Asia’s Contribution to Global Economic Development and ...

Asia’s Contribution to Global Economic Development and Stability

Asia’s C

ontribution to Global Econom

ic Developm

ent and StabilityA

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Institute

Asian Development Bank Institute, Tokyo, Japan

The Asian Development Bank Institute (ADBI), located in Tokyo, is a subsidiary of the Asian Development Bank (ADB). It was established in December 1997 to respond to two needs of developing member countries: identi�cation of e�ective development strategies and improvement of the capacity for sound development management of agencies and organizations in developing member countries. As a provider of knowledge for development and a training center, ADBI serves a region stretching from the Caucasus to the Paci�c islands.

ADBI carries out research and capacity building and training to help the people and governments of Asian and Paci�c countries. ADBI aims to provide services with signi�cant relevance to problems of development in these countries.

ISBN 978-4-89974-030-8

Asian Development Bank InstituteKasumigaseki Bldg. 8F3-2-5 Kasumigaseki, Chiyoda-kuTokyo 100-6008, Japanwww.adbi.org

Annual Conference2008

Printed in Japan

About the Asian Development Bank Institute

Asia’s Contribution to Global Economic

Development and Stability

Annual Conference 2008

Edited by Masahiro Kawai and Susan F. Stone

Kasumigaseki Building 8F3-2-5 Kasumigaseki, Chiyoda-kuTokyo 100-6008, Japanwww.adbi.org

©2009 Asian Development Bank Institute

ADBI [email protected]: 978-4-89974-030-8

Freely available electronically at:http://www.adbi.org/book/2009/asia.contribution.global.economic.dev/

The views expressed in this work are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its board of directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this work and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Contents

Foreword: Asia’s Contribution to Global Economic Development and Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viContributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiAbbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

I Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Masahiro Kawai and Susan F. Stone

II Keynote Address: The International Agenda: Immediate Priorities and Longer-Term Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Jean Pisani-Ferry

III Regional Cooperation for Greater Global Stability: A Medium-Term Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Shinji TakagiComments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Gang Fan

IV Asia’s Role in Stabilizing Food and Agricultural Prices . . . . . . . . . . . . . . 51Kym Anderson

Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96Bambang P. S. Brodjonegoro

V How Can Asian Regionalism be a Stepping Stone to Preserving the Multilateral Trading System? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Inkyo Cheong, Jungran Cho, and Seungyeon JeongComments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Pham Quy Long

VI How Can Asia Develop in a Socially Sustainable Manner? . . . . . . . 123Medhi Krongkaew

Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176Arsenio M. Balisacan

VII Promoting Sustainability Under a Changing Climate in Asia . . . . 179Matthias Ruth

Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205Kazuhiro Ueta

VIII Panel Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

iv Asia’s Contribution to Global Economic Development and Stability

Foreword


While the ongoing global financial and economic crisis originated far from Asia’s shore, its impetus has created an environment of great uncertainty (in the case of credit, especially trade finance credit) and has adversely impacted global economic growth in both 2008 and 2009. It has affected Asia’s economy mainly through the trade channel. Strengthened after the 1997–1998 financial crisis through a series of supervisory and regulatory reforms, Asia’s financial institutions have thus far weathered the storm, even though equity and bond markets have turned down. As the world economy starts down an unprecedented path to reform, there has been no better time to examine the role Asia should play in the new global economy. The chapters in this book do just that: examine Asia’s contribution to global growth and sustainability.

Looking at the issues addressed in this book, it becomes clear that Asia can be a leading force in contributing to the global recovery, while still attending to its own needs. In other words, Asia can help the world by helping itself. By strengthening domestic markets and providing a transparent, well-supervised, and integrated financial market, Asia can efficiently mobilize its surplus savings to provide needed capital to its own investors, as well as potentially provide a mechanism through which the rest of the world can get capital flowing again. By investing in technology and providing training and educational opportunities to its population, Asia can develop “home grown” solutions to the demand-side challenges of unstable food prices, as well as reduce its reliance on unreliable energy sources.

The progression of the current economic difficulties has highlighted the vulnerability of Asia’s development strategy, which relies heavily on external demand. The widespread and fundamental nature of the causes of the downturn means that Asia will not be able to export its way out of the current crisis; it must, instead, turn to Asian markets. Rebalancing growth by increasing reliance on domestic and regional demand will provide ready markets not just for Asian manufacturers, but for global producers as well. As Asia continues on a path toward regional integration, its vast and efficient

system of production networks can be used as a basis for maintaining the competitiveness that has brought such success to Asian producers. Asia knows how to produce; by learning how to consume, the region can contribute to global economic growth and prosperity.

By developing robust markets in goods and financial services, while improving its energy efficiency and use of alternative energy sources, Asia can contribute to global public goods. From a social perspective, a more educated, more engaged population will provide abundant opportunities for growth and poverty reduction, which also help alleviate the social pressures that can accompany inequitable growth. Widespread infrastructure projects can give the poor access to social services, such as education and health care, and to market opportunities they would otherwise lack, while also providing jobs.

The chapters contained in this volume provide ample evidence of the potential for the region not only to lead the way out of the current crisis, but also to provide an example of how to develop sustainable markets and open and transparent economic systems. From well functioning financial markets to energy efficient products and services that could provide new markets for Asian producers, the region stands poised to enter a new era of greater global engagement while providing robust regional markets for regional producers.

Haruhiko Kuroda President, Asian Development Bank

Foreword v

vi Asia’s Contribution to Global Economic Development and Stability

Preface

Given the current economic uncertainty surrounding the recovery of global markets, this volume addresses some fundamental issues for Asia’s growth and development. From the current crisis, there needs to rise a new economic order. In this new global economy, traditional economic relationships will no longer hold and the West’s near monopoly on financial markets may be broken. If this is to happen, Asia must take its rightful place by providing leadership in the global recovery, contributing to the key areas of economic and financial stability, trade stability, and sustainable development.

This volume deals with three crucial issues:•HowcanAsia’sfinancialintegrationandsoundmacroeconomicpolicies

enhance global economic and financial stability and lead to a more sustainable recovery?

•HowcanAsiacontributetoatradingsystemthatensuresfreeandopenmarkets, while promoting growth and prosperity at home?

•HowcanAsiapromotebothclimatechangemitigationandanequitabledistribution of income (along with its associated externalities, such as crime reduction—including terrorism—and political stability) to ensure these regional public goods enhance global welfare?I would like to express our deep appreciation to the distinguished participants

who shared their views, as well as to the conference attendees whose engaged, insightful comments helped stimulate a fruitful discussion.

Masahiro Kawai Dean, Asian Development Bank Institute

Kym Anderson is George Gollin Professor of Economics at the University of Adelaide in Australia. He served as lead economist (trade policy) at the World Bank’s Development Research Group (2004–2007). He has been a consultant to many national and international bureaucracies, business organizations, and corporations, and has published more than 25 books and 200 journal articles and book chapters. Between 1990 and 1992, he was deputy to the director of the research division of the General Agreement on Tariffs and Trade (GATT) (now World Trade Organization) Secretariat in Geneva, and became the first economist to serve on a series of dispute settlement panels at the World Trade Organization (1996–2008). He received his MS from the University of Chicago and PhD from Stanford University.

Arsenio M. Balisacan is director of the Southeast Asian Regional Center for Graduate Study and Research in Agriculture and a professor at the University of the Philippines Diliman. Previously, he was the agriculture undersecretary of the Philippine government. One of the leading development economists in Asia, he has been a consultant to various Philippine government institutions and international organizations. He has authored and co-authored seven books and over 100 journal articles and book chapters. He earned his MS in agricultural economics from the University of the Philippines Los Baños and his PhD in economics from the University of Hawaii.

Bambang P. S. Brodjonegoro is dean of the University of Indonesia’s Faculty of Economics. He has also lectured at Hitotsubashi University and the University of Illinois at Urbana-Champaign. He has published books and numerous articles in academic journals, and has presented a number of papers at various international academic conferences. He has received awards such as the Eisenhower Fellowship in 2002; visiting research fellowships at the Institute of Southeast Asian Studies in Singapore in 1999, and at the Research School of Pacific and Asian Studies, Australian National University in 2004; and was honored by the University of Indonesia in 1989. He holds a BA in economics from the University of Indonesia and MA and PhD degrees from the University of Illinois.

Inkyo Cheong is a professor of economics at Inha University, where he is director of the Center on Free Trade Agreements Studies. He is also vice president of the Korean Association of Trade and Industry Studies and serves as the Republic of Korea’s delegate at official negotiations for bilateral free trade agreements. For eight years, he has served at the Korean Institute for International Economic Policy as director

Contributors vii

Contributors

viii Asia’s Contribution to Global Economic Development and Stability

for Association of Southeast Asian Nations (ASEAN) economies and director for free trade agreement studies. He has also served as secretary general for the East Asian Vision Group. A journal referee and author of articles and books on free trade agreements and East Asian economic cooperation, he holds MA and PhD degrees in economics from Michigan State University.

Gang Fan is director of the National Economics Research Institute, China Reform Foundation, and is a professor at the Chinese Academy of Social Sciences. He also serves as adviser to the Chinese government and to the Center of International Development at Harvard University. He is a consultant to the World Bank, International Monetary Fund (IMF), United Nations Development Programme, United Nations Economic and Social Commission for Asia and the Pacific, and the Organisation for Economic Co-operation and Development . He was ranked 33rd in the “World’s top 100 public intellectuals” and was awarded “Global Leader for Tomorrow” by the World Economic Forum. He has written eight books, over 100 academic papers, and more than 200 articles in newspapers and magazines published around the world. He earned his PhD degree in economics from the Chinese Academy of Social Sciences.

Masahiro Kawai is the dean of ADBI. For three decades, he has served the academic community, first as an assistant and then as an associate professor at the Johns Hopkins University, and as a professor of economics at the University of Tokyo’s Institute of Social Science. He has also served as chief economist for the World Bank’s East Asia and the Pacific Region, deputy vice minister of finance for international affairs at Japan’s Ministry of Finance, the first head of ADB’s Office of Regional Economic Integration, and as special advisor to the ADB president. He has written books and numerous academic articles on international economics, economic globalization and regionalization, and regional financial integration and cooperation in East Asia. He holds an MS in statistics and a PhD in economics from Stanford University.

Medhi Krongkaew is director of the Center for Poverty Studies at the National Institute of Development Administration in Thailand. He was an economist in the Ministry of National Development and dean of the Faculty of Economics at Thammasat University, a post he held while serving with the Prime Minister’s Office. He has been a member of the advisory boards of various committees, in the government and at Thammasat University, and has been a consultant to various international organizations. He has a BA in economics and political science from Victoria University of Wellington, an MA in economics from the University of Canterbury, and a PhD in economics from Michigan State University.

Haruhiko Kuroda has been ADB’s president since 2005. Previously, he was special advisor to the cabinet of the Japanese prime minister and a professor at the Graduate School of Economics at Hitotsubashi University. In a career spanning nearly four

decades, he has represented Japan’s Ministry of Finance at a number of international monetary conferences as vice minister of finance for international affairs. Under his leadership, Japan supported Asian economies hit by the 1997–1998 financial crisis and helped Asian nations establish a network of currency swap agreements to avert another crisis. He holds a BA in law from the University of Tokyo and an MPhil in economics from the University of Oxford.

Pham Quy Long is head of the Department for Economics and Integration at the Vietnam Institute for Northeast Asian Studies. He is also a member of Viet Nam’s Study Team for ASEAN Plus 6, a track-two study group on comprehensive economic partnership in East Asia. Previously, he worked at the Vietnam Institute for Asia-Pacific Studies as a senior researcher. He has published many books and articles on economics and international relations. He earned his BS from Viet Nam National University, Hanoi; an MA in economics from Jawaharlal Nehru University; and a PhD in economics from Ho Chi Minh National Academy of Politics and Public Administration.

Jean Pisani-Ferry was appointed director of Brussels European and Global Economic Laboratory in 2005. A French professor of economics at Université Paris-Dauphine, he was previously economic adviser of the European Commission; director of Centre d’Etudes Prospectives et d’Informations Internationales, the top French research institute in international economics; and executive president of the French prime minister’s Council of Economic Analysis. He is currently a member of the European Commission’s Group of Economic Policy Analysis and the French prime minister’s Council of Economic Analysis. He holds an engineering degree from Ecole Supérieure d’Electricité, an MS in mathematics from the University of Paris, and a graduate degree in economics from the Centre d’Etudes des Programmes Economiques, Paris.

Matthias Ruth holds the Roy F. Weston Chair in Natural Economics at the School of Public Policy, University of Maryland, where he is director of the Center for Integrative Environmental Research, director of the Environmental Policy Program, co-director of the Engineering and Public Policy Program, and a professor of environmental economics and policy. His research focuses on dynamic modeling of non-renewable and renewable resource use, industrial and infrastructure systems analysis, and environmental economics and policy. He teaches courses and seminars on microeconomics and policy analysis, ecological economics, industrial ecology, and dynamic modeling at the undergraduate, graduate, and PhD levels. On occasion, he also conducts short courses for decision makers in industry and policy in the United States (US) and in other countries.

Contributors ix

x Asia’s Contribution to Global Economic Development and Stability

Susan F. Stone joined ADBI in 2007 after serving as research manager for the Productivity Commission in Melbourne, Australia. Between 2003 and 2005, she worked as a research economist at the National Center for Environmental Economics, US Environmental Protection Agency, where she worked on the intergovernmental panel on environmental review of trade agreements. She has held appointments and lectured at various universities in the US and Australia. She has published research on a wide range of trade topics, including expanding water markets in the Murray Darling Basin, technology and trade, the environmental impacts of trade agreements, and the economic effects of invasive species. Her most recent projects involve transport and trade facilitation. Ms. Stone holds a PhD in economics, with a concentration in finance, from Drexel University in the US.

Shinji Takagi is a professor at Osaka University’s Graduate School of Economics and was a visiting fellow at ADBI from 2007–2009. His professional appointments have included: economist at the IMF (1983–1990), senior economist at the Japanese Ministry of Finance (1992–1994), visiting professor of economics at Yale University (2000–2001), and advisor to the IMF’s Independent Evaluation Office. He is a specialist in international monetary economics and author of over 70 professional publications, including four books. His recent work has dealt with issues on exchange rate policy, emerging market crises, capital market development, and regional policy cooperation. His undergraduate textbook on international monetary economics, currently in its third edition and 15th year, has sold more than 25,000 copies. He holds a PhD in economics from the University of Rochester.

Kazuhiro Ueta is a professor at Kyoto University’s Faculty of Economics and Graduate School of Global Environmental Studies. Previously, he was an assistant professor at the Institute of Economics Research, Kyoto University; a visiting professor at the London School of Economics and Political Science; an honorary research fellow at University College London; and a visiting research fellow at Resources for the Future. He also served as a visiting professor at University College Dublin and as a visiting scholar at the Center for Economic Studies Information and Forschung (research) in Germany. He holds an MS in engineering and a PhD in economics from Kyoto University, and a PhD in engineering from Osaka University.

ADB Asian Development BankADBI Asian Development Bank InstituteAFTA Association of Southeast Asian Nations Free Trade AgreementAPEC Asia-Pacific Economic Cooperation APTA Asia-Pacific Trade AgreementASEAN Association of Southeast Asian NationsBBC British Broadcasting CorporationCEPT Common Effective Preferential TariffCNN Cable News NetworkCO2 carbon dioxideCTE consumer tax equivalentDDA Doha Development AgendaDFID Department for International DevelopmentEAFTA East Asian Free Trade AgreementEKC Environmental Kuznets CurveEU European UnionFAO Food and Agriculture Organization of the United NationsFSF Financial Stability ForumFTA free trade agreementG7 Group of SevenG8 Group of EightG20 Group of TwentyGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGDP gross domestic productGITI Growth-Inequality Trade-Off IndexGNP gross national productGPI genuine progress indicatorHPAE high performing Asian economiesHPI Human Poverty IndexIEA International Energy AgencyIFPRI International Food Policy Research InstituteIMF International Monetary FundIPCC Intergovernmental Panel on Climate Change

Abbreviations and Acronyms xi

Abbreviations and Acronyms

xii Asia’s Contribution to Global Economic Development and Stability

ITC International Trade CentreJETRO Japan External Trade OrganizationLao PDR Lao People’s Democratic Republicm3 cubic meterMFN most favored nationMTV Music TelevisionNAFTA North American Free Trade AgreementNESDB National Economic and Social Development BoardNRA nominal rate of assistanceODA official development assistanceOECD Organisation for Economic Co-operation and DevelopmentOPEC Organization of Petroleum Exporting CountriesPPP purchasing power parityPRC People’s Republic of ChinaR&D research and developmentRRA relative rate of assistanceRTA regional trade agreementSAFTA South Asia Free Trade AgreementSME small or medium enterpriseSO2 sulfur dioxideSPS sanitary and phytosanitarySSD socially sustainable developmentTBI trade bias indexTRI Trade Reduction IndexUN United NationsUNCAC United Nations Convention Against CorruptionUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUNESCAP United Nations Economic and Social Commission for Asia

and the PacificUS United StatesWRI Welfare Reduction IndexWTO World Trade Organization

In times of economic turbulence, leadership plays a critical role, not only in maintaining what prosperity there is to be had, but, more importantly, in showing the way out of the crisis. But how does leadership play itself out in the age of globalization? Globalization has made the world more interdependent than ever. The rapid spread of the financial collapse in the United States (US), first to financial sectors throughout the world, and then to real sectors, is testament to this fact. This has affected economies across the world but has been felt most severely in the US, Europe, and Japan. As a result, it is unlikely that the pattern of past recoveries—consumption in the West met by production in the East—will be effective. A new dynamic needs to emerge.

This dynamic will undoubtedly involve a greater role for Asia in the world economy. No longer just the world’s factory, Asia needs to step up and take the lead across the economic spectrum: from developing robust credit markets to enacting safeguards for environmental stewardship. These demands are as vital as they are difficult, yet Asia must rise to the challenge.

ADBI’s 11th Annual Conference, Asia’s Contribution to Global Economic Development and Stability, took up many of these issues. Yet several months on, even the title seems out-of-date. Perhaps a better reflection of today’s economic landscape could be captured by Asia’s Leadership in Promoting Global Economic Development, as the region is perhaps best positioned to lead the world out of the current global downturn.

Contrary to what was believed even a few months ago, Asia is experiencing a rapid deceleration in growth and output. Chinese exports alone were over 25% lower in the month of February than for the same period last year (CEIC

Overview 1

IOverview

Masahiro Kawai and Susan F. Stone

2 Asia’s Contribution to Global Economic Development and Stability

Data Company Ltd.).1 The International Monetary Fund (2009) predicts that the global economy will shrink by 1.3% in 2009, the first time that trade and economic activity have declined simultaneously since the Second World War. In Asia, estimates from the International Monetary Fund are for Japan to contract by 6.2%, for growth in the People’s Republic of China (PRC) to slow to 6.5%, and for the Association of Southeast Asian Nations (ASEAN)-5 economies2 to experience no growth at all.

A recent ADB study estimated that the crisis slashed the value of financial assets worldwide by US$50 trillion last year, with developing Asia suffering more than other emerging markets (ADB 2009b). In addition, the World Bank is estimating that developing countries will face a financing shortfall of US$270–700 billion this year, as private sector creditors shun emerging markets. Less than one quarter of the most vulnerable countries have the resources to prevent a significant rise in poverty (World Bank 2009).

In times such as these, policy makers face a myriad of pressures. Their response must be cognizant of short term needs, but must also take into account medium- and long-term impacts and opportunities. Cash transfers, for example, can alleviate some of the immediate need, but do not meet the longer-term development requirements of the poor. Asia is in a unique position, having come into the crisis in a much stronger position than much of the rest of the world. Its immediate exposure to the subprime crisis was limited and lessons learned from the 1997 crisis were well in place. Thus, it is arguable that Asia is in the best position to be the driving force of global economic growth in future. By focusing on regional cooperation—responding to the crisis by helping developing country neighbors—and regional demand, Asia can not only contribute to growth and development, it can lead the way in attaining both.

1. The International Agenda: Immediate Priorities and Longer-Term Challenges

The conference began with a keynote address delivered by Jean Pisani-Ferry, which touched upon three major issues relating to the current global crisis. The first was countries’ short-term response. He commended the fact that

1 Available: http://www.ceicdata.com/2 Indonesia, Malaysia, Philippines, Thailand, and Viet Nam (ADB 2009a).

Overview 3

in contrast to the experience of the Great Depression, throughout the world there has been a remarkable ability to innovate and learn from mistakes. He emphasized the need to support global demand and avoid free-riding behavior, and cautioned against succumbing to the temptation to support producers through trade defense, subsidies, or non-cooperative exchange-rate policies. The current crisis will test every country’s commitment to international cooperation.

The second issue was the longer-term agenda. Pisani-Ferry highlighted the need to accept that the process of international reform will take years rather than months, especially as there is no generally accepted blueprint to start with. He stressed the importance of the macro-financial dimension, and that responses should take it into account, both nationally and internationally. Key challenges for policymakers will be, at the national level, how to strike the balance between automatic stabilization and discretionary intervention, and, at the international level, effective multilateral surveillance of the risks to global financial stability and their links to macroeconomic developments.

The final issue was the role and effectiveness of international institutions in the changed landscape (both new ones like the Group of Twenty [G20] and the Financial Stability Forum, and established ones like the International Monetary Fund [IMF]). For the IMF, governance reforms are needed, such as reducing and consolidating Europe’s representation, but these will not be sufficient on their own. Another possibility is to make country surveillance more independent by releasing IMF analysis under the responsibility of management. In the absence of quasi-judicial powers like those of the World Trade Organization (WTO) panels, the role of the IMF should be to provide expertise to the G20, that is, to help to base discussion on sound analysis but not to decide.

The conference was broken into three distinct themes. The first session dealt with the instability of two of the great global markets: credit and agriculture. The year 2008 will be remembered for the number of record-setting events. First, there was the spike in food prices (rice, in particular, reaching record levels) in conjunction with soaring oil prices. These were followed by an almost as spectacular decline in oil prices. Immediately on the heels of this commodity price roller coaster, there came the similarly dramatic decline in the fortunes of some of the world’s largest financial institutions.


2. Asia’s Contribution to Global Economic Stability

The first paper from this session examines the degree to which Asia is integrated with the rest of the world. Shinji Takagi argues that while there is evidence of some real integration, the fact that financial integration has not kept pace has been detrimental to Asia’s development. Even though the lack of integration with respect to the rest of the world has meant that the initial impacts of the financial crisis were rather limited in Asia, subsequent events have shown that Asia remains vulnerable.

The region has been, and will continue to be, affected by the crisis. While it has been argued that growing regional trade links have become more important than global demand as a driver of Asia’s economic growth, Takagi presents evidence that ties with the global economy have actually strengthened. The region is export dependent and there is emerging evidence that intra-regional trade is the predominant factor behind the increasing output synchronization in Asia. This large share of intra-regional trade provides the mechanisms through which a shock in one economy affects the output in another.

