrelated and are influenced by economic,
political and sociocultural factors, including the country's devel-
opment and industrialization policies as well as the global envi-
ronment for trade and finance.
D evelopment Strategies and Industrialization Policies
That widespread poverty reflects a failure of development
Pol icy is well recognized. The heavily capital-intensive, import-
substituting development strategy which the country adhered to
for several decades engendered inefficient industries, effectively
penalized agriculture and labor-intensive exports, impeded back-
ward integration, promoted growth-retarding rent-seeking activi-
ties, and stifled the country's competitiveness in the world


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Table 1.2 Table 12

Population Growth, Population Density and Migration, (continued)
by Region Population Growth, Population Density and Migration,
by Region
Annual Growth New Migrants as Percent
Rate of Population Population of Region Population
5 yrs old and over Density
(%) a!
Other city/
municipality, Other
Region 1970- 1980- 1970 1990 same province Province
1980 1990

Region 1970 1990 1970 1990
Philippines 3.12 226 122 202

Metro Manila 5.62 2.68 6,237 12,467 Philippines 3.61 1.71 5.82 4.40
Ilocos Region 1.88 1.99 139 20.1
3.07 1.81 46 74
Cagayan Valley Metro Manila 2.54 2.13 15.53 11.74
Central Luzon 3.16 2.48 198 340 Ilocos Region ? 2.11 1.15 3.01 2.48
Southern Luzon 3.60 2.81 95 176 Cagayan Valley 3.85 1.52 4.01 234
Bicol Region 1.79 1.32. 168 222 Central Luzon 2.18 120 4.69 333
Western Visayas 2.54 1.79 179 267 Southern Luzon 3.96 1.57 5.23 5.58
Central Visayas 2.48 1.89 203 307 Bicol Region 4.23 1.72 356 2.14
Eastern Visayas 1.75 0.96 111 143 Western Visayas 433 1.96 2.72 1.84
Western Mindanao 3.49 227 100 169 Central Visayas 3.79 1.97 3.15 2.41
Northern Mindanao 421 2.27 68 124 Eastern Visayas 3.48 138 2.92 224
Southern Mindanao 5.25 2.70 69 141 Western Mindanao 4.07 1.82 4.41 2.04
Central Mindanao 1.64 3.13 83 136 Northern Mindanao 439 2.19
9.45 5.46
Southern Mindanao 535 2.03 11.08 4.19
Central .Mindanao 4.21 1.29 4.65 2.77

a/ Number of persons per square kilometer.

b/ Based on place of residence 5 years prior to census year.
Sources: National Statistics Office,
Integrated Census of Population, various issues.

8/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY
market.' The impact on sectoral incentives of monetary, fiscal,
exchange rate and trade policies was so pervasive that it often
tended to overwhelm any favorable effects of sector-specific poli-
cies. Trade and exchange rate policies, for example, tended to be
the primary source of production disincentives in agriculture.2 The
undue squeeze on rural incomes could have induced migration to
the cities.
Industrialization policies favored urban areas, particularly
Metro Manila. Infrastructure and social services were dispropor-
tionately located in Metro Manila and its suburbs, thereby induc-
ing the concentration of manufacturing establishments in these
areas (Herrin and Pernia 1987). In contrast, the lack (or poor state)
of infrastructure and social services in rural areas impeded rural
investments.
Substantial changes in 'the macroeconomic environment oc-
curred in the 1980s and early 1990s. For one thing, this period saw
a significant policy departure toward a more open, market-
friendly economy. But the fiscal bind has become a major policy
challenge. The public debt—the large part of which has become
domestic—severely limits the ability of the government to address'
the requirements for infrastructure and social services, of an ailing
economy. This looms large in the macroeconomic environment for
urban poverty alleviation in the 1990s.
Unemployment and Underemployment
Employment generation in the Philippines is poor in relation
to the standards of the Asian newly industrializing economies
(NIEs) and of many other countries at similar income levels. This
is significant considering that the lack of productive employment
opportunities, together. with the relatively rapid growth of the
labor force, is at the core of the poverty problem. In large part,
public policies have created distortions that not only have been
inimical to sustainable economic growth but also have adversely
affected employment growth.
INTRODUCTION /9
Access to Basic Needs and Social Services
The rapid rate of urbanization has spawned problems affecting
the quality of life in the cities, especially for the urban poor. The
growth of infrastructure and services has not kept pace with the
growth in demand. This significantly diminishes the access of the
urban poor to basic services, including housing, health, and edu-
cation.
In the past, relocation of squatters in resettlement areas outside
the metropolis has achieved little success. Although the settlers
were given their own piece of property at very low cost of amorti-
zation, they found themselves, too far from their main source of
livelihood, and many eventually sold their rights and returned to
the city.,
Government assistance for shelters has not only been inade-
quate but also biased in favor of the middle and upper-middle
income groups mostly using provident funds collected from low-
income sectors. The private sector, on the other hand, has concen-
trated its production mostly for upper income groups, partly
owing to cost recovery problems.
In recent years, there have been government initiatives aimed
at addressing the housing problem. A review of these initiatives
vis-à-vis their impact on the poor, their financing and sustainabil-
ity, and the participation of the private sector and nongovernmen-
tal organizations, is called for.
Access to food by the urban poor is another major concern in
a rapidly urbanizing economy. Given the high share of food in their
budget, the poor are extremely vulnerable to food price increases,
with preschool children absorbing the worst effects of food depri-
vation. This threat is real considering that macroeconomic adjust-
ment programs typically involve elimination of food subsidies
and/or a realignment in the exchange rate in the form of devalu-
ation. To cushion the impact of the adjustment reforms on the poor,
the provision of safety nets may be necessary. Little is known,
however, about the efficiency and incidence of various forms of
poverty interventions. Targeting mechanisms, therefore, must
have to be designed such that the intended recipients are benefit-
ted, and the fiscal and economic costs of poverty interventions are
kept low.

10/ POVERTY, URBANIZATION AND DEVELOPMENT POUCY INTRODUCTION / 11

Urbanization unaccompanied by rapid expansion of produc-

tive employment opportunities not only spawns urban poverty but
also diminishes the poor's access to education; health, nutrition, NOTES
and family planning services; and water supply, drainage facilities,
and electricity. Education, health, and nutrition are critical areas 1. This is a common theme found in various studies on Philippine
economic development. See, e.g., 1W (1974), Bautista and Power
for the development of human capital, especially for the poor (1979), Pernia et al. (1983), de Dios (1984), Krugman et al. (1992), de
whose only main asset is their labor. The provision of infrastruc- Dios and Associates (1993), and Balisacan (1993).
ture enhances their access to more productive employment oppor- 2. See David (1983), Bautista (1987), and Intal and Power (1990).
tunities.
These concerns, while well recognized, received no more than
lip service over the last two decades. This was more so in the 1980s
when the economy was buffeted by one crisis after another. The
provision of infrastructure and social services took the back seat to
debt servicing and military expenditures. And out of the limited
public spending on social services and infrastructure, the benefits
accrued disproportionately to the nonpoor.
Organization of the Volume
This study takes an in-depth look at the nature of the urban
poverty problem in the Philippines. Chapter 2 analyzes intertem-
poral and spatial dimensions of poverty since the early 1960s.
Chapter 3 examines aspects of employment and employment gen-
eration, "migration" responses to labor market phenomena, trends
in labor incomes and productivity, and determinants of labor
earnings of urban households. Chapter 4 examines issues concern-
ing access to basic needs and services as well as the cases for (or
against) government interventions in health, education, housing,
and physical infrastructure. Chapter 5 characterizes the influence
of economywide, sectoral, and spatial policies on the pattern and
character of urban development. It also assesses the likely short-
run impact of adjustment policies on the urban poor. Chapter 6
discusses the political economy of development policy change in
the Philippines. The chapter identifies channels by which reforms
aimed at accelerating employment growth and poverty reduction
can be carried out, given the constraints on both political and
economic markets. Finally, Chapter 7 provides conclusions and
further implications for public policy.

Chapter 2.
Poverty Comparisons
and Characteristics
FINe proper identification of the poor, as well as the aggregation
of the data on the poor into a single measure of poverty, is a
necessary element of an effective poverty intervention program.
This chapter discusses key conceptual and empirical issues on
poverty measurement, examines the intertemporal picture of ur-
ban (and national) poverty, and describes the socioeconomic char-
acteristics of the urban poor.
Poverty Measurement Issues
Establishing trends in urban poverty based on existing studies
is problematic owing to the varied concepts and measurement
procedures employed by various researchers as well as the differ-
ences in the quality of data series available. Various estimates of
the proportionate number of the poor in 1971, for example, range
from 36 to 84 percent (Balisacan, 1991a). The relatively wide range
arises from divergent definitions and methodologies employed in
estimating poverty lines. Some of the conceptual and empirical
problems.—the choice of poverty indicator, the determination of
the poverty line, the unit of analysis, the choice of equivalence
scales, and the aggregation procedure—are briefly reviewed be-
low.1
12
POVERTY COMPARISONS AND CHARACThRISTICS /13
Choice of Poverty Indicator
On the issue of poverty indicator, the popular choice in devel-
opment literature is current consumption, or expenditures plus
home produced goods and services. The argument in support of
this choice is found in economic theory: current consumption has
its basis in the permanent income hypothesis and other models of
intertemporal consumption-smoothing behavior. If households
have the opportunity to borrow or dissave, or if households have
access to risk-sharing opportunities, then their shOrt-term con-
sumption levels will reveal their permanent income at that date.
This suggests well-functioning. capital and insurance markets.
However, if the poor's access to capital markets is severely con-
strained, then the relevant indicator of living standards is current
income, not current consumption.
In this study, we use current income as indicator of living
standards. It is well known that the poor are far more constrained
in their borrowing options than the non-poor. The choice is also
dictated by practical measurement considerations. As shown in the
next section (Data for Poverty Comparisons), available data for
intertemporal poverty analysis are more comparable for current
income than for current consumption. Moreover, while measured
magnitude of poverty in a given year depends on the chosen
poverty indicator, poverty trends as well as spatial and sectoral
poverty comparisons are not qualitatively different for the two
indicators.
Poverty Norms
The determination of the poverty line invites even more dis-
agreement. 2 In theory, the poverty standard should allow for
differences in household composition, relative prices faced by
spatially dispersed households, household tastes, health status of
household members, and living conditions and amenities which
are customary in the society they belong (or what is often referred
to as participation standard). However, making all these adjust-
ments can lead to a rather awkward definition for both analytical
and empirical purposes, as the resulting poverty line is then house-
hold-specific, varying according to the specific circumstances of
14 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY Table 2.1
Per Capita Poverty Lines Suggested in Various Studies
the household. In our intertemporal poverty comparisons, we have (In pesos, at 1985 prices)
adopted a non-welfarist approach whereby we pa l regard to
information on individual or household utilities.' This approach Reference Poverty
I

emphasizes specific forms of commodity deprivation, such as in- Year Line a! Source
adequate nutrition. However, in our simulation analysis of the
(1) Rice Wage
poverty impact of certain policy instruments (Chapter 5), we have
Formula 1971 3,379 NEDA (1989)
adopted a welfarist approach, i.e., we have utilized information
(2) Abrera 1974 Abrera (1976)
about household behavior in "discovering" the changes in utilities
Metro Manila 8,959
(or equivalent incomes) for various groups of households with
Other Urban Areas 7,169
different characteristics, associated with a policy change.
Rural Areas 6,274
Thus, for the intertemporal poverty comparison, we define a
poverty line as the critical minimum amount of income below (3) Tan and Holazo 1971 NEDA (1989)

Metro Manila 3,489
which a person cannot attain a predetermined consumption bun-
dle of goods and services, as judged necessary for the fulfillment Other Urban Areas

Low 2,803
of certain basic consumption needs, most importantly (in the con-
High 3,303
text of this study) adequate nutrition. There are certainly other
(4) Tan and Tecson 5,646 NE.DA (1989)
dimensions of poverty, such as access to publicly provided goods
(5) Mangahas 1975 7,844 Mangahas and
and services (e.g., clean water, education and infrastructure serv-
(6) Population, Resources, Barros (1980)
ices), but this narrow definition of poverty captures much of what
Environment and the
matters most as per the standard of living in the Philippines. In
Philippine Future p7,517 NEDA (1989)
later chapters, we will attempt to present a more balanced picture
(7) World Bank 1975 World Bank (1981)
by also showing trends in other indicators of well-being.
Urban 5,018
Poverty lines suggested for the Philippines vary considerably
Rural 3,763
(Table 2.1). For urban areas, these range from P2,800 to P8,000 per
person (at 1985 prices). For rural areas, the range is from P2,600 to (8) World Bank 1983 World Bank (1985)

P6,300 per person. Prior to the December 1992 revision of official Urban 3,108
Rural 2,620
poverty lines (in brackets), upward adjustments in the official
(9) World Bank 1985 World Bank (1988)
poverty lines had been considerable. In 1971, the official poverty
Urban 5,010
line for rural areas was P3,267 (at 1985 prices). In 1988, this was
Rural 3,759
P4,452 (also at 1985 prices), representing an increase of 36 percent.
The corresponding increase for urban poverty lines was 64 percent.
These adjustments may explain the relatively small reduction in
official estimates of poverty incidence (e.g., from 1985 to 1988). The
World Bank has periodically claimed that the official poverty lines
are too high. But, as shown in Table 2.1, even the World Bank could
not make up its mind on this issue. Its poverty line for urban areas,
for example, fell from P5,018 in 1975 to P3,108 in 1983, then rose to
P5,010 in 1985 and again fell to P4,285 in 1988.
 Table 2.1 POVERTY COMPARISONS AND CHARACTERISTICS /17
Per Capita Poverty Lines Suggested in Various Studies
(In psos, at 1985 prices) For our purposes, we have adopted the new official poverty
lines for 1988 estimated by the National Statistical Coordination
Board's Technical Working Group (TWG) on Poverty Determina-
Reference Poverty tion. Broadly comparable to those for Indonesia and Thailand,
Year Line a! Source TWG's estimates cover the country's 13 regions subdivided into
rural and urban areas (see Appendix Table 1) and take into account
regional price differences and consumption patterns. 4 Real poverty
(10) World Bank b/ 1988 World Bank (1992) lines are held fixed for the period covered by the study. We are, of
Urban 4,285 course, aware of the possibility that poverty lines might be posi-
Rural 2,671 tively related with correlates of development. However, Ravallion
(11) Official Estimates 1971 World Bank (1988) et al. (1991) have demonstrated that, for a large number of low-in-
Urban 4,365 come countries, real poverty lines tend to increase with growth,
Rural 3,267 but they will do very slowly for the poorest countries.
(12) Official
Estimates In practice, a certain amount of arbitrariness is involved in
c/ 1985 NSCB (1993) defining poverty lines. The TWG's poverty lines are not an excep-

Urban 6,042 [4,365] tion. TWG's estimates of nonfood needs, for example, are based on
Rural 4,132 [3,353] the consumption pattern of sample families whose incomes fall
(13) Official
Estimates within 10 percentage points above and below the food threshold.
c/ 1988 NSCB (1993) Why not 5, or 20, or 30 percentage points? It is not the intent of the

Urban 7,141 [5,183] present study to work out poverty lines that are agreeable to all -
Rural 4,452 [3,601] indeed an almost impossible task. At the same time, it is recognized

(14) Low-Income Study 2,538 NEDA (1989) that the choice made may affect the conclusions drawn from pov-
erty comparisons. In unambiguously establishing whether poverty
has changed over time, we have employed well-known theoretical
a! Poverty lines reported in various studies for years (in results on stochastic dominance (see Appendix A).
parentheses) other than 1985 were updated to 1985 using the
Consumer Price Index for all items. Unit of analysis
b/ Assumed to be 40 percent less than the official poverty lines
estimated by the NSCB Technical Working Group on Poverty assessment may also be affected by the chosen unit of
Poverty Determination. analysis, that is, the group of persons for whom resources are
c/ Poverty lines in brackets are based on the 1992 assumed to be combined when poverty status is being assessed. If
official methodology. there is considerable intrahousehold inequality of access to house-
hold resources or of standard of living, the ideal unit of analysis is
the individual member of the household. Ignoring intrahousehold
inequality may misrepresent the extent and nature of overall pov-
erty and inequality However, in practice the individual members
of the household are seldom chosen owing to the extreme difficulty
of observing the distribution of benefits within the household. An
alternative unit is the family or household. To choose this unit, one
18 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY POVERTY COMPARISONS AND CHARACTERISTICS /19
has to assume that all members of the household share the same
standard of living. This is a reasonable assumption for some items
of consumption, such as housing, which have some of the attri-
butes of public goods as far as the individuals in the household are
concerned. But in the case of food, there may be considerable
inequality in the household (e.g., according to gender). The survey
design of the FIFS uses the family as the unit of analysis.
The use of the family as the spending unit for poverty assess-
ment raises another (but related) issue: What equivalence scales
should be given to families with different characteristics and cir-
cumstances?An equivalence scale indicates at reference prices the
cost differential for a household, due to demographic charac-
teristics (e.g., family size, age and sex of family members) and other
relevant household attributes (e.g., education, occupation, and
region of residence), to reach the welfare level of the reference
household. Viewed as a true-cost-of-living index, it represents in
one summary measure the changing "needs" of a family as it
expands and/or changes its attributes. -
• Balisacan (1992b) estimated the cost of children in the Philip-
pines to be about 20 percent of the reference couple's expenditures.
He used this estimate to illustrate the difference that equivalence
scales make on aggregate poverty calculations in poor countries.
His results show that the practice of assessing aggregate poverty
(see below) in poor countries based on available distributions of
total household expenditure (or income) tends to exaggerate their
aggregate poverty. Normalizing household aggregates by the
number of persons in the family reduces the error, although the
error is still relatively large for indices that take into account the
poor's poverty deficits. Furthermore, the direction of error is ro-
bust with respect to the poverty line.
Unfortunately, household data on incomes in early years are
available only in tabulated form, thereby making it impossible to
construct household-specific adult equivalents. However, since
the interest here is not so much in establishing precise magnitudes
as in providing an unambiguous direction in the changes of aggre-
gate poverty for a plausible range of poverty lines, the use of
income per capita is adequate for our purposes. Unless there have
been substantial changes in demographic composition (especially
among the poor), the ranking of two or more dates with respect to
alternative equivalence scales is not likely reversible.
Aggregating the Data on the Poor
There remain unsettled issues in aggregating the data on the
poor into an overall measure of poverty. However, most re- -
searchers agree that a list of desirable properties of a poverty
measure would have to include what has become known as the
monotonicity, transfer, and subgroup consistencyaxioins. The first
axiom states that, ceteris jaribus, a reduction in the income of a poor
person must increase the poverty measure. The second axiom
simply says that, given other things equal, a pure transfer of
income from , a poor person to a less poor one must increase the
poverty measure. Finally, the third axiom states that all other
things equal, the overall level of poverty must fall whenever pov-
erty decreases within some subgroup of the population and is
unchanged outside that group. Although these properties appear
to be simple, they are often violated by many of the poverty indices
suggested in recent years.6
Most poverty studies in the Philippines, including virtually all
poverty statistics released by government, have focused on the
familiar head count (11) index as a measure of poverty. This is given
by
H = (2.1)
where q is the number of persons deemed to be poor, and n is the
total population. This index fails the monotonicity axiom: a poor
person may become poorer but measured poverty will remain the
same. H also fails the transfer axiom: an income transfer from a
person below the poverty line to one above it does not change
measured poverty. Its advantage is that it is easily understood and
communicated.
Another familiar poverty measure is the poverty gap (PG),
measured as the mean of the proportionate income shortfall over
the whole population:

20/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY
PG = (2.2)
n j=1 i(_^_
where z is the poverty line, Yi is the per capita income of family i
and n1 is family size. This measure is sensitive to both the number
of the poor and their degree of poverty, thereby satisfying the
monotonicity axiom. It is, however, insensitive to a redistribution
of income within the poor group owing to the equal weights
attached to the various income deficits. One advantage of this
measure is that it can indicate the potential savings that can be
made from targeting transfers to the poor. To see this, note that the
minimum cost of eliminating poverty using targeted transfers is
simply the sum of all poverty gaps in the population, i.e., 7,[z-yd.
It is, of course, assumed that policymakers and program imple-
mentors have complete information, and that they behave in a way
that is consistent with the objectives of the transfer program. In
practice, governments spend more than this sum owing to admin-
istrative and rent-seeking costs as well as imperfect targeting of
transfer programs. If policymakers know nothing about who is
poor and who is not, then the only way they can ensure that none
are poor is to give each member of the population a transfer of z.
Summed up over the whole population, the maximum cost of
eliminating poverty with no targeting is n.z. By inspection of (22),
it can be seen that the ratio of thejninimum cost to the maximum
cost is simply the PG index.
A class of poverty measures which we employ here is that
proposed by FOster, Greer, and Thorbecke (1984). This is given by
= i(
(2.3)
P
where a>O is a measure of poverty aversion. The parameter cx
indicates the importance given to the poorest poor: thelarger a is,
the greater is the emphasis given to the poorest families. As the
value of cx becomes very large, Pa approaches a "Rawisian" ineas-
POVERTY COMPARISONS AND CHARACTERISTICS /21
ure giving weight only to the poorest among the poor. H and PG
are special cases of this class of poverty measures (for aO and a=1,
respectively). Where the weights are the income gaps themselves,
the resulting Pa measure is distributionally sensitive. For example,
for a2, the resulting measure, P2. in (23) is then simply the mean
of the squared income shortfalls. This index, hereafter referred to
as distribution-sensitive measure, satisfies all the above axioms for a
desirable summary measure of poverty7 Its drawback is that it is
not as easy to interpret as H and PG. Nonetheless, the key point to
bear in mind is that a ranking of dates, socioeconomic groups, or
policies in terms of P2 should reflect well their ranking in terms of
the severity of poverty. It is not the precise number per se that
makes the measure useful, but its ability to order distributions in
a better way than the alternative measures can.
All members of the Pa poverty measures have the desirable
property of subgroup consistency. Moreover, they are additively
decomposable in the following sense: the aggregate (population)
poverty level is simply a weighted average of the subgroup pov-
erty levels, the weights being their population shares. This prop-
erty proves to be extremely useful for our purposes. For example,
for a policy change that increases the incomes of group i and
reduces those of group j, we can work out the impact of the change
on each group's average poverty level, and then use the groups'
respective population shares to estimate the new aggregate pov-
erty level.
Data for Poverty Comparisons
The statistical base for the analysis in this chapter is mainly the
various rounds of the Family Income and Expenditure Survey
(FIES). These'surveys were undertaken by the government's sta-
tistical agency in 1961,1965,1971,1975,1979,1985,1988, and 1991.8
The 1975 and 1979 surveys, however, were not published due to
some technical problems, one of which was the implausibility of
the data generated arising from substantial underrepresentation of
households-in plush subdivisions. Excluding 1975 and 1979, it
appears that the FIES provides a reasonably good series—and the
only one available—for a comprehensive analysis of trends in
income inequality and poverty over the last three decades. Unfor-

