Economic Growth with Equity: Lessons from East Asia

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Lessons fromEast Asia

Kevin Watkins

Oxfam Publications


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front cover photograph: Jakarta, Indonesia. J Hartley/Oxfam

OxfamGB1998First published by Oxfam GB1998A catalogue record for this book is available from the British Library.ISBN 085598 3841All rights reserved. R eproduction, copy, transmission or translation of any part of thispublication may only be made unde r the following conditions: with the prior written permission of the publisher with a licence from the Copy right Licensing Agency Limited, 90 Tottenham Court Road,London W1P 9HE, UK, or from any other licensing agency for quota tion in a review of the work unde r the terms set out below.This publication is copyright, but m ay be reproduced by any method w ithout fee forteaching purposes b ut not for resale. Because Oxfam wan ts to know how w idely itsmaterials are disseminated, formal pe rmission is required for all such uses, but will begranted immediately.For copying in any other circumstances or for re-use in other publications, or fortranslation or adaptation, prior w ritten permission m ust be obtained from the publisher,and a fee may be payable.Available from the following agen ts:for Canada and the USA: Hum anities Press International, 165 First Avenue, AtlanticHighlands, New Jersey NJ 07716-1289, USA; tel. 732 8721441; fax 732 872 0717for Southern Africa: David Philip Publishers, PO Box 23408, Claremont, Cape Town 7735,South Africa; tel. (021) 644136; fax (021) 643358for Australia: Bush Books, PO Box 1370, Gosford South, NSW 2250, Australia;tel. (043) 233274; fax (029) 212248for the rest of the world contact: Oxfam Publishing, 274 Banbury Road, Oxford OX2 7DZ, UK

Published by Oxfam GB, 274 Banbury Road, Oxford OX2 7DZJB004/RB/98Printed by Oxfam P rint UnitOxfam GB is a registered charity no. 202918, and is a mem ber of Oxfam International.

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Contents Preface 5 Introduction 7Chapter 1 Three East Asian lessons 20Chapter 2 Grow th with equity and poverty reduction 28Chapter 3 Prioritising human development:

the social policy fundam entals 54

Chapter 4 Employment and manufacturing 89Chapter 5 Rural develop me nt through redistribution 100Chapter 6 The limits to growth w ith equity 116Chapter 7 Postscript: The East Asian crisis

and the threat to grow th with equity 127 Notes 147


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PrefaceThis Insight book started life as a short briefing paper prepared, for theannual m eeting of the International M onetary Fund (IMF) and the WorldBank in Hong Kong in September 1997. The aim of the briefing pa per wasto draw attention to the success of East Asian countries in combininghigh growth w ith equity and in achieving levels of poverty reduc tionwhich are without historical precedent. Shortly after the briefing paperwent to print, the full extent of the financial crisis in East Asia began toemerge, as first Thailand and then Indonesia and South Korea wereforced to tu rn to the IMF to avert outrigh t collapse. Almost overnight, itseemed, the East Asian 'miracle' w as being converted into a mirage, withthe financial crisis spilling over into the real economy and threatening toreverse progress towards poverty redu ction.

Pronouncements on the death of the East Asian 'miracle' are, inOxfam's view, at best premature and at worst wildly misplaced. Thefoundations upon which the region's social and economic advance havebeen built remain intact, however severely they hav e been shaken. Socialinvestment in basic health and education has created a stock of h um ancapital which has been instrumental both in sustaining economicgrowth, and in converting grow th into poverty reduction. At the sametime, the redistribution of productive assets has enabled the poor in EastAsia to produc e their w ay o ut of poverty, creating a mutually reinforcingprocess of economic growth and social advance. Governments in LatinAmerica an d sub-Saharan Africa should, as we sugg ested in the originalbriefing paper, still be asking themselves why their economies have togrow at up to five times the rate of those in East Asia to achieve the samerate of poverty reduction .

This said, the financial crisis does pose an unp receden ted challenge toEast Asia and the wider international community. The economic mis-management which contributed to the crisis is in large measure theproduct of corrupt, autocratic, and anachronistic political structures,unde r which government has become a vehicle for the pu rsu it of priva tevested interest. Banking systems and finance ministries have become


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Economic Growth with Equity: Lessons from East Asiaconduits for the transfer of public funds to powerful but inefficientcorporations, or, as in Indonesia, to the extended families of politicalleaders. For too long, governments in East Asia have maintained themy th tha t economic success and social advance are not consistent with atransition to more democratic political structures. The lesson of thepresent crisis is that they are not consistent with autocracy and unac-countability and that political reforms are urgently needed to supporteconomic reforms.

For the international community, the challenge is to develop aresponse to the financial crisis which protec ts the gains of the past, whilesuppor ting the reforms needed to maintain future p rogress. It is failingin this challenge. The failure is not in the speed or scale of resourcemobilisation. Over $100bn has been comm itted to the region under IMFauspices since the crisis began, dwarfing the financial response toprev ious crises. The problem is that insufficient attention has been pa idto the specific circumstances of East Asia. Conditions attached to IMFloans parallel those familiar from the Latin American deb t crisis of the1980s. They reflect a bias tow ards deflation and fiscal austerity which arenot only inappro priate, given the underlying economic conditions, butwhich threaten to turn recession into a full-blown depression. Otherconditions such as the requirement that banking systems are op enedup to foreign ownership threaten to cause further instability, andappear to bear the heavy imp rint of US influence and self-interest.The text of the September 1997 briefing pap er has been extended andupdated to take into account the financial crisis and the response to it.The resulting Insight book, like the earlier pap er, has benefited fromdiscussions with and comments from a number of Oxfam colleagues,including Tony Burdon, Heather G rady (Vietnam), Siddo Deva, Lot Felizco(Philippines), Justin Forsyth, Jan Klugkist (Novib), Dianna Melrose, JohnSayer, Veena Siddarth, Patrick W att, and Lydia W illiams (Oxfam US).Finally, a wo rd on 'East Asia'. In keeping with common usage, we usethis term to refer to countries in the sou th-east of the region, as well as th eeast proper. Where regional data on poverty are used, the relevantcoun tries are specified in the text.


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Introduction

Twenty-five years ago Mei Hong's parents left their village in China'snorth-west province of Xianjing and moved to the southern town ofShenzhen. Like millions of families in the developing w orld , they w ereattempting to escape desperate rural poverty. Unlike most, theysucceeded. Mei Hong now works in Shenzh en's special economic zone,one of the country's fast-expanding industrial areas. Life is hard, butliving standards are far higher than those the family left behind andthey are rising fast.

Last year Mei Hong gave birth to her first child, Yu Lee a namewhich means 'new hope'. The name is an apt description of what hashappened to the poor in China. In 1972, when Yu Lee's grandparentswere leaving Xianjing, one in three Chinese lived in pov erty, unable tomeet their basic needs for food, clothing, and shelter. Illiteracy waswidesp read and child mortality rates were high. Today, poverty afflictsless than one in ten Chinese. Child mortality has fallen by m ore than half,and fewer than 10 per cent of people between the ages of 10 and 25 areilliterate. Children like Yu Lee are twice as likely to reach their firstbirthday than children born to her grandparents' generation, and theywill live on average ten years longer.

Yu Lee is the beneficiary of a revolution which has sw ept over EastAsia in the past three decades. Built on the foundations of grow th w ithequity, it is a revolution which resulted in the fastest reduction in povertyfor the largest num ber of people ever witnessed in history and it is arevolution which provides lessons for other regions. Com placency basedupon past achievement is a luxury East Asia can ill afford. Yet in a worldwhere one in three people live in a state of absolute want, and wh ere thenum ber of poor continues to rise, the region provides a beacon of hop e inthe midst of pervasive gloom, serving as a reminde r tha t the war againstpoverty can be won. Encouraging as the achievements of the past may be,there are powerful obstacles to continued p rogre ss. The curren t financialcrisis is one such obstacle. W hat started as a crisis in financial systems hasnow been transmitted to the real economy, underm ining production and


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Economic Growth with Equity: Lessons from East Asiaemployment. Poverty levels are rising across the region, and there isnow a real danger that the gains of the past will be reversed. Restoringstability while protecting these gains and m aintaining the m om entumtowards poverty reduction poses a challenge to governments across theregion. It also poses a challenge to the industrialised countries, whichhave mobilised resources for IMF-sponsored rescue packages with anapparent disregard for their impact on poverty. The World Bank hasrecently been drafted in to finance the creation of social welfare safety-nets, but, welcome as these are, they bear all the hallmarks of hastilycontrived afterthoughts. What is needed is the integration of poverty-reduction considerations into the macro-economic reform measuresadopted in response to the crisis.

