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INCOME DISTRIBUTION AND POVERTY IN THE PHILIPPINES

Submitted To: Mrs. Eponine Contemprato

Submitted By: Culajara, Lexi Rizzia T. De Leon, Cierylene E. Fabi, Rhacell C. Villenueva, Jeanne AC 202

September 2011

T A B L E

O F

C O N T E N T S

I. OBJECTIVES II. INTRODUCTION III. DISCUSSION a. Income Distribution b. The Lorenz Curve c. Gini Ratio and Income Mobility d. Poverty e. Income Distribution and Poverty in the Philippines IV. REFERENCES

O B J E C T I V E S

Define Income Distribution Measure and Describe Income Inequality Define Poverty

Examine Income Distribution and Poverty in the Philippines

I N T R O D U C T I O N

The incidence of poverty in the Philippines was not unusually high in the early 1970s, compared with a representative sample of Asian countries, but very slow subsequent progress in reducing the rate of poverty meant that by the early 1990s, the poverty rate was dramatically higher in the Philippines than in its neighbors. In addition, income distribution in the Philippines, as measured by the Gini coefficient (a ratio of income inequality, with 0 representing absolute equality and 1 representing absolute inequality), is extremely unequal. Moreover, the Gini coefficient barely changed during 195794, varying only between 0.45 and 0.51. In 1994, the richest 20 percent of the population received 52 percent of the countrys total income, nearly 11 times the share of the poorest 20 percent. These figures had changed little since the 1980s and had even become slightly worse: in 1985, the richest 20 percent of the population received the same share of national income as in 1994 and their average income was about 10 times that of the poorest 20 percent. The distribution of assets has also shown little improvement over the last few decades. Between 1960 and 1990, for example, the Gini coefficient on landholding worsened slightly. Although an improvement in income distribution is often accompanied by a decrease in the poverty rate, the two are not necessarily linked. It is quite possible for poverty rates to fall even when the distribution of income becomes more unequal. In fact, while progress in fighting poverty in the Philippines has been slow by Asian standards, the countrys disappointing experience in improving income distribution is not unique in Asia. It suggests that decades of very slow growth, rather than inequality, may have been the most important cause of the persistence of poverty in the Philippines. Indeed, between 1970 and 1995, real GDP in the Philippines grew at an annual rate about half that of the other Asian countries and barely exceeded population growth. Poverty in the Philippines, as in most countries, tends to be associated with low education levels for heads of households and with large family size. Poor Filipinos are disproportionately employed in agriculture, fishing, and forestry: these occupations account for 62 percent of poor households, but for only about 40 percent of the employed labor force. The poor also seem to be disproportionately rural: 60 percent of the poor were living in rural areas in 1991, compared with 51 percent of the total Philippine population. Since 1960, the proportion of the population classified as urban has increased from about 30 percent to 50 percent, while the proportion of the poor living in urban areas has grown from 30 percent to 40 percent. Although these figures could be interpreted as suggesting that migration from rural to urban areas has led to a reduction in poverty rates, they reflect, in part, a statistical artifact: rapidly growing rural areas tend to be reclassified as urban, while slowly growing ones do not. In fact, between 1970 and 1990, poverty rates declined faster in areas that were initially classified as rural as in areas that were classified as urban.

WHAT IS INCOME? Before examining what distribution of income is, lets first study what falls under the category of income. Personal Income (PI) the flow of annual income received by households before payment of personal income taxes. Personal income includes wages and salaries, corporate dividends, rent, interest, Social Security benefits, welfare payments, and any other form of money income. In-kind Income non-money income. These are services provided by the government such as food stamps, education, medical aid, housing assistance, or any good service that can be consumed.

WEALTH VS. INCOME Wealth refers to the market value of assets (such as houses and bank accounts) people own. Hence, wealth represents a stock of potential purchasing power; income statistics tell us only how this years flow of purchasing power (income) is being distributed.

INCOME DISTRIBUTION The size of distribution of income tells us how large a share of total personal income is received by various households, grouped by income class. So long as goods and services need not be purchased in the marketplace, the distribution of money income isnt synonymous with the distribution of goods and services.
A. Distribution by Income Category

The households are grouped by income class lined up in order of income, with lowest-income recipients on top and highest-income recipients at the bottom.
B. Distribution by Quintiles (Fifths)

A second way to measure income inequality is to divide the total number of individuals, households, or families (two or more persons related by birth, marriage or adoption) into five numerically equal groups, or quintiles, and examine the percentage of total personal (before-tax) income received by each quintile. THE LORENZ CURVE

The Lorenz curve displays the quintile distribution of personal income. It is a graphical illustration of the size distribution.

