Article

Challenge of Sustaining Growth with Equity in Asia

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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Despite the general picture of relative success, Asia needs to tackle some major long-term development problems

Attila Karaosmanoglu

The 1980s are often described as a “lost decade” for the developing countries. Indeed, there were many countries in Asia and other parts of the world where the growth in per capita incomes during this period was negligible or negative. However, for the region as a whole, Asia registered remarkable growth. In fact, during this decade, Asia’s per capita income grew by 5.2 percent per year, which was impressive both in relation to its own past performance (nearly twice the rate during the 1960s and 1970s), and in relation to other parts of the developing world.

The success of Asia during this period was in spite of unfavorable external conditions. The region experienced a decline in its terms of trade and higher international real interest rates. It had its share of natural disasters and political upheavals. Nor was external aid large; in fact, Asia’s share of overseas development assistance (ODA) continued to decline in the 1980s. What is unique about the success of Asian countries was the nature of their structural reforms, which were voluntary, sustained, gradual, and effective. These reforms covered a broad spectrum, including prudent fiscal and monetary management, trade liberalization, encouragement of private sector development, and support for social sectors.

Of course, the new found prosperity of the rapidly industrializing economies of Asia, such as Indonesia, Malaysia, the Republic of Korea, and Thailand (see table) accounts for a large part of the success of Asian countries. Despite a decline in their terms of trade, and an accelerated decline in their share of ODA, these countries registered a high per capita growth rate during the 1980s. By 1989, these countries made dramatic progress in reducing the percentage of population below the poverty line to less than 20 percent. In addition, an increasingly favorable environment was created for private sector development, with governments playing an active role in building physical, social, legal, regulatory, and technical infrastructure. As a result, these countries were in a position to handle the shocks of the early 1990s and maintain sustained growth, while continuing to reduce poverty.

The principal source of acceleration in the region’s growth rate was the remarkable surge in the per capita growth rates for China—a spectacular 8.3 percent per year, from 3.3 percent per year in the 1970s—and India, whose per capita growth during the 1980s was 3.3 percent per year, three times the rate in the preceding two decades. Income growth in these countries was also associated with a significant improvement in social indicators. By 1988, China had a life expectancy at birth of 70 years, daily calorie supply of 2,630 per capita, infant mortality rate of 31 per thousand, and, near universal primary education enrollment. India, though lagging behind, had also made significant progress in all these areas.

However, while China and India benefited from the liberalization process in the 1980s, strains were beginning to be evident by the end of the decade. China reaped the fruits of reforms in rural sectors in the early 1980s, but the next stage of decentralized management in the urban and industrial sectors proved more difficult. Serious inflation developed by 1988, requiring a strong policy response. For India, the liberalization process was associated with significant improvement in industrial and export growth, but problems emerged by the end of the 1980s. On the external front, foreign exchange reserves declined and the debt-service burden increased to alarming levels. The budget deficits were high and inflation was approaching double-digits. The accumulating short-term macro-management problems were combined with continuing problems in terms of distorted trade policies, a weak financial sector, restrictive labor markets, inefficient parastatals, and constraints on the private sector.

For other countries in Asia, the 1980s was a decade of low and declining rates of growth. Per capita income for this group in the 1980s declined by about 0.6 percent per year, similar to the rate for developing countries outside of Asia. Within this group, the Philippines experienced the sharpest decline (1.7 percent per year), with Myanmar, the Pacific Island countries, and Papua New Guinea following closely behind. For Bangladesh, Laos, Nepal, and Sri Lanka, per capita income growth rates were low or declining. Many of these countries combined the problems of policy distortions with problems of capacity building and unsustainable population growth.

It is in this context that Asia faced the Middle East crisis in 1990. Many feared that the shock would be severe, not only because of higher oil prices (the third oil shock), but also because of higher interest rates, losses in workers’ remittances, and a sharp decline in exports to Iraq and Kuwait. However, the shock proved much less severe than had been expected. It was less severe on the fiscal front because Asian governments quickly adopted measures to deal with the potential losses: domestic fuel prices had been increased in oil importing countries by late 1990. The impact of the shock, however, was more severe on the balance of payments, with estimated losses by the end of 1990 of $1.3 billion in India, $0.5 billion in the Philippines, and $0.3 billion in Bangladesh—the countries most affected by the oil shock in Asia. Additional external assistance was mobilized to help with the short fall. In addition, the relatively fast return to pre-crisis oil prices in early 1991 and a continued expansion of export revenues in most countries, helped. By early 1991, the shock had largely dissipated, with the notable exception of India.

