Consumption Pattern in Philippine Rural Areas by Roxanne Bayo-ang

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					   Household Consumption Pattern in Philippine Rural Areas:

                      An Empirical Assessment



________________________________________________________________________




                                    by:

                          Roxanne C. Bayo-ang

                         Caryl Riza L. Javellana

                           Keren I. Caballero




                    Ateneo de Davao University
                                                              2




                                Table of Contents



ACKNOWLEDGEMENT………………………………………………………….i

TABLE OF CONTENTS…………………………………………………………...ii

LIST OF TABLES AND FIGURES………………………………………………..iii

I.    Introduction

      i.     Background of the Study ………………………….………………..1-2

      ii.    Objectives ………………………………………….………………..3

      iii.   Significance …………………………………………………………3-4

      iv.    Scope and Limitation ……………………………………………….4

      v.     Definition of Terms …………………………………………………4-5

I.    Review of Related Literature

      i.     Review of the Factors ………………………………………………6-11

      ii.    Related Studies ……………………………………………………...12-13

      iii.   Theoretical Framework ……………………………………………...13-14

II.   Methodology

      i.     Type of the Study ……………………………………………………15

      ii.    Locale of the Study …………………………………………………..15

      iii.   Data Collection ………………………………………………………15-16

      iv.    Variables and Measures ……………………………...………………16

      v.     Data Analysis ………………………………………………………...16-17
                                                                     3


       vi.      Model Specification…...……………………………………………..17-18

III.   Results and Interpretations

       i.       Household Consumption Pattern ……………………………………19-24

       ii.     Summary of the Estimation Result …………………………………....24-26

       iii.    Summary of the Final Model ………………………………...………26-27

IV.    Summary of the Findings and Recommendations

       i.      Summary of the Findings……………………………………………28-29

       ii.     Recommendations…………………………………………………...29-30

Bibliography

Appendices

  Appendix 1

  Appendix 2

  Appendix 3
                                                                                   4




                            List of Tables and Figures



Tables

Table 1 Variables and Measures ………………………………………………………..17

Table 2 Estimates of the Parameters of the Model …………………………..…………24

Figures

Figure 1 Growth in Aggregate Household Consumption Pattern in rural areas ……….20

Figure 2 Growth in Household Nominal Consumption per Region ……………………21

Figure 3 Growth in Household Real Consumption per Region ………………………...22
                                                                                         5




                                        Chapter I

                                   INTRODUCTION



I. BACKGROUND OF THE STUDY

        Growth in the household consumption in the Philippines is in varied pattern for

15 years. Consider the fact that a lot of factors such as macroeconomic policies, natural

disasters, political crisis and instability and unexpected economic crisis such as the 1997

Asian crisis affect the overall performance of the household consumption.

       Aggregate trends on the average consumption expenditure in 1998 were 10

percent higher than in 1985, although not that high compare to the level prevailing at the

turn of decade. Mean expenditure in 1991 managed to rise by 6 percent over that in 1988.

In 1994, average per capita expenditure plunged below 2 percent below that in 1991. But

in 1997, mean expenditure was approximately 21 percent higher than in 1994, the highest

three year growth achieved since the mid-1980‟s. On the other hand, it fluctuates in 2000

because mean expenditure was 3 percent lower than in 1997. (Balisacan, 2003) This

pattern according to some studies was the result of the combined impact of the Asian

financial crisis and the El Nino phenomenon.

       Regional disparities on the consumption expenditure were also clearly visible. In

year 2000, Metro Manila‟s mean expenditure was nearly twice the national average or

about three times the mean living standard for Bicol and Western Mindanao, the poorest
                                                                                         6


regions of the country according to the estimates of Balisacan (2003). Not surprisingly,

mean expenditure for the Luzon regions is higher than for the most of the regions in

Visayas and Mindanao.

       There is also a high mean consumption disparity between urban and rural sector.

Mean consumption in urban areas is nearly twice that in rural areas, rising during the high

growth periods of 1985-88 and 1994-97. Yet, it is worth noting that consumption

performance in rural areas has been marked by strong flow in consumption growth

throughout the early 1990‟s particularly on the 1994-97 growth. It is noticeable however

particularly on the agricultural sector that growth was not sustained and in fact shrunk

significantly during the combined crisis of El Nino phenomenon and Asian financial

crisis. This pattern is consistent across all region of the country‟s household consumer

expenditure and more noticeable in some regions but it does not however an indication of

good economic condition since poverty becomes even more prevalent.

       Given that consumption is a better indicator of welfare level, as what the standard

arguments in microeconomic theory suggest that since welfare level is determined by

“life-cycle” or “permanent” income and since current consumption is a good

approximation of this income, current consumption is an appropriate measure not only of

current welfare level but also of long-term average well-being, then it is interesting to

first consider these consumption patterns and some of the possible contributing factors.