So the question becomes, if such a linkage with the real economy has exposed Asia to the ravages of the global downturn, should Asia similarly open its financial markets as well? Takagi argues that the answer to this is yes. He bases his argument on two major points: First, there is a need for a long-term, local-currency funded bond market to provide the finances necessary to grow businesses in the region. This would be an effective mechanism to bring the large pool of Asian savings “home.” Second, an intra-regional financial integration strategy would place the region in a better position to meet its own financing needs, in addition to creating new opportunities by lowering the transaction costs of cross-border activities. The paper concludes that a more closely linked Asia will expand the demand for goods both inside and outside the region.

In his comments on the paper, Gang Fan warns that though such liberalization would be beneficial, it should avoid “over shooting.” There needs to be a balance between financial liberalization and the level of economic development and institutional capacity in the region. He points out that it took Europe 50 years to arrive at its current level of economic integration. While Asia is well ahead of this time frame, it still has a long way to go.

Specifically, Fan argues that reserve balances should continue to reflect a country’s level of participation in world trade. A cross-holding approach

Overview 5

provides greater flexibility in dealing with regional account imbalances. Holding currencies of regional trade partners allows governments the opportunity to avoid risks in other currencies as well as deepening integration by making countries mutual investors.

But 2008 saw more than just a collapse of the banking sector, a widespread lending freeze, and toxic asset seepage into the real economy. As mentioned above, it was also the year that saw some of the largest variation in the prices of food and fuel in over 20 years. Oil prices, on which food costs largely depend, hit a record high of US$147 per barrel in July 2008 before falling sharply to less than US$40 a barrel in December 2008/January 2009 (Figure 1.1).

The price of food likewise reached record levels. In 2008, the price of food outpaced general price increases across the region (Figure 1.2). Viet Nam and the PRC experienced the largest increases, followed by Thailand and Hong Kong, China. The cause of the rapid increase in these prices has been hotly debated. In addition to rising oil prices, many have blamed speculators and various hedge fund investors. However, a recent World Bank report found that the most important factor in explaining these price spikes was the large

US$ = United States dollar.

Source: Energy Information Association. Available: http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm (accessed 28 July 2009).

Figure 1.1: Weekly Crude Oil Prices

US$

per b

arre

l


increase in biofuel production from grains and oilseeds in the US and the European Union (Mitchell 2008). The large increase in rice prices was mainly a response to the increase in wheat prices rather than to any specific changes in rice production or stocks and, thus, was indirectly related to the increase in biofuel production. The implication is that speculative activity probably would not have occurred without the large price increases due to biofuel production. Thus, these traders were responding to rising prices rather than causing such changes. Higher energy and fertilizer prices were estimated to increase crop production costs by between 15–20 percentage points in the US and by lesser amounts in countries with less intense production practices (Mitchell 2008).

While food prices have fallen from last year’s spike, they remain high. Rising unemployment and falling incomes are putting additional pressure on poor and vulnerable groups. More worrying still is that, once the global economy recovers, the pressures that drove up food prices last year will return.

The specter of volatile food prices is of grave concern to developing nations. Recent modeling by the World Bank measured the impacts of the price increases on urban poor (Dessus, Herrena, and de Hoyos 2008). Not surprisingly, initial conditions were a key determinant of total impacts. However, many countries

Figure 1.2: Ratio of Increase in Food Consumer Price Index to Increase in Overall Consumer Price Index, 2008

Sources: ADBI staff estimates using (i) CEIC Data Company Ltd. data for Indonesia, Malaysia, Republic of Korea, New Zealand, and Viet Nam; (ii) data from statistics offices of Australia; Bangladesh; People’s Republic of China; Hong Kong, China; Japan; Philippines; and Singapore; and (iii) data from the Ministry of Commerce of Thailand.

Overview 7

in Asia were shown to be affected more than the average, especially in South Asia.3 As large and as sudden as the recent price spikes were, they were not unprecedented, nor are they the last expected to be seen in the near future.

In times of price volatility, governments often intervene to stabilize domestic food markets. For example, in the early part of 2008, 14 countries, including India, PRC, Thailand, and Viet Nam, banned or limited exports of rice (Berthelsen 2008). However, it is often the intervention itself that leads to further price volatility, Kym Anderson argues in the second paper of this session. Intervention seeks to reduce fluctuations in domestic food prices and quantities available for consumption by erecting barriers to trade. By doing this, countries undermine the stabilizing role international trade can bring to the world’s food markets. The more countries insulate their domestic markets, the more other countries perceive a need to do likewise, exacerbating the effect on world prices.

Anderson presents evidence that while trade in general has expanded much faster than global production, the propensity to trade agricultural goods has seen relatively little growth. Even accounting for the growth in regional trade intensities, the share of farm production exported has remained at around 4% or 5% for Asia. The most likely explanation is the persistence of government intervention in these markets.

The paper presents recent evidence of this anti-trade bias through a new set of agricultural distortion estimates. The results show a dramatic rise in the relative (to other sectors in the economy) rates of assistance to agriculture in both India and the PRC in the past several decades. Both countries have remained close to self sufficient in agriculture products over the past four decades and Anderson argues that the steady rise in this assistance has contributed to that outcome.

The paper shows further that only 8% of agriculture’s output is traded, versus 31% for primary products and 25% for all other goods. This has led to thin markets, a major contributor to volatility in international prices for weather-dependent products.

Anderson concludes by saying that Asia can lead the way toward thicker markets and less volatile prices by applying domestic policies appropriately. While this may increase import dependence in agriculture in some countries over time, the region as a whole would benefit. If Asia were to lead the way in

3 Out of a sample of 73 countries covering 88% of the world’s poor, Cambodia, Bangladesh, India, and Pakistan all ranked in the top 20 most affected countries.


this, other developing countries might well reconsider their current position in the WTO’s Doha Round. By agreeing to lower substantially their bound tariffs and subsidies on agricultural products, developing countries would be in a stronger position to extract greater concessions from high-income countries without having to reduce their actual applied rates. Reducing tariff binding overhangs and the scope to vary taxes on farm trade should boost that trade, thickening markets and reducing food price instability.

The discussant, Bambang Brodjonegoro, highlights the impact of domestic policies on international prices, not only through relative rates of assistance, but also through the promotion of biofuels, citing the US and European Union as examples. Brodjonegoro argues that most governments see the insulation of their domestic markets for important basic needs such as energy as an imperative. However, he also points out that the protection of food is often for the farmers’ benefit and not that of the general population of the developing country. Thus, it is often easier for countries with relatively high domestic purchasing power to determine the price acceptable to the majority of domestic consumers than to find a price satisfactory to farmers.

The answer to these conflicting goals, Brodjonegoro states, is through openness, by not imposing barriers for agricultural exports. It is also then important for government polices to provide real income support for farmers. He argues that as a result of their presumption that liberalization and free trade primarily benefit developed countries, economies in the Asian region do not like the idea of internationalization determining their fate. Rather than creating thickness in international markets, they prefer to keep any agricultural surplus as domestic reserves. He questions if free trade will still be the answer if renewable energy and bioenergy are included in the picture. If Asia wants to take a bigger role, it should ensure that the agricultural price for food takes into account the agricultural price for energy, and that food and energy supplies are both secure.

These sentiments are likely to become stronger as the global economy continues to weaken and Asian countries continue to face a sharp downturn in commodity prices (Figure 1.3). Such a decrease, while a welcome relief to consumers, implies lower earnings for producers, especially farmers in the developing world. This, combined with the tightening credit markets, will make it tempting for countries to again try to isolate domestic markets and even impose protectionist measures.

Overview 9

Figure 1.3: Change in Commodity Prices

M1 = January, M4 = April, M7 = July, M10 = October.

Source: Loser (2009). Based on International Monetary Fund Commodity Prices.

Figure 1.4: Number of New Anti-Dumping Measures

Source: World Bank (2009).


3. Asia’s Contribution to the Global Trading System

The second session looked specifically at these and other issues facing the global trading system. Fears of protectionism are rife. The number of anti-dumping measures registered with the WTO increased in the second half of 2008, compared with the first (Figure 1.4). This caused so much concern that the recent Group of Eight (G8) ministerial meeting felt obliged to make a formal statement eschewing such practices in order to placate domestic constituencies. Likewise, the leaders from the 10-member ASEAN issued a joint statement that called for “…bold and urgent reform of the international financial system” to tackle the worsening crisis, while agreeing to “stand firm against protectionism” (Reuters 2009). However, such pressures are difficult to resist in such times. Some regional leaders are citing the example of US President Obama’s advice to “Buy American.” For example, the Indonesian Trade Ministry, which is encouraging civil servants to buy Indonesian products (Johnston 2009).

Despite the rise in anti-dumping claims, there is little evidence that protectionism has been the chief cause of the rapid decline in international trade (Johnston 2009). Rather, it has been argued, it is the decline in the availability of trade finance that has hurt trade. Still others say that while a general reassessment of risk among financial institutions and companies may have hurt smaller and poorer countries—now cut out of global supply chains—bank lending in trade finance has held up well compared with their activities in other areas of lending. Whatever the reason, the dramatic decline in world trade in 2009, the first since 1982 (World Bank 2009), is cause for serious concern.

These issues have led to an increasing call for regional cooperation. Coordination will be key as stimulus packages implemented by one or two countries will be rendered ineffective by international diffusion. The returns from such coordinated actions will spread throughout the globe through international trade linkages (Lin 2009). Thus, the first paper of the session focused on using the strong regional dynamics that have arisen in the Asian community to strengthen and promote the global trading system.

In these turbulent times, the extent to which regionalism—particularly regional trade agreements—acts as a kind of regional protectionism, isolating select countries from the storm of the current crisis, is more pertinent than ever. It is important to be confident that such arrangements function as an open road over which countries may better emerge from this current slowdown, rather than as a road block for global growth.

Overview 11

In the first paper, Inkyo Cheong, Jungran Cho, and Seungyeon Jeong argue that Asian regionalism has indeed complemented the multilateral system, and, in some respects, has surpassed it. Cheong and his co-authors point to the rules of origin in the Asia Pacific Trade Agreement as an example of going beyond current standards. A further characteristic of Asian regionalism is that regional agreements were generally concluded in a relatively short time frame and thus applied the rules already established under the multilateral system.

On the other hand, the authors argue that regionalism can also lead to a lack of differentiation in trade rules between free trade agreements (FTAs) and the multilaterally set most favored nations. Measures tend to be so minor as to be a disincentive to businesses to act under the FTA. Indeed, the paper points to the fact that the ASEAN FTA’s preferences are not being widely used, ranging from 11.2% to 5% in Thailand and Malaysia, two highly outward oriented countries (Kawai and Wignaraja 2008).

A negative aspect of the multilateral system is the increasing complexity such a large number of participants can add to the negotiating process. Regional trading blocs reduce this number and simplify the process. They also allow the content of many FTAs, including that of the ASEAN FTA, to include a much broader agenda covering, for example, investment and government procurement.

For Asia to lead the world with a fully integrated regional trading system, in support of true multilateralism, a driving force or regional leader is needed. Instead, the authors argue, intense internal rivalries within East Asia have led to a network of bilateral FTAs through which competing alliances are formed to gain influence over the region. The authors warn that if this trend continues, it will make regional community building quite difficult and lead to “competitive bilateralism.”

The discussant, Pham Quy Long, agreed with the assessment that Asian FTAs have played a significant role in contributing to the development of a multilateral system. Long states that from a political economy viewpoint, FTAs in East Asia have been influenced by regional rivalries and, thus, that Asia should be on guard not to let the conflict of non-economic factors influence the track of regional development. Regional FTAs must be motivated by market-led forces.

Long goes on to argue that while Asian regionalism has made adjustments to follow WTO rules, it is rightful that the multilateral trading system change to reflect the activity and proficiency of today’s markets. Although governments in the region need to balance their economic and political agendas with respect


to regionalism, the process of economic integration and globalization is seen as creating a vulnerability to other countries. In this area, however, Asia can lead the world by showing how compromise and patience can be used as a tool for moving forward.

4. Asia’s Contribution to Global Public Goods

The third session dealt with public goods in support of sustainable growth. In turbulent economic times, it is tempting to shelve some concerns as being “luxury” items. The immediate can supplant the important. With government programs in support of tax cuts and rebates becoming more likely, attention must not be diverted from programs for people and issues in need of continued government support, such as the poor and the environment.

However, these programs are coming under increasing pressure. For example, there has been fierce debate in Australia over its proposed emissions legislation with talk of postponement or even abandonment. The country’s leading industry group representing manufacturing, engineering, and construction firms believes that this carbon trading scheme, originally set to be introduced in July 2010, should be postponed to at least 2012. It recently announced that “the 2010 timetable has…become unrealistic because of the impacts of the global financial crisis…” (Grubel 2009: 1). Other industry and labor groups across the globe are increasingly calling for a deceleration of the social agenda outside issues directly related to the global slowdown.

This is creating an atmosphere of uncertainty when clarity on policy and prices is what is needed now. Indeed, uneven implementation of fiscal stimulus, combined with the continued uncertainty created by the economic crisis and the sustainability of recovery, has compounded risk, damping investment. However, it is measures such as the innovation required for a low-carbon economy that can be an effective stimulant to real growth (Stiglitz and Stern 2009). A way out of the current slowdown that supports sustainable growth requires making the investments necessary to move society to a low-carbon economy. These investments could drive growth over the next two to three decades. The Peterson Institute reports that spending US$10 billion to insulate US homes and federal buildings could create and sustain up to 100,000 jobs between 2009 and 2011, while saving the economy from US$1.4 billion to US$3.1 billion a year between 2012 and 2020 (Houser 2009). With idle resources in so many economies, the opportunity cost of action is quite low. This is an

Overview 13

opportune time to meet the challenges the world faces in meeting the needs for basic investment critical to long-run sustainable development.

The concept of sustainable development was coined explicitly to suggest that it was possible to achieve economic growth and industrialization without environmental damage. In the ensuing decades, mainstream sustainable development thinking has been progressively developed through the World Conservation Strategy (Commissioned by the United Nations [UN] in 1980), the Brundtland Report (released in 1987), and the UN Conference on Environment and Development in Rio (also known as the “Earth Summit,” held in 1992), as well as in national government planning and wider engagement from business leaders and non-governmental organizations of all kinds.

Over the past several decades, the definition of sustainable development has evolved. The Brundtland Report defined sustainable as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (UN 1987: Ch 2). This definition was vague, but it captures two fundamental issues: the problem of environmental degradation that so commonly accompanies economic growth, and the need for growth to alleviate poverty.

The core of mainstream sustainability thinking encompasses three dimensions: environmental, social, and economic sustainability. This approach demonstrates that the three objectives need to be better integrated, with action to redress the balance between dimensions of sustainability.

In the first paper of this session, Medhi Krongkaew argues that in these times, the essentials laid out more than 20 years ago in the Brundtland Report are still not only relevant, but an imperative. However, to the seven development agenda items outlined as:

1. Reviving growth;2. Changing the quality of growth;3. Meeting essential needs for jobs, food, energy, water, and sanitation;4. Ensuring a sustainable level of population;5. Conserving and enhancing the resource base;6. Reorienting technology and managing risk; and7. Merging environment and economics in decision making,

Krongkaew adds political development, good governance, and the desirability of cultural and spiritual lifestyles. Political development can be, and has been, defined in a number of ways, but all deal with transparent and well functioning access to a political institutional structure. Economic development, unmatched by commensurate political development, Krongkaew argues, will not lead to


development in a socially sustainable manner. Poverty is a particularly difficult hurdle in achieving this objective given the apathy and indifference to the political process often experienced by the poor, but reducing poverty without a change toward a more positive political outlook will not be enough. Socially sustainable development must include satisfactory political mechanisms and arrangements so that an appropriate type and degree of democracy can be instituted.

Good governance in the public sector is often overlooked in most discussions of socially sustainable development, yet corruption could be one of the most critical factors influencing long-term growth and development. From the existing data and information, a strong relationship has been shown to exist between a country’s level of development and corruption. Therefore, anticorruption efforts should be among the most urgent priorities for Asian countries in their efforts to achieve sustainable development.

Krongkaew states that freedom from poverty lies between the basic rights of the individual’s own person and the rights of the society to live together. Freedom from poverty strengthens and makes a society economically and culturally sustainable. The highest form of human rights is the right to create, develop, and enjoy one’s own cultural and spiritual lifestyle. Sustainable long-run development, therefore, must strive to achieve this level of human rights.

Countries in Asia are still striving to attain a socially sustainable path of development and this will only become more difficult in the immediate future. Krongkaew argues that what is most needed right now is more than the correct choice of economic policies (market-based philosophies will take care of that), but a correct political system where people enjoy basic political and human rights, fully understanding the true nature of democracy. Both the political and corporate sectors need to engage in fair play and act in a socially responsible manner.

In his remarks on the paper, Arsenio Balisacan agreed with the need to expand the concept of sustainable development to include political processes, culture, and ethics, but questioned its ability to inform critical policy choices, especially among resource-poor countries. He points out that taking a broader view of income measures, evidence across countries at the sub-national level shows that there is usually no direct correspondence between income and expenditure measures, on the one hand, and human development and social outcomes, on the other. Indeed, the heterogeneity of the response is the most consistent relationship between poverty reduction and growth, even between countries of similar income levels. This, Balisacan argues, is a key feature of the development experience.

Overview 15

Poverty and inequality are multidimensional concepts. The key challenges for society are to determine which policy levers are required to bring about both sustained growth and poverty reduction. It is important to pay attention to the details. Balisacan points out that for a particular country, it is the inequality within groups that typically accounts for much of the inequality, and this is the case for Asian countries as well. He argues that to improve the spatial disparities that often accompany the development process, priority should be given to improving market links to allow greater factor mobility. He also states that by improving the social services in a region—particularly education and health—lagging regions can catch up.

In the final paper of this session, Matthias Ruth discusses the major challenges in Asia’s determination to develop along an environmentally sustainable path. These challenges are: (i) population growth, especially in urban areas; (ii) the growing contribution of Asian economies to global climate change; and (iii) the vicious circle of using growth to solve the very problems growth is causing. Between 2005 and 2030, Asia’s urban population is expected to grow by over 70%, with countries like Viet Nam, Pakistan, and Cambodia experiencing growth in excess of 100%.

This has wider implications than for social policies and mass transit alone. As both main contributors to and victims of climate change, cities need to develop effective policies to mitigate and adapt to changing conditions. This applies particularly to vulnerable areas that include agricultural production, infrastructure in coastal zones, water supply and treatment systems, adequate and reliable energy supplies, and public health. While other regions in the world face one or more of these challenges, Asia faces all of them. Given that Asia is one of the most affected regions in this dual problem, it is in a unique position to take the lead in designing effective solutions.

The paper goes on to argue that there is a difference between economic growth and economic development, yet the two are often blurred in public discourse and policy debate. Growth typically refers to size and, with respect to economic activity, is often measured as changes in gross domestic product. Development, on the other hand, implies qualitative improvements and has less well-defined measures associated with it. The author suggests two alternative measures for development: the Genuine Progress Indicator and the ecological footprint.

Just as the last paper argued that attempting to measure sustainable development outside the context of political sustainability will fall short of the mark, Ruth argues that attempting to address climate change without


addressing existing social and economic conditions will likewise lead to unviable solutions.

Instead of looking at the issues of climate change and economic growth as either/or initiatives, Ruth argues that the interaction of the two provides many more opportunities than obstacles. The rapid socioeconomic changes taking place in Asia provide a chance to shape resource use and promote a better quality of life for people as well as the ecosystem. The view must change from seeing resources as being “diverted” from economic growth activities, to understanding that they are being invested in technological development opportunities. In addition, a lack of such investment in climate change mitigation efforts will result in the costly use of precious resources down the line—often in orders of magnitude much larger than initial investments might entail. Not engaging in adaptation efforts means neglecting existing vulnerabilities to climate vagaries.

The paper concludes by offering three recommendations. The first is to increase social capital in cities to help develop coping mechanisms for the challenges of climate impact. Second, reduce greenhouse gas emissions by improving energy efficiency, as well as stemming the irreversible loss of valuable assets. Finally, upgrade existing infrastructure and institutional procedures to deal with the climate change resulting from past activities.

In his comments on Ruth’s paper, Kazuhiro Ueta argues that while these recommendations are highly tenable, effective implementation can be less forthcoming. A major field of investigation in environmental economics is the need to integrate environmental conservation with economic growth. Dealing with this supposed trade-off has occupied environmental economists and policy makers alike for the past quarter century.

One way to approach the topic is through the so called decoupling policy. Concepts surrounding decoupling can be classified into two groups. The first, which includes the dematerialization theory, claims that decoupling environmental impacts and growth can be accomplished through technological innovation. The dematerialization theory deals with ways to reduce the amount of materials used in the production of goods and services through various technological advances.

The second group is centered on structural reform, as exemplified by ecological tax reform. Higher tax rates on energy increase revenue that can then be used to reduce the social burden of such a tax. These types of tax reforms generate a so called “double dividend,” namely one dividend from energy savings and the possible impetus to develop alternative energy, and

Overview 17

another dividend from the expansion of social programs. Ueta concludes by urging theoretical and empirical researchers to join forces in developing a multi-level environmental governance agenda.

5. How can Developed and Developing Countries Work Together to Tackle the Big Economic Development Issues?

The conference ended with a panel discussion on how developing and developed countries can work together to solve the major economic issues of the day, notably the Doha Development Round under the WTO, global warming, and the current economic and financial crisis. Essentially, sustainability is the key to future growth, effective global governance, and long-term globalization. It was generally acknowledged that the Asian FTAs could easily be built as a complementary process to the WTO and perhaps serve as a mechanism to jump start these negotiations. But, this should be taken in conjunction with the need for developing countries to develop high-end value-added production. While food security, energy security, and environmental security were all seen as communal issues across the world, it was acknowledged that while the global crisis was still in full swing, countries’ attentions would be focused on emerging from this crisis with their economic security intact. It is perhaps in this realm that the largest advance in developing-developed country cooperation could be made, and Asia is in the best position to take a leading role in that change.

References

ADB. 2009a. Key Developments in Asian Local Currency Markets. AsianBondsOnline Weekly Debt Highlights (July). Available: http://asianbondsonline.adb.org/newsletters/abowdh20090713.pdf (accessed 15 July 2009).

————. 2009b. The Impact of the Global Economic Slowdown on South Asia. Available: http://www.adb.org/Media/Articles/2009/12819-south-asian-economics-crisis/ The-Impact-of-the-Global-Economic-Slowdown-on-South-Asia.pdf (accessed 4 April 2009).

Berthelsen, J. 2008. Can the Food Crisis Return? Recession has Overshadowed ‘Agflation’ but Prices Could Spike Again. Development Asia 2. Available: http://development .asia/issue02/feature-04.asp.