The unfinished agenda

Thus, while the overall performance of Asia in the 1980s is a cause for confidence, there is no room for complacency. Except for the rapidly industrializing, open economies (Korea, Thailand, Malaysia, and Indonesia), most of the Asian countries were facing the risk of macroeconomic imbalances and slow, or decelerating, growth rates. In most of these cases, the structural reform problems were embedded in longer-term development problems of poverty, linked tightly to rapid population growth and the deteriorating environment. Concern over these issues has intensified in recent years. But even under the very difficult conditions prevailing in many of the countries in Asia, there is reason for hope that their response to these problems will be positive and improvements attainable.

Growth and structural reforms. The experience of the rapidly industrializing open economies of Asia have shown that growth is essential for poverty alleviation, that structural reforms are essential for growth, and that private sector development is of critical significance for competitiveness and sustained economic performance. While some strains have emerged in recent years, the underlying economic structures and policy directions in these countries are such as to enable them to maintain the growth momentum of the past.

The emerging consensus on development strategy—recognition of the importance of incentives, integrated markets, and private enterprise—is now widely accepted by the authorities of most Asian developing countries. However, the pace of structural reforms essential to attain these objectives has slowed down in many countries of Asia. In these economies, the trade barriers are still high, investment and commercial activity is still overregulated, financial markets are distorted, and the labor markets are seriously segmented. There are also compelling reasons for streamlining the public sector and improving policies toward private foreign investments and technology transfers.

The Philippines’ economic situation is a cause for concern. One of the earliest countries under adjustment programs, it suffered during the 1980s from political unrest, declining per capita incomes, increasing macro imbalances, and growing poverty problems. A resumption of growth with equity will require designing programs that will not only address structural problems but also redirect resources from consumption by the top few to broad-based development. The private sector, defined to include big businesses as well as the small, medium, and informal sector, will play a key role.

Table 1.Asia: growth of GDP per capita, 1960-89(In percent)
1980-70i970-eo1980-90
Indonesia1.04.83.1
Korea607.78.4
Malaysia3.55.422
Thailand5.24.35.1
China3.63.38.3
India1.31.03.3
Bangladesh1.00.90.8
Lao, People’s Deirt. Rep.----0.4
Myanmar0.12.4−1.0
Nepal0.70.12.1
Papua New Guinea4.2−02−0.3
Philippines1.93.5−1.7
Sri Lanka2.03.12.5
Pacific Islands1.82.4−0.5
Asia2.43.25.1
Other developing countries2 73.0−0.4
Source World Bank
Source World Bank

Population and demography. Asia’s population is large, youthful, and rapidly growing in size. More than half the world’s 5 billion people live in Asia, nearly 35 percent of whom are below 15 years of age. Looking at measures of density of settlement, Asia (excluding Pakistan) has 354 people per square kilometer of agricultural land compared to 55 for Latin America, 58 for Sub-Saharan Africa, and 116 for the Middle East and North Africa. Bangladesh has over 1,000 people per square kilometer of agricultural land. Asia is beset today with a population problem imposing high environmental and economic costs that will constrain sustainable development.

Four basic demographic factors affect the growth of population: (1) age structure of the population; (2) mortality rate; (3) fertility rate; and (4) mean age of childbirth. Even under the best of conditions imaginable—that is, an immediate fall in total fertility rates to replacement levels—the population of the Philippines and Bangladesh would be 50 percent higher by 2025, while that of India, about 40 percent larger. A more realistic fertility decline scenario would result in even higher increases in population.