Hence, it is essential to analyze the various factors that could explain the household

consumption pattern in the country.
                                                                                           7


II. OBJECTIVES

           The main objective of the study is to identify factors affecting household

consumption pattern in rural areas in the year 1991-2000.



           The specific objectives of the study are:

    1) To present descriptively the trend of household consumption in rural areas in the

           Philippines from 1991-2000.

    2) To determine the factors that significantly influenced household consumption

           pattern in Philippine rural areas.

    3) To measure the marginal impact of each of these relevant variables to the

           household consumption.



III. SIGNIFICANCE OF THE STUDY

           The knowledge gained in this study will be useful in understanding the behavior

of rural consumer. It can be useful in enhancing the knowledge about consumption

theories and in deriving some government and institutional policy with regards to rural

development and poverty alleviation particularly to the rural sector. It will also serve as a

basis for the national government in policy formulation pertaining to the improvement of

consumption in the rural areas. Moreover, it will also provide some information about

the current welfare level of the rural sector and how it is affected by some economic

factors.
                                                                                          8


IV. SCOPE AND LIMITATION OF THE STUDY

       The study focused on analyzing the factors influencing household consumption

pattern in the Philippine rural areas. It utilized secondary data for the analysis. The data

covered all the regions in the country except National Capital Region, ARMM and

CARAGA due to insufficient data given by the NSO and NSCB. Years 1991, 1994, 1997

and 2000 were considered in the analysis because surveys were conducted only every

three years.




V. OPERATIONAL DEFINITION OF TERMS

Consumption pattern - pattern of expenditures by households on final good and services.

Rural Households –     household population residing in rural areas, they may consist of

one or more persons or groups of persons such as families as reported by NSO

Marginal Impact on Consumption Pattern – refers to the magnitude of change in the

consumption pattern given a change of the explanatory variables.

Explanatory variables affecting rural household consumption pattern are as

follows:

Household Income - includes primary income and receipts from other sources received by

all members during the calendar year as participants in any economic activity or as

recipients of transfers, pensions, grants and others.

Inflation Rate - The percentage change in the price level from one period to the next.

Consumer Price Index (CPI) was used to measure inflation.

Number of Families – total number of families living in a rural area
                                                                                           9


Savings – refers to the total after-tax disposable income of the household sector that is not

used for consumption expenditures in a year.

Employment status - the number of employed persons to the total civilian non-

institutionalized population 15 years old or older in rural areas per year.

Cooperative – rural institutions that are assumes to provide credit extensions, measured

by the total number of registered agricultural multi-purpose cooperative per year.
                                                                                         10




                                        Chapter II

                       REVIEW OF RELATED LITERATURE



       This chapter reviews the factors that are identified to affect household

consumption pattern in rural areas. These are household income, number of household,

inflation rate, savings, employment status and cooperative. Related studies and some

theories in relation to consumption were also included here.



On Household Income

       Normally, people based their consumption on their income. They attempt to

maintain a fairly constant standard of living. An increase in income leads to an increase

in consumption. John Maynard Keynes idea of the consumption function consists of two

main parts: (1) Induced consumption, which refers to increase in consumer spending that

occur as disposable income rises. Increases in consumption follow the famous marginal

propensity to consume. An increase in disposable income leads to an increase in

consumption and; (2) Autonomous consumption refers to consumption spending done as

part of long-term plans for the future (smoothing out income fluctuations, providing for

retirement and other expected future events, etc.) and as a result of habits and contractual

commitments. (Villegas and Abola, 1992)

       In the Philippines, the aggregate trend of the total household income in 1997

amount to 1.7 trillion pesos. It increase by 25.8 percent in 2000 thereby raise it to 22
                                                                                         11


trillion pesos, translating to an average annual increase of 8.0 percent. With the inflation

adjustments computed to 22 percent from 1997 to 2000, total family income actually

grew by 3.1 percent or an average annual increase of 1.0 percent. Urban families lived on

1.53 trillion pesos aggregate income, while rural families earned 664.18 billion pesos in

income. Because urban families reported higher incomes, urban families were able to

allot a bigger percentage of their income for savings. Urban families spent only 81.9

percent of 1.23 trillion of their income, while rural families spent 85.5 percent or 567.56

billion of their income. Shares to total income were 69.8 percent in urban areas and 30.2

percent in rural areas (PY, 2002). Almost 70 percent of the poor based on the rural sector

and depending directly on agricultural-related economic activities for their major source

of livelihood coupled with limited employment opportunities in non farm activities thus

resulted to low income.