Dessus, S., S. Herrena, and R. de Hoyos. 2008. The Impact of Food Inflation on Urban Poverty and Its Monetary Cost: Some Back-of-the-Envelope Calculations. World Bank Policy Research Working Paper 4666. Washington, DC: World Bank.

Grubel, J. 2009. Pressure Builds to Delay Australian Carbon Trading. Reuters, 27 February.

Houser, T. 2009. Structuring a Green Recovery: Evaluating Policy Options for an Economic Stimulus Package. Testimony before the Select Committee on Energy Independence and Global Warming, US House of Representatives, Washington, DC, 15 January.

International Monetary Fund. 2009. World Economic Outlook. Washington, DC: International Monetary Fund. April.

Johnston, T. 2009. Asians Split on Protectionism. Financial Times, 28 February.

Kawai, M., and G. Wignaraja. 2008. Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA. ADB Working Paper on Regional Economic Integration 14. Manila: ADB.

Lin, J. 2009. The Causes and Impact of the Global Financial Crisis: Implications for Developing Countries. Speech given at the Peterson Institute for International Economics, Washington, DC, 9 February.

Loser, C. M. 2009. Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth? Discussion draft. Manila: ADB. Available: http://www.adb.org/media/Articles/2009/12818-global-financial-crisis/ Major-Contagion-and-a-shocking-loss-of-wealth.pdf.

Mitchell, D. 2008. A Note on Rising Food Prices. Policy Research Working Paper 4682. Washington, DC: World Bank.

Reuters. 2009, 1 Mar. ASEAN Leaders Say Coordinating on Financial Crisis. Available: http://www.reuters.com/article/topNews/idUSTRE51R0I720090301 (accessed 2 March 2009).

Sen, A. 1999. Development as Freedom. London: Oxford University Press UK.

Stiglitz, J., and N. Stern. 2009. Obama’s Chance to Lead the Green Recovery. Financial Times, 2 March.

United Nations. 1987. Report of the World Commission on Environment and Development: Our Common Future. Available: http://www.un-documents.net/wced-ocf.htm (accessed 10 March 2009).

World Bank. 2009. Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis. Background paper prepared for the Group of Twenty (G20) Finance Ministers and Central Bank Governors Meeting, Washington, DC, March.

IIKeynote 19

I commend the choice of topic for this year’s conference: Asia’s contribution to global economic development and stability. Stability is a global public good and nowadays it is in very short supply, to say the least. To paraphrase John F. Kennedy, it is the time to ask not what economic stability can do for you, but what you can do for it.

I cannot remember a time when the sense of commonality was as high as it is now amongst countries participating in the world economy. It is truly remarkable that policymakers coming from different backgrounds and subject to different political constraints have been able to agree at the recent Group of Twenty (G20) meeting in Washington on a set of principles to respond to the crisis.

However, several issues relating to the current crisis need attention. I will focus on:•Theshort-termresponse,•Thelonger-termissues,and•Theinstitutionaldimension.

1. The Short-Term Response

The speed at which policy thinking has evolved in recent months is striking. Many of the measures taken over the last year were unthinkable before 10 August 2007 and many of those introduced in recent weeks were unthinkable before 15 September 2008. There have been mistakes—some of them minor, like the European Central Bank decision to raise interest rates in July, some

Keynote Address The International Agenda: Immediate Priorities and

Longer-Term Challenges

Jean Pisani-Ferry


1 Saha and von Weizsäcker (2008) provide an evaluation of the size of the European stimulus programs.

of them major, like the United States (US) Treasury decision to let Lehman fail—but throughout the world there has been a remarkable ability to innovate and learn from mistakes. This is a major difference from the experience of the Great Depression.

Why is this so? One reason is that there have been marked improvements in the ability of policymakers to learn from research insights, due to the closer relationship between research and policy. Throughout the crisis academics have participated actively in policy discussions and they have helped break the instinctive reluctance toward bold decisions that characterizes government bureaucracies. Ideas have moved at unprecedented speed from seminars to blogs and from there to legislative bills. Also, policymakers have studied past experiences and have drawn lessons from them. This is especially true of the Japanese banking crisis of the 1990s, where the errors made in dealing with it, and the eventual success, have served as a lesson. Nevertheless, it remains to be seen whether the current response will be sufficient and appropriate.

By “sufficient,” I mean proportionate to the problem. The shock we are suffering from is of unprecedented magnitude and it is important not only to cushion its effects, but also to address the risk of a vicious circle between financial market developments and economic developments. This risk is still very much present and this is why governments need to act forcefully. North America, Europe, and East Asia each represent about one quarter of world gross domestic product (GDP) at purchasing power parity exchange rates. Each needs to contribute to supporting global demand.

Everywhere, monetary policy has moved or is moving aggressively toward easing—where there is still room—and unconventional measures are being contemplated. But there are limits to the effectiveness of monetary policy when money markets are clogged and when banks, uncertain about their own solvency, are reluctant to take the risk of lending.

On the budgetary front, we learn from the US that a major fiscal support initiative is being contemplated. In Europe a coordinated response is desirable (Pisani-Ferry, Sapir, and von Weizsäcker 2008) but it is likely to be somewhat weaker. The European Council has endorsed the principle of a fiscal boost amounting to 1.5% of GDP but some countries are reluctant. It remains to be seen whether, on the aggregate, Europe will come up with something significant.1 In East Asia, the People’s Republic of China has announced a

Keynote 21

major budgetary program and Japan and the Republic of Korea have also moved toward providing support.

What we are likely to see is, on the whole, a rather uneven reliance on fiscal support. This can be regarded as a natural development as long as the magnitude of the stimulus is roughly commensurate with the magnitude of the shock. After all, not all countries are affected to the same degree. The US has been hit much harder than the other major countries, and whereas Europe suffered directly from the financial crisis, for Asia the trade channel is more important.

However, there would be reason for worry if responses were to differ too much or in a way that does not correspond with economic realities. Supporting global demand is a common goal and it is important to avoid free-riding behavior. If such behavior were perceived to be the case, governments would most probably shift to supply-side measures, giving preference to subsidizing their producers rather than to supporting global demand. This temptation is already visible.

This brings me to the appropriateness issue. The lessons from history are very clear: in a major downturn it is of utmost importance to avoid having recourse to trade-distorting or trade-reducing measures. This is why we can commend the commitment to this end included in the G20 communiqué and the more recent Group of Seven (G7) pronouncement—and regret that some countries have started departing from it.

The devil is in the details and the temptation is to support producers through trade defense, subsidies, or non-cooperative exchange-rate policies. Already we are seeing signs of such temptation on all three continents, and temptation can only grow as the recession unfolds. To be honest, there is more involved than just temptation. Governments that embark on major budgetary support to banks or nonfinancial companies are accountable to domestic taxpayers about the use of public money, and we need to recognize that there is for this reason a true tension between the logic of democratic accountability and the logic of economic integration. So a good start has been made, but it is not enough. The current crisis will test every country’s commitment to international cooperation.

2. The Longer-Term Agenda: Policy Issues

Dean Acheson, who represented the US State Department at the Bretton Woods conference, noted in his memoirs that the gestation period of these


agreements had been “about twice as long as that of an elephant.” Indeed it was in 1941 that Keynes and Harry Dexter White had embarked upon the design of the monetary and financial architecture that 44 countries signed up to in July 1944.

This tells us something about the level of ambition of the discussions initiated at the G20 summit in November. If the goal really is to rebuild the foundations of international financial stability, one has to start from a clear idea of what the problems are and what the likely solutions will be. One also needs to accept that the process of international reform will take years rather than months, especially as there is no generally accepted blueprint to start from.

At the risk of overstatement, I would argue that the agenda for regulatory reform is, intellectually at least, rather straightforward. Many of the developments that have led to the current crisis can be attributed to pervasive regulatory failure. Economic theory—event economics 101—tells you that, in a world of imperfect information, the way contracts are designed is essential for determining attitudes toward risk. The standard contracts for credit origination, rating, and executive pay, to take only three examples, were bound to create perverse incentives toward inadequate risk evaluation and/or excessive risk-taking.

The solutions are certainly not self-evident. There are discussions, for example, between those who blame accounting standards and those who blame prudential ratios. There are trade-offs involved in the choice of response, especially between controlling risk and fostering innovation. There are institutional issues. There is the international dimension. But at least the diagnosis is well established and the type of response required is clear.

However, it would not be enough to address the regulatory failures one by one. Regulators do not think in systemic terms and they tend to miss correlations across risks. The most novel and challenging part of the agenda for reform is what is usually termed the macro-financial dimension. That is, the assessment of and response to threats to financial stability that arise from overall financial developments under certain macroeconomic conditions.

On this issue there is much less clarity. It is telling that the G20 communiqué is, purposely or not, remarkably vague on the macroeconomic dimension. The key paragraph reads “major underlying factors [...] were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes” (G20 2008: paragraph 4). This is obscure in the extreme.

Keynote 23

The analytical question for economists is twofold:•WhethermonetarypolicyintheUSshouldhavebeenmorerestrictiveand

whether this would have helped to avoid an excessive rise in asset prices, and

•Whetherwhatweusedtocallglobalimbalancescontributedtocreatingthe problem and whether a less complacent attitude toward them would have helped.

These are closely related but not identical questions. The second one is broader because it involves other potential policy remedies, including fiscal and regulatory policies.

On monetary policy I have sympathy for the view expressed by the US Federal Reserve that somewhat tighter monetary policy would have helped contain the housing and credit bubble but would not have changed the overall picture fundamentally. A central bank whose mandate is to maintain price stability (and even more, one whose mandate is dual, like the Fed) can factor in the risk that asset price inflation will ultimately translate into price inflation and therefore err on the side of caution, but it cannot go much beyond. The low interest-rate environment clearly contributed to the asset-price bubble (or, to put it differently, there is certainly an interest rate level that would have been sufficient to avoid its development), but for the Fed to prick the bubble, it would have had to raise interest rates much more aggressively than allowed by its mandate.

There is more in the view that global imbalances contributed to the problem. Remember Ben Bernanke’s global savings glut or the academic version of the same story, the model of Caballero, Fahri, and Gourinchas (2007). The rationalization given to global imbalances was in both cases that the US had a comparative advantage in the supply of financial assets and that the rest of the world had high demand for those assets. So the simple story is that there was excess demand for US AAA assets and the US financial system responded by manufacturing more assets of lower quality.

This simple story is not entirely satisfactory. It does not tell us why the balance between demand and supply involved quality rather than price adjustment, nor why European rather than Asian institutions accumulated toxic assets on their balance sheets. After all, Europe was not exporting much of its savings, so a more elaborate story must explain why Asia bought plain vanilla government bonds while Europe bought the toxic waste.

But the story is sufficient to warn against the neglect of the macro-financial dimension and to suggest responses that take it into account, both nationally


and internationally. To start with the national dimension, if macroeconomic developments played a role in creating favorable conditions for excessive risk taking, then as in previous financial crises, and if there are limits to what monetary policy can do to counter them, this has implications for regulatory design. Put simply, the less macroeconomic factors are taken into account, the tighter sector-specific and product-specific regulations have to be because they have to be suited to situations that are auspicious for risk-taking.

It is like deciding on safety standards for a car and its components. Road quality standards, speed limits, and signposts on the road are also there to ensure safety, and the less effective they are, the more your car needs to be equipped for rough conditions.

This is why the macro-financial issue is high on the agenda. At the national level, proposals have been made to equip policy institutions—either the central banks or an institution in charge of market stability—with new instruments to tame threats to financial stability (see, for example, Shafer 2008). But there are other options to address the problem. There is no water-tight distinction between micro and macro responses: automatic financial stabilizers stand somewhere between the macro-blind regulatory response and the discretionary macro response. For example, Kashyap, Rajan, and Stein (2008) have proposed giving incentives to banks to subscribe to state-contingent capital insurance to make sure that they would automatically have access to additional capital in case of macro-financial stress.

This brings us into the familiar “rules vs. discretion” debate. How to strike the balance between automatic stabilization and discretionary intervention is bound to be an important issue on the policy agenda.

Turning to the international dimension, two issues deserve attention. The first has to do with the international spillover effects of regulatory policies. These are important, as uneven regulatory requirements are bound to trigger capital flows and/or the relocation of financial actors, and this has implications for the choice between rules-based and discretionary approaches: rules lend themselves more easily to coordination among independent national regulators.

The second issue is that recognizing the importance of macro factors highlights the importance of effective multilateral surveillance of the risks to global financial stability and their links to macroeconomic developments. This surveillance does exist—in fact, the Global Financial Stability Reports of the International Monetary Fund (IMF) and the Annual Reports of the Bank for International Settlements for 2006 and 2007 included strong warnings. But

Keynote 25

its effectiveness has been limited. This brings me to my last point: international institutions, their role, and their effectiveness.

3. The Longer-Term Agenda: Institutions

It is appropriate to start with two major changes in the landscape:(i) Emergence of the G20 as a substitute to the G7(ii) Emergence of the Financial Stability Forum (FSF) as an effective

regulatory bodyEach has its problems. The G20 is a welcome addition as recognition of

the reality of the current economic environment, but it has not yet passed the test of time. It is large and diverse and unlikely to play the role of the G7, which has been more successful in addressing the problems of others than in addressing problems among its members. While the coordination record of the G7 is weak, it has been successful in defining common positions on Russia and Argentina. The transition to the G20 is therefore likely to be a slow learning process. G7 countries have to learn that they are not running the show anymore and emerging countries have to learn how to cope with interdependence and the responsibilities this implies.

The FSF has been surprisingly successful so far (Angeloni 2008). It has no status, no structure, no decision-making power, and no staff, but it has been able to steer a coordinated regulatory response. The question is why it has been successful: most probably because of a combination of a clear political mandate from the G7, intellectual proximity among participants, and, paradoxically, absence of formal powers. It is easier to engage in coordination when you know that it does not entail any formal transfer of power. The question is how the FSF will perform in the future. An enlarged FSF operating in a non-crisis environment may face more difficulty reaching consensus and fostering implementation of commonly agreed guidelines. Whatever the strengths and shortcomings of these new institutions, however, the fact is that the landscape has changed. This raises questions: what consequences for the institutional architecture? Especially, what role for the IMF?

The IMF is not the central institution it once was, and it is not likely to regain its past centrality. It is one among several. The current environment is different from Bretton Woods’ time and even from ideas discussed at the time of the Asian crisis. However, the IMF is in a better situation than a year ago when there were questions about its relevance in a world of capital mobility.


It is now back in business and questions today are rather about the adequacy of resources in response to increasing demand for assistance.

The regional challenges faced by the IMF are mostly, but not exclusively, in East Asia. The response provided in Europe with programs in Central and Eastern Europe suggests that its assistance can and probably will be combined with regional support. In a situation of high risk aversion, the IMF label has considerable, even indispensable, value.

However, conditional financial assistance is the monopoly business of the IMF. What about its other businesses, especially surveillance? The surveillance record is not strong. It has provided good analysis—and it has strengthened intellectual credibility with Global Financial Stability Reports and World Economic Outlooks. These have been more accurate than most other assessments or forecasts—but there have been few results.

The weak surveillance of US macro and financial developments has weakened the IMF’s credibility. Nobody can remember what the IMF told the US authorities about their domestic policies. The Chinese insist that surveillance must start with “the reserve currency-issuing countries” and they have a point.

Exchange-rate surveillance as currently envisaged is a dead end. At US insistence the IMF was recently given the ability to slate countries contributing to “external instability,” but it has been unable or unwilling to say anything clear to the People’s Republic of China. So the IMF has been too shy to resist US pressure and then too shy to criticize the People’s Republic of China.

Multilateral consultations, on the other hand, were an innovative and well thought-out initiative but, probably because of a lack of ownership among participant countries, did not result in anything significant.

Which way forward for the IMF? There continue to be problems of governance; it is very hard for an institution to openly criticize its major shareholders. Further reform is needed, including through reducing and consolidating Europe’s representation (see Ahearne et al. 2006), but it will not be enough on its own.

One response could be to make country surveillance more independent. Already the World Economic Outlook and Global Financial Stability Report are issued under the responsibility of staff. Why not extend this to country reports? To vote on an analysis is not best practice. Fund analysis should be released under the responsibility of management.

On exchange rates there is an inconsistency in the procedures. A statement by the IMF that a country’s policy contributes to external instability—let

Keynote 27

alone that it is manipulated—would almost certainly trigger a procedure at the World Trade Organization. So we are speaking of quasi-judicial powers and for them to be exercised the IMF would need quasi-judicial procedures. The model should be that the World Trade Organization panels decide on trade conflicts.

Absent such powers, the role of the IMF should be to provide expertise to the G20, that is, to help to base discussion on sound analysis but not to decide. This is what Mervyn King (2006) called the role of a cricket umpire instead of a referee. We are thus talking of a complex and evolving landscape. Robert Zoellick (2008) was right to speak of a “Facebook of multilateral economic diplomacy.” And we know that on Facebook the important thing is to make friends.

4. Conclusion

The challenge to policymakers is not to waste time before addressing the urgent tasks ahead of them and not to lose the momentum for reform created by the crisis. The sense of urgency and commonality that characterized this autumn should not be lost.

At the same time, there are difficult issues that deserve to be analyzed and discussed. While some aspects are clear, research is still far from fully understanding the root causes and the mechanisms of the crisis—let alone being close to drawing policy lessons from it.

Furthermore, the G20 has yet to develop the kind of common analytical framework the G7 has been able to achieve, a framework that does not imply consensus but does facilitate making the best of differences of view. So there is a need to move fast while acknowledging that an unambiguous lesson born of experience is that there is nothing the best possible science can do to shorten the gestation period of a baby elephant.

References

Ahearne, A., J. Pisani-Ferry, A. Sapir, and N. Véron. 2006. Global Governance: The Agenda for Europe. Bruegel Policy Brief No. 2006/07. December.

Angeloni, I. 2008. Testing Times for Global Financial Governance. Bruegel Essay and Lecture Series No. 3. October. Available: http://www.bruegel.org/Public/PublicationPage .php?ID=1170.


Caballero, R., E. Fahri, and P.-O. Gourinchas. 2007. An Equilibrium Model of Global Imbalances and Low Interest Rates. American Economic Review 98(1): 358–393.

Group of Twenty (G20). 2008. Declaration of the Summit on Financial Markets and the World Economy. Washington, DC. 15 November. Available: http://www.g20.org/Documents/g20_summit_declaration.pdf.

Kashyap, A., R. Rajan, and J. Stein. 2008. Rethinking Capital Regulation. Mimeo.

King, M. 2006. Reform of the International Monetary Fund. Speech at the Indian Council for Research on International Economic Relations, New Delhi, February.

Pisani-Ferry, J., A. Sapir, and J. von Weizsäcker. 2008. A European Recovery Programme. Bruegel Policy Brief No. 2008-09. November.

Saha, D., and J. von Weizsäcker. 2008. An Evaluation of the Size of the European Stimulus Packages. Mimeo. Basel, Switzerland: Bruegel. December.

Shafer, J. 2008. Restoring International Financial and Monetary Stability. Remarks at the Reinventing Bretton Woods conference, New York, November.

Zoellick, R. B. 2008. Modernizing Multilateralism and Markets. Speech given at the Peterson Institute for International Economics, Washington, DC, 6 October.

IIIRegional Cooperation for Greater Global Stability: A Medium-Term Agenda 29

Regional Cooperation for Greater Global Stability: A Medium-Term Agenda

Shinji Takagi

1. Introduction

The world economy is experiencing what some call the worst economic crisis since the Great Depression. The impact of the global recession is being felt in Asia with a slowdown in exports of final goods to the markets in North America and Western Europe. Despite much ado about the decoupling of Asia from the United States (US) and Europe, the economies of emerging and industrial Asia have not been as immune to the global economic meltdown as had been anticipated.

In relative terms, though, the impact on Asia appears limited. While the outlook for Asia is clearly down from previous years, the latest update from the International Monetary Fund (IMF) (January 2009) places the 2009 forecasts for developing Asia at 5.5% (compared to 7.8% in 2008 and 10.6% in 2007). This contrasts with the forecast of 1.1% for the Western Hemisphere and -0.4% for Central and Eastern Europe. At least collectively, Asia has not experienced the kind of crisis that swept the emerging market economies of Europe in recent months.

At least two reasons explain the comparatively limited negative impact of the current global crisis on Asia. First, the region is not very well integrated with the global financial system, the financial systems of many economies in the region are relatively underdeveloped, and many countries still restrict the cross-border flow of capital. Second, the region has been a net exporter of capital since the East Asian crisis. This has allowed many economies to avoid becoming susceptible to ebbs and flows of international capital and


thereby developing balance-sheet vulnerabilities that come from reliance on external borrowing. Part of the net capital exports, moreover, has been retained as official foreign exchange reserves: The region’s balance of official reserves quadrupled over the decade following the East Asian crisis of 1997–1998.

The recent experience has demonstrated that trade and financial globalization is a double-edged sword. Globalization benefits the world by giving countries opportunities to exploit their comparative advantage to the fullest; it provides opportunities to lend and borrow, to allocate resources in an efficient manner. As a result, when there is an economic boom in the center countries, most countries in the system participate in the global prosperity. By the same token, a large negative shock in the center countries could also have ripple effects throughout the entire system. It spreads quickly and profoundly affects the whole world. A globally integrated economy can be a dangerous place unless there is a safety mechanism to prevent the concentration of risks in the center and to diffuse the spread of negative shocks when they do occur.

This chapter considers the lessons of the recent global crisis for Asia from a medium-term perspective. The chapter does not consider what Asian economies could do now to mitigate the immediate impact of the global crisis; in Asia (at least outside the Association of Southeast Asian Nations [ASEAN]), a credible institutional mechanism does not exist to make a collective response possible at this time. The most that the region’s economies can hope to do is to start the process of building an institutional mechanism to make sure that Asia will contribute to a more stable world.

The rest of the chapter is organized as follows. Section 2 discusses the nature of Asia’s output linkages both within the region and with the rest of the world. Section 3 discusses Asia’s financial openness (which is a necessary ingredient of financial integration) and how it compares with the level achieved in other parts of the world. Section 4 explores the implications of a region that is well integrated through trade but not so well integrated financially. Finally, Section 5 offers a few conclusions.

Regional Cooperation for Greater Global Stability: A Medium-Term Agenda 31

2. Asia’s Intra- and Inter-Regional Output Linkages2.1 Strengthening Regional Output Linkages

Economic integration has been progressing in Asia, mainly led by intra-regional trade in parts and components. Within ASEAN+3, for example, the share of intra-regional trade rose from around 30% during 1980–1990 to over 38% in 2006; with Hong Kong, China and Taipei,China included, the share was almost 55% (Rana 2007). These figures were comparable to 67% in EU-25 and 44% among the North American Free Trade Agreement (NAFTA) countries. Intra-regional trade provides a channel through which a shock in one economy affects the output of another economy within the region, both as final demand and as direct inputs into the production process. Closely related is intra-regional foreign direct investment, which has recently accounted for as much as half of the region’s total foreign direct investment (Hattari and Rajan 2008). Direct investment in plants and equipment, in particular, has created production networks in some industries that cut across national borders.

