Looking Ahead Beyond 2015: Making Growth Work For The Poor Rogier van den Brink, Lead Economist and Program Leader, and Karl Kendrick Chua, Senior Country Economist Macroeconomics and Fiscal Management Global Practice Presentation to the Philippine Economic Society, November 14, 2014

Contents 1.Global trends—pessimistic 2.Philippine trends—optimistic 3.Inclusive growth—challenge 4.Opportunity—stars aligned, wind in your sails 5.Poverty projections—look good 6.Jobs challenge—remains 7.The way forward….

Recent economic and policy developments Global Recovery: Weak and Slow 3  Disappointing year  Global growth forecasts: revised further down  Trade: slower long-term growth  Outlook is pessimistic:  Summers’ “Secular Stagnation”  Lagarde’s “New Mediocre”  Rodrik’s pessimism about the “old” growth strategies  Developing countries: transition to a new environment  Post-crisis growth slowdown widespread  Structural challenges abound

Recent economic and policy developments Global growth: 3.2% >> 2.6% Growth in developing countries: 5.3% >> 4.5% Growth in high income countries: 2.2% >> 1.8% Source: World Bank Global Economic Prospects Global growth has been downgraded since January

Medium-term global growth projections 5 Sources: World Development Indicators; DECPG Projections

Slower trade growth…. 6

Rodrik on service sector and growth strategies in developing countries…. 7

3% by 2030 is far from assured: Business as usual will not get us there 8 Scenario Headcount (percent) Number of poor (million) Average income growth of 4% p.a. in each country Each country sustains avg per capita growth during past 20 years Each country sustains avg per capita growth during past 10 years Each country sustains avg per capita growth during past 10 years (survey-based growth) Global Poverty in 2030 at $1.25 per day (2005 PPP), assuming unchanged inequality Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared Prosperity …and growth is slowing.

Projecting the Changing Face of Poverty to Source: World Bank, 2014, A Measured Approach to Ending Poverty and Boosting Shared Prosperity

10 The Philippines has experienced higher growth in the last decade.. Post war reconstruction Debt-driven growth Governance-led growth

11..along with strong macro fundamentals..

..low and stable inflation.. 12 Low and stable inflation in the last decade has led to increased real income for businesses and households

..improving fiscal position.. 13 Lower debt levels and deficit mean more fiscal space for pro-poor spending. In fact, social spending doubled in the last 4 years.

..and a history of successful reforms that made a big difference.

15  GDP growth decelerated somewhat to 6.0 percent in H due to weak government consumption and public construction.  Private consumption continued to drive growth.  But growth was third highest in the region behind only China and Malaysia. Recent economic and policy developments

Inclusive growth challenge: Creating more and better jobs, reducing poverty and protecting the vulnerable

China’s incidence of growth: inclusive growth in several periods

Philippines? Long history of policy distortions has slowed the growth of agriculture and manufacturing in the last six decades. Incomplete structural transformation Agricultural productivity has remained depressed, manufacturing has failed to grow sustainably, and a low-productivity, low-skill services sector has emerged as the dominant sector of the economy. Structural transformation?

Philippine incidence of growth: less so…

A regional environment favorable to the Philippines Sound macroeconomic fundamentals A government committed to reform Widespread confidence Highly skilled, talented, English-speaking, youthful population Abundant natural resources Opportunity to build on momentum of reforms already successfully implemented, for instance: Better public financial management, which created fiscal space Doubling of budgets for social services since 2010 Conditional cash transfer and CDD programs Major improvements in transparency (Open Government) A window of opportunity

The East Asia and Pacific (EAP) region is a global growth driver 21  EAP accounts for over 25% of world nominal GDP, and its share will continue to rise  At current real growth rates of 7% annually, developing EAP countries will add a further $7 trillion by 2019 China 2nd largest economy, Indonesia 10th  Increasing trade and FDI with all regions  China will remain growth driver in the region and globally  Rethinking its growth model with greater focus on sustainability  Market-oriented reforms  Regional integration is increasing  ASEAN integration in 2015 presents opportunities for furthering reforms  Nearly 50% of FDI in ASEAN countries originates within EAP  Challenges and Risks  Need to move forward with structural reforms and investments to raise factor productivity and address vulnerabilities * Includes Hong Kong SAR, China; Taiwan, China; Singapore; and Korea. ** Includes Japan, Australia, New Zealand, and Brunei Darussalam. *** Differs by country; 34% of countries have their estimates start after 2013.

