Trends in Growth and Poverty in Asia: An Economic Background Paper for ASREP

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1 Trends in Growth and Poverty in Asia: An Economic Background Paper for ASREP Executive Summary, January 2003 This study examines growth and poverty reduction in the six economies that are most significant for achieving the Millennium Development Goals in Asia. Five of these countries have achieved historically high rates of per capita economic growth over most of the last two decades, with the best growth performance being in China, Indonesia (before the impact of the crisis at the end of the 1990s) and Vietnam. Growth performance in South Asia has been weaker than in East and South-East Asia but average per capita growth has still exceeded 3% per annum in Bangladesh and India. Pakistan is by some way the worst performer with per capita income growth of less than 1% per annum over the last decade. There have been significant changes in economic structure in most of the countries, particularly a declining GDP share for agriculture and a sharply rising share for exports, with manufacturing exports becoming of dominant importance. This growth has been associated with a strong impact on income poverty and hence on reductions in the proportion of the population below national and international poverty lines. The poverty impact of growth has been greatest where access to education has been most widespread in East and South East Asia and those areas of India which have the highest literacy rates and where past land redistribution policies have created conditions for a widespread sharing of the benefits of agricultural growth (in China and Vietnam, as earlier in South Korea and Taiwan). However, the poverty impact of growth has been showing a marked tendency to fall over time in the rapidly growing economies. While the benefits of growth were initially widely spread, regional and sectoral differentials have been widening (with agriculture lagging in particular), reflected in growing income inequality. In both China and India, growth has continued to be largely concentrated in particular areas of the country (especially coastal regions), which are already relatively wealthy and have markedly better education, infrastructure and human development indicators than the rest of the country. As the engine of growth moves away from the impact of reforms in agriculture (as it was in the early stages of China and Vietnam s growth acceleration) towards increasingly capital and skills-intensive manufacturing and services, the opportunities for the poor and ill-educated to share in the benefits of growth appear to be weakening. In relation to the achievement of the MDGs, the most marked regional difference is between the low and highly unequal (including in relation to gender) educational levels in South Asia and the near universal basic education in East and South East Asia. Baseline scenarios for growth to 2015 are based on growth performance over the last decade for those countries that have enjoyed relatively stable growth performance (Bangladesh, India, Pakistan, Vietnam). In China, the growth baseline reflects the lower performance of most recent years compared to the first part of the 1990s and the view that the growth i

2 benefits of liberalisation and heavy levels of investment will moderate. In Indonesia, where there has been a modest rate of recovery (compared to average growth rates in the 1980s and first half of the 1990s) from the economic collapse of 1998/9, the baseline projects a continuation of this modest growth, whereas as the high growth scenario is based on a return to historical growth rates. In most cases, the high growth scenario is around 2.5% per annum higher than the baseline. The poverty impact of the projected growth depends heavily on whether the trends towards increasing income inequality continue. Baseline- and higher- poverty impact scenarios are therefore developed which are related to how rapidly income inequality is projected to rise. This in turn depends on the extent to which there is successful investment in human development (particularly access to education), and rural infrastructure, both of which are strongly associated empirically with relatively pro-poor growth, as well as on policies related to internal migration and arrangements for fiscal equalisation between rapidly growing and lagging sub-national regions. Several issues emerge as of critical importance for growth and poverty reduction prospects: The dependence of the livelihoods of the poor on the lagging rural economy, and how the benefits of growth and globalisation can reach the rural poor. The prospects for South Asia to match East Asia s growth rates through more effective economic reform and human development. The significance of the WTO as a shaping influence on domestic policy. The prospects for China sustaining exceptionally high investment and savings, and for increasing foreign direct investment to South Asia. The need for, but risks associated with, financial sector reform. The critical question is whether future growth will remain relatively biased against the poor as it has been during the 1990s, or whether the political conditions exist for effective policy responses both to boost growth in those countries that are not achieving their potential, and to improve the response of poverty to growth. ii