On the Number of Households

       It is said that population is an important indicator of sustainability because it

shows the relationship between production and consumption, import and export and in

addition gives pool from which can draw human, social and cultural capita. As

population increases in a given region, this increases production capabilities by

increasing the human capital necessary to extract resources, manufacture goods, and

provide services. In addition to this, consumption increases with population. (Humboldt

County Wealth indicators Project 2001)

       In 2000, there were 15.27 million families in the Philippines, grew by 7.6 percent

increases from the 1997 data. Compared to 1997, urban families comprised a bugger
                                                                                          12


share to total than in 2000. The country had 7.49 million families resided in urban areas

and 7.78 million families in rural areas. Urban families now grew from 47.6 percent to

49.1 percent of total. About 50.1 percent of families lived in rural areas. Despite the fact

that urban families were fewer than rural families, aggregate income of urban areas

surpassed the aggregate income of rural families, that is, expenditure in urban sector is

also greater than that in rural sector. Families in urban areas accounted for 67.4 percent of

the country‟s total expenditures, spending some 951.54 billion pesos in expenditures.

Expenses of rural families summed up to 461.14 billion pesos or a third of the nation‟s

expenses. Nevertheless, expenditures increase as the number of household increases.

Population growth as measure by the increase in the number of household in rural area

led to persistently high unemployment and poverty rates. (PY, 2002)



On Inflation Rate

       Unanticipated inflation matters: consumers initially underestimate the average

price level and shocked by the „excessive‟ rise in prices, cutting back their consumption

in response until recognizes higher price levels. (Deaton, 1977)

       During 1983-1985, inflation averages to 25 percent. The rate dropped from 18

percent in 1988 possibly benefiting the majority of the Filipino poor, who tended to be

fixed income earners or self-employed workers in rural areas. Inflation surged once more

to an average of 15 percent per year at the end of the decade. Inflation decelerated to only

7.9 percent per year during 1992-94, 7.7 percent during 1995-97, and 6.9 percent during

1998-2000. (Balisacan, 2003 p.320)
                                                                                            13


       As what to be expected, inflation largely brought a great impact to the consumers.

In 1998, as effect of the Asian financial crisis, prices shot up and food prices went up

immediately. During the first quarter, when the peso reached a low level of 45 pesos per

dollar, the inflation rate rose to 7.9 percent. Inflation rate accelerated further to almost 10

percent. Food prices rose by 4.3 percent during the first quarter of 1998. Higher food

prices amidst lower incomes may mean smaller food consumption particularly for the

poor household. (Reyes and Mandap, 1999)



On Savings

       In rural sector, households save. Savings is part of the income not consumed nor

paid to the government. They do this by depositing it in some financial institution (e.g.

commercial and rural banks, cooperatives) or by simply holding it in some tangible assets

like houses, or by raising animals such as pigs, cows and goats as form of investments. If

income is low, household tend to dissave and focus more on the basic needs.

       Empirical studies have shown that the increases in consumption, lead to decreases

in saving. In the paper analysis of Mary Ryan about determinants of Irish consumption,

she noted that the savings rate have generally kept pace with growing personal incomes

and falling period of savings rate as consumer felt less need to save if market revaluation

effects of wealth had been a factor in consumption decision. (Ryan, 2003 p. 78)
                                                                                       14




On Employment Status

       The country‟s labor force grew by 2.6 percent annually in 1981-89 to 2.6 percent

in 1990-2000. Thus the labor force, which numbered 17.3 million in 1980, had nearly

doubled to 32.2 million by 2000. The rapid increase in the size of the labor force can be

attributed not only to high population growth but also to the steady increase in the

participation of women in the workforce. Unfortunately employment opportunities have

failed to keep up with the rapid growth in the labor force. The consequences have been

unemployment and underemployment rates. The total number of unemployed person rose

from 1.3 million in 1980 to 3.6 million in 2000 or 11.2 percent of the workforce. The

highest unemployment rate of the 1970‟s was 6.3 percent recorded in 1972. (Herrin and

Pernia, 2000 pp. 292-295)

       Underemployment is particularly pervasive in rural areas, where farm work is

irregular and seasonal and off-farm employment opportunities few and far between. In

1999, rural underemployment was estimated at 25 percent compared with the over all rate

of 19.5 percent. (BLES-DOLE 2000) Rural unemployment rates also tended to rise

during recession years particularly during 1998 where an El Nino drought coincided with

the Asian economic crisis.