Theoretically, the impact of economic integration on the nature of output linkage is uncertain. If economic integration leads to greater specialization, it could result in weaker output synchronization. If the direct trade channel dominates (such that a positive output shock in one country, for example, is transmitted as a positive demand shock across borders), there is a presumption that output synchronization increases with economic integration (Frankel and Rose 1998). Greater economic integration can also mean that countries are increasingly faced with common shocks, in which case output synchronization is also expected to strengthen. This is an empirical issue.

Within Asia, there are at least two reasons to believe that interdependence is creating a co-movement of output. First, because most trade within Asia consists of intra-industry trade in parts and components,1 it propagates common, industry-specific shocks across the region.2 Second, because the US and Europe remain the principal export markets for Asia’s final goods—accounting for over 40% of total exports—external demand shocks to Asian economies tend to be similar, as has been demonstrated in the current global crisis.

1 More than 70% of intra-Asian trade consists of intermediate goods used in production (ADB 2007).2 Rana (2007) showed intra-industry trade to be an important factor explaining the positive output

correlations in Asia.


Indeed, many recent studies have noted that the synchronization of Asian business cycles has greatly increased (McKinnon and Schnabl 2003; Kawai and Motonishi 2005; Sato and Zhang 2006; ADB 2007). Taking three-year moving averages of quarterly gross domestic product (GDP), one would find that the average output correlation of Asia’s 10 economies rose from a mere 0.07 during 1988–1996 to 0.54 during 1999–2007 (Figure 3.1).3 The correlation for the post-crisis period typically becomes larger as the sample for the moving average is lengthened (in part reflecting the impact of the East Asian crisis), but a similar (though somewhat dampened) rise in the correlation is still observed in contemporaneous data.

A number of analytical studies are almost unanimous in showing that output links within Asia strengthened after the East Asian crisis (Table 3.1, third column). The role of the People’s Republic of China (PRC) and (to a lesser extent) Japan, however, is less certain. Moneta and Ruffer (2006) showed that the PRC was not synchronized in terms of either GDP or industrial production, while Japan was highly synchronized with Asia only in terms of industrial production (but not in terms of GDP). On the other hand, Haltmaier et al. (2007) used rolling regressions to estimate the contemporaneous output correlations of an Asian economy with the PRC and the US and found that, during 1970–2006, Chinese growth became more important for emerging Asian countries. Moneta and Ruffer (2006), in particular, argued that the strong synchronization of business cycles during 1993–2005 primarily reflected the co-movement of exports.

Empirical work has confirmed the view that intra-regional trade has been the predominant factor behind the increasing output synchronization in Asia. For example, Choe (2001) found that, during 1981–1990 and 1986–1995, greater bilateral trade dependence was on average associated with greater business cycle synchronization among 10 East Asian countries (or 45 pairs)—the coefficient of trade intensity on correlation was larger (and usually more statistically significant) during the latter period. Likewise, Shin and Wang (2003) showed that increasing trade had caused a greater co-movement of business cycles among 12 Asian countries during 1976–1997, with intra-industry trade being the main channel through which output shocks were transmitted.4 Cortinhas (2007) directly tested

3 The economies include PRC; Hong Kong, China; Indonesia; Japan; Republic of Korea (hereafter Korea); Malaysia; Philippines; Singapore; Taipei,China; and Thailand.

4 Other recent studies that confirm the positive contribution of trade intensity to output synchronization in Asia include Shin and Sohn (2006) and Rana (2007).


Figure 3.1: Asia’s Output Correlations with Itself, 1986–2007

Source: Adapted from Asian Development Bank (2008), Figure 5.1.

Study Sample Period Impact of Output Shocks Within the Region

Impact of Output Shocks in Industrial Countries

Moneta and Ruffer (2006)

1993–2005; 1990–2005 Increased over time (1993–2005)b

Weak, particularly with respect to North America (1990–2005)

Asian Development Bank (2007)

1999–2006 (compared to 1983–1996)

Stronger Stronger

International Monetary Fund (2007)

1986–2005 (compared to 1960–1985)

Stronger Weaker (but stronger for spillovers from the United States)

Rana (2007) 1989–2003/1989–2004 Stronger Weaker/strongerc

Kose, Otrok, and Prasad (2008)

1985–2005 (compared to 1960–1984)

Stronger Weaker

Akin and Kose (2008) 1986–2005 (compared to 1960–1985)

Strongerd Weaker

Kim and Lee (2008) 2000–2007 (compared to 1990–1996)

Stronger Stronger

Asian Development Bank (2008); also Takagi and Kozuru (2008)

1999–2006 (compared to 1988–1996)

Stronger Stronger

Table 3.1: The Decoupling of Emerging Asia: Selected Empirical Studies, 2006–2008a

Notes: a The definition of emerging Asia differs slightly from study to study. The results are therefore not strictly

comparable but are reported here for illustrative purposes.b Here the region includes only Singapore; Hong Kong, China; Korea; and Taipei,China.c The United States is the only industrial country considered.d Here, the region refers to all emerging market economies (as a group) irrespective of geography.


and confirmed the importance of intra-industry trade in generating business cycle synchronization in ASEAN countries during 1962–1996.

2.2 Decoupling of Asia?

Within Asia, there has been a heated debate on whether the region’s output linkage with the rest of the world has weakened as a result of increasing regional economic integration (see ADB 2007). The “decoupling hypothesis” says that, with recent growth and integration, regional demand has become more important than global demand as a driver of Asia’s economic growth. There is, however, a contrary view that states that, with commitment to openness and the importance of the US and European markets as a destination for the export of final goods, Asia’s economic linkage with the rest of the world has actually intensified in recent years.

Again, taking three-year moving averages of quarterly GDP, one would find that the average output correlation of Asia with the rest of the world (consisting of the US and Europe) increased from 0.16 during 1988–1996 to 0.51 during 1999–2007 (Figure 3.2). This appears to be a fairly robust result found in many studies. For example, ADB (2007) used contemporaneous data to come to a similar conclusion about output correlations between Asia and the rest of the world.

Several recent analytical studies have confirmed the broad conclusions from using correlation analysis (though the empirical literature is far from conclusive).

Figure 3.2: Asia’s Output Correlation with the Rest of the World, 1986–2007

Source: Adapted from Asian Development Bank (2008), Figure 5.1.


For example, Takagi and Kozuru (2008) used vector autoregression methodology5 to show that the output linkage of emerging Asia as a group strengthened both with Japan and the rest of the world (consisting of the US and Europe). In particular, although almost 90% of the variance of Asia’s GDP (outside Japan) was explained by a regional shock before the East Asian crisis, the percentage fell to 60% following the crisis (while that attributable to global and Japan shocks rose to 30% and 10%, respectively, from 10% and 0%); while regional GDP responded significantly only to a regional shock before the crisis, regional output became significantly responsive to all shocks following the crisis.

The results appear to be sensitive to the choice of sample and methodology, however (see Table 3.1, fourth column). Moneta and Ruffer (2006), for example, showed that Asian growth was relatively little affected by developments in industrial countries outside the region; IMF (2007) likewise found that common global factors became less important drivers of national business cycle fluctuations, while regional factors became more important among highly integrated regions, such as emerging Asia (see also Akin and Kose 2008; Kose, Otrok, and Prasad 2008).6 The same study also found that spillovers from US growth onto global and national growth were significantly higher during 1986–2005 than during 1960–1985 (see also Kim and Lee 2008). The response of Asia to the recent global crisis is an additional reminder that Asia remains connected to the world in a serious way, whether the linkage has strengthened or weakened over the past 10 years.

3. Asia’s Financial Openness3.1 Measuring Asia’s Financial Openness

There is a presumption that the strengthening of output links in Asia has largely been driven by trade integration, with financial integration playing

5 They considered a three-region model, consisting of global, Japanese, and regional outputs. Asia included, in addition to Japan, PRC; Hong Kong, China; India; Indonesia; Korea; Malaysia; Philippines; Singapore; Taipei,China; and Thailand. The rest of the world included Belgium, France, Germany, Italy, Netherlands, Spain, US, and United Kingdom. Global and regional GDPs were the weighted averages of the individual country GDPs in the respective regions, with 2,000-dollar GDPs used as the weights. Their results were robust to the choice of ordering.

6 Regional factors accounted for 41% of the output fluctuations in emerging Asia. With Japan added, the contribution of regional factors to output fluctuations increased from 9.5% during 1960–1985 to 34.7% during 1986–2005, while the contribution of global factors declined from 10.6% to 6.5% over the same period.


a smaller role. Imbs (2004, 2006) showed that stronger financial links could increase not only consumption correlations (as theory suggests) but also output correlations. But in the context of East Asia,7 Shin and Sohn (2006) found little evidence of financial integration (proxied by monthly interest rate correlation) contributing to a co-movement of output during 1971–2003. The weaker financial-output link for Asia may well mean that financial integration in the region has not fully kept pace with real integration. In fact, there is good evidence to support such a view.

Financial integration can be measured in several ways, but no matter how it is defined, it has a strong policy component. Deeper financial integration will not take place unless policymakers try to promote the development of domestic financial markets and to dismantle legal and regulatory restrictions on cross-border financial transactions. Asian economic integration has been largely a market-driven process. It is thus understandable that regional financial integration has lagged behind.

To obtain a sense of how Asia’s financial integration stands, relative to its past as well as to other regions, I used saving-investment correlation as a measure of average financial openness for the region. Saving-investment correlation has several conceptual problems, but it has the benefit of being obtainable for a large number of economies on a consistent basis. Moreover, recent research indicates that it contains useful information about the broad direction of change in average financial openness in a region (see Takagi and Taki 2008 for further discussion). For example, with the financial globalization of the 1990s and 2000s, there has been observed a substantial secular decline in saving-investment correlations in many parts of the world,8 while work based on intra-national data has consistently shown that correlation within a sovereign nation is small or often nearly zero.9

7 East Asia includes PRC; Hong Kong, China; Indonesia; Japan; Korea; Malaysia; Philippines; Singapore; and Thailand.

8 Taki (2008), for example, reports that the coefficient (β) (the FH coefficient) for Organisation for Economic Co-operation and Development (OECD) countries declined from 0.66 during 1975–1979 to 0.10 during 2000–2003.

9 Taki (2008) reported that the coefficient for Japanese prefectures was consistently small over 1975–2004; the coefficient could even be negative, indicating the impact of fiscal transfers within a sovereign nation. Other studies based on intra-national data have indicated a similar result, with a coefficient estimate ranging between -0.11 for the US and 0.15 for the PRC (Sinn 1992; Boyreau-Debray and Wei 2002).


Table 3.2 reports the estimates of β when the investment-to-GDP ratio is regressed over the saving-to-GDP ratio, as follows:

(I/Y)i = α + β (S/Y)i + εi, (1)

where I is domestic investment; S is domestic saving; Y is domestic income; α and β are coefficients to be estimated; ε is a random error term; and i is a country subscript. It was the seminal work of Feldstein and Horioka (1980) that first postulated that the coefficient (β)—henceforth referred to as the FH coefficient—would be unity in the complete absence of capital flows and zero under perfect capital mobility.

Three observations are immediate from Table 3.2. First, there is a strong indication that Asia’s average financial openness increased over the period: The

Table 3.2: Estimates of β for Regions and Country Groups, 1990–2006a

ASEAN = Association of Southeast Asian Nations, EU = European Union, MERCOSUR = Southern Common Market, OECD = Organisation for Economic Co-operation and Development.

Notes: a Figures in parentheses indicate the number of countries in each region or group (first column) and standard

errors (second and third columns); depending on data availability, the list of countries in each region or group may not be exhaustive.

b ASEAN+3 (7) includes Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand; ASEAN+3 (10) includes ASEAN+3 (7) plus Cambodia, People’s Republic of China, and Viet Nam.

Source: Takagi and Taki (2008), Table 2.

Regions or country groups 1990–1999 2000–2006

Asia-Pacific:b

ASEAN+3 (10) 0.534 (0.067) 0.349 (0.169)

ASEAN+3 (7) 0.470 (0.103) 0.223 (0.162)

Europe:

EU (27) 0.109 (0.141) 0.080 (0.078)

Euro Zone (15) -0.131 (0.178) 0.049 (0.075)

Other Parts of the World:

MERCOSUR (10) 0.229 (0.201) 0.284 (0.134)

Africa (38) -0.063 (0.144) 0.092 (0.064)

CFA Franc Zone (12) 0.524 (0.375) 0.255 (0.080)

Other Groupings:

OECD (24) 0.152 (0.146) 0.020 (0.070)

G7 (7) 0.808 (0.141) 0.329 (0.168)


estimated FH coefficient declined for both groups. The decline is particularly substantial for the seven advanced members of ASEAN+3, for which the estimate fell from 0.470 during 1990–1999 to 0.223 during 2000–2006. This latter estimate (0.223) is not statistically significant.

Second, looking at other parts of the world, we cannot say that financial openness increased consistently over the same period. This is true especially of Europe, which most likely means that the degree of openness was already high during 1990–1999. Financial openness changed little among the Western Hemisphere countries, despite the fact that the region was not as open as Europe to begin with. The extremely low estimates for Africa must be interpreted with care, because this could mean that the share of official development assistance in financing domestic investment is large (relative to GDP) in many countries (the coefficient for the Communauté Financière Africaine countries, however, is much larger).

Third, comparing the coefficient estimates across regions and country groups, we note that the degree of financial openness in Asia, even for the later 2000–2006 period, is not very high relative to Europe or the Organisation for Economic Co-operation and Development (OECD) members. Asia’s openness (of 0.22–0.35) appears comparable to the degree observed in the Western Hemisphere (0.28).10 Although comparison with Africa is difficult, Asia as a region remains among the world’s least financially open—hence integrated—despite the great advances made in real integration over the years.

3.2 Explaining Asia’s Limited Financial Integration

The limited volume of cross-border capital flows observed in Asia is consistent with the region’s low average financial openness (and integration). Kim, Lee, and Shin (2006), estimating a gravity model of bilateral financial asset holdings for 1999–2003, found that the East Asia dummy had no additional explanatory power (indicating a lack of financial integration beyond what could be explained by trade) and concluded that financial links during 1999–2003 were almost entirely explained by trade. Indeed, the volume of autonomous capital flows in Asia is rather limited relative to other regions. For example, trend gross capital

10 The estimate of β for the Group of Seven (G7) countries declined substantially over the period but remained high for the second period (0.329). This likely reflects the fact that the group includes large industrial countries, such as US, Japan, and Germany, for which the global budget constraint becomes more binding.


flows in ASEAN+3 over 2000–2004 were only 15–18% of GDP, compared to 39–46% in the OECD, over 40% in the European Union (EU), and 55–56% in the Euro Zone (Figure 3.3).11

Moreover, for the capital transactions that do take place, Asian economies are financially more connected with the global financial centers outside the region than with each other (see Eichengreen and Park 2004 for cross-border bank credit flows; Kim, Lee, and Shin 2006 for cross-border securities and bank assets). Cowen et al. (2006), based on the IMF’s portfolio survey, showed that Asia’s portfolio liabilities to other Asian countries amounted to only 2.25% of regional GDP in 2004, less than one-third the liabilities to either

11 The Hodrick-Prescott filter was used to remove cyclicality from the volatile time-series of capital flows. Each region or country group in Figure 3.3 includes fewer countries than Table 3.2 because of data limitations.

Figure 3.3: Trend Gross Capital Flows, 2000–2004 (in % of GDP)

ASEAN = Association of Southeast Asian Nations, EU = European Union, GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Development.

Notes: a. Figures in parentheses indicate the number of countries in each region or group; depending on data

availability, the list of countries in each region or group may not be exhaustive.b. ASEAN+3 (7) includes Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand; ASEAN+3

(10) includes ASEAN+3 (7) plus Cambodia, People’s Republic of China, and Viet Nam.

Source: International Monetary Fund (various years[b]).


North America or the EU. ADB (2008) noted that Asia held less than 10% of its total portfolio assets within the region in 2006, while the share held in the US was nearly 30%; for portfolio liabilities, the corresponding shares were 11% (within the region) and nearly 40% (in the US). A substantial portion of Asia’s savings appears to be recycled back to the region through the global financial centers in the US and Europe.

Capital account restrictions and financial underdevelopment are among the factors responsible for the lack of financial integration in Asia. First, Asia as a region maintains a wide range of restrictions on capital transactions (though some economies in the region have a highly open capital account regime). In terms of the IMF’s de jure measures of exchange and capital controls, Asia not only remains more restrictive than groups of industrial countries, but also has changed little since the currency crisis (Figure 3.4).12 In fact, Asia’s exchange and capital control regimes are among the most restrictive in the world, comparable to Sub-Saharan Africa (where the index has also been in the 0.6 range).13

Second, Asia’s financial markets are underdeveloped relative to the advanced markets of North America and Europe. The development of capital markets is hampered by poor corporate governance rules, inadequate accounting standards, and weak regulatory and legal frameworks (ADB 2008). According to the World Bank’s financial sector development indicators, Asia’s stock markets (including those in Japan and Singapore) rank low in the efficiency rating.14 Except in some economies, the lack of deep corporate bond markets in particular is limiting the availability of long-term financing to viable investment opportunities. The banking system has improved considerably since the East Asian crisis, but room remains for further reforms in enhancing competition, promoting consolidation, and strengthening risk management skills.

4. Should Asia Promote Financial Integration?

Asia has reaped the benefits of trade integration without a commensurate increase in financial integration. Asia’s relative financial isolation has allowed

12 The de jure index is based on 14 types of restrictions on foreign exchange and capital transactions.13 This figure excludes the Communauté Financière Africaine zone, where the index has been around

0.9—the most restrictive in the world.14 To give just a few examples, among the 58 countries rated in 2006, the PRC ranked 56th, Indonesia

54th, Philippines 53rd, Singapore 49th, and Thailand 45th.


it to limit its exposure to the fallout of the current global financial crisis. Also, Asia does not seem to have suffered terribly by relying on world financial centers to intermediate its rather limited flow of financial resources (at least as a share of GDP). Does this mean that Asia should continue to pursue the policy of limited financial integration? Not necessarily. A convincing case can be made for promoting financial integration.

First, maintaining the status quo is not a sustainable policy option for Asia. The region needs an efficient financial system for its own sake. The lack of liquid and well-functioning bond markets is limiting the availability of long-term local currency funding for viable and profitable investment projects. Financial underdevelopment is also acting as a constraint on the region’s growing trade and investment links. But with better financial systems, financial integration will be a natural consequence.

Figure 3.4: De Jure Exchange and Capital Controls, 2000–2006 (Share of controlled transactions)

ASEAN = Association of Southeast Asian Nations, EU = European Union, OECD = Organisation for Economic Co-operation and Development.

Notes: a. Figures in parentheses indicate the number of countries in each region or group; depending on data

availability, the list of countries in each region or group may not be exhaustive.b. ASEAN+3 (7) includes Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand; ASEAN+3

(10) includes ASEAN+3 (7) plus Cambodia, People’s Republic of China, and Viet Nam.

Source: International Monetary Fund (various years[b]).


Although the outcome of financial system development does not discriminate between regional and global integration, given the nature of information asymmetry in financial transactions, it should be biased toward intra-regional financial integration. The fact that Asia’s savings are mostly intermediated abroad is a reflection of the greater efficiency of the financial centers outside the region; as the financial systems in Asia improve in efficiency, geographic proximity, closer time zones, and more direct personal contacts within the region should begin to create a “home” bias that has so far been totally absent in Asia (ADB 2008).

Second, financial integration should not be assumed as an outcome of financial system development: It should be actively promoted. Financial integration facilitates further real integration. Imbs (2006), based on a sample of 41 countries over 1960–2000, found that more financially integrated economies (in terms of cross asset holdings) tended to have more synchronized output movements, even after the effects of finance on trade and specialization were accounted for. Intra-regional financial integration is expected to strengthen trade and investment links both by creating new opportunities and by lowering the transaction costs of cross-border activities. A more closely linked Asia will be a greater source of demand for final goods from both within and outside the region.

In sum, the emergence of a “home” bias and the strengthening of real links are expected to work together to mitigate the danger that the region’s vulnerability to global shocks will increase as a result of financial integration.

Figure 3.5: The Hub-and-Spoke Structure of World Trade and Finance


Larger “point-to-point” trade and capital flows within the region will be a form of insurance against the adverse impact of global shocks that originate outside the region. This will represent a transformation of the current hub-and-spoke structure of world trade and finance, which has been the source of instability, to a more pluralistic structure (see Figures 3.5 and 3.6 for schematic representations). It will be a more stable world for all parties.

Regional cooperation is essential in the process. First, cooperation facilitates financial integration at the regional level by promoting the harmonization of standards and regulations; through the sharing of best practices, it helps establish a more resilient financial system. Second, regional cooperation promotes sound macroeconomic policies that are consistent with financial stability, through peer pressure and surveillance (designed to allow policymakers to take account of the cross-border spillovers of each other’s policies). Third, as a last resort measure, a regional crisis management facility—complementing the global facilities provided by the IMF—would give the region’s policymakers additional confidence.

5. Conclusion

The chapter has provided evidence—corroborated by a growing empirical literature—that Asia’s financial integration has not kept pace with its real

Figure 3.6: The Pluralistic Structure of World Trade and Finance


integration. Driven mostly by increasing intra-regional trade in parts and components, output synchronization has risen within the region in recent years; at the same time, the output link with the rest of the world does not seem to have weakened in the process. Financially, however, Asia remains among the least open regions of the world; it may even be more integrated with world financial centers outside the region than within itself. Although this has allowed the region to remain relatively unscathed by the fallout of the recent global financial crisis, the chapter has argued that maintaining the policy of relative financial isolation is not a sustainable option for Asia.

First and foremost, Asia needs an efficient financial system for its own sake, but with more efficient financial systems inevitably comes greater financial integration. Second, paradoxically, actively promoting greater financial integration will benefit both the region and the world. Given the nature of information asymmetry in financial transactions, promoting financial integration is expected to be biased toward intra-regional integration, which in turn will strengthen trade and investment links within Asia. A more closely linked Asia will create demand for final goods from within and outside the region. It will help prevent the concentration of risks in the center and diffuse the spread of any negative shock that may originate in the center.

To make the needed shift, Asian policymakers must begin by making concerted efforts to develop a deep, efficient, and well-supervised financial system, and liberalizing a substantial portion of restrictions on cross-border capital transactions. Regional cooperation is essential, not only to push the process forward but to give additional confidence to the authorities.

References

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Choe, J.-I. 2001. An Impact of Economic Integration through Trade: On Business Cycles for 10 East Asian Countries. Journal of Asian Economics 12: 569–586.

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Cowen, D., R. Salgado, H. Shah, L. Teo, and A. Zanello. 2006. Financial Integration in Asia: Recent Developments and Next Steps. Working Paper 06/196. Washington, DC: International Monetary Fund.