3 Contents Executive Summary...i Contents... iii List of Tables... iv List of Figures...v Trends in Growth and Poverty in Asia: Main Report Introduction Growth and Economic Change Trends in Income Poverty and Inequality...14 What is Happening to Poverty?...14 Has Growth Been Associated with Rising Inequality? Performance against Other Millennium Development Goals Growth and Income Poverty Scenarios...21 Growth Scenarios...21 Growth and Poverty Reduction...22 Results of the Scenario Analysis Factors Affecting Growth and Poverty Reduction Prospects...26 Appendix: The Growth-Elasticity of Poverty Reduction...29 References...31 Annex 1: Bangladesh...32 A1.1 Growth and Poverty Reduction Performance...32 Economic Growth...32 Poverty and Inequality...33 A1.2 Prospects for Growth and Poverty Reduction...37 A1.3 Growth and Poverty Reduction Scenarios...38 References...38 Annex 2: China...39 A2.1 Growth and Poverty Reduction Performance...39 Economic Growth...39 Poverty and Inequality...40 A2.2 Prospects for Growth and Poverty Reduction...48 Economic Factors...48 Social Factors...49 Political/Administrative Factors...50 Environmental Factors...50 Interaction with Other Asian Developing Economies...50 A2.3 Growth and Poverty Reduction Scenarios...50 References...53 Annex 3: India...54 A3.1 Growth and Poverty Reduction Performance...54 Economic Growth...54 Poverty and Inequality...56 A3.2 Prospects for Growth and Poverty Reduction...60 A3.3 Growth and Poverty Reduction Scenarios...61 References...62 Annex 4: Indonesia...63 A4.1 Growth and Poverty Reduction Performance...63 Economic Growth...63 Poverty and Inequality...64 A4.2 Prospects for Growth and Poverty Reduction...68 A4.3 Growth and Poverty Reduction Scenarios...69 References...69 Annex 5: Pakistan...70 iii

4 A5.1 Growth and Poverty Reduction Performance...70 Economic Growth...70 Poverty and Inequality...71 A5.2 Prospects for Growth and Poverty Reduction...74 A5.3 Growth and Poverty Reduction Scenarios...76 References...76 Annex 6: Vietnam...77 A6.1 Growth and Poverty Reduction Performance...77 Economic Growth...77 Poverty and Inequality...78 A6.2 Prospects for Growth and Poverty Reduction...82 A6.3 Growth and Poverty Reduction Scenarios...82 References...83 Annex 7: Cambodia, Nepal, Sri Lanka and East Timor...84 A7.1 Cambodia...84 A7.2 Nepal...88 A7.3 Sri Lanka...92 A7.4 East Timor...96 List of Tables Table 1: Per Capita GDP Growth... 3 Table 2: Indicators of Structural Economic Change... 4 Table 3: Export Structure and Performance... 8 Table 4: Regional Comparison of Structure of Exports Table 5: Merchandise Exports as % of Exports of Goods and Services Table 6: Destination of Merchandise Exports (%) Table 7: Significance of International Development Assistance, Table 8: Number of People (m) Below International Poverty Lines Table 9: Proportion of People (%) Below International Poverty Lines Table 10: Data on Poverty and Inequality Table 11: Poverty Headcount Based on International Poverty Line Table 12: Recent Trends in Inequality and Poverty Table 13: Trends in Inequality in Selected Rapidly Growing Asian Economies Table 14: Millennium Development Goals Table 15: Growth Scenarios Table 16: Projected Growth in Per Capita GDP Table 17: Baseline Growth-Elasticities of Poverty Reduction Table 18: Results of the Scenario Analysis Table A1.1: Indicators of Structural Economic Change Table A1.2: Structure of Merchandise Exports and Growth of Total Exports Table A1.3: Trends in Poverty and Inequality Table A1.4: Performance Against Millennium Development Goals Table A2.1: Indicators of Structural Economic Change Table A2.2 Structure of Merchandise Exports and Growth of Total Exports Table A2.3: Poverty Impact of Alternative Forms of Rural Public Investment Table A2.4: GDP per Capita at Provincial Level Table A2.5: Educational Enrolment and Literacy at Provincial Level Table A2.6: Population and Demographic Change at Provincial Level Table A2.7: Fiscal Revenue and Expenditure at Provincial Level Table A2.8: Performance Against Millennium Development Goals iv

