PRESENTATION How can inclusive business promote the inclusive growth agenda of the Philippines? Hon. Arsenio M. Balisacan Secretary of Socio-Economic Planning Philippines Inclusive Business Forum November 26, 2012 ADB Headquarters, Mandaluyong City

Before I proceed, let me first present to you the big development challenge we are facing in our country:  Growth in the past has not been rapid enough and worse, it has not been inclusive.

Poverty reduction in the country has been slow and lagging.  One reason for this is that we have not experienced high growth that has been sustained over a long period.  For instance, if we want real per capita incomes to increase two-fold in fifteen years, then we must grow by 6.7% annually, on the average for the next 15 years.

What is the more disturbing fact revealed by this slide is that poverty reduction has not been responsive to growth.  During the period 2000 to 2009, the proportion of poor Filipinos seemed to have only plateaued, when this should have gone down given the continuous economic growth at the time. This is why we term this period as our “lost decade.”

In addition, we suffer from having high income inequality, which indicates that economic gains have not been broadly distributed across the different sectors of our population. Opportunities remain unequal, in terms of access to health and education services, market infrastructure and the like. 

This is the reason why the Aquino administration has committed to ensuring that there will be growth and that is rapid, sustained and inclusive.

Achieving inclusive growth is quite a formidable task.  Let me share with you some employment statistics:

In July 2012, unemployment rate was 7 percent and it has been at about this level for two years now.  Note that the background for these employment statistics was a very commendable economic growth, low and stable inflation, fiscal prudence and therefore, sound macroeconomic fundamentals, and high consumer and business optimism. 

But what do the numbers tell us?

First, that we have not been creating jobs fast enough. The higher growth was perhaps supported by stretching the capacity of the current workforce, and not by increasing the workforce.

Second, there is still the problem of quality of jobs.  We are seeing an uptick in underemployment rate, mostly in the agriculture sector.  For these workers, 23 percent of the employed, they would still want to work some more but could not find any.  The only possible reason for them to want more work is because their present job is not enough to meet their needs and wants.

We are hoping that this is simply a lagged effect, perhaps because businesses are still trying to ascertain if the sound macroeconomic fundamentals can be maintained over the medium to long-term.  We assure you that we are committed to exercise prudence in the fiscal sector and ensure a healthy financial sector. We are also implementing fiscal and governance reforms to promote discipline in the sectors that are directly within our control.

In the meantime, we in government are already coming up with concrete actions to fill the employment gap, albeit, only temporarily.  At the same time, we implore on the business sector and civil society to help come up with a more sustainable solution.

Inclusive growth represents a paradigm shift for reducing poverty.  It contrasts with the terms “exclusive growth” and “trickle-down.”  Exclusive growth means that the benefits of growth are confined to a few, the kind of growth that we experienced in the last decade. In trickle-down growth, the poor also benefit from growth, but only after some time. Given the current volatile situation in the global market and even the physical environment, it would be very difficult to sustain rapid growth long enough for trickle down to happen.  Inclusive growth, on the other hand, includes the poor and marginalized groups in the growth process.  This presents a better chance for the poor to benefit from growth.

In the business sector, I am aware that many of you carry out activities as part of your corporate social responsibility like offering scholarships, rehabilitating a forest, an ecosystem, medical outreach, public housing projects, and others.  This is yet another example of the trickle down strategy.  Perhaps, the business sector can adopt the same paradigm shift in carrying out their social responsibility. I think this inclusiveness paradigm advocated here is a way to that shift. 

            The Philippine Development Plan enumerates a number of strategies to achieve inclusive growth.  Most of these are needed for rapid and sustained growth.  For inclusive growth, these strategies have to be targeted to benefit the poor and the marginalized. 

First is massive infrastructure development not just in the cities, but making sure that the rural and marginalized areas are connected to highly-urbanized centers.

Second is human development and human capital formation. To ensure that productive sectors would have the pool of skills they would need for a growing economy and at the same time, improve the capacities of the poor to benefit from growth.

Third is direct poverty relief. We acknowledge that there are those who cannot be directly involved in the growth process but we have to ensure their basic right to live decent lives.  For them, government is implementing targeted poverty reduction programs.

Lastly is employment generation, where government can provide temporary employment to selected individuals in implementing public works, like rehabilitation of infrastructure in disaster-affected areas, construction of other small infrastructure, and other activities.  At the same time that the infrastructure is built, the poor are able to earn incomes and learn new skills.

All these strategies are anchored on the principle of good governance.  Note that for inclusive growth, huge amounts of public resources will have to be directed to the poor and marginalized sectors.  This requires leadership, transparency and accountability, and popular participation in governance to ensure that the scarce public resources are judiciously spent and benefit those they are intended to benefit.