22 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
tunately, only published tabulations are available for 1961, 1965,
and 1971; also, only preliminary tabulated results are available for
the 1991 survey. The analysis of poverty trends for the last three
decades has therefore been limited to published aggregate data
(e.g., rural and urban areas). 9 Detailed analyses of urban poverty
and its determinants, which require access to individual household
data, have been confined to 1985 and 1988.
Some problems need to be noted concerning the use of the
PIES. First, the definition of "urban areas" has changed substan-
tially during the last three decades. In the 1961 PIES, urban areas
included all places within the boundaries of chartered cities and
provincial capitals and Metropolitan Manila (Manila and adjacent
cities and municipalities) and the town centers (poblaciones) of
municipalities other than provincial capitals. There was no refer-
ence to population density. With this definition, about 34 percent
of all households were located-in urban areas.
In the 1965 PIES, the definition of urban areas followed that of
the 1960 Population Census. Here, urb places consisted of all
municipalities with a population density of at least 1,000 persons
per square kilometer; the town centers of municipalities with a
population density of at least 500 persons per square kilometer,
including any contiguous village (barrio) of at least 2,500 inhabi-
tants; the poblaciones (regardless of population size) plus barrios
having at least 2,500 or more inhabitants and contiguous to the
poblacion of cities and municipalities with a population of at least
20,000 persons; and all other poblaciones having a population of
at least 2,500 persons. This definition put the proportion of all
families living in urban areas to about 30 percent.
The 1971 PIES used a slightly different definition from that of
the 1965 survey. Following the definition of urban areas used in
the 1970 Population Census, the 1971 PIES also took into account
the presence and number of public infrastructure and facilities, i.e.,
public buildings, plazas, streets, hospitals, etc. The 1985, 1988, and
1991 surveys followed the definition employed in the 1971 survey.
Apart from the changes in definition, which turn out to be a
minor problem, the physical area of the "urban sector" is, almost
by definition, shifting over time. As population grows and/or
economic activity expands, an initially rural area will be classified
POVERTYCOMPARISONS AND CHARACTERISTICS /23
as urban, sooner or later. While this may not be problematical for
purposes of measuring,, say, urbanization trends, it tends to create
a systematic upward (downward) bias on urban (rural) perform-
ance indicators. Suppose, for example, that rapid, sustained agri-
cultural growth in some regions leads to a similarly rapid
expansion of nonfarm employment and incomes. This induces
urbanization, thereby reducing the physical size of "rural areas."
To the extent that household incomes rise faster in urbanizing areas
than in non-urbanizing areas, poverty in physically expanding
urban areas tends to fall relative to that in contracting rural areas.
This is particularly so if there are constraints to the movement of
labor from the slow to the rapidly growing areas, or if there are
considerable lags to such movements. Thus, while the growth
stimulus is initially rural-based, the gains in poverty reduction are
registered as urban-based. The data, as reported, would seem to
suggest that rural development programs, even if they are success-
ful in spurring rural income growth and reducing rural poverty,
do not matter much! -
Table 22 presents "urban" population counts when physical
areas are fixed over time. The estimation involves reclassifying
geographical areas in the various population censuses according
to the urban-rural definition used in the 1970 census of population.
These estimates show that urban areas had a population share of
32 percent in 1960 and 1970, 34 percent in 1980, and 36 percent in
1990. In contrast, the "uncorrected" population share of urban
areas reported in the various population censuses was 30 percent
in 1960, 32 percent in 1970, 38 percent in 1980, and 49 percent in
1990. The next section (Aggregate Poverty Prpflle) suggests a pro-
cedure for constructing intertemporal "urban poverty" indicators
purged of the technical flaws of reported data on urban incomes.
Another worrisome aspect of the PIES data is that estimates of
average family income and expenditures for all survey years are
lower than those implied by the National Income Accounts (NIA).
We do not know which is closer to the truth- 10 Note, however, that
the average family income obtained from PIES was consistently
dose to two thirds of the average obtained from NIA, with the
exception of 1991 (Fable 23). This is significant since our main
interest is in the changes in poverty and income distribution during
 Table 2.2 Table 2.3
Population of Fixed Physical Urban Areas a! Comparison of NIA and FIES Estimates
of Family Income and Expenditures

1960 1970 1980 1990 1961 1965 1971 1985 1988 1991

Total Population NIA Personal Income

(in million) 27.09 36.68 48.1 60.69 (million pesos) 12,680 19,387 39,276 466,644 621,453 1,028,028
NIA Personal
Urban 852 11.68 16.19 21.75 Consumption
Rural 1857 25.01 31.91 38.93 Expenditures
(million pesos) 11,761 17,949 35,565 469,133 603,281 916,367
Population Change Number of Families
(thousands) 4,426 5,126 6,347 9,847 10,666 11,975
Total - 3.01 2.71 232 NIA Personal
Urban - 3.16. 326 2.96 Income/Family 2,865 3,782 6,188 47,389 58,265 85,848
Rural - 2.98 2.44 1.99 NIA Personal Consumption -
Expenditures!
Level of Family 2,657 3,502 5,603 47,642 56,561 76,523
Urbanization b/ 31.45 31.83 33.65 35.84 FIES Average
Family Income 1,804 2,541 3,736 31,052 39,728 65,563
Tempo of FIES Average Family
Ubanization c/ - 0.18 0.83 0.97 Expenditures 1,793 2,877 4,479 26,866 32,214 52,490
Ratio FIES/NIA
a/ Based on 1970 urban-rural classification of 'income per Family 0.63 0.67 0.60 0.66 0.68 0.76
physical areas. Ratio FIES/NIA
b/ Proportion which is urban. Expenditures -
c/ Urban-rural growth difference. per Family 0.67 0.82 0.80 056 0.57 0.69
Sources: National Statistics Office, Integrated Census of
Population, 1960, 1970, 1980, 1990. Sources: NEDA, Philippine Statistical Yearbook, various issues.
NSO, Family Income and Expenditures Survey, various issues.
26/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY Table 2.4
Poverty Indices, 1961-1991
(In percent)
this period. In contrast, for average family expenditure, the dis-
crepancy between PIES and MA remained somewhat steady for
1961, 1965, and 1971, but substantially increased for 1985 and
PIES Estimates
19801 This discrepancy is another reason for our preference for
current income as indicator of living standards, in addition to those
Year Distribution-
earlier mentioned (See Poverty Measurement Issues). But even if
Head Poverty sensitive
these discrepancies are not present, the calculation of aggregate
count gap measure
poverty indices is still problematic since published PIES data for
1961,1965, and 1971 do not provide for a disaggregation of families
by expenditure class. Total
1961 5925 27.78 16.55
Aggregate Poverty Profile
1965 51.47 23.64 14.30
1971 52.23 23.71 14.05
Table 2.4 summarizes poverty estimates based on the PIES
1985 53.94 21.10 10.87
income data. The estimates referred to as PIES estimates are based
on population distributions reported in the PIES. The other set of 1988 4424 15.95 7.64
estimates, referred to as Fixed Physical Areas (EPA) estimates, is 1991 44.59 16.46 8.04
based on population distributions for fixed physical areas, i.e.,
based on rural-urban classification of villages in 1970. The estima- Urban

1961 50.50 22.99 13.82
tion involved using the information in Table 22 to adjust for
1965 43.19 18.04 10.38
poverty indicators obtained from the PIES data on household
income (see Appendix B). Thus,while the PIES estimates do not 1971 40.60 16.01 8.78
1985 4520 1724 8.68
control for the "shifting physical areas" problem noted above, the
1988 34.49 11.64 $34
EPA estimates do, thereby providing a better indicator of intertem-
1991 36.66 13.89 7.04
poral urban (and rural) poverty.
Based on the head count index, aggregate (national) poverty.
fell from about 59 percent in 1961 to 52 percent in 1971, rose to 54 Rural
1961 64.06 30.42 18.05
percent in 1985 when the economy suffered its deepest contraction
1965 5523 26.18 16.08
since the late 1940s, fell to 44 percent in 1988 and rose slightly to 45
1971 57.31 27.08 16.35
percent in 1991.12 The average annual reduction from 1961 to 1991 1225
1985 59.43 23.52
was dismal compared with the experiences of neighboring Asian
1988 50.19 18.58 9.05
countries.13 Moreover, all three indices of poverty suggest virtu- 9.03
1991 52.40 19.00
ally no change in poverty from 1965 to 1971, suggesting that the
growth of GDP per capita-averaging about 2 percent a year-did
not "trickle down" to the poor. The slight increase in poverty from
1988 to 1991 was primarily due to the almost zero growth of GDP
per capita and the rise of inequality in size distribution of personal
income during this period. The income share of the poorest 20

Table 2.4
(continued)
Poverty Indices, 1961-1991
(In percent)
FPA Estimates
Year Distribution-
Head Poverty sensitive
count gap measure
Total
1961 5925 27.78 16.55
1965 51.47 23.64 14.30
1971 5223 23.71 14.05
1985 53.94 21.10 10.87
1988 4424 15.95 7.64
1991 '44S9 16.46 8.04
Urban applies to 1965, 1971, and 1985, and to 1988 and 1991, where the
1961 56.91 25.91 15.57
1965 42.66 17.82 1025
1971 38.57 1521 834
1985 50.18 19.14 9.64
1988 36.90 12.45 5.71
1991 50.77 1924 9.75
Rural
1961 6033 28.65 17.00
1965 55.54 2633 16.17
1971 58.66 27.72 16.74
1985 55.94 22.14 11.53
1988 4827 17.87 8.70
1991 41.13 14.91 7.09
Source: Author's calculations.
POVERTY COMPARISONS ANDCHARACTERISTICS /29
percent of the population dropped from 53 percent in 1988 to 3.8
percent in 1991.
The ranking of 1985 poverty vis-à-vis poverty in earlier years
is ambiguous. The head count index suggests higher poverty in
1985 than in either 1965 or 1971; the other two indices show quite
the opposite picture. Clearly, whether poverty increased, de-
creased, or remained the same between two dates is subject to the
particular poverty measure and poverty line adopted.
Figure 2.1 summarizes the results of first-order dominance
analysis. The range of poverty lines encompasses almbst all those
that have been suggested for the Philippines (see Table 2.1). The
curve for each indicated year traces the poverty incidence (propor-
tion of persons below the poverty line) associated with the assumed
poverty line. If one curve is lower than the other for the range of
plausible poverty lines, then the direction of change in poverty is
unambiguous. Clearly, one can say that poverty in 1991 is unam-
biguously lower than in 1971 and 1985, although one may not be
able to say the precise difference since the shifts are not uniform.
The possibility of disagreement on the direction of poverty change
curves intersect. Thus, one cannot rank 1991 and 1988 iithe range
of permissible poverty lines extends both above and below, the
official poverty line (which is the point of intersection in this case).
However, if poverty measures are restricted only to those
which take into account the depth of poverty and the distribution
of living standards among the poor (i.e., excluding the head count
index), then the ambiguity, of the ranking tends to vanish. This is
demonstrated in Figure 22 which summarizes the results of the
second-order dominance analysis. For the admissible range of
poverty lines, poverty in 1985 is definitely lower than in 1965 and
1971. Poverty in 1991 is also higher than in .1988 for almost all
plausible poverty lines. Only at extreme ranges of poverty lines can
poverty in 1991 be the same as that in 1988.
In both FIES and FPA poverty estimates, urban poverty fell,
while rural poverty rose from 1965 to 1971 (Table 2.4). Basêdon the
FPA estimates, head count poverty in urban areas fell from 43
percent in 1965 to 39 percent in 1971. In contrast, rural poverty rose
from 56 percent to 59 percent. This suggests that the relatively
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32/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY Table 2.5
Contribution of Sector to Total Poverty
rapid growth of GDP per capita during this period benefitted (In percent)
mainly the urban population.
The PIES estimates show a relatively mild increase in urban Contribution to Total Poverty
poverty from 1988 to 1991, with head count poverty rising from 35
percent to 37 percent.. In contrast, the EPA estimates indicate a Year Distribution-
sharp increase in poverty, with the head count index rising from Head Poverty sensitive
37 percent in 1988 to 51 percent in 1991. The discrepancy is mainly count gap measure
in the shifting of physical areas arising from. reclassification of
villages. The 1985 and 1988 PIES sampling frames were based on Total
1961
the 1980 population census, while the 1991 was based on the 1990 100.00 100.00 100.00
census. Both censuses applied the same set of criteria in classifying 1965 100.00 100.00 100.00
-villages into "urban" and "rural" areas. A large number of initially 1971 100.00 100.00 100.00
rural areas in 1980 became urban areas in 1990 when they were 1985 100.00 100.00 100.00
found to satisfy the criteria for "urban" areas. This reclassification, 1988 100.00 100.00 100.00
in addition to net migration from rural to urban areas, reduced the 1991 100.00 100.00 100.00
population share of PIES rural areas from 62 percent in 1988 to 50
percent in 1991. In contrast, the estimated rural population share Urban
1961 30.24
based on EPA was virtually the same-64 percent-during the 29.36 29.63
same period. 1965 26.23 23.86 22.69
The share of urban areas in total poverty ranges from 20 1971 23.64 20.53 19.01
percent to 44 percent, depending on the year and on the poverty 1985 32.32 31.52 30.79
measure employed (Table 25). The drop in the share from 1961 to 1988 29.53 27.64 26.46
1971 partly reflects changes in the definition of urban areas. On the 1991 40.81 41.28 43.45
other hand, the increase in the share from 1985 to 1991 resulted
mainly from the reclassification of rural into urban areas. Rural
1961
69.76 70.64 70.37
Characteristics of Urban Poverty 1965 73.77 76.14 77.31
1971 76.36 79.47 80.99
Metro Manila accounts for 28 percent of the total urban popu- 1985 67.68 68.48 6921
lation but contributes only about 15 percent of the urban poor and 1988 70.47 72.36 73.54
10 percent of the total poverty deficits of the urban population 1991 59.19 58.12 56.55
(Table 2.6). The region's head count poverty is the lowest in the
country; the average income deficit of Metro Manila's poor is also
the lowest among the regions, even after accounting for cost-of-liv-
ing differences. The popularly held view that urban poverty is a
"Metro Manila phenomenon" is thus not quite correct. 14 This is
significant considering that basic social services and poverty alle-
viation programs have tended to cluster in Metro Manila (see
Chapter 4). The highest incidence of urban poverty is found in Bicol
 POVERTY COMPARISONS AND CHARACTERISTICS / 35

Region and Northern and Central Mindanao. Bicol accounts for

about 10 percent of the total poverty deficits of the population,
while Northern and Central Mindanao account for 14 percent.

I
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Other major contributors to urban poverty are-Central Luzon,
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U sectors have been conventionally associated with urban poverty.15
C') ,0'QN-N-.4N-0(1
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ployed workers account for about two thirds of rural poverty.
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CO for barely 5 percent of the total urban poverty. This has ar impor-
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b0 (see Chapter 5).
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 POVERTY COMPARISONS AND CHARACTERISTICS / 39

large, shaped by the quantity (number of years) and quality of

0
schooling. Although there are still unsettled measurement issues,

available evidence points to a strong link between educational

$_._ u
attainment and poverty (Behnnan 1990a, Jimenez 1992). In urban
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o unfinished secondary education are included.

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secondary schools is visibly elitist.

00 0
Poor households are larger in size and generally younger than

- bc nonpoor households, as measured by income (or consumption)

U C)
I-.-
.4.-.
(I) 0) qqqoQLr per person. Household size tends to be inversely related with
I-. 16
U o p t- income per capita. In urban areas, the incidence of poverty is

U
highest among families with sizes exceeding 10 members. This
I-. c1jc -
.. bo group, however, contributes only at most 10 percent to observed
o
urban poverty. Households with 4 to 9 members contribute the

('1 d
4-. (C 00 single largest share (about 80 percent) to urban poverty. Of the
Lfl)
0) Cr urban poor households, deprivation tends to be greatest among
-o - c a '.0N. N
4.4.4 U those with high child-adult ratios (Balisacan 1991b); their members
4- -
—, 0 are less likely to live as long as the nonpoor. In many places, infant

and child mortality increases quite steeply with poverty (Lipton

1983: 15-18). This is not surprising since poverty tends to be more

U (C
4J .4-. .0 pronounced for households with low maternal education, little or
U
U 0 no access to safe water and health facilities, inadequate housing,
0
0) insecure tenancy and highly uncertain work.
>.'
I-. (I) —.
Parents of poor households are usually migrants from the most
-. - -d . .
cq
(C (C depressed regions of the country (Pernia 1978,1979; Herrin 1985;
Ln
-. 0) 41) bO0) (CC)
4-. Perez 1985; Luna et al. 1983). This migration accentuates the unem-
-
oo'- c •. U Q '-
L) >--d 0d ployment problem in urban areas, partly because employment

U opportunities in high-paying formal sector of the urban economy

4....'-
tv C: b,jbO0 are very limited owing to a variety of policy-related problems (see
(C
0)
-
— 0)
Chapter 5). The growth of the informal sector in urban areas can
U
I-
0
. 0 Z . L)
(C
thus been seen as a response to the deterioration in the employ-

'J)
ment prospects of the poor in formal sectors of the economy.

40 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
The proliferation of slums and squatter settlements has be-
come rampant in recent years. There are over 10 million .dwellers
in slums and squatter colonies in major cities nationwide; they
comprise 17 percent of the national population and nearly 40
percent of the entire urban population (Nuqui 1991:517). Children
constitute-A large proportion of slum dwellers. They, are most
vulnerable to unsafe sanitation, poor shelter, and limited access to
health and educational opportunities. The more visible of them are
seen making a living through a variety of odd jobs such as scav-
enging in dump sites, vending cigarettes or newspapers, begging,
washing or watching cars, or shining shoes. Reports of sexually
exploited children are common stories in popular dailies.
The characteristics of the poor noted above are, at best, only
indicative of poverty. Since some of these characteristics are partly
or wholly subject to choice by the households, one should not
interpret them as causal determinants of poverty. In Chapter 3
household behavioral equations are estimated to explain the vari-
ous factors accounting for the variation In'household earnings.
NOTES
1. See Ravallion (1992a) for an excellent discussion of these issues,
especially with reference to poverty measurement in developing
countries. See also Srinivasan (1990) and Atkinson (1987).
2. For a comprehensive survey on this issue, see Callan and Nolan
(1991).
3. In contrast, a welfarist approach to measurement of living standards
aims to base comparisons of well-being solely on individual utility
levels, as assessed by the individuals themselves. It can be argued
that while information on utilities will often have a role in the design
of poverty alleviation programs, it is often the case that policymakers
in developing countries put more weight on certain non-welfarist
goals such as adequate nutrition levels for the population. On this
issue, see Sen . (1979) and Dreze and Sen (1989).
4. The TWG's procedure of establishing the poverty line is an adapta-
tion of the Orshansky method, following Orshansky (1965). Daily
and monthly food thresholds are obtained by costing low-cost
menus by region and by area (i.e., whether urban or rural), which
meet 100% adequacy of the Recommended Dietary Allowance
POVERTY COMPARISONS AND CHARACTERISTICS / 41
(RDA) for energy (2,000 calories) and 80 0% adequacy for other nutri-
ents. Estimates of nonfood needs are based on the consumption
pattern of PIES (Family Incomes and Expenditure Survey) sample
families whose incomes f411 within 10 percentage points above and
below the food threshold. That is, to obtain the total poverty line
(food plus basic nonfood), the food threshold is divided by the
average propensity to consume (APC), defined as the proportion of
food to total expenditures, for these sample families. In contrast,
TWG's 1985 methodology uses the average consumption pattern for
all PIES sample families.
5. On this issue, see Haddad and Kanbur (1990).
6. See Foster (1984) for a review of the literature on aggregate poverty
measures. On the diversity of judgments concerning the measure-
ment of poverty, see Atkinson (1987). Foster and Shorrocks (1991)
characterize the class of subgroup-consistent poverty indices.
The Pa for a=2 hasbeen popular in recent empirical work owing to
its appealing properties. See, for example, Foster et al. (1984), Greer
and Thorbecke (1986) and Ravallion and van de Walle (1991).
8. The Bureau of Census and Statistics for 1961, 1965, and 1971; the
National Census and Statistics Office for 1985; and the National
Statistics Office for 1988 and 1991.
9. This does not suggest that there need be substantial loss of accuracy
in using grouped (aggregated) data for poverty comparisons. Aggre-
gate poverty indices are not very sensitive to the level of aggregation
of living standards. Ravallion et al. (1991), for example, have dem-
onstrated using Indonesian data that estimates of poverty obtained
from highly aggregated date (i.e., 50,15, 10, and 5 class intervals) are
comparable in magnitude with those estimated directly from unit
record data. We have performed similar sensitivity analysis using
unit record data from the 1988 PIES and have found this to be true
also for the Philippine data.
10. Personal income from the national income accounts includes in-
comes of nonprofit organizations besides households, and other
incomes. These incomes may account for 10-15 percent of the per-
sonal income in national accounts. The remaining discrepancy be-
tween the PIES and the national accounts is possibly due to two major
sources of underrepresentation in the PIES. One is the failure of the
PIES to draw a meaningful number of respondents from plush
subdivisions or residential enclaves of the rich. The other is the
failure to properly impute income-in-kind and consumption out of
household's own production. This is a common problem in practi-
42/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY

cally all household surveys in the Philippines as well as in many

other countries.
11 It should be noted, however, that, in PIES, the difference between
family income and expenditures is direct family savings, whereas in
NIA the difference includes direct taxes, transfers to the rest of the
world, social security, and statistical discrepancy.
12. These estimates are not directly comparable with those in Balisacan Chapter 3
(1992a). The latter employs the old official poverty lines which are,
on the average, 31 percent higher than those adopted in the present
study. However, in both studies, qualitatively similar results are
obtained. Labor Markets and
13. Based on data in World Bank (1990:45-48) and Quibria and Srini-
vasan (1992). Earning Differences
14. Estimates of urban poverty in Metro Manila and other urban centers
may be underestimated owing to the omission in PIES of families
without official and permanent residence. The poor families in slums
and squatter colonies are known to move a lot and are likely under- ustained increases in the earnings of the poor's only major
represented in the survey. S asset—labor—represent the long-term solution to poverty.
15 The "Others" sector in Table 2.7 represents 19 percent of the popu- This requires inducing employment growth in productive sectors
lation. However, there is an overrepresentation here owing to the
clustering of families whose sectors of employment were not de- of the economy, dismantling barriers to labor mobility, and im-
clared. proving the poor's access to social services such as education,
16. This relationship has also been observed in many other countries health, and nutrition. This chapter reviews the Philippine record
(Kuznets 1979, Birdsall 1980, Lipton 1983, Lipton and Ravallion with respect to these three areas. In comparison with the growth
1992). in labor supply and the performance of newly industrializing
economies in Asia, the Philippine experience would appear poor.
Specifically, this chapter describes the structures and charac-
teristics of employment (and underemployment), the patterns of
labor supply, ''migration" responses to labor market phenomena,
trends in labor incomes and productivity, aria the impact of gov-
ernment policies and programs on labor markets.

The Overall Picture of Employment

Employment generation in the Philippines is poor in relation

to the standards of the newly industrializing economies of East
Asia and of many developing Asian countries. This is significant
considering that the lack of opportunities for employment in pro-
ductive sectors lies at the core of the poverty problem in the
Philippines. As will be seen in the following discussion, in large

43
44/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY

part, public policies have created distortions that not only have
been inimical to sustainable growth but also have likewise been
adverse to the employment content of growth.
Figure 3.1 shows the output and employment shares of the 0
C 00 0 0 0
major sectors of the economy. The changes in the sectoral compo- 1 CD ' ('I 0
ition of aggregate output are in accord with well-known stylized E
patterns of development: the increase in the share of industrial
output and the fall in that of agriculture as per capita income rises
>
0 0
C
C) 3
(Chenery and Syrquin 1975). Industry's share rose from only one- CL C)
fourth of GOP in the mid-1950s to one-third in the early 1990s. This E
change took place mostly from the mid-1950s to mid-1970s when W
industry, particularly its manufacturing subsector, grew relatively
rapidly in response to economic incentives spawned by import-
substituting development policy. In the following period, from the C)
cm
mid-1970s to early 1990s, industry grew sluggishly; it even con-
traded in the first half of the 1980s when the economy succumbed
to its structural weaknesses, leading to its sharpest contraction
1 6.

since the Second World War.

The failure of industry's employment share to grow despite 0
0
I
the rapid expansion of its share in GDP meant that services, mainly p.-
UU
in the informal sector, and agriculture were the major sources of Cd 1•>.
ole
employment generation for the rapidly expanding labor force.
Unfortunately, in these sectors, labor productivity was relatively
low and declining (see below). Services accounted for 40 percent
I: -6.
(O
01
3

of output and also about 40 percent of total employment. Although

the shares of agriculture in output Sand employment were compa- E
0
C)
rable to those of other countries of similar income levels, the same
can not be said for services. In these countries, the average share 0
of services in national output was about 45 percent while its share 1I
in total employment was about 25 percent, thereby implying a a-
4-
much higher relative labor productivity.' It is apparent that, in the .2

o o 0 0 0 LI
0 C)
Philippines, a large part of the employment in services (as well as
in agriculture) reflects the sector's forced absorption of redundant
C.)
20
co a
workers, as well as a high degree of underemployment.
0
That labor productivity in agriculture is low relative to the rest 0 CD ' (II
of the economy is, of course, also a well-known pattern of devel-
opment (Syrquin 1988). The sectoral difference reflects differences
in the nature of production function, rate of technological change,
 LABOR MARKETS AND EARNING DIFFERENCES/ 47

and mobility of resources. The productivity gap may increase from

the early to middle stage of development. Thus, the transfer of
labor out of agriculture to more productive sectors would be
0 interpreted as an improvement in average employment situation
0 o 0 0 0
OD 40 1 0 and living standards of the employed population. Once migration
S and capital accumulation have significantly reduced labor surplus,
C relative labor productivity and wages in agriculture rise, eventu-
0 ally reducing the productivity gap between , this sector and the
3

I
I- >1
I- other sectors.
Figure 32 shows the trends in average labor productivity in
the three major sectors of the economy—agriculture, industry, and
services—since the mid-1950s. At least three major observations
'I- can be noted. First, average labor productivity in agriculture has
0 consistently been lower than that in industry and services. Second,
I-
1- 1
0 0 labor productivity in the services sector was comparable to that in
C 0 4-.
manufacturing in the latter part of the 1950s, remained virtually
1
I, 0 U
> U stagnant up to the 1970s, and then dropped in the 1980s, especially
>0E
1
a) 0 for the commerce subsector. This occurred in tandem with the
substantial increase in the share of the services sector in total
CL p.
employment—from 25 percent in the mid-1950s to 39 percent in
E the late 1980s. Third, although labor productivity in industry man-
w
'-0
LJ 0a
aged to rise in the 1960s and 1970s, the growth soon petered out
and labor productivity fell for the most part of the 1980s. Average
I- labor productivity in industry in 1986-1991 was even lower than
4-.
I0
0 during the economic crisis of 1983-1985. Thus, unlike newly indus-
trializing economies whose historical patterns show that the pro-
ductivity gap was narrowed down by capital accumulation and
technological change in agriculture, the reduction in productivity
gap (at low level of development) in the Philippines was achieved
4-
not by relatively rapid growth of labor productivity in agriculture
C WD but by the prolonged drop of labor productivity in industry.
S
2S
0
0 0 00 0 0
O
I-.