Eichengreen, B., and Y. C. Park. 2004. Why Has There Been Less Financial Integration in Asia than in Europe? Staff Paper No. 28. Singapore: Monetary Authority of Singapore.

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Imbs, J. 2004. Trade, Finance, Specialization, and Synchronization. Review of Economics and Statistics 86: 723–734.

————. 2006. The Real Effects of Financial Integration. Journal of International Economics 68: 296–324.

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————. Various years(a). Annual Report on Exchange Arrangements and Exchange Restrictions. Washington, DC: IMF.

————. Various years(b). International Financial Statistics. Washington, DC: IMF.

Kawai, M., and T. Motonishi. 2005. Macroeconomic Interdependence in East Asia: Empirical Evidence and Issues. In Asian Economic Cooperation and Integration. Manila: ADB.

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Kim, S., J.-W. Lee, and K. Shin. 2006. Regional and Global Financial Integration in East Asia. Seoul: Korea University.

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Three recommendations for Asian economies emerge from Professor Shinji Takagi’s chapter, to which I fully agree. These economies should:

1. Continue to develop their financial markets;2. Further open their financial markets and capital accounts and remove

more restrictions against capital flows; and3. Promote regional financial integration that will reduce the dependence

on “center countries,” reduce transaction costs, and facilitate the further development of real integration.

The questions are how and how much opening up and integrating should be done.

1. Proportionate (Appropriate) Financial Development

One of the lessons from the recent financial crisis was not to allow a country’s financial development to outpace or “bubble out” the real economy. The lesson from the previous financial crisis in the region, i.e., the Southeast Asian financial crisis (1997–1998) was that a developing country should avoid “overshooting” in liberalization of its capital account and financial market and be careful about the compatibility between its financial liberalization and its level of economic development and institution building.

Comparisons are often made between Asian economies and the financially open economies of the US, EU, or OECD, to determine why Asia is not able to fully benefit from more efficient financial markets and freer capital flows. While such comparisons can be instructive, we need to look at other differences between Asian economies, particularly between developing Asia and more developed countries. If we compare the current situation of a developing Asian economy with other countries at the same economic level (having per capita income of

Comments

Gang Fan


US$2,000, for instance), it is hard to say that the Asian one is behind schedule. The level of development is important not only because it determines the amount of financial assets a country has and what financial services it needs, but also because it relates to conditions such as the level of education, the development of legal and regulatory frameworks, the existence of a political system for checks and balances, the sophistication of market transactions, and the knowledge of the world market and management skills. These are all important conditions for financial development and all relate to the economy’s ability to handle financial risks and market fluctuations domestically and globally.

All countries should make efforts to develop their financial system and eventually all countries should “converge;” these efforts must include risk-control regulatory frameworks. However, the efforts needed will differ for real economies that are at different levels.

2. Difficulties for Asian Financial Integration

A special difficulty for Asian financial integration is caused by wide diversity among Asian economies in terms of development level; economic, legal, and political system; and financial maturity. Europe took 50 years to reach full financial and monetary integration. But even the Europe of 50 years ago was more homogenous than present-day Asia. We have to account for this diversity when thinking about financial integration in the region.

The Bretton Woods System and the post-Bretton Woods US dollar standard international monetary system made it more difficult for monetary integration to take place in a regional framework if that system could not provide common reserve money. That is one of the reasons why businesses link themselves directly to the “center country” or “center countries,” which provide the convenience of common reserve currency (currencies), even if they have to pay higher transaction costs.

3. Can Asian Countries Provide Partial Currency Reserves to One Another?

Instability and imbalances were caused by the US dollar standard monetary system in the past decades. This experience has taught us that we need to reform the global governance of financial markets and the global monetary order.


Some foreign currencies are still needed to facilitate global trade and capital transactions. That is why we may still need the US dollar or US dollar + euro to serve as reserve currencies, particularly for the developing countries that need to provide some reserves as collateral for trading because their own currencies are not yet accepted as reserve currencies. This is independent of whether or not the countries should adopt free-floating foreign exchange regimes.

If more alternative and competing reserve currencies mean a more stable global financial system (a yet untested hypothesis), we may increase regional and therefore global financial stability by creating a mechanism to reduce our dependence on the US dollar and provide alternative reserve currencies.

As an intellectual exercise, imagine a mechanism of “cross-holding” of the currencies of other economies in the region as part of a country’s official foreign exchange reserves, proportional to each country’s trade structures with other economies. For instance, if the imports of the PRC from Thailand count for (say) 3% of the PRC’s total imports, the PRC may hold 3% of its total foreign reserves in Thai baht (instead of US dollars), and vice versa for Thailand.15 If the trade balance itself cannot meet the holding requirement under the agreement, the country should swap for the “targeting currency” with some other acceptable currency(ies) in the reserve. For instance, if the PRC is running trade deficits against Thailand and cannot increase its holdings of Thai baht through trade, it should “buy” Thai baht using other currencies that Thailand accepts. This approach may avoid negotiation costs.

The commitment of governments is necessary for any trial of this regional integration initiative. At the beginning, corporations do not need to denominate and intermediate their trades in local currencies. As long as governments start to hold reserves of the currencies of their regional trade partners, the choice will be available and corporations may start to use this mechanism if they see opportunities to avoid risks with other currencies. Later on, private foreign direct investment may also become part of the mechanism before cross-border financial liberalization. It will definitely make trade and foreign direct investment easier and will give stakeholders the sense of mutual trust and integration.

15 At the trial stage, we may think of a “partial scheme.” For example, a country that has 40% of its total trade in intra-regional trade may only need to hold 10% or 20% of total intra-regional reserve cross-holding if everyone does the same. But the holdings of each country’s assets in this 10–20% may still be proportional to the shares of trade.


Unlike the current “currency swap” system, this cross-holding approach does not require a major international balance of payment crisis to be tested and start to function. It is also different from the regional “reserve fund,” which is supposed to use a pool of foreign reserve currencies (including the US dollar and the euro) and is also not functioning on an ongoing basis. All economies that subscribe to the cross-holding agreement can get reserves right away and get interest payments (or lose money) immediately on each other’s financial assets. This is the way to make all participants mutual stakeholders of one another. In addition, the diversification of reserve money holdings is a good approach to reduce the systematic financial risks in the current global financial market.

Through this initiative, we may reduce our reliance on the US dollar and further increase intra-regional trade. This will contribute to the reform of the global monetary system and the stability of the global financial market in addition to the development of regional economies.

IV1. Introduction

The theme of ADBI’s annual conference, on Asia’s contributions to global economic development and stability, was timely for several reasons, including the rapid rise of food, petroleum, and other primary product prices in 2007–2008 in response to high growth in Asia’s large emerging economies; the sudden deceleration of the world economy in the second half of 2008; and the widespread recession that followed. The focus of this chapter is on the region’s contributions via policies affecting the agricultural sector, and, in particular, on the role of Asian governments in stabilizing the prices of food and other agricultural products.

Food price gyrations worry the poor even in high-income countries, but are especially important in low-income countries where poorer households spend most of their income on food. Upward spikes clearly hurt buyers of food, but downward spikes in the prices of farm products can also negatively affect a large proportion of households in developing countries, for which agriculture is a major source of employment and gross domestic product (GDP). National

This is a product of an ongoing World Bank research project on distortions to agricultural incentives, under the author’s leadership (www.worldbank.org/agdistortions). The author is grateful for the efforts of the nearly one hundred authors who provided country case studies for the agricultural distortions project; for computational assistance from a team of assistants led by Ernesto Valenzuela that brought together the global agricultural distortions database; for help with some of the graphs from Jayanthi Thennakoon; and for funding from various World Bank trust funds, particularly those provided by the governments of the Netherlands and the United Kingdom, as well as by ADBI. Views expressed are the author’s alone and not necessarily those of the World Bank or its executive directors.

Asia’s Role in Stabilizing Food and Agricultural Prices

Kym Anderson

Asia’s Role in Stabilizing Food and Agricultural Prices 51


policies that reduce the amplitude of domestic agricultural price fluctuations over time therefore help domestic consumers at the expense of the country’s farm households, or vice versa.

The policy instruments used for this purpose are typically the same as those used to alter the trend level of domestic agricultural prices, namely trade policy measures.1 When many national governments intervene with variable trade taxes or quantitative restrictions, the share of global production that is traded shrinks, making the international market “thinner” than it otherwise would be. This erodes the international public good that open national economies generate through trade, not only because the normal economic gains from trade are diminished, but also because an international market that is thinner for this reason is more volatile. This greater volatility entices even more governments to intervene to stabilize their domestic food markets, further increasing international price volatility. This is especially bad for the development of open agricultural-exporting economies, as history has shown that volatility in a country’s long-run trend terms of trade slows its economic growth (Williamson 2008). Such a beggar-thy-neighbor unilateral policy action generates an international public “bad,” suggesting there is scope for collaborative action.

Section 2 of this chapter looks at how large the fluctuations in real international food prices are, both absolutely and relative to those for other primary products, and how the price spike of 2008 compares with earlier spikes. Section 3 examines how much agriculture has lagged behind other sectors in expanding the extent to which its products are traded internationally in the latest wave of globalization, and how Asia compares with other regions in this respect. In Section 4, new evidence is presented on the impacts government policies have had on farmer incentives in Asia as compared with elsewhere, in terms of both long-term trends and fluctuations from year to year. The final section examines what can be done by governments in Asia and elsewhere, both unilaterally and collaboratively, to achieve more

1 These are occasionally supplemented with government storage initiatives, which are largely ineffective or too expensive, and so tend to be short-lived. Managing public food stockholdings is difficult because of uncertainty regarding the quantity of stocks needed and how much to release at any time. Stock mismanagement can even be destabilizing, as appears to have been the case in 2008, with some attempts to create or expand stocks when food prices were at their peak. Stocks are a large drain on the treasury, particularly when displacement of private stocks is taken into account. Their interaction with trade policies also needs to be carefully considered. If, for instance, farm output falls for a product protected only by an import tariff, sales from stocks will reduce imports but do nothing for the farmers whose output has fallen.


efficient and equitable outcomes in the future, while improving stability and growth and alleviating poverty.

2. The 2008 Commodity Price Hike in Historical Perspective

The international price of rice nearly trebled in the first few months of 2008, sending politicians, bureaucrats, and consumers into a panic. Some governments responded with restrictions on their exports of rice, which exacerbated the situation for rice-importing countries. Prices of other grains and oilseeds also rose rapidly, though none as much as for rice. As a result, the World Bank’s food price index in the second quarter of 2008 was 55% above its 2007 level in nominal United States (US) dollar terms. Figure 4.1 shows quarterly grain prices for the decade to mid-2008. In the second half of 2008, however, they—and most other primary commodity prices—roughly halved, again in nominal US dollars.

2.1 Drivers of the Recent Food Price Rise

Causes of this latest food price spike have been much debated (International Food Policy Research Institute [IFPRI] 2007; Mitchell 2008; Organisation for Economic Co-operation and Development [OECD] and Food and Agriculture Organization of the United Nations [FAO] 2008; Stoeckel 2008; Meyers and Meyer 2008). On the supply side, grain reserves had been run down over the first half of this decade in response to low prices so that, when crop failures occurred in some grain-exporting countries in 2006–2007, supplies could not be replenished until the following harvest.2 Meanwhile, the steady rise in petroleum prices—due in large part to the rapid growth of Asia’s emerging economies—and hence, also in urea fertilizer prices (Figure 4.2), added substantially to farmers’ costs, which dampened their incentive to expand output.

On the demand side, two sets of changes coincided. One was the impact of rapid income growth in Asia on the demand for high-protein foods, including meat and milk. This demand drove up the prices of these products, but also

2 In 2006, global grain reserves comprised less than one-quarter of annual consumption, compared with more than one-third during 1997–2001 (Stoeckel 2008). By 2007–2008, they accounted for only one-sixth (Meyers and Meyer 2008).


Figure 4.1: Nominal International Market Prices for Wheat, Rice, and Maize, 1988 to mid-2008 (current US$ per ton)

US$ = United States dollar.

Source: World Bank Commodity Price Data.

bbl = barrel , t = ton, US$ = United States dollar.

Source: World Bank (2008b).

Figure 4.2: Nominal International Market Prices for Crude Oil and Urea Fertilizer, October 2003–October 2008 (current US$)

Crude Oil, Average (US$/bbl)

Urea (US$/t)


those of feed grains and oilseeds.3 The other was an unanticipated government response to rising petroleum prices and concerns about carbon emissions from both the US and the European Union (EU), namely, the imposition of policies to subsidize domestic biofuel production through tax credits and the introduction of mandates on biofuel use. Those actions led to sudden increases in the demand for maize in the US and for rapeseed in the EU. Farmers in affected countries responded by growing those crops at the expense of others, thereby adding to the shortage of grains and oilseeds for food and animal feed demand (OECD 2008c). The weakening of the US dollar against the euro and other currencies also contributed to the rise in the nominal US-dollar price of commodities. Also, there was an increase in speculative holdings of commodities because the excess demand for assets from emerging economies (whose own financial sectors are underdeveloped) could not be met by financial assets in the US in the 12 months to mid-2008 (Caballero, Farhi, and Gourinchas 2008). That excess demand had driven down US interest rates, making it less unprofitable to hold commodities (Frankel 2008). Panic buying and hoarding by Asian rice consumers increased the magnitude of the rice price spike in the second quarter of 2008.

A consensus on the relative contributions to the food price hike of these various factors—and of the food export restrictions instituted by many food-surplus developing countries during 2008—has yet to emerge. According to Mitchell (2008), higher energy prices and related increases in farm production costs, combined with the weakening of the US dollar, may have contributed about one-quarter of the rise in food prices between 2002 and early 2008. In addition, biofuel subsidies (themselves partly a response to high petroleum prices and growing concerns about energy security) may be responsible for much of the rest. In the case of rice, export restrictions are reported to have caused its price rise by as much as one-quarter (Meyers and Meyer 2008).

Mitchell’s analysis implies that the dramatic fall—by more than two-thirds—of the US-dollar price of oil in the four months to early December 2008 was a contributor to the halving of the prices of numerous agricultural products over that period, as was the easing/removal of temporary food export restrictions. Whether those food prices will return to and remain at the relatively low levels of earlier this decade, however, depends heavily on whether biofuel tax credits and mandates persist in the US and EU. Projections published

3 The volume of oilseed use in the People’s Republic of China (PRC) doubled in the decade to 2007–2008 (Meyers and Meyer 2008).


before mid-2008 by IFPRI (2007) suggest that by 2050, real international food prices will be 30–80% higher than in 1999–2001 unless farm productivity growth accelerates substantially. The OECD and FAO (2008) projections are not quite as dramatic, but they suggest nominal food prices will rise and real prices will fall much less than in previous decades. The agencies stress, however, that their price projections would be much less positive if biofuel subsidies (via tax credits) and mandates were to be reduced or abandoned (OECD 2008c; FAO 2008).

2.2 Relative Magnitude of the Recent Food Price Rise

Large and sudden as the latest food price shock has been, it was not unprecedented. Using the price of manufactured exports to developing countries from the five largest high-income countries as a deflator, the World Bank has compiled an index of real international prices since 1900 for food products important for developing countries (Grilli and Yang 1988, updated by Pfaffenzeller, Newbolt, and Rayner 2007). During the 20th century, the real food price index fell at 0.75% per year. Most of the decline, however, was in the second half of the century, and for the 60 years since 1948 the annual rate of decline was twice as rapid, at 1.5%. During that post-World War II period the index spiked above trend six times, or an average of once per decade. It is clear from Figure 4.3 that the 1973–1974 spike was much larger than the estimate depicted for 2008, but nonetheless, the price rise in 2008 was the next largest in proportional terms. The 1973–1974 event was partly associated with the four-fold rise in the price of oil that resulted when the

Figure 4.3: Real International Food Price Index, 1948–2008 (1977–1979 = 100)

Sources: Author’s compilation using data from Pfaffenzeller, Newbolt, and Rayner (2007), updated from 2004 with data from World Bank (2008b).

Real

Foo

d Pr

ice

Inde

x


Organization of Petroleum Exporting Countries (OPEC) unilaterally imposed production quotas. However, it was mostly due to the Soviet Union departing from its policy of self-reliance and entering the international grain market in a significant and unanticipated way to offset a domestic shortfall (Johnson 1975; Morgan 1979).

The other point to note from Figure 4.3 is that in each of the six previous cases, the price rise was followed very shortly by an equally sharp fall. The fall in food prices in the second half of 2008 was thus also not unprecedented, although its suddenness and severity may have been exacerbated by the cessation of economic growth brought on by the global financial crisis of 2008.

In Figure 4.4, the annual movements in food prices since 1960 are shown alongside those for energy, minerals and metals, and other primary products, all of them deflated by the same price index for manufactures. Energy price rises since the early 1970s have been driven largely by the OPEC cartel’s production quotas, which have not expanded as fast as global demand. Fluctuations in the prices of minerals and metals have primarily been demand-driven, as has the price of timber, which is weighted at 44% in the index for other primary products (the rest being non-food agricultural and so also subject to farm policy interventions).

It is conceivable that weather-related supply shocks could contribute to price fluctuations for food and other agricultural products, but vast differences in unseasonable weather around the world mean its influence on international prices would be minor if each national market was fully integrated with the rest of the world. Indeed, Johnson (1975) estimated that had free trade in grain been in place in the mid-1970s, prices would have been so much less variable—because trade would mitigate local supply variability—that only negligible quantities of carryover and/or storage would have been profitable. A subsequent study of global food trade provided complementary results. Using a stochastic model of world markets for grains, livestock products, and sugar, Tyers and Anderson (1992) found that the instability of international food prices in the early 1980s was three times greater than it would have been had there been free trade in those products. This suggests that the relatively high volatility in international food markets is caused by the thinness of those markets, which, in turn, is due to the use of variable trade policy instruments to insulate domestic food markets from fluctuations abroad.

Market thinness is also linked to another common characteristic of agricultural trade policies: their use to alter the trend level of domestic prices of farm products. Should these policies have an anti-trade bias, they would


Figure 4.4: Real International Price Index, Food, Energy, Minerals and Metals, and Other Primary Products, 1920–2007 (1977–1979 = 100)

Source: Author’s compilation using data from World Bank (2008b).

Food

Energy

Minerals and Metals

Other Primary Products


also contribute to making the international market thinner, and hence, more volatile. As discussed below, the stronger a country’s agricultural comparative advantage (disadvantage), the more its government tends to keep domestic prices below (above) the trend level in the international market, and, within the farm sector, to bias assistance toward import-competing farm industries at the expense of export industries.

Before addressing recent evidence for intra- and inter-country anti-trade bias in government intervention in agricultural markets, this chapter will review trends in the international tradability of agricultural versus other products.

3. Trends in Tradability of Agricultural Products

Globalization forces have greatly lowered the cost of doing business across national borders. During the past quarter century, these forces have included the information and communications technology revolutions, as well as technical changes in transport, such as bulk carriers and the containerization of ocean shipping. Policy changes, such as the deregulation of airline and other services, and the phasing down of manufacturing tariffs, have also significantly lowered trade costs, for example, by allowing ever-greater fragmentation of production of goods and services, and outsourcing abroad. As a result, international trade has expanded much faster than global production. Between 1974 and 2007, real GDP grew at 2.9%, while the real value of international trade grew at 5.0% (World Trade Organization [WTO] 2008).

In agriculture, by contrast, there has been relatively little growth in the propensity to trade. For developing countries, the share of farm production traded has remained approximately 8% since the early 1960s, and for high-income countries it has grown, mainly within the EU and within North American Free Trade Agreement (NAFTA) countries. Even including that intra-bloc trade, the share of farm production exported globally has risen only modestly over the past five decades, from 11% to 16%, and has remained at 4% or 5% in Asia (Table 4.1).

It is certainly more difficult to break up the production process into component parts in agriculture than it is in manufacturing, but that is likely only a small part of the explanation for relatively low farm trade growth. A more likely explanation is the persistence of government intervention in agricultural markets, especially when such intervention includes an insulating component or an anti-trade bias. To explore that possibility, the next section


Table 4.1: Export Orientation, Import Dependence, and Self-Sufficiency in Primary Agricultural Production, Major Regions of the World,a 1961–2004 (percent at undistorted prices)

a. Exports as Share of Production1961–1964 1970–1974 1980–1984 1990–1994 2000–2004

Africa 19 17 12 7 8Asia 5 4 4 6 5Latin America 24 27 16 16 27Western Europe 13 16 27 37 43United States and Canada 14 14 20 20 21Australia and New Zealand 41 35 44 43 48Japan 1 2 1 0 1

All countries 11 11 13 16 16 Developing countries 8 8 7 8 8 High-income countries 14 15 22 26 29

b. Imports as Share of Apparent Consumption1961–1964 1970–1974 1980–1984 1990–1994 2000–2004

Africa 2 2 5 4 4Asia 4 4 8 16 14Latin America 2 4 7 10 17Western Europe 32 28 34 41 46United States and Canada 4 4 5 9 12Australia and New Zealand 3 2 3 5 6Japan 23 24 24 26 27


c. Self-Sufficiency Ratio1961–1964 1970–1974 1980–1984 1990–1994 2000–2004

Africa 120 117 107 104 105Asia 102 100 96 89 91

PRC 99 100 98 101 98India 98 99 99 100 100

Latin America 129 132 110 107 114Western Europe 78 85 90 94 94United States and Canada 111 112 119 114 111Australia and New Zealand 165 151 174 170 183Japan 78 78 77 74 74


EU = European Union, FAO = Food and Agriculture Organization of the United Nations, NAFTA = North American Free Trade Agreement, PRC = People’s Republic of China.

Note: a Includes intra-EU (and intra-NAFTA) trade.

Source: Anderson (forthcoming) using estimates of total agricultural production valued at undistorted prices and the FAO’s total agricultural trade value data.


summarizes the findings of a new set of estimates of distortions to agricultural incentives over the past half-century.

4. Estimates of Distortions to Agricultural Incentives

A study completed two decades ago showed that developing economies had been heavily taxing their agricultural sectors, both directly and indirectly, by protecting manufacturing from import competition and overvalued exchange rates (Krueger, Schiff, and Valdés 1988, 1991). The main exceptions seemed to be the Republic of Korea and Taipei,China, which, like Japan some decades earlier, had switched from taxing to providing financial assistance to their farmers, and were steadily raising that assistance as per capita income and agricultural comparative disadvantage rose in the course of their rapid economic growth (Anderson and Hayami 1986). Since the mid-1980s, however, great progress has been made by many developing countries in reducing their earlier anti-farm policy bias. Indeed, these changes have been transformational in the People’s Republic of China (PRC) and, to a lesser extent, in India.