Looking beyond the immediate crisis, there are problems to beconfronted if progress in human development is to be maintained.Rising inequality is one such problem. Part of East Asia's success inpoverty reduction has been built upon the equitable sharing of thebenefits of economic growth, especially in comparison with otherdeveloping regions. During the 1990s, however, growth has beenaccompanied by a widening divide in income, with the gap between richand poor becoming ever larger. There is also a huge 'democratic deficit'.Economic development has been pursued under governments which,for all their political differences, share in com mon a deep hostility to theprinciples of democracy and accountability. Moreover, the growthwhich has driven pove rty reduction has been accompanied by extremeforms of exploitation notably of female labo ur and environmentaldestruction. In Mei Hong's home-town of Shenzhen, it has beenestimated that one-half of all factories violate health and safety laws.Young wom en, driven to the city by extreme rural pov erty, are requiredto work long hours in dangerous conditions, withou t even the most basicwelfare protection. Industrial accidents are common, and trade unionrights almost non-existent. Outside of the factories, public health isthreatened by high levels of water an d air pollution. The problems whichchildren like Yu Lee will face as a result of these harsh realities are assignificant as the oppo rtunities they will hav e for a better life. This year,an estimated 178,000 people living in China's cities will suffer prematuredeath because of pollution.

1The mental development of children inmajor cities is threatened by blood-lead levels which average 80 per centhigher than those defined as dangerous by international stand ards.


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IntroductionPast successes and failuresThis book examines some of the positive lessons for poverty reductionand grow th to emerge from East Asia. It asks why the region has been sosuccessful in comparison to other regions in combining high levels ofgrowth with rapid progress towards poverty reduction. But the darkerside of the East Asian miracle should not be forgotten. Poverty is abou tmore than low incomes and social welfare ind icators. It is also about aninability to exercise basic human and political rights, the absence ofdignity, deprivation in knowledge and comm unication, environm entalimpoverishment, and the violation of the rights of women. In theinternational league table for poverty reduction, East Asia ranks at thetop. On these broader indicators for hum an d evelopm ent it wo uld rankfar lower. For other developing regions, the challenge is to learn fromEast Asia's success in advancing social and economic welfare. Thechallenge for East Asia is to develop more participatory approaches todevelop ment, in which the poor are given a political stake in society aswell as an economic and social stake.

There are other limits to the East Asian success story. While pastachievements have been impressive, there are still 345 million peopleliving below the W orld Bank poverty line of $1 a day.2 In China there are270 million people in poverty more than in the whole of sub-SaharanAfrica. Moreover, progress towards poverty reduction has not beenuniform across the region. The Philippines has a lamentable record, withits share of the region's poor doubling over the past two decades. D uringthe 1990s Vietnam has emerged as the latest high performer in thegrowth and poverty reduction league-tables, but it has a great deal ofcatching up to do. Along with Lao PDR, it is one of two countries in theregion with over 40 per cent of the population in poverty and theintensity of poverty is far greater than elsewhere in the region. In rura lareas of Vietnam, the average income of the poo r is 20 per cent below thepoverty line.

Poverty in the region is to be found in its most concentrated formamong small farmers, the landless, fishing comm unities, and indigenousor tribal comm unities, often living in geographically remote areas. Earlyin 1997,2,000 people established a camp outside Government House inBangkok. They were draw n from impoverished rural areas in the north-east of the country, from slums in Bangkok, from villages wherecommunities had been displaced by large-scale development projects,and from trade unions. W ithin two week s, the camp had g row n to 20,000people, and its residents, now organised into a Forum for the Poor, had


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Economic Growth with Equity: Lessons from East Asiaoutlined demands for a new pattern of development capable ofresponding to the needs of the marginalised.3 As an expression of thefailure of existing growth patterns to benefit the poor, the protest inThailand was an element of a wider protest movement.

Across the region, rapid growth, with all of its benefits in terms ofpoverty reduction, has been achieved at a high price. Natu ral resourcemismanagement has left a legacy of environmental destruction whichhas und erm ined the livelihoods of vulnerable comm unities. The powerand infrastructure demands of industry have spawned huge projects,often financed by the World Bank and o ther multilateral donors, wh ichhave displaced millions of poor people, usually without adequatecompensation. In urban areas, the presence of sprawling slums istestament to the uneven distribution of the benefits from grow th. But itis in rural areas that poverty remains deepest and most pervasive.Alongside the poverty, islands of prosperity emerged to highlight thedivide between rich and poor. Before the financial crisis struck, Thailandwas one of the wo rld 's largest mark ets for Mercedes Benz cars. Yet in therural north-east, poverty levels are of dimensions more familiar fromAfrica. Political protest in Thailand has been a response to the rapidincrease in inequality which has accompanied high g rowth. Inequalitiesare also wid ening in other coun tries. The economically powerful in EastAsia acquired all the trappings of Western consumerism, with im ports ofluxury goods flourishing. At the other end of the social scale are the po orwho, lacking political power, are often treated appallingly. The relo-cation of urban squatters, the eviction of farmers from their land, theviolation of indigenous land-rights in the interests of domestic andforeign investors, and the suppression of civil society are among themore visible outrages perpetrated against the poor. To add to theseproblems there are signs that economic grow th is slowing, and w ith it,progress tow ards the eradication of poverty.

A 'miracle' under threatOther clouds have appeared on the East Asian horizon over the pastyear. During the 1980s countries such as Malaysia, Thailand, andIndonesia followed the first generation of 'tiger economies' in combiningbreakneck economic growth-rates with financial stability. The regionhas, in many respects, reap ed the benefits of globalisation. Rapid exportgrowth has been one mechanism increasing the region's integration withthe global economy and export growth has been converted into high10


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Introductionrates of job creation and rising real wages. East Asia is the onlydeveloping region to have consistently expanded its share of worldtrade over the past three decades. The region has also attracted a largeprop ortion of the private capital flows which have surged in the 1990s.Over the past five years, it has absorbed more than 40 per cent of theprivate capital invested in developing countries. However, integrationin the global economy creates risks as well as opportunities. The benefitsof successful participation founded on good policies are high, bu t so tooare the costs of policy mistakes. This is a lesson which East Asia is nowlearn ing, to its cost.During 1997, the region's reputation for stability evaporated in arolling cloud of financial turm oil, the effect of which has spread to WallStreet, to European stock markets, and to Latin America. Concern over'contagion', or the spread of instability across global markets, hasprompted the industrialised countries to contrive massive financialrescue packages, now totalling over $100bn, under the auspices of theInternational M onetary Fund (IMF).

Some commentators have been swift to pronounce the Asian miracledead and buried, claiming that the currency crisis is a symptom ofterminal economic problems.4 The date on the tombstone reads 'July1997', when Thailand's devaluation marked the onset of a regionalfinancial crisis. Others have cited the latest crisis as evidence that therehas been no m iracle, but a mirage built on the foundations of inefficientstate intervention.5 Both argum ents contain a germ of truth, in the mids tof wild exaggerations. The hard fact is that no other gro up of countries inthe developing world has sustained more rapid economic growth orachieved more dramatic poverty reduction . Contrary to the increasinglypopu lar view, the miracle was not a mirage. Absolute poverty has beenvirtually eliminated in Korea, Malaysia, and Thailand; and Indonesia,which was a scattering of poverty-stricken islands 30 years ago, is insight of the same goal. Of course, the challenge ahead remainsformidable and East Asia's economic growth rates have obscuredserious structural shortcomings. But while the region's economies facesystemic problems, their capacity for recovery and continued growthremains strong. Savings rates are high, government finances are stable,and the region has invested heavily in social and economic infra-structure. While the economic aspects of the 'miracle' may have beenover-stated, East Asia has not been transformed overnigh t into a 'basket-case'. The causes of the presen t crisis vary, although some elem ents areshared across countries. Three factors have been of particular im portance.

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Economic Growth with Equity: Lessons from East AsiaFirst, global dem and for East Asian exports has slowed, diminishing thecapacity of exports to sustain growth. In a region where exports haveacted as the main engine of growth the consequences have beeninevitably severe. Second, the US dollar has appreciated significantlyagainst the yen, undermining the competitiveness of East Asiancountries since most have tied their currency to the dollar. Countrieswith the least flexible exchange-rate regimes notably Thailand hav e faced the most acute adjustment pressure s, losing market share tolow-cost competitors such as China. Third, a combination of heavyforeign investment and weak financial regulation has allowed lenders torapidly expand credit to high-risk borrowers, making financial system sincreasingly vulnerable. In Thailand and Indonesia, banks and otherfinancial institutions took out large, short-term dollar-denominatedloans from foreign lende rs, lending on to create a boom in real estate, andfuelling stock-market speculation. In South Korea, inadequate regula-tion of capital markets has enabled the giant chaebol, the conglomerateswhich dominate economic life, to borrow recklessly, destabilising thecountry's bank ing system in the process.

