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Instructional
Media
In

Economic
Development

Table of Contents
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Chapter 1 Economic Growth and Development

Chapter 2 Poverty and Inequality

Chapter 3 A Nation’s Wealth

Chapter 4 Cost of Living

Chapter 5 Agriculture and Rural Development

Chapter 6 Industrialization

Chapter 7 Labor Market

Chapter 8 Finance System

Chapter 9 Finance and Development

Chapter 10 Foreign Trade

Chapter 11 Foreign Direct Investment

Chapter 12 Foreign Aid and Remittances

Chapter 13 National Economic Policy

Chapter 14 Cooperatives

Chapter 15 Social Enterprises Development

Chapter 16 Peace Economics and Development

CHAPTER 1 ECONOMIC GROWTH AND DEVELOPMENT

LEARNING OBJECTIVES
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In this chapter, you will be introduced to the concepts of economic growth and
development. Specifically, this will help you:

1. describe the concepts of economic growth and development;

2. discuss the relationship between economic growth, development, and public
policy;
3. explain the determinants of productivity, a key factor for economic growth
and development;
4. critique the O-Ring theory of production and development;
5. evaluate the Solow Model of long-term growth;
6. discuss the economic development of the Philippines;
7. explain the targets of the world for economic growth and development;
8. use the rule of 70 in estimating the growth of a factor in the economy;
9. discuss the role of industrial production and trade to East Asian economic
growth and development; and
10. appreciate Boston Consulting Group's (BCG) view on Association of
Southeast Asian Nations (ASEAN) economic development.

American Environmentalist, Entrepreneur, Author, Activist Benesh,

Unsplash.

LOOKING BACK

In basic economics, we learned about the foundation of economics as a

social science that deal with efficient management of limited or scarce
resources. Economics depends on the concept of human nature, strongly on
the assumptions of behaviors, motives, meanings of individuals and
interactions with other people, and groups and diverse institutions.3 It
highlighted the basic economic questions of:

(1) What products are to be produced and their quantities?

(2) How are they going to be produced?
(3) For whom are the products? And, there are two main branches, namely,
Microeconomics and Macroeconomics

Basic Economic Questions:

1. What products are to be produced Microeconomics, also known as the
and their quantities? economics of individual activities and
2. How are they going to be entities, discusses the various laws in
produced? supply, demand, equilibrium and
3. For whom are the products? diminishing marginal utility, and the
factors affecting the products' supply and
demand.

In "demand,” there are substitution and income effects, thus applying the
concepts of substitute goods and complementary products, in addition, the
marginal propensity to consume and the marginal propensity to save.
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In “supply," some of the concepts include elasticity and equilibrium, shortage,

surplus, imposition of price ceiling and floor, and government interventions in
market equilibrium, like subsidies and taxes.

Moreover, the various market

models and their characteristics, Basic Macroeconomic Questions:
production and cost, both short-run 1. What determines the standard of
and long-run, economies of scale, living?
diseconomies of scale and constant 2. What determines the cost of
returns to scale. living?
3. Why does our economy fluctuate?
In Macroeconomics, economics of the entire nation, there are three basic
questions:

(1) What determines the standard of living?

(2) What determines the cost of living? and
(3) Why does our economy fluctuate (Business Cycle)?

The concept of production is limited by the amount of resources available in

the Production Possibility Frontier (PPF), the basic measure of a nation's income,
that is the gross domestic product (GDP). As the market value of all final products
of a country, the relationships of inflation and unemployment, thus, the Phillips
Curve, fiscal and monetary policies, functions of money, various economic
theories, and, central to economic growth occurs when the PFF Shifts outward, like
technological innovation and capital accumulation, and the increase in real GDP.

INTRODUCTION

One of the most important topics in economics is appreciating,

comprehending, and measuring economic growth and development consequential
to many theories' role and determinants of long-term growth. Fundamentally, the
term “economic growth” refers to the percentage change in a nation's per capita
GDP-the money value of all goods and services produced over a long period of
time. We often associate economic growth with the standard of living in a country
for a relevant time horizon. Many economists would suggest that economic growth
is the key indicator of a country's power and accomplishment.

Various studies have been dedicated to the study of economic growth that
clarified the ways, programs, and situations that sustain growth. In this lesson,
we are going to describe economic growth, using the actual data on per capita
real GDP, analyze the role of productivity and finally, discuss economic
development of the country.

Economic growth boosts development; all other things remain

the national output, the total constant, as higher GDP would mean
money value of all goods and more to spend on factors that are
services produced by one considered development.
country, whereas, economic According
development means to the definition of the Philippines
advancement of the standard Statistics Authority (PSA), “standard
of living, e.g., education, of living” s the level of consumption
healthcare, innovation, that people enjoy, on the average,
environment, to name a few. and is measured by the average
Growth directly boosts income per person, while the “cost of
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living” is the amount of

money it takes to buy goods
and services that a typical
family consumes. A rising cost
of living is called inflation and
deflation as otherwise.

Figure 1.2. Economic Growth and

National Economic Policy
ECONOMIC GROWTH

Governments around the world are faced with issues concerning

productivity and living standards. In 2013, the World Bank Group adopted the
twin goals to guide its work: ending extreme poverty and boosting shared
prosperity.
The following are the factors considered in building an economy:

Saving and Investment. In order to produce more, we have to invest in

capital assets to enable us to have the capacity to yield more goods and
services. However, it is to be noted that capital investment would mean
sacrifice to consume more. There is a need for a country to promote both
domestic and foreign investments in order to reduce unemployment. Ideally, a
reduction in unemployment will reduce poverty levels, and hence, the
government's social burden, which will ultimately allow for increased public
savings.?
Diminishing Returns and Catch-up Effect. As the stock of capital increases,
the extra output produced from an additional unit of capital decreases.
Productivity is considerably affected minimally when the workers with a large
quantity of capital they use in the production process are given extra units of
capital. In the long run, a higher saving rate leads to a greater level of
productivity and income but not greater growth in these variables.
Investment from Abroad. An investment that is sponsored with foreign
money and operated domestically is called foreign portfolio investment. It is
expected that the use of the foreign money would mean more opportunities to
produce where the money is capitalized, but, of course, a certain interest in
that money is foreseen as well. The World Bank (WB) and the International
Monetary Fund (IMF) were established to ensure that there is economic
prosperity around the world by financing public goods and services with funds
accumulated from more advanced economies like the United States of America
(USA).
Education. Human capital theory attributes differential investments in
human capital to inequalities in income, such as those found to exist between
women and men or minorities and whites. This theory emphasizes human
capital as a set of economic assets. Education benefits human capital that is as
important as physical capital. In fact, the largest chunk of the annual budget is
dedicated to the education sector. More quality educated people produced in a
country would mean an opportunity to generate more and better ideas to
produce goods and services. However, in developing economies, highly
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educated individuals may opt to serve in other countries with a higher standard
of living, hence, brain drain-the emigration of most highly educated workers to
rich countries. In a recent happening, we made it a policy to limit the
permission for registered nurses to work abroad for a given period of time.
Health and Nutrition. A healthy population would also mean human
capital, just like education, hence, are capable to produce more goods and
services because they can maximize employment as compared to an
unhealthy population. Other things remain fixed, healthier individuals are more
productive. Policies that lead to economic growth would consider having
healthy workers to promote greater productivity.
Property Rights and Political Stability. Property rights ensure the exercise
of rights over one's property and these guarantee more production of goods
and services. In addition, when there is less uncertainty in government
decisions and policies, especially in terms of market trading, there is an
opportunity to improve production processes and distribute products in the
country. A stable political environment is considered to have efficient
executive, legislative, and judiciary systems, working together for the country's
economic development.
Free Trade. A competitive economy that reduces or eliminates trade
restrictions experiences economic growth after benefiting from more products
to be used as input to production. Outward-oriented policies give way to
developing countries' opportunity to interact with other countries and trade
freely, thus creating more prospects to improve production.

Research and Development. The products of research and development

(R&D) are new ideas, goods, and services that people consume. Government
institutions allocate a part of their yearly budget to research to continue
improving the ways things are done, in a more efficient or totally distinctive
way. To protect the idea, a patent is awarded to an innovator for a certain
number of years to encourage more researchers to discover beneficial things.
Essentially, R&D turning money into knowledge and innovation is a process of
creating a business out of this knowledge.
Population Growth. There are two schools of thought regarding population
growth. On one hand, a relatively large population means more human
resources working and contributing to the production of the country, but on the
other hand, it also means more people to consume those goods and services. It
is to be noted, however, that there are countries with a few population and
slow population growth rate but are considered developed like Germany,
having an annual growth rate of 0.2%, and Singapore,-0.3% in the 2020 study
of the World Bank.

PRODUCTIVITY
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In production, we consider technology, as it develops, so is the

the factors such as quantity of production of goods and services.
labor (L), quantity of physical The production function shows that
capital (K), quantity of human all other things remain constant;
capital (H), quantity of natural output increases as physical
resources (N), and technological capital, human capital, labor, and
advances (T), and if we are to natural resources increase.
summarize the output of
production (Y), we say, Y=
Y =Tf {L , H , N },N}. In the advent of Figure 1.3.Productivity Factors

Productivity means the amount of goods and services produced from each
unit of labor. It is obvious to see that the key factor in defining the standard of
living is the advances in productivity. Remember that the GDP may be seen in
two ways, the total cost of expenses that a country spends on goods and
services and the economy's income as its output.

Remember the factors of production: land, labor, capital, and

entrepreneurship. These are the factors to consider in productivity as well.

Physical Capital. These are assets utilized to produce goods and services.
The more capital we use, the more production we have. For example, a
carpenter with more wood, cutters, machines, and other structures to build a
piece of furniture will be able to produce more furniture to sell; hence,
increased production.
Human Capital. Although intangible than capital resources, human capital
comprises knowledge, skills, and abilities (KSA), it is undeniable that it greatly
affects the production of goods and services. The KSA is developed in a person
with education, training, years of experience, more knowledgeable, skilled, and
able, which produces more than those who do not have.

Natural Resources. The abundance of natural resources such as trees,

water, minerals, metals, fruits, root crops, and oil makes an economy produce
more goods and services. The abundance of natural resources varies from
country to country. Take or instance the USA which is endowed with wide
arable lands for agricultural production or the countries in the Middle East,
such as Qatar, Kuwait, and Bahrain that are rich in oil, which they call "black
gold." They use these natural resources to produce more goods and services or
trade them to other countries that have less of these inputs. It does not mean,
however, that if one country does not have a wide array of natural resources, it
cannot be considered productive. For example, Japan is technologically
advanced over other countries enabling them to produce and export more.
Technology. This is closely related to research and development, as it refers to
the output of innovation and never-ending thrust to discover new things and new
processes that would make production more efficient and faster using less input. It is
related to human capital because humans create these advances in technology, like in
agricultural, pharmaceutical, or industrial sectors.
Needless to say, we all need these four determinants of productivity to create
products and services, Different countries have varied levels of these factors, hence we
can say that there is an evident discrepancy in productivity and gross domestic
product.

O-RING THEORY OF DEVELOPMENT

O-Ring theory of economic development was proposed by economist
Michael Kremer in 1993, which explains that production is composed of a set of
tasks, and each task must be carried out proficiently for each one of the tasks
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to have value. The name "O-Ring" was derived from the devastating
destruction of the Challenger space shuttle in 1986, resulting from a faulty
little gasket or O-Ring.1° This theory of development explains the discrepancy
of the developed and underdeveloped countries in terms of the complexity of
their production, product intricacies, and the level of skilled workers that they
have.
The theory tells us that a weak link in the production process may cause a
surmountable quality failure of the final output. The quality of input is given
more value than its quantity. For example, a highly skilled chef of a restaurant
cannot be replaced by two or three cooks, or a great opera singer cannot be
replaced by ten people who sing the videoke, a music system used in singing
with lyrics on a monitor by those who usually do not have proper training in
opera and are done at homes or other social gatherings.
Assume that there is one worker for every task in a production process.
We use the variable W, the level of quality is within the range of zero to 10,with
10 being the highest quality and zero for no quality. A quality of 0.9 may be
understood as either, a 90%probability of the task being done perfectly and a
10% probability that it is a complete failure. The other view is that there is a
50-50 chance of perfect completion of the task and the other half is by a
reduced value of 20%, that is, 0.0.5(1)+0.5 (0.8)=0.9 ..The O-Ring production
function is, Output,O=W ×(Q 1 ×Q 2× ⋯Qi × ⋯Qw ).
In the graph, the O-Ring theory
explains the relationship between O-RING MODEL
output and quality. Notice that a
level of output 10 is equal to the
highest quality level 100%, as the
level of output goes down, the
quality also drops. We can replace
output with wages, and explain why
wages go down as the quality of
input diminishes. The model explains
further why poor countries have
workers that are considered in less
capital-intensive production
processes like agriculture. Usually,
the methods in agriculture that
they use are simple and entail
fewer tasks.
With the use of the theory,
we can analyze the complexity of
the production processes and
determine the effect of the
quality of the tasks on total

ECONOMIC DEVELOPMENT IN

According to the World Fact

Book 2020 of the Central
Intelligence Agency (CIA) of the
USA, the Philippines ranks
132nd out of an estimated 211
countries or states with a per
capita GDP (on a purchasing
power parity basis) of $8,400
annually in 2017. Top 3, were
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Liechtenstein (1st-$139,100 pa), Qatar (2nd - $124,100 pa), and Macau

(3rd -$122,000 pa), while the bottom 3 were, Democratic Republic of Congo
(180th - $100 pa), and tied for the last two places are Central African Republic
(181st - $700) and Burundi (181st - $700).
Figure 1.6.Mojor Businesses in the
Philippines
Inflation of the country is at 5.7% p.a. (1995-2004). As per writing of the
book, the inflation of the country increased from 4% in July 2021 to 4.9% in
August 2021.13 Inflation is commonly known as the quantitative measure of
the price rate increase of goods and services over a period of time. Strong
coconut, pineapple, and banana export industries and remittances of
Overseas Filipino Workers (OFWs) fully open outside investment and
development of business process outsourcing center.

A shortfall in budget, diminishing investor confidence, and outrageous

political scandal were eminent during the time of former President Joseph
Estrada, while Gloria Macapagal-Arroyo acted a lot of deregulations and
privatizations of public corporations and tax reforms thus, redeeming the
country's status in the International Monetary Fund and the international
community. Although there was an annual growth rate of 5%, because of the
Asian Financial Crisis of 2008, the country's export began to plunge. Despite
this, the country did not go into recession and was even strengthened by
Benigno Aquino Jr.in 2010.

The country's geographical setup of economic activities is considered a

drawback, intensifying underemployment, instability, and even corruption.
Power breakdowns limit the room for development.

According to a report by the

Philippine Coop, another factor
that is considered in the country's
economic development is how the
government deals with the leftists
and separatists, like the New
People's Army (NPA), the Moro
National Liberation Front(MNLF),
Moro Islamic Liberation Front
(MILF), and of course, the Abu
Sayyaf. In 1996, a peace
agreement was signed by the
MNLF and joined by the MILF in the
peace process of 2001.The Abu
Sayyaf, however, continued to
fight in Mindanao, the so-called
Muslim home land even in parts of
Luzon and Visayas, as they
claimed to have an international
backup.
One of the most noteworthy programs of the current administration of
President Rodrigo Duterte is the "Build, Build, Build" program, which aims to
significantly expand infrastructure and boost employment growth in the
country. It was just hampered by the spread of COVID-19 that started in
China.16 The Philippines bolstered ties with the economic giant China that
gave way to numerous partnerships in terms of public works and finance. In
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addition, there is a pervasive campaign of the eradication of crime, corruption,

and substance abuse, which was not flouted by the opposition party, and in
fact was frowned upon by many political groups locally and internationally.
Despite this, the administration of President Duterte receives a high approval
rating and it manifested in the midterm elections, whereby nine out of 12 seats
in the Senate were secured by his allies.

Approximately one-third of the country's GDP went to exportation after the

revival of the Asia-Pacific region. Electronic products continued to be the top
export followed by agro-based minerals, forest, and petroleum products.

The COVID-19 pandemic

greatly affected the tourism
industry, although this is true
not only in the country. The
tourists are hesitant to come to
the Philippines because of the
purported sex industry and
child trafficking reported by
some investigation bureaus of
other countries.
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Moving onward, the Philippines % of total arrivals is faced with a heavy

challenge of economic recovery after spending most Figure 1.8, Tourism
Arrivals in the Philippines of its budget to tackle the pandemic in health
programs and financial assistance to its poor constituents.

The Philippines joined the United Nations in 1945 and is currently a

member of the Asia-Pacific Economic Cooperation (APEC), Association of
Southeast Asian Nations (ASEAN), World Trade Organization (WTO),
Intergovernmental group of 24 on International Monetary Affairs and
Development (G24) and Non-Aligned Movement (NAM), the next biggest
grouping of states worldwide after the United Nations.

ECONOMIC GROWTH AND THE WORLD

The United Nations Department of Economic and Social Affairs (UN-DESA)
released the 17 Sustainable Development Goals (SDG) adopted by all member
countries of the UN. One of them, SDG 8, “promote sustained, inclusive, and
sustainable economic growth, full and productive employment and decent work
for all."19 There are many challenges that the world is facing right now, and
one major problem is the pandemic and its aftermath, an unprecedented
happening that is shaking the modern economy. We are now facing the worst
economic recession since the Great Depression, a decline of the GDP per
capita by 4.2%, risk of losing livelihoods of around 1.6 billion workers in the
informal economy, slowing down of tourism and some even stopped,
considering that some countries' GDP relies heavily on income coming from
tourists.

Here are the targets and indicators of SDG 8 to tackle economic growth:
 Sustain per capita economic growth in accordance with national
circumstances and, in particular, at least 7% GDP growth per annum
in the least developed countries.
 Achieve higher levels of economic productivity through
diversification, technological upgrading and innovation, through a
focus on high-value added and labor-intensive sectors
 Promote development-oriented policies that support productive
activities, decent job creation, entrepreneurship, creativity and
innovation, and encourage the formalization and growth of micro-,
small-, and medium-sized enterprises, including access to financial
services
 Improve progressively, through 2030, global resource efficiency in
consumption and production and endeavor to decouple economic
growth from environmental degradation, in accordance with the 10-
year framework of programs on sustainable consumption and
production, with developed countries taking the lead
 By 2030, achieve full and productive employment and decent work
for all women and men, including for young people and persons with
disabilities and equal pay for work of equal value
 By 2020, substantially reduce the proportion of youth not in
employment, education, or training
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 Take immediate and effective measures to eradicate forced labor,

end modern slavery and human trafficking, and secure the
prohibition and elimination of the worst forms of child labor,
including recruitment and use of child soldiers, and by 2025, end
child labor in all of its forms
 Protect labor rights and promote safe and secure working
environments for all workers, precluding migrant workers, in
particular, women migrants, and those in precarious employment
 By 2030, devise and implement policies to promote sustainable
tourism that creates jobs and promotes local culture and products
 Strengthen the capacity of domestic financial institutions to
encourage and expand access to banking, insurance, and financial
services for all

Name: Jerry A. Lopez

Position: Senior Manager
Company/Organization: Accenture, Inc.

What do you do?

I am a client experience lead of one of our global clients for Finance and
Accounting Operations.

What should the Philippines focus on today to recover from the recent
economic slowdown?
From my own personal view, the government should focus now to promote
work-from-home enabled employment and relax some tax rules to support
foreign stakeholders to employ more Filipinos in various fields. Due to
pandemic, it was proven that most work can be done at home. Filipinos are
known to be diligent and responsible that is making us the most sought-after
employees. Able to provide infrastructure support for faster Internet and labor
law protection will help our home-workers more incentive to be productive.
This will boost our economy and provide comfortable work-life balance being at
your own home.

How does the BPO industry help in the economic growth and development
of the country and the region?
BPO industry played an important role in our economy by providing more
jobs and opportunities to work with multinational companies. Not only have
those employees by BPOs but even street seller been provided round-the-clock
jobs because of the very big market they need to cater. Even other provinces
benefited from BPO because of the need of English speakers, good thing,
English is almost our primary language. It also boosts our tourism because
business travelers of those companies doing the transition would tend to visit
our islands and promote in return. Again, all these microeconomic movements
have an impact on the growth and development of our country.
What is your advice to the students/candidates of the university to
contribute to the economic growth and development of the country?
My advice is to support local businesses and products. Not only that it
boosts our economy but it also provides a sense of nationalism of loving our
own

CHAPTER 2 POVERTY AND INEQUALITY

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LEARNING OBJECTIVES

In this chapter, you will be introduced to the concepts of poverty and

inequality and their relationship to economic growth and development.
Specifically, this chapter will help you:

1. differentiate absolute and relative poverty or inequality;

2. discuss global poverty and inequality;

3. understand poverty measures, issues, and variables;

4. appreciate poverty incidence and the Lorenz Curve;

5. examine poverty trap and the various effects of work combinations and

government support;

6. reflect on ways how to alleviate poverty;

7. explain world targets toward poverty alleviation and eradication;

8. create a short documentary on economic poverty;

9. recommend steps on how to eradicate poverty; and

10. understand some poverty eradication measures at work.

"With our globalized economy and sophisticated technology, we can decide to

end the age-old ills of extreme poverty and hunger."

Ban Ki-moon,b.1944
8th Secretary General of the U.N.
LOOKING BACK

In Chapter 1, you have learned the fundamentals of economic growth

and development. You were able to appreciate the various aspects of
growth and public police such as savings and investment, diminishing
returns and catch-up effect, investment for abroad, education, health and
nutrition, property rights and political stability, free trade research and
development, and population growth. Subsequently, you have also learned
the idea of production and productivity relative to the factors of production
such a physical capital per worker, human capital per worker, natural
resources per worker, an technological knowledge. After that, the O-Ring
theory of production and development was also discussed, and you have
attempted to understand the complexity of the production processes and
determine the effects of quality on total production. This may explain why
the rich economy distinctively has a more sophisticated production
infrastructure than the poor ones. The Solow Model of long-term growth,
the dynamics of the capita (depreciation) line, and the investment and
revenue curves, in considering the movement toward the steady state,
were evaluated. Finally, there was a brief discussion on economic
development in the country in terms of inflation, budget, some economic
activities, issue on economic development, like leftist and separatist
groups, the COVID-19 pandemic and its impact on the economy, as well as
the targets of the UN under the Sustainable Development Goal, promoting
inclusive and sustainable economic growth that is full of productive and
decent employment.

INTRODUCTION

According to Amartya Sen, a Nobel Prize Winner in Economics, poverty

is a complex multifaceted world that requires a clear analysis in all of its
many dimensions.2 Among the dimensions referred to in his theory are the
geographical, biological, and social factors that must be taken into
consideration to fully understand poverty, not just by determining the
poverty line that separates those who are above and below it.

There are two main assets that the poor derive their income from:
their own labor-largely unskilled labor-and the agricultural land. In effect,
they diminish the prevalence of poverty but undeniably make the rich
richer, simply because they have the education and they own most of the
agricultural land.

This chapter is comprised of five parts in understanding poverty and

economic development. First, we define and differentiate absolute and
relative poverty. Second, we observe broader dimensions of measuring
poverty. Third, we discuss some issues involved in quantitatively
measuring poverty. Fourth, we appreciate poverty around Southeast Asia,
and lastly, we understand general ideas to reduce poverty and inequality.

ABSOLUTE AND RELATIVE POVERTY

Economic growth, for a long period of time, has been impressive in

Southeast Asia despite some hindrances like the Asian Financial Crisis of
1997-1998. There is a presumption that growth reduces absolute poverty in
the long run. To understand this notion, we define absolute poverty
incidence as those levels of incomes and expenditures that fall below a
level, popularly known as the "poverty line," nominal value of which is
adjusted to hold a fixed value of its purchasing power; whereas, relative
poverty or sometimes called inequality, is the comparison of the incomes
and expenditures of the poor with reference to the rich or of some other
groups.

POVERTY AND THE WORLD

It is observed that impoverished countries share common

characteristics. Those who are considered the poorest normally work in the
agriculture sector; they are highly uneducated, somehow labeled as
illiterate, and mostly considered malnourished. Industrial revolution
created a great deal of inequality between countries and was believed to
even intensify the gap between the rich and the poor nations. There are
economists who suggest that the skill-biased technological change helped
the rich countries that are considered more educated and trained. They
thrived as the technology basically replaces the unskilled workers that
normally comprise the poor.

There are some people who mainly attribute poverty to sluggish

economic growth and low production and consumption of goods and
services. According to a study made by the Asian Development Bank
published in 2009 in the Philippines, it is evident that there is a population
explosion in the urbanized areas, where labor-intensive work is in high
demand, but the government is not able to sufficiently supply their basic
needs such as education, health services, and food security. Another
possible reason for poverty is the natural disasters that are considered
catastrophic to economic resources, leaving the people to go back to zero
in terms of capitalization. In addition, there is the apparent reduced
influence of unions in businesses, tax policies are becoming more and more
favorable to the rich population, the upper-level management of economic
organizations are receiving a hefty deal of salary and income as compared
to the middle and lower-level management, not to mention to the ordinary
employees and the worsening gap in races and gender inequality.

Poverty is relative to the standard of living of one country. A threshold

is set to determine who are below this line and may be considered
impoverished or extremely impoverished. Extreme poverty is characterized
by those disadvantaged in basic living conditions, such as food, clean
water, sanitation, housing, good health, and even to information.

In the light of poverty, we may see globalization as an avenue of exploitation

and oppression. For example, a labor-intensive product like a Spanish brand T-shirt
is manufactured in Dhaka because it offers the cheapest labor and materials and
has a weak regulation to work conditions as compared to Europe. We may consider
the companies, consumers, and the low-income earners winners in this situation,
even though they are considered working in sweatshops. On the other hand, the
losers are the high-wage workers in Spain or even Europe who may have had the
job, had it been given to the Asian manufacturers, although we may see these low-
income earners as losers at the same time We often describe companies in this
type of setting as putting profits first before the people.

There is hope in the eradication of global poverty, even if it is

considered a small step, like fair trade. A lot of developed countries lead
the way in spreading awareness of the condition of a lot of countries that
are suffering from poverty and even child abuse. Some labels on the
packaging products that are considered from ethical sources are fair trade
certified, fair trade foundation, equal exchange fairly traded, fair for life,
and fair-minded among others. Another example is Fairtrade Labelling
Organization International (FLO-I)initiatives such as TransFair in the USA,
Canada, Germany, Italy, Austria, and Japan. They also monitor Fair Trade
Foundation in the UK and the Max Havelaar in Holland, Switzerland, France,
Belgium, Denmark, and Norway.

In the 2019 data by the UN Department of Social and Economic

Affairs, young workers are twice as possible to live in extreme poverty as
compared to adult workers. There are around four billion of the population
who did not receive any form of social protection support. Due to the
pandemic, the poverty eradication aim was off-track, manifesting the first
increase in global poverty in decades; more than 71

million are pushed into extreme poverty during this year. Not to
mention, economic downturns in 63 countries in 2019 from natural
calamities effecting to around $23.6 billion in direct losses. The first
Sustainable Development Goal adopted by all member states of the United
Nations aims to "end poverty in all its forms everywhere." Its seven
associated targets aim, among others, to eradicate extreme poverty for all
people everywhere; reduce at least by half the proportion of men, women,
and children of all ages living in poverty; implement nationally appropriate
social protection systems and measures for all, including floors; and by
2030, achieve substantial coverage of the poor and the vulnerable.

MEASURING POVERTY
The most common measure of poverty is the poverty rate, relative to the
poverty line. In most countries, the poverty line is set by the government as the
threshold to which the absolute value of income and expenses is compared to
consider a family to be in poverty. The proportion of the population that is below
the poverty line is the poverty rate.
The poverty line is constantly adjusted to hold the real purchasing power
given changing price levels. In the Philippines, further classification of the part
below the poverty line suffering from extreme hunger is called subsistence
incidence. Filipinos whose incomes and expenses fall below the food threshold are
also set by the government.
Inequality is oftentimes associated with poverty. There are two major types of
inequality: wealth and income. Wealth inequality is the uneven distribution of
accumulated assets after deducting the liabilities, while income inequality is
income distributed in an uneven manner. Today, the USA and the European Union,
including the United Kingdom, have an accumulated population of less than 20% of
the world but enjoy two-thirds of the global wealth; China estimates 20% of the
population but enjoys only 8% of the wealth; India and Africa roughly estimate 30%
of the population and share 2% of the global wealth.
For example, P100 is distributed in a population with a percentile of
the richest, rich, poor, poorer, and the poorest. The richest receives ₱80,
the rich at P12, the poor at an estimate of P5, the poorer at P2, and the
poorest will have a relatively low share of P1 out of the P100.

Share in Income
 Figure 2.2. Distribution of Income to the World Population
(SDGS-UN,2015)
POVERTY INCIDENCE
Most countries such as Indonesia, Vietnam, Cambodia, and Laos use
expenditure-based measures of poverty that are considered to be more in
line with the economic theory that is more relative to household well-being.
Some countries such as Thailand, Malaysia, and the Philippines use the
income-based measures of poverty, per individual and per household, and
consider gender and age distribution. This is important to note when the
government's way of interacting short-term implications of poverty is the
adjustment of income.

Poverty incidence (PI) is the

percentage of families or
individuals with per capita income
or expenditure less than the per
capita poverty threshold to the
total number of families or
individuals; hence, P=(a n)×100.
0.According to the Philippine
Statistics Authority (PSA), poverty
incidence (among families) in the
country decreased from 18%to
12.1% from 2015 to 2018 data,
and poverty incidence from
23.5% to 16.7% from the same
data year. Among the three major
The Lorenz Curve
islands of the country, Mindanao has the worst poverty incidence (among
families) in 2018, with 23.8%, followed by Visayas with 15.2%, and
Luzon with 6.6%. Poverty incidence (among the population) in Mindanao is
31.6%, Visayas is 20.2%, and Luzon is 16.7%. The National Capital Region
(NCR) continues to be experiencing the least poverty incidence. In the
manner the upper class may suffer a loss of a breadwinner businessman
member that may impact the downfall of their class.

The Lorenz Curve was developed by American economist Max O.

Lorenz in 1905, in his undergraduate essay and doctoral paper in
“Economic Theory of Railroad Rates.” It is a curve showing the relationship
between the population in percentile ranking and the national income.
Since the data used are estimates and may be considered incomplete, the
depiction in the graph may be an inaccurate picture of income inequality
but would still show the wide discrepancy of perfect equality to the actual
distribution of income.

