Wednesday, January 11, 2006

Poverty alleviation: a better way

Pump priming is a government intervention to boost economic activity and reduce unemployment. The background here is that, under Keynesian macroeconomic assumptions, weak aggregate demand depresses growth and employment, hence the need for an outside economic stimulus. Usually this takes the form of expansionary fiscal policy (e.g., hire an army of street sweepers who would otherwise be unemployed or underemployed), or expansionary monetary policy (e.g. the Central Bank purchases government Treasury bills using its reserves, thus reducing interest rates and stimulating investment).

Lately the term has been mixed up with poverty alleviation. Consider this:

THE debate continues: can a hastily put-together pump-priming program, kicked off with the distribution of P500 million in rice-noodles subsidies, translate "positive economic fundamentals" into sustained relief for most people?

Smarting from criticism of this strategy by a leading administration senator, the Palace said Sunday the controversial P35-billion "pump-priming fund" has been designed to let ordinary folk directly benefit from "the positive economic developments" in the country that the administration has been trumpeting since late last year.

It's a minor quibble, but I wish the government stuck to the "poverty alleviation" tag. Despite the growth slowdown, there is really no warrant for a stimulus package. The high unemployment and underemployment rate the country suffers from is due to structural factors, not a deficiency in aggregate demand. When there is a savings over the programmed deficit (the source of the 35 billion fund), a better signal to financial markets is to carry it over as reserve for the following year's budget. At least in doing so it goes through the mandated budgeting process.

Legal issues aside, suppose the government did package the fund as earmarked for "poverty alleviation." Is this money well-spent? I have nothing in principle with targeted transfers to the poor. One can justify, say the 500 million rice and noodle subsidy, as a form of targeted transfer. My problem is the amount and manner of targeting: as for amount, does 35 billion worth of subsidies make society better off, compared to say 35 billion worth of rural roads? Not quite sure, but at a modest 1 million pesos per kilometer, that's 35,000 km of barangay roads. Very tempting.

As for manner of targeting: the current strategy is a combination of commodity-targeting (rice and noodles) and geographic targeting (rolling stores). As for commodity targeting, a better choice is corn (i.e. corn grits), which is in the Philippines is consumed by the poorest of the rural poor, but shunned by the higher income groups. The problem with rice and noodles is that even the higher income groups buy it. This makes the system prone to cheating. Which brings us to the geographic targeting. An enterprising retailer can just follow the rolling store, buy the subsidized goods, and resell at the market price. (There are regulations against this, but how to prevent it in practice?) There is anecdotal evidence suggesting that such cheating is happening. A lot.

Am I saying the rice-noodle program is not helping the poor? Of course it helps. However I'm saying there's a better way, magis. President GMA, an alumnae and former teacher of Ateneo, surely knows this!


Amadeo said...

I completely agree. It is this kind of false stimulus that's giving feasible and effective poverty alleviation measures a bad name, such measures as promoting microfinance activities and retooling existing credit unions for microfinance activities.

"The high unemployment and underemployment rate the country suffers from is due to structural factors, not a deficiency in aggregate demand.."

Like how many contractuals (in the grandiose malls) contribute to the acute underemployment in the country?

Paying living wages should increase purchasing power substantially. And that definitely is poverty alleviation. Thus, why not use those extra funds to "educate" with suasion, both moral and otherwise, those who stubbornly make their billions on the back of these poor hapless individuals.

And with regard to barrio feeder roads, I am in a good position to recommend that that would also be a good alternative. Farm-to-market access is still a problem even in many areas very close to urban centers.

Back to that old tired cliché again, teach a man how to fish…..

Major Tom said...

I think they've got the whole Keynesian idea wrong. Though it may suggest mass inputting of currency into the economy, it is by no way thru direct infusion like the poverty alleviation program---with noodles and rice. I think what is more effective is by government spendings like livelihood projects and infrastructures...

Econblogger said...

Major tom,

Right. Even if government is pump-priming, why put the money in low or zero return projects, when instead the money can be spent on higher return projects? It can however be argued that at least the low return projects end up benefiting the poor. I am though convinced that there are high return projects that benefit the poor - like some types of farm-to-market roads.