Foreign speculation and integration in global financial markets hasincreased the costs associated with financial mismanagement. But toblame ruthless foreign speculators for the currency crisis, as theMalaysian government has done, is dangerously misleading.6 As weargue in this book, greater regulation of global markets is urgentlyneeded in the interests of sustained growth, employment, and povertyreduction. However, improved regulation and sensible policy reformsare also needed at the national level. Serious policy mistakes have beenmade, which must not be repeated and painful reforms must bepursued. Deeply corrupt political structures built on the foundations of'crony capitalism', and family-run states, are not well-equipped to dealwith the economic problems no w facing East Asia. From South K orea'schaebol to the Suharto family em pire in Indonesia, inefficient commercialenterprises have been granted privileged access to credit and statesubsidies. The same motley collection of big business elites are nowusing their political influence to escape the costs of the crisis they hav ehelped to cause.

Much will now depend on whether economic reform is backed bypolitical reform. In some cases, the economic crisis is fuelling politicaltransformation. In Thailand, the crisis has broug ht d own a governm entand eased the passage of a new constitution. Similarly, in South Korea, anew government has been elected on a platform of cleaning up the12


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Introductionfinancial corruption which contributed to the crisis in the bankingsystem. In both cases, there have been moves to wards im proved finan-cial transpa rency and accountability. Unfortunately, the same cannot besaid of Indonesia and Malaysia. Whatever its past achievements andfailings, the regime of President Suharto is now seen as a major part ofIndonesia's problems. Pressure from the IMF has resulted in some limitsbeing placed on favours for the Presidential family. But economicreforms are being grafted on to a political structure w hich functions onthe basis of patronage and the use of public office to advance privategains, notably through subsidies, the granting of monopolies, and tariffprotection. In M alaysia, populist bluster aimed in the general direction ofthe IMF and the industrialised countries has prov ided a smokescreen fordomestic policy failure. The Petronas Tower in Kuala Lumpur wasdesigned as the world's tallest building and as a testament toMalaysia's economic strength. Instead, it has become a symbol of theruinous property boom which, driven by irresponsible lending, hasswept East Asia, diverting investment aw ay from produc tive enterpriseinto speculative activity. The problem in Malaysia, as in Indonesia, is thatthe govern ment is so firmly a part of the corrup t economic and financialstructure s behind the crisis that it cannot institute fundamental reformswithou t underm ining its own positions.

Not all of the threats to East Asia's past achievements are domestic.Perhaps the greatest threat to continued growth an d poverty reduction islocated in Washington, at the headquarters of the IMF. For practicalpurpose s, the IMF has assum ed responsibility for formulating economicpolicy in countries with over 300 million citizens. It has don e so with outscrutiny, transparency or public accountability.7 In these respects, itmirrors the problems associated with the governments with w hich it isnow negotiating. The more serious problem is that the conditionsassociated with the IMF's 'rescue' operations now threaten to roll backthe gains of the past. Just as it did in response to the Latin American debtcrisis in the early 1980s, the Fund has re sponded to the East Asian crisisby dem anding massive deflation, with cuts in public spen ding and highinterest-rates as the main policy instruments.8 This approach is notjustified by the underlying economic conditions in East Asia where, incontrast to the position in Latin America in the 1980s, savings rates a rehigh, inflation is low, and bu dge ts are broadly in balance. Whatever theregion 's prob lems, East Asia is hardly a basket-case of fiscal profligacy.The danger no w is that excessive deflation will turn recession into a full-blown depression, with its attendant consequences in terms of mass

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Economic Growth with Equity: Lessons from East Asiaunem ployment and rising poverty. There are already ominous parallelswith Latin Am erica, notably in the way that foreign-exchange shortagesare undermining the capacity of potentially competitive companies toaccess imported technology.Even less justified than the scale of deflation being imposed is thefailure of the IMF (and the governm ents which have contributed to itsoperations) to consider the implications of its 'rescue' operations for thepoor in the region. Perhaps several decades of rapid economic growthand poverty reduction have obscured the depth and severity of thepoverty which remains. In Indonesia, deflation is being imposed on acoun try facing its worst d rou gh t in 50 years. This is a coun try in whichone in ten of the popu lation over 20 million people live in poverty.Millions more live perilously close to the poverty line, highly vulnerableto adverse economic trends. Moreover, extreme regional inequalitieshave left a huge poverty gap between Jakarta and some of the OuterIslands. In East Nussa Tengarra and West Kalimantan, where Oxfamworks with local comm unities, poverty levels are in excess of 40 per cent.Field staff reports already indicate disturbing increases in poverty, asdesperately poor rural households lose remittances from relatives inurban areas who are victims of the increase in unemploym ent. These arethe wo rds of one women, Rose Suares, a mother of six children living inFlores, in the Nusa Tengarra Timor Province of Indonesia: 'Without theearnings of m y husban d in Jakarta, I do n't know how we will survive.How will I buy food, let alone find the fees for m y ch ildren's school?' Herhusband was among the first wave of 150,000 construction workers tolose their jobs. But her story is likely to become an increasingly comm onone, with an estimated one in five households in the Outer Islandsdepending on remittances from the 3 million migrant workers in Jakarta.It is a similar story in Tha iland, whe re unemp loym ent is expected toincrease by around 1 million over the next year. This has potentiallydevastating consequences for rural poverty in the north-east of thecoun try, where over half of the absolute poor live, and wh ere remittancelevels are among the main determinants of welfare. While absolutepoverty levels in Thailand are minimal, using the $1- a- day threshold,there are some 6 million Thais who live perilously close to that threshold,on incomes of $1 to $2 per day. Like Indonesia, Thailand will be req uiredto undertake substantial cuts in public spending. This poses animm ediate threat to the poo r, wh o face a loss of basic social services inhealth and education. It also poses long-term threats to povertyreduction. East Asia's success has been built on the foundations of14


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Introductioninvestment in huma n capital, which has created opportunities for healthand education. These in turn have fuelled the process of economicgrow th. It follows tha t any e rosion of the region's capital base will pose athreat to future g rowth.None of this is inevitable. Less deflationary options designed toprotect employment and public provision are available. Indeed, thedanger is that excessive deflation will send regional economies into anose-dive of declining investment and slow growth, underminingprospects for poverty reduction. Similarly, policy options are availablewhich could restore stability without painful cuts in priority socialservices. What is needed at the outset is a political recognition of thepotential threat to growth, equity, and poverty reduction posed by thecurrent crisis, with the World Bank undertaking a review of theimplications for the poo r of its 'rescue' plans.Looking to the future, there is another problem at the heart of theIMF's operation in East Asia: namely, the presumption in favour ofcreditors. Foreign creditor claims on the financial institutions of theregion hav e been uncritically accepted as legitimate. This is despite thefact that reckless lending by W all Street and European m oney m arke ts isas m uch a feature of the crisis as domestic policy failure. As a FinancialTimes editorial has pu t it, the role of the IMF 'is not to bail out every idiotwh o has lent short-term to fund long-term investment'.9 Unfortunately,this appea rs to be precisely wh at the managem ent of the Fund regard asthe institution's proper role.But questionable as the IMF's adherence to deflationary economicpolicies may be, and as unacceptable as its domination by US and widercreditor interests undoubtedly is, there are positive elements in theconditions attached to the rescue packages. For instance, in Indonesia theIMF has demanded that President Suharto withd raw s all tax and tariffexemptions, as well as subsidised loans, to the national car companyown ed by his son, Hu tomo Mandala Poutra. The same son will lose hismonopoly on the purchase of cloves, resulting in benefits for farmers.Major development projects, wh ich would have transferred a large shareof the bud get to the Presidential family and associated cronies, have beenabandoned or postponed. In South Korea, Indonesia, and Thailand, theIMF's loan conditions dem and mo re effective surveillance of banks, andgreater independence for central banks. All of this is long overdue.Ultimately, the precondition for successful constitutional reform isradical political change and it remains to be seen whether or not theregion's political systems can adap t.

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Economic Growth with Equity: Lessons from East AsiaThe need for reformProtecting the gains of the past and bu ilding upo n them for the futureposes enorm ous challenges to policy makers in East Asia. How can rapideconomic grow th be combined with sustainable resource managemen t?What policies are needed to ensure an equitable sharing of nationalwealth? Can East Asia's autocratic political structures be reformedwithout conflict and instability? There are no easy answers. Majoreconomic reforms are clearly needed. So too are institutional reforms.There is mo unting evidence that economic growth is running up againstthe barriers presented by political autocracy. The region's institutionsare debased and corrupted by their subordination to the pursuit ofsectional self-interest. Their renewal demands the transition to moreopen and accountable political structures and a more constructiveresponse to the calls for dem ocracy now being heard across the region.