Perfect equality of income distribution is graphed with the line of

quality-45-degree line-and the graph underneath it is the estimation of the
income distribution. In a curve line, the inequality gap is called the Gini
Coefficient, a scalar metric of inequality that was introduced by Corrado
Gini, an Italian statistician and demographer, who further enhanced the
Lorenz Curve.

POVERTY TRAP
Poverty is a fluid idea with different meanings in different places. It
generally represents earning or living off of less money than adequate, as
deemed by a particular country or region. There are findings on how to
combat and alleviate poverty, but people and the government need to
really be on top of the issue to finally resolve the problem. It would
definitely not be easy and would not be in the near future, but the steps
that we undertake today will definitely shape what we will become in the
 long run. We have just recently experienced a drastic turn of events when
the pandemic hit us. This was obviously not expected, and it hit all the
nations, causing poverty incidence to go up the notch so quickly that a lot
of government and social interventions were set in place. Let us take a look
at the Philippine statistics before the pandemic hit the country.

Figure 2,4.Poverty among Basic Sectors in the Philippines14

On the issue of poverty trap, why is poverty likely to persist worldwide? While
governments and NGOs are working hand-in-hand in solving this issue, programs
in place are deemed ineffective at reducing poverty at its very core. A lot of
poverty reduction programs, that will be discussed in the next section, are likely
discouraging people to work, as employment may not be available. In the 2019
report of the PSA, in addition to the thresholds and incidence, other measures such
as income gap, poverty gap, and severity of poverty are used as metrics to
measure poverty in the country.

The existence of the poverty trap is seen to be inevitable where there

is a system of means-tested social security benefits, the situation where a
slight increase in earnings lead to an individual or family being worse off
overall as a consequence of losing entitlement to other benefits.

Table 2.1. Earnings at Different Combinations of Work and Government

Support
Work(Hours) Earnings Government Support Total Earnings
0 PO P120,000 P120,000
500 P25,000 P95,000 P120,000
1,000 P50,000 P70,000 P120,000
1,500 P75,000 P45,000 P120,000
2,000 P100,000 P20,000 P120,000
2,500 P125,000 PO P125,000
 For a regular Filipino who is
earning P50 an hour, balancing
leisure and work hours is depicted
on the budget constraint line
without government assistance.
Working for 2,500 work hours for
P50 would mean no leisure hours LABOR (IN HOURS)
and earning P125,000 a year,given Figure 2.5.Poverty Trap:Budget
that there are 50 weeks in a year. Constraint without Government
Ifwe limit it to 40 hours a week, Assistance
2,000 labor hours a year at ₱50 will
be earning P100,000 (see point X
in the graph). As we increase
leisure time, hours for work would
decrease and would diminish our
opportunity to earn.
Now, suppose there is a
government program that would
guarantee a poor Filipino an income of
P120,000 a year. Table 2.1 shows the
effect of the combination of work and
government assistance: only when the
employee works more than 2,000 hrs a
year or more than 40 hours a week
does the total earning start to increase
beyond the guarantee of the
government, although it is evident that
the marginal increase is quite small LABOR (IN HOURS)
and may have negligible impact on the Figure 2.6.Poverty Trap:Budget
worker. But then again, this employee Constraint with Government Assistance
will have extra expenditures such as
education, child support, healthcare,
transportation, etc. Even if there is no
work done, the employee would still
receive P120,000 which would mean
discouraging work, not building
substantial work background, no
network, and no opportunity to work in
the future.
 To combat this poverty trap, we can reduce P0.50 from every P1
earning; hence a new budget line is formed. Look at the graph on the
previous page. There is a reduction of government assistance when the
individual decides to work; for example, for every P50, an hour of work will
really net at P25 per hour. Table 2.2 shows the summary of the
combination of the work and the new scheme of government assistance.
An anti-poverty program like this guarantees P120,000 income and more
incentive to work despite receiving financial aid from the government. For
example, when working for 500 hours, the total income is equal to
925,000
P132,500, that is, P925,000+(9120,000− ).). For every 2,000work
2
9100,000
hours,P100,000100,000+(9120,000− )=9170,000 ,∧500 no
2
on.Somehow,this is more encouraging to do work because the total
earning is not fixed to P120,000 even if one is working less than 2,000
hours, which is the threshold.

Table 2.2. Earnings at Different Combinations of Work and Government

Support
Reduced to 50% for Every Peso Earned
Work(Hours) Earnings Government Support Total Earnings
0 PO P120,000 P120,000
500 P25,000 P107,500 P132,500
1,000 P50,000 P95,000 P145,000
1,500 P75,000 82,50 P157,500
2,000 P100,000 P70,000 P170,000
2,500 P125,000 P57,500 P182,500

POVERTY REDUCTION
The government plays an important role in reducing poverty in the
country through its policies to improve the welfare of the people. This
eventually benefits the country in the long run as it is believed that the
poor are more vulnerable to experiencing health issues, unemployment,
drug dependence, illiteracy, and homelessness as compared to those who
have sufficient financial resources. In addition, those in poverty are more
likely to be the victims of crimes, or worse, they are those who commit
crimes.

Cash Transfers. Some Latin American and African countries have

conditional cash transfer (CCT) programs to aid families who are
considered poor. In the Philippines, we have the Pantawid Pamilyang
Pilipino Program (4Ps) that resembles the same policy. It is aimed to help
the poorest of the poor improve the health, nutrition, and education of
children aged 0-18 by giving monetary support and social development
programs to break the poverty cycle.
In-Kind Transfers. Another way is to directly provide goods and
services as social safety nets through specialized welfare programs such
as social pension for indigent senior citizens, supplementary feeding
programs, temporary shelter for the homeless and those who are
displaced by natural calamities or casualties of battles, and free
medicines/vaccines for the vulnerable and indigent members of the
population (e.g.,free flu vaccines and other medicines that indigents can
have from the Department of Health centers in the communities).
Work Incentives. These commonly happen when a natural disaster
occurs, and those who are displaced in their workplaces are given an
 incentive to work and help rebuild the place of adversity in exchange for a
reasonable wage to bring home and spend on those afflicted.

Minimum Wage Law. It is an act of Congress or the Senate that

imposes a minimum payment of wage to workers in a specific location,
duration of work, and nature of the industry to ensure that a reasonable
amount of income is provided to a specific group of employees. Advocates
of this measure believe that this alleviates the condition of the poor with
little to no cost to the government. Some argue that this hurts the people
it intends to hurt as it gives the power to minimize the payment to a
deserving individual.

Adjust Tax Code. It is intended not to collect any form of tax from
individuals who earn a specific amount or less in one year, reflected on a
graduated income tax. The notion is to collect more taxes from those who
are earning more, as the basis of the computation of the tax is the net
income in a certain period of time. Hence, a 0% tax rate is to be imposed
on those whose income is at a certain level or less. In addition, a call to
adjust the tax code to mainly fix the ambiguities in the tax law that the
rich use to avoid paying taxes may effect to a more just imposition of
taxes.

Sustainable Development Goals. The UN Social Development Goals

include these priority actions to be taken as addressed in the
Johannesburg Plan of Implementation in 2002, prioritizing poverty as a top
global challenge that we are currently facing, specifically for developing
countries:

 Improving access to sustainable livelihoods, entrepreneurial opportunities,

and productive resources
 Providing universal access to basic social services
 Progressively developing social protection systems to support those who
cannot support themselves
 Empowering people living in poverty and their organizations
 Addressing the disproportionate impact of poverty on women
 Working with interested donors and recipients to allocate increased shares
of Official Development Assistance (ODA) to poverty reduction
 Intensifying international cooperation for poverty eradication
 MSG
RECVD
What is your Name: Monica Aclan
Position and Organization: Deputy Executive Director;
Project PEARLS

What do you do?

I support the executive director in various project management tasks,
and I oversee the overall implementation of our different programs in the
communities. I also work closely with companies, government agencies,
community leaders, and other nongovernment organizations to establish
sustainable partnerships and collaborations.

Are we on the right track in poverty eradication as one of the UN-SDG

(Social Development Goals)2030 Agenda?
The COVID-19 pandemic resulted in a national crisis affecting all
aspects of our lives. Many Filipinos have been pushed even further into
poverty. It has also deepened the challenges that plague our country:
unemployment, food security, access to quality and affordable healthcare,
and inadequate educational resources. Because of these, the goal to
eradicate poverty became even more difficult. The government, the private
sector, and the civic society must work even harder to achieve the 2030
agenda.

What are your current projects/programs that deal with poverty

eradication?
Our core programs are Education & Literacy, Health Care & Nutrition,
and Empowerment through Skills Development. All of these programs aim to
break the cycle of poverty by helping children, youth, and families develop
their full potential through educational resources, access to food,
healthcare, and skills development. We believe that education has a
transformative power that is essential to personal development and to the
development of our country as a whole.

What is your advice to the university students to undertake in helping this

economic issue of poverty?
My advice for you is this: go to the communities; volunteer; talk with
the people; build relationships with them; know and understand their
struggles and dreams; and leave your judgment behind and open your
hearts and minds to what the people in the community can teach you.
These are all essential in truly understanding the root causes of poverty. It
is important to understand that they are agents of change and that they
are not just mere “recipients” or “beneficiaries” of economic programs.

Do you advise the students and candidates to be in public service/NGO in

the future?
Yes! Being in public service/NGO is a fulfilling experience. It is more than
a career; it is a mission.

Do you advise them to be like you in the future?

I advise you to pursue your passions and your dreams-whether it is to
work in the private sector or in public service. What's important is that you
always find an opportunity to help those who are in need, in any capacity
that you may have. Our small contributions can create ripples of positive
change in our society.
 CHAPTER 3 A NATION'S WEALTH

LEARNING OBJECTIVES

In this chapter, you will be introduced to a nation's wealth in relation to

economic growth and development. Specifically, this will help you:

1. expound on GDP as a metric for economic growth and development;

2. contrast the two approaches of computing the GDP;

3. evaluate the uses of GDP and its implications on economic growth and

development;

4. differentiate and evaluate real and nominal GDP and define GDP deflator and

GDP per capita;

5. discover data on GDP and apply it to your understanding of economic growth

and development;

6. discuss other measurements of a nation's income or wealth;

7. analyze the case of Vietnam as an economic miracle; and

8. recommend possible

measurements of performance

from the case of economic

development.
 LOOKING BACK

We have differentiated absolute from relative poverty, the previous being

relative to the poverty line and the latter being known as inequality of the rich
and the poor. Then, we had a discussion on poverty and the world where poverty
and inequality are attributed to each other and to the sluggish economic growth
and low production and consumption of goods and services, natural disasters
that are considered catastrophic, bad politics, and even discrimination. We also
mentioned hope for the eradication of global poverty, like the commitment of all
member nations of the United Nations to adopt Sustainable Development Goals
to eradicate poverty. Subsequently, we attempted to understand how to
measure poverty, its issues, and the variables to consider. We appreciated the
poverty incidence and equality through the Lorenz Curve, showing the
relationship of the population in percentile ranking to the national income.
Thereafter, we examined what poverty trap is and the persistence of poverty
despite all government and private sectors' efforts to eradicate it. We realized
various ways to somehow reduce poverty, like cash transfers, in-kind transfers,
work incentives, minimum wage law (which will be dealt with in more detail in
Chapter 7 -Labor Markets), and adjustment to the tax code. Finally, we have
explained the target of the world for poverty alleviation and eradication toward
economic growth and development.

INTRODUCTION

For some, GDP may be the easiest and most accessible measure of economic well-
being of a nation that can be associated with the standard of living of its people.
Standard of living as a social indicator may be attributed to the country's social mobility,
environment, and even income and poverty.2 Adam Smith, the father of economics, in
1776, published a paper titled, "An Inquiry into the Nature and Causes of the Wealth of
Nations" or more simply, "The Wealth of Nations," that tackled the foundations of a lot of
economic concepts such as laissez-faire, minimizing the government intervention, free
markets, the work of the invisible hands that guide the supply and demand and creation
of wealth not only from land but also from assembly lines, and market systems and
capitalism.3 This has been the foundation of the attempt to understand a nation's wealth
that is relative to the use of limited resources.

In this chapter, we are going to discuss the GDP and its components,
measurement, positive and negative dimensions, real and nominal GDP, and the
importance of the GDP deflator in understanding inflation. This is toward policy-
making.

GROSS DOMESTIC PRODUCT (GDP)

GDP
"Peso Value" monetary
value
"Final Goods and
Services"
Finished goods do no
include
intermediate goods.
"within the country"
domestically produced
"in one year" does not
goods and services that
were
included in another year
 transaction shows that there is an equal monetary value
that is involved, that is P280, and both contributed to the
economy as described in the circular flow of income. This
is a simple instance of money flowing in and out of the markets of goods and
services an the markets for factors of production.

Thus, this can be used to measure the gross domestic product, which is
considered economists as a major measurement of a nation's income, of course,
at a given time and a given place or region. It is important to note that the
income should always be the same as the expense, although the case is not true
all the time. Every economy wants a long term economic growth; this is an
indication of development. There is a need to know if the economy is growing or
contracting, and GDP is able to estimate such. GDP is the peso value of all final
goods and services that are produced in one country in a year. Finished goo do
not include intermediate goods, for example the car seats, window shields,
rubber tire and stereo system for cars that are locally manufactured. It is
important to note that w include in the GDP only domestically produced goods
and services, which would mean, for example, apple products that are known to
be produced in China are not included. However

it can be comprised in the

computation
of the Gross National Product (GNP)
determining the difference between
the
two. Goods that are already included
the GDP of the previous periods are n
included, like a house purchased yea
back or used clothes that are sold in
ukay-ukays. Furthermore, GDP
computation
excludes financial transactions li
investments in stocks and bonds as
there
is really nothing produced here; it is
just
Figure 3.2.GDP Approaches in an Economic Cycle capital transfer. Of course, non-
material
and illegal goods are not counted in
the
determination of the GDP.

COMPONENTS OF GROSS DOMESTIC PRODUCT

 This section explains the two methods of calculating the GDP: the
expenditure approach and the income approach. The first one summarizes the
total expenses to buy final goods and services by households, firms, and the
government. We use the formula below in computing the GDP using the
expenditure approach:

GDP=C+1+G+(X −M )

Where:
GDP=GrossDomesticproc
C=Totalspendingonconsu
1=PUrchaseofplants ,
G=Governmentspeno
(X −M )=Netexportsorexpc

Consumer spending is the peso value that households are spending

for final goods and services in a year, for example, supplies used at home,
food, restaurant spending, and many more.
Government spending includes both national and local government
units' spending to acquire goods and services that are used for public
facilities, for example, when the government hires private contractors to
build bridges, roads, hospitals, and the like.
Net exports are just the difference between the final goods and
services derived from importations from exportations. The ideal situation
is to have a trade surplus, if not a trade balance, wherein the value of
exports exceeds imports, or they are equal/balanced.
The other approach is the income approach. Here, we summarize the
compensation of employees, net interest, rental income, corporate profits,
and income of other firms.

GDP = Total National Income + Sales Taxes +Depreciation + Net Foreign

Factor Income

Where:
Total national income is the sum of all wages, rent, interest, and profits.
Sales taxes is the tax imposed on consumers for the sale of goods and
services.
Depreciation is the cost allocated to capital assets over an estimated
useful life.
Net foreign factor income is the income that citizens make while abroad,
less the income generated by foreigners in the country.

For example, a country has the following data for the year 2022 (in
billions of dollars) We determine the gross domestic product in both the
expenditure and the income approaches:

Transfer payments $64

Interest income 160
Depreciation 26
Wages 77
Gross private investments 134
Business profits 210
 Indirect business taxes 84
Rental income 85
Net exports 28
Net foreign factor income 22
Government purchases 166
Household consumption 314

Using the expenditure approach, GDPGDP=C+G+1+(X −M ),

Household consumption (C) 14
Government purchases (G) 166
Gross private investment (I) 134
Net exports(X −M )
28
GDP (Expenditure Approach) $642

Using the income approach,

GDP=¿+T + D ,WhereNl=W + R +i+(X −M )ln ⁡come=Wages , 77+ Rent ental
Income, 85+ ln ⁡teresrest Income,160+ B ∪ Si usiness Profit,210=532.
Hence,
Net income $532
Indirect business taxes 84
Depreciation 26
GDP (Income Approach) $642

USES OF GROSS DOMESTIC PRODUCT

We can summarize the use of the GDP in three ways, although we
can have more than these as the component variables are really vast.
First, with the use of the GDP, we can compare the economic
performance on an annual basis by determining the growth rate to help
us understand where the economy stands. For example, we want to know
the percentage increase or decrease of GDP before the pandemic in 2019
and during the pandemic in 2020. Using the data provided by the World
Bank, we can compute:
GDPCurtent−GDPPrevious
Percentage Change Increase/Decrease in GDP ¿
GDPPrevious
5362.24
¿
53
The answer is a percentage decrease of approximately 3.86%.
Second, to assess the efficiency and effectiveness of government
policies, GDP is an indication of a positive or negative effect of the policy
as an indicator of its success or failure and the extent of how the
economy is helped or hurt by this policy. In effect, the government learns
to refine and repeat the successes, and of course, stop the mistakes and
identify the economic stimulants that impact them. Of course, this is just
a minor indicator of efficiency and effectiveness that may be used.
Third is to compare the GDP with that of other countries. A higher
GDP growth means a better quality of life and a higher standard of living,
in general. We determine the superpowers, tigers, rising tigers, etc.,
boosting the economic reputation and enhancing more business
transactions with them.

REAL VERSUS NOMINAL GDP

Changes in volume of output as well as in price largely affect the
total spending over a period of time. For example, an increase in
production would increase the total spending, and the same is true when
the price is increased on the same good and service. In order to measure
the total spending that is minimally affected by the changes in the prices
of goods and services, economists have come up with a measure they
call real GDP that evaluates current production using constant prices.
In order to understand real and nominal GDP, let us take a look at
this example of mangoes and guyabanos. Let us assume that these are
the only two products-that the country produced from 2017 to 2021.

2017 2018 2019 2020 2021

Price of Mangoes P15 P25 P35 P40 P50
Quantity of Mangoes in Tons 25 30 35 40 45
Price of Guyabanos P55 P65 P65 P70 P85
Quantity of Guyabanos in Tons 5 8 10 12 20
Nominal GDP
In computing the nominal GDP, the current prices are used to multiply the
volume of production given in a period of time. In the example given below, we
take note that the prices and the volume of spending increased from 2017 to
2021; hence, the nominal GDP also increases. We can also say that the
increase is partly attributable to the increase in price and partly to the
increase in spending.
2017 2018 2019 2020 2021
(35*35)
(15*25) + (25*30)+ (40*40)+ (50*45) +
Computation +
(55*5) (65*8) (70*12) (85*20)
(65*10)
Nominal GDP P650 P1270 P1,875 P2,440 P3,950

Real GDP
In computing the real GDP, we use the base price:
2017 2018 2019 2020 2021
(15*25)
(15*30) + (15*35) + (15*40) + (15*45) +
Computation +
(55*8) (55*10) (55*12) (55*20)
(55*5)
Real GDP P650 P890 P 1075 P 1260 P1,775

GDP DEFLATOR
Implicit price deflator or GDP deflator is a metric used by economists to
understand the changes in prices of products that are produced in one
country. It is easier to appreciate the economic activities in various timelines
in order to adjust a specific policy toward economic growth. Some economists
believe that this measurement is more reliable than the Consumer Price Index
(CPI)which only relies on the basket of goods and services when it comes to
the gross effect of inflation. The CPI is a measure of the average change in the
prices paid over time by urban households for a market basket of goods and
services.6
Nominj ∈alGDP
GDPDeHator= × 100
RealGDP

2017 2018 2019 2020 2021

P650 x P1875 x
P1270 x 100 P2440 x 100 P3950 x 100
Computation 100 100
890 1260 1775
650 1075
GDP Deflator 100 143 174 194 223
Offenberg,"Consumer Price Index."

Gρρρρeρiarinyear 2−GρρDefatorinyear 1
e ∈ year 2= ×100
60 PDeeflarinyeari
20172018
143-100 x 174-143 x 194-174 x 223-194 x
Computatio
No Data 100 100 100 100
n
100 143 174 194
Inflation
No Data 43% 22% 11% 15%
Rate

GDP PER CAPITA

GROSS DOMESTIC PRODUCT AND INFLATION

Two methods of calculating GDP:
1. Expenditure Approach-the sum of all expenditures to purchase final goods
and services by consumers, businesses, and government
GDP=C+1+G+(X −M )

Where,
C ¿ cos ⁡umnsumption expenditures (total household spending on
nsumption goods and services)
¿ ln ⁡vestme (firm's purchase of plants, equipment, buildings, andaddit to
inventories)
G ¿ Government purchases (government spending on goods prj(es )
(X −M )=NeteNet exports (exports minus imports or “foreign sales”less
“foreign purchases")
2. Income Approach-adds the compensation of employees, net interest,
rental income, corporate profits, and proprietor's income. Inflation exists
when there is a sustained increase in the price level. The price level is
the average level of prices. The inflation rate is computed as follows:
(cp∨thisyear)−(cp∨¿ astyear )
ln ⁡fationrate= ×100
Cp∨astyear
The labor force equals the sum of employed plus unemployed workers.
Numberofpeop/eunemployed
nentrate= × 100
Laborforforforce
Unemployment
Productivity function: γ =Tf {L , K ,
Where: quantity of labor (L), quantity of physical capital (K), quantity of
human capital (H), quantity of natural resources (N), and technological
advances (T)

There are economists who believe that GDP per capita is the best way in
measuring the standard of living in one country. Essentially, it is the GDP of a
country divided by its total population. GDP alone merely says the final output
produced in a given period of time, but the GDP per capita clearly depicts the
distribution of wealth to its population, and that is a better measure than GDP of
how prosperous is that country within a given time period. In addition, if we have a
comparison of GDP per capita between two or more countries, we have to express
GDP in its purchasing power parity value, which is in US dollars.
The GDP per capita is a metric used to measure the overall production of
goods and services in a country translated to the value per person. Economists
agree that this is a better measure than the total GDP, whether real or nominal, as
it can be comparable to other countries and realistically understand the standard of
living of their respective citizens. For example, we are comparing two countries
with the same GDP, but with highly different populations. The one with the higher
population obviously will have a lower GDP per capita and thus would mean a lower
standard of living, as the denominator used in the computation of the GDP per
capita is the country's population.

OTHER MEASUREMENTS OF A NATION'S INCOME/WEALTH

Gross National Product. This is the sum of all the finished goods and
services produced by the citizens of a country overseas and domestically.?
 Net National Product. This is the sum of all the finished goods and
services produced by the citizens of a country overseas and domestically
less depreciation.
National revenue. This is part of the national budget of a country that
is composed of all revenue sources to be used in national expenditures.

Personal revenue. This is the sum of an individual's or citizen's

earnings from salary, wages, and investment during a period of time.
Disposable personal revenue. This is the sum of an individual's or
citizen's earnings from salary, wages, and investment during a period of
time less current individual taxes.

GROSS NATIONAL HAPPINESS

The kingdom of Bhutan is known for its

application of a unique metric for the nation's
wealth and well-being-the Gross National
Happiness(GNH). It attracted the attention of
world recently, and in 2012, the United
asked it to develop the guiding principles for
happiness in the world. Bhutan believes that DO MAINS OF GNH
1.Psychological Well-
GNH is a more important tool to use than
being
GDP. 2. Health
They believe that happiness is living in 3. Education
harmony
with nature while serving the p eople, 4. Time Use
economic inputs. There are nine domains,
including 5.Cultural Diversity and
Resilience
and
6. Good Governance
out of these are around two to four indicators
7. Community Vitality
for each one, for a total of 33 indicators to measure 8. Ecological Diversity
the GNH. They have learned from the mistakes of and Resilience
9.Living Standards
the western capitalist and pursued development without compromising
the values of the country.
Economically, GNH is founded
on the basics that happy people
live longer and thus will need less
public health funding. They can
achieve more in terms of the
productivity of goods and services.
Happy people are more generous,
and they are more likely to
conserve natural resources,
thereby promoting sustainability.
GNH reflects the normative values
of culture and traditions. It should
be statistically sound, reflecting
happiness correctly, relevant for
the action of the government, and
of course, understandable to the
people as they are the ones doing
a self-reflective survey for
themselves.
 Bhutan held periodic surveys of the population, like in 2006, 2008,
and 2010, and then came up with the GNH. It is only relatively recent that
Bhutan utilized the GNH in their policy-making. For now, they use it as a
tool to identify what aspects to focus on that are considered cause or
causes of unhappiness. For example, they have recognized that in urban
areas, they need to focus on insufficient community vitality, culture, and
psychological well-being. In rural Bhutan, they should focus on living
standards and balanced use of time.
 Not everyone is impressed with the GNH as a metric for the nation's wealth.
Some argue that the measurement is relative and that the factors used are
subjective, like in the standard of living and work-life balance, which is based on
perception and self-assessment There is a question on the proper identification of
what to measure; is it measured the right way and at the right time? They say it is
only academic and proves nothing because of the weak evidence that it shows.
Still, Bhutan admittedly pronounces that happiness is still a hope for their country.

GENUINE PROGRESS INDICATOR

economists believe in the deficiency of GDP as a measure of the

performance of the economy. Hence, they suggest an alternative metric called the
genuine progress indicator (GPI). This is founded on the index of sustainable
economic welfare and growth. If we are to make an analogy of GDP and GPI, the
former is the gross revenue and the GPI is said to be the net revenue when all
negative impacts of environmental and social externalities are considered. As
such, GPI uses the data that is derived from the GDP, just adding the good and
bad effects of production and consumption like pollution and social impacts like
poverty and the attempts to internalize those externalities, like the costs to repair
and control poverty and pollution.

Both the GDP and the GPI are measured in terms of monetary value; hence,
it becomes easy to compare with other forms of metrics in understanding
economic stability and performance. However, GPI includes non-material aspects
such as environmental damage, depletion of non-renewable resources,
dependence on foreign aid, and crime rate, among others. In GDP, capital is
included just once, but in the computation of the GPI, it takes into consideration
the ongoing effect of the use of capital. Some economists argue that the GPI uses
quite subjective data, as the value given by the respondents of the survey for GP
can be biased and may not represent the entire economy (Pais et al, 2019).
Besides, it is more expensive to derive the GPI and time consuming as compared
to the GDP. It needs to survey households, firms, and governments and their view
on how much are the costs of externalities like pollution and poverty and how
much is the internalization applied to them.
 MSG
RECVD
Name:Melani T.Allen
Professional Background:Finance
Professional in the USA

Are we currently on the right track in terms of continued economic

growth?
Yes,I believe we are currently on the right track in the Philippines and the
US.

In your experience with the importation of goods from abroad, do you

think we are importing more than we are exporting?
Yes, we do. As a matter of fact, the Philippine Statistics Authority
recently showed more growth in Philippine imports than exports. We've
imported more telecommunication equipment and electrical machinery,
food and live animals, and plastics during February.

How can the country fully recover from all the financial debts it
incurred from the pandemic?
In my opinion, sustained improvements in managing the pandemic
and a possible economic rebound will help our country recover from all the
financial debts. The government should improve fiscal policy by adjusting
the spending levels and collecting more taxes, coupled with a balanced
monetary policy.

Do you think it is wise for future leaders to continue the "Build Build
Build" Program as an expansionary solution to the economy?
Yes, BBB Program should be continued because it is one of the key
divers of our country's economic recovery. It helps in shaping a better
connected Philippines. It's a good infrastructure investment that improves
the lives of many Filipinos and has created millions of jobs since 2016 and
will create more employment in the future. It will increase government
spending which will be good for economic growth. This will stabilize and
boost economic activities in the country.

Do you advise the students and candidates to work in public

service/government in the future?
Yes, the younger generation should consider working in the public
service in the future. The country will definitely benefit from
technologically savvy future leaders who are flexible, mobile, highly
educated, and always striving for continuous development.
 CHAPTER 4
COST OF LIVING

LEARNING OBJECTIVES

In this chapter, you will be introduced to the concepts of the standard and costs
of living as factors in economic growth and development. Specifically, this will help
you:

1. discuss the concept of basket of goods and services of the country;

2. determine the meaning of the standard of living in relation to economic

development;

3. understand the concept of consumer price index (CPI) in relation to inflation

rate;

4. differentiate economic situations such as hyperinflation, depression, recession,

and stagflation;

5. define the cost of living allowance (COLA);

6. appreciate the cost of living in the Association of Southeast Asian Nations

(ASEAN) to better understand the region's economic growth and development;

7. use the Lorenz Curve and Gini Coefficient in explaining the extent of

inequality, a measure of the standard of living in a country;

8. explain the targets of the world in reducing inequality within and among

member countries of the United Nations (UN);

9. compare and contrast the cost living in the ASEAN with the use of a

worksheets and;

10. understand the cost of living application in the eyes of a government

employee.

LOOKING BACK

In Chapter 3, we discussed the nation's wealth, which some economists

believe to be the outcome of the determination of the Gross Domestic Product
(GDP). The GDP is the monetary (peso) value of all final goods and services
that are produced in a given year that can be computed in two ways (although
there are other approaches discussed in other books): the expenditure and the
income approach. The expenditure approach is much more popular than the
other. It focuses on the product market, the summation of consumption,
investments, government spending, and net exports. The income approach
centers on the factor market. It is the total income, taxes, depreciation, and
net foreign factor income. The major distinction between the two is their
starting point and quick estimates of the money spent or earned in a given
period of time. In the previous chapter, we also evaluated the uses of GDP as
a measure of economic performance on different periods, assessed the
efficiency and effectiveness of government policies, and compared the
economies of two or more countries. Subsequently, we also have
differentiated real and nominal GDP, the former being the method of
evaluation using current production with fixed past rate prices, and the latter
using the current prices to the volume of production. Moreover, we understood
the concepts of GDP deflator and GDP per capita. We have discovered some
data about GDP to understand the current state of economic growth and
development of the country and the region. Lastly, we have discussed other
measurements of a nation's wealth such as Gross National Product (GNP), Net
National Product (NNP), National Revenue, Personal Revenue, Disposable
Personal Revenue, the Gross National Happiness (GNH) of the Kingdom of
Bhutan, and the Genuine Progress Indicator(GPI).

INTRODUCTION
This chapter is relevant because of the idea of inflation-one thing that is
most applicable in our daily lives regardless of where we are in the world. Say,
for example, we had an increase in our salary by 3%, but the inflation rate at
that time is 6%. In this case, we did not actually experience an increase in our
salary and in fact would have lost 3%purchasing power of our money. Inflation
is the increase in prices in the economy, thereby decreasing the purchasing
power of money on our hands. Inflation may be categorized into a general
sustained increase in prices resulting from excessive demand for goods
(demand-pull inflation), increased pricing by sellers in the absence of
increased demand (cost-push inflation), or an expansion of the money supply
(monetary inflation).