5 Table A2.9: Scenarios of Poverty Prediction for Rural China Table A2.10: Simulation Outcomes of Poverty Reduction 1990 to Table A3.1: Indicators of Structural Economic Change Table A3.2: Structure of Merchandise Exports and Growth of Total Exports Table A3.3: Economic and Social Indicators for India s Major States Table A3.4: Performance Against Millennium Development Goals Table A4.1: Indicators of Structural Economic Change Table A4.2: Structure of Merchandise Exports and Growth of Total Exports Table A4.3: Trends in Poverty Table A4.4: Regional Distribution of Poverty Table A4.5: Performance Against Millennium Development Goals Table A5.1: Indicators of Structural Economic Change Table A5.2: Structure of Merchandise Exports and Growth of Total Exports Table A5.3: Poverty Headcount Estimates for Pakistan Table A5.4: Incidence of Poverty by Province and Region During 1990s Table A5.5: Inequality Gini Coefficients Table A5.6: Performance Against Millennium Development Goals Table A6.1: Indicators of Structural Economic Change Table A6.2: Structure of Merchandise Exports and Growth of Total Exports Table A6.3: Performance Against Millennium Development Goals Table A7.1: Growth Per Capita: Five Year Averages Table A7.2: Indicators of Structural Economic Change Table A7.3: Performance Against the Millennium Development Indicators Table A7.4: Growth Per Capita: Five Year Averages Table A7.5: Indicators of Structural Economic Change Table A7.6: Structure of Merchandise Exports and Total Export Growth Table A7.7: Significance of International Development Assistance Table A7.8: Performance Against the Millennium Development Goals Table A7.9: GDP Growth per Capita: Five Year Averages Table A7.10: Indicators of Structural Economic Change Table A7.11: Structure of Merchandise Exports and Total Export Growth Table A7.12: Significance of International Development Assistance Table A7.13: Performance Against the Millennium Development Goals Table A7.14: Inequality and Poverty Indicators List of Figures Figure 1: Comparative Performance in Reducing Income Poverty Figure A1.1: Bangladesh: Growth Performance Figure A1.2: Trends in Poverty Incidence and Inequality Figure A2.1: China: Growth Performance Figure A3.1: India: Growth Performance Figure A3.2: Poverty Incidence in India, Figure A3.3: Ratio of Rural to Urban Poverty Figure A4.1: Indonesia: Growth Performance Figure A4.2: Trends in Poverty Over the Crisis Period Figure A5.1: Pakistan: Growth Performance Figure A6.1: Vietnam: Growth Performance Figure A6.2: Regional Differences in Poverty Figure A6.3: Real Per Capita Expenditure Changes v

6 Figure A7.1: Cambodia Growth Performance Figure A7.2: Nepal Growth Performance: Figure A7.3: Sri Lanka Growth Performance: Figure A7.4: Fluctuations in GDP: vi

7 Trends in Growth and Poverty in Asia: Main Report 1 1. Introduction The objective of this paper is to provide background information and data on: Recent performance and trends in economic growth in the main Asian countries and sub-regions Trends in inequality and whether Asian growth has been associated with increased inequality Performance against the Millennium Development Goals. The paper develops alternative scenarios for growth and poverty reduction for the six major Asian developing economies (Bangladesh, China, India, Indonesia, Pakistan and Vietnam). Asia s aggregate performance in achieving the Millennium Development Goals will be determined almost entirely by the performance of these countries. The paper is structured as follows. Section 2 provides information on economic growth performance including the main changes in economic structure and exports over the last two decades. Section 3 presents information on income poverty and inequality and discusses the relationship between GDP growth and (income or consumption) poverty reduction. Section 4 discusses performance against the other Millennium Development Goals. The results of the scenario analysis are presented in Section 5 and major issues affecting growth and poverty reduction prospects are discussed in Section 6. An appendix discusses some methodological and empirical issues. More detailed discussion for each country is included in Annexes 1-6 to the Main Report. Annex provides summary information on growth and poverty reduction for a selection of smaller countries (Cambodia, East Timor, Nepal, Sri Lanka). Two points should be noted about the scope and limitations of this study. First, while there are active initiatives under way to improve the quality and international comparability of data on poverty, there are still large areas of uncertainty about the magnitude and trends of key variables and a fortiori about the relationships between these variables. For instance, Cassen (2002) notes that for India, the data do not really permit resolution of a key issue, whether poverty decline has slowed or not over the 1990s. Estimates of the poverty headcount against the international poverty line for China in 1999 appear to differ by around 20 million, and for Indonesia (where the issue is complicated by the effects of the economic crisis and recovery process during which poverty levels changed rapidly), alternative published figures for the same variable differ by almost 100%. Major revisions of international estimates of poverty for the 1990s are reported in Global Economic Prospects 2003 compared to the previous year, but the comparative basis of other published 1 This paper has been prepared by Stephen Jones of with contributions from Alex Duncan and other OPM staff. Research assistance was provided by Astrid Cox. Thanks are due to Professor Robert Cassen (LSE), Nithya Nagarajan (World Bank) and Professor Shujie Yao (Middlesex University) for assistance in accessing relevant material and for comments from Sophie Pongracz of DFID. Contact: 6 St Aldates Courtyard, 38 St Aldates, Oxford OX1 1BN. Tel