       Statistics from the Department of Labor and Employment in the Philippines seem

to support the this claim. For instance, DOLE has reported 82,839 workers in 1,750

companies in the country have been laid off in the first seven months of 1998 because of

the region‟s financial crisis. The figure is expected to grow as some 123 firms have filed

advance notices of retrenchments in the next four months of that same year. Among the
                                                                                         15


causes of firms in scaling down of operations are the lack of financial market, the high

cost of production and lack of capital due to the peso depreciation. (Reyes and Mandap,

1999)



On Cooperative

        The availability of credit may facilitate consumption in the short run by

augmenting consumer cash flow. Related to the idea that wealth functions to smooth

consumption patterns over the long term, increases in the levels of credit outstanding can

add to consumer spending power, while repayments of debt will divert cash from

spending purposes. Thus, one could reasonably expect to find, in estimating a short run

consumption function, that growth in consumption is positively related to growth in

credit. (Ryan, 2003)

        The creation of CARP in 1988 has brought a lot contribution to the rural sector

particularly for the landless peasants. Thus, it facilitates credit extensions to the farmer

beneficiaries as well as those farmers who are in need financially for agricultural

purposes. More cooperatives are being established especially in the agricultural sector to

facilitate credit extensions and loans and other useful purposes. Basically, the primary

objective of the cooperative is to provide goods and services to its members and thus

enable them to attain increase income and savings, investment, productivity and

purchasing power and promote among them equitable distribution of net surplus through

maximum utilization of economies of scale, cost-sharing and risk-sharing without

however conducting for charitable purposes. Cooperative takes in different forms. These

are in the form of credit, consumer, producer, marketing, service and multi-purpose.
                                                                                        16




RELATED STUDIES

       In the empirical study of Mary Ryan about Patterns and Determinants of Irish

Consumption, she noticed that consumption performance in Ireland is increasing

throughout the 1990‟s following a more muted performance in the preceding decade.

Accordingly, latter part of the 1990‟s shows high growth in personal consumption, as a

reflection of the Ireland prevailing strong economic conditions. She compared Ireland

consumption performance from all EU countries and the US for the periods 1991to 1995

and 1996 to 2000. Based on the findings, Irish consumption growth rates did not differ

from those other countries for the first half of the 1990, but from 1995 a strengthening of

growth rates relative to other countries became apparent. She identified the likely several

economic factors that affect the consumption performance in Ireland both in long-run and

short-run consumption within the context of including the relationships in the Central

bank macroeconomic model for Ireland.

       In the long-run determinants of consumption, she distinguished disposable

income, wealth in terms of capital stock growth, government debt growth, net foreign

assets and savings rate. In her findings, consumption and disposable income are closely

related. Measures of wealth are used in assessing the determinants of consumption as a

stock of available funds and as an indicator of accumulated income over time. It was

assumed that a consumer does not just make consumption choices based on their current

level of income, but also bears in mind other wealth resources at hand. She presented

these determinants through graphs to show the relationship of each factor to the

consumption.
                                                                                       17


       In the short-run determinants of consumption, she identified interest rates, a

measure of consumer confidence and the availability of credit. In her findings, period of

growth in the consumption tend to coincide with decreasing real interest rates as shown in

his graph analysis. She noted that the more pronounced changes in interest rates are

associated with significant changes in the pattern of consumption, which is the fall in

interest rates directly preceded prolonged strong growth in consumption. As factor,

consumer confidence is proxied by the unemployment rate. She clearly justified that

these is negative correlation exists between changes in the unemployment rate and

growth rates in personal consumption, with periods of falling unemployment coinciding

with accelerations in consumer spending.



THEORETICAL FRAMEWORK

Consumption function


       In the simple model of the economy, the simple relationship that household

spending depends on household income. The latter can be translated into national income

accounts as disposable personal income. Thus, postulated a functional relationship as

follows:


                      C = f (Y)

       Since in the simple model of the economy, it is assumed that there are no taxes

nor retained income in the business, Y (which was GNP) also was equated with

Disposable Income (YD).

       Such a basic relationship can be readily verified from actual empirical studies of

household income and expenses by income class.
                                                                                          18


       However, in using that relationship, it is assumed that all other factors capable of

influencing consumption remained constant. This is an assumption that may not be

completely realistic but reasonable to take when considering the short-run.

       These other factors are the distribution of income among households, the size of

the population, the availability of credit, the expectation with respect to future prices and

incomes, the interest rates, consumer tastes and marketing practices and institutions, etc.

All of these were considered unchanged in the short-run income determination model

discussed. So therefore, if any of these factors actually change (even in short-run), the

relationship between consumption and income would thus change, causing the

consumption function or schedule to shift.



Keynes’ General Theory of Employment, Interest and Money

       A decline in income due to a decline in the level of employment, if it goes far,

may even cause consumption to exceed income not only by some individuals and

institution using up the financial reserves which they have accumulated in better times,

but also by the government, which will be liable, willingly or unwillingly, to run into a

budgetary deficit or will provide unemployment relief; for example out of borrowed

money. Thus, when employment falls to a low level, aggregate consumption will decline

by a smaller amount than that by which real income has declined, by reason both of the

habitual behaviour of individuals and also of the probable policy of governments; which

is the explanation why a new position of equilibrium can usually be reached within

modest range of fluctuation. Otherwise, a fall in employment and income, once started,

might proceed to extreme lengths. (Encarta Encyclopedia 2004)
                                                                                        19




                                       Chapter III

                                   METHODOLOGY



Type of Study

               The study is a descriptive-correlational research which mainly describes

       and correlates factors affecting household consumption pattern.