Prices of goods and services generally increase over time, but of course, at
different paces. Some are increasing fast, and some are quite slow; some are
not even moving, and some are decreasing. That is deflation. But, how do
economists measure inflation? In the next section, we are going to understand
inflation more by determining a basket of goods and services on a yearly basis
and then comparing it to a selected base year. We call it the consumer price
index (CPI). CPI allows adjusting the impact of inflation by leveling the playing
field. It may not be perfect compared to the products today and definitely
different from the same products years back, for example, computers,
television, mobile phones, etc.

BASKET OF GOODS AND SERVICES

The Philippine Statistics Authority (PSA) conducts a Commodity and
Outlet Survey (COS)"(the last survey of its kind was in 2007-2008) to
understand the goods and services that each household in the country
purchases or consumes, and the type of channels in the country wherein these
are available. There are designated provinces and cities that are gauged in
terms of consuming goods and services, and are carefully chosen to represent
the composite behavior of the prices consumed by Filipinos. Below is a typical
basket of goods and services: commonly products purchased and consumed
by households.
 Flgure 4.2. Basket of Goods and Services

The largest category is the food and nonalcoholic beverages which is

almost 40% of the basket, followed by housing, water electricity, gas, and
other fuels with roughly 20%.The next category with 12% is restaurant and
miscellaneous goods and services, and the rest weighs lower than 10%,For
example, education and furnishings, equipment, and routine maintenance of
the house, health and clothing and footwear have around 3% each, while
communication, alcoholic beverages and tobacco, and recreation and culture
have roughly 2%.The categorization of the goods and services is determined
by PSA.

CONSUMER PRICE INDEX (CPI)

The consumer price index (CPI) is a statistic used to measure the total goods and
services purchased and consumed by a household compared to a base year.
According to the Encyclopedia of American Government and Civics, CPI is a measure
of the average change in the prices paid over time by urban households for a market
basket of goods and services (2017). There are many uses of the CPI, mainly for
determining inflation and the purchasing power of the country's currency to allow
adjustments to the economic policies of the government. Furthermore, knowing
inflation makes us more reactive to the buying behavior of the public and creates laws
to alleviate the standard of living of the people.
The first step in computing the CPI is to collect price quotations under the
categories in the basket of goods and services. This will depend on the geographic
coverage as well as the classification standards set by the PSA. The Philippines uses
the 1999 United Nations Classification of the Individual Consumption According to
Purpose (COICOP) and the 2015Philippine Standard Geographic Classification Codes
for the geographic locations. For example, there are more price quotations required in
the cities than in the provinces, and there can be more price quotations on certain
classification in the basket than the others.
Next, we use the data collected and apply it to the basket of goods and services
at various periods of time. From the time periods identified, we choose the base year,
compute for the consumer price index, the price of the basket of goods and services in
a given year divided by the price of the basket in the base year.
 Another way of finding out the inflation per year, apart from what was
introduced in the previous chapter, the use of the GDP deflator, is the
consumer price index by comparing the CPI of the current year as opposed
to the base year.

cρl ∈ yearX−cp ∈rX −1

ln ⁡fafonRate ∈ YearX= × 100
cρl ∈ K −1
Suppose we only have two products: mangoes and guyabanos. Hence, our
basket of goods will be comprised of only mangoes and guyabanos. The
PSA determines the weights for each product by surveying the
consumption of these products. For example, the survey reveals that 6
mangoes and 4 guyabanos are bought in a period of time.

Let us go over the CPI and inflation computations listed as follows:

Price 2019 2020 2021
Mangoes P11 P13 P15
Guyabanos P30 P35 P42

Now,let us compute that yearly basket of goods:

2019 2020 2021
(11*6) + (30*4) (13*6) + (35*4) (15*6) + (42*4)
P186 per basket P218 per basket P258 per basket

Hence,the CPI from 2019 to 2021 are as follows (on base year 2019):
2019 2020 2021
189 * 100 218 * 100 256 * 100
186 186 186
100 117 139

Therefore, the inflation rates for 2020 and 2021 are as follows:
2020 2021
117-100 * 100 139-117 * 100
(100) (117)
17% 19%

The CPI is just one metric used to understand the standard of living
and the quality of life in a country.
ECONOMIC CRASHES

Economic crashes usually begin with the

vicious cycle of higher prices and the
expectations of higher prices that greatly
affect the buying behavior of the people. A
vicious cycle is any situation in which an
action tends to bring about a further reaction
that offsets any gain brought about by the
initial action and exacerbates the initial
problem.5 When there is too much supply of Figure 4.3.Vicious Cycle
money in circulation, the people are somehow of Higher Prices
forced to spend as quickly as possible rather
than decide to save their money or let
circulate in financial institutions.
Consequentially leading to decline in personal
wealth and savings and limiting foreign
investments and trade, money increases too
 Figure 4.4.Stagflation
fast that it pushes inflation to rise instantaneously and in great
magnitude, which affects the velocity of money. It is the average
number of times a currency is spent on purchasing goods and services.°
When this happens, and the monthly inflation rate increases over
50%or around 13,000% per year, it is called hyperinflation.
The USA experienced the Great Depression in the 1930s, which started in
1929.There was a sustained decrease in the GDP. Americans cut off a lot of
their spending behavior. There were more workers but fewer jobs, a lot of
outputs but no buyers. After the Great Depression, the USA did not want to
recall that painful experience and somehow changed the term to recession,
although a consistent trend of downward recession is what an economic
depression is all about. According to the USA National Bureau of Economic
Research, recession is defined as three consecutive quarters of falling real
GDP, while depression includes a 10% decrease in per capita GDP and
consumption and 10%unemployment that persist for at least 24 months. The
depression was eventually reckoned with massive expansionary solution, left
and right government spending until the economy finally stabilized. The
condition when the production of goods and services slows down or is put to a
halt or simply stagnates while the prices are rising is called stagflation. It is
simply a combination of a stagnant economy and inflation at the same time.
The USA experienced a prolonged period of stagflation in the 1970s and early
1980s.There was a combination of falling demand and rising prices.10

COST OF LIVING ALLOWANCE (COLA)

The cost of living allowance is an
adjustment applied to the income received by
the employees to sustain the standard of
living due to the inevitable rising prices or
inflation. When the CPI increases, the COLA is
then raised to adjust the market value of what
is received by the employees to maintain
their standard of living. In other words, the
Figure 4.5. Liquidity Trop
COLA is used to
counteract the effect of inflation. So, the cost of the goods and services
incurred has a direct impact on the COLA, to balance the economic inequality
carried by the prices. The cost of living allowance fluctuates depending on the
rise and fall of prices in the area. This is determined by a regular survey of the
employees and the suppliers of goods and services, by determining the
market basket categories that are set and the pattern of behavior for buying
them.

STANDARD OF LIVING
By now, we understand the concept of GDP per capita and other
measurements of a nation's income. Like the basket of goods and services, the
standard of living measures the material characteristic of the economy and the
amount of goods and services that are produced and are made available to
households, firms, and government. Standard of living, or the level of material
well-being enjoyed by an individual or a group, is generally measured by the
collective cost of goods and services considered to be essential to all society
members.

The Big Mac Index is a metric used that is based on the concept of
purchasing power parity (PPP), currency exchange of equalizing prices of
products in various countries in the long run. Essentially, the "Big Mac" burger of
the popular food chain is analogous to the basket of goods with all of its
ingredients that are exactly the same in every country. The Big Mac Index,
 therefore, is an idea of identical basket of goods and services in different
countries, based on PPP theory. In practice, divide the price of a Big Mac in a
given country by the price of a Big Mac in another country using the local
currency of each, hence the exchange rate, and then compare it to the official
exchange rate between these currencies, realizing if there is either
undervaluation or overvaluation. The Big Mac Index is quite useful in investing
decisions.

GDP does not consider some externalities in its determination, e.g., the costs of
pollution, safety, and health deterioration from the chemical content of a good and
the air pollution that the process of creating a certain product emits. In addition,
unpaid work done is not considered in the computation of GDP, such as volunteerism,
child and elderly care, some house jobs, etc. High consumer and government
spending, investment, and income from exports indicate that the standard of living in
that area is also high. Other measurements for the standard of living can be life
expectancy, quality of education and the environment, literacy rate, GNI per capita,
and how income is distributed to its population called the Gini Index.

Myanmar Philippines Indonesia Vietnam Cambodia Lao PDR Singapore Thailand

Malaysia Brunei
Darussalam
2013 2018
Figure 4.6 Inflation Rate in Southeast Asian Countries
Source: ASEAN Secretariat Database, compiled/computed from country data
submission, publications and/or websites of ASEAN Member States' National Statistics
Offices (NSOs)

ASEAN IN NUMBERS
Country Base 2013 2018
Year
MYN 2006 4.4 6.8
PHL 2006 4.1 6.6
IND 2012 8.4 3.1
VTN 2014 6.0 2.7
CAM 2006 4.6 1.6
LAO 2010 6.6 1.5
SGP 2014 1.5 0.5
THA 2011 1.7 0.4
MAL 2010 3.2 0.2
BRD 2010 0.2 0.1
LORENZ CURVE AND THE GINI INDEX
 It is essential to understand economic inequality for policy-making and
decision with regard to proper distribution of income and even determination
of allowances should there be a widespread inequality going on. One method
that is used is the analysis of the income percentages in relation to the
percentage of the population, normally spread in percentile ranking; this is
what we call the Lorenz Curve, which was first introduced by an American
economist, Max Lorenz in 1905. This metric, along with other derivative
measurements, is commonly used to understand inequality in a country.

Here is an example of a Lorenz Curve. Imagine the population is divided

into five percentiles, but in this case, they are represented by individuals 1 to
5. Take note that the horizontal axis is the cumulative percentage of the
population, and the vertical axis is the cumulative percentage change in
income. Moreover, the graph shows that the data is between 0 and 1 or 0 and
100 %. The Lorenz Curve, just like any other model in economics, is not
perfect; therefore, it is just a guide to comprehending the disparity in income
of a country in a given period of time.

GINI INDEX
A few years later, in 1912, an Italian statistician developed a metric sed to
measure income inequality with the use of the Lorenz Curve, which is now
known as the Gini Index or the Gini Coefficient. The value of the Gini Index is
from 0 to 1 or 0 to 100 %. A zero Gini Index would mean that the income is
extremely dispersed, while an index of 1or 100% would mean that the income
is perfectly equal.

Here is an example of the analysis of the Gini Coefficient using the Lorenz
Curve. Using the same data, we take note of the right triangle that is formed
by the x and Y axes and the line of equality that is the equality line. The Gini
Index is the area inside that formed shape of the equality line and the Lorenz
Curve. We first take the area outside of X but inside the right triangle and
further compute for the Gini Coefficient, in this case, X. The Gini Coefficient is
0.71; the value is going to be meaningful if we compare it to some historical
data and if it is analyzed along with some other economic tools in measuring
income inequality. Take note that because of limitations such as dispersion of
income, actual population discrepancies, and those in the black economy Gini
Index may overstate or understate income inequality. This is just a guide for
decision makers about income distribution and policy adjustments.

GINI INDEX USING MICROSOFT EXCEL

1. Analyze the data using the Lorenz Curve and the supporting table.
2. Identify the area, X, by computing the area outside of X that is within
the formed right triangle below the equality line.
¿
3.Add a column area under the Lorenz Curve, in F7,t type ,=(E 7+ E 6)/2 0
1
0.2,wherein area is bhbh,and ratio to total population is 0.2,i.e. ,drag
2
down.
4. Take the sum of F6:F11,that is the area of X.
x
5.Compute the Gini Index, i.e. ,in the , example, it is 0.71, it must be a
0.5
value from 0 to 1.
 The United Nations Department of Economic and Social Affairs (UN-DESA)
released the 17 Sustainable Development Goals (SDG) adopted by all member
countries of the UN. One of them, SDG 10, aims to “reduce inequality within
and among countries." Before the 2020 pandemic, income inequality was
falling in some countries; Gini Index fell in 38out of 84 countries from 2010 to
2017. Vulnerable groups were hit the hardest during the pandemic-the elderly,
persons with disability, women, children, migrants, and refugees. The world
experienced the worst recession ever in history-a major decrease in the
resource flow for development, from $420 billion in 2017 to just $271 billion in
2019.

The targets and the indicators for SDG 17 are the following:
 By 2030, progressively achieve and sustain income growth of the
bottom 40% of the population at a rate higher than the national
average
 By 2030, empower and promote the social, economic, and political
inclusion of all, irrespective of age, sex, disability, race, ethnicity,
origin, religion, or economic or other status.
 Ensure equal opportunity and reduce inequalities of outcome,
including eliminating discriminator laws, policies, and practices, and
promoting appropriate legislation, policies, and action in this regard
 Adopt policies-especially fiscal, wage, and social protection policies-
and progressively achieve greater equality
 Improve the regulation and monitoring of global financial markets
and institutions and strengthen the implementation of such
regulations
 Ensure enhanced representation and voice for developing countries
in decision-making in global international economic and financial
institutions in order to deliver more effective, credible, accountable,
and legitimate institutions
 Facilitate orderly, safe, regular, and responsible migration and
mobility of people, including through the implementation of planned
and well-managed migration policies

CHAPTER 5 AGRICULTURE AND RURAL DEVELOPMENT

LEARNING OBJECTIVES

In this chapter, you will be introduced to agriculture and rural development

as a facto for economic growth and development. Specifically, this will help you:

1. examine the effects of modernization and industrialization of agriculture o

economic growth and development;

2. elaborate export promotion and its significance to international trading;

3. list infrastructure development in agriculture;

4. explain the targets of the world for sustainable agriculture to end hunger,

achieve food security, and improve nutrition;

5. discover the ocean, seas, and marine resources as valuable inputs to rural

development;
 6. discuss ecotourism and its relationship and implications for rural

development

7. create a case study report related to agriculture and rural development;

8. recommend possible steps in improving a agricultural process for economic

development; and

9. understand agriculture and rural development at work in the eyes of a non

government organization professional.

“Agriculture is one economic activity that does not obey the laws of demand

and supply”

John Kenneth Galbraith, b.190

Canadian-American Economist, Diploma

Public Official

LOOKING BACK
Chapter 4 discussed the idea of inflation that affects our purchasing
power. We are reminded of the reality that prices of goods and services are
generally increasing over time, in an open and competitive market. The
basket of goods and services is a typical combination of goods and services
that are purchased in each period of time whose categorization of products is
determined by the PSA. This is used in the computation of the CPI. Then, we
have evaluated it in relation to determining the inflation rate, by a base
period, and defined a cost of living allowance to adjust to the effect of inflation
and the inevitable rising prices and somehow mitigate the effect on the
standard of living, especially to those whose jobs are relocated to another
area. We defined further the concept of standard of living, and the quality of
life, considering some externalities such as pollution, safety, health,
education, life expectancy, and many more. Thereafter, we have applied what
we have learned and appreciated the cost of living in the ASEAN region and its
connection to economic growth and development. Furthermore, we also
applied the Lorenz Curve, discussed in Chapter 2, with the Gini Index or
coefficient, to learn the extent of inequality and its effects on the quality of
life. Finally, we have discussed the world targets in relation to the cost of
living and inequality, the Sustainable Development Goal 17, reducing
inequality within and among countries with at least seven targets and
indicators.

INTRODUCTION
 The development of areas outside the urbanized economic system is
what rural development is all about. The center of the development of rural
areas is the exploitation of natural resources such as agriculture and, of
course, forestry and fisheries. In the Philippines, the agriculture, forestry, and
fisheries (AFF) sector is crucial in contributing to the employment of almost
one-third of the country's workforce in addition to providing raw materials to
sectors like manufacturing and services. Thus, it cannot be denied that
developed agriculture and rural areas add to productivity and economic
development.2

In this chapter, we will discuss the following topics: modernization and

industrialization of agriculture, export promotion, infrastructure development,
high value crops, and a case of Philippine Banana Cooperatives' Successes
and Challenges.

MODERNIZATION AND INDUSTRIALIZATION OF AGRICULTURE

Agriculture in economic growth and development means the income is
higher and the food is cheaper and easier to obtain. Efficiency in agriculture
and rural development is defined by the sustainable food production in one's
country relative to the costs of its production. Examples of these are labor
costs, raw materials used, supplies, and overhead costs to produce
agricultural products.

Nowadays, specialization is evident in almost all facets of production in

agriculture forestry, and fisheries. In order to be more efficient in the business of
agriculture, farms are becoming more specialized in terms of production to optimize
the costs and realize the maximum profit. A farmer might need to manage different
crops and various livestock all at the same time, like raising chickens, cows, and other
land animals while composting for the crops such as vegetables, fruit-bearing trees,
corn, rice, and the like. With specialization, farm enterprises specialize in one or two
production/s focusing their knowledge, skills, and abilities on a narrower range of
tasks, not to mention capitalizing on fewer machines and equipment in producing
more of a limited product. In addition, specialization paved the way for genetically
improved species of plants and animals to produce more and supply the increasing
need for food and raw materials. For example, chickens are genetically enhanced to
have exaggerated traits like larger breasts that are sought after by most restaurants
and fastfood chains. However, this is much debated mostly by the process and ethical
considerations.
The increasing population translated into a more demand for food that is
available in the market. This can only be fulfilled if we can produce and
harvest more AFF products fast and efficiently. Mechanization allows
tremendous production of food and raw materials

compared to human labor. Repetitive tasks that may be performed by

machines undeniably cut the time by more than 80% and further eliminate
wastage to its minimum.

There is an increasing reliance of farms on synthetic and mineral

fertilizers as well as pesticides to boost production and to eliminate the cause
of possible diseases and pests. In addition, the use of some pharmaceuticals
like antibiotics' and other chemicals is becoming widely common in meat,
milk, and egg production facilities to ensure that the animals are protected
and, to some extent, increase their weights and eradicate bacteria and
viruses. There is a price to pay with industrialization, and in this case, there
are consequences on the health of the livestock as well as the consumers and
possible degradation of the ecosystem because of pollution.
 Most government policies in Asia encourage the consolidation of farms
into one large farming facility to enjoy the economies of scale as well as speed
up the processes involved in the production of agricultural products. Under the
Duterte Administration, the Department of Agriculture (DA) introduced an
intervention in consolidating backyard hog raisers into clusters to fight the
African Swine Fever (ASF). Unfortunately, the effect of consolidation gets
smaller farms going out of business.

Everything that we enjoy today as brought by industrialization is always

preceded by agricultural revolution. The need to have cheap and readily
available food is the most influential factor to advance technology and
processes that serve as a catalyst to boost economic activities and a better
quality of life.

EXPORT PROMOTION
Exportation of AFF products is a conjoined effort of different agencies of
the government relevant to production, marketing, improving, and
transporting raw materials and processed goods to other countries. According
to the website of the DA, the Philippines only has two agricultural products
earning $1 billion per year, and mostly in oil form-these are bananas and
coconuts-compared to Thailand having 13 types, Indonesia having five, and
Vietnam having seven products, earning the same amount in a year.

The main goals in the exportation of AFF products are in the quality and quantity
generating high quality goods in large amounts that would suffice the need of the
international trading partners. The price of a good that is exported really shows how
borders take so much factorization from the source to the receiving country in terms
of price. For example, the USA does not have warm weather all year round; hence
during winter, the tomatoes that are available in the market are imported from other
warm countries. The bigger, more even, juicier, and easier to pack tomatoes are
priced with a factor of at least three times than where the source is.

INFRASTRUCTURE DEVELOPMENT
Infrastructure is beneficial to agriculture and rural development as it
serves as the backbone of the AFF industry and stabilizes the movement of
products within and outside
the rural areas. One of the major
concerns of farmers is how to
transport goods and some services
from their area to be sold to markets.
Hence, the program farm-to-market-
roads, bringing the farmers' produce
in the most efficient way, and
attempting to reduce middlemen to
ensure cost, is minimized, and
revenue is optimized. Countries that from island to island. These
consist of islands need to consider ships allow the
the roll-on/roll-off or RORO ships
designed to carry heavy loads

produce to be safely carried to the consumers in a timely manner.

Figure 5.2. Advancement of

Agriculture In Economic Development

Another infrastructure that needs to be continuously developed is the

irrigation for land farmers-projects such as small and large irrigation-to meet the
 needs even of the small or backyard farmers. Success in agriculture
infrastructure development may be attributed to building the right roads and
markets, rural education, intensive research and development in agriculture, and
a more stable economic environment for agriculture to flourish.

GENETICALLY MODIFIED ORGANISMS

Genetically modified organisms (GMOs) are organisms in which the genetic
material is altered using modern biotechnology, typically a recombination of
deoxyribonucleic acid (DNA) to create new genes. The top value GMOs in the
USA are cotton, soy, and corn, followed by rice and other crops. Many scientists
claim that there is no serious negative impact on health in its consumption and
that it does not destroy the environment. In fact, it is easier to integrate
micronutrients into GMOs, may be designed as insect, fungus ,and virus
resistant, and does not need pesticide, hence, helping the environment. It is
found out that high yielding GMOs are actually less of a burden to the declining
supply of arable land.
These types of crops are greatly opposed by mostly western countries out of
political and unknown fears. Since the African countries are largely partnering
with Europe, they are refusing the use of GMO crops for fear that the European
partners will stop accepting products from their countries.

GREEN REVOLUTION
The term “green revolution" is attached to a Nobel Peace Prize winner,
Norman Borlaug, in his attempt to improve crop yield in South America and later
brought to Asia through Pakistan and India. Essentially, it is the combination of
more modern mechanized vehicles, better crops and hybrids, larger farmlands,
and the application of large-scale business management skills to growing food. In
the early 1960s, India and Pakistan adopted crops from Mexico, particularly wheat
and hybrid rice. This was allowed by these governments and eventually reached
the developing countries of Asia that augmented the problem on more food and
crops for business purposes.

Micronutrients are another product of green revolution. It is the idea of

infusing more nutrients into the produced crops. This is the solution to the ever-
growing problem of malnutrition that greatly causes more deaths and
productivity, hence, market inefficiency. The identified nutrients that were earlier
given focus on are iodine, vitamin A and iron, folate which is also known as
vitamin B9, and zinc. In the Copenhagen Consensus, priority in improving life is
given to developing countries, which identified that adding micronutrients in food
largely improves the health of the people. However, it was noted that there was a
lack of substantial and coordinated effort by the government and the farmers,
hence agreed to have more education and awareness on the matter.

The Philippines determined the high value crops and created a roadmap to
develop these industries. They are the abaca, banana, cacao, coffe, mango, and
rubber industries, having a clear strategic plan for the years 2018 to 2022.

Buyers in urban and rural areas and sellers (usually in the rural areas) may
use the platform that is launched by the Philippine Department of Agriculture (RP-
DA) to assist the agriculture, ,and fisheries sector offer and sell their products,
initially to major urban areas nationwide. Payment may be made via cash on
delivery (COD) or bank transfer and now negotiating for a more online transaction
such as credit card payments and delivery service providers.

SUSTAINABLE AGRICULTURE
The United Nations Department of Economic and Social Affairs (UN-DESA)
released the 17 Sustainable Development Goals (SDG) adopted by all member
countries of the UN, one of them, SDG 2, “end hunger, achieve food security,
improve nutrition, and promote sustainable agriculture." Before the COVID-19
pandemic of 2020, the world was already suffering from food insecurity,
classified as moderate to severe from 23.2% of the population to 26.4% from
2014 to 2018. The pandemic adversely affected food producers, comprising
40% to 85% of all food producers in developing regions. Apart from this, risks
such as climate shocks, locust crises, and conflicts greatly affect agriculture.
Hence, the SDG 2 aims to solve this global problem. The UN targets the
following (indicators):

 By 2030, end hunger and ensure access by all people, in particular,

the poor and people in vulnerable situations, including infants, to safe,
nutritious, and sufficient food all year round
 By 2030, end all forms of malnutrition, including achieving, by
2025,the internationally agreed targets on stunting and wasting in
children under 5 years of age, and address the nutritional needs of
adolescent girls, pregnant and lactating women, and older persons
 By 2030, double the agricultural productivity and income of small-
scale food producers, in particular, women, indigenous peoples, family
farmers, pastoralists, and fishers, through secure and equal access to
land, other productive resources and inputs, knowledge, financial
services, markets and opportunities for value addition, and non-farm
employment
 By 2030,ensure sustainable food production systems and implement
resilient agricultural practices that increase productivity and
production, help maintain ecosystems, strengthen capacity for
adaptation to climate change, extreme weather, drought, flooding and
other disasters, and progressively improve land and soil quality
 By 2030, maintain the genetic diversity of seeds, cultivated plants,
and farmed and domesticated animals and their related wild species,
through soundly managed and diversified seed and plant banks at the
national, regional, and international levels, and promote access to fair
and equitable sharing of benefits arising from the utilization of genetic
resources and associated traditional knowledge, as internationally
agreed

OCEAN, SEAS, AND MARINE RESOURCES

The ocean, seas, and marine resources are considered vital agricultural
aspects that are given much attention, especially in countries that have huge
coastal areas and archipelagic nature. They serve as a main source of food
security and other forms of medical derivatives and even source of energy.
However, the marine ecosystem is continually threatened by industrialization
and the exploitation of its resources, not to mention the effects of global
warming, pollution by toxic waste thrown into the waters and negligence to
protect them. In effect, a 100-150% rise in ocean acidity is estimated by 2100,
which may adversely affect half of the global marine life. The pandemic of
2020 may have a positive effect on our seas and oceans as humans were
forced to stay at home and industries were shut down or required to slow
down with their operations. This allowed the restoration of the ecosystem.

Another UN-DESA SDG is the conservation and sustainable use of the

oceans, seas,
and marine resources for sustainable development. SDG 14 targets the
following:
 By 2025, significantly reduce marine pollution of all kinds, from
land-based activities in particular, including marine debris and
nutrient pollution
 By ocean acidification through enhanced scientific cooperation at all
2020, levels
sustai  By 2020, effectively regulate harvesting and end overfishing,
nably illegal unreported and unregulated fishing, and destructive
manag fishing practices and implement science-based management
e and plans in order to restore fish stocks in the shortest time feasible,
protec at least to levels that can produce maximum sustainable yield as
t determined by their biological characteristics
marine  By 2020, conserve at least 10% of coastal and marine areas,
and consistent with national and international law and based on the
coastal best available scientific information
ecosys  By 2020, prohibit certain forms of fisheries subsidies that
tems contribute to overcapacity and overfishing, eliminate subsidies
to that contribute to illegal, unreported, and unregulated fishing,
avoid and refrain from introducing new such subsidies, recognizing
signific that appropriate and effective special and differential treatment
ant for developing and least developed countries should be an
advers integral part of the World Trade Organization fisheries subsidies
e negotiation
impact  By 2030, increase economic benefits to small island developing
s by sates and least developed countries from the sustainable use of
streng marine resources through sustainable management of fisheries,
thenin aquaculture, and tourism
g their
resilie ECOTOURISM
nce Tourism is often described as the world's largest industry, while a small
and component of the overall industry, ecotourism, is believed to be one of
taking the fastest-growing sub-sectors. There are multiple definitions of
action ecotourism, having these characteristics:(1) ecotourism occurs “in
for nature"; (2) considered to be “low impact,” with minimal disturbance to
their the environment; (3) portion of profit should be in conservation efforts;
restora (4) there is education to both tourists and local people about nature
tion in and its value; and lastly (5) ecotourism development should be
order undertaken, ideally with local participation in planning and
to management.
achiev
e One way of not exploiting the natural resources is catering to tourists
health to experience the natural habitat of our food supply in a non-
y and detrimental manner. In this way, we may conserve the natural design
produc of the land and seas by just appreciating the beauty in the
tive surroundings without the complications of cultivation, deforestation,
oceans extreme farming, and water acidification. Sustainability can be defined
 Minimi in a plethora of ways, and it is in economics and the wider social
ze and sciences. These can include monetary values, value in terms of wider
addres sets of attributes as well as a temporal component.7 Ecotourism is
s the centering on environmental sustainability by preserving the resources
impact and allowing them to recuperate and produce more for future
s of generations, although we can say that this has a small impact on the
food production from agriculture; still, it is beneficial to the locality by
providing revenue from tourists and promotion of the cultural heritage
of the area and empowering the identity of the people, hence,
economic development.

Here are some advantages and disadvantages of tourism:

 Figure 5.3. Costs and Benefits of Tourism

Almost all the provinces in the Philippines offer ecotourism to boost revenue
in their rural areas. It is true that the country is an archipelago, and going to these
places will have to need motorized vehicles like airplanes and ships that utilize
carbon-based source of energy and may counteract the positive effect of
ecotourism. These are the identified challenges: mismanagement of the
government of funds in ecotourism and lack of skills o the people in the rural
areas to properly operaté sustainable leisure. Moreover, there ma be a possible
conflict between tourism management and indigenous peoples that may be
affected by the surge of tourists and of course, the deficiency of infrastructure in
the area that may support ecotourism.

There must be a balance between the environment and the socioeconomic

impact o ecotourism in order to realize its value to economic development. The
idea of minimized exploiting areas of land and seas and diverting them to a more
sustainable purpose like that of tourism may be a good indication that the
ecosystem is somehow protected biodiversity is given an opportunity to produce
more, and the hazard of over-exploitation is obviously prevented. But at the same
time, it should make money, provide employment to the locality, and protect the
culture and identity of the indigenous peoples. The sad part is, most ecotourism
platforms are owned and managed by foreign corporations who may be using the
derived income from ecotourism in projects that are not benefiting the local
economy, just taking the income to their home countries or elsewhere, not to
mentor pushing the indigenous peoples to live elsewhere as they may be going in
the way of this type of development. They may even drive off the wildlife and with
the outpouring o guests that may want to experience this so-called alternative to
agriculture and now a big part of rural development.
 RECVD
Name:Ali Mefleh
Position: Agricultural Engineer
Organization: Al Darmaky Cont.Agri. Mat LLC.

What do you do?

Together with stakeholders, we develop plans, strategies, and policies
related to the environment, agriculture, in addition to combating desertification
and preserving biodiversity. In general, these policies are based on innovative
technologies and solutions, such as hydroponics, aquaponics, and organic
agriculture. The overall objective is to make local produce more competitive
and to instill confidence in the consumer about the quality of local products.

What are the challenges faced by the agriculture sector in UAE/Middle East?
The UAE faces significant challenges in producing food domestically. Due to
the limited supply of arable land, water scarcity, hot climate, and a heavy
reliance on imported food, food security has become a key policy priority for the
UAE, and the country receives very minimal rainfall. As a result, the UAE
currently imports roughly 90% of its food supplies but is considered food secure
due to its capacity to purchase food on the international market even if at higher
costs.

