Saturday, June 19, 2004

Asia Pacific: Asia's Rural Tears

Asia Pacific: Asia's Rural Tears
By Daniel Lian

Asia’s “Sacred” Economic Model: The Big Re-think
India’s surprise election result last month and a recent piece by Andy Xie, our chief economist for Asia/Pacific, reignited my interest in structural issues relating to Asian economic development, long held as a model to be adopted by other developing regions.

In India, the Congress Party scored an unexpected victory over the incumbent BJP, despite the latter’s record in economic restructuring and growth. For most political analysts, the reason was clear in hindsight: the fruits of economic development under the BJP had not spread sufficiently to the rural sector. Market participants were starkly reminded that rural development matters to economics and investment.

Andy Xie, in his recent piece “Gambling, Arbitraging, and Successful Development” (June 2, 2004), argues that a “high savings rate is a necessary condition for rapid economic development” and “in East Asia, exports to rich economies are the source of income that make saving possible.” He further argues, “The wage income and profits from the export sector are the starting point of economic growth, and as these new incomes are spent or saved, the multiplier effect makes the rest of the economy tick.”

Andy essentially was spelling out the generic formula for the economic “success” of East Asia that has long been held as sacred by Asian policy makers, the Washington Consensus, and supra-national development agencies. In a nutshell, the formula rests on cheap labor, high savings, and an export-oriented development model.

Cheap labor attracts mass-manufacturing FDI from multinational corporations (MNCs), and high savings suppress domestic demand, making possible trade and current-account surpluses. Both labor income and profits earned from the export sector create a multiplier effect that rapidly lifts the economy. As such, FDI levels and export growth are often seen as the only measures of economic performance.

Imbalanced Strategy and the Asian Pork Barrel
Importantly, Andy Xie points out that while “cheap labor creates wealth in Asia, the wealth tends to be distributed disproportionately to the rich.” Inequitable wealth distribution highlights the partial failure of the East Asia Economic Model (EAEM). EAEM, in my view, is an incomplete and now quasi-defunct model because economic growth often proves extremely imbalanced, resulting in substantial equity and social issues.

Economic success has “camouflaged” the rent-seeking culture that permeates most of Asia, and which typically favors politicians, government insiders, and large local corporate owners. Political patronage and rent-seeking create tremendous government inefficiencies and protect the monopoly power of large local corporate owners.

Substantial parts of the “super” corporate profits, regular government spending, and government concessions and contracts constitute the “Asian pork barrel.” This pork barrel is created at the expense of many constituencies: minority shareholders – whose rights often are not respected; urban workers – whose real purchasing power is artificially suppressed by a vastly undervalued exchange rate and a lack of wage bargaining power; rural dwellers and farmers – who tend farmland that is heavily taxed and low yielding as rural and agriculture development gets left behind; and indigenous SMEs – who do not receive the subsidies through infrastructure, protracted tax holidays or tax incentives that are enjoyed by rent-seeking local large corporates and by MNCs.

Rural Cries
Of the four disadvantaged groups mentioned above, rural dwellers and farmers suffer the most from policy discrimination and pork-barrel politics, in our view. The urban-rural divide can be serious. In China, on a rough estimate, rural dwellers are 60% of the population but account for less than 30% of national income. Farmers’ relative share of national income could be substantially lower. In India, 60% or more of the population belongs to the agriculture-rural sector but their output accounts for not more than 25% of GDP. In Thailand, more than 40% of the labor force belongs to the agricultural sector and produces less than 11% of GDP.

Policy ignorance by the authorities and the rural sector’s lack of political power help entrench the urban-rural divide. Policy makers ignore rural development in the belief that i) industrialization will create jobs in the cities and towns that will be filled by the migration of surplus agricultural labor; and ii) the multiplier effect of manufacturing-based export growth will ultimately lift a shrinking rural-agricultural sector. To me, such propositions are naïve.

Asia Awakening and Mr. Thaksin’s Proactive Response
Some Asian policy makers seem to be waking up to the cries erupting in rural areas. In India, the new coalition government is promising to spread the fruits of economic development. In China, policy makers are starting to address some of the “regressive” tax measures inflicted on farmers. Rural development has become a big campaign issue in the Indonesian elections, and Prime Minister Abdullah Badawi of Malaysia has declared the rural-agriculture sectors and SMEs as a major policy emphasis of his nine-month regime.

Mr. Thaksin and his Thai-Rak-Thai party were elected on a pro-rural platform in early 2001, and the Thai government is the only one in Asia to initiate a comprehensive policy response to the malaise of EAEM and the rural cries. Over the past three years, Thailand has aggressively pursued a well-thought-out “second” development track, in which emphasis has been placed on developing the rural, agricultural, and SME sectors, and which has been quite successful in reviving domestic spending and relieving the country’s past dependence on external demand.

However, Mr. Thaksin’s successes thus far have been largely macro-based. Creative initiatives have revived the economic confidence of Thai citizens and businesses by expanding domestic demand, and have attempted to correct the macro malaise of EAEM. However, no major breakthroughs have been made in terms of micro-based structural changes. Formidable challenges lie ahead for Mr. Thaksin, such as eradicating the rent-based culture, sharpening government efficiency, and improving corporate governance.

Bottom Line: The Inevitable Rise of Social Capitalism
Signals abound that some forms of social capitalism are emerging in Asia in attempts to balance the past excesses of EAEM, namely: the recent “surprise” Indian electoral outcome, a development policy shift in Malaysia, a probable change in rural-agricultural policy in China, promises of rural-agricultural reforms by all major parties and presidential candidates in the Indonesian election campaign, and the now deep-rooted dual-track development strategy pursued by Mr. Thaksin in Thailand over the past few years.

The Asian social capitalism that eventually evolves is unlikely to be a doctrine that completely rejects capitalism or the existing EAEM strategy. In my view, it will need to include the dismantling of the rent-based complex, and the balancing of past excesses — in terms of dependence on external demand, mass manufacturing and other FDI by MNCs, high savings, and artificially suppressed real wages and exchange rates — with a platform that addresses the long-term development needs of the urban poor, rural, resource, SME, and the government and corporate sectors. ...Link

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