To better understand the nature and extent of this reform process, a new World Bank research project has revisited this issue, extending the earlier estimates of distortions to the present decade, and expanding the sample to examine similar trends in other parts of Asia, as well as in Africa, the Americas, and Europe. In all, estimates are now available for 75 countries—comprising 90% of global agriculture (and 95% of Asia’s economy)—and for as many years as possible over the past five decades (Anderson and Valenzuela 2008).

A key driver of the rapid growth and industrialization of Asia has been the decision by many countries in the region to become more open and to transition from import-substituting development strategies to those that are export oriented. With export-led growth has come a dramatic restructuring of Asia’s economies away from agriculture and toward manufacturing and service activities. For developing Asia as a whole, agriculture now accounts for less than one-eighth of GDP (down from more than one-third in the late 1960s), industry has risen from 27% to 38%, and services from 35% to 49%. The apparent decline in agricultural comparative advantage in developing Asia is evident in the self-sufficiency data for primary farm products. Until 30 years ago the region was nearly 100% self-sufficient in farm products, but since then that indicator has declined to less than 85%. The share of farm production exported has not changed significantly, averaging in the 4–6% range


(although there have been substantial changes in some individual countries, with declines in Malaysia; Philippines; Sri Lanka; and Taipei,China offset by increases in countries such as Viet Nam, Thailand, and PRC). By contrast, since the late 1970s, the share of imports in domestic consumption of farm products has quadrupled, to roughly 20% (Table 4.1).

The increasing dependence on imports of farm products in Asia has occurred despite lower taxes on agricultural exports and greater incentives provided to farmers via government policy reforms. Before presenting those results, it is necessary to briefly summarize the methodology used to generate these new indicators of distortions (details of which are available in Anderson et al. 2008).

4.1 Methodology for Measuring Price Distortions

The nominal rate of assistance (NRA) is the key indicator used. It is defined as the percentage by which government policies have raised gross returns to farmers above what they would be without the government’s intervention (or lowered them, if NRA<0).4 If a trade measure is the sole source of government intervention, then the measured NRA will also be the consumer tax equivalent (CTE) rate at that same point in the value chain. When domestic producer or consumer taxes or subsidies also exist, however, the NRA and CTE will not be equal, and at least one of them will differ from the price distortion at the border due to trade measures. Both are expressed as a percentage of the undistorted price (unlike the producer and consumer support estimates computed by the OECD [2008a], which are expressed as a percentage of the distorted price).

Each industry is classified as import-competing, as a producer of exportables, or as producing a nontradable (with its status sometimes changing over the years), so as to generate for each year the weighted average NRAs for the two different groups of tradables. Those NRAs are used to generate a trade bias index (TBI), defined as:

(1) TBI = (1+NRAagx/100)/(1+NRAagm/100) -1,

4 In most countries, distortions to farm inputs are very small compared with distortions to farm output prices. Where there are significant product-specific distortions to input costs, however, they are captured by estimating their equivalence in terms of a higher output price. This figure is then included in the NRA for individual agricultural industries wherever data allow. Any non-product-specific distortions, including distortions to farm input prices, are also added into the estimate for the overall sectoral NRA for agriculture as a whole.


where NRAagm and NRAagx are the average percentage NRAs for the import-competing and exportable parts of the agricultural sector. The TBI indicates in a single number the extent to which the typically anti-trade bias (negative TBI) in agricultural policies changes over time.

The coverage of products for NRA estimates averages between two-thirds and three-quarters of the gross value of Asian farm production at undistorted prices. Authors of the country case studies also provide “guesstimates” of the NRAs for non-covered farm products. Weighted averages for all agricultural products are then generated, using the gross values of production at unassisted prices as weights. For countries that also provide non-product-specific agricultural subsidies or taxes (assumed to be shared on a pro-rata basis between tradables and nontradables), such net assistance is then added to product-specific assistance to calculate an NRA for total agriculture (and also for tradable agricultural products).

Farmers are not only affected by the prices of their own outputs, but also by the incentives non-agricultural producers face. That is, it is relative prices, and hence, relative rates of government assistance that affect producer incentives. More than seventy years ago Lerner (1936) published his symmetry theorem that proved that in a two-sector economy, an import tax has the same effect as an export tax. This also applies to a model that includes a third sector producing only nontradables, or to a model with imperfect competition, and applies regardless of the economy’s size (Vousden 1990). If one assumes there are no distortions in the market for nontradables and that the value shares of agricultural and non-agricultural, non-tradable products remain constant, then the economy-wide effect of distortions to agricultural incentives can be captured by the extent to which the tradable parts of agricultural production are assisted or taxed relative to producers of non-farm tradables. By generating estimates of the average NRA for non-agricultural tradables, it is then possible to calculate a relative rate of assistance (RRA), defined in percentage terms as:

(2) RRA = 100[(1+NRAagt/100)/(1+NRAnonagt/100) -1],

where NRAagt and NRAnonagt are the weighted average percentage NRAs for the tradable parts of the agricultural and non-agricultural sectors, respectively. Since the NRA cannot be less than -100% if producers are to earn anything, neither can the RRA (assuming NRAnonagt is positive). If both of those sectors are equally assisted, the RRA is zero. This measure is useful in that if it is below


(above) zero, it provides an internationally comparable indication of the extent to which a country’s policy regime has an anti- (pro-) agricultural bias.

In calculating the NRA for producers of agricultural and non-agricultural tradables, our approach sought to include distortions generated by dual or multiple exchange rates. Such direct interventions in the market for foreign currency were common in some Asian countries in the 1970s and 1980s, including the PRC. However, as the authors of some of the focus country studies had difficulty finding an appropriate estimate of the extent of that distortion, its impact on NRAs has not been included in all cases. Its exclusion from the figures for some countries (e.g., India) means their estimated (typically) positive NRAs for importables and (typically) negative NRAs for exportables are smaller than they should be. This may also have led to an underestimation of the (anti-)TBI. Moreover, in cases where the NRA for importables dominated that for exportables, this omission may have led to an underestimation of the average (positive) NRA for such tradables.

NRAs and CTEs are useful as distortion measures in national or global economy-wide computable general equilibrium models to estimate the trade, economic welfare, and other effects of government interventions. They are not ideal as trade or welfare indicators on their own, however, because of possible offsets. For example, if a country has positive NRAs for its import-competing farm industries but negative NRAs for its export industries, the weighted-average NRA for the sector might be close to zero, whereas the trade and welfare effects of those two subsectors’ distortions are additive. That is, their total effect on trade or welfare is greater than the two individual sets of effects, not less than, as implied when their NRAs are averaged. The same is true when averaging NRAs across countries if the sample includes countries with both positive and negative average NRAs. To overcome this averaging problem, Lloyd, Croser, and Anderson (2009) devised more-satisfactory indexes for capturing distortions to agricultural incentives, drawing on the trade restrictiveness index literature developed by Anderson and Neary (summarized in their 2005 book) and the theoretical simplifications made by Feenstra (1995) and Lloyd (2007, 2008).

To capture specifically the distortions imposed by each country’s border and domestic policies on its economic welfare and trade volume, Lloyd, Croser, and Anderson defined measures they called the Welfare Reduction Index (WRI) and the Trade Reduction Index (TRI). The WRI (or TRI) has the advantage of providing a theoretically sound indicator of the welfare (or trade) effect of a single sectoral measure that is comparable across time and place. That


measure provides an estimate of the common trade tax across all agricultural products that would generate the same welfare cost (or same reduction in trade) as that generated by the actual structure of NRAs and CTEs in a country. In this way, the WRI and TRI are better able to approximate what a computable general equilibrium model can provide in the way of estimates of the trade and welfare (and other) effects of the price distortions captured by the NRA and CTE estimates for a given product—and have the advantage of being able to indicate trends over time.

4.2 Estimates of NRAs, RRAs, CTEs, WRIs, and TRIs

First, estimates of NRAs to agriculture will be compared with nominal rates for non-agricultural tradables in Asia and with similar rates for other regions. Then, estimates from the WRI and TRI will be provided, again reporting those for other regions for comparison.

Nominal Rates of Assistance to AgricultureFrom the mid-1950s to the early 1980s, agricultural price and trade policies reduced the earnings of farmers in developing Asia—on average by more than 20%. Implicit taxation declined from the early 1980s, however, and from the mid-1990s, the NRA switched sign and became increasingly positive. That average NRA hides considerable diversity within the region, however. Nominal assistance to farmers in the Republic of Korea and Taipei,China was positive from the early 1960s (although very small initially, compared with the 40+% in Japan at that time). Indonesia’s NRA was only slightly above zero in some years in the 1970s and 1980s (as was Pakistan’s prior to Bangladesh becoming an independent country in 1971). Average NRAs in India and the Philippines were positive from the 1980s (Table 4.2).5

This trend also holds for the vast majority of commodity NRAs in the region, with meat and milk the only products to have seen their assistance rates cut over that period. As is true for other regions of the world, assistance is among the highest for “rice pudding” products: sugar, milk, and rice. Even for those

5 Note that in the tables and figures to follow, it has been assumed that NRAs for the PRC pre-1981 and for India pre-1965 are the same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that the gross value of production in those missing years is that which gives the same average share of value of production in total world production in 1981–1984 and 1965–1969, respectively. This NRA assumption is conservative, in the sense that for both countries the average NRA was probably even lower (more negative) in earlier years.


Table 4.2: Nominal Rates of Assistance to Agriculture,a Asian-Focus Economies, 1955–2004b (percent)

1955–1959

1960–1964

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

Japan 38.8 45.8 50.4 46.9 65.9 68.3 116.6 115.8 118.6 119.8

Northeast Asia -42.8 -42.6 -41.7 -41.2 -39.5 -38.2 -25.7 -1.7 14.4 11.9

Republic of Korea -3.2 4.0 13.4 35.7 56.3 89.4 126.1 152.8 129.8 137.3

Taipei,China -12.0 3.6 3.0 9.3 7.1 14.9 27.1 38.1 46.4 61.3

PRCb -45.2 -45.2 -45.2 -45.2 -45.2 -45.2 -35.5 -14.3 6.6 5.9

Southeast Asia na -6.8 5.9 -8.8 0.0 4.6 -0.4 -4.2 0.0 11.1

Indonesia na na na -2.6 9.3 9.2 -1.7 -6.6 -8.6 12.0

Malaysia na -7.2 -7.5 -9.0 -13.0 -4.6 1.3 2.3 -0.2 1.2

Philippines na -5.3 14.4 -5.1 -7.1 -1.0 18.7 18.5 32.9 22.0

Thailand na na na -20.3 -14.0 -2.0 -6.2 -5.7 1.7 -0.2

Viet Nam na na na na na na -13.9 -25.4 0.6 21.2

South Asia 0.0 -0.5 0.6 0.4 -5.5 0.6 20.9 0.7 0.2 13.6

Bangladesh na na na -16.0 1.4 -3.3 11.7 -1.5 -5.2 2.7

Indiab 0.1 0.1 0.1 0.2 -5.6 1.9 24.9 1.8 0.7 15.8

Pakistan na -0.7 15.3 6.8 -8.5 -6.4 -4.0 -6.9 -1.6 1.2

Sri Lanka -2.3 -22.8 -24.5 -16.3 -25.5 -13.5 -9.9 -1.2 12.2 9.5

Asian dev economiesa -27.3 -26.7 -25.1 -25.3 -23.8 -20.6 -9.0 -2.0 7.5 12.0

Av. dispersionc 39 37 56 42 48 51 67 56 56 64

na = data unavailable, NRA = nominal rate of assistance, PRC = People’s Republic of China.

Notes: a Weighted average includes product-specific input distortions and non-product-specific assistance as well

as authors’ guesstimates for non-covered farm products, with weights based on gross value of agricultural production at undistorted prices.

b Estimates for the PRC pre-1981 and India pre-1965 assume the NRAs to agriculture in those years were the same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that the gross value of production in those missing years is that which gives the same average share of value of production in total world production in 1981–1984 and 1965–1969, respectively. This set of assumptions is conservative in the sense that for both countries the average NRA was probably even lower (more negative) in earlier years.

c Simple average across countries of the standard deviation of product NRAs around the weighted mean for each country each year.

Sources: Calculated from Anderson and Valenzuela (2008), which draws on national estimates reported in Anderson and Martin (2009).


three products, however, there is great diversity in NRAs across countries, with five-year averages ranging from almost zero to as much as 400% for rice and 140% for milk in the Republic of Korea, and to 230% for sugar in Bangladesh. There is also a great deal of NRA diversity across commodities within each Asian economy’s farm sector, and the range (as measured by the standard deviation) has grown rather than diminished over the past five decades, from a regional average of less than 40% in the early years of the period being studied, to more than 55% in recent years. This suggests that there is still much that could be gained from improved resource reallocation, both between Asian economies and within the agricultural sector of individual Asian economies, if differences in rates of assistance were reduced.

A striking feature of the distortion pattern within the farm sector is its strong anti-trade bias. This is evident from Figure 4.5, which depicts the average NRAs for agriculture’s import-competing and export subsectors for the region. The former’s average is always positive and its trend is upward-sloping, whereas the average NRA for exportables is negative and did not diminish until the 1980s, after which it gradually approached zero. Since the 1980s, the gap between the NRAs for those two subsectors has diminished somewhat for the region as a whole, with several countries (Malaysia, Thailand, Pakistan, and Sri Lanka) contributing to that trend.

Assistance to Non-farm Sectors and Relative Rates of AssistanceThe anti-agricultural policy biases of the past were not solely due to agricultural policies. Also important to changes in incentives affecting intersectorally mobile resources has been the significant reduction in border protection for the manufacturing sector (which has been the dominant intervention for non-agricultural tradables). Reduced assistance to producers of non-farm tradables has had a greater positive impact on farmer incentives than has reduced direct taxation of agricultural industries.

It has not been possible to quantify the distortions to non-farm tradable sectors as carefully as for agriculture. Authors of the country case studies typically relied on applied trade taxes (for exports as well as imports) rather than being able to undertake price comparisons, and hence most of the studies do not capture the quantitative restrictions on trade that were important in earlier decades, but have become decreasingly so in recent times. The case studies were also unable to capture distortions in the services sectors, some of which now produce tradables (or would in the absence of interventions preventing their emergence). As a result, the estimated NRAs for non-farm importables are


smaller and decline less rapidly than in fact was the case—this also holds true for non-farm exportables, with the exception that in some cases their NRAs would have been negative, bearing in mind the anti-trade bias in the dual exchange rate systems that operated in the PRC and elsewhere. Of these two elements of underestimation, the former bias dominates, so the authors’ estimates of the overall NRA for non-agricultural tradables should be considered to be on the conservative end. The underestimation becomes greater further back in time, such that the NRA’s decline appears to be less rapid than it is in actuality.

Despite the likely underestimation, NRA estimates for non-farm tradables prior to the 1990s are very sizeable. For Asia as a whole, the average NRA value has declined steadily throughout the past four or five decades as policy reforms have spread. This has contributed to a decline in the estimated negative RRA

Figure 4.5: Nominal Rates of Assistance to Exportable, Import-Competing, and Alla Agricultural Products, Asian Developing Economies,b 1955–2004 (percent, weighted averages across 12 developing economies)

NRA = nominal rate of assistance, PRC = People’s Republic of China.

Notes: a The total NRA can be above or below the exportable and importable averages because assistance to

nontradables and non-product specific assistance is also included.b The exportables, import-competing, and total estimates are based on PRC pre-1981 and India pre-1965 values

estimated on the assumption that the nominal rate of assistance to agriculture in those years was the same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that the gross value of production in those missing years is that which gives the same average share of value of production in total world production in 1981–1984 and 1965–1969, respectively.



for farmers. The weighted average RRA was less than -50% up to the early 1970s but improved to an average of -32% in the 1980s, -9% in the 1990s, and is now positive, averaging 7% in 2000–2004. Five-decade trends in RRAs and their two component NRAs for each economy are reported in Table 4.3. It is even clearer from Figure 4.6 that falling positive NRAs for non-farm producers have contributed even more to the rise of the RRA in Asia than has the gradual reduction in negative NRAs for farmers due to agricultural policy reforms.

Has the location of production of farm products within and between Asian countries become more or less efficient as a result of policy changes over the past five decades? A global computable general equilibrium model with a time series of databases is needed to fully answer this question. In the absence of such a model, one crude method of addressing the question involves examining

Figure 4.6: Nominal Rates of Assistance to Agricultural and Non-agricultural Tradable Products and Relative Rate of Assistance,a Asia Developing Economies,b 1955–2004 (percent, weighted averages across 12 economies)

NRA = nominal rate of assistance, RRA = relative rate of assistance.

Notes: a The RRA is defined as 100*[(100+NRAagt)/(100+NRAnonagt)-1], where NRAagt and NRAnonagt are the

percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively.b The exportables, import-competing, and total estimates are based on PRC pre-1981 and India pre-1965 values

estimated on the assumption that the nominal rate of assistance to agriculture in those years was the same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that the gross value of production in those missing years is that which gives the same average share of value of production in total world production in 1981–1984 and 1965–1969, respectively.



Table 4.3: Relative Rates of Assistance (RRA) to Agriculture,a Asian-Focus Economies, 1955–2004 (percent)

1955–1959

1960–1964

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

Japan

NRA Ag. 37.2 44.5 50.4 47.3 70.8 67.0 127.7 129.7 133.4 133.6

NRA Non-Ag. 2.5 3.9 3.8 2.8 1.6 1.1 1.3 1.1 0.8 0.7

RRA 33.9 39.1 44.9 43.3 68.1 65.2 124.8 127.1 131.4 132.1

Northeast Asia

NRA Ag. -43.1 -42.5 -42.2 -41.3 -40.0 -18.4 -26.2 -1.7 14.7 12.0

NRA Non-Ag. 40.9 40.8 40.0 39.7 39.4 71.1 18.8 15.0 6.8 3.3

RRA -58.2 -57.7 -56.6 -55.7 -53.7 -51.9 -38.0 -14.2 7.4 8.5

Republic of Korea

NRA Ag. -3.3 4.9 16.3 46.1 71.8 118.6 159.8 197.6 164.8 171.9

NRA Non-Ag. 45.6 37.1 22.3 11.4 11.7 6.8 5.7 3.3 2.3 1.7

RRA -32.6 -21.4 -4.8 30.5 53.9 104.8 145.9 188.2 158.8 167.3

Taipei,China b

NRA Ag. -15.8 4.7 3.9 12.0 8.9 18.7 33.8 46.3 54.9 70.9

NRA Non-Ag. 8.8 9.3 8.8 7.5 7.0 5.2 4.5 2.6 1.8 1.0

RRA -22.5 -4.2 -4.5 4.2 1.7 12.9 28.0 42.5 52.2 69.0

PRC b

NRA Ag. -45.2 -45.2 -45.2 -45.2 -45.2 -45.2 -35.5 -14.3 6.6 5.9

NRA Non-Ag. 41.6 41.6 41.6 41.6 41.6 41.6 28.3 24.9 9.9 5.0

RRA -60.5 -60.5 -60.5 -60.5 -60.5 -60.5 -49.9 -31.1 -3.0 0.9

Southeast Asia

NRA Ag. na -5.8 5.6 -10.2 0.1 4.9 -0.9 -4.7 0.0 12.1

NRA Non-Ag. na 11.5 15.4 20.2 22.0 21.1 18.0 11.5 8.2 8.1

RRA na -15.5 -8.5 -25.3 -18.0 -13.4 -16.1 -14.5 -7.7 3.7

Indonesia

NRA Ag. na na na -3.8 10.4 10.5 -1.9 -7.5 -9.7 13.9

NRA Non-Ag. na na na 27.7 27.7 27.7 26.5 17.6 10.6 8.1

RRA na na na -24.7 -13.6 -13.5 -22.5 -21.3 -18.3 5.4

Malaysia

NRA Ag. na -7.6 -7.9 -9.4 -13.7 -4.9 1.4 2.6 -0.2 1.5

NRA Non-Ag. na 7.4 7.0 7.1 6.5 5.2 3.9 2.8 2.0 0.9

RRA na -14.0 -13.9 -15.5 -18.9 -9.6 -2.4 -0.3 -2.2 0.6

Philippines

NRA Ag. na -1.7 14.3 -6.0 -7.2 -4.0 15.8 16.7 35.7 23.5

NRA Non-Ag. na 19.0 20.3 16.3 16.3 12.9 11.0 9.9 8.6 6.4

RRA na -17.4 -5.0 -19.8 -20.3 -14.9 4.3 6.1 24.9 15.9

Thailand

NRA Ag. na na na -23.1 -15.9 -2.3 -6.9 -6.4 1.8 -0.2

NRA Non-Ag. na na na 16.1 16.0 14.2 11.1 10.0 8.9 7.8

RRA na na na -33.7 -27.5 -14.4 -16.3 -14.9 -6.5 -7.4


1955–1959

1960–1964

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

Viet Nam b

NRA Ag. na na na na na na -15.9 -26.4 0.0 20.7

NRA Non-Ag. na na na na na na 4.3 -11.2 1.5 20.8

RRA na na na na na na -19.2 -17.4 -1.3 0.0

South Asia

NRA Ag. 4.7 3.9 4.4 9.7 -7.7 1.8 47.1 0.2 -2.4 12.7

NRA Non-Ag. 112.7 115.5 143.1 81.7 57.8 54.6 39.9 18.6 15.0 10.1

RRA -56.2 -56.8 -57.0 -39.8 -41.6 -33.3 5.1 -15.5 -14.9 3.4

Bangladesh

NRA Ag. na na na na 3.1 -3.9 17.5 -2.4 -8.0 4.0

NRA Non-Ag. na na na na 28.4 22.4 28.5 33.3 29.0 23.4

RRA na na na na -19.7 -21.5 -8.6 -26.7 -28.6 -15.8

India b

NRA Ag. 5.2 5.2 5.2 12.6 -7.4 4.1 67.5 2.0 -2.3 15.4

NRA Non-Ag. 113.0 113.0 113.0 83.1 64.8 59.3 48.6 15.9 12.6 5.2

RRA -56.3 -56.3 -56.3 -38.3 -43.8 -33.5 11.7 -12.1 -12.9 12.5

Pakistan b

NRA Ag. na -1.0 21.7 9.3 -11.8 -9.3 -5.9 -10.2 -2.6 1.5

NRA Non-Ag. na 169.7 224.5 146.7 44.0 48.3 45.1 39.3 27.0 14.6

RRA na -63.8 -62.4 -55.9 -38.6 -38.6 -35.1 -35.2 -23.0 -11.5

Sri Lanka

NRA Ag. -2.7 -25.7 -27.6 -18.5 -29.0 -15.4 -11.2 -1.3 14.0 10.8

NRA Non-Ag. 104.9 124.6 138.4 70.7 52.9 57.1 59.0 47.1 36.4 22.9

RRA -52.5 -66.6 -68.0 -51.6 -53.5 -46.2 -44.3 -32.9 -16.3 -9.8

Asian Developing Economiesc

NRA Ag. -29.0 -27.7 -26.9 -24.3 -31.3 -18.8 -11.2 -2.6 7.5 11.7

NRA Non-Ag. 66.8 67.1 70.9 50.3 50.3 38.3 15.4 14.9 9.6 4.3

RRA -57.5 -56.4 -55.3 -47.9 -44.7 -40.8 -22.8 -15.2 -1.9 7.1

Dispersion of national RRAsd 21.9 30.7 36.2 37.6 41.5 51.9 56.0 65.1 50.5 50.8

na = data unavailable, NRA = nominal rate of assistance, PRC = People’s Republic of China.