What specific projects/programs have you launched to develop or promote

agriculture or rural development?
Abu Dhabi Farmers' Services Centre (ADFSC) has launched an initiative to
provide safe food to the consumers in UAE through the implementation of
GLOBALG.A.P.Standards. We are working closely with the government
authorities, strategic partners, and shareholders to adopt sustainable and
climate-smart agriculture methods that focus on the optimal utilization of the
cultivated land and the quality of local produce to enhance its competitiveness.

Do you think the developing countries are doing enough to contribute to

economic development?
In developing countries, agriculture continues to be the main source of
employment, livelihood, and income for between 50%-90% of the population. An
increase in agricultural production and the rise in the per capita income of the rural
community, together with industrialization and urbanization, lead to an increased
demand for industrial production. It will, in turn, lead to the production of more
goods supporting industrialization and increasing employment. It has become
increasingly evident in the last few years that the role of agriculture in economic
development has undergone an important evolution.

What is the future of the agriculture industry?

With all the green technology and advanced processes, we have a bright future
in food production and agriculture.
 CHAPTER 6
INDUSTRIALIZATION

LEARNING OBJECTIVES

In this chapter, you will be introduced to industrialization and its implications to

economic growth and development. Specifically, this will help you:

1. discuss industrialization and its contribution to economic growth and

development;

2. appreciate the contributions of the first industrial revolution as a jumpstart

to the current state of the world economy;

3. compare the influences of the first and second industrial revolution and the

significant development of entrepreneurship, financial systems, and

international trade;

4. discuss the innovations in the third industrial revolution and the application

of total quality management to economic development;

5. elaborate the contributions of the fourth industrial revolution and all its

benefits and costs for today's economic growth and development;

6. identify the various modes of industrialization and the costs of

industrialization;

7. explain the targets of the world for sustainable cities and human settlements

as factors of industrialization and metrics for economic growth and

development;

8. create a mixed short video on

industrialization in economic

lenses; and

9. understand industrialization at

work in the eyes of a

professional.
40th President of the USA.
LOOKING BACK
In Chapter 5, we examined the development of areas outside the
urbanized economic system, the exploitation of natural resources, and the
modernization and industrialization of agriculture toward economic growth
and development. We elaborated on export promotion and its significance
to international trading practices. Moreover, we explained the targets of the
world for sustainable agriculture to end hunger, achieve food security, and
improve the nutrition of the people. We discovered the importance of the
resources from the oceans, seas, and other marine life and non-life factors
as inputs to rural development. Finally, we also discussed ecotourism as an
alternative to the utilization of land and water resources, its advantages and
disadvantages, and realized the importance of balance between the
environment and the socioeconomic impact of ecotourism to realize its
contribution to economic growth and development.

INTRODUCTION
Industrialization is one of the key factors of economic growth and
development, not to mention the proper use of natural resources, utilization of real
or physical assets, and employment of labor or the population. This includes the
regulation of economic activities of an institutional framework, that is the
government. There was a need to revolutionize how goods and services were
produced. In the 18th and 19th centuries, Europe and the “Great Depression" in the
United States of America resulted in mass production minimizing the use of
resources (inputs) like materials and labor. In addition, there was a widespread
transformation of agricultural lands to areas that involved construction and
manufacturing, thereby increasing the financial capability of the country. We can
synonymously compare industrialization to technology and financial dominance of
an economy. It is a key to mention, the forerunners of industrialization in Asia, the
“Asian Giants:” China and India; the “Asian Tigers:" Singapore, South Korea,
Taiwan, and Hong Kong; and the “Asian Cubs: "the developing economies of
Indonesia, Vietnam, Malaysia, Thailand, and the Philippines.

In this chapter, we are going to focus on the four industrial revolutions

that are essential in understanding economic development and how they
can be used for future progress.

THE FIRST INDUSTRIAL REVOLUTION

In the study of Crafts2 in 2010, the ever-increasing demand of people
for more goods led the way to invent many things that can be used in the
production of more products. In the mid-1700s when Britain colonized India,
there had been a massive transfer of materials and labor and inventions of
machines that can be used to create products from textiles, like the spinning
jenny, the first weaving machine.

An essential factor of industrialization at that time was to increase

food, and thereby taken into consideration the more efficient way to
produce agricultural products. Agriculturists were very influential in their
innovations in terms of producing new crops and breeding animals to yield
more than what was normal. Robert Bakewell contributed a lot to the
science of animal husbandry, devices like the seed drill of Jethro Tull', and,
of course, the cotton gin of Eli Whitney.

The demand to transport

the goods and labor led the
way for railroad, steam resources and led the way to
engine trains, and many the development of steam engines
machine tools. Iron and coal to be used for more operations in
were the primary energy factories. James Watt contributed to
the enhancement of steam engines
by introducing separate
condenser and double-acting
piston

Figure 6.2.Spinning Jenny,1891

motion. At this time, there was a lot of black smoke found in factories
and trains from burning coals, the earmark of the industrial age. The
scarcity of coal during this time, as it comes from wood, signaled the use of
fireproof materials made of iron and steel. There was a requirement to
advance the knowledge and skill to extract and make use of this material in
the production processes.

In the process of making use of wood, iron and steel were put together
to produce interchangeable parts that would make production faster and
more efficient. Joseph Bramah' contributed the hydraulic press, Henry
Maudslay8 with his lathe slide rest and pattern screw, and Jesse Ramsden'
with the use of dividing engine led the way to produce machines by
machines, mechanization to production to industrialization.

The first industrial revolution took place from the 1700s to the mid-1800s.

THE SECOND INDUSTRIAL REVOLUTION

In the study titled, "Learning-By-Producing and the Geographic Links
Between Invention and Production: Experience from the Second Industrial
Revolution," 2006,the second industrial revolution brought about the so-
called "modern life. "There was
an immense sharing of science and technology, like the canning of food to
the study of bacteria. Nature has been vastly studied and used for the
production of goods and services. There were huge migrations from rural to
urban areas, hence, the creation and expansion of cities. Entrepreneurship
capitalism was introduced as resources and finances had been growing
steadily. Electricity, automobiles, and telephony made transactions much
easier at this time.

Europe and the USA took the lead in the second industrial revolution.
There was an immense cultivation of knowledge in science and applied
technology that solved a lot of problems during this time. The USA was
traveled in much ease with the railroad track from east to west coasts.
Steam, electricity, and engine-powered boats, cars, and airplanes made
transportation of goods and services faster and more reliable. In 1908, Ford
was able to eliminate the skilled craftsmen for steel and iron with the
“Assembler” and the perfect part interchangeability was achieved by
Cadillac in 1906. Statistical process control (SPC) as a tool was used to
identify variability in processes, introduced by Shewhart in 1924.
Other characteristics of this period are the notions of
entrepreneurship, international trade, and the creation of a market unique
for trading shares of stocks. The progress that was experienced by
industrialization paved the way for the rise of the demand for more
 resources that are not afforded by entrepreneurs, hence, the creation of the
stock market, enabling to pool financial assets together of businessmen and
entrepreneurs to be able to manufacture goods and trade to other
countries.

The impossible became possible, like food preservation with the use of
refrigerators and canning; foods that are only available in the summer may
be consumed in the winter. The farmers were displaced and became
workers in factories, more roads paved the way to connect the farm to the
marketplaces. Self-expression was documented with the use of
photography; motion pictures were introduced and music can be listened to
with the use of phonographs. Because of these, they were able to introduce
the publishing industry, and information was made available everywhere in
newspapers and other published materials.

Meanwhile, in Asia, particularly in Japan, there was a significant

development in the economy following the control of Korea and Taiwan.
This paved the way for more exports, steel production, shipbuilding, and
factories.
The second industrial revolution took place from the mid-1800s to the mid-
1900s.

THE THIRD INDUSTRIAL REVOLUTION

In the study, "Post-Foundationalism, Social Transformation and the
Coming Third Industrial Revolution," 2010, this era revolved around
computerization, market competition, and globalization. At the beginning of
this period, scientific management was continued to be developed, and this
was after the Second World War that ended in 1945.1° A system called the
Toyota Production System (on Lean Production)was introduced by Eiji
Toyoda and Taiichi Ohno, that still is being used today, revolutionized the
production of cars following the trainings of hundreds of Japanese engineers
and managers by the American scientists, including statisticians on
statistical process control and economic control of manufactured products.
Japan took over the car manufacturing world market share in the 1960s and
1970s.

In 1982, Deming introduced his philosophy on the "Fourteen Points" of

quality management and was adopted by many American business
organizations. And in 1987,Motorola introduced a better total quality
management tool called the Six Sigma. Total quality management was
widely taught and studied in a lot of U.S. colleges and universities with the
purpose of educating young engineers and managers to improve production
and take back the glory to the U.S.

Leaders in this era like the U.S., Japan, and Germany can be
characterized by having sophisticated computer technology, high speed air
travel capability, and access to satellite communications, and made their
way to internationalize their manufacturing and servicing operations.
However, this also led to the transfer of multinational companies(MNCs) to
Asia because of cheaper materials and labor. This positively affected the
GDP. of the key players in Asia like China, India, Hong Kong, Taiwan,
Singapore, and South Korea. Although South Korea has just survived the
devastating Korean War, it bounced back to develop its economy in the
1960s, increased its GNP by roughly 12,000% from 1962 to 199211. The
U.S. assisted Taiwan in the early part of the 1950s and boosted its
exports on electronics and personal computers. Singapore focused on
trainings and computer education, and offered incentives to foreign
investors, while Hong Kong jumped 20 notches in the world GDP list from
1960 to 2000 by their textile and light manufacturing industries12.
116 Economic Development
 Toward the end of the third industrial revolution, two countries were
predominantly leading, they were China and India. India changed their
policies, paving the way to ease up regulations for the production of
goods and services, thereby allowing small businesses to thrive and
export software programs and other high-technology products and even
services like being the hub of western call centers due to the English
speaking and technological skills of its educated population.

China began dominating the globalized economy by selling

garments, toys, technological products, household things, and other
consumer products at the cheapest price imaginable, but we will see
more of them in the fourth industrial revolution that is happening today.
The third industrial revolution took place from the mid-1900s to the year
1999.

THE FOURTH AND FIFTH INDUSTRIAL REVOLUTION

The management systems like the Total Quality
Management(TQM),Lean Production and Six Sigma became widely
practiced worldwide. This enabled more efficient production of goods and
services traded in a globalized economy.

The primary aim of industrialization is to increase productivity,

thereby improving the standard of living of the people. You may have
known Toyota's Robina and Humanoid o even ASIMO robot of Honda from
a previous search or an encounter on social media robots built to assist
the elderly and interpret emotions for human socialization.

This period of industrialization, so far, focuses on biotechnology

additive manufacturing telecommunications, and transportation. The
sudden rise of a pandemic, like the COVID-19gave way to many
researches and technology buildup in the field of medicine, specifically
testing, relief response, care, and vaccination. Up to the moment of
writing this book, we still do not have a cure for the eradication of the
virus that caused the global pandemic in the years 2020 and 2021.

The purposes of researching and developing genetic engineering

such as DNA sequencing and gene editing is to develop a treatment for
some congenital diseases, invent new materials as inputs to the
production of food or medicine, and analyze data for future advances in
the field of biotechnology, not to mention the mitigation of health risks
from SARS and MERS to COVID-19

The 3D printing technology is a $21 billion dollar industry as of

today, mainly targeting the businesses of automobiles, textile, military,
medical, consumer products, and many more. The advantages of additive
technology, like the use of 3D printing, are the optimization of cost in
manufacturing products and the use of materials that are lighter, stronger
and more flexible, not to mention cheaper.

It is undeniable that almost everyone, regardless of social status, has one or

more smart device or even social media account to use personally,
professionally, or for leisure. In fact, in the Philippines, some local government
units (LGUs) provided smart tablets or phones to each household that is
registered in their public schools mainly because the modes of learning for the
years 2020 and 2021 are both offline and online. There are billions of subscribers
of telecommunication services in Asia alone, having services from even more
than one Internet service provider (ISP)for each household. South Korea's
Samsung dominates the smartphone market, enjoying 21% in 2017,the next in
line being competed by the Chinese brands like Huawei, Oppo, and Vivo with a
close rival in the USA's Apple.16As of the writing of the book, 5G is in place and
said to deliver faster telecommunication and Internet service to its users
compared to the 4G technology. In addition to this, the proliferation of social
media mobile applications (apps) software is not to be discounted as they are
continuously gaining popularity and use in Asia and the west.

For example, WhatsApp and Facebook are widely used for various purposes
in India, while China uses WeChat. They even incorporated payment schemes
with the use of these social media apps. Mobile phone softwares are even
packaged with devices that can monitor blood pressure, electrocardiographs, and
monitor physical activities."

Public transportations that are run by automated technology are now

in place in the countries such as UAE, USA, Japan, Taiwan, and China.
Companies like Samsung and Hyundai of South Korea continuously
develop self-driving automobiles that may be used on public highways.
Self-driving taxi is launched in Singapore in the year 2016, and there are
plans to expand its operations. Various patents are being applied by
MNCs car manufacturer for automated vehicles worldwide, e.g., Nissan
Motors of Japan to India.

If we are going to observe today's advancement of technology in the

improvement of the quality of life, Asia has been leading and continuing
to be a formidable force in industrialization. The fourth industrial
revolution is from the year 2000 to the present time or more commonly
known as the 21st century.

The fifth industrial revolution, humanism, civility, inclusivity,

creativity, and purpose in a digitally enabled progressive economy are the
drivers. The Internet of things, devices, data, and digitization have
already come of age.18 In the recent pandemic that the world is
experiencing, a need to act quickly humanizing processes that efficiently
allocate resources that had been scarcer than ever before, Artificial
Intelligence, mechatronics, and robotics had been the focus of research in
most formal universities and laboratories in the world. The fifth industrial
revolution is characterized mainly by three things: profits, purpose, and
people, prospering together.

THE MODES OF INDUSTRIALIZATION

Mercantilism. In protecting the economy of one's country or state, it
is important to optimize net exports. This adds to more products and
services available to its people and affects the increase of the GDP of the
country. Lars Magnusson points out in mercantilism the shaping of an
economic language that mercantilism in its traditional form was not a
well-structured doctrine containing principles to describe economic
behavior or to prescribe policy measures. Rather, it was characterized by
a strong emphasis on the means to achieve national wealth and power.
Protectionism. A set of policies by which a government seeks to
shelter its industries from foreign competition or to help them increase
exports to international markets.20Restriction by governments to
importation of goods and services is through increasing tariffs, import
quotas, or more regulations to products sourced from other countries.
Laissez-faire. An economic idea that means less involvement by
means of regulations of the government to its private industries to let
them operate on their own, hence laissez-faire is a French concept that
literally means “let alone."
Importation. In the context of trade, when there is a need for goods
and services, because of a shortage of a good and/or service from
another country, a country buys from another country. Sometimes, it
comes from the trade agreements between countries whether
importations are allowed.
 Exportation. When there is a surplus, or we want to gain from sale to
another country and increase gross domestic product, we sell them our
domestically produced goods and/or services. Like importation, a trade
agreement may give way to supply the needs of other countries at a
given period of time.

COSTS OF INDUSTRIALIZATION
Industrialization, modernization, urbanization, and capitalism are
concepts that are intertwined and cannot really be separated. Businesses
that produce goods and services are basically motivated by self-interest
that is maximizing profit, which means the least possible cost of
production.

Capitalists and even governments tend to save for future survival,

and because of the idea of laissez-faire or let alone policy, the
government tends to give some level of freedom to producers, which may
lead to abuse of land, labor, and other valuable resources. Although
industrialization seemed to take place for a long time, the effect of which
happened is really fast. More people are moving from rural to urban
areas, factories are multiplying to supply the needs of the people. In
effect, there are possibilities of long hours for factory workers, with
considerably low wages. Children as young as six, seven years of age are
forced to work for more than eight hours daily just to achieve the
production quota. Sweatshops are thriving in countries that have weak
labor laws, or if not, they may utterly ignore them. Dangerous working
conditions, like long working hours and workplaces not conducive for
working, lead to frustrations and mental illnesses.

DEINDUSTRIALIZATION
Economic development of the past is mainly characterized by
countries that are into export-oriented growth. These countries have
many manufacturing factories that employ thousands and thousands of
manufacturing jobs. The workforce is considered highly trained, has
acquired technical skills, is receiving relatively higher wages, and is very
active in exportation.

Today, it seems that the model of economic development is

changing; a developed nation may not necessarily be the one exporting
to other countries. There is much automation in the manufacturing of
goods and services, an evident decrease in jobs in manufacturing and
increase in the service-sector jobs. Moreover, copying the technology
elsewhere and customizing to one's market seems to be what is
happening in some developing countries, creating products available
domestically, and needing less imported products. This leads to
consumer-led growth, where individuals are empowered in the production
and consumption of goods and services with the use, for example, of a
mobile phone, production, banking, payment, and other business
transactions are made possible online. Consumers are becoming smarter
and keen on networking and mobilization of information and commerce.

In the study titled, "Next Generation Business Models in Ecommerce,"

2011,e-commerce has opened new avenues with the use of brokerage
systems, in the stock market, airlines, shipping, and the like. Majority of
e-commerce is relying on two-tier models, i.e., b2b, b2c, c2b, and so on. It
is now replaced by three-tier architecture,i.e.,b2b2b, b2b2c,and c2b2b.22
We were pushed to do businesses online because of the quarantine
requirements during the pandemic period. We had to be familiar with the
use of applications to buy and sell products online, for example, in a
B2B2C setup, a seller on Facebook marketplace or Shopee/Lazada to
consumers.

URBANIZATION AND THE WORLD

The United Nations Department of Economic and Social Affairs,
Sustainable Development Goal 11 states, “make cities and human
settlements inclusive, safe, resilient, and sustainable." In 2019, only
about half of the world's urban population

has convenient access to public transportation; air pollution had

caused 4.2 million premature deaths in 2016, those living in depressed
areas increased to 24% in 2018, and over 90% of cases of COVID-19 are
in the urban areas. Because of these, the member countries and states of
the United Nations come up with targets and indicators in relation to
urbanization, they are:
 By 2030, ensure access for all to adequate, safe, and affordable
housing basic services and upgrade slums
 By 2030, provide access to safe, affordable, accessible, and
sustainable transport systems for all, improving road safety, notably
by expanding public transport, with special attention to the needs of
those in vulnerable situations, women, children, persons with
disabilities, and older persons
 By 2030, enhance inclusive and sustainable urbanization and capacity
for participatory, integrated, and sustainable human settlement
planning and management in all countries
 Strengthen efforts to protect and safeguard the world's cultural and
natural heritage
 By 2030,significantly reduce the number of deaths and the number of
people affected and substantially decrease the direct economic losses
relative to global gross domestic product caused by disasters,
including water-related disasters, with a focus on protecting the poor
and people in vulnerable situations
 By 2030,reduce the adverse per capita environmental impact of
cities, including by paying special attention to air quality and
municipal and other waste management
 By 2030, provide universal access to safe, inclusive, and accessible,
green and public spaces, in particular for women and children, older
persons, and persons with disabilities

There was a rise in global population, demand was rising so fast, and
evidence of underproduction of goods and services forced the economies
to industrialize and produce more in the most efficient manner. Basic
products that we enjoy today, like medicine, food, clothing, and
accessories are all brought about by industrialization. An approach to
production, making more products with the least possible inputs, started
with specialization of labor. Specific jobs were done by a group of
individuals and some external forces, like mechanization, the use of
machines, like steam engines, conveyor belts, and the like.

Today, we are experiencing the fifth industrial revolution, where

goods and services are available that were considered impossible half a
century earlier. There is a price that must be paid with a modernized,
industrialized economy: pollution, health, and social issues. We need to
constantly visit our laws and policies to protect the future generation from
total degradation.
 CHAPTER 7
LABOR MARKETS

LEARNING OBJECTIVES

In this chapter, you will be introduced to labor markets and their

relationship with economic growth and development. Specifically, this will
help you:

1.evaluate the demand for and supply of labor and its implications on labor

market equilibrium;

2. discuss labor market equilibrium;

3. elaborate on individual earnings and wages, with a focus on the minimum

wage intricacies;

4. illustrate international immigration, its costs, benefits, and implications

on economic growth and development;

5. evaluate labor market discrimination and its effect on market efficiency;

6. discuss the human development index (HDI) as a metric for economic

growth and development;

7. appreciate labor markets in the article about the Rana Plaza accident;

8. recommend key areas to focus on

fair labor for economic development;

and

9. understand labor markets at work

in the eyes of a professional in labor

and manning agency.

LOOKING BACK
Chapter 6, we appreciated the significance of industrialization to
global economic growth and development. From the first industrial
revolution to today's fifth industrial revolution, we maintained the
increase in production and consumption and continued to innovate to
achieve maximum efficiency in the processes involved in various
economic activities. But because of this, we also realized the cost of
industrialization, the widespread abuse of land, labor, and other
valuable resources, like the issues of childlabor, bondlabor, and
sweatshops. Furthermore, we identified various modes of
industrialization, mercantilism, protectionism, laissez-faire, importation,
and exportation. Lastly, we determined the world target of making cities
and human settlements inclusive, safe, resilient, and sustainable as
described in the UN Sustainable Development Goal.

INTRODUCTION
Among the factors of production, land, labor, capital, and
entrepreneurship, labor is the most important, and in fact, has the
largest share in almost all economies with the gross national earnings.
Basically, the labor market operates by supplying a skill or talent that
someone else would need or demand. Let us look at it this way: roles in
a labor market are determined by the one who supplies the labor, or the
seller of labor, and the one who buys it, the buyer of labor. There should
be a voluntary exchange of work, an agreement that a certain price,
that is the wage, the buyer agrees to the work and employs the seller of
that work. The market for professional athletes is considered a little
more complicated than other labor markets, but the idea is the same. It
follows the law of supply and demand. The supply of highly talented
basketball player is paid way higher than an average worker not only
because their supply is scarce, the talent itself is limited, but at the
same time, the demand for basketball players is high. They usually
generate millions of revenue in merchandise and ticket sales, hence
their wage is also high. Wages are determined in the same way, it starts
with a skill or a talent. If it is abundant and the demand is low, then the
wage is also low, and vice versa.

This chapter talks about the demand for and supply of labor,
individual earnings and wages, international immigration, labor market
discrimination, and human development index. In addition, an article
about one of the largest labor accidents in the world as of today will be
discussed as a case study.

DEMAND FOR LABOR

Demand is the link between the price of a product and the quantity
demanded for it. We sometimes present it in a table or schedule to
further appreciate the changes in quantity demanded as the price
increases or decreases. The basic rule is that all other things remain
constant, as the price increases, the quantity demanded decreases or
vice versa. There is a negative relationship between the price and the
quantity. A demand curve is a graphical representation of the price and
quantity demanded, and since the relationship is negative the curve is
also negatively sloped. Labor is the input to a factor of production. In
most cases, we hire labor to produce goods to sell. Labor markets, like
any other markets, exist with the invisible hand at work, forces of supply
and demand.
 Consider an example of the Navotas Fish Market. The table below
shows the number of workers hired and the weekly output by the
number of oval crates given the price an the wage.

Table 7.1.Navotas Fish Market Workers Output

Output Marginal Value of Margin
Weekly Product the al
Number Pric of MPL Income
Labor Wage
of e Labor (E-F)
Oval
Crates
A
C in
(workers B D E in P F in P G in P
P
)
0 0 0 - - - -
P50
1 150 150 75,000 - -
0
3 200 500 25 12,500 6,000 P6,500
5 260 500 30 15,000 6,000 9,000
7 340 500 40 20,000 6,000 14,000
10 400 500 20 10,000 6,000 4,000
12 430 500 35 17,500 6,000 11,500
7(approx
15 450 500 3,500 6,000 (2,500)
.)

Table7.1 shows expected for additional labor

the relationship
between workers,
given the price and
the wage of
employment. It
would yield an
optimum marginal
income and a level
where loss is
incurred for the
number of workers
employed, given a
competitive market
and the wage is fixed
at P6,000.

The value of employed.

the marginal product
of labor gives us the
idea about decision-
makers on how much
more income is
 Figure 7.2.Production Function

138 Economic Development

 In this case, P20,000 is the maximum value of the MPL, hence an
optimized number of workers of 7.

The production function in Navotas Fish Market gives us te relationship

of the inputs in terms of labor and the amount of product obtained. The more
labor put into the production function shows that it increases at a fast rate at
the beginning and moves slowly, flatter, toward the rightmost part of the
graph. We call this the diminishing marginal productivity. Firms employ
workers as long as the revenue generated by the output of a marginal
worker exceeds the cost of that worker, i.e., until the worker's marginal
revenue product is equal to the market wage rate. The marginal product of
labor will decline and the wage of all workers will fall.

SUPPLY OF LABOR
Supply is the link between the price of a product and the quantity
supplied for it. Just like demand, we sometimes present it in a table or
schedule to further appreciate the changes in quantity supplied as the price
increases or decreases. The basic rule is that all other things remain
constant, ceteris paribus, as the price increases, the quantity supplied also
increases or vice versa. There is a positive relationship between the price
and the quantity. A supply curve is a graphical representation of the price
and quantity supplied, and since the relationship is positive, the curve is also
positively sloped or going up from left to right of the graph.

Labor Market
Individual Employer

W =Wage ; W e =atE Equilibrium

Q=Quantityof of Labor;Q0=QtyDer manded;Q3=QtySupplied
D=Demand
MRP=Margirginal Revenue Product
MRC=Mar arginal Resource Cost

Figure 7.3. Labor Market to Individual Employer

It is significant to note the reservation wage theory that says individuals
would be choosing not to work when they value leisure more than the wage
rate that they would be receiving from working. Hence, reservation wage is
the minimum rate that a worker is willing to accept for a specific job, at a
given period of time, considering there is no change in an individual's overall
wealth, marital status, length of unemployment, health, and security and
disability issues.

DEMAND AND SUPPLY OF LABOR

The graph in Figure 7.3 shows the relationship between the labor
market and the effect on the individual employer. The demand for labor is
downward sloping and the supply is upward sloping. The point where they
meet is the equilibrium wage and quantity. The demand represents the
revenue attributable to additional workers as they are hired.
 The wage rate
basically is the profit-
maximizing level of
individual employer,
also known as the
marginal resource cost
(MRC). In a competitive
labor market, the firm
can pay to hire
additional workers.

There are
situations wherein
there is a change in
demand even if the Figure 7.4. Demand Shift -3
price does not change. -D1
In effect, it shifts the -D2
demand curve to the
right. Remember the
notion, “all other things
remain constant or
fixed. "What if the
“other things "change?
These are the
factors that result in a Supply Shift to the Right
"change in demand: "As
the price of a substitute
service increases,
demand also increases.
For example, we always
go to a famous -
hairstylist salon situated
in a shopping mall. If
the price of the same
service outside the mall
increases, the demand
for the salon service in
the mall increases as
well. Another factor is
the price of the 32
-31
-D
Figure 7.5. Supply Shift
 complementary service. Let us say that the price of the shampoo-ing in
the salon increases and the demand for the salon service decreases, hence
there is an inverse relationship between the price of the complementary
service to the demand.

If there is an expectation that the price of the salon service increases in

the future, then the demand for it also increases. So we can say that there is
a direct relationship between the two. Let us assume this time tat the income
increases. The demand for the "no brand" salon decreases, a service that is
considered inferior to the hairstylist salon.

SHIFTING OF DEMAND AND SUPPLY

GENERAL RULES ON SHIFTING OF DEMAND AND SUPPLY

When the population of the city increases, there is an effect that may be
attributable to the migration from the provinces or other countries. Therefore,
there will be an expected increase in the demand for the salon service. As the
market for salon services increases, an expected increase in salon service also
increases. Lastly, there is an expected shift in the demand curve when the
taste or preference of clients and potential clients changes. It may be deemed
favorable or not favorable depending on the change itself. These are the
factors that affect the demand for a service: price of a substitute service, price
of a complementary service, expected future prices, client's income or wealth,
population growth, increase in the size of the market, and change in the taste
and preference of the consumers. There may be a shift in the supply curve,
even if there is no change in price when some factors change. When more and
more agencies sprout in the market doing the same job as us, it will cause an
increase in the number of workers given a certain level of price. An expected
increase in the wage of workers in the Middle East would mean an increase in
the number of workers that we will source out and deliver.

Let us say the government would provide incentives to agencies, such as

tax cuts would mean an increase in the number of workers that we can provide
to the market, an increase in tax would mean the other way around. Another
special influence would be the partnership of our government to other states in
supplying workers, promising a better benefit package with our workers, safety
and protection, then the supply of workers would definitely increase, as more
would like to be benefited by the agreement.

These are the factors that may affect the change in supply, even without
changing the price of labor: cost to acquire more skills for labor, the number of
agencies and businesses providing the same labor, expected future increase or
decrease in wages, technology, government subsidies, taxes, and other special
influences.

INDIVIDUAL EARNINGS AND WAGES

As an employee invests his or her time, labor services, ideas, skills,
knowledge, and abilities, the employer must fairly compensate these with a
reasonable wage, that is at par or even higher with the same employee
contributing the same resources in the market. Wage must cover the
opportunity cost, the value that is lost like the worker's free time and the
income that may be derived from another job, or from doing something else.

If the demand for a certain good or service is booming, more of it is

produced and offered in the market, and ultimately increase wages. We call
this derived demand. The demand for a factor of production derived from the
demand for its product, e.g., there is a demand for labor in the construction
industry because of the demand for houses, engineers, and some medical
professionals are in low supply, and yet the demand for their skill is high;
therefore, the wage is also high. Whereas social work is considered a very
important job for poverty alleviation and protection of human dignity, the wage
is low, that is because the supply for social work is high.

There are some businesses that provide high wages to their employees,
compared to the market equilibrium, to motivate them to work and not leave
the company (among other reasons). We call this efficiency wages. Labor
unions can affect wages as they advocate the benefits and interests of the
employees and improve their working conditions. Through a collective
bargaining agreement (CBA), this is more common in the government sector
and is slowly declining in existence.