11 Exacerbating the poor performance of the economy in gener-

ating productive employment opportunities has been the rela-
tively rapid expansion of the labor force.2 By international
standards, the growth of the labor force was high, averaging 32
percent a year in 1967-1976 and 3.7 percent in 1977-1990 (Table 3.1).
The unusually high growth rate of the working-age population in
1967-1976 (averaging 31 percent a year) partly contributed to the


Table 3.1
Labor Force Participation Rate and Average Annual
Growth Rate of GDP, Labor Force and Employment
I

1967- 1977- 1980-

1977 1979 1990

I
Labor Force Participation
C Rate a! 52.00 62.00 64.00

Growth Rate -

GDP 539 1.71 1.12

4f
Working-Age Population 3.72 2.81 2.90

Labor Force 3.19 3.71 3.67

CO
I-

Employment 3.68 3.36 323

I-
a •

.2<
L. a
Agriculture 3.03 229 2.19
P.
Cj
CD
Industry 4.62 5.47 5.41

(Manufacturing) 520 238 2.56

0

Services 5.14 4.77 5.10

CL
0

a! Labor force as percent of working-age population.

a
0
<(0 Note: For the period 1971-1976, the reference period is past
I- week and working age" refers to 10 years and above;
I- •-
for the period 1977-1990, the reference period is past
quarter and "working-age' refers to 15 years and above.
Sources: NEDA, Philippine Statistical Yearbook, various issues.
NSO, Integrated Survey of Households Bulletin,
various issues.
50/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY

high growth of the labor force during this period. Labor force
participation rates also rose, particularly among female members,
from 52 percent in 1967-1976 to 62 percent in 1977-1990. 3 Working-
age population growth slowed down to 2.8 percent a year during
1977-1990, but labor force participation remained high throughout
the 1980s. 0
G
The combined forces of rapid labor force growth and slow pace
of employment generation in productive areas created a large pool
of unemployed and underemployed workers. Diminishing returns
in agriculture pressed laborers to move out from the farm to rural
nonfarm as well as urban areas. This tended to depress real wages
outside the farm, especially those of unskilled occupations in the
0
informal services sector. As Figure 33 shows, the generally declin-
Cl)
ing labor productivity in the services sector was matched by falling '3) 0
real wages for both skilled and unskilled workers. Moreover, 0
although real wages in agriculture were lower in the 1980s than in
the late 1960s, the drop was not as sharp as those for skilled and
unskilled workers. This implies that the unskilled and skilled

I
c3) C
occupations outside the farm were the ones which bore a larger I-
proportion of the adjustment on real wages.4
Legislated minimum wages also declined for the most part of
the 1970s, rose in the early 1980s, and fell again until 1987 (Figure LL
a
3.4). These wage laws, however, have not been effectively enforced as
and have affected only formal, large establishments in urban areas, '3, CA

especially in Metro Manila, where there are well organized labor a:

unions (Reyes et al. 1989). The difficulty of enforcing the various
laws has arisen not because the government's machinery was
unable to cope with the task, but because the workers themselves
saw it fit to accept a job, even without the benefit of higher wages,
on account of the high number of unemployed and underem-
ployed workers. Moreover, legislation on minimum wages has
allowed numerous exemptions (e.g., to firms which employ work-
0
0

I0

ca
C
C

a
C
I
ers through tenancy or leasehold arrangements and to export-ori-
ented or labor-intensive firms established outside Metro Manila)
and has largely left the initiative to grant wage adjustments to
private firms (Tidalgo and Esguerra 1982:111). Employers likewise
have resorted to practices effectively circumventing labor laws
(e.g., hiring on a casual basis).
 LABOR MARKETS AND EARNING DIFFERENCES! 53

Interestingly, while employment growth was persistently

lower than output growth in the 1970s (the implicit employment
elasticity with respect to output for this period was close to 0.65),
such was not the case in the early part of the 1980s. Employment
expanded at an extraordinarily high rate of 35 percent per year in
0 1981-1985 even though GDP contracted by an annual average of
1.9 percent. However, the number of underemployed workers was
high, averaging 27.2 percent of the total labor force during the
U) period (in contrast with the average of 20.7 percent in 1976-1980).
ci) Moreover, the expansion took place in low, productivity areas,
C.) mainly the informal services sector.
-D 2 The economic recovery in 1986-1989 which boosted GDP
C growth to an annual average of 55 percent led to an expansion of
* employment, although at a rate hardly sufficient to absorb new
1) co a- entrants to the labor force. Thus, the open unemployment rate
0) ,- '.w C
continued to increase from about 4.6 percent in the 1970s and 62
percent in 1983-1985, to 8.6 percent in 1986-1989. By the turn of the
CD

ci) CD 1990s, the economy succumbed to devastating domestic events

I-
E 0
and unfávorable environment for trade and finance—coup at-
tempts, destructive earthquakes and volcanic eruptions, pro-
0)
U- E Im
longed droughts, floods, Gulf crisis, recession in the country's
trading partners, and massive net resource outflows arising from
C foreign debt servicing. In 1991, GDP growth was virtually nil, and
0 the number of the underemployed swelled from 4.87 million in
0
1987 to about 5.08 million in 1991.
I... =. • As shown in Chapter 2, the incidence of poverty declined
ci) between 1961 and 1988 despite the overall fall in real wages. Other
than the slight reduction in income inequality in the 1980s, two
0
0
I-
other factors partly explain the decline in poverty—the increased
cl — Z1 0 participation rate of the labor force, particularly among women,
I-.
0) and the substantial rise in the share of non-wage, non-en-
1 CY
trepreneurial incomes in total household incomes. Comparable
estimates of labor force participation rates rose from 60 percent in
N T11 T11
the mid-1970s to 65 percent in the late 1980s. Based on the various
rounds of the Family Income and Expenditures Survey, the share
of rent, remittances, gifts, support assistanee, and relief in total
household incomes ballooned from only 17 percent in 1961 to 32
percent in 1985, 27 percent in 1988, and 28 percent in 1991. The

54/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY
proportion of households mainly dependent on these incomes rose
substantially from about 5 percent in 1961 to 19 percent in 1985 and
16 percent in 1988. Finally, the proportion of families reporting
remittances, support assistance and relief quadrupled from 22
percent in 1961 to 88 percent in 1985.
It bears noting that the trend of persistent declines in real
wages coupled with the rise in per capita income was rather unique
to the Philippines. In the post-World War II experience of Asian
countries, especially Taiwan and South Korea, growth was accom-
panied by rising real wages in agriculture and industry, even when
there was considerable unemployment (Oshima et al. 1986: 151).
This occurred not because these countries had effective laws on
minimum wages, but because labor productivity growth and em-
ployment expansion accompanied the growth of their GDP per
capita. Government policies in the Philippines, on the other hand,
tended to undermine both productivity growth and the generation
of employment opportunities for its expanding labor force (see
Chapter 5).
Characteristics of Urban Labor Markets
The share of the urban sector in total employment increased
considerably from only 30 percent in the early 1970s to 36 percent
in the late 1980s and 47 percent in 1991 (Table 3.2). The increase
was due partly to rural-urban migration and partly to the shifting
over time of geographical areas from rural to urban as population
and/or economic activity expanded over time.5
As in most developing countries, the most striking difference
between the urban and the rural labor market in the Philippines is
the extent of urban unemployment. Visible and measurable unem-
ployment in urban areas is about twice that in rural areas (Table
3.2). Urban unemployment hovered at around 8 percent in the
1970s, then rose to 12 percent during most of the 1980s. The rate is
particularly high among the young members (aged between 14 and
25) of the labor force, especially among high school and college
graduates (Table 3.3): In the late 1980s, about 23 percent of workers
with at least a secondary education were unemployed; the corre-
sponding figure for workers with little education (at most elemen-
tary education) was only 7 percent. This suggests that open
LABOR MARKETS AND EARNING DIFFERENCES! 55
unemployment is an unsatisfactory indicator of poverty since only
those with alternative income sources can afford to remain without
work. What it highlights is the economy's inability to generate
attractive employment opportunities for schooled entrants into the
labor force.
High open unemployment among the highly schooled groups
exerts a downward pressure on the wages of not only skilled
workers but also the poor with little or no education. However, this
does not deter private investments in higher education. Indeed, as
shown below, private returns to higher education are high, par-
ticularly among wage and salary workers.
Underemployment is a better indicator of labor's economic
condition. As shown in Table 32, underemployment rose from
about 18 percent in the late 1970s to 29 percent in the mid-1980s
and then fell slightly to 23 percent in the late 1980s. In 1991, one in
every five employed laborers desired longer working hours and
was classified underemployed. The rates are higher for rural areas
than urban areas, but the trends are essentially the same. This
disturbing situation reflects increasingly limited opportunities for
productive employment.
The participation of nonprime-age children in the labor market
is less common in urban areas than in rural areas owing in part to
the greater incidence of poverty in rural areas and in part to the
seasonal nature of agricultural production in a monsoon-depend-
ent agrarian economy. The seasonality of production causes steep
shifts in the demand for farm labor. These shifts are particularly
pronounced during planting and harvesting seasons. In poor
agrarian economies, farm households tend to meet this demand by
drawing on their own pool of labor resources, including those of
the children and adult female members. One reason for this pref-
erence is the relatively high transactions costs involved in hiring
and supervising hired workers, i.e., the supply price of own family
labor is less than the effective unit cost of hired labor. Another
reason is the high cost of operating capital due to limited access by
small farm households to formal credit channels.
Urban labor markets are often described as consisting of for-
mal and informal subsectors. The dividing lines are not always
dear, but attributes gven to the informal sector include ease of
 0- CO
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60/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY
entry, low capital-labor ratio, restricted access to credit, limited
capacity for accumulation, dominance of self-employment, pro-
duction of low-quality goods or services, and lack of official regis-
tration. These attributes are by no means coincident or universal,
and as a result there are many "informal" sectors with varying
levels of production capacity, labor intensity, productivity, and
organization.6
Nonetheless, popular views have associated the urban infor-
mal sector with low wages (or earnings) vis-á-vis the formal sector.
While wages in the informal sector are competitively set (i.e.,
determined by supply and demand) owing to ease of entry, insti-
tutional factors prevent wages in the formal sector from being bid
down by low-income workers in the urban informal sector. Be-
cause of the wage differential, workers queue for formal sector
jobs. These views are best exemplified by the Harris-Todaro model
of migration. This model assumes that the urban informal sector is
predominantly a "parking lot" for rural migrants while they search
for jobs in the high-wage urban formal sector. Moreover, the model
assumes that migrants are gamblers who hope to take advantage
of expected wage differentials between the rural sector and the
urban formal sector.7
Empirical research in developing countries provides little sup-
port to these assumptions (Mazumdar 1987, 1993; Williamson
1988). What is increasingly being shown is that an average worker
is as likely to move in the direction of the informal sector rather
than the other way around. The reason is that some segments of
the informal sector require capital investments. A worker in a
high-paying formal sector may thus build up savings and set
himself up as an independent entrepreneur in middle years. Avail-
able evidence also reveals that risks of migration have become an
important consideration and that high risks serve to deter labor
movement. Thus, labor migrants typically do not come from the
poorest villages or the poorest households, but rather from more
prosperous villages or from households with some assets. These
migrants also tend to get high-wage urban formal jobs at a shorter
waiting period.
The graduation of workers from the low-paying informal sec-
tor to the high-paying formal sector in urban areas is thus limited.
LABOR MARKETS AND EARNING DIFFERENCES/ 61
Indeed, the increasingly accepted view is that urban labor markets
are segmented, possibly leading to perpetuation of large differ-
ences in earnings between the two sectors. While institutional
factors may be important (e.g., minimum wage legislation and
labor unions), economic factors may necessitate labor market seg-
mentation. First, there may be incentives for employers to increase
wage rates rather than hire extra workers from low-wage informal
sector if wage increases result in greater efficiency. Second, if urban
employers perceive a strong link between efficiency and stability
of labor supply, they may offer wages high enough tar attract
permanent (family) migrants whose supply price is higher than
that of transitory (individual) migrants. The relatively high supply
price for the former is due to high transactions costs of resettling a
family as well as opportunity costs associated with the family's loss
of farm income. In firms or sectors where stability is not an impor-
tant consideration, offered wages are relatively low and the takers
are expected to be transitory migrants.
Third, the costs of learning new work skills may be high, and
since specialization tends to rise with firm size, there may be a
positive relationship between wage level and firm size. This sug-
gests that once a stable labor force has been formed, it could be
costly to replace them with the "reserve army" of workers from the
urban informal sector. Finally, internal labor markets may be well
developed in medium and large firms. That is, new workers are
recruited principally to fill up positions in the bottom of the organ-
izational ladder, while vacancies at higher rungs of the ladder are
filled up by current employees. The savings from on-the-job train-
ing costs as well as efficiency gains induced by the presence of
opportunities for vertical mobility within the firm could be strong
incentives for employers to limit their search of workers for high-
pay positions within the organization.
The difficulty in defining what constitutes an informal sector
has been noted. In practice, data availability dictates the choice of
definition. One common practice of ascertaining the magnitude of
the informal sector is to deduct estimates of employment in large
enterprises from estimates of the employed labor force. The latter
is obtained from household surveys, while the former is typically
estimated from surveys of establishments. In the Philippines, large
62/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY

enterprises are defined as those employing 10 or more workers.

Based on this approach, the informal sector in the Philippines
accounts for 82 percent of nonagricultural employment (Table 3.4).
While this share was virtually constant from 1983 to 1988, the
C14 C 14 LO
sector's share in nonagricultural income rose from 46 percent in C7*'
k
1972 to 55 percent in 1983 and 1988. However, despite the rise in LO
income share, real value added in the informal sector was lower in 2
1988 than in 1983. The number of employed workers in this sector, a
on the other hand, rose by 14 percent. Consequently, average labor
productivity dropped by 14 percent during the period (panel a of
Figure 35). 000-4—
0 N. N N
'c0'c
N.
q 0
Labor productivity in the formal manufacturing sector also Cn ON Cn LO 00 U)
00 N 0
tended to fall from 1983 to 1988. Interestingly, the extent of the fall a'
-4 ON r-4 00
4..
I-
was inversely related with firm size (panel a of Figure 35). Earn- 0
ings per worker also tended to increase with firm size (panel b), 1.40
U;.. •1
- 0....A
partly reflecting the greater work skills required in large firms. CD 00 U-•
In-i
The available data do not provide a breakdown of the informal N
sector into its urban and rural component. One due to the size and U 0 .00
U 4N -
. - .
changing composition of the urban informal sector is the type of a'
-4
0O0
In 4
I- a
0.4
employment. Employment in the urban informal sectqr is typically N 0
dominated by own-account and unpaid family wOrkers. A rise in
8 a'
-4 — 4..
the share of these workers in total employment could be seen as a .4-.
E
.0 .0
deterioration in employment quality since these types of jobs are 4 .4_• u
viewed as employment of last resort (Gregory 1980; Harris and Q) U
U

Rashid 1986). In urban areas, the share of own-account workers in a a •Tj 0.. 0..
.E a
total employment increased from 24 percent in the mid-1970s to 30
percent at the turn of the 1990s (Table 3.5). The growth of own-ac-
w . U E . 4..
count workers was particularly rapid (8 percent per year) in the I-
15-
I

I'
; •U
1980s when overall GDP growth was way below population I U 0.-
growth (Table 3.6). About two-thirds of them were in the low-pay- U .-
ing services sector. Unpaid family workers also increased sharply .< U
- b0 I.. 4r
in the first half of the 1980s when the worst economic contraction 0
I..
U
in postwar years set in. -402
- .
Note that urban wage and salary workers also continued to o—— g
U
grow in the 1980s at 5.8 percent a year, a rate greater than the
average annual growth rate (32 percent) of the labor force. This
suggests a relatively rapid rate of migration of workers from rural
to urban areas in the 1980s. Indeed, rural labor force growthwas
 OD

Cl)
Cl)
0
E 0
E
I-
.0 co
0 U-
I-
>
.0
4..
V
C
.0
I

U o
co . .. I
CO

c
2>•0co
CL
0)

C
oco OEs C
o LO
I.-
coco
'., w —c
c
E
o
11111"
-
w
- C
• .0
IE

o C
C) — cis It
.iTL 0
UL > PL
a,
oj E
C, 00
> 00
4-,
g
It

>
C., oc 0)
1 CL
0
0 Ul

0
•0
I.-
0
a. 0
0 •0
0 I.- 0
0. 60 0 to 10 C a - a
0 —o I.-

-o0co
in V 0
0
-J a, I-
0
—j
I— 4- - .0

'0 0 ID 0 ID
.- —j


Table 3.5 Table 3.6
Employment Shares by Type of Workers a! Growth Rates of Employment by Type of Workers

1974 1980 1985 1990

1971- 1977- 1980-
1977 1979 1991

A. Urban Areas 100.00 100.00 100.00 100.00 A. Urban Areas

Wage and Salary Workers 69.14 70.65 62.96 63.94 Wage and Salary Workers 5.56 539 431
Own-Account Workers 23.75 22.47 28.95 29.97 Own-Account Workers 2.45 7.84 938
Unpaid Fanily Workers 7.11 6.88 8.09 6.10 Unpaid Family Workers 6.49 539 533

B. Rural Areas 100.00 100.00 100.00 100.00 B. Rural Areas

Wage and Salary Workers 25.92 30.01 3352 35.49 Wage and Salary Workers 5.67 4.02 4.04
Own-Account Workers 43.70 44.49 44.75 4453 Own-Account Workers 15.40 2.64 225
Unpaid Family Workers 30.39 25.49 21.73 19.98 Unpaid Family Workers 4.70 3.85 -0.19

C. Philippines 100.00 100.00 100.00 100.00 C. Philippines

Wage and Salary Workers 39.09 42.24 43.84 45.73 Wage and Salary Workers 5.61 3.80 4.17
Own-Account Workers 37.62 37.87 39.21 3928 Own-Account Workers 1.71 3.81 3.84
Unpaid Family Workers 23.29 19.89 16.95 14.98 Unpaid Family Workers 4.89 1.01 0.51

a! Three-year averages centered on the year shown, except Sources: NSO, Integrated Survey of Households Bulletin,
for 1990 which is a two-year average. various issues.
Sources: NSO, Integrated Survey of Households Bulletin,
various issues.
 68 / POVERTY, URBANIZATION AND DEVELOPMENT POUCY
barely 2percentayear in the 1980s, while the growth in urban areas
was about 8 percent a year. Noteworthy is the contraction in the
number of unpaid family workers in rural areas in the 1980s, their
share in total rural employment dropped from 30 percent in the
mid-1970s to 20 percent at the turn of the 1990s. Tables 35 and 3.6
do not, however, suggest that the migration of rural unpaid family
workers to urban areas accounted for the swelling of the ranks of
own-account and unpaid family workers in urban areas. The avail-
able data do not allow for a matching of reported job types in urban
areas with origins of workers.
Earning Differences: An Econometric Analysis
In this section, we estimate household behavioral equations in
an effort to explain the various factors accounting for variations in
household earnings. Workers are assumed to choose from among
competing occupational alternatives at least in part on the basis of
anticipated incremental returns. The fact That a person chooses a
given alternative suggests that he has tangible basis for perceiving
a more favorable return than those who choose otherwise. This
implies that workers tend to be non-randomly distributed within
the population as a whole. Thus, observations on wages or earn-
ings in a particular occupation may not convey much information
about what other workers would earn in that occupation. Put
differently, estimates of the impact of certain worker attributes on
wages or earnings based on sector-specific samples may be bi-
ased.9 In this study, a switching regression technique is employed
to control for the selectivity bias inherent in the choice between
self-employment and wage/salary employment. The technique
involves incorporating appropriate "selectivity variables" into the
earnings functions. The empirical model is described in Appendix
C.
The earnings functions have the standard Mincerian form
(Mincer 1974), regressing the logarithm of earnings on education,
experience, and other exogenous variables. Education is measured
by years of schooling of the household head. Experience is proxied
by the household head's age. This variable is entered in the regres-
sion in quadratic form. Regional indices for access to electricity and
markets are included to capture the location effects of physical
LABOR MARKEFS AND EARNING DIFFERENCES! 69
infrastructure on productivity and earnings. The variation in earn-
ings among self-employed is expected to be influenced by their
endowment of household assets, both physical -and financial. Pre-
sumably, the presence of these assets facilitates access to working
capital, especially in the formal financial sector. Rental incomes are
assumed to adequately represent (predetermined) ownership of
these assets.
The data source is mainly the urban panel of the 1988 Family
Income and Expenditures Szrvey of the National Statistics Office.
Supplementary data on road density and electricity were obtained
from other government offices. Self-employed workers are defined
as those who are employed in own farm or business without any
employee or who are employers in own family-operated business.
Wage and salary workers include all those who work for private
employers or for government (including government corpora-
tions). Respondents who do not report their mode of employment
are excluded from the sample. The total sample consists of 4,365
wage and salary workers and 2,567 self-employed workers. Table
3.7 gives the definitions and means of the variables, and Table 3.8,
the parameter estimates of the earnings equations.
Rates of return to secondary education are generally low, at
least for urban households. For both modes of employment, earn-
ings of workers who had attended or completed high school are
not statistically different from those with only primary education
(whether completed or not), all other things remaining the same.'°
Even wage and salary workers who had attended (but not com-
pleted) tertiary education have earnings not statistically different
from those who did not reach college. This is not the case, however,
for self-employed workers; those who had attended college had
higher earnings than those who had not. On the average, the
earnings of self-employed workers who completed college are 43
percent higher than those who only attended (but not completed)
college and 88 percent higher than those who had only primary
education. The rates of return to tertiary education are higher for
wage and salary workers than those for self-employed workers.
This is consistent with the screening model of education (see Riley
1979). In this model, if screening is present, rates of return to
screened workers (wage and salary workers) are higher than for
 Table 3.7 Table 3.8
Variable Definitions and Means Earnings Equations Corrected for Selectivity Bias,
Urban Households
(t-values in parentheses)
Mean
Self-Employed Wage and Salary
Variable Definition Self- Wage and Workers Workers
Employed Salary
Workers Workers
EDUCATION 1 0.213 0.746
EDUCATION 1 1 if attended or 0.073 0.046 (1.40) (138)
completed high EDUCATION 2 0.369 1.027
school, 0 otherwise (2.00) (1.81)
EDUCATION 2 1 if attended 0.065 0.042 EDUCATION 3 0.629 2.148
college, 0 otherwise (225) 3.51)
EDUCATION 3 1 if completed 0.824 0.895 AGE 0.059 0.108
college, 0 otherwise (5.49) (3.65)
AGE age of the house- 50.151 44.964 AGESQ -0.0007 -0.0016
hold heady (-4.67) (-3.78)
AGESQ
AGE squared 2,746.1 2,227.0 SEX 0.500 1.063
SEX 1 if household 0.755 0.830 (2.82) (3.85)
head is male, ASSETS 0.109
0 if female (335)
ELECT
proportion of muni- 0.962 0.971 ELECTRICITY 0.678 4.172
cipalities with (.82) (2.94)
electricity ROAD 0.379 0.869
in region of residence (1.90) (421)
ROAD
road density in 3.169 3.316 SELECTIVITY 0.443 4.260
region of residence, (.50) (3.46)
in natural logarithm Constant 5.572 -3527
FMSIZE
family size 5.247 5.309 (10.61) (-1.16)
ASSETS household assets 9.125 8.907 R2 0.126 0.173
EARNINGS earnings from employ- 9.864 10.328 F-value 36.82 101.04
ment in natural logarithm

Number of

observations 2,567 4,365
72 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
unscreened workers (sell-employed). Note, however, that the in-
tercepts are substantially higher for the self-employed.11
Earnings-experience profiles are flatter for the self-employed
workers than for the wage and salary workers. This suggests that
the earnings of the latter peak earlier than the former.This finding
is consistent with Lazear and Moore's (1984) conjecture and Fujil
and Hawly's (1991) results. Lazear and Moore argue that princi-
pal-agent problems are less serious for self-employed than for
wage and salary workers. Thus, to reduce incentives to shirk,
employers tend to offer wage and salary workers steeper experi-
ence profiles, underpaying them for the first few years and then
overpaying them later.
Earnings tend to be higher for urban male workers than for
female workers, regardless of the mode of employment. This
seems inconsistent with the observation made in Chapter 2 show-
ing that households headed by male are, on the average, poorer
than those headed by female. That observation does not control for
sex differences in terms of educational attainment and other char-
acteristics. What is disturbing, however, is the magnitude of earn-
ing differences. Among self-employed workers, earnings are 65
percent higher for male worker. The difference is 189 percent for
wage and salary workers.
As expected, assets positively influence earnings of self-em-
ployed workers. A 10 percent increase in assets raises earnings of
self-employed workers by about 11 percent.
The infrastructure variables are significant and positive in the
wage and salary regression, while they are insignificant in the
self-employment regression. The latter result is surprising consid-
ering that earnings from self-employment in urban areas are pre-
sumably more electricity-depeident than wages and salaries.
Note, however, that the 1988 PIES data used,in the analysis encom-
passed a period of high-interest rate regime. The high cost of credit
could have affected more severely self-employed workers with
high capital utilization. Since capital intensity of production is
plausibly related with the level of infrastructure development, the
high interest-rate regime could have diminished considerably the
influenceof infrastructure variables in explaining the variation of
earnings among the self-employed.
LABOR MARKETS AND EARNING DIFFERF10ES/ 73
Also of interest are the estimated coefficients of the selectivity
variables. In the self-employment equation, the coefficient is insig-
nificant, while it is positive and significant in the wage and salary
equation. This result lends support to the hypothesis of self-selec-
tion, at least as it pertains to wage and salary workers from the
population. It may be interpreted as supportive of the notion that
wage and salary workers in the population choose this mode of
employment because they fail to perceive more favorable earnings
elsewhere.
The final step in the analysis is the probit estimation of the
structural decision equation (see Annex Q. Consistent estimates
of the parameters of the earningsquations are used to obtain fitted
values of (the logarithm of) earnings, which are then inserted into
the structural decision equation. To avoid collinearity problem,
exogenous variables which are included in the earnings equations
are excluded in the structural decision equation. Hence, only fam-
ily size and log-earning differential are included in the structural
decision equation. The family size variable is a proxy for the ability
of the household to diversify its sources of labor. incomes. Both
variables are expected to have a positiie effect on the decision to
choose wage and salary employment over self-employment.
The resulting maximum likelihood estimates are given in Ta-
ble 3.9. Both variables have the expected signs. Of particular inter-
est is the significant and positive value of the coefficient of
log-earning differential, thus lending support to the hypothesis
that large expected gains increase the probability of workers choos-
ing wage and salary employment over ñelf-employment.
In summary, the analysis suggests that educational attain-
ment, job experience, physical assets, and access to physical infra-
structure considerably influence worker earnings. Hence,
considerable improvement in the access of the poor to human
capital development as well as physical infrastructure represents
a key avenue for poverty alleviation. Yet, as will be discussed in
Chapter 4, government policies and programs have provided lim-
ited opportunities for the expansion of their access to basic services.


