9.2.14

The economy grew by 7.2%? But why are we still poor?

The Philippine Statistics Authority, which I am currently part of, released the estimates of the fourth quarter economic performance late last month. According to the PSA report, the Philippine economy grew by 6.5 percent in the fourth quarter of 2013, bringing full year growth to 7.2 percent. The growth was particularly driven by manufacturing, an industry which has received a fair amount of attention from our policy makers, mainly because of its ability to employ unskilled workers, the type of workers which we have in abundance here in the Philippines.

The national government, big businesses and some economists in the academe tend to be celebratory whenever they hear GDP growth rates above 6 percent. Meanwhile, people from the left would often point out that these numbers are meaningless, and that growth only benefits the already rich. The majority, which compasses those who didn't have the luxury of going through basic economics and those who did but had bad professors or they were more preoccupied by their classroom crush, would be more likely to agree with the left, because you know, there's poverty everywhere. Our public transport is inefficient, wages are not rising, the electricity bill is burning holes in our pockets. There is great temptation to ask, where is this economic progress that you are talking about? How come things seem the same?

Although fast growth rates are essential in development, there is such a thing as sustained growth, which is more necessary if we want to make a dent on poverty. Sustained growth entails maintaining a fast growth rates by a certain number of years.

Why is sustained growth important? Let us look at a critical indicator derived from GDP, the GDP per capita. In a nutshell, GDP is the aggregate wealth of a country in terms of how much goods and services its residents produced within its economic boundaries. GDP per capita meanwhile is the average wealth per person, derived by dividing the GDP level with the total population. Having a high GDP level may not be significantly felt if you're population is really large. In simpler terms, it doesn't matter if you ordered a 17-inch pizza, if there would 50 of you sharing, each would have a smaller slice as compared to the group who ordered a 10-inch pizza, but there are only six of them sharing.

Source: Philippine Statistics Authority

Let's make a comparison between the GDP per capita of the Philippines and Malaysia, which has had substantial successes in dealing with poverty. The per capita GDP of Malaysia is $10,381 substantially higher than the per capita GDP of the Philippines at $2,588. If you want to reach that level in one year you have to grow by 400 percent, which is not realistic for any country. So you need to achieve that level gradually.

The current level of $2,588 would have to double twice in order to reach the level of Malaysia. Assuming annual growth of 7 percent per year, when will that double? the doubling time of 7 percent is ten (10) years*. So that means the country would have to grow by 7 percent for 20 years in order to reach the status of Malaysia. Sustained growth is not the ends of the policy but a means. And it's still something that we should be happy about because at least we're starting at the right direction.

                                           Source: World Bank


*formula for the doubling time:

T_{{d}}={\frac  {\log(2)}{\log(1+{\frac  {r}{100}})}}