MINIMUM WAGE
A minimum wage is the price floor that ensures employees receive this
amount or more, and employers are prevented from paying below this amount.
Classical economists argue from any form of government manipulation in a
competitive market like the minimum wage. They believe that this is of no value
to alleviate poverty and does not solve the problem of unemployment, in fact,
this worsens the unemployment problem in the economy. Paying the minimum
wage stops some employers from hiring unskilled workers. Instead, they look for
skilled or semi-skilled workers, leaving this type of labor to be untapped, hence
unemployment increases. Skilled workers are those who have special skills or
who have had long training.4
Labor Market Individual Employer

W =Wage ; W e =atEqU w m=Minim imum

Wage
Q=QuantityofLabor Q0=QtyD Demanded;
Q3=QtySupπed
D=Demand
MRP=Margiginal Revenue Product
MRC=Mar rginal Resource Cost
Figure 7.6. Labor Market to Individual Employer with Minimum Wage

In the graph in Figure 7.6, we can see that imposition of a minimum wage
(price floor) would change the behavior of the labor supply and demand. The
quantity demanded will decrease, while the quantity supplied will increase, by
the wage price difference with the existing wage rate. In effect, this would
create a surplus, but in the case of labor market, we call this unemployment. In
addition, from the point of view of the wage taker, that is the individual
employer, a minimum wage, a new marginal revenue cost is set, leaving a
decrease in the quantity of labor they would want to hire up to the level when
MRP =MRC or the maximum level they wish to employ. This situation is only
true in a competitive market and when the wage is lower than the minimum
wage, although there are a lot of businesses now that pay more than the
minimum wage.
 The question now is, how much should be the minimum wage? An
increase in the wage would mean more and more people have the capacity to
buy goods and services. It increases the demand for products and stimulates
employment and the economy. A high minimum wage in high median places
like major cities is probably good, but detrimental to the low median areas like
the town and provinces, hence, we need to key in all factors including the
geographical location of the economy for the proper determination of the
wage. In the end, economists do agree that skill and education are factors that
the market sees valuable. Perhaps because it is in low supply, in high demand,
and therefore, those who have it are promised higher wages.

It is important to note that not all regions have a minimum wage, and for
those Philippines, the minimum wage in the National Capital Region (NCR) is
different from the rest of the regions.

The minimum wage will not solve the problem of poverty and inequality; it will
just be a trade-off of something that may have a positive or negative impact
on the economy.
It is still significant that the people be educated and develop skills that may
be used to contribute to the development of the country.

INTERNATIONAL IMMIGRATION
When people move between countries and become part of the labor
market of that country, that is called immigration. The main economic benefits
of immigration are the following: (1) increases the national output, the GDP; (2)
enhances specialization especially with highly skilled immigrants; and (3)
provides net economic benefit to the country. Immigration resulted in
advancements in technology and improved transportation in terms and the
desire to look for greener pastures.

There are two main arguments in the

economic impact of immigration, that
increases demand because of the
population increase, but low-skilled workers
tend to ad to the poor and worsen inequality in
the market. Highly skilled immigrants
contribute to a large employment surplus,
as they innovate and become
entrepreneurs, adding to the factors of production in the country.

LABOR MARKET DISCRIMINATION

Wage discrimination has been mentioned in the news, especially the kind
when certain race or nationality is undermined and is given less respect,
dignity,and attention. Discrimination happens, favoring some group of
individuals according to gender, age ethnicity, nationality, and disability.
Although there are moral and ethical issues involved in labor discrimination, we
focus on wage discrimination, its nature, and its impact on the economy.

Wage discrimination happens considerably when there is monopsony-

there is only one buyer of the labor offered, it can clearly be distinguished who
is favored and who is discriminated against, and an ostensible varied price
elasticity of labor supply in different groups. This may negatively impact the
economy, as it tends to effect inefficiency and may cause market failure.

For example, the marginal revenue product (MRP) of the favored group
tends to be overestimated while the discriminated group, undervalued, distorts
the market as the latter inclines to withdraw from the market. The effect is
decreasing the supply of labor, reduces human capital and labor, and then
diminishes productivity.

HUMAN DEVELOPMENT INDEX

As the world becomes more sophisticated, having the GDP per capita
alone may not be enough to measure the economic development of a country.
It is instinctive for humans to know how and what others in the world are doing,
not only in terms of money on their hands but also for their welfare. Human
Development Index (HDI) indicates the average well-being of people in a
country in a given period of time. It is a composite index combining life
expectancy at birth, mean years of schooling, expecting years of schooling,
gross national income per capita, and non-income using a geometric mean.

There are three main components in determining the HDI: life expectancy,
knowledge, and standard of living. The average life of the people in a country
according to various demographic factors, such as age, gender, and so on is a
part of life expectancy. The average year of schooling of adults and children is
a part of knowledge. And the standard of living basically is the GDP per capita
plus all income by citizens deserved abroad, foreign investments, and foreign
aid received. However, not all countries have the same purchasing power to
buy a specific good and service; hence, we use the purchasing power parity
agreement to express the differences in dollars for more accurate results.
 CHAPTER 8
FINANCIAL SYSTEMS

LEARNING OBJECTIVES

In this chapter, you will be introduced to financial systems as a significant

factor in economic growth and development. Specifically, this will help you:

1. explain what a financial system is and its connection to economic growth

and development;

2. elaborate on financial institutions, financial assets, real assets, portfolio

management, and the key players in these institutions;

3. evaluate the specific contributions of financial systems to economic

development;

4. create a short animated explainer/whiteboard video about financial

systems;

5. understand financial systems at work in the eyes of a financial planner

and practitioner; and

6. understand labor markets at

work in the eyes of a labor

professional and manning agency.

LOOKING BACK
Chapter 7 talked about labor markets, centering on the idea that labor, at the
same time, is the most complicated. We attempted to understand why the wages of
a certain profession are higher than the others through the law of supply and
demand and the implications to the labor market equilibrium. We discussed the
concepts of marginal product labor (MPL) to marginal income to additional labor,
applied them to the production function. Further, we discussed the connections in
the state of labor market equilibrium and the possible causes of the shifting of the
demand and supply curves. The wage rate, the profit-maximizing level of an
individual employer known as the marginal resource cost (MRC) in a competitive
and open labor market, is analyzed with the use of graphs. Moreover, we elaborated
on individual earnings and wages and the effect of an imposition of a minimum
wage. We illustrated international immigration, the movement of people between
countries to be a part of the labor market of those countries, as well as its
advantages and disadvantages. Likewise, we evaluated labor market discrimination
and its repercussion on market efficiency. Finally, we discussed the human
development index (HDI),life expectancy, knowledge, and standard of living as key
determinants of the labor condition toward economic growth and development.

INTRODUCTION
Most transactions use cash and near-
cash items as they are considered a more
efficient way to do business as compared to
the barter system. We have learned from
our finance courses that money has three
main roles, as a medium of exchange as it
is generally accepted as payment for goods
and services, a store of value and a unit of
account, and a standard measurement that
generally determines the value of things.
For economists, money is used as a medium
of exchange; it has value because everyone
thinks that it has value. It is also considered
a legal tender, that currently, it is the form,
by law, a debtor may require a creditor to
accept in payment of a debt.2

Figure 8.2.Financial and Real

Assets

Nowadays, it moves around electronically, as it is more secure and may

function better than physical money, especially in the time of a pandemic when
people are discouraged from holding anything physical from other people, Bitcoins
are gaining popularity in the digital financial system; they are not regulated in a
specific country, are considered a speculative asset, and are accepted by a few
groups of people. They are those who usually do not believe in the central banking
system.

Financial system is a network of institutions, markets, and contracts that bring

together lenders and borrowers-the two main players in the system. Lenders are
those who believe that money that they have now has the potential of snowballing
in the future; hence they lend it to a financial institution like a bank. Borrowers can
be a household that needs to buy a house or a car but does not have enough money
on hand to acquire it; a firm that needs more capital to fund an asset to bring more
income; or the government that typically spends more than it owns.

The lenders and the borrowers agree to fulfill their goals through exchanges in
three ways: the banking system where depositors are considered lenders and of
course, those who loan funds for themselves, the bond market. Government may
choose to increase its funds by issuing an IOU promising to pay on a regular basis
and the principal at a certain date and the stock market, which is basically a place
where ownership in a company may be sold and bought. It is worthy to note,
however, that fluctuations in the stock market are not dependable metrics of
economic well-being. Changes in the stock market may just be reactions to real or
perceived changes in the performance of an economy or of the company.
Crowdsourcing of funds, raising capital from investors, and distributing the risk that
is attached to the investment are essentially a financial system.

FINANCIAL INSTITUTIONS
Investment means committing funds to one or more assets, which can be a
financial or real asset. Most individuals and firms make this decision to increase
their wealth and secure the future. Savings, on the other hand, may be understood
as a part of wealth that may be used to fund the investment of another. The
financial system works in a way that it considers the interaction of the investors and
the savers, as in savers put their assets into an institution to penetrate the market
for the investor's use.

Financial asset is someone else's liability. For example, money is a liability of

the central bank, whereas real asset is something with intrinsic value. Examples of
real assets are valuable pieces of jewelry, machines, or other physical assets that
may be traded in a hard market. Financial assets are “manufactured” by the stock
market or any financial institution. They are greatly affected by inflation or the
decreasing purchasing power of money. Manufactured here means that the stock
market creates assets traded that are intangible.

There are five investment assets or sometimes called investment classes (in
some books) that are traded in the market. They are stocks, bonds, currencies
(considered financial assets), real estate, and commodity (considered real assets).
However, commodities like gold and silver may be considered either financial
assets or real assets, depending on the behavior in the market (as it changes
according to inflation)and how it is traded.
Short-term instruments, mostly securities that mature in less than one year are
traded in the money market, while long-term instruments, or those mature more
than a year, are traded in the capital market. Financial derivatives are forms of
financial instrument, a value of which is derived from another instrument. A good
example of which is a stock option, wherein the stock is the base and the option
would be its derivative. It is a tradable financial instrument based on an asset's
underlying value.3 This is explained thoroughly in your other finance courses.

The process of investment essentially

involves portfolio management, building
the collection or set of assets; allocation of
assets, splitting of the portfolio into five or
less types of investment classes; and
construction decision, choosing from the
top-down or bottom-up approaches in
portfolio management.
 Basically, top-down portfolio

management tries to allocate assets

by country or region, as well as the type of asset, while bottom-up is looking at specific
company/ies then investing in it, with the tendency of investing in just one country and/or
one class.4567
Investment management involves channeling of
funds by means of financial intermediaries,
transferring and scheduling of risks, appropriation of
the investment class, and managing ownership of
funds. It is important to note that ownership and
management exist in a separation concept and deal
with agency issues, of principal and agent roles.
Hence, in order to mitigate the issues, there must be
good corporate governance in place and regulated by
the government or state. Corporate governance is the
examination of the control of a company as exercised
Figure 8.3. Key Players in
by its directors.
Financial Systems
A competitive market may be characterized by these three factors, how risk and return
are optimized, how efficient is the investment market, and how appropriate is the style of
investment, whether active, passive, or a combination.

In the economy, assets are plotted by these players: the businesses issuing securities
(debt and equity) or financial instruments, the firm; the ones who lend and borrow from
financial intermediaries, the household; the one that never overfunds and is considered
always in a shortage, the government; and the one that positions between the debtors and
the creditors, the financial intermediaries.
There are a lot of examples of financial intermediaries, such as banks, mutual
funds,pension funds, and insurance companies.

Financial System in Economic Development

Flourish Savings and

Investment relationship. The
existence of a lively financial
system in one country provides
facilities for individual and firm
savings. When there are more
savings and investment, there is
more production of goods and
services. Firms may enjoy a
suitable interest rate (would
optimize the bottom line) that
would entice them to borrow
money and have more
production and distribution of
goods and services.

Figure 8.4.
Develop labor and
Employment. More
manufacturing
companies can boost their working capital, thereby, they are able to employ more
individuals for their production. Furthermore, there are opportunities for banks, other
financial institutions like funds, and others to have more skilled workers. Prospective
 venture capitalists are able to fund a technology-based industry and employ more
workers.
Growth in Capital and Securities Markets. Capital markets issue debenture' and
shares to public and other fund institutions that are expecting good returns from
their fixed capital or fixed assets like machinery and equipment. Short-term loans are
available for daily business operations and help in the continuity of the business and
trade. Foreign exchanges markets help address transactions that involve foreign
currencies, help raise funds for these companies, and support the forex requirement
of some companies who are dealing with other countries.
Trade Development. Advance business, both domestically and internationally,
allows capital goods to be sold through hire purchases and installment schemes. For
those firms that engage in shipments, financial institutions allow issuance of letters of
credit, finance them, and even offer to discount some financial instruments like bills.
Infrastructure and Technology Development. Countries that are not dependent
on natural resources such as oil and gas, financial institutions allow financial
prosperity by the governments. Economic liberalization is set as a policy establishing
development banks and merchant banks to raise funding for infrastructure buildings.
In addition, venture capitalists allow companies with investable funds to invest in
highly risky information and technology businesses or promote other new ventures.
Uphold Fiscal Policy. The existence of a worthy financial system in one country
helps in the control of inflation, recession, and even depression through a sound
policy on finance. The system is regulated by the Bangko Sentral ng Pilipinas. Laws
and other legislation may be enforced to mitigate the risks of unwanted and
speculative transactions. Examples of these laws are R.A. 3765: An Act to Require
the Disclosure of Finance Charges in Connection with Extensions of Credit;10 R.A.
6426: An Act Instituting a Foreign Currency Deposit System in the Philippines, and
For Other Purposes; and R.A. 3591 An Act Establishing the Philippine Deposit
Insurance Corporation, among others.

Attract Foreign Investment. Vigorous financial systems in one economy entice

potential investors in various sectors and provide more production opportunities and
investment prospects that can lead to economic growth and development.
Foster Economic Integration. In the inevitable integration of countries in proximal
distances or regions, forming economic integration tends to have a common
investment, trade practice, and even legislation. In terms of market having one
common currency is practiced, just like the European Union.
Balance Regional Development. Provide various concessions and stock
ownership plans (SOPs) that eventually help avoid political risks in regions. Equitable
interest rates offered in various places would discourage migration from rural to urban
areas.
Sustain Macroeconomic Balance. Having a good financial system allows balance
in the industrial, agriculture, and service sectors, ensuring that contributors to the
national income benefit from the financial resources.

As one of the financial analysts of Rafael Funds, you are tasked to analyze the
stock returns of McBee Foods Corporation in the last quarter of 2020, given the
following stock prices in US dollars, opening and closing stock prices, as well as the
high and low prices during the day, volume of the stocks traded in the period (in
weeks), and the adjustment:

Table 8.1.McBee Foods Corporation

Stock Prices from September 28 to December 28,2020
Date Open High Low Close Adj.Close Volume
9/28/20202.91 3.19 2.01 10200
10/5/20203 3 2.87 2.92 2.898172 8600
12/2020 2.9 3 2.9 2.9 .9523 10300
10/19/20203.09 3.65 3.09 3.63 3.602864 23700
 0/26/20203.76 3.9 3.42 3.57 3.543313 39600
11/2/20203.57 3.99 3.57 3.97 3.940323 10800
/20203.9 4.25 3.9 39 3.930397 16300
11/16/20204.2 4.28 3.96 4.06 4.02965 24200
220204.06 4.1 3.7 3.98 3.963242 10100
11
3.98 4.4 3.98 4.4 4.381474 27200
11/30/2020
/7/20204.18 4.5 4.13 4.4 4.381474 46500
12/14/20204.4 4.44 4.15 4.2 4.182315 6500
20203.95 4 3.84 4 3.3 3700
12/
4 4.1 3.9 4 3.983158 13400
12/28/2020

Compute and describe each of the following in the example equity market prices:
1.Average Return - used to smooth out variations in a fund's return13
2. Variance of Return-measure of the average variability (spread) of prices14
3. Standard Deviation of Return

Proposed solution to the case:

Step 1: Add a column for the returns in the period given the adjusted stock price
close. Remember that the stocks are traded during the working days only, hence,
"today" and "yesterday" may not necessarily be one day apart, but one “working
week" apart.
'
Toda y sPrice 3.983158
Returns= '
−1 ; Returns 12/28/20= −1=−1 , andsoon and so
Yesterda y sPrice 3.983158
forth
 CHAPTER 9
FINANCE AND DEVELOPMENT

LEARNING OBJECTIVES

In this chapter, you will be introduced to some concepts about finance and
development. Specifically, this will help you:

1. appreciate the role of finance in development;

2.understand the application of good governance in the Philippines;

3. explain microfinance and how is it related to the economic growth of the

country;

4. discuss microcredit and its access to the poor;

5. relate to microsavings, its application to the local community, and how it

contributes to the economic growth of the country;

6. describe Islamic finance and how is it related to the economic growth of the

Philippines; and

7. create a script about microfinancing experience in the local community.

LOOKING BACK
Chapter 8 was about financial systems, how the system works in terms of
investment management and funds lending and borrowing through a network of
institutions, markets, and contracts. The lenders and the borrowers agree to fulfill
their goals in three ways: the banking system where depositors are considered
lenders, the bond market, and the exchanges of stocks. Crowdsourcing of funds,
raising capital from investors, and distributing the risk attached to the investment
is essentially what the chapter is all about. We elaborated on financial institutions,
financial assets, real assets, portfolio management, and the key players in these
institutions: the firm, the household, the government, and of course, the financial
intermediaries that bind them all. Lastly, we discussed that the relationship
between financial system and economic development are as follows: flourish
savings and investment relationship, develop labor and employment, growth in
capital and securities markets, trade development, and infrastructure and
technology development, uphold fiscal policy, attract foreign investment, foster
economic integration, balance regional development, and sustain macroeconomic
balance.

INTRODUCTION
Financial systems are usually there to transform short-term liabilities into
long-term assets. For example, demand deposits can be transformed into long-
term loans. Finance is a driver of sustainability. However, to achieve sustainability
through finance, it is necessary to rebuild and adapt the financial system to the
specifics of sustainable development. Modern financial systems can be described
as one-dimensional, focusing on ensuring the economic security of transactions.

In this chapter, we are going to discuss the different roles of finance in

economic growth and development. In addition, we are also going to determine the
contribution of the emerging activities of microfinance, microcredit, microsavings,
and Islamic finance that are relevant to the savings and investment portfolios in
developing countries like the Philippines.

ROLE OF FINANCE
Financial institutions such as banks, bond markets, or stock markets link the
savers and borrowers of the economy. These are organizations offering financial
services, specifically, banks, building society, finance company, or credit union.
Supply of savings coming from “savers" like households, firms, and other venture
capitalists save up or invest money that are managed by these institutions to meet
the demand for such savings by borrowers such as firms, entrepreneurs, or even
households.

The concept of venture capital basically benefits start up business

entrepreneurs to develop new products. since is a start-up business, this can be a
very risky investment to the point of losing the entire investment. Venture
capitalist normally screen new ideas, evaluate the viability of the business, and
solicit investments for these. Apart from screening function of finance, it also
monitors the daily activities of financial assets that are traded in the market. In
fact, we can check the movements of our stocks and bonds on various financial
platforms like yahoo money.

Borrowing and saving help smoothen consumption over a lifetime; It can be

the systems help us borrow and save money to acquire these assets without
waiting for many years to come.
Other roles of finance in development are diversification and transformation of risk
and the management of payment systems, i.e., reducing transaction costs.
According to Pan and Fan, in view of the stability of the banking system,
 considering shadow banking, interbank lending, and complex relationships
between banks, there is a need for concentrated interbank network structure that
is easier to increase the probability and degree of risk contagion. Shadow banking
is the credit intermediation of channels funding from depositors to investors
through a range securitization and secured funding techniques and may cause
systematic financial risks and arbitrage risks.5 Moreover, the management of
payment systems is getting easier with the use of mobile devices. In a study by Su-
Chang et al. in 2019, due to smartphones being more popular and the wireless
network infrastructure improving, it positively affects customers' satisfaction in
terms of mobile payment usage intention.

The roles of finance in development are: (1) link the savers and investors;
(2) screen and monitor investments; (3) smoothen consumption; (4) manage
risks; and (5) manage payment systems.

Financial development has been considered an efficient mechanism for

sustainable economic growth and development of emerging markets in the past
decades. The study by Thang et al. in 2019 published in the Journal of Risk and
Financial Management, implied that income inequality may rise at the early stage
of financial development and fall after a certain level is achieved.' In other words,
financial development is essential for reducing income inequality. Moreover, there
is no doubt that financial development plays a key role in sustainable economic
growth and development.

FINANCE AND GOVERNANCE

There must be a sound legal system to generate trust because this affects the
borrowing and lending behavior of individuals and firms. The issue of insecure
property rights in a firm because of insiders creates weak trust for minority
shareholders. Effective corporate governance is the examination of the control of a
company as exercised by its directors. The directors of public companies are
accountable for their actions to the company shareholders.

The separation of the chief executive officer and chairman positions

emphasizes the independence of the chairman of a company. There is a shared
recognition of the benefits of an independent governing body, especially in situations
of conflict of interest. Nevertheless, there are different views on the adequate
number of independent members across countries. In Oman, the Philippines, and
Thailand, most members should be non-executive with at least one-third being
independent according to their governance codes. With respect to the rights and
equitable treatment of shareholders and key ownership function, the Philippines goes
beyond the standard set by the Organization for Economic Cooperation and
Development (OECD) Principles and promotes a vote by proxy and use of electronic
means to facilitate shareholder participation in general meetings. Like many
developed countries, Brazil, the Philippines, South Africa, Malaysia, Taiwan, and
Thailand have issued a stand-alone stewardship code dedicated entirely to the issues
of institutional investors and other intermediaries in detail. The Philippine code
encourages a governance body to put in place policies, programs, and procedures to
encourage employees to actively participate in the realization of the company's goal
and management. Furthermore, the country opted for the predominant “comply or
explain” approach promoted by the OECD principles that combine voluntary
compliance with the mandatory disclosure of the company situation. Companies thus
do not have to comply with all the code provisions necessarily but must indicate and
explain their reason for noncompliance.9

MICROFINANCE
 Microfinance is defined as a range of financial products (loans, savings/cheque
accounts, insurance, etc.) focused on low-income individuals who have generally
been overlooked by traditional financial service providers. They have been neglected
by or denied access to mainstream financial institutions because of the perceived
risk or relatively low balances/high transaction accounts to maintain.10

The poor usually are subject to low, irregular, and unpredictable income flows
and their needs vary from time to time. The usual pecuniary (or in-kind) are sourced
from family, friends, or remittances. Microfinance is available as well, like the
rotating savings and credit association (ROSCAs), microlenders, store credit, and
money lenders.

Microfinancing has been directly related to the economic growth of a country.

In a study by Sainz-Fernandez in 2018, it was found that the degree of economic
growth affects the relationship between the financial sector development and
microfinance activity. When the economic growth is high, the development of the
financial sector positively influences the activity of microfinance sector.
MICROCREDIT
One of the many financial tools today is microcredit. These are ways of
improving access of the poor to a variety of financial services, including
microsavings and micro insurance. Microcredit does not require collateral,
relatively because of the value of the loan. It may be borrowed one time or on a
recurring basis, depending on when a need arises. Interests on microcredits are
relatively high, sometimes as much as 35% per annum or higher, but these
organizations, especially the successful ones, do not allow individuals to borrow
more than they can afford to repay.12 The proponent of microcredit is the Nobel
Prize winner and awardee of the Indira Gandhi Prize for Peace, Disarmament and
Development, Muhammad Yunus, PhD, believing that poor people will repay loans
given the opportunity to commercialize their ideas, making microcredit a viable
business model.13
MICROSAVINGS
The idea of pooling resources is not new in terms of savings for Filipinos.
Group cooperation among individuals is inevitable as well as the desire to help one
another in times of need. One example of microsavings that is prevalent today is
the rotating savings and credit associations (ROSCAs). They are informal financial
institutions that exist worldwide, in which all participants contribute to a common
fund and take turns to receive a return. ROSCAs are common in developing
countries and among migrant groups in developed countries.14 In India, they call
their version of ROSCAs as chit fund15, Susus in Nigeria and Ghana, tontines in
West Africa, pasanaku in Bolivia, hui in China, arisan in Indonesia, and, of course,
paluwagan in the Philippines.

There are two common types of ROSCAs: the random ROSCA and the auction
ROSCA.The first ROSCA is familiar to the regular paluwagan of Filipinos, wherein a
fund is formed by contributions of those who agreed on the microsavings and
every agreed time, they would take the pooled amount. For example, Estela,
Adelaida, Luzviminda, and Merlina agreed to contribute P5,000 each, and when
brought together would amount to P20,000.In the span of four months (let us just
say) each of them would receive P20,000 every month, usually done at random
draw lots. They do not need to wait for weeks to receive 20,000 except for the last
one in the paluwagan.

The second type of ROSCA is the auction ROSCA,wherein a bid is tendered by

those who want to pool their money. The one who bids the highest would be the
first to receive the total amount, and so on. Auction ROSCA allows those with
urgent needs to receive funds earlier than those with less urgent needs. However,
the bid amount will be deducted from the total amount to be received by the
members of the ROSCA.Using the same example in the previous paragraph,
Merlina bid ₱500 and Estela P1,000. The highest bidder is Estela;therefore,she will
be the first one to receive the total amount by ((P20,000-P1,000),i.e.,19,000 and
Merlina would receive in the next month, the amount of (₱20,000-
P500)i.e.,19,500, the savings of P1,500 would go to the one managing the
collection and Adelaida and Luzviminda would have to draw lots for the third and
fourth recipients of the fund.

ISLAMIC FINANCE
A well-functioning Islamic financial system promotes economic growth. In a
study made by Suseno et al. in 2018, it was found that macroeconomic factors, the
level of employment, and GDP per capita have the most significant influences on
financial inclusion in Islamic banking countries. Other non-economic societal
factors such as information technological advancement and corruption level do not
significantly influence financial inclusion.

The Islamic finance model has its foundation and origin in the Koran and in
the sunna (the sources of sharia, i.e., the Islamic law). Its application (except for a
few cases) is bound by a conventional body of rules and regulations as well as the
historical, social, and economic context of the country (Muslim and otherwise) in
which the model has been implemented.

In the Gulf Cooperating Countries (GCC), there is a direct relationship

between adopting Islamic finance and the economic growth of its member
countries. The performance of their banking institutions has contributed to the
economic growth through induced financing activities. Managers of the Islamic
banks have an understanding of how their institutions could improve economic
performance as it reduces the severity of the financial crisis by
avoiding major weaknesses of the conventional banking system.

The Philippines, as a predominantly Catholic country, would contribute mainly

to its Halal industry to address the international system of Islamic finance. In a
study made by Martin et al. published in 2020, it showed that the knowledge of
Halal concept makes the respondents of the said study agree more with the active
role of Islamic finance. It provided insights to the main stakeholders, and it can be
strategically used to foster adequate synergy between Islamic finance and the
development of Halal tourist products to specialize in a more sustainable tourism.
This would eventually contribute to the economic growth and development of the
country.
Halal means literally, that which is permitted or prescribed, primarily refers to
dietary restrictions that Muslims are expected to follow. Halal products are in great
demand by consumers all over the world.
 CHAPTER 10
FOREIGN TRADE

LEARNING OBJECTIVES

In this chapter, you will be introduced to foreign trade as a factor

contributing to economic growth and development. Specifically, this will help
you:

1. define foreign trade and its relationship to economic growth and development;

2. discuss the history and fundamental concepts of international trade;

3. explain the benefits of foreign trade to economic growth and development;

4. understand some risks of trade to a private firm;

5. elaborate on the effects of the introduction of a world price on market equilibrium;

6. discuss foreign trade in Asia and the ASEAN;

7. discuss the article, "Trade in Goods Outlook in Asia and the Pacific 2020, in

economic lenses;"

8. recommend possible steps to improve the country's foreign trade for economic

development; and

9. understand foreign trade at work in the eyes of a practitioner in foreign trade.

182 Economic Development

LOOKING BACK
In Chapter 9, we discussed the roles of finance in economic
development, as follows:(1) link the savers and investors; (2) screen and
monitor investments; (3) smoothen consumption; (4) manage risks; and (5)
manage payment systems. Financial development has been considered an
efficient mechanism for sustainable growth and development of emerging
markets in the past decades. Subsequently, we appreciated the importance
of a sound legal system that may affect the lending behavior of individuals
and firms. We discussed the environment of corporate governance in the
country today. The poor are usually subject to low, irregular, and
unpredictable income flows and their needs vary from time to time. There is
a need to address this by microfinancing. This has been directly related to
economic growth of a country. Furthermore, we explained what microcredit
and microsavings are. We also elaborated on some examples of microsavings
like the concept of rotating savings and credit associations (ROSCAs),
paluwagan of the Philippines. Lastly, we appreciated that a well-functioning
Islamic financial system promotes economic growth. In the Philippines, there
is synergy between Islamic finance and the development of Halal tourist
products as a way to sustainable tourism and eventually contribute to the
economic growth and development of the country.

INTRODUCTION
Foreign trade is the exchange of goods and services between countries.
However, the dynamics of trade are highly complicated as there are a lot of
risks involved, but of course, the reward to reap when it is a success. This
economic activity started for centuries, even before history was written. Early
people exchange goods for a different variety of products; we know it as
barter, which some of us are still doing nowadays, especially during the time
of pandemic, 2020 and 2021. The Greek civilization and the Roman Empires
used to trade with their nearby empires and so as the Chinese (Middle
Kingdom) to the world. In Chapter 6, we discussed that a boom in the global
economy is now led by Asia in terms of biotechnology, communication,
transportation, and production of goods and services. Countries in Asia are
aiming to increase their exports and attract more foreign direct investments
(FDIs) to alleviate poverty, improve social reforms, increase life expectancy,
and of course, improve the quality of life. Technological innovations led to
globalization and made the world seem borderless in terms of all forms of
trading. As believed, one country cannot be self-sufficient, does not have
everything in the world, and must exchange for another product, even for
North Korea.

HISTORY OF FOREIGN TRADE

In this chapter, we will start with the concept of mercantilism that
started toward the end of the seventeenth century. Mercantilism valued
balance of trade, exports given to a foreign country must, at any time,
exceed the imports, if not equal.

In the eighteenth century, Adam Smith wrote a book, The Wealth of

Nations, the time of liberalism emphasized the role of specialized production
to supply the highly increasing demand for consumption. This led to David
Ricardo's theory of comparative advantage, wherein each country specializes
in a particular product or set of products and import everything else for
consumption. The main factor that pushes international trade is a
comparative advantage, a concept by David Ricardo. A country has a
comparative advantage in the production of goods and services if that
particular country can produce
the same at a lower opportunity cost than other countries. In the year 1913,
gold and other precious metals were considered a medium of exchange; a lot
of countries considered it valuable and made it possible to trade much easier
despite the borders.
 David Ricardo
(1772-1823)A .
classical economist
best known for his
theory on wages
and profit, the
labor theory of
value, the theory
of comparative
advantage, and
the theory of rents
The League of Nations organized the World Economic Conference in
1927,masterminded the multilateral trade agreement between nations,
and set the regulations to keep up with the ever-evolving international
trade. Today, profitability is maximized through efficient production and
distribution, as well as exchange, by the use of comparative advantage
and regulations that are in place to ensure seamless business
transactions beyond borders. Governments always sought to manipulate
foreign exchange activities to favor their own economy, which is just
reasonable.