Flawed generalisationsGeneralisations about the underlying causes of East As ia's 'success' arefraught with problems. The diversity of the region's countries andpeoples, their historical differences, and differences in social and economicpolicy suggest the need for caution. Nonetheless, generalisationsabo und . Three schools of thought d om inate efforts to explain East Asia'ssuccess. The first argues that authoritarian governance has been thecentral factor, with human rights being sacrificed on the altar ofeconomic growth. One variant of this view is that universal humanrights, as provided for in the UN C harter, are 'individualist', and there-fore inconsistent with 'Asian values', which place the good of societyabove individual rights. The Malaysian Prime Minister has recentlygone so far as to propose that the UN abandon its commitment touniversal rights in order to accommodate East Asia, claiming thatcontinued economic and social progress requires the suppression ofindividual liberties.10 The second school of thought identifies free-market economic prescriptions as the critical factor in East Asia'ssuccess. In this account, trad e liberalisation, financial deregu lation, andadherence to market p rinciples have acted as a springboard to efficiency,grow th, and poverty reduction.11 The World Bank has used East Asia'sexperience or, more accurately, its own interpretation of that expe-rience to draw up a checklist of good po licies, to be copied elsewhere.The third interpretation is essentially the reverse of the second. This

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Introductionstresses the central role of state intervention, protectionism, and financialregulation in driving East Asian growth.12Each of these arguments suffers from a selective and inadequateinterpretation of the evidence. Political factors are important inexplaining poverty reduc tion in East Asia. But if authoritarianism wereclosely correlated w ith economic developm ent, much of Africa and LatinAmerica wo uld be booming. Moreover, while political autocracy in EastAsia delivered high grow th in the past, it has also delivered the financialcrisis and deep recession now gripping the region. The argument thatdemocratic and accountable government is unab le to deve lop long-termstrategies for managing grow th looks increasingly threadb are. Today, itis the inability of corrupt, unaccountable autocrats to disentangleeconomic policy from a complex web of corrup tion an d private favoursat the expense of the public purse, rather than the presumed short-comings of democracy, which poses the greatest threat to futureprosperity. In short, the implied 'trade-off between political freedomand progress tow ards poverty reduction is a myth. In reality, the notionof 'Asian values' is a euph em ism for the violation of hum an righ ts on thepart of political autocrats pursuing vested political and economicinterests. In Malaysia, Indonesia, and Thailand exponents of East Asian'values' receive funds from private interests, who claim repayments inthe form of access to public funds and political favours p rovid ed at theexpense of the poor. Leaving aside the w ide variety of value system s inAsia, political protests in Indonesia, Thailand, and South Korea serve asa timely reminder that East Asian people, as distinct from their rulers,aspire to democracy and accountable gov ernment.

This book rejects the view that the economic success of East Asia isrelated to the preference of regional elites for autocracy and theirpredisposition to hum an rights violations. These are sources of weaknesswhich threaten economic performance and future progress towardspoverty reduction, rather than a source of strength. Nor is the secret ofsuccess to be found in adherence to free-market ideology. M arkets havebeen important, but many of the policies advanced by the World Bankand others unde r structural adjustment run counter to those which havespurred poverty reduction and growth in East Asia. Governments acrossthe region have adopted a wide variety of policies for regulating tradeand investment, none of which conform to the free-market modelfavoured by international financial ins titutions such as the World Bankand the IMF. Moreover, Latin America and sub-Saharan Africa haveembraced economic reforms w ith a conspicuous lack of success in terms

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Economic Growth with Equity: Lessons from East Asiaof either growth or pov erty reduction.13 This is not to suggest, as do somecritics of the World Bank-IMF view , that East Asia is a model of state-ledgrowth through import substitution. Many of the mistakes associatedwith that model in sub-Saharan Africa, South Asia, and Latin Americahave been av oided in East Asia. Subsidies have been d irected at specificindustries in an effort to increase productivity and enhance com-petitiveness, but large and sustained bu dget deficits have been avoided.Similarly, protectionist measures have been used to provide domesticindustries w ith the space to take root and develop; but currency over-valuation and its corollary of unsustainab le trade deficits has been(until recently) conspicuous by its absence. Another important differ-ence is that the specific forms of intervention ado pted in East Asia haveprom oted labour-intensive (as oppo sed to capital-intensive) growth andenhanced produc tivity among smallholder produce rs. At the same time,strong and m utually reinforcing linkages have been established betweengrow th and poverty reduc tion, with the expansion of opportunities forpoor producers.

In this book we arg ue that East Asia's success in reduc ing pove rty ha sbeen rooted in policies which combine grow th and equ ity. Public invest-ment in education and health, and the redistribution of productive assets,enabled the poor to produce their way out of poverty, contributing toeconomic growth in the process. Rather than facilitating the 'trickledown' of wealth through income redistribution, the East Asian modelused the potential of the poor to act as agents of poverty reduction.Structure of the bookThis book examines the preconditions for growth with equity, andpoverty redu ction, draw ing u pon the experience of East Asia. Chapter 1examines the broad backg round to East Asia's performance. It identifiespolicies for expanding health and education services, labour-intensivegrowth, and rural development as the central policies for combininggrowth with equity. Chapter 2 explains why growth and equity areimp ortant for poverty reduction. It points ou t that high levels of equ ityin the distribution of opportunities for production resulted in growthbeing more effective in reducing poverty in East Asia than in otherdeveloping regions; and that high grow th has been an outcome, as wellas a cause, of progress towards equity and poverty reduction. The claimthat there is a trade-off between growth and equity, with gains in onearea being possible only at the expense of costs in the other, is challenged.

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IntroductionChapter 3 outlines the central role of social policy in creating thehuman development foundations for high growth and povertyreduction, contrasting the efficiency of social spend ing in East Asia with

other developing regions. Five policy recommendations based on EastAs ia's experience are offered. In Chapter 4, we turn to policies for labour-intensive growth in manufacturing, which include selective protectionand the regulation of foreign investment. Chapter 5 examines theimportance of asset distribution to achieving grow th with equ ity in ruraldevelopment policies. It argues that, with supportive policies, small-holder production is inherently more efficient than large-scaleagriculture, both as a vehicle for raising output and as a means ofreducing poverty. There have been limits to grow th w ith equity in EastAsia, and these are examined in Chapter 6, with a focus on problemsfaced by Oxfam partners as a result of displacement, unregulatedinvestmen t, and social marg inalisation.

Finally, in Chapter 7, the origin of the cur rent econom ic crisis affectingEast Asia is examined, and the response of the international financialinstitutions critically assessed. There is an urgent need for concertedinternational action to protect the poorest and most vulnerable in theregion, and recomm endations for such action are ou tlined.

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Three East Asian lessons

Interest in the East Asian 'model' has intensified since the World Bankclaimed that the region's record was a testament to the success of free-market policies of the type associated with its structural adjustmentprogrammes.

14In fact, the East Asian 'm od el' is an invention designed tosustain a myth. There is no single model because the countries of theregion have followed a diverse range of policies, reflecting theirparticular historical, political, and economic circumstances. With vary-ing degrees of success, most have combined growth with equity andpoverty red uction . But different countries have followed differentroutes and they offer different lessons. The myth based on the EastAsian 'model' is that governments in the region have adhered to free-ma rket p rescriptions. To the extent that there is any shared feature of

economic policy it is to be found in a shared rejection of ideologically-driven free-market models of the type endorsed by the World Bank andthe IMF. Indeed, many of the policies associated with structuraladjustment are inconsistent with the policies which achieved rapidgrow th and poverty reduction in East Asia.15Attempts to discover a single blue-p rint, designed in East Asia, which

will be universally applicable are doom ed to failure. That does not m eanthere are no lessons to be learned. Latin America and sub-Saharan Africacannot blindly follow an East Asian path. Differences in the admini-strative capacity and political composition of states, differences inhistory and in economic wealth, will inevitably determine what ispossible in particular regions and countries. But Taiwan did not followSouth Korea, Indonesia did no t follow T aiwan, and China and Vietnamhave not followed Malaysia. Each country has developed specificpolicies cond itioned by local circumstances. There are insights from eachcountry: but they are different insights, and they vary over time.However, three broad lessons emerge from the range of nationalexperience in East Asia: they are that poverty is not inevitable; thatgrow th w ith equity is the key to poverty reduction; and that success inpoverty reduction depend s on political commitment.

