ANALYSIS: Does GDP growth mean better living standards?

Jose Galang — Your Business

Posted at Jan 29 2018 09:12 PM

While the Philippines’ gross domestic product (GDP) growth rate has been described as the fastest among Southeast Asian economies over the past few years, this growth has also been among the slowest in terms of closing the gap between the nation’s rich and poor citizens.

Among 74 emerging economies in this year’s Inclusive Development Index produced by the World Economic Forum (WEF), the Philippines is ranked 38th (on a score of 3.8 points, with 7.0 as the highest achievable), which is just below the upper-half mark of the list.

The 2018 ranking, an improvement over the 40th place in the previous year, is also fifth among the 10 nations in Southeast Asia led by Malaysia (Singapore’s performance was not included for lack of data). Vietnam, which has a lower per capita GDP than the Philippines, has a more inclusive economic growth, placing 33rd among developing countries.

Topping the emerging economies, Lithuania, with a per capita GDP that is nearly six times that of the Philippines, scored 4.86 points. Among the “advanced” economies, Norway was on top with 6.08 points even if its GDP per capita was smaller than that of Luxembourg, which was 3rd in the rankings.

Perhaps reflecting the significance of inclusive economic growth, Norway, which remains the top scorer among all the 103 countries in the 2018 index, was also on first place in last year’s “World Happiness Report” released by the Sustainable Development Solutions Network for the United Nations. The largest economy in the world, the United States, was only the 14th happiest country in the world that year.

Measuring living standards

The Inclusive Development Index measures the performance of economies in improving not just aggregate growth data but more importantly in raising people’s living standards. Designed by a team of economists, scholars and research institutions, the annual scorecard shows the level and rate of improvement in “shared socioeconomic progress” in terms of 11 dimensions of progress under three main “pillars” (growth, equity, and sustainability).

For this year’s index, averages for the period 2012 to 2016 (latest available) were used. In a way, the index could also be a measure of the record of the administration of former President Benigno Aquino in paving the way for sustainable and inclusive economic development. During that five-year period, the Philippines’ score on the Inclusive Development Index rose by 2.4 percent. The economic managers of the Duterte administration, which assumed power on June 30, 2016, had publicly announced they would continue the key economic policies they inherited.

In its review of developing countries in the index, the WEF notes that the Philippines shows “more potential” on the third pillar of inclusive economic development (related to the impact of pollution, public debt and the ratio of dependents to working-age population) but lacks progress on inclusion indicators such as income and wealth inequality.

Of the 12 measures of sustainable development (4 indicators in each of the 3 pillars), the Philippines’ best scores were in GDP per capita growth and labor productivity growth, both at 4 percent each. In 2017, it registered 4.2 percent in GDP per capita growth and 3.3 percent in labor productivity growth, which were one rung below the top 20 percent performers in that pillar. Its record in this pillar was 49th best among the developing countries monitored that year.

In the “inclusion" indicators, the Philippines made little progress in net national income gini (a measure of inequality) and median income. It scored a 5 percent reduction in poverty but wealth inequality inched up over the five years to 2016, according to the WEF calculations.

On the sustainability of its inclusive development track, the Philippines performed poorly in net savings rate trend (down 8.6 percent, to land in the lowest 20 percent group), but a 6.9 percent reduction of public debt puts the country in the top 20 percent in that performance measure. It was also one rung below the top 20 percent with a reduced ratio of dependents to working-age population, and in the middle with a declining carbon level from its economic activity.

The Philippines’ record follows the general trend in developing countries. The WEF report says that while 84 percent of all developing economies recorded declines in poverty rates, their “absolute levels of inequality remain much higher”. Wealth is significantly more unequally distributed than income, the report says.

Measuring future growth

The WEF argues that its Inclusive Development Index provides an alternative metric of national economic performance. People still measure their countries’ economic progress not by the GDP growth statistics published by governments but by changes in their households’ standard of living.

Households look at such indicators as income, employment opportunity, economic security, and quality of life. This, the WEF points out, creates a policy imbalance given that GDP growth remains the primary focus of both policymakers and the media, and is still the standard measure of economic success, WEF notes.

“The structural policies and institutions in these domains collectively represent the system through which modern economies diffuse gains in living standards,” it says, adding that “governments often fail to appreciate the potential of policy in these areas to increase the rate of growth and spread its benefits more widely, particularly in demand-constrained and low-productivity contexts.”

Are we going to see less emphasis on GDP growth reports in the future and start to read more of how ordinary Filipinos benefit—or suffer—from economic policies? It should be interesting to find out what the impacts of the tax reform program and the expensive infrastructure program will be on actual living standards of the people.