The government strategies I have previously enumerated will hopefully result in better conditions for the poor to be linked with business, and vice-versa.  On the other hand, we hope that the business sector will also adopt this paradigm shift towards inclusive business in a big scale.  As you may have already noted, this entails a conscious effort to involve the poor on a more massive scale than philanthropy or CSR allows.  For the business sector, this involves a deliberate effort to engage the poor in business operations.  In the pursuit of commercial objectives, the poor can be engaged as suppliers, distributors, and even as employees.

Let me cite a few examples.

Most of the poor we know are in agriculture.  Companies in the fast food chain businesses engage the poor for the supply of either raw or cooked ingredients, like Jollibee for example. 

Subcontracting is another arrangement where big companies engage the poor as suppliers of goods and services.  Companies in the food manufacturing businesses, for example, San Miguel, Vitarich and Monterey, engage the poor in contract growing of livestock such as chickens and pigs.  

Other companies may not require agricultural produce as inputs to their businesses.  But they employ workers who consume food.  These companies may still engage the poor by giving out food gifts and food bonuses to their employees, thereby increasing the effective demand for agricultural produce.

The poor can be directly employed by businesses.  Of course this is the long-term solution that the economy can provide through the business sector’s employment opportunities especially for the unskilled. But let me note the importance of creating jobs for the tourism sector through manufacturing plant workers, unskilled construction workers, and so on.  What this means is that the qualifications need not be unnecessarily set too high to give the poor better chances of being employed. But that depends on the requirements of the firms.

Many firms have evolved in providing accessible services and products to the poor. For example, products can be packaged such that even the poor can afford them.  This is especially necessary for health and hygiene products. Even in the financial sector, services for the poor are being provided in the form of new innovations like from private banks and other financial intermediaries. But I still have to see that we in the government are improving, in a big way, access to financial services.  I hope that these services will continue to be accessible to small players in the market.

Successful strategies that have been identified to develop inclusive businesses, which the business sector should look at, are:

• Adapting products so that these are made affordable to the poor; adapting processes so that even the poor can qualify.
• Leveraging the strengths of the poor.  Poor people often have the best ideas for creating new products and services that meet other poor consumers’ needs.  Generally, when the poor take over some tasks in a business model, the transaction costs for the businesses fall—while the poor benefit from rising income, knowledge and skills and social standing.
• Combining resources and capabilities with others.  Engaging other businesses in mutually beneficial partnerships and collaborations can help inclusive businesses succeed.  Through collaborations, businesses can gain access to complementary capabilities and pool resources to work around or remove constraints in the market environment. 

Government is willing to partner with inclusive business. We can help further develop inclusive businesses by:

•        Providing market information on the poor.  Businesses know little about the poor, —what poor consumers prefer what they can afford and what products and capabilities they could be engaged in as employees, producers and business owners.
•     Streamlining business procedures and processes.  Difficulty in registering business, securing business permits and clearances, among others, act as deterrent to business.  
•          Upgrading knowledge and skills.  Poor consumers may not know the use of and benefits from particular products, or may lack the skills to use them effectively.  Poor suppliers, distributors and retailers may lack the knowledge and skills to deliver quality products and services consistently, on time and at a set cost.  TESDA provides skills training at very affordable cost.  There is also the apprenticeship program under which the enterprise can avail itself of certain incentives.
•      Improving peace and security conditions.   Some poor areas may be located in security risk areas.  We are committed to improving this situation.  Very recently, we have entered into a Framework Agreement for Peace and Development in Mindanao and we are also reaching out to the other groups.  The PAMANA (Payapa at Masaganang Pamayanan) is another mechanism for engaging with the poor who are in areas affected by conflict.  Its third pillar is about linking “conflict affected areas to markets.”
•           Policy dialogue.  We know that this is a novel style of doing business, but potentially, very beneficial to society. Some businesses have already adopted inclusive strategies and we would like to hear from them. For this reason, we will regularly communicate with business, basic sectors and local governments through policy dialogues on how we can further promote inclusive business. 

I am confident that with a conducive business environment and a more proactive business sector, more and more inclusive business models can be found and adapted, which hopefully will contribute to the attainment of inclusive growth in the country.

At the end of President Aquino’s term, I hope we will be able to reduce the country’s poverty incidence and sustain a high growth. The next data on poverty will be available in early 2013 (pertaining to early 2012) and then in early 2016 (pertaining to early 2015).  We also know that we have committed to halve the incidence of poverty by 2015, from its level in 1991.  This is a tough call, but it could be done if we all work together to ensure inclusive growth.  And for the business sector, we hope you can help us by doing inclusive business.

Thank you.

M.R. No. 2012-078

26 November 2012