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IMF: Income gap dampens growth

PH gains shortlived if inequality is high

THE Philippines must address the widening income gap if it hopes to sustain its economic growth and ensure that it becomes inclusive, a senior International Monetary Fund official said Friday.

“There is an empirical study that income inequality is high and associated with short durations of high economic growth. You might be able to enjoy high growth for a short amount of time, but it’s not sustainable,” IMF deputy managing director Naoyuki Shinohara said in a forum entitled “Rethinking Economic Growth” at the World Economic Forum  on East Asia.

Shinohara said government’s role in allocating funds plays a big role in addressing income disparity. Governments in this part of the world, he said, don’t have “not enough” taxes, provide huge amounts of tax exemptions and suffer from corruption.

“If you look at countries in Asia, the size of government is relatively small. It means the role of government in the allocation of income is relatively small compared to other regions,” he said.

Shinohara pushed for higher income taxes compared to consumption taxes, such as value-added taxes, with the latter being “regressive” and “hitting the poor more than the rich.”

However, VAT may have its benefits if combined with social transfer mechanisms, he said. The Philippines, Mexico and Brazil have implemented conditional cash transfers, while Japan spends its VAT on the government’s social security programs.

“If the design of [social transfer mechanism] is not right, it can harm the efficiency of the economy. There needs to be a good balance between efficiency based on mechanism and whatever the social value we have to protect,” Shinohara said.

“Taxation and income transfer in the area of social programs will reduce income inequality by one-third,” he said.

Economic officials on Friday said the administration was able to showcase the Philippine narrative during the three-day WEF summit, with world and business leaders expressing interest in investing here.

Finance Secretary Cesar Purisima said the Philippines, as host, was able to share its remarkable comeback story to the rest of the world through WEF-EA.

“By focusing on the good governance, the Aquino administration has been able to provide the Philippines with strong macroeconomic fundamentals that have not only resulted in economic growth but have also resulted in a more optimistic future for ordinary Filipinos,” he said.

This sentiment was echoed by Budget Secretary Florencio Abad, saying during the forum the Philippines was able to show how its has transformed itself from a laggard to a leader.

“The WEF-EA has served as a great platform to share how in a short period of time the Philippines has become the leading economy in Southeast Asia,” Abad said.

But Senator Juan Edgardo Angara said the Philippines might be losing out on the race for job-creating investments because of the high 30 percent corporate income tax, the highest among the ASEAN countries.

“If it (Philippines) does not follow the regional trend of reducing tax on business income, it might be left behind,” Angara said.

At present, he said the region’s average rate is about at 23.1 percent, with Singapore as the lowest at 17 percent and the Philippines as the highest at 30 percent.

Also t the WEF summit, the World Bank said climate change was among the biggest threats to poverty reduction and economic growth.

Rachel Kyte, World Bank Group Vice President and Special Envoy for Climate Change, said climate change was a challenge that needs collective action by national governments, development partners, private sector, civil society, and local communities.

Speaking before participants of the WEF on East Asia, Kyte emphasized that climate change is not just an environmental challenge, but a fundamental challenge to economic growth and financial stability.

“Countries need to take bolder action now before the impacts of climate change put prosperity out of reach for millions and roll back decades of development. If we don’t confront climate change, we won’t end poverty,” Kyte said. “The cost of inaction far exceeds the cost of action.”

Kyte said the government can design and enforce policies that put resilience at the core of development. Resilience should also be at the core of the private sector’s investment decisions. And this will not happen, she added, without the involvement of communities and local leaders.

Kyte cited the Philippines as among the countries most vulnerable to natural disasters as a result of climate change.

Over the last five years, the country has experienced severe weather that resulted in huge damage and losses.

“Typhoons Ondoy, Pepeng, Sendong, and Pablo claimed the lives of more than 3,000 people, caused economic damage and losses amounting to approximately $5.7 billion, and affected new areas such as Mindanao, which historically have not been hit by strong typhoons,” she said.

Then in November last year, typhoon Haiyan (Yolanda), one of the strongest typhoons to ever make landfall, hit the country and left a trail of devastation, claiming more than 6,000 lives and doing an estimated $12.9 billion in damage.

World Bank country director MotooKonishi added that the poor are most affected by disasters.

“Disasters also push people, who previously were not poor, into poverty,” he said. “This is the very reason why the World Bank is supporting measures, programs and projects that strengthen the country’s capability to deal with natural and man-made disasters.”

The three-day WEF summit ended May 23 with a reception and farewell dinner at the Philippine International Convention Center.

Finance officials said the government spent P71 million for the WEF-EA with some help from private corporations like the Ayala Corp. and SM Investments.

The forum brought together three state leaders, 16 finance ministers, and over 600 delegates representing more than 30 nationalities.

Among the heads of state were Myanmar Vice President Sai Mauk Kham, the Vietnam’s Prime Minister Nguyen Tan Dung, and Indonesia’s President Susilo Bambang Yudhoyono.

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