Locale of the Study

       The study focused in Philippine rural areas.

       Philippines, as part of western Pacific Ocean, comprising the Philippine Islands

and forming part of the Malay Archipelago, an island grouping that extends

southward to include Indonesia and Malaysia. The location of the Philippines just north

of the equator gives the republic a moderate tropical climate suited for the cultivation of

export crops such as coconuts and pineapples. Agriculture has long formed the backbone

of the economy. Rural areas in the Philippines can be categorized as agricultural based

society and has higher rate of poverty incidence. The regions that were included are from

regions I to XII and CAR.



Data Collection

       Data were taken from the Family Income and Expenditure Survey (FIES) 1991-
                                                                                       20


2000; Integrated Household Survey Bulletin:Labor Force (IHS), 1991-2000; Philippine

Statistical Yearbook, 1991-2000; publications of National Statistical Office (NSO) and

National Statistical Coordination Board (NSCB) respectively.



Variables and Measures

Variables are measured by the following:

Table 1. Variables and their Measurements
                                    Variables                         Measures
Dependent Variable           Consumption                     Total amount of
                                                             household expenditures
                                                             per year in ‘000 peso
Independent Variable          Household Income               Total amount per year in
                                                             ‘000 peso
                              Number of Families             Total number per year
                              Inflation Rate                 In % change
                              Savings                        Total amount per year in
                                                             ‘000 peso
                              Employment Status              Total number of employed
                                                             persons per year n ‘000
                                                             Total number of
                              Cooperative                    registered multi-purpose
                                                             cooperative per year




Data Analysis

       The study used Pooled Regression Model. This model captures the variation of

per region‟s consumption and its changes over time. It shows the individual effects of

several explanatory variables on a single dependent variable.       The most important

explanatory variables are those that account for a significant proportion of the variation

on the observed consumption between years and across the region.

        The pooled observations cover all the regions in the country every three years
                                                                                         21


from 1991 to 2000. Pooled data were considered because they permit a rich model

specificaton and have more advantages since they allow the researcher to sort out

economic effects that cannot be distinguished with the use of either cross-section or time-

series data alone. As cited in the paper of Gillado, 2003, some of the advantages are: (1)

Panel data provide an increase number of data points, which in turn generate additional

degrees of freedom; (2) Panel data incorporate information relating to both cross-section

and time-series variables, thereby substantially diminishing the omitted-variable

problems; (3) Panel data eliminate some of the statistical inference problems which may

arise from a probable correlation between some of the explanatory variables (such as

multicollinearity, heteroscedasticity and autocorrelation); (4) panel data have the ability

to control heterogeneity and the likely joint endogeneity of some explanatory variables

and the bias due to under-reporting.



MODEL SPECIFICATION

       In this study, the consumption pattern of household expenditure is expressed

mathematically as follows (there were actually several functional forms tried, but the

model below has the best fit to the data).



logYit = λ0 + λ1X1 it+ λ2X2it+ λ3X3it+ λ4X4it+ λ5X5it+ λ6X6it+εit

 Where:

       logY = logarithm of consumption

       Xi = household income

       X2 = number of families
                                                                                        22


       X3 = inflation rate

       X4 = savings

       X5 = employment status

       X6 = cooperative

       λi = the regression parameters which measure the change in the consumption

             given a unit change in an explanatory variable holding other variables

            constant.

       ε = random error, which represents all the factors that could influence

            consumption but are not included in the model



         Basically, the model above is the statistical framework of the study. The model

simply illustrates that consumption is a function/dependent of household income, number

of household, savings, employment status, inflation rate and cooperative.The subscripts

“i” and “t” denote as the ith regional and tth yearly observations, respectively. The model

was fitted through Estimated Generalized Least Square (EGLS) via Shazam (10.0

version). Shazam is a comprehensive computer program for anyone who uses statistical

techniques. The primary strength of Shazam is for the estimation and testing of many

types of regression models.
                                                                                            23




                                       Chapter IV

                         RESULTS AND INTERPRETATIONS



       The first part of this chapter presents the aggregate household consumption

pattern and regional household consumption pattern in Philippine rural areas, 1991, 1994,

1997 and 2000 in real and nominal values. Data were adjusted using 1994 prices as

consumption deflator. The second part presents the summary of estimation result of the

model and its implication.