Despite encouraging trends in fertility, demographic prospects for low-income Asia are unfavorable for two reasons. First, in most countries, fertility is still substantially above replacement levels. Second, the impact of lowered fertility in slowing population growth has in many instances been totally or partially offset by parallel declines in mortality and the mean age of childbearing, as well as by larger cohorts of women of childbearing age. India is a good example: between 1980 and 1987, the total fertility rate fell from 4.5 to 4.0, but the corresponding annual rate of population growth actually rose from 1.97 to 2.06.

Without doubt, these problems loom larger for the poorer South Asian countries because their capacity to cope with them is much more constrained by tight budgets, the already heavy pressure on environmental resources, the sparseness of existing infrastructure and institutions, and high fertility rates. For these countries, the urgency of accelerating the decline in fertility rates is well recognized. At the same time, raising the mean age of child-bearing is also critically important; a decline will significantly offset the benefits of lower fertility rates. Hence, these findings point to a greater emphasis on making temporary birth control methods available to young mothers to encourage a higher mean age of childbearing.

Patterns of poverty and poverty reduction. Population growth is tightly linked to the persistence of poverty. The dimensions and rough distribution of poverty in Asia have been known for some time, both in the poor countries of South Asia and in East Asia, where the industrializing high-growth economies have achieved dramatic reductions in the proportion as well as the total number of people living in poverty. The Bank’s recent analytical work, however, has brought to light some important characteristics of poverty in Asia and pointed the way toward effective public interventions to hasten its reduction.

  • Asia’s poverty and its population is concentrated in five countries (India, Bangladesh, Indonesia, the Philippines, and China), which contain about 540 million poor, and within those countries, poverty tends to be concentrated regionally. This is also true for disparities in social indicators and the availability of social and economic services.

  • The impact of population growth, particularly in the densely settled rural areas, on the quality of environmental resources tends to aggravate Asia’s problem of poverty. Forests are cut down, soils eroded, and soil nutrients exhausted under pressure from land and fuel hungry poor.

  • The status of women in South Asia, particularly in regard to health and education, is abysmally low and strongly associated with poverty status. Higher female than male mortality rates are a particularly disturbing indicator of inequitable access to services. An increasing number of women are landless heads of household, joining a traditional and very large group of rural landless poor, especially in South Asia.

For Malaysia, Korea, Thailand, and possibly Indonesia, the high rate of growth has or will effectively control the poverty problem. It is in the countries of South Asia, as well as the Philippines and Indochina—characterized by slow output growth, poor resources, and rapid population increase—that significant problems of poverty still persist. In many of these countries, a targeted approach of investments and programs designed to reach the poor can serve as an effective complement to an overall growth strategy. Considerable recent work has been done to clarify problems and approaches of targeted poverty interventions.

For example, the provision of irrigation and agricultural services in poor underserved regions would be an effective strategy in such countries as China, Philippines, and India. Investments in drinking water and electricity in such regions can also improve the productivity of the rural poor. To reach the landless rural poor, including women, both direct and indirect approaches are necessary. An increase in the productivity of agriculture will raise farmers’ incomes, as well as the demand for farm and off-farm labor. More direct programs will need to involve Asian NGOS, many of which have an excellent record of motivating the poor and delivering well-targeted credit, employment, and training programs.

In the area of social infrastructure, the existence of wide disparities between poor and nonpoor in both social indicators and in terms of access to quality services opens up a wide area of possible interventions on a sectoral basis. One promising approach to these problems is through analysis of public expenditure in the social services. Primary education in India, for example, receives a comparatively low proportion of public spending, leading to severe inequities in educational attainment. This is not the case for hospital admissions in India, where the poor enjoy proportionately greater access. By contrast, data for Indonesia show that access by the poor to hospital care is very low compared to the better off. Differences among countries in level of access by the poor are significant, and indicate the potential, on a case-by-case basis, for retargeting social sector expenditures and changing policy to reach the poor.

The environment. The region’s focus on environmental issues is in part driven by the severity of poverty and the rapid growth of population. The combination of demographic, economic, and climatic conditions in Asia are producing enormous pressures on the environment that will need to be addressed in the near term if further environmental degradation and potential environmental catastrophes are to be avoided in the long term.