Table 3.9 LABOR MARKETS AND EARNING DIFFERFNCES/ 75

Probit Estimates of Structural Decision Equation

NOTES

Coefficient t-value 1. Based on figures from the World Bank's World Development Report
and ILO's International Labour Statistics.
2. The basic source of labor force data is the Integrated Survey of
FMSIZE 2.159 8.78 Household (ISH) which has been conducted on a quarterly basis
since 1976. Before 1976, the working age population includ4 those
who were 10 years and older; since 1976, the age limit has been 15
EARNINGDIF a! 1.172 15.99 years and above. Also, in 1976, the period of reference for the
questionnaire was changed from a week to a quarter of a year. The
Constant 1.422 1051 change understandably increases the relative size of the employed
because of the greater likelihood that one would have worked for at
Chi-squared 9,030.4 least an hour during a period of three months compared to a week's
period. These two major changes have probably resulted in the
underestimation of unemployment in the.1980s compared with the
1970s. Tidalgo and Esguerra (1982: 63-69) noted, for example, that
a! lnY - lnY,, where lnY., and lnY are predicted for the period 1976-1978, employment figures based on a reference
quarter were consistently higher than those based on a reference
earnings (in natural logarithm) of wage workers week. Similarly, one would expect a higher underemployment rate
and self-employed workers, respectively. when the estimate included the 10-14 age group than when the
youngest group of the labor force is excluded. This should be borne
in mind in interpreting the data.
The increase in female labor force participation rate can be explained
partly by the decline in real wages in the 1970s and 1980s. As wages
had been falling, females, especially housewives, and the elderly
entered the labor market in order to maintain family incomes.
Oshima et al. (1986:160) noted that the average number of earners
per family rose from 1.83 to 2.0 in the 1970s. This, in turn, might have
accentuated the fall in real wages as the rise in the female participa-
tion increased labor supply. Another factor that facilitated female
participation in the labor market was the work opportunities opened
up to them during the 1970.
4. Lal (1986) provides a systematic explanation of the movements of
real wages in the Philippines in terms of the standard trade-theoretic
Stolper-Samuelson-Rybcznski model.
The reclassification of physical areas takes place only after each
decadal census of population, not every timea labor force survey is
conducted. For example, the rural-urban classification of physical
areas used in the labor force survey from 1981 to 1990 was based on
the 1980 Census of Population. The Labor Force Survey in 1991, on
76/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY
the other hand, used the urban-rural classification based on the 1990
Census of Population.
6. Mazumdar (1993) provides a lucid description of the functioning of
urban labor markets in developing countries. For descriptions on the
link between labor market access and urban poverty, see Rodgers
(1989).
7. Because of ease of entry, the wage in the urban informal sector is
determined by earnings in the rural sector, since urban labor markets
are fed by rural migrants. See Mazumdar (1987) for an exhaustive
discussion on rural-urban migration. See also Williamson (1988) and
Stark (1991).
8. Own-account workers include those who operate their own business
and do not employ paid workers in the conduct of their economic
activities, as well as those who employ one or more paid employees
in the operation of their business or trade. Self-employed workers
are included in this category. Farmers and small retail (sari-sari store)
operators constitute the most common type of self-employed per-
sons. Unpaid family workers, on the other hand, are members of the
family who assist another member in the operation of the family farm
or business enterprise and who do not receive any salary or wage for
their work.
9. This "selectivity bias" problem is likewise recognized in past studies
on returns to schooling (e.g., Willis and Rosen 1979), migration
(Nakosteen and Zimmer 1980), and labor force participation (Singh
et al. 1986). On self-selection and choice of employment, see Sumner
(1981), van der Gaag and Vijverberg (1988), and Fujii and Hawley
(1991). For a general survey of the conceptual and measurement
issues on household decisions, see Strauss and Thomas (1992).
10. Household heads who had only attended or completed primary
education are the control variable.
11. These results do not discount for the possibility that skill (produc-
tivity) differences rather than differences in schooling input, deter-
mine earning differentials (see Boissiere et al. 1985). Our data do not
allow us to include measures of basiccognitive skills—reading,
writing, and simple arithmetic—as well as school quality. The hu-
man capital theory predicts that it is these variables, rather than years
of schooling per se, that will determine earning differentials.
Chapter 4
Access to Basic Needs and Services
o in the education and health of the population
F have positive effects on productivity, entrepreneurial skill, and
technologicaI innovation which ate crucial to building a dynamic
economy (Schultz 1981). For the poor, these improvements repre-
sent the main avenue for increases in returns to their only major
asset-4abor--as well as for the accumulation of income-generat-
ing physical assets. The stimulus that these improvements provide
to their human capital is even stronger if complementary invest-
ments in physical infrastructure (transport, electricity, water,
waste disposal facilities) are adequate and accessible to them.
It is often presumed that governments need to intervene in the
provision of basic needs, such as education and health, and serv-
ices, such as physical infrastructure. The basis for intervention rests
on either one or all of the following notions of "market failure."
First, there are social benefits (external effects) that make public
provision more efficient than private provision. For example, edu-
cation instills personal discipline, citizenship and work values;
facilitates market and nonmarket transactions, thereby increasing
overall productivity of workers; and reduces fertility rates, thus
easing population pressure. Second, individuals undervalue re-
turns to health care, education, and infrastructure. The under-in-
vestment arises because of lack of information about the benefits
of these services; there may also be problems in acquiring informa-
tion about user preferences and in excluding nonpaying users of
77
78 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY

these services. Finally, meeting non-economic objectives, such as

reduction in poverty, may justify government intervention.
This chapter examines the access of the urban poor to basic
needs and services aswell as the cases for (or against) government 0

interventions in health, education, housing; and physical infra-

structure in the Philippines. q
1-4 1-4
Health and Nutrition . E
. U
. ,
Several studies have demonstrated the important link between 00
N t1% a
ON N
— -
health and nutrition, on the one hand, and productivity and in- —
come, on the other. In general, these studies suggest that "at least
for poorer individuals in developing countries, improvements in
health and nutrition ... have a positive effect on labor productivity
and income" (Gertler and Rahman 1993:7). While much of the
I -
IC)

oQ

CI
1-4

0'. zE
0(5

evidence has been based on rural households, available studies on 0.

'-4
'-4 N
urban household behavior in few developing countries confirm the
00
generally positive relationship between health and wage.' Thus, .5 .
I-
health and nutrition programs, when they are properly targeted, IS 15 -
4

alleviate both the consequences and causes of poverty. 41 0 ' 5-

I-.
(5
I is
I
41 (5
Aggregate health indicators for the Philippines show consid- 4-

erable progress in the health status of the population. Infant mor- h2

I P9
i
tality, a sensitive indicator of the general health condition of the bo
population, dropped from 84.8 per 1,000 live births in 1970 to 632 5-
'4-
in 1980 and 515 in 1989. Life expectancy at birth also increased 0 .

from 61 years in 1978 to 64 years in 1988. Indicators of malnutrition 41

±
0
bO
among preschool children also indicate similar progress, except 41
41 41
15
(5
during the mid-1980s, a period characterized by sharp economic
'4- '4- .b c, u
downturn, when these indicators showed worsening nutrition 0 0 41

status of children.2 The overall prevalence of acute malnourish-

ment among preschool children (0-6 years old), based on weight- U III
for-height standard, fell from 13.8 per 100 children in 1978 to 9.5 in
1982, increased markedly to 12.7 in 1987, but subsequently fell to
LO
9.0 in 1989-1990 (Fable 4.1). The incidence of underweight pre- Ir

school children also dropped from 21.9 per 100 children in 1978 to
14.0 in 1989-1990. The considerable increase of malnutrition during
an adjustment period has an important implication for the design
of adjustment policies; this will be discussed in Chapter 5.
80 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
Compared to other low-income countries, the Philippines'
health status has seen little improvement. The record was much
better for China, Sri Lanka, and Viet Nam where infant mortality
rates are lower than would be predicted for them on the basis of
income per capita (World Bank 1992).
- The aggregate picture, however, masks substantial differences
in the health status of the population by region and socioeconomic
groups. Infant mortality in 1989-1990 ranged from 35.4 per 1,000
live births in Metro Manila to 101.1 per 1,000 live births in Central
Mindanao (Table 42). Life expedancy at birth was lowest in Min-
danao regions (55 to 59 years) and highest in Central Visayas,
Metro Manila, and Central Luzon (67 tO 68 years). While regions
with high per capita income tendëdto have low prevalence of child
malnutrition, the correlation was rather weak. Metro Manila, for
example, had the highest per capita income, but it was second to
Bicol Region (the poorest region) in terms of the prevalence of
malnutrition among preschool children, implying their disadvan-.
taged positiondespite, perhaps because df, living in large cities.
Contrary to common belief, the prevalence of undernutrition
among preschool children lends to be virtually the same for both
urban and rural areas (Florentino and Magbitang 1991: 14-16). In
1987, undernutrition affected about 12 out of 100 preschool chil-
dren in both urban and rural areas. Wasting was 1 however, more
common in rural areas than in urban areas. Among 7-14 year-old
children, the prevalence of stunting was about equal (about 14 per
100 children) for both urban and rural areas (NNC 1992). The
incidence of underweight for this group of children was only
slightly higher for rural areas (about 12 per 100 children) than for
urban areas (about 11 per 100 children).
Malnutrition typically characterizes households with lowly
educated mothers, having large family size and low incomes, and
engaged in subsistence farming (either as owner-cultivator farm-
ers, share tenants, or Ered workers) and fishery. Nutritionally at
risk are infants and preschool children, pregnant and lactating
women, and school children in low-income households The in-
verse association between the prevalence of preschool malnutri-
tion and household income is dear in Table 43. In urban areas,
especially in Metro Manila, malnutrition is concentrated in squat-
Table 4.2
Regional Indicators of Health Status
Infant Life Expec- Percent
Mortality Rate tancy 4t Malnourished a!
(per 1,000 Birth (0-6 years old)
live births) (years)
1989 1988 1989-1990
Philippines 515 64.0 9.0
Metro Manila 35.4 67.9 10.0
llocos Region 45.7 65.4 93
Cagayan Valley 65.9 60.7 85
Central Luzon 373 67.4 9.7
Southern Tagalog
41.0 66.5 10.4
Bicol Region 53.9 63.5 11.8
Western Visayas 49.9 66.6 8.8
Central Visayas 41.9 682 9.5
Eastern Visayas 65.9 62.4 9.7
Western Mindanao 99.1 55.4 83
Northern Mindanao 77.4 59.0 6.0
Southern Mindanao 84.1 58.4 8.1
Central Mindanao 1013 55.4 5.6
a! Below 85% of weight-for-height standard.
Sources: National Statistical Coordination Board, Compendium of
Philippine Social Statistics, 1988.
National Nutrition Council, uTowärds Nutritional Adequacy
for All: A Country Paper of the Republic of the Philippines
for the International Conference on Nutrition, Makati,
September 1992.
National Statistics Office.


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84 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY Table 4.4
National Government Expenditures on
ter colonies where household incomes are low and access to basic Health Services
health services and sanitary facilities is poor.
To be sure, adequacy of food supply is not the major nutritional As Percentage of
issue. Available food supply exceeded national requirement dur- Total Health
ing most of the 1980s, even during the major economic disruption - Year Expenditure GDP Total
between 1983 and 1987. Total calorie supply, expressed as a pro- (in million Government
portion of national requirement. exceeded 110 percent in 1978- pesos at Expenditures
1990. However, about two thirds of all households in the 1980s 1972 prices)
never achieved 100 percent calorie adequacy. The bigger issue,
therefore, is access to available food supply. For the poor, low
household incomes severely limit their access to food and health 1970 271.61 0.53 5.45
services. This is exacerbated by misguided public policies unduly 1971 242.43 0.45 4.94
causing concentration of supply of health services to the nonpoor, 1972 281.00 0.50 4.88
as will be shown below. 1973 303.87 0.50 3.95
While health status is generally related with household in- 1974 404.90 0.63 5.04
come, the government's fiscal support to the health sector, particu- 1975 46839 0.68 4.09
larly to nutritionally-at-risk groups, as well its choice of programs, 1976 609.86 0.83 4.98
cannot be overemphasized. Aggregate fiscal support to health in 1977 486.90 0.62 433
recent years is heartening. Real per capita health expenditures 1978 606.19 0.73 4.71
grew by an annual average of 15.9 percent in the second half of the 1979 592.37 0.62 3.92
1980s, thereby more than compensating for the contraction (aver- 1980 567.33 0.56 3.62
aging 3.8 percent a year) in the first half of the decade (Table 4.4).4 1981 534.21 0.62 3.49
The high growth in 1986-1990 raised the share of health in total 1982 624.93 0.69 3.75
government expenditures from 35 percent in the early 1980s to 4.2 1983 737.25 080 4.53
percent at the turn of the 1990s. Finally, the share of health expen- 1984 45029 0'.SO 2.67
ditures in GDP rose from about 0.6 percent to 0.8 percent during 1985 472.49 0.63 3.62
the same period. 1986 518.62 0.63 3.01
However, access to health services by a large majority of the 1987 551.16 0.66 2.74
population could have dropped in recent years, as evidenced by 1988 683.27 0.82 3.26
the increase in the average number of persons per hospital bed and 1989 723.90 0.86 3.29
per medical practitioner. The drop can be even worse among the 1990 859.16 0.81 4.17
1991 870.02 0.82 3.90
poor, considering the bias of the health delivery system in favor of
the richer members of the society. The system increasingly empha-
sized hospital-based curative care which was largely inaccessible
to low-income households due to its prohibitive costs. Given the Source: National Statistical Coordination Board,
prevailing disease pattern, especially among the majority of the Philippine Statistical Yearbook,
population, what would be required is an emphasis on promotive various issues.
and preventive health care services, including family planning,
86/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY

nutrition, breast-feeding, environmental sanitation, immuniza-

tion, and health education. These services generate externalities to
the community, but for which willingness to pay among house-
holds is low. In most household studies (see, e.g., Solon (1991)), 0

access to safe water and sanitation consistently emerged as pow- CD

CD

'erful determinants of children's health status, especially in impov-

erished areas and among the disadvantaged groups of the
population. Co

The changing mix of health expenditures is a cause for concern. 1

EC

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Based on estimates of World Bank (1992), the share of preventive
Co
care services in total national health expenditures fell sharply from Co

35 percent in 1981 to 14 percent in 1990 (Figure 4.1). In contrast, the

share of curative care rose from 55 percent to 65 percent during the 0 LD
z.
same period. Administrative costs also swelled from only 10 per- F.-
Co
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cent in 1981 to 19 percent in 1990, perhaps reflecting growing
inefficiencies in health care delivery system.
The Ramos administration recognizes this problem and plans
i.E
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Philippine Development Plan for 1993-1998 calls for a focused OI-
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delivery of social services to the poor, maintenance of social safety
nets, and provision of infrastructure required in facilitating and S w
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improving the delivery of social services. The Plan also indicates -C 1

targeted spending for priority areas in the health sector, but falls le
short of indicating sources of funding and delineating incentive-
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compatible mechanisms to improve the delivery of health care 1
services. Moreover, given the priority claims of other sectors,
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especially power and roads, it is unrealistic to expect significant Co
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social services. And unless overall tax effort improves considerably
in the medium-term, sourcing of additional funds for the health 2
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sector is highly uncertain. a- Co
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The Ramos administration also vows to continue the deregu-
lation thrust of its predecessor. The pressure to deregulate the
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arising from low overall tax effort and burdensome servicing of CO CD '* 01
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public debt. Restructuring user fees with the end view of recover-
ing the cost of providing public services is part of the overall thrust.
Care, however, must be exercised in designing user fees for health

88 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
services. Available studies reveal substantial price responsiveness
of outpatient care for children, and that the price responsiveness
of households is stronger at lower income levels than at higher
income levels.5 Moreover, willingness to pay for the full cost of
public services tends to be less for low income households than for
high income households. This suggests that some form of price
discrimination, or targeting, or both, must be part of program
design so as to prevent substantial reduction in the health utiliza-
tion of the poor.
An important consideration in this design is the institution of
incentive-compatible mechanisms aimed at reducing the incen-
tives for the nonpoor to avail of public programs intended for the
poor. In this case, the mechanisms may exempt the poor from
paying user fees, while charging these fees to those who are willing
to pay. To reduce the information problem (and administrative
cost) associated with sorting out the poor from the nonpoor, pub-
lidy provided services intended for the poor need to be located in
areas where the poor live. The resultihg.accessibility (i.e., shorter
distance) is expected to improve the poor's utilization of these
services.
At the same time, private sector provision of health services
has to be enhanced so as to encourage the nonpoor to move out
from the public sector. Available studies (e.g., Russo and Herrin
1992; Gertler and Rahman 1993) show that where private services
are available, the nonpoor tend to prefer them over public services.
If existing subsidies to the public health sector are not reduced, the
movement by the nonpoor away from this sector raises the subsidy
per poor person.
Education
As early as the 1960s, the Philippines enjoyed a reputation for
having a relatively highly educated population (ILO 1974). Based
on such indicators as the proportion of the relevant age-groups
enrolled in secondary and higher education and the proportion of
active population aged 10-65 with (i) at least five years of primary
education, (ii) with some college education, and (iii) with com-
pleted education, the Philippines ranked above most countries of
Asia during the 1960s. At the turn of the 1990s, participation rates
ACCESS TO BASIC NEEDS AND SERVICES /89
at the elementary level hovered around 98 percent, suggesting that
universal education had been virtually achieved in the Philippines.
Funding, however, did not match relatively large enrollments
over the last three decades. In the early 1970s, the proportion of
GM' devoted to education was lower in the Philippines than in
Korea, Thailand, and Malaysia, and the average for all Asian
countries (Table 45). Expressed as a ratio of total government
expenditures, the share for education presented a more striking
contrast. This disparity persisted in the 1980s, and even somewhat
deepened in the mid-1980s. During the mid-1980s, education
spending in the Philippines was only 1.8 percent of GM', com-
pared to 3.7 percent for Indonesia, 3.6 percent for Thailand, 6
percent for Malaysia, and 33 percent for all Asian countries. The
ratio of public expenditures on education to total government
budget tells the same story.6
Accordingly, the quality of education inputs was quite low.
Many teachers at all levels did not have the minimum qualifica-
tions for teaching. In the late 1980s, less than one half of high school
teachers of mathematics and science did not have the qualification
to teach these subjects7 In vocational education, only 3 percent of
teachers had the required industrial training or experience. In
tertiary education, only about one third had credentials beyond the
baccalaureate, while about one tenth of the graduate faculty in the
social sciences did not even have MA. units.
Physical inputs to education had likewise deteriorated. About
one-half of the country's elementary schools did not have water
facilities, and about two thirds had no electricity (EDCOM 1991:9).
Overcrowded classrooms were common. Public schools in urban
and populous communities had class sizes of up to 60-70 pupils.
There are pronounced differences in access to education be-
tween rural and urban areas and between poor and rich families
(Figure 42). Although there is an almost 100 percent enrollment
rate for children aged 7-10 years old, it' starts to drop after that age,
especially for the rural poor. The drop in enrollment is sharper for
the lowest three deciles, regardless of location. At ages 13-14,
enrolment rates for these deciles are down to 65 percent in rural
areas and 75 percent in urban areas, while the rates for the upper
three deciles still remain high at 85 percent in rural areas and 98