We plot the cumulative percentage of households on the horizontal axis and the percentage of income they obtain on the vertical axis. The diagonal line represents a perfectly equal distribution of income because each point along that line indicates that a particular percentage of households receive the same percentage of income. In other words, points representing 20% of all households receiving 20% of total income, 40% receiving 40%, 60% receiving 60%, and so on, all lie on the diagonal line. By plotting quintile data, we obtain a Lorenz curve. The gray area between the diagonal line and the Lorenz curve is determined by the extent that the Lorenz curve sags away from the diagonal and indicates the degree of income inequality. If the actual income distribution were perfectly equal, the Lorenz curve and the diagonal would coincide and the gray area would disappear. The farther the Lorenz curve sags away from the diagonal or the greater the area between the Lorenz curve and the diagonal, the more inequality exists.

GINI RATIO

The visual summary of inequality the Lorenz curve provides is also expressed in a mathematical relationship. The ratio of the gray area in the previous image to the area of the triangle formed by the diagonal is called the Gini Coefficient. The higher the Gini coefficient is, the greater the degree of inequality. In other words, the income inequality described by the Lorenz curve can be transformed into a Gini Ratio a numerical measure of the overall dispersion of income:

(The Gini coefficient for complete income equality is zero and for complete inequality is 1.)

INCOME MOBILITY Income mobility is the movement of individuals or households from one income quintile to another over time. This is an important point because evidence suggests considerable churning around in the distribution of income as time passes. For most income receivers, income starts at a relatively low level during youth, reaches a peak during middle age, and then declines. It follows that if all people receive exactly the same stream of income over their lifetimes, considerable income inequality would still exist in any specific year because of age differences. In any single year, the young and the old would receive low incomes while the middle-aged receive high incomes. In short, individual and family income mobility over time is significant; for many people, low income and high income are not permanent conditions. Also, the longer the time period considered the more equal the distribution of income becomes. THE ECONOMICS OF POVERTY

The broader issue of income distribution is the more specific issue of very low income, or poverty. A society with a high degree of income inequality can have a high, moderate, or low amount of poverty. DEFINITION OF POVERTY Poverty is a condition in which a person or a family does not have the means to satisfy basic needs for food, clothing, shelter, and transportation. The means include currently earned income, transfer payments, past savings, and property owned. The basic needs have many determinants, including family size and the health and age of its members. It relates current income to the minimal needs of a family and thresholds vary with family size.

POVERTY LINE AND GAP Poverty line or poverty threshold is the estimated minimum level of income needed to secure the necessities of life. The poverty gap is the shortfall between actual income and the poverty threshold.

POVERTY IN THE PHILIPPINES Resources are limited, but demands tend to be unlimited. One of the results of unwise use of resources is Poverty and even extreme cases like hunger and starvation. POVERTY is both more widespread and more persistent in the Philippines than in neighboring ASEAN countries. While the poverty rate has decreased in the Philippines over the past 25 years, the decline has been slower than in other ASEAN countries. Some of the blame for the Philippines slow progress in reducing the incidence of poverty can be attributed to past economic policies that retarded growth by discriminating against agriculture and discouraging investment in human capital. These policies, in turn, sustained powerful interest groups that blocked or delayed economic reform. The Philippines began to undertake political and economic reforms in the late 1980s and early 1990s, however, and GDP growth has accelerated to about 5 percent a year since 1994. With faster growth, the percentage of Filipinos living below the poverty line is decreasing, but agricultural reform and increased investment in human capital would allow a more drastic reduction in the poverty rate. INCOME DISTRIBUTION AND POVERTY IN THE PHILIPPINES One of the goals of economics is the fair distribution of income.