8 estimates, including those in the World Development Indicators, are not clear. More detailed investigation of sources could resolve or explain some of these discrepancies, though others reflect basic weaknesses in the data available. Second, the limited time and resources available for the study 2 (and the need to use approaches that can provide comparability across the six focus countries), as well as limiting the extent to which data discrepancies could be resolved, has required the use of simplifying assumptions and methods for generating the projections used in the scenarios. In most cases the data is rich enough to bear more sophisticated analysis (though problems with comparability would remain). This could for instance involve directly modelling the full relationship between growth, inequality and poverty, basing growth projections on explicit models of the growth process at the national level, or working with household survey data that provides complete information on the shape of the distribution function for personal income or consumption. It has also been necessary to focus on the single poverty measure of headcount below US $1 per day, whereas a more complete analysis would use a wider range of indicators. Despite these limitations, the data and methods used do appear to be sufficient to identify the main features and trends in growth and poverty reduction in Asia, including the salient similarities and differences at national and sub-regional level. The scenario analysis does provide a solid basis for making estimates of the likely order of magnitude of changes based on current trends or plausible modifications to these trends, as well as suggesting hypotheses for more detailed and sophisticated investigation. However, much deeper analysis at the country level would be required to draw policy conclusions. 2 The study was contracted on 12 th December 2002 for delivery in draft by January 3 rd

9 2. Growth and Economic Change Table 1 shows the comparative growth performance of the six countries for the last four fiveyear periods back to 1982, and comparisons between the South Asia and East Asia/Pacific regions as a whole (respectively dominated by India and China) and middle and low-income countries in other regions of the world. The salient features are: All of the six countries have enjoyed a significant level of per capita growth over each of the periods, with the exception of Indonesia and Pakistan in The growth rates of the three East / South East Asian economies have generally significantly exceeded those of the three South Asian ones, with China having the highest growth rate by some margin in each period. Within South Asia, Pakistan s growth performance has stagnated comparing the 1980s with the 1990s, while growth for Bangladesh and India has improved. In each of the sub-periods, East Asia/Pacific was the best performing region of the developing world, and South Asia was the second best performing though growth performance was almost identical between these two regions in the last sub-period. Table 1: Per Capita GDP Growth Bangladesh China India Indonesia Pakistan Vietnam East Asia & Pacific Europe & Central Asia N/A Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Source: WDI (2002) - Averages for each five year period. Table 2 shows information on value added and employment by sector, and the relative importance of investment, savings, exports and foreign direct investment in the six economies and for the international comparison between regions of the developing world, as indicators of changes in economic structure. This shows that: The share of agriculture in GDP has fallen over the period in all the countries. The fall has been largest in Bangladesh and China, and smallest in Pakistan. 3

10 The growth of the share of industry has been largest in Bangladesh and Indonesia, followed by China. China and Indonesia have substantially larger GDP shares of industry than the other countries, followed by Vietnam. Bangladesh s rapid increase in the share of industry has brought it up to similar levels to the other two South Asian economies. The share of employment in agriculture 3 has fallen most significantly in China followed by Indonesia, Pakistan, and Vietnam. Rapid growth of manufacturing exports has been an important driver of economic growth in each of the countries that has achieved a significant increase in per capita income, and the industrial share of GDP has increased significantly in Bangladesh, China, and Indonesia. However, the employment share of industry does not appear to be rising except in Indonesia. The ratio of exports to GDP has increased over the period in all the countries, most dramatically in Vietnam, which has gone from having one of the lowest proportions (7.2%) to the highest (43%). The share has approximately doubled in both Bangladesh and India, but in each remains only about half that of China (23.7%). Pakistan has seen the most modest increase. Gross domestic savings are and have remained an exceptionally high proportion of GDP in China, and the share of savings has risen sharply from low levels in Bangladesh and Vietnam. Savings shares have remained low in Pakistan and approximately constant in India at a significantly lower level than in Indonesia even when savings fell there during In Bangladesh, China and Vietnam the investment share of GDP has increased substantially. In Indonesia the investment share fell in the last period (when Indonesia faced severe economic and political crisis). It has remained fairly constant in India, and is at much the lowest levels (and falling) in Pakistan. In , none of the countries were significant recipients of foreign direct investment (less than 0.5% of GDP in any of the countries). During the 1990s China, Vietnam and Indonesia became extremely significant recipients of FDI (of the order of 4-5% of GDP), though Indonesia subsequently suffered net capital outflow at the time of the economic crisis. FDI has also increased from a very low base in the South Asian countries, but remains below 1% of GDP. East Asia and the Pacific is the only region in which the industrial share of GDP has increased over the period. It has also increased slightly in South Asia, having fallen in the other regions. Export shares have increased sharply in both regions, as they have in Europe and Central Asia, but unlike the other three regions. East Asia/Pacific has markedly higher savings and investment than any other region. Table 2: Indicators of Structural Economic Change 3 This measure needs however to be treated with caution in the Asian context where typically households significantly or primarily engaged in agriculture may have a wide range of other income sources especially in more dynamic economies. 4

