Philippines unlikely to achieve middle class status by 2040

MANILA, Philippines — The economic fallout from the coronavirus pandemic can wipe out a decade’s worth of poverty reduction efforts, making it unlikely that the Philippines can become a predominantly middle class society by 2040, according to the Philippine Institute for Development Studies (PIDS).

In a paper titled “Poverty, the middle class, and income distribution amid COVID-19,” the state-run think tank said simulations on various levels of income reductions amid the pandemic showed delays in the transition of poor households to middle income status as many of them fall deeper into poverty and some middle income households descend into poverty.

The simulation used the latest available data from the 2018 Family Income and Expenditure Survey (FIES) as the next FIES will be conducted next year.

The study assumes income contractions of 10 percent and 20 percent across income distribution sectors.

“The simulation results suggest that poverty conditions can revert to those more than a decade ago, and that targets for the country to attain its aspirations to become a largely middle class society can be pushed back,” the study said.

While poverty reduction had been sluggish from 2006 to 2012, poverty reduction gained momentum from 2012 up to 2018.

In December 2019, the Philippine Statistics Authority (PSA) reported that poverty incidence fell to 16.6 percent in 2018 from 23.3 percent in 2015.

This pertains to the proportion of Filipinos whose per capita income is not enough to meet basic food and non-food needs.

In turn, this translates to 17.6 million Filipinos living below the poverty threshold of P10,727 monthly for a family of five in 2018, the minimum income needed to satisfy basic food and non-food needs.

The simulation by PIDS showed that the number of poor Filipinos could rise by about 1.5 million from baseline figures of incomes contract by 10 percent across all income distributions and even with social amelioration and wage subsidy programs in place.

Without social amelioration support, the number of poor Filipinos could rise by 5.5 million, according to the study.

Assuming the domestic economy realizes a V-shaped recovery - which entails a swift return to growth after a deep slump - and manages to provide a growth rate of real income per capita of 2.5 percent per year, it will take 21.5 years for families classified as low income as of 2018 to become middle class.

This also assumed that this level of per capita income growth will be sustained and will be uniform across the population.

Under the worst case scenario of a 20 percent income contraction across all income segments with the social protection cash transfers in place, the average transition time for poor households to become middle income increases to 24 years.

“For lower growth rates that could arise from a prolonged recovery, we would further expect the transition to take even much longer,” the PIDS said.

“The simulation results in this study provides concrete indication on how the country’s aspiration for a middle-class society articulated in Ambisyon Natin 2040 can get affected,” it said.

The simulations also assume effective targeting schemes for the social protection cash transfers to all families except for the upper 10 percent of the capita income distribution and that cash support was given for two months.

Households with a monthly income that is less than the poverty threshold for five members fall within the poor income group, while those earning between P10,957 and P21,914 per month are considered low income but not poor.

Middle income households are those earning between P21,914 and P219,140 monthly for five members. Those earning upwards of P219,140 per month are classified as rich.

Under the government’s long-term vision Ambisyon Natin 2040, the Philippines is envisioned to be a predominantly middle class society within the next two decades with significant improvements in the standard of living, finances, security and ease of transacting with the government.

PIDS said that while the pandemic will have the most impact on the poorest households, low income and lower middle income groups are also at a disadvantage because they have meager savings to cushion the effects of sustained economic disruptions.

They may also have little protection against other related shocks such as job losses and food insecurity.

“Their recovery may be challenging compared to those in higher income groups,” the report said.

“There is imminent risk that whatever inequalities we currently have across income classes that have been heightened during the COVID-19 pandemic may further widen given the glaring digital and the other divides we currently have in the country,” it said.