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Three East Asian lessonsLesson 1Poverty is not inevitable: a message for 2000The first lesson is the most imp ortan t and the simplest. It is that rapidprogress towards poverty eradication is possible. Four decades ago,anybody pred icting the social and economic advan ces which have beenachieved in East Asia would have risked public ridicule. Then, averageincomes in South K orea were lower than in Zaire or Sudan. In the early1970s, the incidence of poverty in Indonesia and Malaysia wascom parable to that in much of sub-Saharan Africa a nd S outh Asia andboth countries were heavily dependent on exports of primarycommodities. A Nobel Prize-winning economist confidently predicted ableak future of economic stagnation an d rising poverty. Indonesia w as aprime 'basket-case' in the mid-1960s, burdened by an unsustainabledebt, heavily dependent on aid, suffering from hyper-inflation, andchronically reliant on imported food.16 The parallels with sub-SaharanAfrica today are striking. In 1968, the auth or of one of the most influentialbooks on developm ent economics concluded that Indonesia 'm ust surelybe accounted the num ber one failure amon g the major und erdevelopedcountries'.17 He, too, predicted a future of slow gro wth a nd poverty.

Subsequent events in Indonesia and beyond provide a powerfullesson that nothing in human affairs including poverty isinevitable. As we show in Chap ter 3, progress towards poverty reduc-tion and economic grow th has been sustained at rates which are withouthistorical precedent. The achievements of East Asia since 1960 meritserious reflection on the part of the international comm unity. A round theworld today, an estimated 1.3 billion people one-third of thedeveloping w orld's pop ulation live in poverty.18 Malnutrition afflictshalf a billion peop le, contributing to th e loss through infectious disease of25,000 child lives every day. Over 110 million children a re denied the rightto a basic education. As we app roach th e first decade of the twenty-firstcentury , end ing the hum an suffering associated with these cold facts is amoral imperative. Poverty should not be tolerated: what East Asiademonstrates is that the eradication of poverty is a practical possibility,and that poverty need not be tolerated.

This first lesson is an impor tant one for the internationa l community.At the World Summit for Social Development in 1995, governmentscommitted themselves to 'the goal of eradicating poverty in the worldthrough decisive national actions and international co-operation, asan ethical, social, political, and economic imperative of humankind'.

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Economic Growth with Equity: Lessons from East AsiaAmbitious targets were set for reducing child and maternal mortality,increasing literacy, and reducing malnutrition. The Programme ofAction19 adopted at the summ it pledged by the year 2015 to : reduce the incidence of extreme poverty by 50 per cent; reduce infant and child mortality rates by two -thirds from their

1990 levels; reduce by three-quarters ma ternal mortality rates; achieve universal prim ary education in all countries.

Targets such as these are impo rtant because they establish yardsticksfor measuring progress. But global averages are not enough. Progressmust be achieved on a country-by-country basis, with governm ents in allcoun tries judg ed against their performance. Tw o factors will dictate theprospects for success. First, accelerated economic growth will berequired for a group of more than 130 developing countries. Second,increased investment in hum an developm ent is both a requirement foraccelerated growth, and a precondition for converting growth intopoverty reduction. On both coun ts, East Asia prov ides insights into thepolicies needed to convert poverty reduction pledges from idle rhetoricinto meaningful action.

Lesson 2 Growth with equity: the key to successThe second b road lesson to emerge from East Asia is that growth withequity holds the key to poverty reduction. For too long, debates aboutthe relationship between growth and poverty have been characterisedby an air of unreality. On the one side there are those wh o are mesmer -ised by economic growth, regarding it as the ultimate instrument forpoverty reduction. On the other there are those who claim that g row thleads only to continued poverty and widening inequalities. Both areslightly righ t and both a re badly w rong . Economic grow th is vital topoverty reduction, but growth can result in some people becomingworse-off. Poor communities can be the victims of growth, for instancewh ere they are displaced from their land by commercial investors, or bylarge-scale infrastructure projects. They can also be bypassed by growth,especially where they live in geographically rem ote areas. More broadly,wealthier people and regions tend to benefit more from economicgrowth than do their poorer counterparts, with the result thatinequalities wide n. But increasing inequality does not necessarily imply

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Three East Asian lesson sincreased poverty. Contrary to the claims of growth pessimists,relatively few examples can be found of sustained growth in per capitaincome being associated with rising levels of poverty. However, growthoptimists have turned a blind eye to the fact that w idening inequalitiescan not only diminish the potential for translating g row th into povertyreduction, bu t can also, as we suggest below, hav e the effect of slowingeconomic grow th.

In short, economic growth , though essential for poverty reduction, isnot enough. More research is needed to develop an understanding ofhow to optimise the poverty-reducing potential of growth. The WorldBank has been at pains in recent years to refute the 'imm isering gro wth 'thesis (the notion that growth marginalises the poor or tends to impover-ish significant sections of the population). An impressive body of evidencehas been com piled to show that the incomes of the poor are increased bygrowth, and that a rising tide of wealth raises all boats. Unfortunately,much of this evidence is directed to demolishing the straw man erectedby growth pessimists. What is needed is a better und erstan ding of whichpatterns of grow th bring m ost benefits to the poor. W hy, for exam ple,wa s China so much m ore successful in redu cing poverty in the first halfof the 1980s than in the second half, despite a strong growth performancein both periods? W hy have levels of poverty in India fluctuated arou nd aconsistently modest downward trend which appears to be only weaklylinked to growth performance? Why has Latin America's record onpove rty reduction in the 1990s been so poor despite economic recovery?This book attem pts to addre ss some of these questions.

One of our conclusions is that the way in which w ealth is created is asimportant as the volume of growth. The potential of growth to reducepove rty is optimised w hen the poor them selves act as agents of g rowththrough their own production.20 This has im portant policy implications.Income redistribution can play a central role in enhancing humandevelopment. More important, however, is the redistribution of theproductive assets needed for wealth creation. These can take the form oftangible assets, such as land, credit, and water rights. Intangible assets,such as education and health, are equally vital to wealth creation, notleast because of their implications for the productivity of tangible assets.It follows that effective poverty reduction strategies require redistri-bution in two areas: redistribution of tangible productive assets, andredistribution of hum an capital throu gh pro-poor public spending .

Such strategies can enable poor people to participate in the growthprocess through the creation of opportunities. Markets are relatively

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Economic Growth with Equity: Lessons from East Asiaefficient at allocating resources. But people enter m arke ts with differentendowments, in terms of the skills and assets they bring, and theyreceive different rew ards. Changing the pattern of reward s in a pro-poordirection requires prior action to change the distribution of assets andhu m an capital endow men ts (such as health and education). The linkagesbetween growth and other aspects of human welfare, such as health,literacy, and life-expectancy, are far from autom atic. Where mo st of EastAsia scored far m ore highly tha n other developing regions has been inconverting growth into poverty reduction and human development.This is precisely because economic growth has been combined with ahigh degree of equity in the distribution of income and, moreimportantly, access to opportunities for production, and to health andeducation services. In other w ord s, greater equity in the d istribution ofrew ards from the market has been based on the redistribution of assetsand en dow ments in favour of the poor.

There is another reason for the positive interaction between grow thand equity in East Asia. W idespread poverty, as well as being degradingin hum an term s and m orally unacceptable, is also grossly inefficient inpurely economic terms. Poverty reduces productivity, lowers thecapacity for savings and investment, and restricts the development ofdynamic markets.21 The cycle is mutually reinforcing in a negativedirection: lower productivity reduces incomes and future investment,which in turn reduces future output, income, and investment flows.Reduced purchasing power limits market opportunities for otherproducers, acting as a disincentive for production and employmentcreation. Poverty and inequity create negative linkages which are themirror image of the positive linkages created by grow th and equity.

The mechan isms for achieving grow th with equity have been diverse.However, an important condition has been the creation of 'virtuouscircles' of growth and human development. Growth in East Asia hasself-evidently been good for poverty reduction . But policies for po vertyreduction have also been good for growth, creating the conditions forrising productivity a nd output. One of the reasons why countries such asIndia, Brazil, and Mexico have failed to sustain growth, or to convertgrowth into poverty reduction, is that they have failed to make thenecessary investments in human development. Where growth hasoccurred, it has trickled down to the poor at an abysmally slow pace.Meanwhile, the poor in East Asia have benefited from growth notbecause the gains have 'trickled down' to them, but because thedevelop me nt of their produc tive potential has been central to the growth24


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Economic Growth with Equity: Lessons from East Asiaefficiency, often p enalising the poor in the process. The result has beenslow growth and even slower rates of employment creation. Thus,countries such as Brazil, Mexico, and India hav e industrialised witho utsignificantly reducing poverty because they distorted interest rates,prices, and exchange rates to favour capital-intensive, rather thanlabour-intensive, industry .