East Asia and ASEAN Growth Projections 22 Forecast East Asia Developing East Asia China Indonesia Malaysia Philippines Thailand Vietnam Cambodia Lao PDR Myanmar ASEAN Developing EAP excluding China World High-income countries Developing countries Source: World Bank, "East Asia and Pacific Economic Update: Enhancing Competitiveness in an Uncertain World", October 2014

Poverty reduction shows improvement in 2013… 23

24  First half poverty incidence among the population fell by 3 ppt. to 24.9 percent, down from 27.9 percent in the same period in  This translates to around 2.5 million Filipinos uplifted from poverty.  Job creation:  In 2013, still weak job creation.  In 2014, better. In 2013, poverty incidence declined significantly

At current trends, the Philippine Development Plan’s poverty targets can be achieved… 25  Under both growth scenarios, achievement of 18-20% poverty target possible if elasticity is maintained (pro-poor growth).  In the higher growth scenario, an elasticity half the size would also achieve the target.  These rough estimates suggest the government could achieve its poverty reduction target  The jobs challenge is more daunting, however…. Scenario 1:  GDP p/cap growth 4.2% (Med-Term WB estimate)  Alternative elasticities of pov reduction  not pro- poor to pro-poor growth. Scenario 2:  GDP p/cap growth 5.7% (Gov. 7-8% GDP growth target by 2016)  Same alternative elasticities of poverty reduction.

More challenging: providing more and better jobs to the 15 million Filipino’s who are either unemployed or underemployed 26  Jobs challenge  Three million unemployed  Seven million underemployed  New entrants to the labor force number 1.15 million/year  Informality accounts for 75 percent of employment

Medium-term reform agenda: 27  Thematic reform areas  Enhancing competition  Simplifying business regulations  Securing property rights  Increasing investment in physical and human capital

Investing on infrastructure, education and health can help sustain inclusive growth 28 However, the Philippines has an investment deficit  Spending on infrastructure, health and education has been lower than in some neighboring countries.  Low spending has contributed to weak health outcomes and lower quality of education, and tremendous traffic.  But recent trends are in the right direction…

Financing this trend needs more revenues…so reduce the tax gap 29 BIR tax gap (in percent of GDP) (Actual collection plus collection gap) BOC tax gap (in percent of GDP)

…and more reforms in areas such as real property tax. 30 As of June 2014, around 80% of cities and 75% of provinces use outdated schedule of market values (SMVs) for collecting real property tax.

A proposed tax reform package to finance investments 31 Raising tax revenues efficiently and equitably First phase: raising tax revenues Rationalize tax incentives to reduce redundancy; Enact a tax expenditure ceiling Reduce the number of VAT exemptions; use the NHTS-PR to protect vulnerable Filipinos Centralize the valuation of real properties and, if needed, levy a national surtax to enhance equity Index petroleum excise taxes once prices have fallen or automatic increase in excise tax once fuel price falls to enhance equity Second phase: lowering tax rates and further broadening the base Reduce the corporate income tax rate while increasing the gross income earned to enhance equity Reduce the highest marginal tax rate for personal income tax and reduce the number of brackets Consolidate all laws and regulations on tax incentives into one code Simplify the tax regime for micro and small firms into a single tax on turnover to reduce compliance cost

Broad reform coalitions are necessary. Without a broad coalitions, reforms made under a strong president can be reversed, as the country’s history has shown. Stakeholders need to focus on a package of reforms to support inclusive growth. Given the political economy, individual reforms will face strong opposition. Example: sin tax reform These coalitions can form at many levels and around many themes Country needs to come together and seize this unique window of opportunity …not to be missed! “Working together” is not just a nice slogan…

Example: shipping industry 33

Example: what to about rice prices? Rice Policy in the Philippines34 In September 2014, 1kg of rice cost PHP 41 in Philippine supermarkets. Consumers in Vietnam were paying the equivalent of PHP 16. Source: FAO GIEWS Price Tool

Government Enhance programs to reduce food prices without farm profits falling Provide universal social protection, health insurance, basic education Simplify business regulations, for firms of all sizes Businesses Support reforms that promote competition to level the playing field Support freedom of association and collective bargaining Partner with government and organize training for workers to create and upgrade skills Labor Actively participate in dialogue and include informal workers Recognize valid forms of flexible contracts Reduce calls to hike minimum wages, as food prices fall. Civil society Ensure broad-based participation and support for this type of agreement. Monitor commitments made Support evidence-based policy making, performance-informed budgeting (media, Open Government) Example of a balanced package of reforms:

Thank you Rogier van den Brink, Lead Economist and Program Leader, and Karl Kendrick Chua, Senior Country Economist Macroeconomics and Fiscal Management Global Practice