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p. 8 of 15 BACK | NEXT Executive Summary I. An Analytical Framework II. Regional Experiences A. Africa B. Asia and Pacific C. Central and Eastern Europe, the Baltic States, and the CIS D. Latin America and the Caribbean E. Regional Summary III. Policy Actions to Help Poor People Gain from Globalized Markets

Global Poverty Reduction 2001 : II. Regional Experiences

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B. Asia and Pacific

29. The experience of countries in the Asia and Pacific region contains a broad range of examples² concerning both trade liberalization and poverty reduction. Countries include those best known for their successful integration into a globalized economy and concomitant positive results in poverty reduction (for instance, the Republic of Korea, Singapore, and Taipei,China). They are closely followed by Indonesia, Malaysia, and Thailand: countries that progressed well in opening markets and in improving the living standards of many of their citizens. These countries have shown remarkable economic growth rates over the past 30 years, accompanied by an increasing deregulation of trade and declining incidence in poverty. While greater integration in a globalized market exposed these economies to external shocks, as manifest in the Asian crisis of the late 1990s, trade openness also played an important role both in growth before the crisis and in the ensuing recovery as exports grew rapidly. The People’s Republic of China (PRC) and Vietnam, which achieved outstanding reductions in poverty levels over a short period of time, are increasingly opening their economies to international trade. In the PRC these trends are accompanied by increasing income disparities, whereas in Vietnam no major changes to income distribution have been observed. But, the region also includes countries that have introduced trade liberalization measures reluctantly or not at all, economies with great potential for participation in globalized markets and those that are isolated. Above all, Asia is home to the largest number of poor people in the world.

30. The PRC has made enormous strides toward reducing poverty: “between 1978 and 1999, 227 million people were lifted from absolute poverty” (AsDB, 2001a). A number of sources acknowledge the PRC’s achievements in reducing poverty as a major contribution to the global decline in the proportion of people in poverty. The country’s growth performance is partly explained by its progressive trade opening, although foreign investments and technology transfers played an important role. Trade was liberalized gradually, testing measures that were introduced and adjusting policies as necessary (UNDP, 2001). Early reforms of trade and non-trade barriers were inadequate to promote large-scale production of manufactured goods for export. Subsequent liberalization of imports of intermediate inputs and capital goods related to export production increased the competitiveness of exports. By the turn of the century, only a few products are still subject to state trading, including some agricultural commodities of “importance for the peoples’ livelihood and national economic development” (World Bank, 2000d). But, the positive trends in trade liberalization and poverty reduction were also accompanied by increasing inequality. This approach to selective trade liberalization parallels the earlier experience of the Republic of Korea, where an export orientation was accompanied by policies to support domestic industries and to build human resource capacities through extensive education programs, before the domestic market was opened to imports. These investments in human capital and land reforms also helped reduce income inequality in the Republic of Korea.

31. India, another country with a significant number and proportion of poor people, started market-liberalizing reforms in 1991. However, trends in economic growth, opening the economy, and poverty reduction have not followed a single pattern. While economic growth and deregulation increased, income poverty fell rapidly from the mid-1970s (a time of relatively high protection and low growth rates) to the early 1990s and less rapidly in the second half of the 1990s, although poverty trends are unclear, partly because of data problems. The fact that the poor may not have benefited as much as expected reflects the failure of accompanying measures and enabling conditions—e.g. infrastructure, human capital—and incomplete reforms (especially in the agriculture sector) as illustrated by other research (New School, 2000). The same study shows that the partial removal of restrictions to agriculture exports did not result in higher growth rates in the sector. Also, the removal of protection from agriculture prices resulted in price hikes that hurt the poor (as net consumers), while also affecting the non-poor (who benefited from ill-targeted subsidies). Employment in the agriculture and in non-agriculture sectors has been sluggish, if not declining in the organized and informal sectors,³ without adequate social safety nets to compensate for the loss of sources of income. The only exception was that of urban female workers, whose steady employment rates rose after 1991, albeit at wage levels equivalent to rates paid to men for casual labor. The limited achievements in the agriculture sector are explained by the lack of concomitant reforms to agriculture and other policies and the failure to remove agrarian inequalities that affect rural areas where the majority of India’s poor can be found.

32. Small economies can benefit greatly from an expanded array of goods available at lower prices because of import liberalization. Liberalization would benefit poor and nonpoor consumers and producers in as much as they use imported goods. Small, low-income countries can potentially progress rapidly when favorable trade agreements help boost labor-intensive sectors such as textiles in Cambodia, a country that also introduced parallel reforms to promote investments. A similar small economy, the People’s Democratic Republic of Laos (Lao PDR) (with a relatively low level of protection for a low-income country) adopted policies to introduce greater trade liberalization by lowering tariffs for production equipment, and raw and intermediate materials used in export processing. However, in the Lao PDR rules are not applied consistently, with the many exceptions creating distortions that impede full growth potential. Further, these small countries will invariably be more specialized and therefore more vulnerable to external shocks. This circumstance emphasizes the need for good macroeconomic management. Access to long-term international capital, including private foreign direct investment will also help expand economic opportunities and mitigate the impact of external shocks. It should also encourage development of a flexible, well-trained labor force able to participate in the dynamic opportunities arising from greater openness.

33. The Asian crisis emphasized the increased vulnerability of open economies—in countries most affected, the incidence of poverty increased sharply after the crisis, threatening the achievements in poverty reduction in Indonesia, the Republic of Korea, Malaysia, and Thailand. Even in countries not affected by the crisis, the transformation of society requires adopting new social protection mechanisms for preventing and coping with risks. The economies in the Pacific remain extremely vulnerable to external shocks, particularly with the phasing out of special treaties, and do not have the economic base to provide for extensive social protection. The main challenges in developing mechanisms adequate and affordable to countries in the region lies in the fact that 60 percent of the population is rural, many of whom are poor and live in remote areas and are difficult to cover under formal protection schemes. In urban areas, a large proportion of poor remains in non-registered sectors of the economy, making it hard to include them in formal protection arrangements. The diverse needs for social protection challenge governments in the Asia and Pacific region to find new roles, and partnerships with the private sector to develop formal and informal safety nets. Some countries finance extensive, but poorly targeted support mechanisms, which remain ineffective as the benefits do not accrue to the intended groups. As a number of governments in the region recognize these weaknesses, the Asian Development Bank is adopting a strategy to support its developing member countries to address labor market issues, social insurance, social assistance and welfare services, micro- and area-based schemes, and child protection (AsDB, 2001b).

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