Success in achieving grow th w ith equity depends upon the successfulintegration of these three elements into a coherent policy framework.They cannot be selected on a pick-and-choose basis. Macro-economicreforms aimed at promoting employment and growth are unlikely torealise their potential without prior investm ent in hu m an capital. Chinaand Vietnam have sustained high rates of growth since the economicreforms of the late 1970s and mid-1980s respectively. But the humancapital investment on which this growth was based was made twodecades earlier. In India, by contrast, low levels of literacy and poorpublic health p rovision, the consequences of grossly inadequate socialpolicy, have prevented the economic reforms introduced in 1991 fromhaving any significant effects on growth and poverty reduction.Similarly, countries such as Mexico and Brazil may have liberalised theireconomies, but the inequitable distribution of productive assets hasresulted in slow growth, and in the exclusion of the poor from itsbenefits. To some extent, good social policies can compensate for theeffects of inequity in asset distribution, but only partially so. InZimbabwe, public investment in health and education has contributedto impressive gains in hum an welfare. How ever, inequitable patterns ofland ownership have contributed to high levels of poverty and slowgrowth, which has in turn reduced the resources available for socialinvestment. What Zimbabwe has discovered in the 1990s is that goodsocial policies need economic growth to sustain them, just as sustainedgrow th requires good social policies.

Lesson 3 Political commitmentPolitical commitment is another pre-condition for achieving thesuccessful integration of social and economic measures for povertyreduction. P ro-poor changes in policy direction in East Asia hav e oftenbeen a response to political crises. In Malaysia, the N ew Economic Policywas a response to the ethnic riots of the late 1960s.22 Poverty and themarginalisation of the Malay community was perceived as a threat tonational security, and poverty eradication through growth with equity

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Growth with equityand poverty reductionThe facts of pove rty reduction in East Asia speak for themselves.23 In themid-1970s, six out of every ten East Asians lived in poverty. Today,poverty affects roughly two out of every ten people. However, theabsolute number of poor is still of staggering dimensions because of thesize of the region's population. Around 345 million people were belowthe poverty line in 1995, which is more than in Latin America and sub-Saharan Africa combined. Even so, the progress towards povertyeradication has been spectacular. Over the period from 1975 to 1995about 371 million people m oved out of poverty, while the po pulationincreased by 425 million. (See Figure 1.) As a consequence, East Asia'sshare of world po verty declined to around 34 per cent, compared to 38per cent a decade ago. The contrast with other developing regions isstriking. In both South Asia and sub-Saharan Africa about half thepopulation live in absolute poverty, as do one in four Latin Am ericans.Had sub-Saharan Africa matched East Asia's rate of poverty reduction,100 million fewer of its people would b e living in poverty.

Regional pictures obscure important variations between countries inEast Asia. The Philippines has performed disastrously in terms ofpoverty reduction, with its share of the region's poor doubling to over 5per cent since 1975. Progress toward s income poverty reduc tion has alsobeen slow in Vietnam, where over half of the population were poor in1992, and in Lao PDR. Not only is poverty pervasive in both countries,with around one-half of their populations affected, but the depth ofpoverty (or the gap between the average income of those above andbelow the poverty line) is far w ider than for other countries. By contrast,the two most populous countries in East Asia, China and Indonesia,have m ade the most dram atic advances, accounting for the bulk of thereduction in world p overty. In absolute terms, the number of poor hasbeen more than halved in China and fallen by three-quarters inIndonesia. Translated into numb ers, between 1970 and 1990:

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Growth with equity and poverty red uctionIn China, 175 million people moved out of poverty,while the population increased by 300 million.In Indonesia, over 40 million people moved out of poverty ,while its population increased by 60 million.

Figure l a Poverty incidence in East Asia (percentage of population)

1975 1995

Figure l b Poverty in East Asia800 "

700 "

600 "

a) 500 ~a.o


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Economic Growth with Equity: Lessons from East AsiaIndonesia's record in reducing the incidence of poverty from a start-ing point of low average incomes is particularly remarkable, with thepercen tage of poor falling from over 60 per cent to 11 per cent over the

two decades to 1995. Impressive as this is, the proportional reductionswere even g reater in Malaysia (from 17 per cent to less than 1 per cent)and Thailand (from 8 per cent to less than 1 per cent). These achieve-ments mark a continuation of past tren ds. By 1970, the first genera tion of'tiger' economies the 'newly industrialising countries' (NICs) of North-East Asia such as South Korea and Taiwan had already ma de rapidstrides towa rds poverty reduction.The high levels of economic developm ent achieved by these countries

has tended to obscure the fact that all countries in the region have achievedhigh growth and poverty reduction from a starting point at whichpoverty w as pervasive . In the mid-1960s, Indonesia's per capita incom ewas lower than that of India, Bangladesh, and Nigeria. By the late 1980s,average income in Indonesia w as 50 per cent higher than in Nigeria, 30per cent higher than in India, and 150 per cent higher than in Bangladesh.Income poverty is only one measure of deprivation . While it is closelyrelated to other forms of depriva tion in areas such as health and educa-tion, the links are not automatic. Most countries in East Asia have succeededin combining a steep decline in income poverty with rapid advances inother areas. In 1960, average life expectancy in Indonesia w as 41 years lower than in India, and about two years longer than in Nigeria andBangladesh. Today, life expectancy is two years longer than in India, twelveyears longer than in Nigeria, and seven years longer than in Bangladesh.In China and M alaysia average life expectancy increased by eight yearsin the three decades after 1970. Infant mortality rates for the region havefallen by almost half.

Economic growth and rising average incomes have contributed tothese gains, in part by creating additional resources for social investment;and in part because rising average incomes are positively linked toimproved nutritional status. According to some accounts, the socialachievem ents of countries in the first generation of NICs, such as SouthKorea, can be traced to differences in economic strength. There is anelement of truth in such accounts. For instance, disparities in social-sector spending capacity clearly affect human development outcomes.South Korea spen ds almost $400 per capita on health care, while Ugandaspend s aro und $3. Inevitably, the disparity in spending contributes todisparities in health outcomes. As we show in Chapter 4, however, thequantity of social-sector spending cannot fully account for the differ-ences in outcomes between East Asia and the rest of the developing world.30


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Economic Growth with Equity: Lessons from East Asia

Striking inequalities in the distribution of income, land, andopp ortun ity in Latin America have locked the region into the reverse ofEast Asia's virtuous circle of growth and human development. Moreequitable income distribution would have the effect of raising savingsand investment levels, thereby fuelling economic grow th. It would alsohelp to expand school enrolment, which is one of the most decisivefactors in the long-term grow th process and a primary determ inant ofincome inequality. Similarly, greater equ ity in the distribution of publicinvestment in health and education would generate high returns forboth growth and human development.

Differences in hum an development outcomes between East Asia andother regions underline the importance of combining equity w ith growth.Poor people in East Asia have gained a bigger share in the productionand distribution of wealth; and they have gained from social policieswhich have delivered basic services. Quality has been variable and therehave been significant g aps in coverage, bu t measured against the yard -stick of equity in public investment, efficiency has been high in com-parison with other regions, with strong hum an w elfare returns for eachdollar invested. We exam ine some of the reasons for this in Chapter 3.

Figure 2 Poverty and inequality in Brazil and China$5,000 0.00

Incomeper capita1 0 0 %

Incidence ofpoverty (Incom epoverty measure)

1 0 0 %Chance of deathbefore age of 4 0

(capabilitymeasure)

1.00Glnl

Coefficient(Inequalitymeasure)

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Growth with equity and poverty reductionAccompanying East Asia's poverty redu ction 'm iracle' has been themore widely publicised 'economic miracle'. For almost four decades,countries in the region have sustained u nprecedented rates of economic

grow th. The slow-down in economic growth in East Asia since 1996, andthe recent currency crisis, have prompted a wave of obituary no tices; itremains to be seen whether these reports of the death of East Asia'seconomic miracle are premature. However, the decline has to be set incontext. Average GDP growth for East Asia in 1997 (excluding China) isprojected at between 1 and 3 per cent,lower than for sub-Saharan Africaand Latin America. Looking back over a longer period of two decades,howev er, national incomes in East Asia have rou ghly do ubled every sixto eight years. Central to this achievement has been East Asia's success inpenetrating wo rld m arkets with increasingly sophisticated and higher-value-added products.