I. Household Consumption Pattern

       Aggregate nominal and real household consumption growth from 1991-2000 are

shown in figure 1 below. Accordingly, both demonstrated a strong surge of growth in the

early 1990‟s. Nominal consumption growth slowed down in the latter part of the 1990‟s

specifically from the years 1997 to 2000; nonetheless, it‟s still increasing. On the other

hand, aggregate real consumption fluctuates from the year 1997-2000. This is somewhat

an aftermath of 1997 ASEAN financial crisis happened in 1997, which drives down

economies of Asian countries resulted to high inflation rate and depreciation of

Philippine peso. According to ASEAN report, Philippines central bank was forced to

intervene heavily to defend the peso raising overnight rate from 15 percent to 24 percent.

The peso fell significantly, from 26 pesos per dollar at the start of the crisis to 38 pesos in

2000, to 40 pesos by the end of the crisis. The Philippine Stock Exchange Composite
                                                                                                                        24


Index, the main index of the PSE, fell to some 1000 points from a high of some 3000

points in. The peso fell even further, trading from levels of about 35 pesos to 50 pesos.

With these, prices shot up considerably. Inflation rate rose to 7.9 percent and accelerated

further to 10 percent. This means lower budget for the consumers. Prices of basic

commodities amidst lower incomes may mean smaller consumption particularly for the

poor household.

                                        In agricultural sector, the employment share of agriculture has shrunk

significantly to 37.5 percent in the second quarter of 1998 from 41.3 percent of the

previous year. (Reyes and Mandap, 1999).

                                        Moreover, according to the SWS 2000 survey, global economic slowdown made

Filipinos to consume less thus 1997-2000 aggregate real consumption falls while nominal

consumption is slowing down compare with the early 1990‟s. Combined effects of Asian

financial crisis and El Nino phenomenon in 1998 contributed this.

                                             Figure 1. Growth in Aggregate Household Consumption in Rural Area

                                  600




                                  500
 Expenditure (in billion pesos)




                                  400




                                  300




                                  200




                                  100




                                   0
                                             1991                  1994                          1997            2000
                                                                                  Year

                                                                          Real value     Nominal Value
                                                                                                                          25




                                                  Figure 2. Growth in Household Nominal Consumption per Region

                                    100


                                    90


                                    80                                                                           CAR
                                                                                                                 Region I
                                    70                                                                           Region II
  Expenditures (in billion pesos)




                                                                                                                 Region III
                                                                                                                 Region IV
                                    60
                                                                                                                 Region V
                                                                                                                 Region VI
                                    50                                                                           Region VII
                                                                                                                 Region VIII
                                                                                                                 Region IX
                                    40
                                                                                                                 Region X
                                                                                                                 Region XI
                                    30                                                                           Region XII
                                                                                                                 ARMM
                                    20                                                                           CARAGA


                                    10


                                     0
                                                1991              1994              1997               2000
                                                                           Year




                                          As can be seen in figure 2 above, growth in household nominal consumption per

region is increasing throughout the 1990‟s in most regions of the country and more

clearly visible to some. The trend of the 1994-1997 growth is significantly noticeable

compare to the 1991-1994 growth because growth in the latter is sluggish compare to that

in the former. Region IV has the highest share to the overall consumption expenditure

while CAR has the lowest. It is said that although CAR has the lowest account of

consumption expenditure, GDP growth and poverty alleviation of this region are

increasing. In the recent years, more improvements are being made to this region because

of its local tourism industry. Noticeable in the figure above is the fluctuation of Region

VI and CARAGA nominal consumption from the year 1997-00. Basically, since rural
                                                                                                                           26


sector in this region is predominantly agricultural, multiple impacts of natural disaster in

agriculture combined with economic instability during the Asian financial crisis can

explain to that, same with the other regions.




                                                      Figure 3. Growth in Household Real Consumption per Region

                                    70




                                    60

                                                                                                                  CAR
                                                                                                                  Region I
                                    50                                                                            Region II
  Expenditures (in billion pesos)




                                                                                                                  Region III
                                                                                                                  Region IV
                                    40                                                                            Region V
                                                                                                                  Region VI
                                                                                                                  Region VII
                                                                                                                  Region VIII
                                    30                                                                            Region IX
                                                                                                                  Region X
                                                                                                                  Region XI
                                    20                                                                            Region XII
                                                                                                                  ARMM
                                                                                                                  CARAGA

                                    10




                                    0
                                               1991                 1994               1997              2000
                                                                             Year




                                         Figure 3 illustrate regional real consumption pattern in Philippine rural areas.