Notes: a The RRA is defined as 100*[(100+NRAagt)/(100+NRAnonagt)-1], where NRAagt and NRAnonagt are the

percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively.b Estimates for the PRC pre-1981 and India pre-1965 are based on the assumption that the nominal rates of

assistance to agriculture in those years was the same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that the gross value of production in those missing years is that which gives the same average share of value of production in total world production in 1981–1984 and 1965–1969, respectively. This NRA assumption is conservative in the sense that for both countries the average NRA was probably even lower in earlier years, according to the authors of those country case studies.

c Weighted averages of the above national averages, using weights based on gross value of national agricultural production at undistorted prices.

d Simple average of the standard deviation around a weighted mean of the national RRAs for the region each year.



the standard deviation in RRAs across the economies of the region over time. This suggests that distortions have become more dispersed across countries over time. The dispersion averaged 35% in 1960–1974, 50% in 1975–1989, and 55% in 1990–2004 (Table 4.3, bottom row).

Of the striking changes in the RRAs in individual economies over the past two decades, it is the move from negative to positive RRAs in the PRC and India that matter most for the region and, indeed, for the world. The extent of the decline in non-agricultural NRAs since the early 1980s is very similar in these two key countries. However, their agricultural NRAs have differed. In the PRC, the five-year averages have risen steadily from -45% to 6%. In India, they have remained close to zero, with the exception of an upward spike when international food prices collapsed in the mid-1980s and a rise in the present decade (Figure 4.7).

This dramatic rise in the RRAs for the world’s two most populous countries is significant for those studying the causes of the recent international food price increases. One of the contributors to these increases is said to be the growing appetite for food imports in these two countries as they industrialize and their per capita incomes rise. Yet, as Table 4.1 shows, both countries have remained close to self-sufficient in agricultural products over the past four decades. The steady rise in their RRAs has undoubtedly contributed to this capacity to remain self-sufficient. The rise in RRAs may also have helped ensure that in the PRC, the trend in the ratio of urban to rural mean incomes (adjusted for cost of living differences) has remained flat since 1980 (Ravallion and Chen 2007). At the same time, rising RRAs in India have meant that the Gini coefficient has changed very little between 1984 and 2004 (World Bank 2008a). A major issue, which will be addressed at the end of the chapter, is: Will their RRAs remain at the current neutral level of close to zero, or will they continue to rise in the same way as observed in the Republic of Korea and Taipei, China and, before them, in Japan?

Comparisons with Assistance Rates in Other RegionsThe regional upward shift in agricultural RRAs and NRAs toward zero, and even the recent move to positive numbers, is not unique to Asia. Figure 4.8 shows that similar trends, albeit less steep, have resulted from policy reforms in other developing-country regions over the past four decades. This suggests that similar political economy trends might be at work as economies develop. In the past, it has been found that agricultural RRAs and NRAs are positively correlated with per capita incomes and agricultural comparative disadvantage


(Anderson 1994, 1995). A glance at Tables 4.2 and 4.3 suggests that Asian economies have been—and continue to be—contributors to that trend. This is confirmed statistically in the multiple regressions with country and time fixed effects shown in Table 4.4.

Figure 4.7: Nominal and Relative Rates of Assistance, PRC, and India, 1965–2005 (percent)

India

PRC

NRA = nominal rate of assistance, PRC = People’s Republic of China, RRA = relative rate of assistance.



Figure 4.8: Nominal and Relative Rates of Assistance,a Asian, African, and Latin American Regions, 1965–2004b (percent)

NRA

RRA

LAC = Latin American countries, NRA = nominal rate of assistance, PRC = People’s Republic of China, RRA = relative rate of assistance.

Notes: a Five-year weighted averages with value of production at undistorted prices as weights.b Estimates for the PRC pre-1981 and India pre-1965 are based on the assumption that the NRAs to agriculture

and national share or regional agricultural production in those years were the same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively.

Sources: Calculated from Anderson and Valenzuela (2008), which draws on national estimates reported in Anderson and Masters (2009), Anderson and Martin (2009), and Anderson and Valdés (2008).


Table 4.4: Relationships between Nominal Rates of Assistance to Farm Products and some of their Determinants, Asian Developing Economies, 1960–2004

Explanatory variables:c (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Ln GDP Per Capita

-0.28*(-0.03)

-0.21*(-0.03)

-0.23*(-0.03)

-0.22*(-0.03)

-0.11(-0.05)

-0.06(-0.05)

-0.14(-0.06)

-0.16*(-0.06)

-0.38*(-0.10)

-0.28*(-0.9)

-0.44*(-0.10)

-0.38*(-0.11)

Ln GDP Per Capita Squared

0.23*(-0.02)

0.20*(-0.01)

0.21*(-0.01)

0.21*(-0.01)

0.19*(-0.02)

0.15*(-0.02)

0.21*(-0.03)

0.18*(-0.02)

0.23*(-0.03)

0.19*(-0.02)

0.22*(-0.03)

0.21*(-0.03)

Importable 0.33*(-0.04)

0.34*(-0.04)

0.32*(-0.04)

0.40*(-0.04)

0.41*(-0.04)

0.40*(-0.04)

0.39*(-0.04)

0.39*(-0.04)

0.39*(-0.04)

Exportable -0.13(-0.04)

-0.12(-0.04)

-0.14(-0.04)

-0.03(-0.04)

-0.03(-0.04)

-0.03(-0.04)

-0.04(-0.04)

-0.04(-0.04)

-0.04(-0.04)

Revealed Comparative Advantagea

0.03*(-0.01)

-0.07*(-0.02)

-0.04(-0.03)

Trade Specialization Indexb

0.11*(-0.03)

-0.13(-0.09)

-0.03(-0.10)

Constant 0.14*(-0.01)

0.03(-0.03)

0.00(-0.03)

-0.02(-0.04)

0.07*(-0.02)

-0.11(-0.04)

-0.05(-0.05)

0.07(-0.07)

-0.49*(-0.12)

0.23*(-0.11)

-0.19(-0.09)

-0.08(-0.10)

R2 0.10 0.27 0.27 0.27 0.07 0.23 0.22 0.22 0.14 0.28 0.29 0.29

No. of obs. 2766 2766 2594 2594 2766 2766 2594 2594 2766 2766 2594 2594

Country Fixed Effects

No No No No Yes Yes Yes Yes Yes Yes Yes Yes

Time Fixed Effects

No No No No No No No No Yes Yes Yes Yes

Ln GDP Per Capita = log of gross domestic product per capita in US$10,000s, NRA = nominal rate of assistance, OLS = ordinary least squares, R2 = coefficient of determination.

Notes: a Revealed comparative advantage index is the share of agriculture and processed foods in national exports as a

ratio of that sector’s share of global exports (world=1).b Net exports as a ratio of the sum of exports and imports of agricultural and processed food products

(world=1).c Dependent variable for regressions is NRA by commodity and year. Results are OLS estimates, with standard

errors in parentheses.* Statistically significant at the 1% level.

Source: Anderson and Martin (2009).


Consumer Tax Equivalents of Agricultural PoliciesThe CTE at the farm level is equivalent to the NRA for each covered product only when no farm input or domestic output price distortions exist, and when no domestic consumption taxes or subsidies are in place. In such cases, the NRA is exclusively the result of border measures such as import or export taxes or restrictions. However, such domestic distortions are present in several Asian economies. In the Republic of Korea, for example, producer prices have been well above consumer prices for several important crop products for decades, while in the PRC, the opposite was true at least until the early 1990s. In the PRC, producers of food staples were taxed more than consumers were subsidized, even taking into account the “iron rice bowl” in-kind partial wage payment received by many urban workers. Also, because of international trade, the weights one uses to aggregate product distortion rates on the consumption side of the market differ from those used on the production side. Hence, aggregate CTEs differ somewhat from aggregate NRAs in each economy.

Welfare and Trade Reduction IndexesTable 4.5 reports the WRIs for agricultural import-competing products, exportables, all covered tradable products, and all covered products from 1960 to 2007 for Asia and four other regions, and for the world as a whole.6 The WRI results for covered products show a similar pattern over the five regions. A constant or increasing tendency for policies from the 1960s to the mid-1980s to reduce welfare existed, but thereafter the opposite occurred in almost all regions, as can be seen from Figure 4.9. This pattern was generated by different policy regimes in different regions. In high-income countries, agriculture was assisted throughout the period, although it peaked in the 1980s (at approximately 60%) and fell thereafter. By contrast, in developing countries, agriculture was “disprotected” until the mid-1980s, and only thereafter did taxation of developing country farmers decline to the point that they received positive assistance by the turn of the century. The WRI is thus able to correctly identify the adverse welfare consequences that result from both positive and negative assistance regimes for the sector.

6 National WRIs are aggregated across countries using an average of the value of consumption and production at undistorted prices. National TRIs are aggregated across countries using the absolute difference between the value of production and the value of consumption at undistorted prices. National and regional indexes for the five-year periods are unweighted averages of the annual indexes.


Table 4.5: Welfare Reduction Indexes, Asian, African, Latin American, European Transition Economies, and High-Income Regions,a

All Covered Tradable Farm Products, 1960–2007 (percent)

1960–1964

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

2005–2007

Import-Competing Products

Africa 59 52 53 47 51 98 43 32 30 na

Asia 36 45 46 50 48 62 48 44 48 na

Latin America 54 34 27 37 47 40 46 26 32 na

All Developing Countries 49 46 43 44 44 54 36 28 30 na

European Transition Economies na na na na na na 60 44 45 43

High-Income Countries 79 87 71 100 106 123 102 91 87 50

World 74 76 65 85 81 100 78 65 65 45

Exportable Products

Africa 37 44 48 49 48 55 58 41 40 na

Asia 24 43 34 34 48 45 24 10 7 na

Latin America 28 22 36 32 36 33 29 12 15 na




World 16 27 26 24 34 39 26 13 12 15

All Covered Farm Tradables

Africa 52 52 52 49 51 82 52 37 36 na

Asia 27 43 39 42 47 45 28 19 16 na

Latin America 43 25 38 36 44 39 42 20 22 na




World 48 47 45 55 57 57 41 28 27 23

CTE = consumer tax equivalent, na = data unavailable, NRA = nominal rate of assistance.

Note: a Regional aggregates are weighted using the average of the value of production and the value of consumption at undistorted prices.

Sources: Lloyd, Croser, and Anderson (2009), based on product NRAs and CTEs in Anderson and Valenzuela (2008).


Figure 4.9: Welfare Reduction Indexes for Covered Tradable Farm Products, by Region, 1960–2007 (percent)

Africa, Asia, and Latin America

Developing Countries, High-Income Countries, and European Transition Economies

CTE = consumer tax equivalent, NRA = nominal rate of assistance.

Sources: Lloyd, Croser, and Anderson (2009), based on NRAs and CTEs in Anderson and Valenzuela (2008).


Figure 4.10: Trade Reduction Indexes for Covered Tradable Farm Products, by Region, 1960–2007 (percent)

Africa, Asia, and Latin America

Developing Countries, High-Income Countries, and European Transition Economies

CTE = consumer tax equivalent, NRA = nominal rate of assistance.

Sources: Lloyd, Croser, and Anderson (2009), based on NRAs and CTEs in Anderson and Valenzuela (2008).


Table 4.6: Trade Reduction Indexes, Asian, African, Latin American, European Transition Economies, and High-Income Regions,a All Covered Tradable Farm Products, 1960–2007 (percent)

1960–1964

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

2005–2007

Import-Competing Products

Africa -28 -23 -19 3 0 112 7 10 4 na

Asia 11 25 19 26 38 70 68 63 76 na

Latin America 28 27 11 2 6 1 32 11 20 na

All Developing Countries -1 20 10 11 7 48 26 10 16 na



World 64 55 42 56 58 80 59 60 62 56

Exportable Products

Africa 29 39 43 47 41 36 38 24 30 na

Asia 14 27 26 23 35 20 17 8 0 na

Latin America 20 15 28 22 23 21 5 2 3 na


European Transition Economies na na na na na na 0 2 -2 -9

High-Income Countries -8 -12 -9 -5 -8 -21 -13 -4 -2 -2

World 3 7 11 12 17 8 4 4 3 -8

All Covered Farm Tradables

Africa 32 33 33 34 18 54 17 16 23 na

Asia 15 28 23 28 34 28 18 8 6 na

Latin America 22 8 19 17 19 13 23 7 8 na


European Transition Economies na na na na na na -4 13 14 2


World 21 17 20 24 28 30 21 14 14 2

CTE = consumer tax equivalent, na = data unavailable, NRA = nominal rate of assistance.

Note: a Regional aggregates are weighted using the absolute value of net imports (computed as the difference between the value of consumption and the value of production) at undistorted prices.

Sources: Lloyd, Croser, and Anderson (2009), based on product NRAs and CTEs in Anderson and Valenzuela (2008).


Regarding the trade restrictiveness of agricultural policy, the TRI for developing countries as a group was roughly constant or rose slightly until the early 1990s, after which it declined, especially for Asia and Latin America. This is evident from TRI estimates shown in Figure 4.10 and Table 4.6. For high-income countries, the TRI time path was similar, but the decline began a few years later. The aggregate results for developing countries are driven by the exportables subsector, which is being taxed, and the import-competing subsector, which is being protected. Like the WRI, the TRI correctly aggregates the restrictiveness of subsector policies that are masked in aggregate NRA and CTE measures where they offset one another.

The TRI generally shows greater variance than the WRI. This is because the TRI measure is sensitive to switches from negative to positive rates of assistance. For example, a move from a -30% to +30% rate of assistance would have little or no effect on the welfare consequences of the policy, but it could have a significant effect on trade restrictiveness. For example, net imports of farm products would be greater when the NRA is negative than when it is

Figure 4.11: Nominal Rate of Assistance and Welfare and Trade Reduction Indexes for Covered Tradable Farm Products, World, 1960–2007 (percent)

CTE = consumer tax equivalent, NRA = nominal rate of assistance, TRI = trade reduction index, WRI = welfare reduction index.

Sources: Lloyd, Croser, and Anderson (2009), calculations based on NRAs and CTEs in Anderson and Valenzuela (2008).


positive, other factors being equal. The greater variability of the TRI is most clearly demonstrated for Asia in the period from 1965–1969 to 1985–1989. The WRI measure changed very little throughout that period, whereas the TRI dipped and then spiked upwards in the 1980s (See Figures 4.9 and 4.10).

The fact that NRAs for high-income and developing countries diverged from zero (in opposite directions) in the first half of the period under study and then converged toward zero in the most recent quarter-century means that their weighted average NRAs traced out a fairly flat trend. By contrast, Figure 4.11 shows that the WRI and TRI for the world as a whole traced out a hill-shaped path, thus providing less misleading indicators of the evolving disarray in world agricultural markets. Figure 4.11 also suggests that the global welfare cost of distortions was much higher than the NRA indicates, but was more so in earlier decades than in the current one.

Welfare and Trade Effects According to a Global-Economy-Wide ModelIt is clear from the above that there has been a great deal of change over the past quarter of a century in policy distortions to agricultural incentives in Asia and throughout the world. This is as a result of reduced anti-agricultural and anti-trade biases in many developing countries’ policies. In addition, export subsidies in high-income countries have been cut, and some re-instrumentation toward less inefficient and less trade-distorting forms of support has begun, particularly in western Europe. However, protection from agricultural import competition has continued its upward trend in both rich and poor countries, notwithstanding the Uruguay Round Agreement on Agriculture that aimed to bind and reduce farm tariffs (Martin and Winters 1996). What, then, have been the net economic effects of agricultural price and trade policy changes around the world since the early 1980s? And how do these effects on global markets, farm incomes, and economic welfare compare with the effects of policy distortions still in place as of 2004?

Valenzuela, van der Mensbrugghe, and Anderson (2009) have employed a global-economy-wide model to provide a combined retrospective and prospective assessment of progress toward addressing the policy distortions in world agriculture. Their model quantifies the impacts of both past reforms and current policies by comparing the effects of the NRA distortion estimates in Valenzuela and Anderson (2008) for the period 1980–1984 with those of 2004.

Several key findings from their study are worth emphasizing. First, the policy reforms from the early-1980s to the mid-2000s improved global economic welfare by US$233 billion per year, and removing the distortions that remain


as of 2004 would add another US$168 billion per year. This suggests that in terms of global welfare, the world moved three-fifths of the way toward global free trade of goods over that quarter century.

Second, developing economies have benefited proportionately more than high-income economies (1.0% compared with 0.7% of national income) from past policy reforms, and would gain nearly twice as much as high-income countries by completing the reform process (an average increase of 0.9% compared with 0.5% for high-income countries). Of the prospective welfare gains from global liberalization, 60% would come from agriculture and food policy reform—a striking result, given that the shares of agriculture and food in global GDP and global trade in goods and services in 2006 were only 3% and 6%, respectively. Even in developing countries, agriculture now contributes, on average, less than 10% of GDP and exports (World Bank 2008a). The contribution of farm and food policy reform to the prospective welfare gain for developing countries would be even greater than the 60% globally, at 83%.

Third, the share of global farm production exported in 2004 (excluding intra-EU trade) was reduced slightly as a result of reforms made since 1980–1984, because of lower farm export subsidies. Agriculture’s 8% share in 2004 contrasts with the 31% share for other primary products and the 25% for all other goods—a thinness that is an important contributor to the volatility of international prices for weather-dependent farm products. If the policies distorting goods trade in 2004 were removed, the share of global production of farm products that is exported would rise from 8% to 13%, thereby reducing instability of prices and quantities of those products traded.

Fourth, the developing countries’ share of the world’s primary agricultural exports rose from 43% to 55% between 1980–1984 and 2004, and its farm output share rose from 58% to 62% in the same period because of reforms, which resulted in rises in nearly all agricultural industries with the exception of rice and sugar. Removing remaining goods market distortions would boost their export and output shares to 64% and 65%, respectively.

Fifth, the average real price in international markets for agricultural and food products would have been 13% lower had policies not changed over the past quarter century. Evidently, the effect of falling RRAs in high-income countries (including cuts to farm export subsidies) in raising international food prices more than offset the opposite effect of rising RRAs (including cuts to agricultural export taxes) in developing countries over that period. By contrast, the removal of distortions remaining as of 2004 is projected to raise the international price of agricultural and food products by, on


average, less than 1%. This is contrary to modeling results from previous analyses based on the Global Trade Analysis Project protections database.7 The lower impact predicted in these new results is due, based on the above NRA estimates, to export taxes in developing countries being included in the new database (most notably for Argentina). Their reform would offset the international price-raising effect of eliminating import protection and farm subsidies elsewhere.

Sixth, for developing countries as a group, net farm income (value added in agriculture) is estimated to be 4.9% higher than it would have been without the reforms of the past quarter century, which is more than ten times the proportional gain for nonagriculture. If policies remaining in 2004 were to be removed, net farm incomes in developing countries would rise a further 5.6%, compared with just 1.9% for non-agricultural value-added. In addition, returns to unskilled workers in developing countries—the majority of whom work on farms—would rise more than returns to other productive factors from that liberalization. Together, these findings suggest that both inequality and poverty could be alleviated by such reform, given that three-quarters of the world’s poor are farmers in developing countries (Chen and Ravallion 2007).

Finally, the removal of agricultural price-supporting policies in high-income countries without the institution of corresponding compensation schemes for local farmers would undoubtedly lead to painful reductions in their income and wealth. It should be kept in mind, however, that the majority of farm household income in high-income countries comes from off-farm sources (OECD 2008b), and, in any case, compensation schemes could easily be afforded by taxing some of the gains from those who benefit from freeing trade.

4.3 Are Policies Stabilizing Domestic Prices? The Case of Rice

A common objective of food policies—in Asia and elsewhere—is the stabilization of food prices and quantities. For no other product is this more obvious than for rice. Governments in Asia frequently use year-to-year fluctuations in trade barriers as a buffer against domestic or international shocks, rather than using trade as a source of lower-priced imports or an opportunity for high

7 For example, Anderson, Martin, and van der Mensbrugghe (2006), who estimated that the international price of agricultural and food products would rise by 3.1%, or by 5.5% for primary agriculture alone.


export earnings. As Asia produces and consumes four-fifths of the world’s rice (compared with about one-third of the world’s wheat and maize), this market-insulating behavior of Asian policy makers means that, even as of 2000–2004, only 6.9% of global rice production was being traded internationally8 (compared with 14% and 24% for maize and wheat, respectively). International prices are, as a result, much more volatile for rice than for these other grains. Its coefficient of variation over the 1970–2004 period was 0.63, compared with 0.46 and 0.44 for wheat and maize, respectively (Anderson forthcoming). This means that nominal rates of protection for rice are above trend in years of low international prices and below trend in years of high international prices for rice. Figure 4.12 reveals that this has been the case. Even if figures for all countries in Southeast or South Asia are averaged, the negative correlation between rice NRAs and the international price for rice is high, at -0.59 for Southeast Asia and -0.75 for South Asia.

4.4 Summary of Pertinent Findings

The key findings of relevance to the question of Asia’s contributions to global economic development and stability via reform to policies affecting agricultural incentives include the following:•Overall trade liberalization, including reduced import protection of

manufacturing, has reduced the RRA to nearly zero and improved the competitiveness of the agricultural sector in many economies, especially in the PRC and India.

•The gradual policy shift away from taxing agricultural exportables,although accompanied by a rise in agricultural import protection, has reduced the anti-trade bias in agricultural distortions. This is evident from the movement of the TBI and TRI toward zero over the past quarter century.

•ThedispersionintheNRAsandRRAstofarmersacrossAsianeconomieshas increased rather than diminished, despite reforms in the region. This has also been the case for farm product NRAs within each studied Asian economy. This means there is still scope for reducing the distortions in the region’s use of resources in agriculture through greater international and

8 This was up from the pre-1990s half-decade global shares which are all less than 4.5% (e.g., 4.1% in 1985–1989), and is greater than the Asian share of just 5.7% in 2000–2004, according to Anderson and Valenzuela (2008).


Figure 4.12: Rice NRA and International Rice Price, South and Southeast Asia, 1970–2005 (left axis is int’l price in USD, right axis is NRA in%)

South Asiaa

Southeast Asiab

NRA = nominal rate of assistance, Pw = world price, USD = United States dollar.

Notes:

a Correlation coefficient is -0.75. b Correlation coefficient is -0.59.