11 Bangladesh Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Employment in agriculture (% of total employment) Employment in industry (% of total employment) Employment in services (% of total employment) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) China Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Employment in agriculture (% of total employment) Employment in manufact g (% of total employment) Employment in other (% of total employment) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) India Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Employment in agriculture (% of total employment) Employment in industry (% of total employment) Employment in services (% of total employment) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP)

12 Indonesia Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Employment in agriculture (% of total employment) Employment in industry (% of total employment) Employment in services (% of total employment) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) Pakistan Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Employment in agriculture (% of total employment) Employment in industry (% of total employment) Employment in services (% of total employment) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) Vietnam Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Employment in agriculture (% of total employment) Employment in industry (% of total employment) Employment in services (% of total employment) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP)

13 Europe and Central Asia Agriculture, value added (% of GDP) N/A Industry, value added (% of GDP) N/A Services, etc., value added (% of GDP) N/A Exports of goods and services (% of GDP) N/A Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) N/A Gross fixed capital formation (% of GDP) N/A Gross foreign direct investment (% of GDP) Latin America and the Caribbean Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) Middle East and North Africa Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) Sub Saharan Africa Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) 0.7 N/A Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP)

14 East Asia and the Pacific Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) South Asia Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Exports of goods and services (% of GDP) Foreign direct investment, net inflows (% of GDP) Gross domestic savings (% of GDP) Gross fixed capital formation (% of GDP) Gross foreign direct investment (% of GDP) Source: WDI 2002 Table 3 provides information about export structure and performance. Vietnam has had the most dynamic growth of exports, followed by Bangladesh and China, and then India. Pakistan s strong export growth in the first two periods tailed off sharply during the 1990s. Manufactured goods dominate merchandise exports for all the countries except Indonesia (where oil and gas are major exports) and Vietnam (for which comparable data is not available). Table 3: Export Structure and Performance Bangladesh % of merchandise exports: Agricultural raw materials (%) Food (%) Fuel (%) Manufactures (%) Ores and metals (%) Export growth (% per annum)

15 China % of merchandise exports: Agricultural raw materials (%) Food (%) Fuel (%) Manufactures (%) Ores and metals (%) Export growth (% per annum) India % of merchandise exports: Agricultural raw materials (%) Food (%) Fuel (%) Manufactures (%) Ores and metals (%) Export growth (% per annum) Indonesia % of merchandise exports: Agricultural raw materials (%) Food (%) Fuel (%) Manufactures (%) Ores and metals (%) Export growth (% per annum) Pakistan % of merchandise exports: Agricultural raw materials (%) Food (%) Fuel (%) Manufactures (%) Ores and metals (%) Export growth (% per annum) Vietnam % of merchandise exports: Agricultural raw materials (%) 16.9 Food (%) 72.4 Fuel (%) 6.3 Manufactures (%) 3.1 Ores and metals (%) 1.3 Export growth (% per annum) % of merchandise exports: Beverages, Tobacco, Oils/Fats (%) Food (%) Fuel (%) Manufactures (%) Crude Materials (%)

16 Table 4: Regional Comparison of Structure of Exports Europe and Central Asia % Merchandise Exports Agricultural raw materials N/A N/A Food exports N/A N/A Fuel exports N/A N/A Manufactures exports N/A N/A Ores and metals exports N/A N/A Latin America and the Caribbean % Merchandise Exports Agricultural raw materials exports Food exports Fuel exports Manufactures exports Ores and metals exports Middle East and North Africa % Merchandise Exports Agricultural raw materials exports Food exports Fuel exports Manufactures exports Ores and metals exports Sub Saharan Africa % Merchandise Exports Agricultural raw materials exports Food exports Fuel exports Manufactures exports Ores and metals exports East Asia/ Pacific Agricultural raw materials exports Food exports Fuel exports Manufactures exports Ores and metals exports South Asia Agricultural raw materials exports Food exports Fuel exports Manufactures exports Ores and metals exports