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 ACCESS TO BASIC NEEDS AND SERVICES / 93

percent in urban areas. The drop becomes more acute at ages 15-16,
particularly among the rural poor whose enrollment represents
less than one half of the population for the age group.8
In addition to low completion rates for the poor, the quality of
schooling in primary and secondary public schools leaves much to
be. desired (World Bank 1988, 1992; EDCOM 1991). High-quality
prn
ary education is limited to less than 10 percent of total elemen-
tary education, mostly in private schools in Metro Manila. The
principal contributing factor is the low priority attached by the
government to education, as reflected in the low and declining
levels of government resources allocated to basic education in the
1970s and the first half of the 1980s. With respect to secondary
education, schooling quality varies widely, partly arising from the
'4.
way public secondary schools are financed (Herrin 1990). Not until
1988, these schools were supported mainly by tuition and local
CsJ cli government funds. Their financial capabilities, however, vary
a) widely from area to area, thereby contributing to differences in
I—
schooling quality by school type, i.e., national, provincial, munici-
C cc
iu
pal, and barangay. The Free High School Law passed by Congress
C in 1988 provides for free education in all public high schools. The
:0) 0 -a law requires the national government to contribute to local gov-
0 ernment finance, standardizes teachers' salaries, and subsidizes
U.
eli
the tuition in private schools of students who could not be accom-
modated in public schools.
Finally, for tertiary education, in which the share of public
schools in total enrollment is much lower (about 12 percent in
1985-1986) than that in primary and secondary enrollment, school-
ing quality is likewise highly uneven, both in public and in private
schools. The low-tuition, high-quality public schools (e.g., the Uni-
versity of the Philippines) are not generally accessible to low-in-
come students owing to their stringent admission requirements.
0 Low-income students usually do not perform as well as the high-
o o 0 0 0 o. income students because of their poorer preparation, having come
from low-quality primary and secondary institutions. Private
schools likewise offer varying degrees of schooling quality. In
general, private tertiary institutions that levy high tuition fees have
high. schooling quality. However, the poor's access to these insti-
tutions is practically nil.
94 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
In chapter 3, the incidence of unemployment and underem-
ployment is shown to rise with the level of educational attainment.
At the same time, the chapter also shows that private returns to
higher education are relatively high, especially for wage and salary
workers. While these results appear inconsistent, they support the
view of labor market segmentation. The segmentation is partly an
outcome of economywide and industrial policies favoring the use
of capital at the expense of labor, as well as institutional responses
to labor policies (such as minimum wage laws). In this environ-
ment, the college diploma is a passport to high-paying jobs in the
formal urban sector (or foreign labor market). For the poor who
drops out early from school, this passport is unobtainable. At the
same time, studies in the Philippines and elsewhere show higher
social rates of return to primary education than to secondary and
tertiary education. This suggests a "market failure" argument for
public investments in primary education.
Many of the shortcomings of the educational system are rec-
ognized by the Ramos administration and its predecessor. The
Medium-Term Philippine Development Plan for 1993-1998, for
example, speaks of improving the internal efficiency of basic edu-
cation, increasing access to relevant science and mathematics edu-
cation, strengthening linkages between educational /training
institutions and industry to ensure matching between skill require-
ments and skill supply, and strengthening nonforxnal education
and community-based skill formation services to enhance the
poor's opportunities for employment. These thrusts have pro-
vided continuity to those set by the Aquino administration. These
are evident in the pattern of public spending on education in the
1980s. Per capita real expenditure on education rose from their low
levels—below P30 (at 1972 prices)—in the mid-1980s to P40 in 1987
and P54 in 1991. However, despite these increases, public spending
on education as a proportion of total public expenditures and GNP
still fell short of those in most neighboring Asian countries (Table
43). Largely constraining the increases in social spending were the
low tax effort and the huge debt service—about 40 percent of
government budget—during the second half of the 1980s and early
1990s.
.] 'j: J 1:4i 'l
Much of the budgetary increases to education went to raising
teachers' salaries and other operating expenses. Learning and
teaching materials, as well as retraining of teachers and school
administrators, took the backseat. This is unfortunate considering
that spending per student on these material inputs tends to have
relatively high impact on students' achievements and survival
rates (World Bank 1992).
The government's current program of free secondary educa-
tion and its policy of subsidizing students enrolled in private
schools are likely to impose tremendous pressure on public re--
sources. Too little resources spread in too many programs of
dubious equity value may lead to further deterioration of school-
ing quality in the long run. The impact on equity of subsidy
programs in secondary and tertiary education is limited consider-
ing that the poorest of the poor tend to drop out even before
completing primary education. Other more efficient alternatives to
achieve the government's objective of widening access to educa-
tional opportunities should instead be explored. Focusing scarce
government resources, for example, to primary education in low-
income areas is superior to universal subsidy on education, in
achieving both efficiency and equity goals. Increasing the poor's
access to higher education, in either public or private schools, can
be enhanced by opening scholarship opportunities especially tar-
geted for them. This would save public funds allotted for expan-
sion of tertiary public schools. Socialized tuition programs similar
to that of the University of the Philippines are one possible mode
of expanding the access of the poor to quality tertiary education.
Finally, student loan programs need to be explored with the end
view of expanding this window to the poor.
Housing and Environment
Access to housing and a health-promoting environment is
another sore point in the human development of the urban poor
in the Philippines. They are denied access because of either woe-
fully inadequate provision of urban shelter and basic services, or
their inability to pay for the price of these services, or their inca-
pacity to overcome institutional impediments to access vis-á-vis
these services. Unabated migration of the population from low-in-
96/ POVERTY, URBANIZATION AND DEVELOPMENT POLICY

come areas to highly urbanized centers coupled with inadequate

supply response partly owing to institutional (and policy-induced)
bottlenecks, tends to exacerbate shortages in the supply of these N
services. 0'
The conditions of housing, waste disposal facilities, water and "C
transport, and other basic services have substantially deteriorated a'0
- 4- — eq LO N
in most urban areas of the Philippines. At the same time, the huge a'
a'
'-4
debt service and the similarly enormous demand for rural infra-
structure have severely limited the available resources for urban N 00
a'
a'
development. Moreover, institutional reforms aimed at improving a'
N 'C N.
tax collection efficiency, especially business income and real prop- a'
ON
'0 a) qN 00
00 LO 00 00 M 0
erty taxes, to raise revenues for urban (and rural) development, — 4 — N
have been inadequate. N.
0
Why should housing be a policy concern? For the urban poor, I_I

housing is an insurance against unfavorable events (i.e., a safety 0

net in times of hardship, sickness, or unemployment), an important U
0
means of savings, and a major condition to obtaining credit in Lfl
N.
U)
00
0ON.j SN.
either the formal or informal market (Wegelin 1993). Further, for 0 oa'
- 4.• ,-4
the urban poor, housing provides access to the urban economy I-
0
since the house is also the base for income-generating activities —
(e.g., food vending, tailoring, garbage scavenging, processing of
E *1
collected recyclable materials). a) (a
An equally important consideration is the beneficial effects of bOZ
housing on the health status of cii1dren, school performance, and
productivity. Solon's (1991) econometric analysis, for example, of 0
the link between urban housing and health shows that improve- 4..

ments in housing characteristics (i.e., roofing and flooring material,

interior space, and public amenities) enhance the health status of 0 a...
children. Noteworthy is the relatively greater importance of neigh-

uLH 10
Z
borhood services that have attributes of public goods (e.g., sewage
and solid waste disposal systems) to the health status of children.
Solon finds, however, that improvements in these services do not
0J

II
substantially bring about increases in the market value of houses.
This suggests a potentially suboptimal provision of these services
in the absence of government intervention or of some other alter-
native institutional arrangements.
Government assistance for housing construction and develop-
ment has increased considerably since its first inception in the

100 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
The government's recent response to the housing problem is
the Urban Development and Housing Program (UDHP) estab-
lished under Republic Act No. 7279 in 1992. UDHP aims to provide
socialized housing for the homeless poor in urban and resettlement
areas, provide an equitable land tenure system, regulate and direct
urban growth towards a more balanced urban-rural interdepend-
ênce, encourage private sector's participation in urban develop-
ment, and improve the capability of local government units in
undertaking urban development and housing projects. In line with
this program, the Medium Term Philippine Development Plan for
1993-1998 is targeting 13 million new housing units representing
34 percent of total housing needs. Funding constraints are, how-
ever, likely to stand in the way of public housing development.
Thus, with UDHP's "socialized housing" program, the private
sector is expected to play a major role in providing housing for the
poor. This provision deserves a closer look.
UDHP requires developers of subdivision projects to develop
an area for socialized housing on at least 20 percent of the total
subdivision-area or total subdivision project cost, at the option of
the developer, within the same city or municipality. 9 There are,
however, serious doubts about the effectiveness of the program in
improving the access of the poor to affordable housing. First, the
law offers various avenues of compliance to the 20-percent rule.
The requirement is, for example, complied with if the project is any
of the following: (a) development of new areas, (b) slum upgrading
or renewal of areas for priority development, (c) joint venture
projects with either the local government units or the housing
agencies, and (d) participation in community mortgage programs.
Second, various tax incentives afforded to private developers par-
ticipating in socialized housing reduce potential government reve-
nue which could otherwise be used for the provision of basic
services for the urban poor. These incentives include nonpayment
of project-related income taxes, capital gains tax, value-added tax,
and transfer taxes.
Third, UDHP does not address at all the thorny issue about
real property taxation. If properly designed, progressive real estate
tax is an efficient instrument for breaking large urban estates into
smaller parcels and for mobilizing idle urban lands into productive
ACCESS TO BASIC NEEDS AND SERVICES / 101
uses. Furthermore, it is a potentially important source of govern-
ment revenue for urban housing and basic services. In the Philip- -
pines, real property tax collection is very low, averaging only 1.9.
percent of total tax in 19864990 (Tan 1993a). In contrast, the
proportion is 16.4 percent in Nepal, 12.2 percent in China, 5.0
percent in India, 27.1 percent in Singapore, and 40 percent in Meiji
Japan.'° The main culprit is the systematic undervaluation of real
property mainly because of unwieldy case-to-case valuation prac-
tices that place enormous discretion to local tax assessors. More-
over, where base values for purposes of tax assessment exist, they
are outdated. The case study of Tan (1993a) is indicative of the
extent of undervaluation: in selected plush areas of Quezon City
and Makati, the assessor's valuation of real property was only 6 to
33 percent of market price. Clearly, there is much room for im-
provement in tax design and administration
-To be sure, the Local Government Code of 1991 contains
provisions for real property taxation Unfortunately, the assess-
ment schedule under the Code encourages large real estate hold-
ings and investments in residential improvements and
discourages productive use of urban lands. This is because residen-
tial lands have the lowest assessment rate at 20 percent while
commercial and industrial lands have assessment rates of 50 per-
cent. This does not bode well for the urban poor. -
Finally, while rural-urban interdependence is recognized,. the -
housing program appears tobe still an isolated policy concern. This
is evident in the limited perspective with which housing produc-
tion and housing incentives are viewed: To be effective, housing
reforms are best formulated as part of an overall medium- to
long-term housing policy program, in which the housing sector is
seen as part of the national economy, and housing supply and
demand for low-income households are regarded as part of aggre-
gate housing supply and demand. Viewed this way, many aspects
of the national economy (e.g., employment creation) have impor-
tant implications for wideningffie pooei access to housing. Simi-
larly, policies affecting the demand and supply of housing by
high-income groups have important implications for the access of
the poor to housing (e.g, real property taxation, zoning restric-
tions).
102 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
NOTES
1. See Behrman (1990a) and Strauss and Thomas (1992) for comprehen-
sive reviews of the analytical issues on the relationship between
human capital development and wage.
2. The National Nutrition Survey of the Food and Nutrition Research
Institute has been the source of relatively comparable data on indi-
cators of nutrition. These data are available for 1978,1982,1987, and
1989-1990.
3. See Florentino et al. (1990) and Florencio (1992) for a detailed char-
acterization of the socioeconomic profile of the malnourished popu-
lation.
4. The base of per capita health expenditures was, however, low.
5. See Ching (1992) and Russo and Herrin (1992) for evidence on the
Philippines. For a review of evidence in other countries, see Gertler
and Rahman (1993).
6. The above comparison does not control for the mix of public and
private education. Thus, the cross-country differences in govern-
ment expenditures on education should be seen as providing only
an idea, and not precise differences, of the Philippine government's
under-investment in education.
7. Figures cited in this paragraph are based on the Congressional
Commission on Education's (EDCOM 1991) assessment of the edu-
cational system in the Philippines.
8. Paqueo (1985) analyzed the close connection between years of com-
pleted schooling, on the one hand, and economic, demographic, and
social factors, on the other. He found a statistically significant rela-
tionship between years of completed schooling and these factors,
especially the father's wage, household assets, and the household's
borrowing capacity.
9. The land area for socialized housing need not be located in the same
subdivision area.
10. Based on Bahl and Miller (1983), as cited in Tan (1993a), and Nagatani
(1992).
Chapter 5
Development Policies,
Adjustment, and Poverty
i despread urban poverty and persistent rural-urban imbal-
Wance reflect a failure of development policy in sustaining
growth of productive employment opportunities and in promot-
ing broad-based development. Recent development record in East
Asia and elsewhere demonstrates that it is the growth of employ-
ment opportunities that represents the long-term solution to pov-
erty. The record also indicates the pervasive influence of
economywide, sectoral and spatial policies in broadening not only
the participation of the poor in development but also their access
to income-equalizing and productivity-enhancing basic services.
This chapter delineates the influence of these policies on the pat-
tern and character of urban poverty and urban development.
Long-Term Growth and Industrialization Policies
The nearly-half-a-century past was a missed opportunity for
the Philippines to achieve long-term growth and to advance into
an industrial economy. At the turn of the 1950s, the Philippines had
the highest GNP per capita in Asia, with the exception of Japan and
Malaysia. Although its GNP per capita of $150 (at 1952-1954 prices)
was only four fifths that of Malaysia and about one half that Of
Japan in 1950, it was about one-and-one-third that of Taiwan and
more than twice that of South Kore. 1 Thailand, with a comparable
103

104 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
population and natural resource endowment;, had a GM' per
capita of only $80. By 1970, the country's GM' per capita was still
among the highest in developing Asia, but lower than South Korea
and Taiwan. However, by 1990, its GM' per capita fell to only one
half that of Thailand.
It is natural to inquire why the Philippine economy performed
the way it did during the postwar period,, particularly in relation
to its Asian neighbors. Certainly, adverse developments in the
global environment of trade and finance (e.g., the oil shocks of
1973-1974 and 1979-1980 and the adverse terms of trade deteriora-
tion in the 1980s), partly explain the economic malaise in the
Philippines in recent years. But the extent to which other countries
that experienced the same difficulties have managed to achieve
respectable growth suggests that domestic economic structures
and policies cannot be absolved of the responsibility for the dismal
economic performance. Indeed, this is the major theme of the
analyses of a large number of students of the Philippine economy.2
The Philippines was among the first Asian countries to embark
on import-substituting industrialization, even ahead of Taiwan
and South Korea. Many factors can explain the success of these two
countries and the failure of the Philippines, but one that has
generally been recognized as having the pivotal role is the nature
of their industrialization policies. While both South Korea and
Taiwan initially had import-substituting industrialization policies,
exports were likewise encouraged and, eventually, both countries
switched to an export-oriented industrialization strategy. The Phil-
ippines, on the other hand, has persistently hung on to its capital-
intensive, import-substituting industrialization policies in spite of
the immense trade Opportunities offered by the global economic
environment in the 1960s and, to some extent, in the 1970s.
The late 1940s and early 1950s saw the birth of a highly protec-
tionist trade regime in the Philippines. Comprehensive import and
foreign exchange controls were put in place initially to check the
severe balance-of-payments problem resulting from expansionary
monetary and fiscal policies in 1949, a presidential election.year.
However, their intended purpose was later extended to accommo-
date the Philippine policymakers' objective of industrial import
substitution.
DEVELOPMENT POLICIES, ADJUSTMENT AND POVERTY / 105
These controls effectively led to a sharp rise in the domestic
prices of imported goods. The importation of so-called "essential"
consumer goods, raw materials, and capital equipment was later
liberalized by the government vis-á-vis "nonessential" goods. But
this system of protection created a strong bias in favor of the
domestic production of import-substituting, finished industrial
consumer goods. At the same time, imported raw materials, inter-
mediate products, and capital goods were made artificially cheap
by the overvalued currency. This protection system effectively
penalized the primary export sectors (agriculture and mining),
export-oriented industries, and intermediate and capital goods
sector. Moreover, the system also encouraged large-scale, capital-
intensive production, and the concentration of industrial estab-
lishments in and around Manila. Thus the structure of protection
not only encouraged a bias against labor use in spite of the relative
abundance of labor but also effectively penalized agriculture,
which has been the major source of incomes for the majority of poor
families.
The floating of the exchange rate and the gradual lifting of
import controls in 1960-1962 did not qualitatively change the struc-
ture of protection. The protective tariff system, which took effect
in 1957 but was made redundant at the time by the import and
foreign exchange controls, became applicable. Thus, the export
sectors and the agricultural sector continued to be penalized by the
system of protection which favored the nonessential industrial
consumer goods. It needs to be noted, however, that the shift from
import quotas to tariffs not only reduced the severity of industrial
protection but also enabled the government to collect revenue from
importers who previously benefLtted from the premia arising from
the quantitative import restrictions.
Another major sectoral development in the 1960s was the
implementation of the Investment Incentives Act of 1967 which
provided a comprehensive approach to industrial development
and which created the Board of Investments (BOl). The BOl was
empowered to determine the preferred areas of investments and
to administer the granting of incentives—mainly tax exemptions
and tax credits—to BOl-registered firms. However, the incentive

106 / POVERTY, URBANIZATION AND DEVELOPMENT POUCY
scheme remained strongly biased in favor of import-substituting
firms, particularly in capital-intensive manufacturing.
The 1970s and the 1980s marked a major effort of the govern-
ment to adopt an "outward-looking development policy." The
main features of this policy were the adoption of a flexible ex-
change rate in 1970 (partly in response to the foreign exchange
crisis of late 1969) and the bradening of fiscal incentives granted
to preferred firms through the Export Incentives Act of 1970.
Enacted to complement the Investment Incentives Act of 1967, the
Export Incentives Act entitled BOl-registered firms with various
kinds of tax exemptions including export taxes, deductions of the
firm's export revenue from taxable income, and various tax credits
on raw materials used in export production. These incentives
amounted to a tax subsidy of about 15 percent of the input value
of the BOl-registered firms, or an increase in the rates of return on
projects by 5-16 percent (Tan 1979).
These fiscal incentives, in addition to the (partial) devaluation
of the exchange rate, partly offset the bias Of the country's protec-
tion system against exporting. However; the highly protective
tariff system continued to be the major source of the bias against
the exports sector. Moreover, part of the gains of the devaluation
and the world commodity boom in the early 1970s was siphoned
off from producers of traditional export products. This was facili-
tated by the increased role of the government in the regulation of
various sectors of the economy, particularly foreign trade. Govern-
ment parastatals dominated the foreign trade of major agricultural
products (coconut, sugar, rice, corn, and wheat).
Several policy developments that can be considered either
transitional Or in the nature of emergency measures marked the
1980s. The government, with financial and technical support from
the World Bank, initiated in the early 1980s structural adjustments,
which included the restructuring of the tariff system, import liber-
alization, rationalization of fiscal incentives, exchange rate adjust-
ments, and financial liberalization. The 1981-1985 tariff reform
program (FRP) reduced the spread of statutory rates from 0-100
percent to 10-50 percent. Batas Pambansa 391 changed the charac-
ter of BOl incentives from one that was predominantly capital-bi-
ased to one that depended more on performance. Financial
DEVELOPMENT POLiCIES, ADJUSTh4ENT AND POVERTY /107
liberalization implied the deregulation of the financial market
including the removal of interest controls on both deposits and
loans. These measures would have been accompanied by import
liberalization and agricultural pricing reform, but short-term con-
siderations arising from the balance-of-payments (BOP) crisis,
which erupted in the latter part of 1983, caused a reversal to import
and foreign exchange controls. The crisis also led the government
to undertake a stabilization program that induded fiscal and
monetary restraints and a • devaluation of the domestic currency.
This meant a sharp fall in economic activity, particularly in the
import-dependent manufacturing sector, and in overall govern-
ment spending. The fall in government spending was proportion-
ately greater, however, for economic and social services, thereby
affecting most severely the low-income households whose welfare
depended much on these services. Inflation also reached its highest
postwar level (50 percent in 1984), and this had the worst impact
on the fixed, low-paid blue-collar income earners and the landless
rural fanners.3
The installation of the Aquino administration in early 1986
prompted the continuation of a number of reforms that were
underway before the BOP crisis erupted in 1983. Tax reforms
included the adoption of the value added tax in place of sales/turn-
over taxes, and of a uniform tax rate of 35 percent on corporate
income in place of the dual 25 and 35 percent of the previous
system. With respect to trade, perhaps the most important reform
was the removal of all export taxes (except on logs) which had
imposed a heavy burden on the agricultural sector. Executive
Order 413, issued in July 1990, and its replacement, Executive
Order 470, issued in July 1991, further restructured the tariff sys-
tem, with the objective of improving international competitiveness
and simplifying tariff administration. Under EO 470, tariff levels
were reduced and nontariff barriers removed (or replaced with
tariffs) over a five-year period. Fiscal incentives through the Om-
nibus Investments Code of 1987 were also broadened to include
incentive provisions for labor use. These reforms were consistent
with the administration's employment-oriented, rural-based de-
velopment strategy, although, as noted below, were inadequate in
substantially changing the structure of the economy.
108 / PovEwri', URBANIZATION AND DEVELOPMENT POLICY Table 5.1
Average Effective Rates of Protection by Major Sector
A convenient summary measure of the direct impact of trade (In percent)
and industrial policies on a particular activity is the effective rate
of protection (ERP), defined as the percentage excess of protected
value added over nonprotected value added. This measure takes 1965 1974 1985a/ 1988a/ 1991
into account the changes in the domestic prices of both inputs and
output arising from tariffs and import controls. A positive ERP
ünplies that the sector is accorded protection by the system of A. Effective Rate of Protection

tariffs and import controls. A negative ERP, on the other hand, Overall Average 36 49 37 27

indicates that the system penalizes (i.e., taxes) the activity or sector. Agriculture and Primary 9 9 5 8

Note, however, that protection is a relative concept. If all industries Agriculture 17 15 21 15 16

are uniformly offered high. ERPs, then no industry or group of Fishing 116 8 5 59
industries is actually protected.4 Forestry -26 -10 -22 -22 -23
The primary and agricultural sectors had the lowest ERPs from Mining -17 -2 0

-2 -3

1965 to 1991 (Fable 5.1). Average ERP for manufacturing even Manufacturing 51 44 73 56 35

increased relative to that for agriculture, from 1965 to 1985. How- Exports 4 -7 -4

ever, with the adoption of EO 470 in 1991, the tariff regime became Importables 61 102 75

more favorable for agriculture and the exportable sectors. Indeed, Import, competing 37

Clarete's (1991) and Medalla's (1992) assessment of EO 470 indi- Import, noncompeting 148
cates that the tariff reform program moved the country towards a
lower, sector-neutral, and trade-neutral effective protection policy. B. Relative Protection
The problem, however, was that complementary adjustment in the (Agriculture=100) b/

exchange rate was not pursued. Imports rose substantially, while Agriculture and Primary 95 90 91 93

export supply response was very sluggish. Consequently, deficits Agriculture 100 100 100 100 100

in government budget and current account rose to unsustainable Fishing 188 89 91 137

levels in 1991; this was followed by another round of monetary and Forestry 63 78 65 68 66

fiscal contraction in 1992. Mining 71 85 83 85 88

The indirect effects of protectionist trade regimes on agricul- Manufacturing 129 125 143 136 117

ture and export-oriented manufacturing are even larger. These Exports 90 77 83

effects are derived from the consequential overvaluation of the Importables 140 167 152 129

domestic currency or what is often referred to as "exchange rate Import, competing 119

overvaluation." An overvalued domestic currency acts as a tax on Import, noncompeting 216
tradable goods, depressing their prices (in domestic currency
terms) relative to nontradable goods.5 This distorts incentives and a! Estimates were based on price comparison.
encourages the movement of resources towards nontradable or b/ (1-i-ERPj)/(1+ERPa), where ERPj is effective rate of protection
home goods production. And because home goods are a larger part of sector j and ERPa is effective rate of protection of agriculture.
of nonagricultural than of agricultural production, the effect of Sources: 1965, Power and Sicat (1971).
exchange rate overvaluation on domestic relative prices also shifts 1974, Tan (1979).
resources towards nonagricultural production. 1985 and 1988, Med alla (1990).
1991, Medalla (1992).