The recently released 2009 poverty estimates and household survey (FIES) provide a much needed update on poverty, inequality and income dynamics in the Philippines. The FIES reveals that in contrast with previous trends, household per capita incomes grew from 2006 to 2009 and that, remarkably, rural and poorer households strongly outperformed. However, despite this increase and a resilient economy poverty incidence continued to increase through 2009 though, some improvements occurred in both the gap and severity of poverty. Therefore, poverty, and especially poverty dynamics, in the Philippines remains worse than its neighbors. Spatially, poverty remains highly concentrated in rural areas and in terms of sectors, households that rely on agricultural income are significantly more likely to be poor than other households. From 2006 to 2009, poverty in urban areas increased more rapidly, became more severe, and contributed more to the continuous increase in poverty. Across regions, 10 of the 17 administrative regions experienced an increase in poverty incidence. Household per capita incomes grew from 2006 to 2009; remarkably, rural and poorer households strongly outperformed (Table 3). The latest (2009) Family Income and Expenditure Survey (FIES) reveals that overall household per capita income rose by 4.4 percent during the period 2006-2009. While modest, this is in contrast with the 3.4 percent decline in real incomes that took place during the 20032006 periods. Interestingly, rural areas significantly outperformed urban ones with a 7.2 percent overall increase compared to 3.0 percent, respectively. Also remarkableand consistent with the rural area outperformancewas that increases in per capita were strongest for poorer households than richer ones. Table 3. Per capita incomes, 2003-2009 Figure 21. Overall Trends in Poverty, 20032009 Per capita income Change 2003 2006 2009 2003-06 2006-09 (In 2000 peso) (percent) Philippines 27,046 26,133 27,295 -3.4 4.5 Urban 37,687 35,924 37,018 -4.7 3.0 Rural 16,788 16,615 17,805 -1.0 7.2 Income Group Q1 (Poorest) 6,207 6,174 6,715 -0.5 8.7 Q2 10,993 10,628 11,285 -3.3 6.2 Q3 17,110 16,459 17,263 -3.8 4.9 Q4 27,881 26,926 27,882 -3.4 3.5 Q5 (Richest) 73,043 70,481 73,335 -3.5 4.0

Figure 21. Overall Trends in Poverty, 2003-2009

However, Despite a resilient economy and the general increase in household incomes, poverty incidence and headcount did not decline through 2009. Since 2003, despite good average economic growth, the proportion of poor households in the total population has risen continuously. At the national level, poverty incidence increased by 1.5 percentage points between 2003 and 2006, and inched further in 2009 (Figure 21). Given rapid population growth, rising poverty incidence translates in a large increase in the number of households falling into poverty: about 2.4 million people from 2003 to 2006 and another 1 million during 2006 to 2009. Notwithstanding the stead rise in poverty incidence, some improvements occurred in the overall poverty gap and severity of poverty from 2006 to 2009. (Figure 21) The average income shortfall of the poor declined from 7.5 percent of the poverty line in 2006 to 7.2 percent in 2009. This has also translated into a slight improvement in the overall severity of poverty. These figures suggest that while growth in 2006-2009 benefitted those in the lower income groupspossibly thanks to the growing coverage of the 4Ps conditional cash transfer programit was not enough to prevent those just around the poverty line from falling into or staying out of poverty. The 2009 poverty estimates confirm that poverty, and especially poverty dynamics, in the Philippines remains worse than its neighbors. Comparing countries in the East Asia and Pacific region based on the international poverty line $1.25/day, the Philippines only rates better than Cambodia (Figure 22). Using the $2.00/day line, the Philippines is also better off than Vietnam. However, on both internationally-comparable measures, the Philippines fares lower than Malaysia, Thailand, and China. Chinas $1.25/day poverty had declined dramatically over two decades to a third of what it was in 1993.

Figure 22. Poverty in East Asia and Pacific

Poverty remains highly concentrated in rural areas. Although an equal share of the population live in urban and rural areas, a disproportionate share of the poor are found in rural areas. In 2003, close to 80 percent of poor Filipinos live in rural areas. While this proportion has decreased, 75 percent of poor households in the country are located in rural areas as of 2009. Poverty in rural areas is about twice as high as the national average and more than three times that in urban areas (Table 4). Table 4. Poverty in Urban and Rural Areas, 2003-2009 Area of Poverty Incidence Poverty Gap residence 2003 2006 2009 2003 2006 2009 (% of population) (% of poverty line) Urban 11.3 12.9 13.2 2.7 3.2 3.1 Rural 38.1 39.5 39.4 11.6 11.7 11.2

Poverty Severity 2003 2006 2009 (% of poverty line) 1 1.2 1.1 4.8 4.7 4.4

Across sectors, households that rely on agricultural income are significantly more likely to be poor than households working in other sectors. In 2009, less than a quarter of the population derives most of their income from agriculture. However, they account for half of the countrys poor. This share to the total poor population has declined since 2003 so that a growing number of poor households work in non-agricultural sectors. This is consistent with the finding that poverty incidence in urban areas is increasing more rapidly than in rural areas where agriculture is concentrated. The poverty gap and severity among agricultural households are at least twice as high as the national average and at least four times as high as those who are mainly dependent on non-agricultural incomes (Table 5).