17 Table 4 shows that the increasing share of manufacturing exports which occurred for South Asia and for East Asia and the Pacific also occurred in Sub-Saharan Africa and in Latin America and the Caribbean. Table 5 shows that merchandise exports account for 85-90% of total exports of goods and services for four of the countries. The main exception is India where the share is only 71.5%. India s service exports have both increased more rapidly than merchandise exports and changed dramatically in content over the whole period from being principally travel and tourism related to being mainly business services (such as software and forms of business outsourcing). Table 5: Merchandise Exports as % of Exports of Goods and Services Bangladesh 79.6% 81.7% 82.9% 88.0% China 89.7% 91.0% 88.8% 88.5% India 74.4% 77.9% 80.7% 71.5% Indonesia 96.7% 92.4% 89.6% 90.9% Pakistan 78.1% 82.2% 82.4% 85.8% Vietnam % 75.6% 80.8% Source: WDI 2002 Table 6 shows changes in the destination of exports over the 1990s. The most marked features have been the falls in the share of exports to Asia (except for India and Vietnam), and the sharp rise for all the countries in the share to North America (principally the USA). The export share to Western Europe has also risen for all the countries except India and Pakistan. The decline in exports to the Rest of the World mainly reflects the collapse of trading links with the former Soviet bloc. The declining share to Asia partly reflects the continuing recession in Japan however Japan remains a major source of exports especially for China. Table 6: Destination of Merchandise Exports (%) Asia W. Europe North America Middle East Rest of World From\To Bangladesh China India Pakistan Indonesia Viet Nam Source: ADB

18 Table 7: Significance of International Development Assistance, 1999 Country Aid as % Central Aid per capita (USD) Government Expenditure Bangladesh China India Indonesia Pakistan Vietnam Source: WDI 2002 Table 7 shows the relative importance of aid in each country. While aid is a factor of considerable macroeconomic significance for Vietnam, Indonesia, Bangladesh, and to a lesser degree Pakistan, its importance in macroeconomic terms for both China and India is very limited. India has the largest number of poor people and the highest rate of poverty (see below) but receives the least in per capita terms. The overall growth picture can be summarised for each of the countries as follows: Bangladesh has increased its growth rate substantially in the 1990s compared to the 1980s and managed a significant increase of manufactured exports (principally textiles). Investment (including FDI), savings, and exports have increased substantially as proportions of GDP but remain well below the levels required for a substantial acceleration of growth beyond the 3% per capita of the 1990s. Almost 88% of Bangladesh s exports are to Western Europe or North America, up from 67% in 1990 as a result of declines in exports within the region and to the Soviet bloc. China s economy, while slowing in the second half of the 1990s, has grown at an unprecedented rate for more than two decades, supported by extremely high levels of investment and savings. While growth was initially related to agricultural reforms, it has increasingly been driven by exports of manufactured goods to developed country markets. North America s share of China s exports has increased from under 10% in 1990 to 28% in India s growth rates improved after 1991 and it has achieved increases in exports (including the emergence of major new service industries) and FDI. However, levels of savings and investment remain moderate by international standards, and particularly by comparison with China. India has since 1990 increased the proportion of its exports going to other Asian countries and to North America, while the proportion to the Soviet bloc has fallen. Indonesia grew rapidly through until the economic crisis of the late 1990s with high levels of savings and investment. Recovery from the crisis has been relatively strong though growth rates have not returned to pre-crisis levels. Indonesia remains the most dependent of the countries on regional markets. 12

19 Pakistan stands out as substantially the worst economic performer with symptoms of economic stagnation through the 1990s in terms of declining investment, the ending of export growth, and relatively stable shares of GDP and employment by sector. The share of Pakistan s exports going to North America and the Middle East has increased at the expense of exports to Europe and Asia. Data is not available on a comparable basis for Vietnam but its growth and export performance has been strong following the start of economic reforms in the mid- 1980s, although growth rates have not matched those of China and export growth in particular suffered as a result of the Asian crisis. Manufactured exports increased from negligible levels in to 47% of exports in Food and agricultural exports account for around a third of total exports. Exports to Western Europe, North America and Asia have increased to replace trade with the Soviet bloc. 13