110 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
In addition to trade restrictions, the external terms of trade
movements and the country's balance of trade also influence the
real exchange rate. In the 1950s and 1960s, the protectionist trade
policy regime and large trade deficits accounted for much of the
overvaluation of the Philippine peso. On the other hand, in the
1970s and 1980s the deterioration of the external terms of trade and
the unsustainable imbalance in the external accounts assumed
more importance.
There are now several studies documenting the overwhelm-
ingly negative influence of exchange rate overvaluation on pro-
duction incentives in agriculture and export sectors (e.g., David
1983, Bautista 1987, Intal and Power 1990). The overvaluation—av-
eraging 38 percent in the 1960s, 20 percent in the 1970s, and 25
percent in the 1980s—penalized agriculture and labor-intensive
exports.
The bias of the trade and exchange rate regime against agricul-
ture and labor-intensive manufacturing exports affects various
groups in the society differently. In the short run, when fixed
productive assets cannot be altered, real incomes of rural workers
as well as workers in urban informal sector may decline as the
demand for labor falls along with the negative protection to agri-
culture and labor-intensive exports. In the long run, resources
move away from agriculture and export sectors and new invest-
ments into these sectors are discouraged. Since agricultural pro- -
duction is more labor-intensive, less import-dependent, and more
efficient in earning (or saving) foreign exchange than industrial
production (especially of import-competing industrial consumer
goods), the premature shift of resources away from agriculture
dampens the growth of employment opportunities and output in
rural areas. This induces rural workers to seek employment in
urban areas, thereby worsening the employment situation in these
areas. The fall of real wages in the urban informal sector during the
1970s, and early 1980s was an upshot of this phenomenon.
Technology Choice and Employment Creation
The system of fiscal and other incentives (given to BOl-regis-
tered firms) accentuated the capital-cheapening effect of overval-
ued exchange rate and encouraged large-scale enterprises to the
DEVELOPMENT POLICIES, ADJUSTMENT AND POVERTY /111
detriment of small- and medium-scale enterprises. Production
incentives such as accelerated depreciation, tax exemption on im-
ported capital equipment, tax credit on domestic capital equip-
ment, expansion reinvestment allowance, and tax credit for
Withholding tax on interest reduced the user cost of capital any-
where from 50 to 70percent in the 1970s (Gregorio 1979)6 and from
30 to 80 percent in the early 1980s (Manasan 1986). addition,
BOl-registered firms also had preferential access to low-interest
credit. This also had a capital-cheapening effect on relative factor
prices, redudng the user cost of capital by 9-35 percent.
BOl incentives can be justified as a compensating measure for
the bias of the prevailing trade regime against exports. Viewed this
way, the system of incentives mimics the structure of incentives
that prevailed in Japan, Taiwan, and South Korea in their early
stage of industrialization. Fiscal incentives, however, have not
been rationalized this way.7 Manasan (1989), for example, shows
that, in the case of the Omnibus Investment Code of 1987 (EO 226)
which provides the current guidepost to investment incentives,
incentives are almost perfectly neutral with respect to exporters
and non-exporters.8 Moreover, compared to Batas Pambansa 392
of 1983 which EO 226 superseded, the inducements given to ex-
porters under the latter are reduced by half while the benefits made
available to non-exporters almost doubled. Thus, even import-
competing goods which are already protected by the tariff and
non-tariff regime are conferred additional protection through fis-
cal incentives, further making them artificially profitable vis-á-vis
exportables.
The low user cost of capital relative to labor encouraged the
growth of capital-intensive industries more than those using the
country's abundant labor resources more intensively. Much of this
growth occurred in the nonagricultural sector, largely because the
system of incentives favored this sector vis-a-vis agriculture. On
the whole, while the capital-labor ratio dropped substantially in
the 1980s, a drift toward old habits of promoting capital-intensive
industries was evident in the investment incentives during the
later part of the decade (Medalla 1990). Moreover, import-substi-
tuting domestic producers which historically captured the bulk of
investment incentives tended to employ more capital-intensive
112 I POVERTY, URBANIZATION AND DEVELOPMENT POLICY, - DEVELOPMENT POLICIES, ADJUSTMENT AND POVERTY / 113
techniques ihan export producers, thereby reinforcing the obser-
vation that inward industrialization is inferior to export-led
growth insofar as employment generation is concerned.
Because the industries favored by the trade and industrial
policies relied heavily on imported intermediate inputs and capital
equipment, and because public infrastructure policy was dispro-
portionately biased in favor of urban centers, a strong inducement
existed for firms to locate plants near the main port, he., Metro
Manila (Herrin and Pemia 1987; Ranis, Stewart, and Angeles-
Reyes 1990). In the 1980s, Metro Manila, where one tenth of the
population live, absorbed the bulk of government investments in
physical infrastructure (roads, power, communication) and ac-
counted for about one third of GOP.
Adjustment Policies and Urban Poverty
Adjustment policies—defined here to include short-run poli-
cies that intend to return the economy to an equilibrium path from
which it has moved (owing, for example, to external shocks) as well
as longer-run policies that intend to change the equilibrium path
of the economy—in the 1980s are popularly viewed to have stood
in the way of poverty alleviation in developing countries. System-
atic analysis of how these policies affected the poor is, however,
scant, owing partly to the general complications of analyzing
macro policies that have economywide impact and partly to the
diversit?of economic structures of LDCs.
Increases in poverty as well as sharp cuts in government
expenditures on social services, including health, nutrition, educa-
tion, and infrastructure programs benefiting the poor, have accom-
panied the implementation of adjustment policies in a number of
LDCs. In the Philippines, government expenditures on social serv-
ices dropped precipitously during the adjustment period in the
early 1980s (Chapter 4). The restrictive monetary policy followed
in the mid-1980s and, again, at the turn of the 1990s contributed to
a sharp rise of real interest rates during this period. On the other
hand, cases where the transition apparently has not been anti-poor,
even in the short run, also exist (see, e.g., Behrman 1990b). Indone-
sia's experience with adjustment in the 1980s, for example, appears
to be one such case.
Adjustment policies affect households, both rich and poor,
through any one of the three avenues: (1) changes in the prices of
goods and services consumed by households; (2) changes in em-
ployment status as well as returns to production factors owned by
households; and (3) changes in transfers, both public and private,
and in the provision of public services to households. Changes in
the prices of goods and services are often the most disruptive effect
of an adjustmentprogram, especially on the poor. This may require
the withdrawal of government subsidies on basic food items as
well as nonfood goods and services (e.g., petroleum and electric-
ity). Exchange rate realignment in the form of devaluation, which
often accompanies an adjustment program, also raises the prices
of tradable goods, including food, consumed by households.
The 'changes in profit incentives induced by the adjustment
program may have hi transition costs for wage earners and
self-employed workers. The adjustment program's objective of
promoting economic efficiency may require the dismantling of
tariff and nontariff barriers enjoyed by import-substituting indus-
tries. The program may also require the trimming of excess fat in
the government bureaucracy. The degree of labor mobility partly
determines the extent of the fall in the welfare of workers during
the adjustment period. Finally, changes in the provision of public
services as well as public transfers are a common feature of adjust-
ment programs. Public funds for health, nutrition, education, fam-
ily planning, and basic infrastructure (e.g., roads, power and
communication, electricity generation) may be reduced as part of
an overall effort to reduce the government deficit.
Macroeconomic and computable general equilibrium (CGE)
models are appropriate for understanding the nature of relations
between macro policies and the meso variables (factor and product
prices, infrastructure, etc.) that determine the context in which
households and production entities operate. These models, how-
ever, are typically too aggregated for poverty analysis. They are
silent with respect to the "human face" of the poor (who they are,
what their socioeconomic circumstances are, where they live, etc.).
Available evidence indicates that, if true -household income or
expenditure is unobserved (or can be obtained only at high costs),
the efficiency of providing income transfers to the poor can be
114 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY

enhanced by employing household characteristics—such as area

of residence, educational attainment of the household head, occu-
pation of household members, landholding class, or a combination
of characteristics—as targeting indicators (Kakwani 1990, Raval- .- v
lion 1989).
In what follows, we build on this aspect of the poverty-target- 2
ing literature by combining the information available in household
surveys, with the information on meso variables generated by
macroeconomic models. The analysis uses simulation results of a
macroeconomic model designed for analyzing the short run im- 0)
0
pact of macroeconomic reforms, as inputs into a household model U U U '- L 00000% t.. . 0
designed for poverty analysis. The household model exploits the LJ
wealth of information typically available in household surveys,
0
thereby providing much richer information on the characteristics tni '
of the poor, than is available in either macro or CGE models alone. .-
I..
I- .-
The technical description of this model is given irl Appendix D. -C 4,
00c000
Ifl F Lt)
4, U q 'Q sq c tr sq 0:
The focus of the analysis is on the short-run poverty impact of 4, 000-000000000
C
commodity price changes arising from selected macroeconomic tf X
Co
adjustment policies. For simulation results on macro-meso rela-
tions, we have employed the macroeconomic model of Bautista
4,
(1992), although any other model tailored for an analysis of the Z .E C 4,
U
probable short-run impact of macroeconomic adjustment policies U
could have been used as well. We use the simulation results for (i) —U -o 40sOIfl0C'40
a devaluation alone and (ii) a combination of devaluation and
contractionary monetary policy. These policies are typical compo- 4,
I- C p
nents of an adjustment program. The devaluation, as expected, 0 0
4, 0
tends to raise agricultural (as well as nonagricultural) prices. The
contraction of money supply partially offsets the inflation effect of
0-C q%qri%q(1
the devaluation.
Tables 52 and 53 present the implication of the two cases on
urban poverty by sectors of employment. In both cases, the net
effect is an increase in aggregate poverty. The increases in poverty
C C
indices are higher in the second case—a combination of devalu- U 0
ation and contractionary monetary policy—than those in the first 5- •
. 0 ..
case which involves only devaluation. Although commodityprice
increases have a welfare-reducing effect on households as consum- 5-

ers, these raise the incomes of the numerically-large en- 2 (0

5-

trepreneurial (self-employed) households. The profit effects are

 DEVELOPMENT POLICIES, ADJUSTMENT AND POVERTY / 117

much greater in the first case than those in the second case, primar-
ily owing to the larger price increases of commodities in the first
case.
The pattern of change for the two cases is similar. Thus, in the
0 discussion henceforth, only the case of devaluation is further dis-
cussed.
• The impact of the devaluation on poverty, when viewed in
(a
4-.
o . NON terms of the head count index, is greater for urban families than for
I- E
.2
rural families. Urban poverty, based on the head count index,
. C') a)(U. represents about two thirds of the change in national ltead count
a)
a)
o bC
index. On the other hand, when one takes into account the welfare
0>.
deficits of the poor as well as the distribution of these deficits

U a)a)
o
U
1

a)0
4-.

0Q0000
among them, the living standards of rural families are reduced
more than urban families. Rural families, who comprise about 62
percent of the total population, would represent about two thirds
of the change in the national distribution-sensitive poverty index.
LO a) 0 It is frequently claimed that because agriculture is largely
LO tradable—more so than industry—a devaluation would have rela-
a)0
OLOIONa4%C
tively large income effects for agricultural households. This should
c;a) q t o o F .. N. C1 IQ IQ Ii reduce poverty in the sector, even in the short run. Table 52 shows,

I
OO 4 0 0 0 0 0 0 0 0
however, that this may not necessarily be the case. Because the
OOO('4O
severity of poverty is greatest among the disproportionately nu-
LO
0c — _4 merous landless and small farmers who are net buyers of staples
—0--- 0---
U (Balisacan 1993), the overall net impact of price increase on the
(a sector is an increase UT the average poverty gap. Based on the
a)
tv
a)
- U
distribution-sensitive measure, agriculture contributes about 50
percent to the change in poverty.
o. Table 5.4 further demonstrates the usefulness of household
surveys, when combined with simulation outcomes on macro-
U) x . - ,
meso relations, in characterizing the differential impact of policy
a) 0 reforms on various groupings of households. In this table, urban
0a).
households are reclassified according to the type of work of the
household head. Urban workers employed in private firms ac-
2 count for almost two thirds of the change in urban head count
U index; this group represents about one half of urban workers.
Notice that workers in government and government-controlled
corporations account for only 15 percent of total urban workers,
and their average poverty is less severe than the averages for other
 DEVELOPMENT POLiCIES, ADJUSIMENT AND POVERTY / 119

types of workers. Accordingly, they representonlya small propor-

0
tion (about 10 percent) of the change in urban poverty arising from

adjustment. It thus appears that, as part of an effort to reduce fiscal

iq deficits, retrenchmentof workers in unproductive sectors of gov-
oo — 0
ernment is not tantamount to a substantial increase in aggregate
2 poverty.
bO Table 5.5 presents the simulation results for a 20 percent in-
I- 0
crease in the price of utilities (defined broadly to include fuel, light,
.0
N water, communication and transport). Not surprisingly, given the

0 w
i0 N 0 relatively small share of utilities in total consumption expenditures
U U of poor households, the increase hardly makes a dent on both the

national poverty gap and the distribution-sensitive indices. The

increase in the head count index for urban households in mining,
0
.4-
0 manufacturing, construction, and transport is somewhat high, but

fl ,.
e o
o 000 o
,osoc' • '-4
4
these households represent only about 10 percent of the total

number of poor households. When their welfare deficits are con-

4 wt
0 ,q
sidered, they are not as adversely affected as the rural poor. Thus,

- adjustment programs involving removal of subsidies in power,

4- In N -

t-woe4-
fuel, water, and transport are not likely to have significantly ad-
In I- 1 aQc1 t
,-4 - 0 '-4 0 - verse, immediate effects on the welfare of the large majority of the

1-
Uo poor.

A caveat on these results is in order. The simulation outcomes

0.Iu p44 U N (n C4 '-4 0 should be viewed as providing only an idea of the probable impact

of certain adjustment policies. This is sá since estimates of the

short-run impact on poverty of adjustment policies may be sensi-

o LJ
tive to the way the macroeconomy is modeled(Behrman 1990b).
04
Household targeting is a key element in providing safety nets
R qä If)
0 to the poor at reduced fiscal and economic costs. This would reduce
- '4-
0 benefit leakages to the nonpoor households. Ideally, targeting
'4-
would be based on incomes of households adjusted for size and
I-.
composition. However, it is seldom the case that reliable estimates
I-
. I 0 0
of household incomes are available. Efforts to obtain such esti-

o .E mates are extremely expensive and often impossible. These can
easily raise the administrative costs of income transfers, and such
.-
044# costs may outweigh the savings from reducing leakages to the
$4 nonpoor households. Moreover, these costs may add severely to
.2
- 0 the budget-deficit problem which may have been partly the raison
(cjI d'être for an adjustment program.
 DEVELOPMENT POfICIES, ADJUSTMENT AND POVERTY / 121

Thus, other targeting mechanisms, albeit notperfect;. may have

to be relied upon, or may have to complement household incomes.
These may include targeting by geographical unit;, by employment
status, by occupation of household members, by landholding class,
by type of commodity, by nutritional status of household mem-
bers, and by season of the year (say, in periods where seasonal
fluctuations severely limit the ability of poor households to acquire
:;1 Oc1c4e4-0 sufficient food). Available evidence indicates that, when informa-
Ine-N0It)00 C-
tion (and hence targeting) is imperfect;, these mechanisms may be
.qirq superior to targeting by household income or to a case where
transfers are untargeted. As a general rule, targeting approaches
that contradict household behavior the least are most likely to be
tfl00Lt)000O00
successful in achieving income transfer or nutrition goals, given
-o
..I U the government outlay for safety nets. Two examples thatmeet this
rule are subsidies on food less preferred by rich households, and
urban work programs which offer wages lower than minimum
(legislated) wages and those prevailing in the formal labor market.
In the latter example, only poor workers who need work the most
vU
I!)
U) .
0 q
C') 00 LI) 00000 .0 C'l are likely to seek employment in urban work programs.
.. ,q
z 0 00000000000 0
.0
NOTES
.-
U
0
- 4.•
II) ON 00
0 00000000000 0
jL1L
1. Based on figures in Oshima (1987, p. 75).
0. 2. See, in particular, Power and Sicat (1971), de Dios (1984), Alburo et
c%l %.Lfl If) 0%
0 - OQ al. (1986), Bautista (1989), Alonzo etal. (1989), Jntal and Power (1990),
1u U 9- ,-4C')I-40NN©.-4 0
and Krugman et al. (1992).
3. Meddala (1986) demonstrated that for selected components of the
U structural adjustment program implemented in the Philippines, the
U) Vo short-run impact on output and.employment could be negative. (
0 the other hand, using alternative economywide models which allow
for sectoral interdependence, Manasan (1989) showed that the im-
• bO4 pact of the tariff reform program on output and employment would
I- most likely be positive and would be greater if the program were
0 I .. accompanied by a more realistic exchange rate.
UIIo 4. This Is, of course, true only for tradable goods. As a whole, tradable
goods can be penalized relative to nontradable goods by an overval-
ued currency.
122 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY

5. Many service industries and industries with high transport costs

may be regarded as nontradable. Wages are a large component of
their costs.
6. The extent of the reduction in the user cost of capital depended on
whether the BOl-registered firm was a pioneer or nonpioneer pro-
ducer, a new or an expansion project, a domestically produced or an
imported capital, etc.
7. See Mànasan (1989) and Medalla (1990).
8. Meddala (1990) also notes that the EO 226 is inferior to the law it
replaced—the Batas Pambansa 391—in terms of its promotion of
labor-intensive and export industries. Political Economy of
Poverty Alleviation

iven the magnitude-of poverty and the enormous fiscal con-

Gstraints to direct redistribution of physical assets, long-term
solutions to poverty have to be found in sustained expansion of
high-paying employment opportunities and in improved access of
the poor to human capital development. Rapid employment
growth requires the institution of credible development policies
aimed at fostering productivity increases, efficiency, and interna-
tional competitiveness. Expanding the poor's access to basic serv-
ices, on the other hand, demands either increases in government
expenditures for human resource development, or rechanneling of
benefits of public transfer programs from unintended groups
(typically the nonpoor) to the deserving poor, or both. In both
cases, there is no free lunch. Beneficiaries of the status quo, who
are typically well-organized, can mount strong opposition to pol-
icy reforms. On the other hand, gainers of policy reforms, who are
usually unorganized, spatially dispersed, lowly educated, and
often uninformed about the benefits (and costs) of policies, are
politically weak, even though they may be a numerically-large
group. In part, their weakness arises from their inability to raise
sufficient resources for influence-peddling. The challenge then is:
How can support for poverty-alleviating policies and programs be
generated? What institutional arrangements can improve the ac-
cess of the poor to basic services? Relatedly, what incentive mecha-
123

124 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
nisms can be put in place to discourage preemption by the nonpoor
of benefits intended for the poor?
This chapter examines the dynamics of development policy
change in the Philippines.' The objective is to identify channels by
which reforms aimed at accelerating employment growth and
poverty reduction can be carried out;, given the constraints on both
• political and economic markets.
Interest Groups, Ideas, and Economic Controls
• As has been pointed out, economywide policies during the
post-World War!! period, especially trade and exchange-rate poli-
cies, penalized agriculture, labor-intensive rural nonfarm enter-
prises, and small- and medium-scale urban establishments, in
favor of capital-intensive, import-dependent;, large-scale enter-
prises in urban areas. Public investments in physical and social
infrastructure were likewise biased against the poor, especially in
rural areas; this stifled supply response—especially rural supply
response—to the stimulus provided by relatively favorable world
trade environment in the 1960s, as well as by relatively rapid
agricultural growth during the 1970s and early 1980s. Thus, this
period saw the continued swelling of the unemployed and the
underemployed, the fall of real wages in the 1970s and 1980s, the
virtual absence of improvement in the size distribution of income,
the sluggish reduction in rural poverty even during the high
agricultural growth period of the 1960s and 1970s, and the deterio-
ration of urban environment in the 1980s and early 1990s.
The landless rural workers and small owner-cultivators en-
gaged in traditional export and import-substituting crops—who
comprised the vast majority of the poor in rural areas—bore the
brunt of the indirect taxation induced by industrial protection and
exchange-rate policies. This arose because agricultural outputs are
highly tradable, much more so than industrial outputs. The pro-
tection system discouraged investments in rural areas and prema-
turely "pushed" resources from rural to urban areas.
The proliferation of economic controls, especially import and
foreign-exchange controls, in the late 1940s and in the 1950s—the
period which set the tone of &onomic controls in subsequent
periods—goes beyond considerations of pork-barrel politics by
POLITICAL ECONOMY OF POVERTY ALLEVIATION / 125
vested interest groups.2 Indeed, the policy of import substitution
was hardly questioned, except in the late 1960s when it became
apparent that economic controls had imposed a heavy burden on
the export sector and had negated the objective of rapid industrial
dev?lopment. The ideology of rapid industrial development
through import substitution, which became popular following the
emergence of newly independent states after World War II, par-
ticularly in Latin America and South Asia, had adherents among
key policymakers in the government. The relatively high growth
of import substitutes made it possible for policymakers to be less
concerned about the impact of these controls on exports; this
growth gave the impression that rapid, sustained industrial devel-
opment was on the way. Even among serious students of Philip-
pine economic development, there was little recognition of the
impact of trade and exchange-rate policies on exports and overall
growth. In fact, this realization emerged only in the late 1960s.
To be sure, producers of traditional exports, principally sugar
and coconut, were an important economic group in the 1950s and
early 1960s. The so-called "sugar barons" were a powerful and
cohesive interest group, largely facilitated by the fact that sugar
was based on large-scale plantation agriculture. The coconut pro--
ducers, though not as effectively organized as sugar producers
owing to the dominance of small owner-operated farms, received
substantial support from the sugar bloc, mainly because they
shared the same interest—an access to the huge American market.
These blocs were the liberalizing" influence in the controversy
•over exchange-rate policy (Power and Sicat 1971:61). However, a
concession in the form of an export bonus, which enabled them to
receive a minor increase in the effective exchange rate they re-
ceived. for their exports, muted their resistance. Moreover, the
more enterprising members of the sugar barons moved into indus-
try as a result of the more attractive policies favoring that sector.
Other producers of exports, particularly nontraditional exports,
were a very small class of entrepreneurs at that time, at least in
relation to the import-substituting economic interests.
By the late 1960s, at least ti,y developments somewhat
changed the tide in favor of export development. First, the unfa-
vorable impact of the import substitution regime on export-on-
126 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY POLITICAL ECONOMY OF POVERTY ALLEVIATION / 127
ented industries had become increasingly understood, at least in
the academic community and among a number of senior govern-
ment officials with strong academic backgrounds (Bautista 1989:
34). The latter increased in number substantially during the period;
they became defacto spokesmen of exporters in policy discussions.
Second, the experience of East Asian countries, particularly Singa-
pore, Taiwan, and South Korea, where industrial developments
were geared toward export growth, began to be appreciated in the
Philippines. The global environment for trade was also very favor-
able during most of the 1960s. Unfortunately, the political influ-
ence wielded by vested import-substituting interests, which were
likewise well represented in various departments of the govern-
ment and in Congress, overwhelmed the dout exerted by the
pro-liberalization forces in academic and business communities as
well as the "technocratic" group in government. The subsequent
enactment of a number of export promotion measures, especially
the Export Incentives Act of 1970 could thus be seen as a political
compromise among contending interests. But as later research
would show, the structure of protection still remained largel
biased against exports, especially traditional agricultural exports.
The incentives given to exports were simply crumbs from the table.
Labor as a whole was expected to benefit from the shift of
policy from import substitution to export promotion. The benefit
would arise from the expansion of employment opportunities as
resource allocation efficiency improved and as the market for
domestically produced labor-intensive goods expanded. They
could therefore be a potential source of strong political support for
industrial policy reform. However, workers in small-scale, export-
oriented industries as well as the unemployed and underem-
ployed are typically unorganized, widely dispersed (especially in
rural areas), and uninformed; they can easily be misled by the more
articulate spokesmen of protected industrialists and self-pro-
claimed nationalisIs The impact of the policy shift on employment
and wages, which were their main concern, is not easily under-
stood, nor immediately apparent owing to the time lag involved
from the initiation of reforms to actual output response of trad-
ables. On the other hand, organized labor groups in urban-based,
import-substituting industries can easily identify the impact of this
shift on their current employment. The less mobile is labor, the
greater is the short-run cost of adjustment, and the more intense is
labor's opposition to the policy change. Indeed, in the policy
reform effort of the 1960s and 1970s, organized labor in industry
expectedly sided with self-styled nationalists whose main interest
was to preserve the protection of import-substituting industries.
The 1970s saw an unprecedented expansion of direct govern-
ment interventions in the market economy (de Dios 1984). The
imposition of Martial Law in 1972 as well as supply shocks from
both local and international sources facilitated this turn of events.
Perhaps the most controversial was the direct interventions in
agriculture which eventually resulted in rampant rent-seeking in
agricultural production, marketing, and international trade, espe-
cially in sugar and coconut. At their inception, these interventions
were justified, rightly or not, either as stabilization measures aimed
at averting "food crises" (especially in rice and corn) or as struc-
tural measures intended to "rationalize" export crop industries, or
both. Moreover, advocates of interventions in the export crops
sector argued that these would be necessary to strengthen the
country's position in foreign markets. In the case of coconut oil
exports, some technocrats argued that the country, which had the
dominant share (about 70 percent) of the total world coconut oil
market, could exert market control. In the case of sugar, the gov-
ernment's consolidation of the domestic trading was premised on
the government's desire to replace the excessive dependence of
farmers on middlemen and to efficiently manage supply. How-
ever, the various interventions ran counter to their avowed objec-
tives, as these had stifled competition, militated against
comparative advantage, and squeezed incentives in agriculture.
The political landscape for deregulation in agriculture as well
as for trade and industry reforms took an unprecedented form in
the early 1980s. The oil shock of 1979-1980, the deep recession in
the country's major trading partners, the emerging global debt
crisis which capped off with a "big bang" in 1982, the soaring to
new heights of interest rates, the sharp fall in the country's external
terms of trade, and domestic political instability, forced the con-
omy to succumb to its structural weaknesses. Economic collapse
was inevitable. The World Bank came forward for the needed

