INTRODUCTION

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Economic growth has been the traditional prescription for poverty reduction

in developing countries. Indeed, one regularity in cross-country studies is

that the incomes of the poor move almost one-for-one with overall economic

growth (Dollar and Kraay, 2001; Bhalla, 2002). Yet a closer examination of

recent individual country experiences suggests that while growth is good for

the poor (as well as the non-poor), it is often not good enough, suggesting

that other factors apart from growth matter as well. That is, an effective

program for poverty reduction has also to include mechanisms for directly

improving the institutional and economic environment facing the poor so

that they are able to participate more actively in the growth process and

its consequent benefi ts.1 Indeed, addressing current poverty has the added

benefi t of raising subsequent growth rates, that is moving the country to a

higher growth path.

For the Philippines, the absence of a comparatively high and enduring

economic growth has been the single biggest constraint to the pace of

poverty reduction (Balisacan, 2003). But even during periods when growth

was considerable, the incremental response of the incomes of the poor

to overall income changes was quite muted compared with the country’s

neighbors, especially Indonesia and Vietnam. For instance, the elasticity

of the income of the poor – defi ned to be those in the bottom 20 per cent

of the population – with respect to overall average income is 0.54 for the

Philippines (Balisacan and Pernia, 2003), while the comparable fi gures for

Indonesia (Balisacan et al., 2003a) and Vietnam (Balisacan et al., 2003b)

are 0.72 and 1.37, respectively.

It is not, of course, surprising to fi nd considerable differences in the

response of households to economic growth, both within and across

countries. This is because socio-economic conditions and circumstances

of households in society vary considerably. There are usually some groups

who are unable to benefi t – either partially or fully – during episodes of

growth, or who in fact may be hurt by public decisions chosen to move the

economy to a higher growth path. These groups may include: (i) individuals

who do not have the assets, particularly skills, necessary to take advantage of

opportunities offered by growth; (ii) households located in geographic areas

bypassed by growth, that is geographic poverty traps; (iii) households whose

entitlements are shrunk by public actions chosen to bring the economy to

a higher growth path; and (iv) households falling into poverty traps owing

to the reinforcing effects of adverse shocks and imperfect capital markets,

the latter leading to a failure to smooth consumption.

Policy and institutional responses to the poverty problem thus require

more than growth-mediated long-run poverty reduction initiatives. They

should involve direct intervention to meet short-run poverty reduction

objectives, including avoidance of transient poverty, as well as provision

of the conditions for some groups to escape poverty traps.

While the roots of the Philippines’ economic malaise during the past 30

years have been well articulated (that is weak governance, low investment in

basic infrastructure, political and macroeconomic instability, and a highly

unequal distribution of productive assets such as land), that is not quite

the case for programs intended to effi ciently deliver assistance to the poor,

especially in the event of adverse shocks such as during a macroeconomic

crisis or natural calamities. In short, how must programs intended for the

poor be designed so as to achieve the desired objective? What lessons have

been gleaned from recent experience to serve as an input to this design?

Effi ciency in the use of funds for poverty reduction underlies the principle

of targeting, in which benefi ts are channeled to the high priority group that

a program aims to serve. Targeting requires the identifi cation of the poor

as distinct from the non-poor, as well as the monitoring of program benefi t

fl ows to intended benefi ciaries. As such, it is a potentially costly activity,

both in terms of time and administrative outlay.

This chapter examines the Philippines’ recent experiences in poverty

reduction efforts. It begins with an overview of the country’s poverty profi le.

A brief review of government spending on sectors strongly linked to poverty

is then provided. It then discusses the features of poverty targeting in the

Philippines and some simulation results illustrating the impacts of different

spending patterns on growth and poverty.