Throughout 1990‟s, household real consumption performance demonstrated a somewhat

varied pattern. Real household consumption of region IV still has the highest share in the

consumption expenditure throughout the 1990‟s while CAR‟s real household

consumption is the lowest, ARMM as the second. The low consumption expenditure of

the household in ARMM region is somewhat relevant to the study of Balisacan (Causes

of Poverty, 1999) in which ARMM had the highest poverty incidence compare to other

regions. World Bank poverty assessment 2001, five regions appear to have lagged in
                                                                                       27


terms of poverty reduction. In the three of these (ARMM, CARAGA, Region XII), this is

driven by the lack of significant growth in mean consumption; for Eastern Visayas, there

was some growth but the poor failed to share adequately in its benefits due to an increase

in inequalities. The study is somewhat reflected to the figure shown above in which

Regions XII, ARMM and CARAGA have lower consumption expenditure. CARAGA is

not included in the years 1991 and 1994 above because it is still considered as part of

Region X during those years. It is also expected for region X consumption performance

to decline because of the creation of CARAGA in later years of the 1990‟s where in some

provinces split and become part of CARAGA. Region XI real consumption performance

is accelerating all throughout the 1990‟s. It reflects only of Region XI prevailing strong

economic conditions.

       The dominance of region IV can be pointed out to the two of the five existing

ecozones located in the region, Southern Tagalog. Enterprises located in the ecozones are

granted fiscal incentives thus each ecozone shall be provided with transportation,

telecommunications and other facilities needed to generate linkage with industries and

employment opportunities for its own inhabitants and those of nearby town and cities.

Region IV has the highest regional share of GDP (13.92%) second to the NCR (35.68%).

(Pernia and Quising, 2002)

       It is worth noting that real consumption performance of region VI begins to

decline from 1997 to 2000 similar to its nominal consumption performance. It is due to

the onslaught of the El Nino event in 1998 where greater effect is evident. Moreover,

1997 financial crisis dramatically affected this region which resulted in decreasing
                                                                                            28


employment and incomes particularly in the agricultural sector. (Reyes and Mandap,

1999)



II. Estimation Results

        There are a lot of functional forms that were tried to achieve a model that has a

good fit to the data (e.g. loglog, linear, linlog and loglin pooled regression model). It

came out that loglinear model has the best fit. The table below shows the summary of the

estimation results.


 Table 1. Estimates of the Parameters of the Model




INDEPENDENT               COEFFICIENT               STANDARD                  P-VALUE
VARIABLE                                               ERROR


INCOME                      0.18339E-07              0.3221E-08                 0.000


INFLATION                  -0.15365E-01              0.3912E-02                 0.000
RATE


EMPLOYMENT                  0.40980E-03              0.1312E-03                 0.002
STATUS


COOPERATIVE                 0.81230E-04              0.3886E-04                 0.037


R2 = 0.9646                                     σ2 = 0.84388
                                                                                      29


        Of the six independent variables that were used to explain the variation of

household consumption, four variables are significant at 0.05 level namely household

income, inflation rate, employment status and cooperative. Saving and number of

households are the variables that are not significant. It can be verified to the actual

economic condition of the rural sector where in they are unable to save because of low

financial resources coupled with lack of employment opportunities. Furthermore, poor

economic conditions continue to persist in rural area and were even affected more by

increasing population.

        Looking at the signs of the coefficient estimates, household income and

consumption are positively related, that is, and the higher the income, the higher the

consumption would be. It supported the theory of consumption function that the amount

the community spends on consumption obviously depends partly on the amount of its

income. Common sense suggests that the more income households have, the more they

are willing to spend on consumption.

        Inflation rate is negatively related to household consumption. Due to the

increasing inflation rate, household consumer tends to spend less because prices of

certain commodities become more expensive. Such basic relationship can be verified

from the theory of Deaton that consumers as shocked by the excessive rise in prices,

cutting back their consumption in response. It only means that household consumers in

rural area also anticipate higher price thus lessen their consumption given their limited

income. The law of demand that as the price increases, demand for certain commodity

decreases can also justify it.
                                                                                       30


       Employment status has positive relationship to the household consumption.

Consumers are confident to spend more because they have jobs. The more employed

person there is, the higher the consumption. This relationship holds true and can be

verified from actual empirical studies of consumption and employment by Ryan. Based

on her study of Irish Consumption, rising employment correspond with the acceleration

of Irish consumption.

       Cooperative as assume to provide credit extensions to the rural sector is directly

related to the consumption. The increase of credit extensions in the rural area can add up

to the spending power of the household. It may facilitate consumption in the short run by

increasing cash flows. Thus, the increase in the number of multipurpose cooperative may

encourage household to consume more because more loans and credit facilities are

accessible.