20 3. Trends in Income Poverty and Inequality What is Happening to Poverty? Figure 1 provides a regional comparison of progress against the income poverty Millennium Development Goal. While East Asia and the Pacific (dominated by China) has succeeded in reducing poverty at a rate substantially in excess of what is required to half absolute poverty from 1990 to 2015, the rate of reduction of poverty in South Asia has not been sufficient to stay on track, though the performance has been substantially better than in Africa. Figure 1: Comparative Performance in Reducing Income Poverty Source: MDG monitoring website Table 8: Number of People (m) Below International Poverty Lines USD 1 per day (PPP) USD 2 per day (PPP) East Asia and Pacific (excluding China) Europe/Central Asia Latin America/Carib Middle East /North Africa South Asia Sub-Saharan Africa Total

21 Tables 8 and 9 provide estimates and projections from the World Bank of the numbers and proportions below two internationally defined poverty lines. The projections are for further sharp falls in absolute poverty in East Asia, driven by China s performance, and a significant but still limited reduction in absolute poverty in South Asia. Table 9: Proportion of People (%) Below International Poverty Lines USD 1 per day (PPP) USD 2 per day (PPP) East Asia and Pacific (excluding China) Europe/Central Asia Latin America/Carib Middle East /North Africa South Asia Sub-Saharan Africa Total Source: World Bank Global Economic Prospects and the Developing Countries, 2003 Table 10 provides data on poverty and inequality from national sources for the late 1990s. Estimates of the Gini coefficient and of the ratio of the incomes of the top 20% to the bottom 20% suggest that Bangladesh, China and Pakistan have the most unequal income distribution, while Indonesia, followed by Vietnam, is the most equal. Poverty is (based on national poverty lines) higher in rural than urban areas though for Bangladesh, India and Indonesia the differential in rates is quite limited. The Chinese official poverty line is set very low by international standards and is not particularly useful for analytical purposes. Table 10: Data on Poverty and Inequality Country % Population Below National Poverty Line Total Urban Rural Date Ratio of incomes of top to bottom 20% Date Bangladesh May May China Urban 97, Rural India / Indonesia Feb Feb Pakistan Vietnam Source: Asian Development Bank Gini Coefficient 15

22 Table 11 shows estimates of the proportion of the population in each country below the international poverty line of USD 1 per day (at purchasing power parity). 4 These figures suggest that more than half of the poor in this group of countries are in India, with around a third in China, and the remainder are fairly evenly divided between the other four countries in absolute numbers. Table 11: Poverty Headcount Based on International Poverty Line Country Poverty Population Poverty Population Gross National Headcount Headcount Growth Income p.c. (%) (m) (m) (% per annum) (USD) Bangladesh 29.1% China 18.8% 1, India 42.0% Indonesia 12.9% Pakistan 32.6% Vietnam 37.0% Source: WDI (2002), MDG (2002) Has Growth Been Associated with Rising Inequality? Growth has not necessarily been associated with rising inequality during periods of growth in these countries. The Gini coefficient (GC) fell in China with the initiation of economic reforms (from 31.7 in 1978 to 28.4 in 1983 World Income Inequality Database: Zhang Ping series), or on an alternative measure from 32.0 in 1980 to 25.7 in Likewise in Indonesia between 1978 and 1990 the GC fell from 38 to 32. Inequality within urban and rural areas also fell in Indonesia over this period (GC from 38 to 34 and 34 to 25 respectively). Both these episodes were associated with growth that was strongly agriculture-based as was Vietnamese growth in the period immediately after economic reforms began. In each case, inequality subsequently increased, to 38.2 in 1988 and 43.0 in 1995 (Zhang Ping) in China. In Indonesia the Rural GC increased from 25 in 1990 to 28.6 in 1996, and the Urban from a minimum of 32 in 1987 to 37 in Trends in income inequality and poverty headcount for the six countries are summarised in Table 12. In summary, while earlier growth periods were relatively pro-poor, recent growth in Bangladesh, China, India and Vietnam has been associated with rising inequality. The poverty impact of the growth that has occurred in 1990s has therefore been less than past experience alone would have predicted. 4 It should be noted that there are significant discrepancies between estimates from different sources for the baseline level of headcount poverty using the international definition and that the estimates of poverty for 1990 and 1999 were significantly modified in Global Economic Prospects 2003 compared to