128 / POVERTY, URBANIZATION AND DEVELOPMENT POUCY
resuscitation—a structural adjustment loan (SAL)—with the con-
dition that the country would undertake a comprehensive struc-
tural reform program. Dismantling of the monopolistic structures
in agriculture was part of the SAL arrangement. The major actors,
even those in government who had been blocking past reform
efforts, embraced the arrangement, but for different reasons. As
Fabella (1989:211) puts it
The multilateral organizations saw an opportunity to run an
experiment in a controlled atmosphere.... The academic tech-
nocrats saw an opportunity to implement its trade and indus-
try ideas which thus far had been paid only lip service. The
business technocrats saw financing for high ticket projects. The
political leadership saw its fortunes rise with the major indus-
trial projects. The business sector was either coopted or felt it
prudent not to make noise. Thus, the SAL arrangement had
two components as far as the players were concerned: the trade
and industry reforms which were the conditions and the pos-
sible financing of the major industrial projects. These were, in
fact, contradictory components and one could not really be
pushed without hurting the other. Commitment by the politi-
cal leadership did not mean implementation.
Reforms undertaken were largely cosmetic procedures which
failed to remove the structural deficiencies of the economy and
thus were ineffective i1 moving the economy toward a sustained
growth path. They only seemed to postpone the inevitable: the
economy plunged into its deepest crisis in postwar history in 1984
and 1985. At the same time, the political unrest which started to
simmer in 1983 following the assassination of opposition leader
Benigno Aquino, intensified. What followed was the ouster of the
dictatorial regime and the birth of the Aquino Government.
Like its predecessors, the Aquino Government's new eco-
nomic program primarily stressed the alleviation of poverty, the
generation of more productive employment opportunities, and the
promotion of equity and social justice The strategy adopted to
achieve these goals was, however, quite distinct from the previous
Ones. The emphasis was a market-based development strategy,
rather than unrestricted government interventions in the market-
POLITICAL ECOMYOF POVERTY ALLEVIATION / 129
place. Unlike previous programs which emphasized import-Sub-
stituting industrial development;, the new program called for the
removal of policy biases against agriculture and the rural sector
and thus, for the improved profitability of labor-intensive 'and
agn-based nontraditional exports. In thort, the new program em-
braced an employment-oriented, rural based development strat-
egy which had its origin in the work led by the Yale University
professor Gustav Ranis in the early 1970s
The role the academic community played in the shaping of
"new" policy directions, i.e., the stronger emphasis on markets, is
crucial. Here; the "crisis monographs" from the U.P. School of
Economics deserve to be mentioned. These monographs, particu-
larly An Analysis of the Philippine Economic Crisis (popularly re-
ferred to as the White Paper) and its sequel, Towards Recovery and
Sustainable Growth, attracted wide attention, both within and out-
side the government, not because they offered the only analysis in
the arena, but because of their "strong, but economically argued,
advocacy of social reforms such as better income distribution,.
progressive taxes, land reform, etc." (Fabella 1989, p. 207). More-
over, these papers cogently argued that while adverse external
developments (such as the oil shock of 1979-1980 and the deterio-
ration of the country's ternisof trade) explained part of the chronic
weakness of economic performance, the more culpable villain is
the domestic economic structures and policies.
• Agricultural policy reforms in the second half of the 1980s were
also shaped by the equally controversial policy studies of a group
of researchers, led by Cristina C. David, from the University of the
Philippines at Los Banos. These studies, collcted in .a volume
entitled Agenda for Action.for the Philippine Rural Sector (popularly
referred to as the Green Book) became the "official bible" of the
Department of Agriculture (DA) in its advocacy for sector-specific
and economywide reforms aimed at removing the substantial
biases of government policies against agriculture and the rural
sector. Many of the contributors to this volume eventually became
either consultants to the new DA leadership or technocrats within
the department.
However, the influence of market reformers waned fast as
institutional sderosis—described by Olson (1982) as the accumu-
130 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY POLITICAL ECONOMY OF POVERTY ALLEVIATION /131
latiOn of special interest groups engaging in wasteful rent-seeking
activities—afflicted the highly vulnerable Aquino administration
after a year of "honeymoon" with regained democracy. Public
perception of the president's naivete in the exercise of power only
heightened its vulnerability to pressure groups. With the restora-
tion of Congress in 1987, many of the special interest groups during
the Marcos regime were back in the corridors of power and exer-
cised considerable influence in policy formation. Moreover, a
power play among the economic offices under the National Eco-
nomic and Development Authority (NEDA), on the one hand, and
the Central Bank (CB) and the Department of Finance (DOF), on
the other, took place. NEDA, the bastion of economists with strong
academic credentials, championed for market-oriented policy re-
forms (i.e., market liberalization and deregulation) as well as a
stronger stand on the foreign debt. The CB and the DOF, on the
other hand, espoused protectionist policies and more accommo-
dating policy stance concerning debt negotiations with commercial
banks. The outcome of the power play was a NEDA effectively
diminished in relative importance, and a CB and a DOF virtually
made the main actors in economic policy formation. Defeated,
Prof. Solita Monsod, NEDA's secretary-general and the socioeco-
nomic planning secretary, tendered her resignation and returned
to the U.P. School of Economics which had always been supportive
of her policy stance. This was a victory for big business groups and
for commercial bank creditors—including lenders of so-called be-
hest loans—of the Marcos regime.5
Nonetheless, the Aquino administration succeeded in bring-
ing the economy closer to the market than it ever was in the past.6
Reforms, though, were insufficient in several areas. Tax effort
remained low at 10-15 percent of GNP, still one of the lowest in
Asia; the tax system also remained regressive, as reflected by the
relatively high proportion (60 percent) of indirect taxes in total
government revenue. Public investment in infrastructure, espe-
cially in energy, took the back seat as the public debt service burden
took up over 40 percent of total government expenditures. The
neglect of complementary public goods meant that the supply
respOnse to market reform initiatives was weak. Indeed, after a
establishing an average GDP growth rate of 5.6 percent a year in
19861989, the economy slowed down in 1990 and eventually
stagnated in 1991 and 1992. The government's neglect of energy
took its toll on the economy at the turn of the 1990s when brown-
outs lasting from four to eight hours became a daily occurrence.
To be sure, political instability, natural calamities, and unex-
pected external events contributed to the poor economic perform-
ance in the late 1980s and early 1990s. A series of coup attempts
sowed uncertainty on a "nascent democracy" and reduced confi-
dence in the economy. Rehabilitation efforts in areas affected by
the devastating earthquake in July 1990, volcanic eruptions, pro-
longed droughts, and floods severely strained government's finan-
cial resources. On the external front, growth in the country's major
trading partners slowed down starting in 1988. The Gulf crisis in
late 1991 further weakened the economies of many industrialized
countries. Taken together, these unfavorable events merely accel-
erated what was to befall the economy, sooner or later.
Policy Research, Policy Advice,
and Development Policy Formation
The above episodes in policy reform efforts have highlighted
the interaction of ideas, whether corruptor not, and special interest
groups in the making of economic policies. The import-substitut-
ing industrialization strategy of the 1950s had its adherents among
top decision-makers and academic technocrats. The impact of the
import and trade controls on exports and sustained growth was
hardly understood at that time. The controls eventually led to the
growth of vested interests. As the lessons from the East Asian
development experience registered in development discussions
and as the costs and consequences of the import-substitution strat-
egy on export and industrial development became apparent, these
interests began to pose a critical obstacle to the desired shift of
strategy.
The academic community and social action groups—many of
whom have origins from or ties with the poor—play a critical role
in the struggle for pro-reform policies. Policy analysis can help
shape perceptions among the actors in the political arena about the
costs and benefits of government action (or inaction). In less devel-
oped countries, the numerically large, geographically dispersed

132 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
small farmers, landless rural workers, and unskilled urban work-
ers—the poor in geneial—typically have little influence in the
making of economic policies. Pressure for reforms that beneficially
affect them must have to come from somewhere else. The presence
of pro-reform advocates in government is seldom enough to bring
about reforms. It is here that policy analysis plays a major role. In
this regard, the reminder of John Maynard Keynes is instructive:
"The ideas of economists and political philosophers, both
when they are right and when they are wrong, are more
powerful than is commonly understood. Indeed the world is
ruled by little else. Practical men, who believe themselves to
be quite exempt from any intellectual influences, are usually
the slaves of some defunct economist" (Keynes 1964:383).
Policy analysis informs pro-reform advocates in government
on the costs of monopolistic tendencies, protectionist trade re-
girnes, and ill-advised institutional arrangements. At the very
least, the research makes influence-peddling more difficult (costly)
for rent-seekers.
Organizing the diverse, export-oriented industries—mostly
small-scale—into a powerful lobby group which can support the
position of pro-reform advocates in government, is also extremely
helpful in enhancing the success of reforms, especially in counter-
ing the protectionist pressure exerted by import-substituting,
large-scale industrialists. The process requires that the pro-reform
advocates explain to the public why the reforms are needed and
how they are to work. This must be done in simple language and
may have to be done repeatedly.
Balanced rural-urban growth and economic development re-
quire the strong complementarity of state and market. The state
not only institutes and enforces the long-term rules of the game that
empower and constrain economic actors but also provides comple-
mentary public goods for the efficient operations of markets. The
Marcos administration provided a strong (and corrupt) state, but
had distaste for an independent and competitive private sector.
The Aquino administration, on the other hand, championed the
cause for market-driven private sector but had weak political
muscle. This meant that the state missed performing its major
POLITICAL ECONOMY OF POVERTY ALLEVIATION /133
role—the financing and public-private sector coordination of in-
vestment in social and physical infrastructure, the promotion of
rules ensuring incentive compatibility in government and the pri-
vate sector, and the pursuit of an egalitarian distribution of assets
in the private sector—in laying the foundation for king-term eco-
nomic growth and development.
Public Agency, Incentive Compatibility,
and Pro-Poor Policy
The design of pro-poor, pro-market, and pro-growth govern-
ment interventions can be usefully conceived as a principal-agent
problem. In general terms, an agency problem exists when one
economic actor, the principal, engages one or more other economic
actors, the agents, to perform certain tasks on the principal's behalf,
but it is difficult (costly) to observe the agent's effort and to nego-
tiate for and enforce agreements. A common example is the ten-
ant-landlord relationship in rental housing markets. Because
improvements in rental housing are capitalized. On the market
value of the property and because the residual claimant of rent is
the property owner (principal), there is no incentive for the tenant
(agent) to maintain the productive life of the property. The owner
must devise forms of private enforcement that induce the tenant
to act in a manner consistent with the former's interest. In public
policy, the public is the principal, and the government and the
market are the agents. A pro-poor policy is one which not only
provides a dear blueprint for achieving poverty alleviation objec-
tive but also explicitly specifies penalties and rewards ensuring
that private and public actors find it in their interest to behave in
a manner consistent with this objective. Such policy is incentive
compatible.
An incentive-compatible pro-poor policy induces state offi-
cials to implement certain objectives in behalf of the poor. The
central incentive scheme eliciting this behavior is contingent re-
newal: holders of government offices are given high salaries and
perks, with a credible threat of their withdrawal if they fail dearly
specified measures of satisfactory performance. For certain basic
services, such as garbage disposal, the assessment of performance -
is not problematic. However, for other basic services, such as health

134 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY POLITICAL ECONOMY OF POVERTY ALLEVIATION /135

delivery and education, it is difficult to measure public servants' information systems is critical in raising the effective demand of
performance, since the intended beneficiary's health status and the poor for poverty-focused policies and programs. The articula-
progress in skill and learning formation also depend on a host of tion of this demand can be enhanced by bringing together the poor
other factors affecting the individual, his family, and his physical and the nonpoor groups that have interest in seeking poverty-re-
and social environment. Contingent renewal, in this case, may be ducing reforms. The political power and administrative machinery
ineffective. of nongovernmental organizations and private volunteer groups
Another difficulty with instituting efficient incentives aimed can be harnessed for this purpose.
at eliciting pro-poor actions of the public agent is that certain
groups with particularly strong stakes in his decision have an
interest in offering him alternative incentives: lucrative private NOTES
sector job after tenure in public office, "gifts" during special holi-
days, electoral contributions, and threats. As noted above, influen- 1. This chapter draws largely from Balisacan (1991a).
tial rent-seekers are typically small-number groups in business as 2. See, for example, Bautista (1989) and Intal and Power (1990).
well as organized labor in formal sectors; they have the long-term 3. The structure of protection is well documented in Bautista, Power
and Associates (1979).
interest and resources to impose these incentives. The poor, on the 4. See ILO's Sharing in Development: A Programme of Employment, Equity
other hand, are highly dispersed, unorganized and uninformed; and Growth for the Philippines published in 1974. The Marcos admini-
because of serious free-rider problems-confronting this group, the stration had commissioned this work, but it simply ignored the
poor are incapable of generating sufficient resources (time and volume's policy reform recommendations.
money) for influence-peddling. The outcome of the contest is See, e.g., Bautista (1989,37 if) and Fabella (1989, p. 213).
undue concentration of basic services and program subsidies to 5. See also Lamberte et al. (1992).
nonpoor groups, e.g. public sewage facilities in high-income com- 6. See, e.g., Bautista (1989, 37ff.) and Fabella (1989, p. 213).
munities, curative care for the elite, subsidized housing programs
for the urban nonpoor, and large subsidies for higher education.
Moreover, rent-seeking behavior may also lead to preemption
of benefits of poverty-focused programs by unintended groups.
This is particularly the case if the service is spatially inaccessible to
the poor (e.g., specialized curative health centers in the nation's
capital), or if it has attributes that are likewise attractive to unin-
tended beneficiaries (e.g., socialized housing units in relatively
high-income neighborhood).
Contingent renewal needs to be complemented by other incen-
tives aimed at eliciting the participation of the poor in the design
and implementation of poverty-focused programs, as well as mak-
ing unintended beneficiaries not worth their while to preempt the
benefits of these programs. Locating basic services in areas where
the poor live is, for example, one way of reducing their participa-
tion cost, while at the same time raising the participation cost of
unintended beneficiaries. On the demand side, providing efficient

Chapter 7
Conclusions and Further Implications
e level of urbanization in the Philippines has accelerated in
recent years; its current level is higher than those in most other
Asian countries at a similar stage of development. But unlike the
East Asian experience, rapid urbanization has not been accompa-
nied by an equally rapid growth of per capita income as well as by
a significant shift of labor employment from low to high produc-
tivity areas. The urban poor have thus become an increasingly
substantial proportion of the country's total poor population, ris-
ing from only 28 percent in 1961 to 41 percent in 1991. At the current
level of urbanization and urban deprivation, poverty in the Phil-
ippines has ceased to be merely a rural phenomenon.
The maintenance of economic growth is crucial to the allevia-
tion of the poverty problem. But even with economic growth
sustained at the rate experienced in 1986-1989, that is, at an average
GDP per capita growth of 32 percent, it will take many years for
the average poor to "cross over" the poverty line. How long
depends much on whether the growth will be accompanied by
changes in the size distribution of income. Assuming that income
distribution remains unchanged, as largely has been the case over
the last three decades (Balisacan 1993), it will take about 15years
for the average poor to cross over the poverty line. A faster growth
of 5 percent—not a far-fetched possibility, given the experience of
neighboring Asian countries—will shorten the cross-over time to
about 10 years. Put differently, to achieve cross-over in 10 years,
136
CONCLUSIONS AND FURTHER IMPLICATIONS / 137
the growth rate of the poor's mean income has to be about 45
percent a year. The implied (point) elasticity of the distributionally
neutral growth is about -1.8, that is, a 10 percent increase in GDP
per capita growth rate reduces the average poverty gap by 18
percent.
If the growth is accompanied by an improvement in income
distribution in favor of the poor, the average poor will, for a given
growth rate, move up the poverty line in a much shorter time. The
elasticity of the poverty gap index with respect to the Gini index is
about 2.4 percent, that is, a reduction in the Gini index by one
percent will decrease the average poverty gap by 2.4 percent.
Clearly, income growth accompanied by a decrease in income
inequality will go a long way in reducing Philippine poverty.
Contrary to popular perception, urban poverty is not a "Metro
Manila phenomenon", although dose to 30 percent of the urban
population live in this region. The region's poverty incidence is the
lowest in the country; the average income deficit of Metro Manila's
poor is also the lowest among the regions, even after accounting
for cost-of-living differences. Moreover, the region contributes less
than one fifth of the urban poor and less than one tenth of total
income deficits of the urban population. Thus, the continuing
concentration of basic social services and poverty alleviation pro-
grams in Metro Manila is unwarranted.
This study has traced the roots of urban poverty to the indus-
trialization policies that unduly encouraged the concentration of
infrastructure and social services in major urban centers, particu-
larly Metro Manila; to trade and macroeconomic policies that
severely penalize agriculture, labor-intensive exports, and small-
and medium-scale manufacturing establishments; and to public
spending policies that accorded little attention to human capital
formation for the poor. This policy environment has engendered
industrial "enclaves" that have little linkage with the rest of the
country, dampened the expansion of high-paying employment
opportunities for the fast growing labor force, and limited the
access of the large majority of the urban poor to basic needs and
social services.
The economic welfare of the poor can be secured only by a
comprehensive economywide policy reform aimed at correcting

138 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
the disincentives against the production (and consumption) of
labor-intensive goods, particularly labor-intensive exports, and at
promoting backward integration and balanced urban-rural
growth. In particular, the reform has to allow for a rapid, sustained
growth of employment outside the agriculture sector and the
urban informal sector. The reform has also to permit infrastructure
and institutional development outside Metro Manila.
Political support for the institution of pro-poor, pro-market,
and pro-growth reform has to be enhanced. Beneficiaries of the
status quo, who are typically well-organized, can mount strong
opposition to policy reforms. On the other hand, gainers of policy
reforms, who are usually unorganized, spatially dispersed, lowly
educated, and often uninformed about the benefits (and costs) of
policies, are politically weak, even though they may be a numeri-
cally-large group. The influence of pro-reform advocates in gov-
ernment is seldom enough to bring about reforms. The academic
community and social action groups play a critical role in this
struggle. Policy analysis can help shape perceptions among the
actors in the political arena about the costs and benefits of govern-
ment action (or inaction). Organizing the diverse, export-oriented
industries into a powerful lobby group which can support the
position of pro-reform advocates in government, is also helpful in
enhancing the success of reforms, especially in countering the
protectionist pressure exerted by import-substituting industrial-
ists. The process requires that the pro-reform advocates explain to
the public why the reforms are needed and how they are to work.
Balanced rural-urban growth and economic development re-
quire the strong complementarity of state and market. The state
not only institutes and enforces the long-term rules of the game that
empower and constrain economic actors but also provides comple-
mentary public goods for the efficient operations of markets. In
recent years, the state missed performing its major role—the fi-
nancing and public-sector coordination of investment in social and
physical infrastructure, the promotion of rules ensuring incentive
compatibility in government and in the private sector, and the
pursuit of an egalitarian distribution of assets in the private sec-
tor—in laying the foundation for long-term economic growth and
development.
CONCLUSIONS AND FURTHER IMPLICATIONS / 139
The design of pro-poor policies needs to provide a dear blue-
print for achieving a poverty alleviation objective as well as explic-
itly specify penalties and rewards ensuring that private and public
actors find it in their interest to behave in a manner consistent with
this objective. A necessary element of this design is a contingent
renewal scheme: public agents are given high salaries and perks,
with a credible threat of their withdrawal if they fail clearly sped-
fled standards of satisfactory performance. However, for many
basic services, this scheme is seldom effective. In health delivery
and education, for example, it is difficult to measure public agent's
performance, since the intended beneficiary's health status and
progress in skill and learning formation also depend on a host of
other factors affecting the individual, his family, and his physical
and social environment. Moreover, certain groups with strong
stakes in the public agent's decisions have an interest in offering
him alternative incentives: lucrative private sector job, "gifts" dur-
ing special holidays, and threats. Finally, rent-seeking behavior
may lead to preemption of benefits of poverty-focused programs
by unintended groups.
Contingent renewal therefore needs to be complemented by
other incentives aimed at eliciting the participation of the poor in
the design and implementation of poverty-focused programs, as
well making unintended beneficiaries not worth their while to
preempt the benefits of these programs. Locating basic services in
areas where the poor live is, for example, one effective way of
reducing their participation cost, while at the same time raising the
participation cost of unintended beneficiaries. Thus, publicly pro--
vided curative health centers in the nation's capital are hardly
pro-poor programs. Similarly, public programs having attributes
also highly valued by unintended beneficiaries (e.g., socialized
housing units in high-income neighborhood, general food price
subsidy) seldom succeed in reaching intended beneficiaries.
Providing efficient information systems is critical in raising the
effective demand of the poor for poverty-focused policies and
programs. The articulation of this demand can be enhanced by
bringing together the poor and the ncnpoor groups that have
interest in seeking poverty-reducing reforms. The political power
140 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY

and administrative machinery of nongovernmental organizations

and private volunteer groups can be harnessed for this purpose.
Finally, the policy perspective presented here has an important
implication for foreign relief and official development assistance
(ODA). The effectiveness of a large number of ODA-supported
development projects in alleviating poverty has been hindered by, Appendix A
among other things, overly complex project designs with little
flexibility, the use of inappropriate technologies, insufficient in-
vestment in local administration, and the lack of beneficiary par- Robustness of Poverty Comparisons
ticipation. More importantly, these projects have failed to give
adequate attention to the implication of government programs and The question of whether poverty is higher or lower in one state
policies on their effectiveness and sustainability. It is suggested than in another may crucially depend on the poverty norm and
that future ODA projects pay more attention to overall sectoral aggregate poverty indicator employed. Unknown differences in
policies, place greater stress on institutional development and needs between households of similar income (consumption) levels
beneficiary participation, should contain as much productivity- are real. There may be also errors in the available data on living
raising content as possible, and be used as an effective device,to standards. Thus, one can ask: How robust are the results of poverty
support a government pursuing policies intended to benefit the comparisons? What would the picture look like under different
poor. assumptions? In pursuing this issue, we invoke well-known theo-
retical results on stochastic dominance to attain at least a partial
ordering of poverty distributions in terms of any well-behaved
measures of aggregate proverty.'
Suppose the poverty line is found in the interval [zo, z il; all
poverty lines in this interval are potential candidates. Let F1 and 19
denote the cumulative distribution of income or standard of living
for states i and j, respectively. Poverty is higher in state i than in
state j for all poverty lines in the interval [zo, zi] and all additively
separable poverty measures, including the Pa class of measures, it
and only if the first-order dominance condition

F1(z)-F1(z)>O (Al)

holds for z<z1, and with a strict inequality for at least one such
value of z (Atkinson 1987, Condition IA). If this condition does not
hold, then some poverty lines or some poverty measures rank the
two states differently to others. That is, given the uncertainty about
precise poverty lines and poverty measures, the poverty ordering
of the two states is ambiguous.

141
142 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY

If the poverty ordering is ambiguous, one can further restrict

the range of poverty lines, or one can impose more structure on the
poverty measures. One appealing restriction to impose is the Sen
(1976) weak transfer axiom. This holds for the Pa poverty measures
as long as a>1. Then a necessary and sufficient condition for
poverty to be higher in state i than in state for all poverty lines in
[zo, z1] and all strictly convex and separable poverty measures is Appendix B
for the following second-order condition to hold for all zSzi (Atkin-
son 1987, Condition IA):
Poverty Indicators for Fixed Physical Areas
f(F1 (y) - F(y))y ^t 0. (A2)
The decomposition of Pa class of poverty measures into rural
(r) and urban (u) sectors is
If poverty orderings remain ambiguous, higher-order domi-
nance conditions may be useful. This requires further restricting P. = () Par + ( 1 ) au (131)
the precise structure of poverty measures.
where co is the population share of rural areas. Let P' ,1 (i = r, u) be
the poverty index for sector i with a population share of co' after a
NOTE change. Following Ravallion and Huppi (1991), the change in
On the application of stochastic dominance theory to poverty assess- observed aggregate poverty can be written as:
ment, see Atkinson (1987) and Foster and Shorrocks (1988). See also
Ravallion (1992b) for an application to measurement of undernutri- =
tion, and Ravallion and van de Walle (1991) for an application to an
analysis of the poverty impact of food pricing reforms. +(B2)

The first term on the right-hand side is the contribution of the gains
to the poor within each sector to the change in aggregate poverty,
controlling for their base period population shares. The second
term is the contribution of urban-rural changes in population
distribution to the change in aggregate poverty. The third term is
residuals, arising from the possible correlation between popula-
tion shifts and intrasectoral changes in poverty.
Collecting all terms for r, the level of contribution of rural areas
to the total change is

143
144 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
(P ,-P ) ' ( 0 'ar ,(Y-o) = c(P-P), (B3)
where c is the proportionate contribution of r to the total change in
Pa.
By definition, P'a-Pa=O at a given date t. If at this date fixed
physical rural areas are different from reported rural areas owing
to reclassification, P's, would be different from Pat, the measured
poverty index based on shifting rural areas. In this context;, co' is
interpreted as the population share based on rural population
distributions for fixed physical rural areas. It can then be shown
that rural poverty at date t for fixed physical rural areas,P'a,y is
simply
= (134)
Similarly, urban poverty for fixed physical urban areas is
= 10- 0)/( l - 01P (B5)
The above procedure is only an approximation. It assumes that
the reclassification of rural areas as urban areas does not alter the
contribution of rural areas to total poverty. This requires that the
reclassification entails switching rural non-poor to the urban sec-
tor. It is plausible that some of the rural poor will also get re-clas-
sified, in which case the rural sector's share of total poverty will
fall due to the reclassification. Thus, it would be useful to estimate
the P'ai directly from distribution of household incomes (or expen-
ditures) for the population of fixed physical rural areas.
Appendix C
An Econometric Model
of Occupational Choice
We consider the choice between self-employment and
wage/salary employment. It is assumed that the choice is directly
related to the difference in relative earnings:1
(Inlç - mY) = Zy + € 1, (Cl)
where
Y. = earnings if worker is self-employed,
Y = earnings if wage or salary worker,
Z = a vector of characteristics that are associated with the
probability of choosing. self-employment, and
ci = disturbance term.
Earnings in each mode of employment is determined as fol-
lows: -
= X1,P, + (C2)
= X2j2 + 112P (0)
where Xis a vector of determining variables. Substituting (C2) and
(C3) into (0), and assuming that all earnings variables also influ-
ence the mode of employment,we have
145

146 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY APPENDIX C I 147

(=1 if Zy + e,>O (self-employed)

= otherwise (wage/salary worker) (C4)
NOTE

Although the discussion focuses on self-employment as the pre-

where E = .L1-.t-E1 and Z absorbs all exogenous variables in X1, ferred alternative, that is irrelevant for the basic argument. For a
X2, and Z. related empirical formulation of occupational choice, see van der
Since E is correlated with .Li and.t2, parameter estimates based Gaag and Vijverberg (1988) and Fujii and Hawley (1991).
on separate ordinary least squares (OLS) regression of the two
modes of employment are generally biased (Maddala, 1983). Lee
(1979) suggested a two-stage estimation procedure to estimate a
switching regression model such as the above. The procedure
involves modifying the earnings equations by incorporating ap-
propriate "selectivity variables" and adding error terms with zero
means. The corrected earnings equations can be written as:

hiY, = XjjPj- a S, + u1,, for self-employed workers, ()

= X02 + + u21, for wage/salary workers, (C6)

where

S11 =

S2 = •(Zy)I(1 - ip(Z1y)).
Since sample separation is observed (i.e., the observations are
observed, ex ante, to be either self-employed worker or wage and
salary worker), probit estimation can be employed to estimate the
parameters y of the reduced form probit decision equation (C4).
These parameter estimates are then used to compute for the values
of S1 and S2 which are then substituted into (0) and (C6) and
estimated by maximum likelihood methods.

