Journal Issue

Recovery in Asia: Social agenda is a necessary prerequisite for poverty reduction and growth

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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After almost two years of economic disruption, the Asian economies have begun to rebound. Yet the crisis period was no ordinary cyclical trough. It was partly due to an absence of the policy reforms necessary to prosper in a global economy with increasingly open capital markets. The costs of the crisis were not small: output declined and remains below trend, and poverty rates increased, reflecting in some countries significant declines in real wages and in others a large increase in unemployment.

The IMF firmly believes that a social agenda should be part of the reform initiatives in Asia, in addition to necessary reforms in structural, regulatory, and macroeconomic policy management, which are now clearly recognized as prerequisites for sustainable growth. We know that growth is necessary to reduce poverty in the long run.

Structural architectural agenda

Since the Asian crisis, a consensus has emerged on the priorities for institutional reform. The objective is to support vibrant, growing economies that can benefit from global investment capital seeking high returns while remaining resilient to potentially destabilizing pressures caused by contagion, capital movements, or external economic developments. High growth is consistent with openness; the task is to ensure that capital mobility and free trade do not destabilize or undermine the financial and real sectors of an economy. Avoiding steep recessions and providing an environment that facilitates rapid growth in output and employment are powerful preventive strategies for reducing poverty. Such growth, and the jobs it creates, can lift real wages and enable workers to manage the inevitable transitions associated with the evolution of the industrialized and service-based economies of the coming century.

Instituting stronger legal, regulatory, and supervisory frameworks is crucial for sustaining growth. These “second-generation” reforms would encompass new or strengthened bankruptcy and foreclosure laws; judicial procedures that allow for expeditious resolution of claims; transparent accountancy practices; tax reforms; and institutions that ensure greater transparency in fiscal and monetary operations as well as in corporate governance. More flexible labor market policies and adherence to the principles of the International Labor Organization are equally relevant. Ensuring responsive and transparent political institutions and responsible governance within public agencies is vital for ensuring confidence and trust and effective policy formulation and implementation.

As a result of the crisis, Asian policymakers have initiated efforts in the area of financial and structural reform. It is important that Asian countries persevere in these efforts.

Social policy agenda

There are four essential elements of an enhanced social policy agenda: investing in human capital, protecting the poor during economic shocks, establishing cost-effective social insurance policies that reflect local cultural norms without creating large disincentive effects in the labor market, and establishing vehicles for long-term savings in the context of aging populations.

Investing in human capital has long been recognized as central to any growth strategy. The Asian economic miracle witnessed the achievement of high literacy rates, the promotion of investment in secondary and higher education, the proliferation of networks of primary health care facilities, and the spread of high-quality secondary and tertiary medical care. The challenges now faced by many Asian economies are similar to those encountered by industrial countries—to ensure that social sector spending is efficient, costs are contained, and equity in access is achieved. Such investments need to be complemented by well-designed policies for regional development and some policies to ensure that the poor, who are less well integrated in the formal economy, can take advantage of the opportunities afforded by rapid growth.

A salient lesson of the recent crisis was governments’ lack of preparedness to respond to losses in wages and the large jump in unemployment rates. Most governments were unable to monitor household income developments and track situations where the nonpoor were being thrown into poverty or experiencing a sharp drop in their assets and where remedial programs were most necessary. Governments should have the capacity already set up to identify those groups and regions where poverty is particularly a problem, as well as to understand the factors and dynamics responsible for persistent poverty.

An equally important element of any social agenda must be the institutionalization of a capacity for a rapid targeted response of income relief and measures to generate employment. In the recent crisis, public works schemes were slow in getting off the ground and those that did were likely to be subject to serious governance problems. Throughout the industrial world, formal systems are in place to ensure against disability, unemployment, death of a household’s main income provider, and old age. Such systems have begun to develop in some emerging market countries of Asia. Those Asian economies that are participating in the global economy are certain to experience flux in the industrial and service sectors—as dynamic firms grow and inefficient ones shrink and close down. Moving from situations without formal unemployment insurance or only enterprise-specific systems to some form of broader unemployment benefits will become a necessary piece of the social architecture in these countries.

The critical task will be to design systems that do not conflict with the equally important objective of fostering growth in employment in these economies and maintaining job search incentives. The recent efforts of the World Bank and some UN agencies to develop broad principles of good conduct in the social area should provide further guidance to countries.

The challenges of designing a financially viable multipillar pension system that can sustain an aging population has been the subject of much attention in recent years. Our understanding of the risks and benefits associated with different approaches—public, private, or mixed, defined benefit and defined contribution—is now quite substantial. We also understand much about the institutional prerequisites of different systems—the types of financial products and institutions that need to be developed and the challenges that are posed. There is no one right system; the appropriate solution for a country will depend on its history, culture, and political economy. Most Asian countries have much work to do, both in designing systems with broader coverage and in developing an institutional framework that can deliver on the promises that will be implicit in any scheme.

Role of the IMF

Finally, I want to highlight how these social issues are influencing the IMF’s work. The initiatives unveiled at the World Bank-IMF Annual Meetings six weeks ago have placed poverty reduction at the center of the IMF’s efforts for its low-income member countries. The IMF’s concessional lending facility, the Enhanced Structural Adjustment Facility, has been transformed into the Poverty Reduction and Growth Facility (PRGF), which makes poverty reduction a key element of a renewed growth-oriented economic strategy. The cornerstone of the new approach is a nationally owned, comprehensive Poverty Reduction Strategy Paper (PRSP), which will be prepared by a country’s authorities with assistance from the World Bank and the IMF. The PRSP will reflect an open, participatory process involving civil society, relevant international institutions, and donors and will identify priorities for public action to reduce poverty. It will also address the critical and often complex issues of enhancing good governance and supporting transparency in policymaking.

In the necessary division of labor between the IMF and the World Bank, the latter will be at the forefront of discussions with authorities on the design of policies for poverty reduction. The IMF will seek to ensure that these social and sectoral programs can be accommodated and financed within a supportive, growth-enhancing, low-inflation macroeconomic and budgetary framework. The IMF’s PRGF will place high priority on the key reform measures critical to achieving rapid and sustainable growth that also leads to faster poverty reduction.

It is also important to understand the IMF’s contribution in the social area for countries that are not implementing IMF-supported programs. Traditionally, the focus has been heavily macroeconomic, but the IMF has become increasingly aware of the importance of a country’s structural policy framework for the global macroeconomic environment and has paid increased attention to the social implications of its policy advice. Poverty, unemployment, and severe inequalities in income distribution can undermine growth and lead to large welfare transfers that burden the budget. It is for this reason that the IMF has emphasized, as part of its surveillance process, collecting and monitoring social and poverty indicators as needed. Policies in the social sectors may need to be taken into account, including the adequacy of social policy instruments, the performance of social safety nets, and the potential social ramifications of macroeconomic and financial policies. Equally, in situations where social policies threaten to give rise to significant vulnerabilities in macroeconomic policy management—over either the short or the long term—the policy implications may need to be addressed in the surveillance process.

The crisis in Asia has made us all aware not only of the remarkable strengths and resiliency of the Asian economies, but of the important policy agenda—both economic and social—that must be tackled in the coming years if these countries are to make a sustained transition to high-income economies with low rates of poverty.

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