As Figure 3 show s, East Asia has separa ted from large sw athes of thedeveloping world by a yawn ing growth g ap, which has been wideningsince the 1960s, and continued to widen in the 1990s. In the first half of thedecad e, average incomes in the region increased by over 8 per cent a year.In South Asia and Latin America, they have grow n by a roun d 2 per centand 1 per cent respectively, on average. In sub-Saharan Africa, income

10 -9 -8 -7 -

OECD BH South Asia 3 Sub-Saharan Africa

East AsiaLatin America

1974-1980 1981-1990 1991-1994

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Economic Growth with Equity: Lessons from East Asialevels have fallen. O nly six out of 49 countries in the region (accoun tingfor less than 5 per cent of its population) have achieved higher levels ofincome in the 1990s than they had in the past.24 The resulting shift inrelative incomes reflects Africa's growing marginalisation. In 1965,average per capita incomes in the region were 60 per cent of thedeveloping country average; today they are 30 per cent. Nor is it onlyAfrica which is suffering the consequences of marginalisation. Out of167 countries reviewed by the United Nations Development P rogramm e(UNDP) for the 1997 Human Development Report, 97 had lowerincomes in 1996 than in 1990.25

Linking growth to poverty reductionDifferences in growth rates have had an important bearing on regionaldifferences in poverty reduction and human development. Growth isimportant for poverty reduction because it determines the size of theeconomic cake: the goods and services which are available. In poorcountries, increases in the supply of income-generating resources a re anecessary condition for improving entitlements to economic goodsthrough employm ent and production. W ithout growth, it is impossibleto sustain improvements in human welfare and achieve rapid povertyreduction. However, economic growth alone is an insufficient cond itionfor advancing human development. Equally important is thedistribution of growth: how the economic cake is divided betweendifferent groups in society for instance, between rich and poor, orbetween men and women has a critical bearing on pov erty reduc tion.So, too, does another consideration: namely, wh o participates in thebaking of the cake, and on what terms. Economists often reduce socialwelfare q uestions to considerations of grow th an d income distribution.But the distribution of productive assets is also critical. These assetsinclude not only what is conventionally described as physical orfinancial cap ital (land, prod uctive inp uts, savings, and credit), bu t alsohu m an capital, for exam ple, education an d health. Both education andhealth are im portant as ends in themselves, because they enhance thequality of life and extend the range of choice for individuals. As such,they represent an important yardstick for measuring humandevelopm ent. However, they are equally impo rtant as means to the endof economic growth and equity. Higher levels of education and betterhealth enable poor p eople to contribute more fully to the grow th process,and to participate more equitably in the opportunities which growthcreates and th e benefits it offers.26 In other word s, the greater the degree34


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Growth with equity and poverty reductionof involvem ent in baking the cake, the better the prosp ect of receiving abigger slice! Equity in this wider sense means more than the equitabledistribution of income. It means the wider distribution of opportunitiesfor participation in social and economic life, which is in turn influencedby the distribution of power at various levels: between rich and poorpeople, men and wom en, different regions, and ethnic group s, to nam ebut four dimensions.Grow th has acted as a powerful driving force for poverty reduction inEast Asia. The relationship between growth and poverty reduction ismuch deb ated and the picture varies from country to country, as weshow below. Without growth, however, it wo uld no t have been possibleto achieve the social advances w hich have been m ade in East Asia. WhenChina's economic reforms began in 1978, the country was a desperatelypoor rural econom y. Over half of its citizens lived on less than the W orldBank poverty line income of $1 a day. Since 1978, average incomes inChina have expanded four-fold. To put this figure in context, Chineseincomes are currently dou bling every ten years. In Britain it took almost60 years for incomes to increase by a similar amo unt after the industria lrevolution. The implications of high growth can be illustrated by afurther comparison of China with the UK. Over time, even a smallchange in the rate of growth can deliver large increases in income, andtransform the income position of households. Were China's 7 per centgrowth rate to be sustained over the lifetime of an average Chinesecitizen born today, their real income at the end of their lives would be 160times what it was at birth. Over the same period, average incomes inChina would rise from 14 per cent of those in the UK to 500 per cent. Ofcourse, such projections need to be treated with caution; it is easier tocatch up than overtake. Even so, the figures do point to somerevolutionary implications for the global economy.27Equally revolutionary has been the impact of grow th on poverty andhum an welfare in China. Between 1978 and 1995,200 million people werelifted out of poverty , over half of them living in rural areas.28 Allied to thereduction of poverty has been a dramatic improvem ent in other develop-ment indicators, with life expectancy ten years longer today than in 1970.

There is a painful contrast between this experience and the typicalpattern in other developing regions. Nowhere are the contrasts morepainful than in South Asia. In Pakistan, economic grow th has created thepotential for achieving sustained human welfare advance, with percapita incomes rising by 230 per cent between 1970 and 1990.29 Yet at theend of this period , Pak istan's hum an welfare indicators make m iserable

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Economic Growth with Equity: Lessons from East Asiareading. An additional 17 million people have fallen below the povertyline, and the incidence of poverty is now higher than it was in the m id-1980s.30 Tw o-thirds of the country 's adult population and three-quartersof wom en are illiterate. Basic health facilities are available to only half thepopulation, and one-quarter of newborn children are underweight.31Such facts demonstra te the way in which inequalities rooted in nationalpower structures and the debasement of political institutions can pre-emp t the gains of economic developm ent.

In terms of poverty reduction, the quality of growth has been asimportant as the quan tity. East Asia has differed from other develop ingregions not only in its rate of growth, bu t in the extent of conversion ofgrow th into poverty reduction. One w ay of cap turing these differences isto com pare the 'po verty elasticity' of growth rate, that is , the percentagedecrease in the num ber of poor people associated w ith each percentagepoint of growth. In Malaysia, and Indonesia, every percentage point ofgrow th reduces the num ber of poor people living below the poverty lineby around 3 per cent, or more.32 Recent World Bank research has showna m ore variable picture for China, which is outlined below. How ever, thedramatic progress towa rds poverty reduction du ring the first half of the1980s was achieved b y a pov erty elasticity of grow th ra te of aro und 3.6per cent. For most of Africa, the pov erty elasticity of grow th rate is below2 per cent, and only 1.4 per cent in Nigeria, the region's m ost p opulouscountry.33 In Brazil, the most populous country in Latin America, eachpercentage point increase in economic grow th prod uces a reduction inthe num ber of poor peo ple of less than 1 per cent.These figures have an obvious practical relevance, in that countrieswith a low growth elasticity of poverty reduction have to grow fasterthan those w ith higher elasticities in order to achieve comparable results.Between 1990 and 1995, per capita economic g row th in Latin Americaaveraged slightly over 2 per cent per an num . Despite this, the numb er ofpoor and indigent people in the region rose from 197 million to 209million, according to the Economic Commission for Latin America(ECLA).34 The num ber of poor people has remained 50 million above theaverage for the 1980s, while the overall incidence of poverty fell by only1 per cent, to 33 per cent, between 1990-1995. Even less success wasachieved in the reduction of 'indig ence ', defined as the inability to meetbasic food needs. This fell from 18 per cent to 17 per cent. As a result, oneou t of six households in Latin America w ould still not be in a position tosatisfy basic nutritional n eed s, even if the entire household income w asspent on food. Clearly, very little of the economic growth achievedduring the 1990s in Latin America has trickled down to the poorest36


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Growth with equity and poverty reductionsections of society, and the num bers affected by pove rty rem ain higherthan in 1980. One reason for this poor performance is that, in all bu t onecountry (Uruguay), the richest 10 per cent hav e increased their share ofnational income, while the poorest 40 per cent have seen their sharesstagnate or decline. Latin America illustrates in extreme form howinequity can act as a catalyst for poverty. During the 1980s, the Girdcoefficient for the region rose by 4 poin ts as the poorest 20 per cent sawtheir income shares shrink. Had this shift in income distribution nottaken place, the number of additional people falling below the povertyline wo uld have been cut by half. Expressed differently, half of the rise inincome poverty representing 50 million people was due to a redistri-bution in favour of the rich. The failure to introduce redistributivepolicies has contributed to a slow-down in poverty reduction since 1994,with only three countries recording progress and fourMexico, Argentina,Honduras, and Venezuela suffering an increase in poverty levels.Without dramatic changes in the quality of growth in Latin America,there is no prospec t of achieving income poverty reduc tion on the scalerequired. (See Figure 4 showing the incidence of poverty in Latin Am erica.)