Appendix D
Measuring the Welfare Impact
of Adjustment Policies
For measurement purposes, we assume that household pro-
duction and consumption decisions are separable and recursive,
i.e., production decisions concerning choice of production technol-
ogy, crop mix, and input levels, are made prior to consumption
decisions. Households choose optimal bundles of consumption
goods and services in order to maximize their well-being (i.e.,
utility), given their maximized profits in production, labor and
rental incomes, and other (fixed) incomes. For producers whose
incomes are directly affected by commodity price changes owing
to policy reforms, their total household income is
Y = + r (Dl)
where 7&(.) is the household's maximized variable profits from all
production activities, V=(P,W) is a vector of prices of outputs (P)
and variable inputs (W), F is a vector of fixed inputs, and F is other
incomes (assumed fixed). The output supply and factor demand
functions are derived from it(.) via Shephard's lemma; that is, the
vector of output (fl and (negative) variable inputs (-X) is written
as
(D2)
Q= [Y, _X1 =
4W
- 148
APPDIX D I 149
Utilizing (D2) and with little manipulation, the proportionate
change in variable profit arising from proportionate changes in
output and variable factor prices can be written as
I,' J(1 (D3)
6, - E b i)
it .•1 I a,.A I
where the hat above a variable denotes proportionate change, Xj is
initial variable profit (value added) from activity i, b1 is the cost
share of variable input j in activity i, and otj' is the ratio of value
addedto total cost.
In Chapter 2, we followed convention in using income (con-
sumption) per capita to distinguish the "poor" from the "nonpoor"
households. We did not attempt to link this poverty indicator with
the theoretical attraction of utility-based poverty measures. In
Chapter 5, instead of using income per capita, we based our
poverty measures on distributions of money metric utility or
"equivalent income"(Varian 1992:108-110). Changes in household
welfare owing to price changes during adjustment were measured
as changes in equivalent income.
Let the expenditure function of the household, which relates
the minimum amount of money y" required to obtain the utility
level ui', be e(d1', p h, u), where dh is a vector of household charac-
teristics (e.g, family size and composition), and ph is a vector of
prices facing the household. Assuming strictly positive marginal
utility of income (i.e., nonsatiation), this function can be inverted
to give the indirect utility function v(d1 , ph, h) of the household.
Then the equivalent income yeh is the amount required to obtain
u' at reference prices pT and for household characteristics dr:
r, pr, u h) = e (d r, pr ' V (d h, y h))
y = e (d
= f(d', p', d h, p h yh)
(134)
'Note that, since pT and d are fixed for-all households, ?h is an
exact money metric of actual utility v(.), i.e., yeh is an increasing

150 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY APPENDIX D / 151

monotonic transformation of v(.). (For most purposes, the choice
of reference prices and household characteristics is arbitrary.) No-
tice too that, for the reference household, the equivalent income is
equal to the money income. Finally, note that the equivalent in-
come poverty line corresponding to the fixed utility level u can be
defined readily as e(dT, pT, u).
The. form of the equivalent income function can be derived if
one knows the specific functional form of the indirect utility func-
tion (or of the expenditure function). Thus, starting from any
well-behaved demand model and household-level data on budget
constraints and household characteristics, a distribution of equiva-
lent incomes can be obtained. In this study, Deaton and Muell-
bauer's (1980) "almost ideal"(AI) demand system model is
employed in deriving parameter estimates of consumer demand
systems for the Philippines. The demand functions derived from
this model are first-order approximations to any demand system
derived from utility-maximizing behavior.
The system of Al demand equations canbe written as
(D5)
w4 = + y.•, logp1 + 3 1 1og (L) i = 1,2,...,m model yielded an own-price elasticity of -0.703 for cereals, -0.954
where w1 is the budget share of commodity i, y is total nominal
expenditures, and P is a cost-of-subsistence index defined by
= logP* + uHp;'
log c(u,p)
(D8)
from which the equivalent income function in (1)4) can be readily
derived.
Adding-up and homogeneity restrictions implied by utility
maximization require that Z jc j =1 and Zjlj = Ijy = Yij = 0 (where
all summations are over m goods). Symmetry of the Slutsky matrix
requires that = Yji. In our estimation of the "linear approximate"
Al demand model, we have chosen to impose these restrictions.
For our purposes in Chapter 5, we have classified expenditures
into four groups: cereals, meat (broadly defined to include meat
and dairy products, eggs, and fish), utilities (broadly defined to
include fuel, light, water, and transportation and communication),
and other expenditures. Data on expenditures were derived from
the FIFS for 1985 and 1988. Because the FIES data do-not contain
prices, price indices for the various regions are used. The iterative
Zeliner estimation procedure is employed in obtaining efficient
parameter estimates Of the Al demand model. The estimated
for meat, -1.135 for utilities, and -0.782 for other expenditures. The
details of the estimation and results are given in Balisacan (1992c).

logP = a 0 + alogp
+
y.1iogp,iogp1. (136)

Following convention, we have used the Stone price index given

by

log P * (D7)
2 w logp
k

as a reasonable approximation to (136). Then we can express the

corresponding expenditure function as


Appendix Table 1 Appendix Table 2
Per Capita Poverty Lines Labor Supply and Employment, 1971-1991
(At current prices)
Rural Urban
Year/Region 1971 1972 1973 1974 1975 1976 1977
Working Age
1961 212 304
1965 265 382 Population b/ 26,378 27,477 28,879 28,764 29,751 24,837 25,787
1971 406 585 (000's)
1985 3,599 5,180 Urban 8,675 9,147 9,747 9,678 10,168 8,561 8,934
1988 4,094 5,893 Rural 17,703 18,330 19,132 19,086 19,583 16,276 16,853
1991 6,003 8,640 Labor Force (000's) 13,241 13,294 14,559 14,283 15,161 15,018 14,994
Regional Poverty Lines, 1988 Urban 4,157 4,166 4,635 4,500 4,822 4,972 4,954
6,576 Rural
National Capital Region 9,084 9,127 9,925 9,783 10,339 10,045 10,049
Ilocos Region 4,769 5,460 Employed (000's) 12,543 12,582 13,865 13,824 1,517 14,238 14,334
Cagayan Valley 4,286 6,263 Urban 3,797 3,759 4,265 4,242 4,444 4,548 4,595
Central Luzon 4,360 6,516 Rural 8,745 8,823 9,600 9,583 10,073 9,690 9,739
Southern Tagalog 4,318 5,829 Labor Force Participa-
3,756 5,625 tion Rate (%) 50.2
Bicol Region 48.4 50.4 49.7 51.0 60.5 582
Western Visayas 4,212 4,682 Urban 47.9 455 47.6 46.5 47.4 58.1 555
Central Visayas 3,428 4,279 Rural 51.3 49..8 51.9 51.3 52.8 61.7 59.6
Eastern Visayas 3,681 4,246 Unemployment 5.3 53 4.8 32 42 5.2 45
Western Mindanao 3,600 4,680 Rate (%)
Northern Mindanao 4,120 5,713 Urban 8.7 9.8 8.0 5.7 7.8 85 7.2
Southern Mindanao 4,445 5,667 Rural 3.7 33 33 2.0 2.6 35 3.1
3,785 6,117 Underemployment Rate (%)
Central Mindanao
Cordillera Autonomous A: c/ 255 17.4
4,696 6,514 Urban n.a.
Region n.a. n.a. n.a. n.a. 21.6 152
Rural n.a. n.a. n.a. n.a. n.a. 273 185
Source of basic data: National Statistical Coordination B:d/ 13.8 8.1
Board'Technical Working Group on Urban n.a. n.a. n.a. n.a. n.a. 7.8 5.4
Poverty Determination Rural n.a. n.a. n.a. n.a. n.a. 166 95
 Appendix Table 2 Appendix Table 2
(Continued) (continued)

1978 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Working Age Working Age

Population b/ 26,882 28,967 29,847 30,748 31,676 32,679 33,646 Population b/ 34,612 34,840 35,865 36,916 37,999 39,114
(000's) (000's)
Urban 9,392 9,583 9,882 10,187 10,502 12,884 13,295 Urban 13,814 13,870 14,255 14,788 15,270 19,806
Rural 17,490 19,384 19,964 20,561 21,174 19,795 20,352 Rural 20,798 20,970 21,610 22,128 22,729 19,308
Labor Force (000's) 17,363 17,308 18,423 18,473 20,311 21,181 21,318 Labor Force (000's) 22,067 22,984 23,452 23,859 24,525 25,246
Urban 5,403 5,252 5,575 5,722 6,067 7,836 7,892 Urban 8,037 8,668 8,821 9,060 9,339 12,334
Rural 11,390 12,056 12,848 12,751 14,244 13,345 13,426 Rural 14,030 14,316 14,631 14,799 15,185 12,913
Employed (000's) 16,101 16,434 17,452 17,731 19,212 19,632 19,801 Employed (000's) 20,295 20,812 21,497 21,849 22,532 22,979
Urban 5,081 4,820 5,112 5,160 5,502 6,879 6,960 Urban 7,115 7,473 7.732 7,998 8,258 10,864
Rural 11,020 11,614 12,340 12,211 13,710 12,753 12,841 Rural 13,480 13,339 13,766 13,851 14,273 12,116
Labor Force Participa- Labor Force Participa-
tion Rate (%) 63.8 66.0 65.4 64.6 64.5 645
tion Rate (%) 64.6 59.8 61.7 60.1 64.1 64.8 63.4
Urban 575 54.8 56.4 56.2 57.8 60.8 59.4 Urban 58.2 625 61.9 61.3 612 623
Rural 65.1 62.2 64.4 62.0,, 673 67.4 66.0 Rural 67.5 68.2 67.7 66.9 66.8 66.9
Unemployment Unemployment
Rate (%) 8.0 95 8.4 8.1
Rate (%) 4.1 5.0 53 6.0 5.4 7.3 7.1 83 9.0
Urban 6.0 8.2 8.3 9.8 9.3 122 11.8 Urban 11.5 13.8 123 11.7 11.6 11.9
Rural 3.9 6.8 5.9 6.4
Rural 32 3.7 4.0 4.2 3.7 4.4 4.4 6.0 62
Underemployment Underemployment
Rate (%) '. Rate (%)
28.4 23.9
A: c/ 19.2 20.9 23.9 255 29.8 36.4 222 A: c/ 23.6 22.7 22.6 22.1
Urban 18.9 19.9 193 24.0 29.9 34.0 16.9 Urban 27.7 . 18.1 24.1 173 17.4 183
Rural 28.8 27.2
'Rural 193 21.4 25.8 262 29.8 37.7 25.1 233 25.9 25.7 255
B:d/ 17.8 11.1 11.4 10.9
B:d/ 9.0 12.0 14.5 13.9 172 22.5 153 13.9. n.a
Urban 5.5 7;4 7.0 8.9 8.1 8.7 16.9 Urban 13.7 6.9 6.8 6.0 8.5 n.a
Rural 19.9
Rural 106 13.9 13.1 16.9 14.4 213 252 135 13.9 13.7 17.0 n.a
a! No data available for 1979.
b/ For the period 1971-1975, working age' refers to 10 years and
above; for the period 1976-1991, it refers to 15 years and above.
Cl Those who worked for the reference quarter, but still wanted
additional work, expressed as a proportion of the employed.
d/ Those who worked less than 65 days in the quarter, but still
wanted additional work, expressed as proportion of the employed.
Note: n.a. No data available
Sources: NEDA, Philippine Statistical Yearbook, various issues.
NSO, Integrated Survey of Households Bulletin, various issues.
 to

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 References

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Asian countries, 43,54,88,89, 103, accumulation 47
136 human, 1, 10, '137
Asian Development Bank (ADB), markets, 10
98 user cost of, 110-11
Atkinson, A.B., 40-442 Cebu, 5
Central Bank, 130
B Central Luzon, 5,6,7,34-35,80,81
Central Mindanao, 6, 7, 34-35, 80,
Balance of Payments (BOP), 104, 81
107 Central Visayas, 6,7,34-35,80,81
Balisacan, Arsenio M, 11-12,18,39, Chenery, H.B., 44
42,99,117,135-36 China, 80, -101
Barros, Bruno, 15 Ching, Panfila, 102
Basic needs, 9 Clarete, Ramon, 108
access to, 77-101 Commodity deprivation, 14
Batas Pambansa, 106 Computable general equilibrium
Bautista, Romeo, 11, 110, 121, 126, (CGE), 113,114
135

171

172 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
Congressional Commission on
Education, 89,93,102
Consumer Price Index, 16
Contingent renewal, 133-34,139
Cordillera Autonomous Region
(CAR), 34
Crisis monographs, 129
Cross-over time, 136
Current income, 13-14
It
Davao,5
David, Cristina c., 110; 129
de Dios, Emmanuel, 11, 121,127
Deaton, Angus, 150
Debt service, public, 8, 53, 86, 94,
130
Department of Finance (DOF), 130
Deregulation, 86
financial market, 107
political landscape for, 127-30
Devaluation
impact on poverty, 114-19
Development strategies, 5,103-10
Distributionally neutral growth,
137
Dominance conditions, 29-31,141-
42
Distribution-sensitive measure, 21,
27-28,33-34,36-38,115-20
defined, 21
Dreze, Jean, 40
Dynamic comparative advantage,
2 Executive Order, 107
E Export-oriented industrialization
Earnings functions, 68
estimates, 69-74
East and Southeast Asian coun-
tries, 2,103
Eastern Visayas, 5,6, 7,34,81
Economic recovery, 53
EDCOM, see Congressional Com-
mission on Education
Education, 10,88
and poverty, 35,39
and unemployment, 54-59,94
differences in access to, 89-93
expenditure on, 89-94
international comparison, 88-89
quality, 39, 89,93
rates of return, 69
screening model of, 69
subsidy, 95
Effective rate of protection (ERP),
108-09
Employment
choice of, 69
effect of fiscal and other incen-
tives, 110-12
generation of, 8,39,43-54
growth, 49,53
productivity, 46-47
sectoral share, 2,4445
type of workers, 62,66-68
Enclaves, 137
Energy, 130-31
Environment, 1,95-102
Equivalence scales, see poverty
norms
Esguerra, Emmanuel P., 50,75
Exchange rate
controls, 105,125
impact of devaluation, 9, 114-19
overvaluation, 108-10
Export Incentives Act, 106
strategy, 104
see also development strategies
F
Fabella, Raul V., 128-29,135
INDEX / 173
Family incomes and Expenditures share of health expenditure in,
Survey, 18, 21, 22-29, 32, 41-44, 84-85
53,69,72,151 share of infrastructure expendi-
FEES, see Family Income and Ex- ture in, 112 -
penditures Survey Gross National Product (GNP), 103
Fiscal bind, 8 tax effort, 130
Fixed physical areas, 25-26,32 Gulf Crisis, 53,54,131
poverty indicators for, -27-29,
143-44 H
seE also shifting physical areas
Florencio, Cecilia, 102 Haddad, lawrence J.,41 -
Harris, G.T., 62
Florentino, Rodolfo F., 19, 80, 83,
102 Harris-Todaro model, 60
Food and Nutrition Research Insti- Hawley, Clifford B., 72,76,147
tute, 102 Head count index, 19,26-29,32,34,
Food 36-38,115-20
access to, 9 defined, 19
crises, 127 Health
price subsidy, 139 access to, 9,77
supply, 84 and food supply, 84
threshold, 41 and productivity, 78
Formal sector, 62 bias of delivery system, 84
Foster, James E., 41,142 expenditures, 86-87
FPA, see fixed physical areas indicators of, 78-83
Free High School law, 93 private provision of, 88
Fujii, Edwin T., 72, 76,147 user fees, 86,88
Herrin, Alejandro N., 8,39, 88, 93,
102
G
Household targeting, 120-21
Gertler, Paul J., 78,88,90,102 Housing
Cmi index, 137 access to, 95-102
Government expenditures, 112 and health of children, 96
on education, 89-90 bias, 9
on health, 84-86 demand for, 98, 101
on social services, 156 production, 9,97
Greer, Joel, 41 security of tenure, 98
Gregorio, Rosario S., 111 subsidy, 98
Gregory, Peter, 62 Human capital, see capital
Gross Domestic Product (GDP)
growth, 26,32,49,53-54,62,130,
136-37
per capita, 2 International labour Organization
sectoral share, 44-45 (ILO), 11, 88,135

174 / POVERTY, URBANIZATION AND DEVELOPMENT POLICY
ilocos Region, 5,6,7,34,81
Import controls, 105,107,124
Import-substituting development
strategy, 5, 104, 125, 131
see also industrialization policies
Incentive-compatible mechanisms,
88,133-34
India, 101
Indirect taxes, 130
Indonesia, 89
Industrialization policies, 8, 103-
10,137
and employment creation, 110-
12
bias of, 5,8,105,137
political economy of, 124-31
Infant mortality, 80-81
Inflation, 107
Informal sector, 39,59-63
Infrastructure, provision of, 1, 10,
138
and worker earnings, 72-73
locational bias, 8, 77,112
public investment, 130,137
Institutional sclerosis, 129
Intal, Ponciano, Jr., 110, 121, 135
Integrated Census of Population,
47
see also Population Census
Integrated Survey of Households
(ISH), 49,75
Interest groups, 124-25, 130
Investment Incentives Act, 105
J National Statistical Coordination
Japan, 101
Jimenez, Emmanuel, 39
Kakwani, Nanak, 114
Kanbur, Ravi, 41
Keynes, John Meynard, 132
Krugman, Paul R., 11, 121
Kuznets, Simon, 42
L Meiji, Japan, 101
Labor force
data, 75
growth rate, 47-49
participation rate, 49-50,53,75
Labor Force Survey (LFS), 75
Labor productivity, 44-48,78
earnings, 62 64-65
formal sector, 62
historical pattern of, 47
informal sector, 62-63
Lal, Deepak, 75
Lamberte, Mario B., 135
Latin America, 125
Lazear, Edward P., 72
Lee, Lung-Fei, 146
Less Developed Countries (LDCs),
1,112
Life expectancy, 80
Lipton, Michael, 39,42
Local Government Code, 101
Luna, C., 39
Luzon, 5
M (NTEs),8
Macroeconomic environment, 8
Maddala, GS., 146
Malaysia, 89,101
Malnutrition, see nutrition
Manasan, Rosario G., 111, 121-22
Mangahas, Mahar, 15
Marcos administration, 130-32
Market failure, 94
notions of, 77
Martial Law, 127
Mazumdar, Dipak, 60,76
Medalla, Erlinda, 108-09, 111, 121-
22
Medium-Term Development Plan,
86,94,100
Meso variables, 113
Metro Manila, 5,6,7,22,34,50,80,
81,93,98
Migration, 8,7,10,39,43,54, 60,95
Mindanao, 5,80
Minimum wages, 50,52
Monsod, Solita, 130
Moore, Robert L., 72
Muellbauer, John, 150
IM
Nagatani, Keizo, 102
Nakosteen, Robert A., 76
National Housing Authority, 98
National Income Account (NIA),
23,25,26,42
Nationalists, 126
National Economic and Develop-
ment Authority (NEDA), 15,25,
49,56,97,
130,155-57
Nepal, 101
Newly industrializing economies
Nolan, Brian, 40
Nongovernmental organizations,
135,140
Northern Mindanao, 6,7,34-35,81
Board (NSCB), 16,79,85,152
National Statistics Office (NSO), 4,
7,24-25,34,41,49,56-57,63,
66-67,79
Nuqui, Wilfredo G., 40
Nutrition, 77-88
INDEX / 175
0
Official development assistance,
140
Oil shocks, 104,129 -
Olson, Mancur, 129
Omnibus Investment Code, 111
Orshansky method, 40
Oshima, Harry T., 54, 75,121
Outward-looking development
policy, 106
see also industrialization policies
P
Paqueo, Vicente B., 102
Parastatals, 106
Perez, A.E., 39
Penia, Ernesto M., 2,8,11, 39
Personal income, 25,41
Policy formation, 131-33
Philippine Statistical Yearbook, 25
Political economy, of poverty alle-
viation, 123-35
Population, 2-3, 23-24
census, 22,75
density, 6,7
working age, 47-49,75
Poverty
aggregate profile, 26-32
aggregation, 19-21
choice of indicator, 13
intertemporal comparison, 14
lines or thresholds, 13-17,29
measurement issues, 12
norms, 13-17
sources of data, 21-25
targeting, 9, 114
unit of analysis, 17-18
see also urban poverty
Poverty gap, 19, 27-28 1 34, 36-38,
137,115-20, 137
defined, 19
 INDEX / 177
176 / POVERTY, URBANIZATION AND DEVELOPMENT POUCY

Power, John H., 11,109-10,121,125, Shifting physical areas, 22-23, 26, Technical Working Group (I'WG), Urban labor markets
135 54,75 16,17,40-41 characteristics of, 54-68
Pressure groups, 130 Shorrocks, A.F., 41,142 Technocrats, 128,131 Urbanization
see also interest groups Sicat, Gerardo, 109, 121, 125 Technology choice, 110-12 level, 2,3, 24,136
Principal-agent problem, 133 Singapore, 101, 126 Tenure, land, 1 pattern, 2
Probit estimation, 73 Singh, I., 76 security of, 98 quality of life, 9
Pro-liberalization forces, 126 Social housing 98 Thailand, 89,101,103-04 tempo, 3,24
Protectionist trade regime, 104 - see also housing Thomas, Duncan, 76,102
see also industrialization policies Solon, Orville, 86, 96 Thorbecke, Erik, 41 V
South Asia, 125 Tidalgo, Rosa Linda P., 50,75
Trade and exchange rate policies, 8 Value added tax, 107
Q South Korea, 54,89, 101, 104, 126 van der Gaag, Jacques, 76,147
Southeast Asian countries, 2 impact on production incen-
Quibria. M.G., 42 tives, 108-09 Varian, Hal, 149
Southern Mindanao, 6-7,34,81 Viet Nam, 80
Southern Tagalog, 5-7,34-35,81 see also industrialization policies
R Traditional exports, 125 Vijverberg, Wim, 76,147
Spatial policies, 2 Visayas, 5
bias of, 5,105, 112
Rahman, Omar, 78,88,90, 102 It
Squatters, relocation of, 9,40 kA9
Ramos administration, 86,94
estimates of, 40 Underemployment, 8,59,94
Ranis, Gustav, 129
Sri Lanka, 80 rates, 54-56 Wages, 50-51, 75, 110
Rashid, Z.B.A., 62
Srinivasan, T.N., 40,42 Undernutrition, see nutrition and poverty, 53-54
Ravallion, Martin, 40-42,114,142
Standard of living, see poverty Unemployment, 8,94 in Asian countries, 54
Rawlsian measure, 20
norm- - by household characteristics, 57- see also minimum wages
Real property taxation, 100-01
Stark, Oded, 76 58 Wegelin,Emiel A., 1,96
Recommended dietary allowance
Strauss, John, 76,102 rates, 54-56 Welfarist approach, 14
(RDA), 40-41
Structural adjustment loan (SAL), University of the Philippines, 95 Western Mindanao, 6, 7,34, 81
Rent-seeking behavior,5, 132, 134,
128 School of Economics, 129-30 Western Visayas, 5, 6, 7,34,81
139
Structural decision equation, 73 Urban areas, definition of, 22-23,32 Williamson, Jeffrey G., 60,76
Reyes, Edna Angeles, 50
Sugar barons, 125 centers, 5 Willis, Robert J., 76
Riley, John G., 69
Sumner, Daniel A., 76 Urban-industrial core, 5 World Bank, 14, 15, 42, 75, 80, 90,
Rodgers, Gerry, 76
Supply response, 130 Urban poverty 92, 93, 95
Rosen, Sherwin, 76
rural, 124 characteristics of, 32-40
Rules of the game, 132,138
Syrquin, Moshe, 44 policy issues, 5-10 z
Rural labor markets, 54-55,59
Rural poverty, see poverty see also poverty
T Zeilner estimation, 151
Russo, Gerard, 88,102 Urban Development Housing Pro-
Zimmer, Michael, 76
Taiwan, 54, 101, 104, 126 gram, 100
S Tan, Edifa, 39,101-02
Tan, Norma, 106,109
Safety nets, 9,119,121
Targeting mechanisms, see house-
see also household targeting
hold targeting
Schultz, Theodore W., 77
Tariff Reform Program, 106
Selectivity bias, 68, 71,76
Tax effort, 86,.94, 130
Sen, Amartya, 40,142