CONCEPTS OF FOREIGN TRADE

Households and firms around the world constantly change their demand
for goods and services that may not be available in their country; hence,
there is a need to acquire these products in exchange for its own capital,
goods, and services. In fact, in the computation of the GDP, we include a
component of international trade that is net exports, the difference between
exportation and importation, and the balance of payments. When a country
exports more than its imports, there is a trade surplus, while when there are
more imports than exports, there is a trade deficit. The balance between all
payments out of a country within a given period and all payments into the
country is an outgrowth of the mercantilist theory of balance of trade.
Balance of payments includes all payments between a country and its trading
partners and is made up of the balance of trade, private foreign loans and
their interest, loans and grants by governments or international
organizations, and movements of gold. For example, the Philippines is one of
the leading suppliers of business process outsourcing services in the world.
We may have more skillful individuals who can do the job in terms of
language and technical knowledge, specifically in voice-based services, for
example, call centers.

Another concept in international trade is where the foreign currency is

being traded and that is what we call the foreign exchange market. There is a
currency appreciation when a currency increases in value compared to
another currency, while there is currency devaluation when a currency
decreases compared to another currency. The term "dual exchange rate"
refers to a situation in which more than one exchange rate applies between
one currency and another. The term arises most often when a country's
authorities establish one exchange rate for certain transactions involving
foreign exchange/currency and a second rate governing other transactions.
Many countries in Europe and the developing world use a fixed exchange
rate for commercial (current account) transactions and another rate, either
fixed or floating for other (e.g., financial account) transactions.

A prevailing price of a good in the international market is called the world

price. This can be the basis of the decision to import and export when the
domestic price of a good is higher or lower than the world price, hence,
maximizing the cost to acquire the specific good.
GAINS FROM TRADE
It is undeniable that there are a lot of benefits to international trade. We
can use electronic devices, wear imported clothes, eat fruits and vegetables
that are not locally grown, and so forth. These are some of the perks of
foreign trade.

Production Costs. Raw materials in certain countries are cheaper than

the others making the production costs lower. For example, China is able to
maximize the economies of scale of the mining and light industries thereby
lowering the production costs making the price that is passed on to
consumers comparatively low.5 It is true, however, that not all industries in
China are able to optimize economies of scale, and, in fact, it is currently
going down, according to the same study.

Competition. The liberalization of trade and investment stimulates

healthy competition. There are two main reasons for an examination of the
relationship between trade and competition. First, there is an increasing
recognition that the benefits of international trade liberalization may be
negated by domestic measures inimical to an open, competitive market
environment. Second, there are cases where the use of either trade policy or
competition policy could lead to differing results, depending on which policy
was given priority.

In a highly competitive open market, prices are low because these

business entities tend to compete with each other's prices and quality of
products. In a monopolistic market, however, prices are at the discretion of
the producer as the sole seller of the product, which makes it more expensive
for the buyers. Moreover, production processes become more efficient,
always innovating on new ways to produce the same products at a much
cheaper cost, thereby improving the existing processes and achieving the
optimized result. It may also be true that in the pursuit of looking for more
efficient ways to produce the product, they may come up with an eco-
friendlier technique, for example, lowering the consumption of non-renewable
energy.

Product Variation. Some people in less developed countries enjoy the

benefits of electronic devices and machines like computers, mobile phones,
home appliances, etc., even if they are not producing them because of the
foreign trading. This somehow makes life for them easier and increases their
standard of living. In addition, products that are available depending on the
season may be accessed any time of the year as they can be supplied by a
country that is not affected by seasonal changes.

Surplus Market. This benefit is particularly for those producer countries

of agricultural products or other perishable goods that may have surpluses
and would be willing to exchange these for other products that are useful to
them. For example, a surplus of tomatoes in Indonesia may supply the
deficiency of the same good in Mongolia, where tomatoes are not grown year-
round because of the weather. There is almost always a country that needs
the surplus products of another country.

Market Efficiency. Seasonal fluctuations of products affect some

companies that may lose the opportunity to do business when their product is
in low demand. For example, the demand for winter clothes. There must be at
least one country that needs this good, even if it is not winter in the home
country, like the weather seasons of the United Kingdom and Australia or
South Africa. It may be summer in the UK but winter for these countries and
may be demanding for warm clothing. This manages the risks of losses of
seasonal fluctuations and enjoys profit because of international trade.
 RISKS OF FOREIGN TRADE
There are benefits and risks from foreign trade. These are some of the
risks that
might be encountered in foreign trading by private trading firms:

Buyer Risks. It may be challenging to

start international trade with the first
client;
trust will always be an issue as the
possibility to be scammed is great.

Seller Risks. Reputation may be

compromised as two factors must always be
met, the volume and the distance of delivery. Hence, the quality as well as the
quantity of the products must always be met, agreement to always be adhered
upon.
Figure 10.2.Benefits and Risks of Foreign Trade

Third-party Risks. Failure to honor buyer-seller agreements is one of the

risks in foreign trade. In cases of losses of products in transit, the believed
insurance may not cover all expenses.

EFFECTS OF FOREIGN
TRADE
Generally, world price is
the price of a product set to
other countries except for the
price in own country.' We
tend to export goods and
services with domestic prices
lower than the world price,
and import goods and
services where the local price
is higher than the world price.

In Figure 10.3, we can

see that domestic supply and
domestic demand meet at a
point of agreement that is the
equilibrium without trade.
However, when we enter free
trade, a world price
is set, and the new equilibrium demand and supply are being set. From the
consumers' point of view, the price tends to go down to meet the world
price, increasing the quantity demanded, whereas, the price of supply
automatically is set to the world price, decreasing the quantity supplied. In
Figure 10.4, we can see the total domestic consumption, the quantity of
importation, and the difference in the domestic production, Qp-Q(with free
trade). Figure 10.4.Tariff on Foreign Trade

In the imposition of a tax

on import, known as tariff,
the world price increases
by the amount of tariff.8 It
changes the equilibrium
demand and supply. For
the consumer side, as the
 price increases, the quantity demanded after tariff decreases, whereas for
the domestic supplier side, as the price increases because of tariff, the
quantity supplied also increases. The importation is the difference between
the quantity demanded and the quantity supplied after the imposition of the
tax. The shaded rectangle represents the tax revenue that is collected by the
government that may be used to finance public goods and services.

A tariff has implications that surely affect the welfare, although it may not be
true always that it benefits both domestic consumers and suppliers. Tax basically
increases prices to the consumers, hence demand decreases and this makes a
deadweight loss, an economic inefficiency as tariff creates a new equilibrium
point.° It also diverts production from foreign producers who may be using low-
cost production to domestic producers that may be using high-cost production
and this wastes resources.

TRADING IN THE ASEAN

The Association of Southeast
Asian Nations (ASEAN) seems to
be doing good in the net exports
of goods and services as it is in
an increasing trend before the
pandemic. The services sector
that is mainly traded by the
ASEAN worldwide is
manufacturing services,
maintenance and repair,
transport, travel, construction,
insurance, and other financial
services.11 In 2015, the ASEAN
Economic Community or the AEC
was established to allow free
movement of goods and services
among its member countries. Figure 10.5. Philippine Exports.by Major
This has led to the growth of the Partner Country
trade bloc. The ASEAN Trade in
Goods Agreement (ATIGA) allows
Brunei, Indonesia, Malaysia, the
Philippines,Singapore, and
Thailand to eliminate intra-ASEAN
import duties on almost all of
their tariff lines ,while reducing
import duties to 0-5% on almost
all tariff lines of Cambodia, Laos,
Myanmar, and Vietnam. The
ASEAN is composed of Brunei,
Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the
Philippines, Singapore, Thailand,
and Vietnam.

The three additional East Asian members of the ASEAN plus three are
China, Japan, and South Korea, with the addition of some Oceanian
members of ASEAN plus six, Australia and New Zealand.
ASIAN TRADING WITH THE PHILIPPINES
In April 2021, bulk of the Philippines' exports went to the Asia-Pacific
Economic Cooperation (APEC) member countries by $4.84 billion, then East Asia
at $2.88 billion, and the ASEAN at $956.67 million. It is then followed by exports
to the European Union and the rest of the world by economic bloc. At the same
time by region, the top geographic region is Eastern Asia, followed by
Southeastern Asia, North America, Western Europe, and the rest of the world, as
per Figure 10.6.
At the same time, China leads the countries in which the Philippines exported
products by $1,036.2 million, followed by the USA, $1,026.8 million, Hong Kong
by $875.2 million, Japan by $847.9 million, and then Singapore, Thailand,
Germany, Korea, Germany, Taiwan, Netherlands, and other countries.

Figure 10.6. Philippine Exports by Geographic Location

 East Asia Free Trade Philippines-Canada ASEAN-Hong
Area FTA Kong,China FTA
(ASEAN +3)
ASEAN-EU FTA Philippines-Mexico ASEAN-People's
FTA Republic of
China
Comprehensive
Economic
Cooperation
Agreement
Comprehensive Philippines-Chile FTA ASEAN-Australia and
Economic New
Partnership for East Zealand FTA
Asia
(CEPEA/ASEAN+6)
Japan-Philippines
Economic
ASEAN-Pakistan FTA India-Philippines PTA
Partnership
Agreement
ASEAN-Eurasian Regional Philippines-European
Economic Comprehensive Free
Union FTA Economic Partnership Trade Association
FTA
Free Trade Area of
ASEAN-Canada FTA Philippines-EU FTA the Asia
Pacific
Philippines- Republic of Korea- Philippines-US Free
Taipei,China Philippines Trade
Economic FTA Association
Cooperation
Agreement
Australia-Philippines ASEAN Free Trade Pakistan-Philippines
FTA Area FTA
ASEAN-India ASEAN-Republic of ASEAN-Japan
Comprehensive Korea Comprehensive
Economic Comprehensive Economic Partnership
Cooperation Economic
Agreement Cooperation
Agreement
PHILIPPINES'BILATERAL AND MULTILATERAL TRADE AGREEMENTS IN
ASIA

Third-wave free trade agreements refer to the free trade agreements

concluded since the late 1990s. Some say that what distinguishes them from
earlier agreements is that in many cases, they are provisions on competition
policy, protection of intellectual property rights, government procurement, etc.14
The Philippines has a number of trade agreements with other countries around
the world. Here are some of the free trade agreements (FTA)that the country has
some level of bargain that may be under study or consultation.
 CHAPTER 11
FOREIGN DIRECT INVESTMENTS

LEARNING OBJECTIVES

In this chapter, you will be introduced to foreign direct investments as a

contributing factor to economic growth and development. Specifically, this will help you:

1. discuss foreign direct investment (FDI) and its forms and types;

2. contrast the advantages and disadvantages of foreign direct investments;

3. simplify the pragmatic approach to FDI;

4. elaborate the impacts of FDI to the country and the ASEAN region;

5. create an infographic on FDIs;

6. appreciate the implications of the FDI Multinational Corporation (FDI-MNC) to the

country's economic development; and

7. understand foreign direct investment at work in the eyes of a professional in an

MNC.
 LOOKING BACK
We were introduced to foreign trade in relation to economic growth and
development in Chapter 10.A brief discussion of the history of foreign trade and
the early concepts of trade ascended the many complicated processes in
international exchanges of goods and services. We also discussed the ideas of
the balance of trade, barter, comparative advantage, distribution, and
multilateral trade agreements. Subsequently, we understood the benefits of
foreign trade, how we are able to enjoy a variety of products at a reasonable
price despite not having the resources to produce such. Some of the benefits
are lower production costs and encouraged competition, thereby enhancing the
quality of the products and decreasing the price. There are a lot of choices of
products in the market, the positive effects of surplus market, and eventually
increasing market efficiency. From the point of view of individual firms, there
are buyers, sellers, and third-party risks attached to foreign trade. Furthermore,
we elaborated on the effects of the INTRODUCTION of world price and tariff on
the market equilibrium. Lastly, we discussed some examples of foreign trade in
the country, bloc, and region, focusing on the country's bilateral and
multilateral trade agreements in Asia.

INTRODUCTION
Foreign Direct Investment (FDI) is measured to be one of the key
components in the global economic integration (OECD, 2002). The idea of FDIs
emerged through globalization. FDI usually benefits countries by establishing
their operations or acquiring tangible assets or even stakes in local businesses.
This chapter includes the forms and types of FDIs, their advantages and
disadvantages, and the FDI in the country and the ASEAN region.

FOREIGN DIRECT INVESTMENT

When a firm decides to invest in another country, usually a Multinational
Company (MNC), either to expand its reach or to merge with existing local
corporations, it is called foreign direct investment. FDI is a long-term capital
flow or investment in which a non-resident entity has a significant management
control of voting stock (10% or more) over an enterprise in a foreign or host
country. Unlike short-term capital flows, FDI is not immediately susceptible to
reversibility. The relationship between the said countries is investor to
investment enterprise. There are a lot of MNCs that have foreign direct
investments in another country. The main goal is to optimize earning by
minimizing costs that may and may not be advantageous to the investment
enterprise country. Some of the industries that have FDIs are energy,
pharmaceutical, telecommunications, entertainment, consumer products,
computer, etc.
In the Philippines, we can easily name some of the MNCs operating such as
Google, Accenture, Hewlett Packard, Proctor and Gamble, Palo Alto, Viber,
Regus, HSBC, Citibank, Thomson Reuters, and many more.3

FORMS AND TYPES

There are two main forms of FDI, the Greenfield Investment and the
Brownfield Investment. The Greenfield Investment is when an investor MNC
starts a new venture in a foreign country by constructing new facilities to operate
from the ground and up; the purpose is to create a long-term presence in the
country, for example, McDonald's and Starbucks. Greenfield investments are
undertaken by a "start-up" (i.e., new) business and by existing firms as a means
of expanding their activities. Establishing a new plant may be preferred to
inheriting existing plants through takeovers and mergers because it gives the
firm greater flexibility in choosing an appropriate location.

Another form is Brownfield investment, that is, purchasing an existing

enterprise, for example, Tata Motors of India purchasing Land Rover and Jaguar,
 where there are already certain capacities and infrastructure in the location. This
type of FDI provides
an opportunity to establish and test
new
sustainable development practices.
We can categorize FDIs into three types:
horizontal FDI, vertical or forward FDI,
and
backward vertical FDI. Horizontal FDI is
when the parent company carries out the
same activities in the enterprise. Forward
FDI is known for the parts of the
production chain that are done abroad,
for example, Toyota acquiring

Figure 11.2. Costs vs. Benefits of FDI

distributorship in the USA. Backward FDI
is an international integration where
materials
are sourced abroad, like acquiring a
rubber plantation to be used for the
rubber needs as materials for the MNC. It may also be known as a conglomerate
type for the business which is considered not related to the business in the home
country.

ADVANTAGES AND DISADVANTAGES

There are many ways that an FDI fosters economic development in a country.
We can sum it up into four main benefits. First is the effect of the transfer of
economic resources in terms of capitalization, technology, both hardware and
software, and management skills in terms of operating in a new environment.
Second is the positive effect on employment, whether directly or indirectly. Hiring
employees from the investment enterprise country would certainly decrease the
unemployment rate, while it can also contribute to the spending population and
boost consumer spending that is advantageous to the per capita GDP. Moreover,
the employment of other suppliers in the country helps build both the MNC and the
economy. Third is the stabilizing effect on the balance of payments. FDls are
considered substitutes for imported goods and services. Last is the constructive
effect on competition, more choices to the consumers, which increases innovation
and generally decreases prices, more capable of spending, thus, helps develop the
economy.

If there are benefits of FDIs, there are also costs. A sudden withdrawal of the MNC
from its enterprise country, which may have been too dependent on them, may be
considered a failure to its economy in terms of employment and market balance. There
are even more risks in operating within multiple governments that may be considered
very risky, especially in sudden changes in a political atmosphere. There are FDIs that
target primarily the host country's domestic market and thus do not increase exports, a
possibility to hinder local firms to become exporters and even neglect the host
country's dynamic comparative advantages by centralizing on cheap labor and raw
materials.

PRAGMATIC APPROACH TO FDI

Approaches toward FDIs providing a certain percentage of
vary from country to country. The the employees to be locals.
focus, however, is the same, that Furthermore, performance
is optimized benefit to both the requirements to the MNC may take
investor and the investor the form of restrictions to product
enterprise. On the view of the contents, technology transfer, and
investor enterprise, they have the even a condition to participating in
automatic inclination to restraint top-level management decisions.
ownership to locals, hence
 FDI Inflows by Country in %, 2019

Figure 11.3.FDI Inflows by

Country, PSA 2019

Today, China has been successful in their FDI in other countries, for example,
the initiative, One Belt One Road (OBOR) infrastructure projects to interconnect
trade in Africa, Asia, and some parts of Europe. OBOR conforms to the trends of
world economic globalization, and also meets the requirements of the
development of a global governance system.8

FDI IN THE PHILIPPINES

According to the PSA in 2019, the

vast majority of FDls in the Philippines
is in the manufacturing, real estate,
tourism, transportation,
financial/banking, and a promising
sector in e-commerce, biotechnology,
business process outsourcing,
education, energy, and retail. The
industries that have a considerably
fewer opportunities are mass media,
advertising, public services, marine
resource management, and small-
Main Invested Sectors in %, 2019 scale mining.
Figure 11.4. FDI Main Invested Sectors
With a population of over 108 million people, the Philippines has a large market to
attract FDIs. It includes a strong workforce that is skilled and considers English as the
second language. Apart from these, the country effectively assimilates with the
customer service management of MNCs through its BPOs. On the other hand,
comparing the Philippines witch its neighboring countries, there is an issue with
communications and transportation, mainly because of its archipelagic nature. The
country may have an unstable partisan system, making the politics
insecure.10According to some international reports, the Philippines has a high level of
corruption in different aspects of governance, which may be detrimental to foreign
direct investors. "Moreover, there has been a long-time inequality in economic
development per region and decades of security issues in the southern part of the
country. Philippine government recognizes the importance of FDIs in the economic
growth and development, especially now that the ASEAN is becoming more active in
the global business participation. Liberalization of legislation leads to a more open
investment, granting investors more incentives like more freedom of establishment,
freer acquisition of holdings, and more economic free zones. Furthermore, there is a
commitment to improving communication and transportation by building roads,
bridges, railways, and
 a modern transport system, introducing more competitions in
communication, thereby making the speed of Internet faster and cheaper.
Recently, the country allowed changes to the Foreign Investment Negative
List(FINL), for foreign MNCs to have 100% investment in Internet businesses.

Figure
11.5.Top 10
Inward FDI to
ASEAN by
Economic
ector,ASEAN
SDPO

Currently, the Philippines provides incentives in the form of tax

exemptions and reliefs, as well as custom facilities and administration. For
example, export businesses enjoy preferential tax treatments that are situated
in ecozones under the Philippine Economic Zone Authority (PEZA).

ASEAN FDI
From Figure 11.6,Inward FDI to ASEAN (in $ millions), most of the countries
increased the inward FDI from 2014 to 2019 data, except for Thailand, Lao PDR,
and Brunei Darussalam. The top three countries that received the largest chunk
are Singapore, Indonesia, and Vietnam; the least three are Brunei Darussalam,
Lao PRD, and Myanmar. The Philippines increased the inward FDI by 32% from the
2014-2018 data. The economic sectors that benefited the most from the inward
FDIs to the ASEAN region are shown in the graph on the next page. There has
been a substantial increase in manufacturing, financial and insurance,
construction, human health, and social work, and a considerable decline in the
wholesale/retail, agriculture (AFF), and mining and quarrying from the 2014-
2019data.
ASEAN Statistics Portal, "ASEAN Statistics Data."
 CHAPTER 12
FOREIGN AID AND REMITTANCES

LEARNING OBJECTIVES

In this chapter, you will be introduced to foreign aid and remittances toward economic
growth and development. Specifically, this will help you:

1. discuss foreign aid;

2. relate the Marshall Plan as an early form of foreign aid to world economic growth

and development, with emphasis on the European economy;

3. critique the contributions on peace and security, public health, remittances, and

other forms of charity to economic growth and development;

4. discuss the USA's foreign aid policy to ASEAN in a pandemic-stricken world;

5. analyze articles on the USA aid to the ASEAN amidst a health crisis;

6. recommend safety measures to ensure that aid is received by the agreed

recipients; and

7. understand remittances and how they are experienced in the eyes of an Overseas

Filipino Worker (OFW).

LOOKING BACK
Chapter 11 started with the definition of FDI involving MNCs seeking to
expand their coverage to other territories through greenfield or brownfield
investments. We differentiated horizontal, vertical or forward, and backward
FDIs. Moreover, we contrasted the advantages and the disadvantages of FDIs.
As a summary, the transfer of economic resources, positive effects on
employment, stabilizing effects on the balance of payments, and constructive
effects on competition that it creates are all considered benefits. Otherwise,
FDI can also pose its dangers, such as over-dependency on the FDI (when it
pulls out, it will lead to a drastic blow to the economy) and the tendency of
FDI MNCs to abuse labor and the environment in the long run, which is the
most feared in this kind of investment. Moreover, we had a brief discussion of
the pragmatic approach to FDI and elaborated on the experience of the
country to FDI inflows and the main sectors tapped by FDI.

INTRODUCTION
The idea of foreign aid started after the Second World War, especially in
Europe. There was a need to rebuild a severely devastated region that must
be restored by other countries like the United States of America. Hence,
international organizations were formed to start taking back with what was
lost. In 1944, with the aim of rebuilding and starting the reconstruction of
Europe, the World Bank was formed, followed by the founding of the United
Nations in 1945 with the intention to maintain and secure peace among
nations. In the same year, the International Monetary Fund (IMF) started to
stabilize and oversee the international monetary system. In 1944, an
agreement was signed in Bretton Woods, New Hampshire, USA that created
the IMF. It set the rules for exchange rate behavior and created a pool of
common currencies, thereby making the IMF the world's “lender of last
resort."2

In this chapter, we are going to discuss foreign aid-the beginning of this

worthy goal with the Marshall Plan, considering the economic impact on
peace, security, and public health-and other sources of foreign aid but in
different form like remittances and international charitable activities.

FOREIGN AID
Foreign aid is the donation or transfer of help in the form of money,
goods, and services to a country that needs it. This is regardless of the
economic status, depending on the purpose of the aid. In general, it aims to
foster peace and security among nations, assist in the growth and
development of one country, enhance the health and education systems,
share technological advances, protect the environment, adjust the effect of
inflation, and help in the time of disasters like earthquakes, tsunamis, and
wars. International aid, or official development assistance (ODA), comprises a
wide range of financial and nonfinancial components. These may take the
form of cash transfers, as well as grants of machinery, technical advice, and
analysis and assistance in capacity-building support.

CONCEPTS OF FOREIGN AID

Foreign aid is there to promote
economic and social development, as
it tends to increase a recipient bag of
resources such as money, food,
medical supplies, etc. There are two
forms of foreign aid, one that is
officially made in between countries or
more popularly known as the official
development assistance (ODA) and
 the one that is done usually through nongovernmental associations (NGOs)
and unofficial aids. An example of foreign aid is humanitarian aid. It helps
in managing short-term sufferings,
providing assistance to those who are affected from a recent typhoon or
hurricane,
flooding, earthquake, and other disasters. Figure 12.2. Effect of Foreign Aid to
Investment and Capital. The more permanent aid is the development aid,
which is like long-term loans provided to build infrastructure programs. It was
discussed previously on the relationship of output and capital by the use of
the Solow Model. Foreign aid is pushed back to a steady state (S.S.) level of
investment that is equal to the capital if there is no improvement of
fundamental factors such as technological advances.

Foreign aid is not all the time “good" in the real sense of the word, at
least on behalf of the recipient country to some cases. This may encourage
more corruption, as government officials in some countries tend to use the
funds for their gains, like for re-election purposes. Because of foreign aid,
dependèncy becomes more evident, and effort for economic development
tends to be neglected. Think of a person who is supplied with help; his/her
basic necessities are met, and in effect, he/she would not want to find
employment. Long-term loans may hinder the real growth of the country
because there is still a promise to pay it back with interest, which would have
to be repaid in the future. Lastly, there can be an underlying motive in giving
foreign aid; it can be used to push for economic policies that may be
favorable to the donating country that may negatively affect the recipient's
own people's benefit. A study published in the African Journal of Governance
and Development in 2019 suggested that in general, foreign aid had a
negative impact on the African economy that has weak governance.5
Furthermore, foreign aid from the USA has a detrimental, negative impact on
the African economy compared to that of European Union (EU) countries.

MARSHALL PLAN
According to a 1947 speech made by George Marshall, who is one of the
recipients of the prestigious Nobel Peace Prize, "It is logical that the US
should do whatever it is able to do to assist in the return of normal economic
health to the world, without which there can be no political stability and no
assured peace. Our policy is not directed against any country, but against
hunger, desperation, and chaos. The United States under the leadership of
then-President Harry Truman signed the Marshall Plan, also known as the
European Recovery Program, which aimed to rebuild Europe that was
devastated by the war. Millions of people were killed or in famished
conditions, without food, clean drinking water, basic clothing, and shelter
simply because the production of these necessities slowed down and even
stopped in a lot of economies. Many infrastructures, buildings, bridges, roads,
railways, and ports were in unfortunate conditions if not totally damaged.
Europe was in dire need of help from other countries, hence, the Marshall
Plan.

A substantial 5% of the US GDP was allotted to this recovery program at

that time, mainly to restore production, boost and expand trading, and of
course, keep communism
from spreading in Europe. It was believed that salvaging these big
countries will eventually be beneficial to the US and the world. But not all
countries in Europe devastated by war were recipients of the said foreign aid.
Those who fought with the Axis power, such as Germany and Italy, as well as
the neutral Switzerland, received smaller amounts as compared to the
members of the Allied Powers.
 The European Recovery Program lasted for four years, but there are
some economists who believed that the impact of which was immaterial as
the aid was estimated only to be 3% or less of the national incomes of the
receiving countries. Nonetheless, it can be noted that the foreign aid helped
in surpassing the severity of the condition at that time.

PEACE AND SECURITY

There is a link between foreign aid in the form of food security and
peace, especially in some countries in Africa and South Asia.° A conflict-
sensitive development aid allows peacekeeping-activities and those that
reduce the inflation of an affected nation,hence fostering peace among the
people. Focusing on the core issue of the conflict like poverty,it may be
addressed by a push in the production of food by foreign aid, thereby
enforcing peace in that country. Since the creation of the United Nations in
1945, it has been their objective to maintain international peace and security
by deploying peacekeepers in various areas that are susceptible to conflicts.
The General Assembly complements the UN Security Council to sustain peace
and security. Foreign assistance awards by certain US agencies have reported
aid specifically aimed for peace and security, counter-terrorism, transnational
crime, and combating weapons of mass destruction. It is said that big
receivers of aid are associated states to somehow relate to the military
despite that aid is not military in nature.

PUBLIC HEALTH
One of the main goals of foreign aid is to eradicate certain diseases that
cause an economic disruption, like HIV-AIDS, malaria, and dengue, to name a
few. More about this topic later on in the chapter when we discuss, "The
United States and Southeast Asia in a COVID 19 World: A New Start."

As an active arm of the United Nations, the World Health Organization

(WHO)promotes the attainment of the highest level of health and safety. It is
the organization that directly responds to health emergencies worldwide, like
what we are experiencing: the COVID-19 pandemic. The World Health
Assembly is the decision-making body of the WHO led by member states of
the United Nations. They all unite to battle harmful diseases in a scientific
manner and come up with health management solutions to finally eradicate
the illness.

REMITTANCES
Remittance is the sum of money that is sent by a worker to his/her own
country, predominantly developing countries such as India, China, the
Philippines, and Mexico, among others. Some countries may even have
remittance as a huge chunk of their GDP like Nepal and some countries in
Eastern Europe. The advantages of remittances are quite obvious, like
contribution to the buying capacity of the families left behind, allowing them
to participate in economic activities like buying more goods and services. In
the 2019 Survey on Overseas Filipinos, the total remittance sent by Overseas
Filipino Workers (OFWs) during the period April to September 2019 was
estimated to be ₱211.9 billion, sent as cash and in-kind, P157.9 billion of
which was cash and remitted through banks, money transfers, agency, local
office, and door-to-door or delivered by friends or co-workers. On average,
the remittances of overseas Filipinos amount to around 9% of the GDP of the
country, undeniably a material amount to sustain economic activities of the
Philippines.

However, some economists believe in the negative impacts of

remittances. They say, it nurtures too much dependency on outside money,
dis-incentivizes growth in the home country and recipient country, and may
negatively affect the vulnerability of the country to the global economy.
Another is the increasing cost of transferring funds from one country to
another that causes billions of dollars loss to the recipient country, although,
of course, the loss may be overcome by the income it represents.13 A
paradox like this is called The Dutch Disease wherein something that is
generally beneficial becomes an opportunity for negative exploitation and
may harm the larger part of the economy.

INTERGOVERNMENTAL NONPROFIT ORGANIZATIONS

We may consider some nongovernmental organizations (NGO's)1s and
inter-governmental organizations that foster the same aim in the nature of
foreign aid. These charitable institutions do similar activities as foreign aid by
the government, but the funding comes from predominantly private
investors.

The United Nations Children's Fund (UNICEF) is a social welfare

organization present in 192 countries and territories aiming to develop
children in developing and underdeveloped countries. Another example is the
International Red Cross and the Red Crescent Movement with 97 million
volunteers to address human suffering and help improve the health
conditions of those who are sick. The World Food Program is an organization
under the United Nations that is focused on hunger and food security. They
are also the biggest provider of school meals in impoverished nations.
Another example of a charitable institution is the Doctors Without Borders, a
French-based organization in conflict zones that treats the wounded in those
territories with endemic diseases.

