The failed promise of trickle-down economics

The Philippine economic development strategies have historically been focused on gross domestic product (GDP) growth, primarily through investment in infrastructure, big-ticket investment projects and showcase industrial ventures.

While economic policy is the prime responsibility of government in most countries, in capitalistic economies like ours, the business sector is primarily responsible for formulating and implementing strategies for economic production. Government is involved mainly in the many investment projects that are being undertaken jointly with business partners, notably those in transportation and energy development, through what are known as public-private partnerships or PPPs.

It bears noting, moreover, that while the business sector has traditionally been mandated to assume a dominant role in spurring economic growth, the government has been supportive by providing business firms with attractive tax incentives and financial assistance to make investment decisions more remunerative.

This business-friendly growth strategy appears to have had salutary affects, as we witness the GDP growth rate of 5.9 percent recorded by the country for the third quarter of 2023, which represents an improvement on the 4.3 percent recorded in the preceding three months. While this growth rate is below the government target of 6 to 7 percent, it remains to be the highest among major Asian economies.

A tacit assumption

The idea behind the important role given to business in spurring economic growth is that the income and wealth generated will benefit not only corporate shareholders and owners of small and medium (SMEs) but will “trickle down” to all of society. However, there is little factual information to support this premise.

Data on economic inequality supplied by Oxfam, the international organization that monitors economic inequality, show that the country’s wealthiest individuals continue to accumulate more wealth, leaving the rest of society farther and farther behind. Moreover, a recent study commissioned by Oxfam found that among a group of Asian countries that included Bangladesh, Cambodia, China, India, Indonesia, Lao PDR, Malaysia, Sri Lanka, Thailand and Vietnam, the Philippines has had the slowest growth in the Human Development Index, a summary measure of human development.

The most recently published SWS survey shows that around 13.2 million families, or 48 percent of all families, consider themselves as poor, or mahirap, compared with the 12.5 million recorded in June 2023.

By all indications, only the superrich have been benefiting from GDP growth, while the rest of society continued to live in abject poverty.

Supply-side economics, a.k.a. Raeganomics, has long been discredited for lack of empirical and theoretical support. If anything, wealth has continued to shift upward to a handful of scandalously affluent families.

Nobel Laureate Paul Krugman considers supply-side economics as “a bad economic idea, an apocalyptic economic thinking that just won’t die.” Other well-known economists, notably Joseph Stiglitz, iconic professor of economics at Columbia University, and Thomas Piketty of the Paris School for Advanced Studies in the Social Sciences, express essentially the same sentiments as Krugman’s, albeit in somewhat less acerbic terms.

An alternative economic development strategy

What, then, is an appropriate economic development strategy for the country, one that both promotes growth and reduces economic and social inequality?

Current economic wisdom calls for investment in human capital as an alternative to the current emphasis on financial and physical capital.

As defined by the University of Chicago’s Gary Becker in his landmark 1975 book, “Human Capital: a Theoretical and Empirical Analysis, with Special Reference to Education,” human capital consists of knowledge, skills and attitudes that are lodged in people and determine their capacity to produce economic value.

Human capital, particularly its knowledge component, is considered as today’s most important and the most highly valued economic resource. It is regarded by many social observers and commentators as a great leveler because it is easy and relatively costless to transfer to individuals with little training and education. It also enables them to become more productive members of the community and command higher compensation for their services. It also makes possible for workers who possess complementary knowledge and skills to work collaboratively and create enormous economic value for themselves, for their employers and for society.

It goes without saying that an economic development strategy that focuses on the creation and dissemination of knowledge will result both in higher level of output and reduced income and wealth inequality.

Business organizations, especially large resource-rich business corporations, can play an important role in transferring knowledge to the less-privileged members of the community by investing in the knowledge and skills capabilities of their workers. In this way, business enterprises enhance the productivity of their workers and enable them to achieve their long-run strategic goal of maximizing shareholder wealth.

Universities and other types of educational institutions can play an important role in addressing the problem of economic inequality by making knowledge and skills more readily accessible to the unschooled and undereducated members of the community, thereby enhancing their ability to improve their material well-being.

Addressing the problem of learning poverty

One of the more pressing economic and social problems faced by our society today is what is known as learning poverty, a measure of the inability of school-age children to read and understand age-appropriate texts or written materials.

In 2022, the World Bank reported that nine out of 10 pupils of age 10 in the country suffer from learning poverty, one of the highest rates among countries in Southeast Asia and the Pacific. Unless this issue is immediately addressed with appropriate measures, the economic well-being of our future generations is clearly jeopardized.

Solving this problem requires a more expanded role for government in economic and social planning, one that involves several government agencies, such as the Department of Education, the Department of Social Welfare and Development, the Department of Health, the local governments, among others, in dealing holistically with large numbers of inter-related issues.

Measures to improve learning capacity of school children include not only those intended to ensure that learners are physically present in the classroom and those designed to improve teacher effectiveness, but also programs for eliminating malnutrition and enhancing prenatal care among poor families. INQ

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is a retired professor of economics and management at UP Diliman. Feedback at [email protected] and [email protected].