23 Table 12: Recent Trends in Inequality and Poverty Income Inequality Bangladesh Having remained around 26 during the 1980s, the GC rose during the 1990s to around 31 by China India Indonesia Pakistan Vietnam Income inequality measured by the GC fell during the first half of the 1980s to 28.4 but subsequently has risen rapidly reaching 43 by Income inequality appears to have fallen slightly from 31.5 to 29.7 over the 1980s. While there are problems of comparability, it appears that the GC increased after 1990 to around 38 by the end of the decade. Income inequality fell during rapid growth from 1978 to 1990 (GC from 38 to 32). It appears to have increased subsequently but remains low compared to other countries. While certain population groups were hard hit by the crisis, it does not seem to have increased income inequality in the longer-term. The GC was around 28 during the 1980s, then fell from 28.7 in 1990/1 to 26.3 in 1996/7. It rose again however (during the period of economic stagnation) to 29.6 in 1998/9. Income inequality appears to have increased between 1996 and 1999, when the ratio of the income of the top quintile to the bottom increased from 7.3 to 8.9. GC estimated at 36.1 in Poverty Incidence of poverty was relatively stable from 1983/4 to 1991/2, then fell significantly until 1995/6 since when the rate of poverty reduction has slowed. Income poverty fell from around 31% in 1990 to 17% in 1999 continuing a trend of rapid poverty reduction since economic reform began in After a long period when the income poverty rate showed no trend, poverty fell significantly from the 1970s to the mid-1980s. There is a debate over interpretation of date for the 1990s but it appears that the income poverty rate fell between 1993/4 and 1999/2000 from around 36% to 29% on the national poverty line measure (alternative estimates are 39% to 34%). Poverty fell from 28% in the mid- 1980s to around 8% in the 1990s, before rising to 18% in 1996 and 24% in Poverty fell again sharply as growth recovered in 1999 and 2000, back to 10% by late The poverty headcount rate fell steadily from 46% (national poverty line) in 1984/5 to 28.6% in 1993/4. However it has subsequently risen to 32.6% by 1998/9. The poverty headcount is estimated to have fallen from around 75% in 1990 to 58% in 1993, 37% in 1998, and 32% in Several common factors across countries appear to underlie this shift to relatively less propoor growth: The first phase of rapid economic growth was associated with the removal of severe policy biases against agriculture in China and Vietnam (and to a lesser extent in Indonesia) in the context of a highly egalitarian land distribution, enabling a wide sharing of the benefits of growth. 17

24 Subsequently the agriculture sector has tended to lag and the driver of growth has been manufacturing exports (or service exports in some parts of India). The direct benefits of this growth have been concentrated in urban areas, and the better educated and more mobile have been better able to take advantage of the opportunities created. As a result, growth is currently associated in particular with rapidly increasing subnational disparities for example between Coastal versus Inland and Western provinces of China, the South and West of India versus the North and East, and the Red River Delta and South East (around Ho Chi Minh City) versus Highland and Central areas in Vietnam. These disparities reflect in particular ease of access to markets and educational levels. A question of central importance is whether the relatively unfavourable pattern of growth from the point of view of poverty reduction is likely to continue or whether trends towards increasing inequality will be stopped or reversed. Table 13 presents a selection of data from the World Income Inequality Database (WIID) on trends in the GC for other rapidly growing Asian economies at earlier stages in their growth process. South Korea and Taiwan have had and have maintained relatively equal income distributions. In Taiwan inequality generally declined from the early 1960s until the mid 1980s, and then increased into the 1990s mildly. In South Korea income inequality appeared to increase during the 1970s and fell again in the next decade. In Thailand income inequality appears to have increased from the early 1980s to 1992, but has subsequently fallen. For Malaysia income inequality appears to have increased between the mid 1950s and mid 1970s, then declined subsequently before remaining approximately constant in the early 1990s. This suggests that rapid growth can be sustained without increasing inequality. However, drawing comparisons between these economies and the much larger ones (in population and geographic area) that are the focus of this paper requires care. In each of these four countries most of the population is located close to centres of growth and access to export markets is good reflecting long coastlines, high population density and generally good internal communications. Where there are exceptions that approximate more the conditions of countries with large inland populations dependent on agriculture and remote from the main centres of urban growth, as in Northern Thailand, growth has indeed been notably unequal. Table 13: Trends in Inequality in Selected Rapidly Growing Asian Economies South Korea Taiwan Malaysia Thailand Sources: WIID: S.Korea ( Martellaro, NBS); Taiwan (HH Survey Series); Malaysia ( Dowling; Bruton, World Bank);Thailand ( Ikemoto, CSO). 18

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