These organizations are tax exempt in most countries around the world,
and their funding normally comes from a few investors who believe in their
goals that are mostly aiming for human development. However, we are
cautioned about the real intent of some institutions as some may be
fraudulent or at least poorly managed, which is such a waste of donation
funds. There are organizations like the charity navigator that serve as an
information guide to intelligent donating.
 CHAPTER 13
NATIONAL ECONOMIC POLICY

LEARNING OBJECTIVES

In this chapter, you will be introduced to some national policies that

affected economic growth and development. Specifically, this will help you:

1. review the business cycle and its implications to economic development;

2. appreciate some macroeconomic concepts and theories of economic

development;

3. relate taxation and its impact on economic growth;

4. elaborate environmental protection to economic development;

5. explain health economics, its categorization, and important issues to economic

growth and development;

6. discuss the economics of education to economic growth and development;

7. summarize the macroeconomic indicators of the country for growth and

development;

8. react to the article on the country's current macroeconomic indicators for

development;

9. recommend possible steps to improve on the macroeconomic indicators; and

10. understand national economic policy at work in the eyes of a government

executive.
 LOOKING BACK may directly or indirectly affect them and are
The idea of foreign faced with many
aid formally was
recognized after the
Second World War
international organizations alternatives while in the process.
such as the World Bank Understanding this whole dynamic is called
and the IMF were macroeconomics, the study of the economy as
established to start a whole.
rebuilding the damages,
Europe was the most badly In this chapter, basic macroeconomic
hit by the war, bringing the concepts and how they are applied to national
focus to the region in policies for economic growth and
terms of reconstruction development will be discussed. Topics include
and financial assistance. the economic cycle, taxation, environment,
Hence, we related the healthcare, and education. An article about
Marshall Plan as an early the Philippines' current macroeconomic
form of foreign aid to indicators and prospects for economic growth
revive Europe's economy. and a video about gender equality and
The World Bank, the United macroeconomics are the culmination of this
Nations, and the section.
International Monetary
Fund were established for BASIC MACROECONOMIC CONCEPTS
the main reason of giving Macroeconomics attempts to provide
aid to those in need. We enlightenment to these concepts, quality of life, by
discussed in Chapter 12 understanding the average enjoyment of
that the aims of foreign aid individuals, firms, and governments, measured in
terms of GDP. Macroeconomics makes us
are: to foster peace and
appreciate how much can be sacrificed to achieve
security among nations, to a certain level of quality of life in terms of money
assist in growth and to buy the everyday basket of goods. The
development, to enhance increasing or decreasing purchasing power of
health and education money to acquire these goods and services called
systems, to share inflation and deflation are also considered.
technological advances, to
advance environmental
protection, to help in In figure 13.2, we can see the business cycle that
adjusting the effects of is the
inflation, and to help in the
time of natural and man-
made disasters. In
addition, we analyzed the
contributions of foreign aid
toward peace and security,
public health, remittances,
and other organizations to
economic growth and
development. Finally, we
elaborated on the policy of
the USA on foreign aid in
the ASEAN region in the
time of pandemic of 2020- irregular movement of the real GDP in a cyclical
2021. motion.
Peak. The highest real GDP followed by an
INTRODUCTION economic boom, characterized by full employment
Individuals, firms, and of resources.
governments make
Trough. The lowest real GDP followed by a recession,
decisions about things that
characterized by low usage of resources.
Recession. Two consecutive
quarters of economic decline in To tackle the issues of inflation,
economic activity, characterized by unemployment, and the increasing interest rates,
increase unemployment. the government uses its fiscal and monetary
policies. A fiscal policy stimulates economic
growth and development by proper imposition of
taxes and subsidies that encourage (or
sometimes discourage) economic activity. Fiscal
expansion is when there is an increase in deficit,
Depression. Long-term downturn in
by decreased tax collection or increased
economic activity, characterized by
government spending, and fiscal contraction if
an economic slowdown and by
otherwise.
sustained fall in the economy in Essentially, the government's decision to
years, not juts quarters, for increase or decrease money in circulation, as well
example, the US Great Depression as the changes in interest rates for borrowings, is
of the 1930’s called the monetary policy. Although, there are
various government agencies that interact with
this (like the
Office of the President), the central
bank is the one that controls and
regulates the monetary policy of a
country. Figure 13.3 shows the trade-
off between inflation and
unemployment rate, which was
thoroughly discussed in
macroeconomics using the theoretical
Phillips Curve. In A.W. Phillips's
famous article "The Relationship
between Unemployment and the Rate
of Money Wage in the UK 1861-1957,"
in Economica, he argued that when
unemployment rate was low, the labor
market was tight and employers had
to offer higher wages to attract scarce
labor. At higher rates of
unemployment, there was less pressure to increase wages. When the
economy was expanding, firms would raise wages faster than "normal" for a
given level of unemployment; when the economy was contracting, they
would raise wages more slowly.

To review, we focus on the three functions of money, as a medium of

exchange, as a unit of account, and as a store of value.5 A financial market
is a place where buyers and sellers of money meet, agreeing on the price
and the quantity of money traded. Domestic money is traded with a foreign
currency in a foreign exchange market.

Below are schools of thought in Economics that will help us understand

some national policies that the government enforces in a country.

Keynesian Theory. Macroeconomic advocacy on more government

expenditures, lowering of taxes to pull out an economy from depression
Neo Keynesian Theory. The market is not self-regulating; hence, there is
a need to stimulate the economic growth by combining fiscal and monetary
policies.
Classical Economic Theory. It explains that an economy will result in full
employment in the long-run with the dynamic movements of value, price,
supply, demand, and distribution without government intervention.
Monetarist Theory. The most important factor that affects the economic
cycle is the changes in the money supply.
 Supply-side Theory. Free trade, lowered taxes, and decreased
government intervention are key to economic growth and development.
 TAXATION AND ECONOMICS
general, those who have more should be taxed more than those who
have less to balance the distribution of wealth among the population. Well, this
may be true to progressive types of taxes. Taxation has been a tool for
resource collection of a civilized society since the early times, like the tax
collection system in ancient Egypt and Mesopotamia. The Bible even mentioned
"tax collectors several times, deeming it inevitable to survive. In the history of
the Christian religion, Jesus said in the book of Matthew, “render to Caesar what
is Caesar's" may connote the necessity to pay the tax to the Romans.

In the Philippines, we are guided by a tax code in the management of

taxes. Taxes are divided into two categories, direct and indirect taxes. Direct
taxes are those imposed on properties and incomes and need no intermediary
in the collection. While in indirect taxes, sales and value-added taxes are levied
on goods and services by an intermediary, who may or may not pass the tax to
the consumers. It is believed that indirect taxes change market prices and
hence, contribute to market inefficiency. Demand for certain products
like hotels, leather goods, cigars, cigarettes, alcoholic drinks, gasoline, sugar,
and fat are
affected by luxury tax, sin tax, gasoline tax, sugar tax, fat tax, and carbon tax.

There is another categorization of taxes-how taxes are classified as regressive,

progressive, and proportional (although there are many classifications of taxes in our
National Internal Revenue Code). The main concern is the fairness of the allocation of
taxes to the rich and the poor that affects their incomes. Regressive taxes are imposed
across the board and take a negative impact on the poor, which might be
disproportionate to the rich tax payer. Imagine a 10% toll or license fee collected from a
person earning P60,000 a year from a person who is earning ₱2,400,000 per annum.
Another tax type is a progressive one; as the income increases, the tax rate increases,
or the use of the brackets. This is the opposite of regressive types of taxes, although, of
course, we have a reduction in the form of tax credits, exemptions, and some
deductions. The third one is proportional, wherein the same percentage of tax is
imposed on anyone, regardless of economic status. An example of this is the flat tax,
which is opposed by people because of the inequitableness of the amount paid for
taxes and its effect on the income that may disrupt the decision to invest, save, or even
donate.

Under the leadership of President Rodrigo Roa Duterte, the Republic Act
10963, otherwise known as the “Tax Reform for Acceleration and Inclusion Act"
or simply TRAIN law was signed. It attempts to reform the long-standing
inequity of the tax system by providing income tax cuts for majority of Filipino
taxpayers while raising additional funds to help support the government's
accelerated spending on its “Build, Build, Build” and social services programs.

Governments around the world impose taxes to raise money to return it to

the households and firms as services. It is said to promote the well-being of the
people and even protect them by providing services that may not be afforded
by individuals such as public safety, national security, and even health and
education. It is important to note, moreover, the concepts of budget surplus
and budget deficits. If the government collects more than it spends, there is
surplus and deficit, if otherwise.

There is no perfect tax system, as people are deemed to do imperfect

decisions, although there is an infinite attempt to do things seamlessly. A not
well-thought of tax law or a choice of a tax scheme by a government may cause
a great deal of upset to the people, eventually causing a rebellion or civil
disobedience. Remembering our history, one of the reasons the Filipinos
rebelled against the Spanish was the abusive tax collection, hence, the famous
"Cry of Pugad Lawin” when the Katipuneros led by Andres Bonifacio tore their
community tax certificates, “cedula,” as a defiance to the Spanish rule.
 Another example is the 1930's "salt tax" imposed on Indians by the British
rulers; they began to trade non-British salts in the form of civil disobedience
and led to overthrow the regime, among many reasons for rebellion, of course.

ENVIRONMENT AND ECONOMICS

Environmental goods such as clean air, clean water, and natural forests
and wildlife have economic value and are faced with environmental costs
while we are aiming for economic growth and development. Every day, we
are faced with choices to produce and consume, but undeniably to conserve
and sustain the economic activities of producing and consuming. A good
example of a government intervention to somehow balance the negative
externality caused by a market transaction is the carbon tax, which is a kind
of a Pigouvian tax, making it more costly for some firms to continue
operations. Creating "markets for the environment" is the aim of
environmental economics. Apart from internalization-which simply implies
the integration between those who produce and those who suffer from the
externality-the standard remedies to correct under-provision of environment
care are "Pigouvian" taxes (such as carbon taxes) and tradable “pollution
permits."11

Households, firms, and governments have the desire to grow and develop,
and the implication of this is a negative externality in the form of pollution to
the environment, may it be water, land, air, and more; hence, there is clearly
a market failure. No one owns the environment and taking care of it is quite
expensive, making the cost as one of the challenges that we face in
resolving the problem. One way to intervene is to introduce pollution taxes.
This makes it more expensive to create pollution as they are now being
charged.
expensive alternatives, as of the moment. Hence, we regulate in the form of
carbon tax.

There are two ways of addressing

this market failure: identify the source
or sources of the pollution and decrease
the supply and demand for these
sources. For example, the source of air
pollution may be the inefficient car
engines used by private individuals or a
factory that uses carbon as its energy
source. Decreasing supply may mean
offering a safer alternatives to carbon
like renewable energy such as solar or
wind and electric card for individuals.
However, these are expensive
alternatives, as of the moment. Hence we regulate in the form of carbon tax.

Government strategy for this issue is not actually to eliminate pollution

but to pollute less and partner with countries to have the same goal, as this
may mean nothing if it is done by one or two countries alone. There are four
strategies of the government addressing the issue of this negative externality,
and these are:(1) laws to allow specific levels of pollutants produced, known as
having permit markets; (2) price incentives for the use of renewable energy or
subsidies for using electric cars; (3) research for more efficient use of
alternative sources of energy and;(4) investment in technology that may be
used to reduce pollution.
 As mentioned earlier, environmental economics transcends boundaries. Hence,
there is a need for a transnational approach in dealing with pollution and climate
change. Another issue is overfishing or even destructive fishing in the Philippines which
may affect the supply of fish for the neighboring countries. Because of this, there are a
lot of international non-governmental organizations (NGOs), like the International Panel
of Climate Change (IPCC),that talk about and recommend solutions to this problem. On
a micro level, we also consider the rebound effect-the negative change in
behavior to improve on a small level but eventually cause to do more harm. For
example, an individual chooses a more economic car in terms of petroleum
consumption. Because

he/she is able to save income from the fuel, the decision to travel more is
apparent that may even be more detrimental to the environment. Multiply this
behavior to millions of car owners to better appreciate the negative effect.

The hope is that we continue to identify the sources of the environmental

problems and continue to give prescriptive or incentive-based solutions to
cutting the supply and demand of the root causes. In addition, we have
international treaties committing to reduce greenhouse emissions, addressing
climate change, and researching on the improvement of technologies and ways
to use the environment more efficiently as a marketplace. Negotiated in 1997,
the Kyoto Protocol set binding limits and targets on greenhouse gas emissions
in 150 countries but not the USA. Politically, a controversy in the said protocol
constituted a follow-up accord to the 1992 Rio Earth Summit, and in 1995, the
first formal steps toward Kyoto were taken by the USA. Under the Kyoto
Protocol, advanced industrial states are required to make reductions in six
“baskets” of gases within a five-year commitment period, 2008-2012.It was not
until November 2012 at the UN Climate Change Conference held in Doha that a
successor agreement to the Kyoto Protocol took shape when another
commitment period was set.12 To date, there are still disagreements with
certain provisions in the attempt to manage the world's environmental
problems.

HEALTHCARE AND ECONOMICS

The economic concerns in healthcare are the effectiveness, efficiency, and
fairness of outcome of the system in place in a country. We look closely at the
accessibility to hospitals, clinics, and private practice; the cost per person to
enjoy the benefit; and the quality of healthcare provided whether from a private
or public institution. There is an apparent concern about the quantity of people
who benefits from the healthcare system and the administrative costs in
managing the structure. Prevention is more cost-effective than treatment, ergo,
prevention is always better than cure. The focus for economic development is
the opportunity cost that is incurred in preventing or providing treatment to
healthcare problems when it could have been used for other economic issues
like education, technology, infrastructure, and so on.

Healthcare is a special type of market because the demand for its

utilization can never be known; we can never know when we need it until we
need it. Economics in healthcare
is characterized by health insurance. And these insurances may be provided by
a private
insurer to collect premium from individuals or from their employers.

We can categorize healthcare systems in four ways. The first one is a

single-payer system. All hospitals and clinics are private, but the government
pays for the services they render to the people; however, the costs for drugs,
dental care, and eyeglasses may come from private insurance or personal
savings. The second one is socialized healthcare system, where all hospitals,
 doctors, and consultants are paid by the government, as well as the basic drugs
and other services. The third is the private system, where the citizens are all
required to have a health insurance. The fourth category is a mixture of all of
these systems, like that of the USA and the Philippines.

In the USA, they have medical

insurance for the citizens who are
65 years old and up, called the
Medicare program; for those
below the poverty line, they have
what is called the Medicaid.
Medicaid was enacted in 1965,
under Title 19 of the Social
Security Act, to assist states in
paying

for the healthcare of the very Figure 13.5. Virtuous Cycle in

poor. Health Development
In the Philippines, there is the
Philippine Health Insurance
Corporation (Philhealth),
mandated to provide health
insurance coverage and ensure
affordable, acceptable, available,
and accessible healthcare
services for all citizens of the
country.

According to the PSA, by 2017, 66% of the population has any form of
PhilHealth insurance, both for the urban and rural areas, 24% of the citizens has
other forms of health insurance such as the Government Service Insurance
System (GSIS), the Social Security System (SSS), or private insurance.15
PhilHealth is a mandatory health insurer in the country that provides
comprehensive healthcare services from primary care to catastrophic situations
on the basis of eligibility, coverage, and specific diseases.

One important issue in healthcare systems is the existence of the “iron

triangle” or the mutually beneficial relationships of the Congress, government
bureaucrats, and the lobbyists in terms of health policy of the government. There
is a possibility that some members of Congress are concerned about re-election.
These bureaucrats are concerned with staying in their government positions and
the lobbyists to advance their clients 'interests, like the insurance companies. In
effect, there might be no or minimal change in the improvement of healthcare
systems, particularly the quality, price, and administrative costs in its
implementation.

Diarrhea is one of the most common diseases that developing countries are
facing. It is usually caused by water contamination, which is the main responsible
for lives lost, stunting, and low intelligence quotients (I.Q.), and certainly affects the
economy of one country. The good thing is, the solution is just a behavioral remedy
of washing hands using clean water and soap, and the treatment is just oral
rehydration. The problem in rural areas is the supply of clean water and soap, and
a lot of people do not know how to deal with it. Another disease that is mainly
caused by contaminated water supply is cholera, also usually in the rural or
underdeveloped countryside. A lot of countries have not yet integrated cholera as a
priority in the public health services despite having identified solution that is oral
vaccination. Some countries are getting some issues on World Health Organization
(WHO) approval, or they have a problem in keeping records of the patients; now,
there is skepticism over the use of vaccine, whether injected or oral.in a study
made in the Philippines in 2015, Cholera in the Philippines, it was found out that
despite the access to improved water sources, cholera remains to be seen. It is
most probably due to the breakdown and non-chlorination of water systems.

Right now, HIV/AIDS is said to be managed well by most countries in the world,
but this may not be true in some countries. It is a well-known fact that the disease
can easily be prevented by information campaigns and the availability of a
retroviral therapy.17 The least cost-effective solutions to this issue are mass media
campaigns, education for sex workers, distribution of condoms to the public,
treatments for tuberculosis and pneumonia, safety precautions during blood
transfusions, and drugs to avoid mother to child infections. The problem for the
government is the availability of retroviral treatments and maintaining this remedy
to those who are already infected, apart from the stigma that the patients are
facing daily for a lot of so-called conservative economies.

Figure 13.6.Vicious Cycle in

Health Development
The economic impact of health
problems cannot be discounted. It is a
cycle that needs to be studied,
addressed, and given much attention
in terms of research and solutions. A
bigger picture of institutional failures,
corruption, and even geographical
location may be factors to
successfully combating diseases and
eventually increase production,
savings, and investments to increase
the standard of living as can be
measured by the GDP per capita of a
nation.

EDUCATION AND ECONOMICS

For economists, there are two theories that explain education and
economics. First is the human capital theory, and the other is the signaling
theory. Human capital theory by G. Becker in 1975 explains that individuals
acquire more skills, as when receiving a higher education means income
differentials as (in part at least) a return to human capital, e.g., the correlation
between the number of years of formal education and earning is explained. On
the other hand, signaling shows how smart and hardworking an individual is,
and a higher education diploma would automatically help prove that rather
than giving a costly and tedious assessment of an applicant, for example.

The main concern for education is the relationship between schooling and
the production of workers to the economic growth and development. Universal
Public Education is known to be free, but it is not free at all; there are
opportunity costs attached to it, like the money used for schools could have
been used to fund other services and social programs of the government.

Education economics is a part of the study of economics that deals with

the demand, financing, and the quality of education, as it is seen as an
investment rather than a cost in the annual budget. In the Philippines, the
education department receives the highest chunk of the budget as mandated
 by the most recent Constitution. The Commission on Higher Education is also a
priority to ensure the production of professional and highly skilled workers.

Education is considered a positive externality; graduates tend to be

employed who contribute to higher productivity. This would increase GDP and
thereby enhance the standard of living.

The main issue in education

economics is inequality of its proper
distribution. The economic solution is
to promote equality by proper
funding, introduce more competitions,
and develop the skills of the teachers.
The government seeks higher funding
for early education, both primary and
secondary, and in fact, it is
mandatory in most countries around
the world. More city colleges and
universities are opened to make
Figure 13.7.College Wage higher education or even skills
Premium schools reach far-flung or rural areas.
Programs are introduced to enhance the
skills of teachers through trainings and
exchanges to other countries to benchmark
best practices in quality education.

It is believed that college graduates

earn more, thus, contributing more to
the GDP of
the country, according to the concept of
"College Wage Premium."

Economists agree that education

benefits all of us; it helps reduce poverty and
inequality and hence improve social
cohesion, increase productivity, and develop
the economy.
MSG
RECVD
Name: Rustum H.Corpuz, Jr.
Position:Vice President and Department Head
Company/Organization:One of the Philippine Financial
Institutions

What do you do?

Manage support services for retail banking operations
How do you relate to the national economic policies at your job on a day-to-
day basis?
 One of the functions of my department is to provide reports that are
financial in nature to aid in management decision-making. These reports
include the funding requirements and the liquidity position of the bank. The
collective funding and liquidity requirements of the national financial system
is a major consideration for the policy direction set by monetary authorities.
Another important piece of information that my department generates and
processes is the report on newly opened deposit accounts. This on the other
hand relates to the government push for financial inclusion.

Are we doing good as of the moment (national economic policy)?

On balance, the government can do more to reverse the negative effects
to the economy of the recent developments including the recent pandemic.

What is the contribution of your organization to the fiscal policy of the

national government to achieve growth and development?
As mentioned above, the bank has more direct contribution to monetary
policy. On the fiscal front, it's mainly through taxes.

What is the most challenging decision that you made to contribute to

economic growth and development?
On a previous role where I was involved in investment banking and the
financial markets, I was a resource person on how the government can better
manage its funding requirements. The most challenging was how to balance
the interest of the government where I was a resource person and the bank
where | had to execute transactions that would generate incremental profits.
Either way, I would contribute to economic growth and development. The only
question was how and of what magnitude.

Do you advise the students and candidates to be a part of the national

government? Of course, everyone has a stake in the success of the national
government. We owe this to the future generations similar to how our
forefathers contributed to what we are currently enjoying.
 CHAPTER 14
COOPERATIVES

LEARNING OBJECTIVES

In this chapter, you will be introduced to cooperatives and their contributions to

economic growth and development. Specifically, this will help you:

1. define a cooperative as a business organization and explain the concept of

cooperative development;

2. discuss the legal framework of cooperative development in the country;

3. explain the seven basic principles of cooperatives that are recognized worldwide;

4. enumerate some types of cooperatives in the country;

5. determine the economic impact of cooperatives;

6. evaluate the advantages and disadvantages of a cooperative as a business

organization;

7. elaborate on cooperative finance, annual cycle of financial activities, and some

issues on cooperative financial reporting;

8. understand cooperatives (coop) at work in the eyes of a coop regional manager;

9. discuss the ASEAN plan for farmer cooperatives development; and

10.propose an economic development plan for cooperatives from the Cebu CFI

experience.
LOOKING BACK
Economics is a social science that is keen to identify market inefficiencies
and optimizes the scarce resources, attempting to avoid market failure. Chapter
13 discussed some national economic policies that affect economic growth and
development .We reviewed the economic cycle and its implications for
development and appreciated some macroeconomic concepts and theories of
economic development. We covered taxation and its impact on economic growth,
elaborated on the protection of the environment, which is the responsibility of the
household, firms, and government. We identified the sources of environmental
issues and how they are managed. Moreover, we discussed the four strategies
that the government should address: laws to allow a specific level of pollutants
produced in a country, having permit markets, price incentives or subsidies for
the use of renewable energy, and investing in technology that may be used to
lessen negative externalities. Furthermore, we explained healthcare systems and
their categorization and important issues relating to economic growth and
development. We also discussed the economics of education: the demand for
education, financing, and the quality of education as it is valued as an investment
rather than a cost, the inequality of its distribution, and the concepts of College
Wage Premium as brought by the theories on human capital and signaling theory.
Lastly, we actively shared and reflected on the article, “Macroeconomic Indicators
of the Country with the Key Economic Sectors Expected Economic Growth.”

INTRODUCTION
Cooperatives are developed with the interest to make life easier, whether
for a variety of reasons or just one purpose. The main responsibility of the
members of a cooperative is to share the capital of the organization. Today,
cooperatives are found not only in the villages or far-flung places in the country,
but even in cities. In the Philippines, cooperatives are regulated by the
Cooperative Development Authority (CDA).2 They oversee the financial status
and operations of the various cooperatives in the country. Cooperatives have this
distinction from commercial banks: (1) Members are part-owners and can
influence the management of the organization; (2) Around two-thirds of their
assets are given back to the members as loans;(3) Deposit rates are high but so
is the lending rates; and (4) Lastly, loans generally do not require collaterals.
Around two-thirds of cooperatives' net surplus is paid back to the members as
dividend and patronage fund. However, it is not guaranteed; it will depend on the
market.

According to the International Cooperative Alliance (ICA), a cooperative is

an autonomous association of persons united voluntarily to meet their common
economic, social, and cultural needs and aspirations through a jointly owned and
democratically controlled enterprise. The question for a common household is:
What is the right cooperative for them? Here are some indicators that the coop is
worth investing in: (1) It has a high reserve fund, having a stable financial
position and good results of operations; (2) It must have a reliable computerized
information system to ensure transparency and accountability;(3)The board
meets regularly as shown in their records; and (4) It must have full provisions for
loans and are having sufficient capital.

Interest rates on regular savings in coops are higher than in banks. Time
deposits are as high as 7% per annum depending on the terms. Some big coops
even have automated teller machines (ATMs) that serve their members whenever
they need access to their money. Many cooperatives are not successful in their
operations. They inevitably close due to mismanagement that brings a big blow
to their members. Cooperatives are generally not protected by deposit insurance;
hence, coops set up a stabilization fund to help those getting in trouble financially
by technical and financial assistance.
 These are some of the common requirements for memberships in
cooperatives:(1)attend a pre-membership seminar to understand the coop
ideology, goods and services offered, as well as the responsibilities as future
members;(2) contribute to share capital; and(3)of course, pay the membership
and some applicable fees.

LEGAL FRAMEWORK
A cooperative is a business organization recognized by most economies in
the world but may be distinct from the three basic economic entities: sole
proprietorship, partnerships, and private corporations. It is characterized by a
group of individuals having a common goal as owners, designating one individual
in the one-vote policy in decision-making. The benefits expected may transcend
monetary advantage but could also be human enrichment, building resiliency, or
just having organic produce available on the table every day.

In the Philippines, coops exist with the concepts and principles provided in
the Republic Act 9520 or more commonly known as the "Philippine Cooperative
Code of 2008." It is defined as "an autonomous and duly registered association of
persons, with a common bond of interest, who have voluntarily joined together to
achieve their social, economic, and cultural needs and aspirations by making
equitable contributions to the capital required, patronizing their products and
services, and accepting a fair share of the risks and benefits of the undertaking in
accordance with accepted cooperative principles. "Furthermore, it adheres to
seven basic principles of cooperatives that are adapted from the same principles
in other countries.5

Voluntary and Open Membership. An important principle followed by coops

around the world is the voluntarism principle, where no one is forced to be a
member of coops and discrimination in any form is not encouraged.
Democrative Member Control. Although there is a management that
administers basic business functions, they are also members of the coop and have
the same equal rights as other members, having one vote per individual in terms
of decision-making.
Member Economic Participation. Members contribute to the coop with the
intention of fulfilling the goals of the cooperative first and sharing dividends with
the members. Any surplus earnings can be used in the expansion of the coop.
Autonomy and Independence. Cooperatives have a legal personality and may
transact with other business organizations or the government within the bounds of
the members' control.
Education, Training, and Information. This is a commitment to continuously
educate and train the management and employees so that they are updated about
the market and improve their product or service as deemed necessary.
Cooperation among Cooperatives. Cooperatives are social organizations that may
be assisting other cooperatives in achieving their goals locally or internationally.
This is important to learn about the mistakes that others may have done and to
continue benchmarking with best practices.
Concern for Community. The main goal of cooperatives is to make life easier,
especially for the members, and to continue the improvement to sustain this
satisfaction.
On the website of CDA of the Philippines, there are 18,065 coops as of December
31,2018, and it is continuously growing. There are 26 types of coop operating in the
country.
The economic significance of the cooperative sector is not limited to its members
and employees. The number of people whose livelihoods rely to a significant extent
on cooperative ventures approaches three billion by 2007, half of the world's
population.
 Figure 14.2.Seven Basic Principles of Cooperatives

TYPES OF COOPERATIVES
Here are the common types of cooperatives operating in the Philippines.
There is one type that is growing recently over the information web, and that is
the Platform Coop. It aims to unite social platforms around the world to achieve a
social cause beyond territories.

Multipurpose Federation-Secondary Health Service

Credit Water Service Electric
Consumers Union-Secondary Fishermen
Agrarian Reform Labor Service Small-scale Mining
Producers Housing Insurance-Secondary
Service Cooperative Bank Education
Marketing Workers Federation-Tertiary
Agriculture Advocacy Union-Tertiary
Transport Dairy

In the Philippines, the top five types of cooperatives are multipurpose,

credit, consumers, agrarian reform, and producers, comprising almost 87% of the
operating coops in the country. On the other hand, the least five types are small-
scale mining, insurance, education, federation, and union coops, having
approximately 0.01% of the total operating coops.

ECONOMIC IMPACT

Figure 14.3. Economic Impact of

Cooperatives
 provide for some reason. An example of
Efficiency. Garcia (2021) noted that it this is the electric coop in far-flung rural
is important for cooperatives to fulfill a areas that do not have access to electricity.
need in the community that is not met by Coops create value for the members. It
the market or even the government.8 This may be comfort, joy, clean water,
is where cooperatives usually excel in electricity, warmth, and even adventure.
terms of satisfying the constituents by
providing what is needed that the
government or market often neglects to
Work Environment. In cooperatives, there is less bureaucracy in the
organization, making them less susceptible to inequality and discrimination. In
addition command and control are reduced, as all members are given one vote
for decision-making.
Ecosystem of Resiliency. One of the principles of cooperatives is cooperation
among cooperatives. It gives an avenue for these organizations to support
themselves, Mutual aid in times of need or emergency or even sharing of
technology and information systems to one another is a common practice.
Human Development. In cooperatives, the soft skills of officers and members
are developed as they foster an environment of "togetherness" in achieving the
goal of the coop.

ASEAN PLAN FOR FARMER COOPERATIVES DEVELOPMENT

One of the goals of the ASEAN cooperation is to create stronger cooperation
among cooperatives, the public sector, and developing partners of the region for
sustainable development. Hence, a workshop was completed by some members of
the Agricultural Cooperative Development from Brunei Darussalam, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, and Thailand, and they came up with a
development plan that enhances the role of agriculture cooperatives in the global
value chain. To be able to achieve the goal, there must be harmony among the four
pillars: institutional and capacity building, competitiveness, access to finance, and
access to the market. This endeavor was done in the early part of 2019.

ADVANTAGES AND DISADVANTAGES

The aim of coops is to protect the weaker members of our society, to give
them representation, and to fulfill the gap in the needs that may not be satisfied by
the market or even the government. The following are some of the advantages and
disadvantages of coops:

Advantages Disadvantages
Easy to Form-Relatively easier to Limited Capital-Since the operation and
form than a corporation and done memberships are limited, the operation
with less formalities and return of investment can be limited
as well.
Democratic and Open
Differences among Members-There can
Memberships-Memberships are
be varied Individual motives of
voluntary, easy to get in and out of
membership that may lead to factions
a coop, with
among the members.
one membership, one-vote policy
Government Support-Fully Rigid Rules and Regulations-A set of
supported by the government for its rules are
social and economic relevance and to be maintained and followed
reach to places they could not consistently, like a financial audit,
reach registration, operations reporting, etc.
Stability-Coops have legal Competition and Strategy-There may be
personalities and may continue less
operations regardless of competition in the market, making the
management
products and services more expensive.
changes.
Low Administrative Cost-Some Inefficient Management-The
functions are voluntary and may management formed may be
be free. There is no need to put in inexperienced in proper administration
place highly skilled professionals and management of the operations,
as it may be run by the members which may lead to mismanagement of
themselves. funds or people.
 Table 14.1. Advantages and Disadvantages of Cooperatives
COOPERATIVE FINANCE

Figure 14.4.Annual Cycle of In the code of conduct of directors

or managers of a cooperative, the
duty of care is emphasized. They
should always be well informed
about the operations and
financials of the cooperative, and
be confident about their decisions,
and exercise good judgment,
especially when resources are
involved. The core responsibilities
of the directors are to the best
interest of the members and to
safeguard their interests in the
cooperative. The board is
responsible for acquiring and
protecting the coop's assets and
assess the financial performance.
They should always be asking
Financial Activities of about the financial condition of the
Cooperatives coop if it is in line with the goals, its
mission, and its vision.
The cooperative board approves the budget for a year after reviewing the
previous audited financial reports or if it is a new cooperative, the financial model
that is prepared by a financial consultant. A business plan consisting of the
detailed market supply and demand and matching the financial estimates is used
in sound financial decisions like asset and capital management. This is important
in strategizing and capturing a clear story of the operation of the coops. They can
even decide to have a capital campaign to entice more members and increase
the share capital, especially in times of uncertainty. At the end of the year, the
board may decide on the allocation of profit-may be for dividends and expansion
of the coop. All decisions will then be presented at the annual membership
meeting. An audit follows to adjust some changes that are needed to be done. If
the coop is relatively large in capacity and operation, a third-party audit may be
necessary.