The same applies even more strongly to sub-Saharan Africa. Justund er half of the region's po pulation aroun d 219 million people live below the income poverty line, rising to over 60 per cent in countriessuch as Zambia, Mozambique, and Burkina Faso. Numbers areincreasing both in proportionate and absolute terms. According tohighly optimistic World Bank projections, per capita incomes in theregion will grow by 1.2 pe r cent for the next decade . Even if this targ etwere reached, it wo uld n ot be remotely ad equate for reducing povertyon the scale required because of the weak linkage between growth andpoverty reduction. At best, average incomes wou ld be no h igher in 2006than in 1987, and 5 per cent lower than they w ere in 1974.35 So the nextdecade offers at best only a partial recovery of groun d lost in the 1980s.Assuming that current income distribution pa tterns rem ain intact, thiswould leave between one-quarter and one-third of the population belowthe poverty line during the m iddle years of the next century.In South Asia, which is hom e to the greatest number of poor people,the linkage between grow th and poverty reduction has been weak sincethe mid-1980s. Between 1987 and 1993 the incidence of income poverty(measured against a poverty line of $1 per day) remained virtuallyunchanged at around 43 per cent. In countries such as India and Pakistan,progress towards poverty reduction has been slow since the mid-1980s,while the absolute numb er of poor people has continued to rise. Duringthe 1990s, economic growth in Pakistan has slow ed, even tho ugh it has

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Economic Growth with Equity: Lessons from East Asiaremained positive in per capita terms. However, a combination ofinflation, rising taxes, and deep inequalities has increased the incidenceof poverty from around 20 per cent to 30 per cent, adding around 18million people to the ranks of the abso lute poor.36 In India, the linkagesbetween growth and poverty reduction have been stronger. As eco-nomic growth accelerated between the mid-1970s and mid-1980s theproportio n of the popu lation in absolute pover ty fell by 2.4 per cent peryear three times the rate in the previous decade. However, growthand pov erty reduction linkages have not been strong enough to preventan increase in the absolute num ber of people living in poverty. Thu s,while the incidence of poverty has declined from one in two to one in threesince 1951, the num ber of poor has grown from 164 million to 312 million.37The contrast w ith Indonesia is striking. Between 1970 and 1993, the pro-portion of Indonesia's population living in poverty fell by a factor of seven,from 58 per cent of the popula tion to 8 per cent, or by 10 per cent a year.38

Income distribution and poverty reductionDifferences in the distribution of income are central to inter-regionaldifferences in poverty reduction. One way of viewing these differencesis to compare the shares of national income going to the richest andpoorest sections of society. Figure 5 summ arises data for 13 countries, forillustrative purpo ses. Assuming that income from growth is distributedon the basis of existing patterns, it is possible to derive some strikinginsights into why growth and poverty reduction are so weaklycorrelated in some countries, and so strongly correlated in others. In thecase of Brazil, wh ich ranks fifth in the world league table for num bers in

Figure 4 Poverty trends 1980-1994: Latin America1980 1990 1994

poor 20%indigent 15%



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Growth with equity and poverty reduction

Figure 5a National income share of the poorest 10 per cent.(Source: W orld Bank and Inter-American Developm ent Bank)

percentage share of poorest 10%

Figure 5b (continued )... and the richest 10 perce nt(Source: W orld Bank and Inter-American Dev elopment Bank)

percentage share of richest 10 %

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Economic Growth with Equity: Lessons from East Asiaabsolute poverty, for every $1 generated in growth the poorest 10 percent of the population receive less than 1 cent,while the wealthiest 10 percent receive 50 cents double the amount received by their counter-parts in Indonesia and Vietnam. Such patterns explain wh y it takes a lotof growth to bring a few benefits to the poor in Brazil and elsewhere inLatin America.

There is a notable exception to the generally positive picture in EastAsia: in the Philippines, the income share of the richest 20 per cent is 11times that of the poorest, compared to five times in Indonesia. Skewedincome distribution has contributed to the poor performance of thePhilippines in reducing poverty. In the two decades to 1990, poverty fellby 1 per cent a year, which was less than half the rate achieved byMalaysia, Thailand and , from a weak er economic base, Indonesia.

Income d istribution pa tterns m ake it clear that some countries w ouldhave to grow very fast to achieve even moderate progress. In order forthe poorest 10 per cent of the population to receive the equivalentam ount of income from growth: Mexico wo uld have to grow at roughly four times the rateof South Korea; Brazil would have to grow at seven times the rate of Indonesia; Zimbabwe wo uld have to grow at more than twice the rateof V ietnam; Kenya wo uld have to grow at over twice the rate of Thailand.

A change in the pattern of income distribution can have importantimplications for poverty, for better or for worse. The better case isillustrated by Malaysia. Until 1970, economic growth in the country wasrelatively strong , averag ing 6 per cent in the 1960s, but accompan ied b ywidening income inequality, with the share in national income of thepoorest 20 per cent declining.39 Progress towards poverty reduction wasslow, with about 60 per cent of the population estimated to be below thepoverty line at the end of the 1960s. Tr ickle d ow n' was not working forthe poor. In 1971, the 'New Economic Policy' was ad opted , giving a highpriority to equity and poverty reduction.40 Social programmes absorbed60 per cent of budge t sp ending, w ith a focus on sm allholder produce rsand m arginal areas. Grow th increased, but not dramatically so; far moredramatic w as the reduction in the incidence of poverty. Using nationalpoverty lines, this fell from 60 per cent to around 18 per cent. WhileMalaysia has remained one of the most unequal East Asian countries,40


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Growth with equity and poverty reductionimproved income distribution was central to this achievement, with theincome share of the poorest 20 per cent rising by one-third be tween 1973and 1987.41

The worse-case scenario is provided by Latin America. During the1980s, average incomes in the region declined under the weight ofeconomic collapse and the debt crisis. Income distribution also changedin favour of the wea lthy, with the average income of the top 20 per centrising from a multiple of ten times the income of the poorest 40 per centto a multiple of 12.42 Over the same period an additional 100 millionpeople fell below the poverty line. According to the Inter-AmericanDevelopment Bank (IDB) half of this increase in poverty was a directconsequence of the change in the pattern of income distribution.43 Suchfacts have an obvious bearing on the distribution of poverty . Average percapita income in Indonesia is half that of Peru, yet in Peru abou t 50 percent of the popu lation live in income poverty three times the percent-age in Indonesia. If the incidence of income poverty in Indonesia w as thesame as it is in Peru, another 830 million Indonesians w ould be poor.Progress towards poverty reduction has not been uniform in EastAsia. In China, the most rapid gains were m ade in the period 1978-1984,as the decollectivisation of agriculture and the associated increase inrural prices and output boosted rural incomes. Because of the con-centration of poverty in rural areas, rapid growth in this period wasaccompanied by a move towards greater equality and poverty reduction.Over the next five years, rural productivity growth slowed, pricesstagnated, and growth was concentrated in coastal areas. As a conse-quence, progress towards poverty reduction slowed and inequalitieswidened. This picture continued until 1992, after which rural incomesbegan to increase more strongly (dramatically so, with a rise in grainprices during 1994-1995).44 Thus during the 1990s, progress towardspoverty reduction has resumed, albeit in the context of wideninginequalities. Important lessons can be derived from China's experience.Perhaps the most important is the need to look beyond broad growthaggregates, to the prices for goods produced and consumed by poorpeople, and the productivity and outp ut trend s in the sectors where poorpeople pursue their livelihoods. In the case of China, it was when GDPgrowth translated into growth in rural per capita incomes that theincomes of the poor increased most rapidly, pointing to the importanceof development strategies which unlock the productive potential of therural poor.

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Economic Growth with Equity: Lessons from East AsiaGrowth and equity: the 'trade o f f mythPolicies to redistribute productive assets, and public investment infavour of the poor, are obvious strategies for achieving more equitablepattern s of income distribution. H owever, there is a widely held viewthat redistributive measures are self-defeating because they sloweconomic growth, thereby reducing the flow of resources needed toreduce poverty. There is, so this argument runs, a trade-off betweenequity on the one side and growth on the other. Another receivedwisdom of developm ent economics is that high rates of growth and thestructural changes associated with them (such as rapid urbanisation)inevitably cause increased inequality.

45Many economists have furtherargued that inequality is good for grow th, since it concentrates resourcesin the ha nds of sections of the pop ulation which are most likely to investthem, and hence contribute to capital accumulation and more rapidgrowth.46 Do such argum ents stand?

The evidence provided in Figure 6 suggests not. This clusterscountries by measuring their performance in terms of economic grow thagainst their income distribution patterns, as indicated by the Ginicoefficient, a measure of how income distribution deviates from ahypothe tical situation in which everybody has exactly the same income.Deviations from 0 (perfect equality) to 1 (total inequality) indicate theextent of inequality. Admittedly, the methodology provides at best alimited indicator of the causal relationships at play. The Gini coefficientprovides only a static snapshot based on average figures, therebyobscuring the dynamic interaction between distribution and growthpatterns. Also, distributiona l factors are only one among several factors,and their effects are not isolated in this snapshot. With theseconsiderations in mind , wha t does the exercise tell us? At one level, not agreat deal. The picture which emerges is inconclusive. Countries such asBotswana and Chile illustrate that it is perfectly possible to combine highgrowth with high levels of inequality, with obvious costs for povertyreduction. Two East Asian countries Malaysia and Thailand veertowards this group. Others such as India demonstrate that it isequally possible to combine relatively high levels of equality with lowgrowth. Most, however, succeed in achieving the worst of all possibleworlds: namely, high inequality together with low growth. Much ofAfrica and Latin America fits into this category, although East Asia isalso represented, by the Philippines. With its Latin American-stylestructure of land ownership and income distribution, this country is aworst-case exam ple. At the other end of the spectrum , in the north-w est42

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Economic Growth with Equity: Lessons from East Asia

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