As Asia’s population continues to grow, the proportion of the regional population living in cities will also increase. By 2025, some 50 cities will have in excess of 4 million people each, compared to 20 cities currently. South Asia is expected to have the highest ratio of population in such mega-cities by 2025. Many of these cities will have 10 million people or more. Few governments have policies or programs under consideration to cope with the projected rates and associated needs of urbanization.

Forest areas are declining in most areas of. the region. Rates of decline are highest in South East Asia and most severe in South Asia. This has resulted largely from the demand for increased agricultural land, commercial logging, and fuel wood collection. In addition to losing the natural resources provided by the forest, deforestation causes soil erosion, water loss, flooding, desertification, and the silting of irrigation reservoirs. Soil erosion is estimated to cost Java alone about $400 million annually (soil productivity loss plus costs of clearing silt from irrigation facilities, rivers, and dams). Deforestation also leads to a loss of habitat—about one quarter of the world’s biological resources are at a high risk of extinction in the next 20-30 years.

Although gross water resources are generally sufficient throughout the region, several local rates of consumption in South Asia and China are unsustainable, with available water supplies being used up. For example, $400 million was spent each year in 1985,1986, and 1987 to supply water to inhabitants in drought-stricken rural Gujarat (India). Further, water quality is declining regionwide and this decline is expected to accelerate to below already intolerable levels. Waste water severely pollutes 70 percent of China’s 78 monitored rivers, and the country is treating only 2 percent of its total waste water. In India, only 217 of 3,110 towns and cities have any form of sewerage treatment, and municipal sewerage systems serve only 4 percent of India’s population. In the absence of clean surface water, groundwater resources are also being depleted, and since shallow wells dry up first, the impact is felt disproportionately among the poor.

Atmospheric pollution in Asian countries is a matter of both national and international concern. Air pollution is a major threat to human health in cities like Beijing, and children in Bangkok show increasing levels of toxic chemicals in their blood stream from automobile emissions. In addition, the rapid increase in atmospheric emissions in Asia’s newly industrializing nations contribute to global problems such as acid rain and possible climate change.

The “greenhouse gases” implicated in global warming are produced mainly by the large developed countries (the United States, the countries in the European Community, and the Union of Soviet Socialist Republic produce about 50 percent of greenhouse gases), but the rate of increase is greatest in the developing world, particularly in Asia. Presently, Asia produces about 20 percent of the world’s greenhouse gases. Emissions in India and China are growing by a startling 6-7 percent per year, while industrial world emissions are growing by less than 1 percent. Left unchecked, these two countries in the next 20 years will triple their carbon dioxide emissions and offset a 40-50 percent reduction by the industrial countries. Consequently, Asia presents the greatest single threat to the world’s environmental balance in atmospheric pollution.

The World Bank’s borrowers have initiated a number of efforts to address environmental concerns. Most countries have either prepared, or will prepare, environmental reports or action plans in anticipation of the June 1992 UN Conference on the Environment and Development in Brazil. These will highlight environmental problems at the national level and identify regional issues related to natural resource management, human resource development, and the need for concessional aid to support recommended investment programs. A major World Bank program with UNDP has sought to identify strategies to improve conditions in Asia’s largest cities, while many Asian countries are studying means to mitigate urban and industrial pollution. To help address global concerns, work sponsored by several donors has been initiated in China, India, Malaysia, and Indonesia.

Conclusion

Overall, Asia’s prospects are good. Despite the seriousness of problems, the favorable economic policy and institutional context provide the foundations for progress. However, the 1990s forces policymakers to confront some particularly disturbing developments: the rise of serious macro imbalances, accentuated in some cases by the impact of events in the Middle East; the danger of losing momentum in the implementation of structural reforms in the more vulnerable economies; the increasingly ominous interaction between poverty and population in countries with a high incidence of poverty; and finally, the accelerating environmental deterioration in many countries, which threatens the productive base of society. These developments should temper the usual optimism bestowed on the region as a whole and direct more forcefully the attention of donors to an important subgroup of Asian countries that must cross many hurdles before joining the ranks of their rapidly growing neighbors.

G AND THE DEVELOPING COUNTRIES

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