ANNUAL CYCLE OF FINANCIAL ACTIVITIES IN A COOPERATIVE

Aside from the terminologies that we use in accounting and finance such
as equity, dept, profit/surplus, and retained earnings, we must understand
some of the financial terms that we use in Financial reporting in cooperatives.
Patronage allocation includes profits that are appointed to the members each
year. It is composed of cash refund and/or allocated equity. Unallocated
Equity, on the other hand, is a portion of the profit that is not allotted to the
members. The use of which may be
dependent in the decision of the
board and its members. The per unit
retain part of the financial
transaction held by
The per unit retain part of the
financial transaction held by the
coop is credited to the members.
Preferred stock, just like what we
know in corporation law or
accounting, is given priority before
 the common stockholders, but they are not allowed to vote in the cooperative
for management decisions.

As mentioned in the introductory part of this chapter, it is important to

note that a reliable accounting information system is in place and is always
updated. The activities of the coop must Figure 14.5.Some
always Cooperative Issues
be monitored so thaton sound
Financial
Reporting
decision may be made possible. Reports that are usually required for
decision-making are the balance sheet, profit and loss statement, and the
cash flow report. The income statement and the cash flow statement are both
period reports; the result of which is then included in the balance sheet to see
the bigger picture of what the coop owns (assets), how much it owes
(liabilities),and how much are the members' resources (equity).

Here is a simple balance sheet of a cooperative:

Cash/Current Assets PXXX
Long-term Assets XXX
Buildings and Equipment XXX
Land XXX
Depreciation-Buildings and Equipment (XXX)
TOTAL ASSETS PXXX
LIABILITIES
Current Liabilities PXXX
Long-term Liabilities XXX
TOTAL LIABILITIES PXXX

EQUITY
Member Equity Investments PXXX
Retained Patronage Allocations XXX
Unallocated Retained Profit/(Loss) XXX
TOTAL EQUITIES XXX
TOTAL LIABILITIES AND MEMBERS EQUITY XXX

Here is a simple profit and loss statement of a cooperative:

SALES
Sales revenue XXX
Cost of Goods XXX
Gross Profit XXX
EXPENSES
Wages XXX
Operating expenses XXX
Depreciation XXX
TOTAL EXPENSES XXX

PROFIT BEFORE TAXES XXX

Taxes XXX
NET PROFIT XXX

In cooperative finance, the reporting of income and expenses is on the

accrual basis.Cash may not have been received or dispensed, but there is an
obvious commitment to fulfill the obligation and the certainty of receipt of cash.
 Expenses may be the amount to pay for producers and packaging shipping of
goods to customers.

Here is a simple cash flow statement of a cooperative:

OPERATING ACTIVITIES
Net Profit Adjustments PXXX
Loans Principal Payments (Cash
out)
Depreciation (No cash out) XXX
Total PXXX
INVESTING ACTIVITIES
Leasehold Improvements PXXX
Equipment XXX
Total PXXX
FINANCING ACTIVITIES
Member Equity PXXX
Loans
Total PXXX
NET CHANGE IN CASH PXXX

It is important to know the cash on hand in order to manage cash

challenges in advance, such as maintaining inventory, using cash to
purchase them, and transactions that needs cash. Furthermore, it is imperative
to apply the financial statement analysis in order to come up with sound
decisions for the organization. Another report that is considered vital for the
board is the annual audit. Needless to say, the auditor does not prepare the
financial statements. Normally, it would include the statement of changes in
members' equity and if the cooperative is considered large. At least two years'
worth of consolidated financial statements is prepared, including the notes. This
is a key in generating new policies or can be a basis for a change in a certain
procedure.

MSG
RECVD
Name:Lucino Don Q.Garcia
Position:Regional Manager
Company/Organization: Cebu CFI Community
Cooperative

What do you do?

Supervise and manage the overall operations in Luzon area

Do you perceive your job to be easy or difficult? Why?

At times difficult but interesting
 Are we doing good as of the moment (cooperative development in the
Philippines)?
I could say we are ranked as the second nationwide cooperative in the country.
Cooperatives are thriving in the country.

What is the contribution of your cooperative to the economic growth and

development of the country?
Offering services, most especially on lending and investment. We contribute to
the GDP in terms of spending and employment.

Do you advise students and candidates to pursue a career in cooperatives in the

future?
Yep. Yep, we are not the cooperative like the others. We are a cooperative that
gives more than what the commercial banks are giving to their employees. I know
this because there are many bank executives applying or availing of our services.

CHAPTER 15
SOCIAL ENTERPRISE DEVELOPMENT

LEARNING OBJECTIVES

In this chapter, you will be introduced to social enterprise development in

building economic growth and development. Specifically, this will help you:

1. discuss social enterprise development and how they factor in the economic

growth and development;

2. elaborate on the social economy and how social enterprise development

advance social rights while considering a business model for economic growth and

development;

3. enumerate the sample initiatives of social enterprise development and their

specific contributions to economic growth and development;

4. explain the challenges of social enterprise development;

5. analyze an actual social development enterprise and its nature, challenges,

solutions, and prospects to economic growth and development;

6. recommend possible steps involving social enterprises in economic

development; and

7. understand social enterprise development at work in the eyes of a social

entrepreneur in social enterprise development.

"People should wake up in the morning and say 'l am not a job seeker, l am a
job-creator.""
 Muhammad Yunus, b. 1940
Nobel Peace Prize Awardee
Microcredit and Microfinance
LOOKING BACK
The Philippines is one of the countries that have an active form of
business organization called cooperatives or more commonly known as coops.
We divulged the contribution of coops to economic growth and development.
It is undeniable that it makes a huge impact to alleviate the situation of those
who are generally not reached by modern financial systems. Initially, we
defined what a coop is, recognized that it is a form of business organization,
and explained the concept of cooperative development. After that, we
discussed the legal framework of cooperatives in the country as it is regulated
by CDA under the mandate of the Republic Act 9520 the "Philippine
Cooperative Code of 2008."We recognized that we have the same seven
principles of coops as the rest of the world. Furthermore, we enumerated
some types of coops and shared our experiences in coops that are in our
country. Moreover, we discussed the economic impact of coops on efficiency,
work environment, ecosystem of resiliency, and human development.
Subsequently, we evaluated the advantages and disadvantages of a
cooperative as a business organization in terms of formation, democratic
rules, regulations, stability, and management efficiency. Next, we elaborated
on the cooperative's financial aspect, revolving around the core responsibility
to the best interest of the members and safeguarding their interests in the
cooperative through acquiring and protecting its assets and regularly
assessing financial performance and condition. Some issues on coop financial
reporting were discussed, like inadequate reserves, obsolete or excessive
inventories, lack of internal control, inconsistent financial reports, and
untimely financial reports. Finally, we reflected on the ASEAN plan for farmer
cooperative development and propose an economic development plan from
the Cebu CFI experience, which was a case study.

INTRODUCTION
If we are to listen and talk to a social entrepreneur, you will notice
something common about the things they will tell you about social enterprise
development. It all starts with a problem that needs a solution. There is
purpose in their passion. They value volunteerism and being active despite
the small monetary return. There is a pursuit for change and the eagerness to
achieve it. They believe that there are a lot of routes to success: one way is
not just going along with the flow; other ways include asking many questions
and not stopping with the status quo.

Social enterprises are businesses. They trade, are revenue generating,

make a profit, and pay reasonable salaries to staff. They do not function
purely through volunteering, the receipt of grants, or donations. However,
social enterprises are businesses with a particular social mission. That mission
is to ensure, as a consequence of their activities and income generation, that
their clearly stated social and environmental objectives are met.2

The landscape for social enterprise development is becoming vibrant in

the world, as economic blocs are beginning to realize its value and benefits in
uplifting the economic well-being of the country by its social, cultural, and
environmental focus, which may have been left out by typical business
organizations. Social enterprises have growing relevance in the ASEAN region
as more and more social enterprises are emerging because of the need for a
fair, sustainable, and inclusive society, especially in this time of green and
digital transition.

THE SOCIAL ECONOMY

Social enterprises are simply businesses with a good or ethical cause.
They are for-purpose businesses, whether for profit or not; they use using the
skills in entrepreneurship to solve big economic issues like poverty, peace,
environment, and the like. Social entrepreneurship describes the discovery
and sustainable exploitation of opportunities to

create social and environmental benefits. This is usually done through

the generation of disequilibria in market and non-market environments. The
social entrepreneurship process can, in some cases, lead to the creation of
social enterprises.

The business model of a social

enterprise development is doing a
good job if its earnings are given
back to society and the economy.
Social enterprises are gaining
momentum to help people become
more resilient, to strengthen the
labor markets, and to create jobs
by re-skilling and upskilling the
labor force, especially in the time
of green and digital transition. The
players of social enterprise
development are considered
varied and heterogeneous as the
aim is to benefit target groups like
the long-term unemployed, young
groups, persons with disabilities
(PWDs), migrants, groups facing systemic
discrimination, and many more. Social
change
is the center of social enterprise development, and the people are the
core of its purpose. In a study titled, "Social Enterprise Development in
Indonesia by Transdisciplinary Approach" in 2020, it is said that it is
difficult to seek ways to support and nurture social enterprises by the
cooperation of industry, government, and academia only. The
transdisciplinary approach is a way to support and foster social
enterprises in solving social problems and can be translated to many
developing countries as long as it can be applied for development
purposes to other countries.4

The growth of social enterprises can be implicit to the various factors of

classic nonprofit organizations, like the increase in operating costs and
growing number of charitable institutions, thereby competing with the
limited number of donors, changing demands, and market conditions of the
economy. Some of these nonprofit organizations now have become the
social enterprises that embrace profit and social wealth as their means to
survive.

EXAMPLE INITIATIVES
Social business initiatives led to social start-ups initiatives that aimed to
improve the economic visibility of these organizations. This involves easier
access to financing, markets, and a more stable framework to the national
level and fosters globally, considering the impact of digital technology. It is
important to develop a strong legal and policy framework for social enterprise
development and access to financial support by more financial intermediaries
supporting this endeavor. In an article published in the Journal of International
Studies in 2021, it was mentioned that “the growth and development of social
enterprises in the world represent a dynamic paradigm shift from dualistic
'market vs. state' and 'private vs. public!' The hybridity has a direct relation to
sustainability, innovativeness, and efficiency of social enterprises. The study
 indicates that enablement of the social enterprise sector requires an
understanding of a complex non-
dualistic socioeconomic
perspective."
The viability and sustainability of a
social innovation rest essentially on a
collective construction, beyond
common social values. There is
necessary cooperation of social
entrepreneurs for sustainable and
responsible social innovation. The
study published in the Journal of
Innovation and Entrepreneurship in
2021 linked the extent to which social
entrepreneurship (SE) contributes to
the construction of a collective
dimension linked to social innovation.

There is a need to propel

understanding of what social
enterprise development is by
spreading awareness in many platforms concentrating on its viability and
potential to contribute to the sustainable growth of the business model.

CHALLENGES
Just like any other business models, social enterprises have challenges in
sustaining their operations.

Goals Conflicts. The key players of the social enterprise may have varying
personal goals in mind for the social enterprise that may lead to changing
demands, social goals, and performance index to success. There may be a duality
of mission in the formation of the business.
Possible Inconsistent Practices. There are challenges in the sustainability of the
social enterprise as these organizations may find it difficult to hire employees
who may want to deal with disadvantaged target groups or the confusion in the
motivation of becoming for-profit or nonprofit. Furthermore, there is a possibility
that the goal may not be in line with the action plan of the enterprise because of
the sudden changes in the business landscape of society.

Financial Sustainability Issues. The key to the successful functioning of the

market and development of this kind of enterprises is the financial support. Some
of the sources of obtaining financial support by social enterprises are public funds
from government assistance programs. The financial performance may be
affected greatly by the current market and may shake the stability of the
enterprise's financial condition, hence its sustainability. There may be issues on
any of the following: access to capital, profitability, reporting, and/or planning.

Lack of Experience. According to Forbes in 2016, social entrepreneurship is the

new business model, and as such, the established management strategies that
are applicable to the classic models may not be applicable. This is manifested in
the social mission that may compromise the financial leverage of the
organization. In addition, this challenge leads to a lack of proper strategy, leading
to non-competitive products, as social enterprises compete with commercial
enterprises.

EXPERIENCES IN SOCIAL ENTERPRISE DEVELOPMENT

 Social corporate responsibility and various human-related aspects are now
included in modern companies assessment of business performance. There is a
rising interest in the social sphere of today’s reality. Research done about a
social enterprise challenged to reach students missed by traditional education
and support networks. Online learning and Massive open online courses

(MOOCs) have the potential to build knowledge and share best practice
experiences among individuals worldwide. Future learn social enterprise program
is a series of MOOCs with over 50,000 registered learners, of which 15% become
active learners, engaging in online exercises, debates, and conversations. It was
found out that the course has not only had an impact on the creation of new
start-up social enterprises, but it has also supported a large proportion of learners
in developing sustainability and social entrepreneurial ideas within a range of
organizations in the public, private, and civil society sectors.

Several social enterprises that were studied in Korea indicated that the
blended value orientation of social entrepreneurs influenced social
entrepreneurship and performance. Social entrepreneurship fully mediated
blended value orientation performance. The findings suggested that it is
important to focus on the blended value orientation of social entrepreneurs and
social entrepreneurship in promoting the policies of social enterprises.

Organizations can successfully operate on an international scale and,

simultaneously, generate financial, social, and environmental value. Below is a
multiple-case study of nine international social enterprises deploying strategies
on an international scale, the challenges to maximize social impact across
borders associated with each of the scaling strategies, and the resources and the
actions that can mobilize to manage such challenges associated with
international expansion.
Year of
Social Headquarte
Establishme Main Activity Social Mission/Ethos
Enterprise rs
nt
Up Group France 1964 Deployment of Provide social
payment progress
methods and and provide solutions
management for a
solutions for better daily life
companies
and other social
actors
Arla Foods Denmark 2000 Production and Use innovative ways
distribution to
of dairy products make the world a
better
place
Join Us to South 2011 Provision of high Create a society in
Maximize Korea quality which
our Potential educational everyone can enjoy
(JUMP) services to learning opportunities
children at the and can grow without
bottom of discrimination
the pyramid
Mondragon Spain 1956 Industrial activities Use of democratic
Group (e.g., methods
(Industrial household in its organization, job
Division) appliances, creation, and
machines, tooling, development;
automotive a pledge of
components) development to
 its social environment
Hippocampus India 2010 Provision of Provide quality and
Learning integrated and affordable education
Centers(HLC) comprehensive opportunities for the
preschool children of under-
and primary grade served
education communities
programs
 The Freecycle USA 2003 Exchange and gift of free Reduce waste, save
Network items for reuse or previous resources, ease
recycling burden of landfills

Aravind Eye India 1976 Eye care-related Eliminate needless

Care System activities blindness through
affordable, compassionate,
and quality eye care for all

The Impact United 2005 Creation of business Support business initiatives

Hub Kingdo incubators and co- for the service of people
m working and planet
spaces for social
businesses
Ben & Jerry's USA 1978 Production and Use the innovative ways
distribution to make the world a better
of ice cream, frozen place
yogurt,
and sorbet

Name:Ronnie G.Serquiña
Position: Director of Marketing
Company/Organization:CerviQMed Corp.

What do you do?

Responsible for the company's overall marketing campaign, both traditional and digital. Plan,
direct, and coordinate marketing strategies to thrust the company's brand and image. Set
marketing budget, study competitors, and do a market analysis to come up with efficient
processes.

Do you perceive your job to be easy or difficult? Why?

Both. It's easy in the sense that I love what l do. The difficulty lies in developing effective
strategies that will appeal to our target audience and get them to engage.

Are we doing good as of the moment (social enterprise development in the Philippines)?
Social enterprise in the Philippines is a novelty. It refers more to how the company functions
rather than how it's structured. It's still a long road ahead, but we'll get there as long as we
keep treading.

What is the contribution of your organization to the economic growth and development of
the country?
Eliminating cervical cancer means saving 11 women every day from death. Most of these
women are economic contributors by being breadwinners of their families. That's how we
create economic impact indirectly. On the other hand, we're the exclusive distributor of
Cerviray (Al-assisted colposcope),imported from Korea. Once there's widespread use of the
machine, it will employ women in areas with a device.

Do you advise students and candidates to pursue a career in a social enterprise

development in the future?
More than a career, joining a social enterprise company is a personal advocacy.
 CHAPTER 16
PEACE ECONOMICS AND DEVELOPMENT

LEARNING OBJECTIVES

In this chapter, you will be introduced to peace economics and its value
to economic growth and development. Specifically, this will help you:

1. discuss the main characteristics of peace economics;

2. explain the concept of peace and its relationship to economic development;

3. elaborate on peace demographic dividends and their association to

economic growth and development;

4.explain the targets of the world for peaceful and inclusive societies for

sustainable development, justice for all, accountability, and inclusive

institutions;

5.discuss transnational crime and terrorism, its roots, and negative impacts

on the global economy;

6.reflect on the UN 17 Sustainable Development Goals toward economic

growth and development;

7. appreciate the new models for peace and development;

8. create a short screen and camera recording on peace economics;

9. recommend possible steps in peacekeeping for economic development;

and

10. understand peace economics and development at work in the eyes of a

security professional.
LOOKING BACK
In Chapter 15, we discussed social enterprise development, social
entrepreneurship, and how they factor in the economic growth and
development of a country. We elaborated on the social economy and how social
enterprises advance social rights while still considering a business model in
strengthening the labor market, creating jobs by re-skilling and upskilling,
especially in the time of green and digital transition. It was mentioned that
social change is the center of social enterprise development, and the people are
the core of its purpose. We discussed indicators to start a social enterprise.
Moreover, we enumerated some examples of social enterprises and their
specific contributions and shared our own experiences with these initiatives and
how they impacted your life or others. Furthermore, we explained some
challenges of these enterprises, such as goals conflicts, inconsistent practices,
sustainability issues, and lack of experience. Finally, we discussed a sample
case of a social enterprise called CerviQMed and their awareness campaign,
remote screening, and mobile treatment of cervicaI cancer in the Philippines.

INTRODUCTION
Peace economics deals with the holistic designs of political, economic, and
cultural institutions and policy interactions with the goal of preventing,
mitigating, or resolving violent conflicts within and between societies.2 There
are three main characteristics of peace economics: (1) the presence of active
resolution management to eradicate or reduce conflict in the society or among
behaving units with economic activities; (2) the use of economic metrics and
policy to cope with and control conflicts whether they are economic or not; and
(3) the impact of conflict in the economic behavior and welfare of firms,
consumers, organizations, and society.

In this chapter, we are going to discuss the basics of peace economics,

peace and demographic dividends, and some issues that revolve around peace
economics and development.

PEACE ECONOMICS
Colonization plays a key role in the determination of peace in most
countries around the world. Fundamentally, with all material aspects,
inhabitants of a specific country are pushed back, structurally marginalizing
them culturally and economically. A very good example of this is Western
colonization, essentially a social and economic phenomenon that let some
European countries exploit the people and the natural resources of others. They
began to draw lines that would separate territories for manipulation and so
were the conflicts when they started giving them some level of freedom.

In the context of business, we define peace economics as ways to

eradicate and control conflicts, as well as conflict impact on society. The priority
of business activities in the border of conflicting countries should reside on the
perception of people, harmony, trust, trade relation and international
brotherhood for growth, and systemization.

The benefits are seen as the reduction of the conflict itself and the
improved opportunities for expanded global trade. Moreover, it is a significant
part of peace economics to identify the causes and effects of conflicts in
international systems and the ways conflicts may be avoided, managed, or
resolved.
 Figure
16.2.Peace Economics Components

Peace economics can also be viewed as the protection of the sacredness

of nature and human beings, ensuring the sustained reproduction of the natural
resources as much as the population.4 It is by controlling hyper-capitalism that
destroys this sacredness and going back to the basics of satisfaction of the
fundamental needs to survive.

PEACE
There are many ways to define peace. It is a state of tolerance and
acceptance of the diversity of people in terms of culture, religion, nationality,
race, and gender, among others. It is a recess between wars and conflict-a
coexistence of multiplicity of opposing ideas and beliefs. For some political views,
it may be the further legitimization of one territory that leads to delegitimize
another, like that of Palestine and Israels, North and South Korea, and some parts
of Russia and the surrounding territories.

The United Nations Department of Economic and Social Affairs (UN-DESA)

Sustainable Development Goal 16 (SDG 16) states that "promote peaceful and
inclusive societies for sustainable development, provide access to justice for all
and build effective, accountable and inclusive institutions at all levels" According
to the UN-DESA, every day, 100 civilians are killed in armed conflicts despite
protections under the international law. The number of people war, persecution,
and conflict exceed 79.5 million, the highest level ever recorded, despite the
global decline in homicide rate from 5.9 to 5.8 per 100,000population in 2015 to
2018, translating to 440,000 homicide victims worldwide. Moreover, it is
important to note the freedom of information, where 127 countries adopted the
right or freedom-of-information laws for accountability and transparency, which is
essential in peace economics.

The UN-DESA SDG 16 has these targets and indicators:

 Significantly reduce all forms of violence and related death rates everywhere.
 End abuse, exploitation, trafficking, and all forms of violence against the
torture of children.
 Promote the rule of law at the national and international levels and ensure
equal access to justice for all.
 By 2030, significantly reduce illicit financial and arms flows, strengthen the
recovery and return of stolen assets, and combat all forms of organized
crime.
 Substantially reduce corruption and bribery in all their forms.
 Develop effective, accountable, and transparent institutions at all levels.
 Ensure responsive, inclusive, participatory, and representative decision-
making at all levels.
 Broaden and strengthen the participation of developing countries in the
institutions of global governance.
 By 2030, provide legal identity for all, including birth registration.
 Ensure public access to information and protect fundamental freedoms, in
accordance with national legislation and international agreements.

PEACE DIVIDENDS
Peace economics is related to peace dividends. For example, in Colombia,
peace talks between the communist guerillas and the government must start
with macroeconomic stability, foster reduction of poverty and inequality, and
social programs and inclusions. The government is responsible for continued
economic policy regardless of who is in the administration, lowered budget
deficits, strong purchasing power of the currency, and sustained political
consensus on open economy, both in trade and in foreign direct investments
and capitalization. In more than 50 years of armed conflict with the guerillas,
there is a substantial sluggish growth in the economy.

One alleged issue in Colombia is the sub-economy or the cocaine-based

produce, which is said to be used as a common currency in some small parts of
the rural areas. Some would say that communist guerillas charge drug
smugglers war taxes and that leads to a negative impact on the economy. This
affects the confidence in the peace talks and peace dividends.10 The key is to
cut the supply of the raw materials used for the black goods by developing the
agriculture sector of the country, giving the farmers better and legal
alternatives to their products. Rural development is a key to peace
development and yields peace dividends.

DEMOGRAPHIC DIVIDENDS
In the Philippines, going to the fundamentals is the key for a lasting peace
that is investing in economic and social infrastructure, especially in the southern
part of the country. In addition, there is a need to create more domestic
employment to allow Filipinos to stay in the country and be more productive.
Mindanao has the second largest landmass next to Luzon and known to be a
resource-rich but underdeveloped island. Initiatives like the Raintrust
Sustainable Ventures link foreign investment in agricultural development to
both the social advancement of local tribal peoples and the protection of large
amounts of remaining wilderness areas.

A partnership composed of countries in Southeast Asia, like Brunei

Darussalam, Indonesia, and Malaysia, started an initiative aiming at a more
technologically advanced production, rather merely on the extraction of
resources concentrating on green technologies. BIMP-EAGA,12 or the countries'
acronyms plus East ASEAN Growth Area, increases the potential of the region to
cooperate in terms of agribusiness, tourism, and sociocultural education to
maintain peace and prosperity with the member states. The organization fosters
economic development in the said region through peace processes and
agricultural cooperation.

TRANSNATIONAL CRIME AND TERRORISM

Figure 16.3. Economic Implications of Transnational Crimes and Terrorism

It is inevitable that alongside global economic growth and development is

the intensification of the transnational crime (criminal activities that transcend
national jurisdiction) and terrorism. Because of the interconnectedness of
various nations through globalization and foreign trade, it provides
opportunities for criminals and terrorists to expand their operations and
reach.14 Economic factors like improved communication and transportation,
faster and sophisticated financial markets, and upgraded mobility of goods and
services worldwide lead to a more active transnational crime and terrorism.

Drug trafficking around the world has become easier and more diversified
in terms of kinds and modes of exchanges. There is a spread of criminal
networks transcending nationalities and even forming alliances, finding
countries that have weak laws and regulations in foreign trade and even corrupt
officials that may be exploited for the underground business.15 In effect, this
undermines the democracy in many countries and drains the national assets
and resources, thereby causing a slowdown in national economic growth and
development.

The United Nations (UN) had identified criminal activities that transcend
jurisdiction like money laundering, terrorism, theft of intellectual properties,
drugs and human trafficking, buying and selling of body parts, fraudulent
bankruptcy, and even the corruption of government officials leading to criminal
activities. There can be no effective policy to tackle transnational crime and
terrorism if we are not going to look at the problem from a bigger picture or a
global perspective. One way to achieve peace is to eliminate transnational
crime and terrorism and stop the opportunistic schemes of "global criminals.
"We must see peace economics as a global issue to mitigate or even stop this
disruptive activity as one connected economy.
 SOCIAL DEVELOPMENT GOALS OF THE UNITED NATIONS
THE 17 SUSTAINABLE DEVELOPMENT GOALS (SDGs):2030 AGENDA FOR
SOCIAL DEVELOPMENT16
(Adopted by all UN Member States in 2015)
1. No Poverty 10. Reduced Inequalities
2.Zero Hunger 11. Sustainable Cities and Communities
3. Good Health and 12. Responsible Consumption and Production
Well-being
4. Quality Education 13. Climate Action
5. Gender Equality 14.Life below Water
6.Clean Water and
Sanitation 15. Life on Land
7. Affordable and Clean Energy 16. Peace, Justice, and Strong Institutions
8.Decent Work and
Economic Growth 17. Partnerships for the Goals
9. Industry, Innovation, and Infrastructure

HISTORY
The 2030 Agenda for Sustainable Development, adopted by all UN
Member States in 2015, provided a shared blueprint for peace and prosperity
for people and the planet, now and into the future. At its heart are the 17
Sustainable Development Goals (SDGs),which are an urgent call for action by all
countries-developed and developing-in a global partnership. They recognize
that ending poverty and other deprivations must go hand-in-hand with
strategies that improve health and education, reduce inequality, and spur
economic growth-all while tackling climate change and working to preserve our
oceans and forests.

The SDGs build on decades of work by countries and the UN, including the
UN Department of Economic and Social Affairs
 In June 1992,at the Earth Summit in Rio de Janeiro, Brazil, more than
178countries adopted Agenda 21, a comprehensive plan of action to build
a global partnership for sustainable development to improve human lives
and protect the environment.
 The Member States unanimously adopted the Millennium Declaration at the
Millennium Summit in September 2000 at UN Headquarters in New York.
The Summit led to the elaboration of eight Millennium Development Goals
(MDGs) to reduce extreme poverty by 2015.
 The Johannesburg Declaration on Sustainable Development and the Plan of
Implementation, adopted at the World Summit on Sustainable
Development in South Africain 2002,reaffirmed the global community's
commitments to poverty eradication and the environment and was built on
Agenda21 and the Millennium Declaration by including more emphasis on
multilateral partnerships.
 At the UN Conference on Sustainable Development (Rio+20) in Rio de
Janeiro, Brazil in June 2012, Member States adopted the outcome
document, "The Future We Want," in which they decided, inter alia, to
launch a process to develop a set of SDGs to build upon the MDGs and to
establish the UN High-level Political Forum on Sustainable Development.
The Rio+20 outcome also contained other measures for implementing
sustainable development, including mandates for future programs of work
in development financing, small island developing states, and more.
 In 2013, the General Assembly set up a 30-member Open Working Group
to develop a proposal on the SDGs.

 In January 2015, the General Assembly began the negotiation process on

the post-2015 development agenda. The process culminated in the
 subsequent adoption of the 2030 Agenda for Sustainable Development,
with 17 SDGs at its core, at the UN Sustainable Development Summit in
September 2015.

 The year 2015 was a landmark year for multilateralism and international
policy shaping, with the adoption of several major agreements:
- Sendai Framework for Disaster Risk Reduction (March 2015)
- Addis Ababa Action Agenda on Financing for Development (July 2015)
一 Transforming Our World: The 2030 Agenda for Sustainable Development
with its 17 SDGs was adopted at the UN Sustainable Development Summit in
New York in September 2015.
- Paris Agreement on Climate Change (December 2015)
 Now, the annual High-level Political Forum on Sustainable Development
serves as the central UN platform for the follow-up and review of the SDGs.

Today, the Division for Sustainable Development Goals (DSDG) in the United
Nations Department of Economic and Social Affairs (UN-DESA) provides
substantive support and capacity building for the SDGs and their related
thematic issues ,including water, energy, climate, oceans, urbanization,
transport, science, and technology, the Global Sustainable Development Report
(GSDR), partnerships, and Small Island Developing States. DSDGplays a key role
in the evaluation of UN system-wide implementation of the 2030 Agenda and on
advocacy and outreach activities relating to the SDGs. In order to make the
2030 Agenda a reality, broad ownership of the SDGs must translate into a
strong commitment by all stakeholders to implement the global goals. DSDG
aims to help facilitate this engagemen