Table 5. Poverty among Agricultural and Non-agricultural Households, 2003-2009 Area of Poverty Incidence Poverty Gap Poverty Severity residence 2003 2006 2009 2003 2006 2009 2003 2006 2009 (% of population) (% of poverty line) (% of poverty line) Agricultural 54.6 57.1 56.8 17.7 18 17.1 7.7 7.6 7.1 household Non14.3 16 17.1 3.5 4 4.1 1.2 1.4 1.4 agricultural household

The poorest households are found among those engaged in entrepreneurial activities in forestry and hunting (among non-wage earners). This is the case regardless of the poverty measure used (incidence, gap, and severity). Three in four people who belong to households whose head derives his/her main employment from forestry and hunting are poor. This is nearly four times as high as those who are earning entrepreneurial incomes from other activities. Households who belong in this segment of the population earn only 75 percent of the income required to meet their daily food and non-food needs.

From 2006 to 2009, poverty in urban areas increased more rapidly, became more severe, and contributed more to the continuous increase in poverty. The share of poor people living in urban areas rose faster between 2006 and 2009 than in rural areas. During this period, poverty in urban areas contributed to the overall increase in poverty at the national level. In addition, while the poverty gap and severity of poverty declined over the years in rural areas, they worsened in urban areas (Table 4). Poverty gap in urban areas widened to 3.1 percent of the poverty line in 2009 from 2.7 percent in 2003 while it declined to 11.2 percent from 11.6 percent over the same period in rural areas. These suggest that although poverty is concentrated in rural areas, poverty in urban areas is worsening rapidly. Across the regions of the Philippines, ten of the seventeen administrative regions experienced an increase in poverty incidence during 2006-2009 (Figure 23). Of these, seven regions showed steady increases in poverty incidence since 2003. Caraga (Region 16), which posted the highest poverty incidence in 2009, also recorded the highest increase in the share of poor population (5 percentage points) between 2006 and 2009. Meanwhile, MIMAROPA (Region 4B) registered the biggest drop in poverty incidence as the share of poor population declined from 40.7 percent to 35 percent between 2006 and 2009.

The poorest regions in the Philippines are concentrated in Mindanao (Figure 23). The top 3 poorest regions in 2009 were also the poorest three years earlier.

Two of these three are located in MindanaoCARAGA (Region 16) recorded the highest proportion of poor population in 2009 and ARMM (Region 15) recorded the second highest proportion. Bicol (Region 5) in Luzon, which used to be the poorest region in 2006, now ranks the third poorest. With the exception of Davao Region (Region 11), poverty incidence in all other regions in Mindanao is above one-third of the population. Mindanao accounts for less than a quarter of the total population of the Philippines but holds about 40 percent of the countrys poor. The most economically active regions continue to have the least contribution to total poverty. NCR, Central Luzon (Region 3) and CALABARZON (Region 4A) together hold nearly 40 percent of the total population in the country, 50 percent of national GDP, but only account for 15 percent of the total poor population. Poverty incidence in each of these regions is less than one-fifth of their total population. NCR, in particular, which holds about 13 percent of total population or close to 11.5 million Filipinos contributes only 4.2 percent, equivalent to less than half a million people, to the total number of poor people in the country in 2009. Figure 23. Poverty Incidence in the Regions, 2003-2009

REFERENCES

Bradley R. Schiller (2006) The Micro Economy Today. New York: McGraw-Hill/Irwin. Campbell R. McConnell, Stanley L. Brue, & Sean M. Flynn (2009) ECONOMICS: Principles, Problems, and Policies (Eighteenth Edition). New York: McGraw-Hill/Irwin. http://www.econlib.org/library/Enc/DistributionofIncome.html http://en.wikipedia.org/wiki/Gini_coefficient http://www.adb.org/Documents/Books/Poverty-in-the-Philippines/chap3.pdf http://www.adb.org/documents/books/poverty-in-the-philippines/chap6.pdf http://www.adb.org/documents/Books/Poverty-Philippines-Causes-ConstraintsOpportunities/Poverty-Philippines-Causes-Constraints-Opportunities.pdf