       The summary of the final model in equation form is the following:

       logy = 15.815+0.18339E-07X1-0.15365E-01X3+0.40980E-03X5+0.81230E-04X6

       The coefficient of each of the independent variables measures the marginal

impact to the consumption given that other variables remain constant. In every

100,000,000 pesos increase in the aggregate income; there is a 100,423,163.90 pesos

increase in the aggregate consumption. This is according to Keynes, “there was a

psychological law” that any increase in income would result in an increase in

consumption. In every one percent increase in the inflation rate, aggregate consumption

will decrease by 1,036.01. It only means to say that higher price tend to influence

consumer in rural area to cut off their spending given that employment and income are

limited. However, the impact is not that high compared to that in the urban areas since
                                                                                         31


inflation rate is measured by the Consumer Price Index, which focused more on

consumer basket for urban sector. It can also be justified as to the conditions in the rural

areas where in household could resort to some option of non-market commodities when

prices increase. In every 1,000,000 increase in the total number of employed person,

aggregate consumption will increase by 2,569,212.34 pesos. Lastly, in every 100 unit

increase in the total number of multipurpose cooperative in rural area will result to

101,887.99 pesos increase in the aggregate consumption.

       The above results imply that employment status, cooperative and household

income has brought a large impact to the household consumption. Among other

significant factors, inflation rate has the least effect to the consumption.
                                                                                      32




                                       Chapter V

             SUMMARY OF FINDINGS AND RECOMMENDATIONS



SUMMARY OF FINDINGS

        Aggregate household real consumption performance in the rural area is in varied

pattern throughout the 1990‟s, raging from a rise in the year 1991-97 to a fall in 1997-

2000 and most noticeable in some regions of the country. Among the regions, region IV

has the highest consumption expenditure and was maintained throughout the 1990‟s

while CAR and ARMM have the lowest.

       Out of the six variables that were tried in the model, four of them were found to

have important roles to play in explaining the consumption pattern namely; household

income, inflation rate, employment status and cooperative. Savings and household

population are not significant to the consumption.

       Employment status, cooperative and income were quantified to have strong

influence to the consumption pattern. Changes in these factors are important explanation

in the variation of household consumption pattern In every 1,000,000 increase in the

aggregate number of employed person 2,569,212.34 pesos will increase in the aggregate

consumption holding other variables constant. It is empirical evidence that the residents

in rural areas are more confident to consume more when they have jobs and more

employment opportunities are available. They are confident to consume more knowing

that they have a source of income. Approximately 100,423,163.90 pesos would increase
                                                                                             33


in the aggregate consumption in every 100,000,000 pesos increase in the aggregate

income. In every 100 units increase in the total number of cooperative, aggregate

consumption would increase by 101,887.99 pesos. Inflation rate has the least impact on

the aggregate consumption in the rural area. In every one percent increase in the inflation

rate, aggregate consumption will decrease by 1,036.01 pesos.



RECOMMENDATIONS

   1. The Philippine statistical agency should come up with separate aggregate

       important variables between rural and urban areas particularly on the total

       investment made in both sector and total expenditures apportioned by the national

       government. There should also be a separate consumer basket between rural and

       urban so that actual relationship can be shown.

   2. According to the findings, given that employment status has brought a great

       impact to the household consumption, the government should pursue on the

       creation of jobs in the rural sector to boost household‟s consumption.

   3. ADB Study pointed out that inadequate rural credit is a major obstacle to rural

       employment and income generation. Only about 30 percent of rural credit is

       provided by banks and savings and loans associations, many of which are of

       unsound financial health, while the remainder is provided by informal money

       lenders who charge very high rates of interest. Since cooperative is measured to

       influence household consumption, it is encouraged that more credit and loans

       facilities should be accessible for the rural sector to increase their consumption.
                                                                                    34


4. Given that income has brought a large impact to the household consumption

   pattern, the National Government should carry out its role in building rural

   infrastructure – roads, water supply systems, storage facilities, electricity, ports

   and communication to facilitate agricultural productivity and investment which

   would result to higher income in rural area thus boosts the sector‟s household

   consumption.
                                                                                   35




BIBLIOGRAPHY:

National Statistic Office, “Family Income and Expenditure Survey” (FIES),

National Summary (2000)

National Statistical and Coordination Board, “Income and Prices”, Philippines Yearbook

(2002)

Arsenio Balisacan and Ernesto Pernia (2002), “Probing Beneath Cross – National

Averages: Poverty, Inequality and Growth in the Philippines”

Arsenio Balisacan and Shigeaki Fujisaki (1999), “Causes of Poverty Myths, Facts and

Policies: A Philippine Study”.

Bernardo Villegas and Victor Abola (1992), “Economics: An Introduction”, 4th Edition

Pp.100-127

Mary Ryan (2003) “Patterns and Determinants of Irish Consumption”,

Economic Analysis, Research and Publication Department

Robert Yaffee (2003) “ A Primer for Panel Data Analysis”

Arsenio Balisacan and Hall Hill (2003), “The Philippine Economy; Development,

Policies and Challenges,” Ateneo de Manila University Press

Celia M. Reyes and Anne Bernadette Mandap (1999), “Social Impact of the Regional

Financial Crisis in the Philippines”.

Alejandro n. Herrin and Ernesto M. Pernia (2003), “ Population, Human Resources, and

Employment” The Philippine Economy.
36

				
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