Sources: Anderson and Martin (2009), based on data in Anderson and Valenzuela (2008).


intranational relocation of production. Since openness tends to promote economic growth, total factor productivity growth in agriculture is slower than it would be if remaining price-distorting interventions were removed. As in other regions, such as Latin America (Lopez and Gallinato 2006), there has been comparatively little assistance provided to Asian farmers via public investment in rural infrastructure and agricultural research and development (R&D),9 even though social rates of return from such investments remain high (Fan and Hazell 2001; Fan 2008).

•FoodpoliciesinAsiacontinuetoseektoreducefluctuationsindomesticfood prices and in the quantities available for consumption via fluctuations in barriers to trade, especially for rice. This beggar-thy-neighbor dimension of each government’s food policies reduces the role that trade between nations can play in bringing stability to the world’s food markets. The more countries insulate their domestic markets, the more other countries perceive a need to do likewise, exacerbating the effect on world prices such that even greater changes in NRAs are desired—a classic collective action problem.10

5. How Can Asia Contribute More to Global Development and Stability of Agricultural Markets?

After the current recession in high-income countries passes, it is expected that Asia’s developing economies will keep growing rapidly, and that this growth will continue to be more rapid in manufacturing and service activities than in agriculture. In the more densely populated economies of the region, growth will be accompanied by increases in the incomes of low-skilled workers where labor-intensive exports boom. Agricultural comparative advantage is thus likely to decline in these economies. Whether these economies become more dependent on imports of farm products depends, however, on their

9 Data in Pardey et al. (2006) suggest that public R&D expenditure in Asia since the late 1970s has averaged less than 0.5% of the gross value of production at undistorted prices, which is trivial compared with the NRA via price-distorting measures for Asia of 25 to 40 times that (12% in 2000–2004 and below -20% prior to the mid-1980s).

10 That policies seeking to insulate domestic food markets from changes in world market prices can be self-defeating because of international spillovers was illustrated in 2007–2008. The imposition of export restrictions in key exporting countries in late 2007 and early 2008 certainly contributed to the sharp increases in world prices in the first half of 2008: such measures simply increase the volatility of world markets as they seek to reduce volatility domestically.


RRAs. The first wave of Asian industrializers (Japan, then the Republic of Korea and Taipei,China) chose to slow the growth of food import dependence by raising their NRAs for agriculture even as they reduced their NRAs for non-farm tradables such that their RRAs rose above the neutral zero level. A key question is: Will later industrializers follow suit, given the past close associations among RRAs, rising per capita income, and declining agricultural comparative advantage?

If the RRAs for Japan, Republic of Korea, and Taipei,China are mapped against real per capita income, it is possible to superimpose on that same figure the RRAs for lower-income economies to see to what extent these economies are tracking the first industrializers. Figure 4.13 does that for the PRC and India, and shows that their RRA trends over the past three decades are on the same upward trajectory as the richer economies of Northeast Asia. This provides a reason to expect the governments of later industrializing economies to follow suit, other factors being equal.

One reason one might expect different government behavior now is because earlier industrializers were not bound under the General Agreement on Tariffs and Trade (GATT) to keep agricultural protection down. Had

Figure 4.13: RRAs and Log of Real Per Capita GDP, India and Northeast Asian-Focus Economies, 1955–2005

GDP = gross domestic product, PRC = People’s Republic of China, RRA = relative rate of assistance.


Real GDP Per Capita

RRA

%


there been strict discipline on farm trade measures at the time Japan and the Republic of Korea joined GATT in 1955 and 1967, respectively, their NRAs might have been kept to less than 20% (Figure 4.14). At the time of the PRC’s accession to the WTO in December 2001, its NRA was less than 5%, or 7.3% for import-competing agriculture alone. The PRC’s average bound import tariff commitment was about twice that figure (16% in 2005), but more important was its out-of-quota bindings on the items for which imports were restricted by tariff rate quotas. As of 2005, the latter tariff bindings were 65% for grain, 50% for sugar, and 40% for cotton (WTO, International Trade Centre [ITC], and United Nations Conference on Trade and Development [UNCTAD] 2007). The PRC also had bindings on farm-product-specific domestic supports of 8.5%, and was able to provide another 8.5% as non-product-specific assistance if it so wished—a total NRA of 17% from domestic support measures alone, which is in addition to assistance available through out-of-quota tariff protection.

Clearly, the legal commitments the PRC’s government made on acceding to the WTO are far from the current levels of domestic and border support it provides its farmers. As a result, the commitments are unlikely to constrain

Figure 4.14: NRAs for Japan, Republic of Korea, and PRC, and Date of Accession to GATT or WTO, 1955–2005 (percent)

GATT = General Agreement on Tariffs and Trade, NRA = nominal rate of assistance, PRC = People’s Republic of China, WTO = World Trade Organization.


NRA

%


the government much in the next decade or so;11 and the legal constraints on Asia’s developing countries that joined the WTO earlier (with the exception of the Republic of Korea) are even less constraining. In India, Pakistan, and Bangladesh, for example, the estimated NRAs for agricultural importables in 2000–2004 are 34%, 4%, and 6%, respectively, whereas the average bound tariffs on their agricultural imports were 114%, 96%, and 189%, respectively (WTO, ITC, and UNCTAD 2007). Also, as in other developing countries, the governments of these countries have significant bindings on product-specific domestic supports of 10%, and another 10% for non-product-specific assistance, a total of 20 additional percentage points of NRA that could legally be applied through domestic support measures. This compares with the less than 15% currently in effect in South Asia (Table 4.3).

One can only hope that the PRC and South and Southeast Asia will not make use of the legal wiggle room they have allowed themselves in their WTO bindings and thereby follow Japan, the Republic of Korea, and Taipei,China into substantial agricultural protection and insulation. Indications from the ongoing Doha Round of multilateral trade negotiations at the WTO are not encouraging. The group of 33 developing countries, led by Indonesia but strongly supported by India and the Philippines, among others, is arguing for additional “special and differential treatment” for developing countries in the form of exemptions from agricultural tariff cuts for so-called “special products,” (that would be subject to only small tariff cuts) and for a special safeguard mechanism that would allow such countries to impose higher than bound tariffs in years of likely import surges. A much more efficient and equitable strategy would involve treating agriculture in the same way as they have been treating non-farm tradables. This would involve opening the sector to international competition, and relying on more-efficient domestic taxes (e.g., income, consumption, or value-added taxes) rather than on trade taxes to raise government revenue, and on general social safety nets rather than on variable trade taxes to cope with food price fluctuations.

It might be argued that such a laissez faire strategy might increase rural-urban inequality and poverty and thereby generate social unrest. Nonetheless, import policies that lead to high food prices—for staples in particular—involve potentially serious risks for the urban and rural poor, who are net buyers of food in developing countries. Available evidence suggests that problems relating to rural-urban poverty gaps have been alleviated in parts of Asia

11 For more on this point, see Anderson, Martin, and Valenzuela (forthcoming).


when more-mobile members of farm households are able to find full- or part-time work off the farm and repatriate a portion of their higher earnings to family members (Otsuka and Yamano 2006; World Bank 2007). Concerted government intervention through social policy measures is hugely important, both in reducing the gaps between rural and urban incomes, identified as a concern by Hayami (2007), and in raising national incomes overall (Winters, McCulloch, and McKay 2004). Efficient ways of assisting overlooked groups of poor (non-farm or farm) households include public investment measures that have high social payoffs, such as in basic education and health care, rural infrastructure, and agricultural research and development.12

Improvements in farm productivity that increase output while lowering consumer prices are likely to be much more important for long-run food security than import restrictions. Both increase farmer incomes, but productivity growth lowers food costs to consumers. Moreover, recognized social benefits from expanding investments in agricultural R&D have become even greater in recent years, due to the threat of climate change. In many regions agriculture will have to contend with hotter, drier, and more volatile weather, and hence, with scarcer water supplies (Pacific Economic Cooperation Council 2008). New technologies to help farmers adapt to these changing conditions will be needed sooner than they can be produced, even if R&D investments increase immediately, given the very long lags from research start to farmer adoption. Greater volatility in seasonal conditions, expected as a result of climate change, is yet another reason governments should agree to reduce their use of trade measures to insulate their domestic markets from fluctuations in the international food market.

In light of the above, what should developing country policymakers do when faced with a sharp upward movement in international food prices? In 2008, as in the past, many governments simply increased export restrictions or lowered import restrictions on food staples for the duration of the spike (Figure 4.12). What if the recent rise in international prices is more prolonged than the short-lived spikes of the past? Outlook projections issued by international agencies in 2008 suggest prices may remain elevated for the foreseeable future,

12 If only one-twentieth of the current NRA provided to Asian farmers via farm price-support policies was replaced by agricultural R&D expenditure, current public spending on such R&D would more than double, and the latter would increase regional economic welfare (whereas price-distortionary policies reduce it). Such a boost to Asian R&D could generate a second green revolution of the order of magnitude of the one that began in the 1960s, especially if it took full advantage of new developments in biotechnology (as shown for rice, for example, in Anderson, Jackson, and Nielsen [2005]).


and that growth in net food imports by rapidly industrializing economies in Asia is a significant contributor to this phenomenon.13 Yet, as shown in Figure 4.7 and Table 4.1 above, over the past two or more decades, the PRC and India have steadily raised their RRAs, despite their having been sufficient to keep both countries very close to self-sufficiency in primary agricultural products over the previous four decades. In terms of total agricultural and processed food trade, however, in 2000–2004 the PRC became a net importer for the first time, while, in South Asia, India’s net exports of farm products were less than those of Pakistan or Bangladesh for the first time since the late 1960s (Sandri, Valenzuela, and Anderson 2007).14 Should these governments choose to maintain RRAs at current levels (close to zero), the import dependence of these countries in agriculture could increase. If this occurs, other developing countries might reconsider their current position in the WTO’s Doha Round of trade negotiations. By agreeing to substantially lower their bound tariffs and subsidies on agricultural products, they could extract greater concessions from high-income countries without having to reduce their actual applied rates for the foreseeable future. If a successful Doha agreement was then concluded, the result would be a reduction in tariff binding overhangs, and hence of the scope to vary taxes on farm trade. This would boost agricultural trade, “thickening” international markets for farm products, and reducing food price instability. If Asia wishes to take a lead in this direction, there is no better product to focus on than rice.

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Comments

Bambang P.S. Brodjonegoro

Kym Anderson’s chapter discusses the role of Asian governments in stabilizing the price of food and other agricultural products. In the last food price hike, the role of governments in developed countries outside Asia was quite influential. Panic relating to oil price hikes prompted the governments of some developed countries to promote the production of biofuel made from traditional food crops (e.g., corn in the US). Once the US government began to promote corn as the base material for ethanol biofuel, many farmers shifted from soybeans to corn due to higher biofuel prices. This widespread shift to corn resulted in reduced production of soybeans and a sudden increase in the price of both corn and soybeans, creating problems for importing countries, including many developing countries.

This US case proved that national policies can influence domestic agricultural price fluctuation over time and can either help the country’s farm households at the expense of domestic consumers, or vice versa. Since the US is a leading food exporter, the influence of its policies extends to international parties, especially consumers. The free trade of agricultural products, particularly of food, should be the solution to overcoming the dependence on major producer countries’ policies. The existence of food trade restrictions, including export restrictions, contributes to high international real food prices. Without an increase in productivity growth, prices in 2050 could be 30–80% higher than in 2000 (see Anderson’s paper for details).

The food market could be considered a unique case, as most countries tend to insulate their domestic food markets from fluctuations, and, consequently, create “thinness” in the international market. As food is the most important basic need, together with energy, governments will do whatever they can to secure the domestic food supply at an affordable price level. At the same time, most governments pay special attention to farmers producing food for the domestic market who have significant political power. Many governments


indirectly apply trade protection to food for the benefit of farmers rather than of the food itself; this is the case in both developed and developing countries. It is not really clear who benefits more from food protection: consumers or farmers. Governments try to establish food prices that will create a balance between domestic customer purchasing power and profit margins for farmers. It is easier for developed countries with relatively high domestic purchasing power to determine what price will be accepted by the majority of domestic customers; developing countries will have a harder time finding a price that will satisfy farmers but not be a burden for relatively low-income customers.

A balance between the conflicting goals of people’s welfare and economic efficiency through openness should be achieved by removing barriers to agricultural exports and imports, combined with government policies that can improve the real income of farmers. Improving farmers’ welfare, for example, should not focus exclusively on protection of products or on maintaining high artificial prices, but should aim more at improving quality of life and lowering input costs. The domestic market price should better reflect the international price, which would result in farmers’ revenues being affected by food price fluctuation. High price fluctuation often invites government intervention in the form of direct market operations or the creation of buffer stock to stabilize prices. Although considered inefficient, the idea of buffer stock is still attractive to developing countries. This may be because farmers in developing countries are more risk averse than those in developed countries.

The simulation results generated using the general equilibrium approach discussed in Anderson’s chapter revealed that policy reforms have improved global welfare quite significantly, and that developing economies have benefited more proportionately than high-income economies. Furthermore, 60% of welfare gains from liberalization have come from agriculture and food policy reform, and developing countries’ share of agricultural exports has risen substantially. If reforms are fully implemented, international food prices will decrease, and at the same time, net farm income will rise. Reforms are not yet complete, as indicated by ongoing protection of agricultural imports, both in developed and developing countries. In fact, the political economy of food security makes it more difficult to achieve complete reform. A major challenge is that liberalization and free trade are not well accepted by developing countries, especially poor ones. The presumption is that liberalization and free trade benefit developed countries while exploiting the natural and human resources of developing countries. Even if that presumption did not exist, governments and citizens want control over their own food and energy security and will


not let the international market or imported products determine their fate. Rather than contribute to “thickness” in the international market, developing countries generally prefer to keep any surplus food as domestic reserves; the idea of exporting food surpluses is considered to endanger national interests.

Asia has an opportunity to stabilize food and agricultural prices, given the current global trend of increasing economic openness and the region’s relatively high level of food and agricultural production. However, Asia is still struggling to implement free trade in food as a major solution to the challenge of securing food supply while benefiting both consumers and farmers. Distrust among Asian economies should be solved first, and more developed economies should lead the way. Another matter to be resolved is the possible dualism of food and renewable energy, especially bioenergy. It might not be an immediate problem, but fossil energy scarcity will eventually force an acceleration of bioenergy production that might compete with food. If Asia wants to take on a bigger role, the agricultural price of food should take into account the agricultural price of energy, which, in turn, should result in the security of food and energy supplies. Will free trade still be the answer if renewable energy or bioenergy becomes part of the picture? The US’ oil price hike experience proves that free trade is not a simple solution, but is rather an opportunity to make a country’s economy more efficient.

1. Introduction

The World Trade Organization (WTO) was established in 1995 amid controversy over the relationship between regionalism and multilateralism. One strong contention held that the spread of regionalism would hamper the development of a multilateral system. The World Bank (2004: 15) noted that regional trade agreements (RTAs) “can create trade and bring other benefits for members… but results are not automatic and depend critically on design. Actual contribution to the multilateralism remains unclear. One of the key factors behind this performance is slow and incomplete implementation of the agreements.” However, optimists concluded that regionalism contributes to the development of a multilateral trade system.1 Supporters of this view have cited the rapid spread of regionalism and the fact that more than half of the world’s trade volume is being traded under preferential trade agreements. Accordingly, it is desirable that regionalism and multilateralism be developed side by side, and that regionalism be developed in such a manner that it supplements multilateralism.

The home page of the WTO states that it is the only international organization that deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible. It provides a forum for governments to negotiate trade agreements and settle

How Can Asian Regionalism be a Stepping Stone to Preserving the Multilateral Trading System? 99

VHow Can Asian Regionalism be a Stepping Stone to Preserving the Multilateral Trading System?

Inkyo Cheong, Jungran Cho, and Seungyeon Jeong

1 Peter Petri of Brandeis University is very optimistic regarding East Asian regionalism. See Petri (2008).


trade disputes. Where countries have faced trade barriers and wanted them lowered, these negotiations have helped to liberalize trade.

RTAs also liberalize trade. Many times, they include trade standards that the WTO has not yet been able to deal with. For example, the protection of intellectual property rights, which was adopted in the North American Free Trade Agreement (NAFTA) for the first time in 1993, was adopted as a regular policy by WTO when it was established. Also, the Republic of Korea (hereafter Korea)-United States (US) Free Trade Agreement (FTA) includes standards related to the environment and labor, which have not yet been included in the multilateral system.

However, with regard to market access, RTAs do not apply the most-favored-nation (MFN) treatment, which is the basic principle of a multilateral trade system, in accordance with Article XXIV of the General Agreement on Tariffs and Trade (GATT). Moreover, RTAs incur trade-diversion losses due to the mutual offering of preferential treatment among their member countries. They also have the disadvantage of incurring spaghetti bowl losses caused by strict rules of origin and overlapping FTAs.

This study examines the current conditions and characteristics of Asian regionalism and explores the ways in which Asian regionalism can contribute to the development of multilateralism. Given that the purpose of a multilateral trade system is to promote the well-being of the populations of the member countries by easing trade barriers and expanding trade, the formation of regionalism that can contribute to trade expansion can also contribute to the development of a multilateral trade system. Thus, FTA member countries should conclude agreements in which the scope of liberalization is wide and comprehensive and should minimize spaghetti bowl losses. FTAs that comply with the GATT-WTO requirements should be concluded. When WTO+ agreements are pursued, regionalism will contribute to the formation of a multilateral trade system. Also, a pan-regional FTA could explore ways of supporting the expansion of trade infrastructure in developing countries and of supporting the development of a WTO system on a regional basis.

2. Current Conditions of Asian Regionalism

The full-scale participation of Asian countries in regionalism began only recently, although the history of Asian RTAs dates back to 1975, when five countries—Korea, India, Sri Lanka, Bangladesh, and Lao People’s Democratic


Republic (Lao PDR)—established the Bangkok Agreement to expand trade among developing countries within the jurisdiction of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) by removing tariffs and nontariff barriers. It was a typical preferential trade agreement for providing preferential tariffs on some items primarily exported by developing countries.

In 2002, the People’s Republic of China (PRC) joined the Bangkok Agreement, and in 2005, an expansion of the applicable items was agreed upon. In 2006, the Bangkok Agreement was renamed as the Asia-Pacific Trade Agreement (APTA), the number of permitted items was expanded, and the rules of origin were eased. In Korea, the number of generally permitted items, which was applicable to all the member countries and which included chemical products, steel, metals, and textiles and clothes, was expanded from 285 (HS10 unit) to 1,367. In the PRC, the number of items was increased from 920 (HS8 unit) to 1,858 and, in India, from 221 (HS6 unit) to 618. The rules of origin of the Bangkok Agreement required that regional value-added ratios (on a free on board price basis) of the applicable countries exceed 50% or be changed into HS6 units. However, the rules of origin of APTA reduced the intraregional value-added rate to 45% and decreased the value-added ratio by more than 35% in the cases of only Bangladesh and the Lao PDR, which were the least developed of the member countries.

One characteristic of Asian regionalism is that many FTAs with different contents were concluded in the region in a short span of time and many FTAs are still being negotiated and/or discussed. Kawai and Wignaraja (2008) reported that as of July 2007, there were as many as 102 bilateral FTAs in East Asia, of which 36 were concluded (implemented), 41 were under negotiation, and 25 were under discussion. As in Europe (i.e., the European Commission and European Union), with its many bilateral FTAs with the Mediterranean region and African countries in the 1990s, the fragmentation of FTAs is currently occurring in Asia. In Europe, concerns were raised over the cost of the spaghetti bowl because of overlapping FTAs and differing rules of origin.

The first FTA in the Asian region was the Association of Southeast Asian Nations (ASEAN) Free Trade Agreement (AFTA). It was established in 1994 following the grouping of the world’s biggest economies into economic blocs, as with NAFTA and the European Union in the 1990s. Since 2003, the existing ASEAN+6 countries, including Singapore, have been implementing the Common Effective Preferential Tariff (CEPT). The main purpose of CEPT is the reduction of tariffs in intraregional trade to 0–5% rather than the complete


abolition of tariffs, considering each country’s sensitivity to tariffs. The contents of AFTA in its early stage focused mainly on lowering tariffs, but later, its range was expanded to include investments and government procurement.

Although ASEAN countries have concluded FTAs with countries outside the region, such as the US, Chile, and Mexico, most of their FTAs are with other Asian countries. Most are bilateral agreements that the PRC, Japan, and Korea have concluded with individual ASEAN countries.

PRC-ASEAN FTAs are composed of 10 bilateral agreements that the PRC has concluded with 10 individual ASEAN member countries. In FTA tariff negotiations, each ASEAN country makes CEPT the base and then tends to decrease tariffs on some items. Thus, there are only slight differences between the tariff rates under FTAs and those under MFN statutes. This has resulted in a lack of incentives for business enterprises to utilize the preferential tariffs under FTAs. According to Cho and Cheong (2008), preferential tariff margins in the Korea-ASEAN FTA are around 1% on average.

Serious discussion on this issue was conducted in a workshop at ADBI in July 2008. According to empirical research on FTA utilization rates,2 AFTA preferences (CEPT) were not being used well and ranged from 11.2% to 4% for Thailand and Malaysia. The Japan External Trade Organization (JETRO) survey showed that among more than 700 Japanese companies, 11.9% of respondent companies were utilizing FTAs, 22.8% planned to do so, and 37.4% had no such plans.3 The margins under the preferential tariffs relative to the MFN tariff rates are not large enough to compensate for the administrative cost and delay of applying for preferential tariff treatment. Even small- and medium-sized enterprises (SMEs) tend to bear higher costs per export than large companies, since those enterprises do not have trade experts or the know-how to use FTAs. Therefore, SMEs have lower rates of utilization and planning for utilization, while large companies tend to have higher rates of utilization and planning for utilization.

Accompanying the global trend toward competitive regional integration, intraregional economic integration has become a survival strategy of the East Asian region. The promotion of FTAs within the entire region has been discussed for the past several years. The proposal for an East Asian FTA

2 The workshop was jointly organized by ADB, ADBI, and Economic Research Institute for ASEAN and East Asia at ADBI, Tokyo, 17–18 July 2008. Refer to Kawai and Wignaraja (2008) regarding major findings about the utilization of FTAs in East Asian countries.

3 Refer to Hiratsuka et al. (2008) for details.


(EAFTA) in the East Asia Vision Group report in 2001 was revitalized with the PRC’s proposed study of the economic effects of EAFTA with ASEAN+3 countries. The first-stage studies of experts on the feasibility of EAFTA led by the PRC were finished in August 2006 and the second-stage studies are underway. At the ASEAN+3 Summit Meeting in January 2007, Korea proposed that these second-stage private studies on EAFTA commence in May 2007 and end in May 2009. In the course of conducting research on EAFTA, Japan proposed an ASEAN+6 FTA with the participation of India, Australia, and New Zealand, called the Comprehensive Economic Partnership Agreement in East Asia. In early discussions on EAFTA, ASEAN countries supported the PRC’s proposal, but later, worried over the expansion of the PRC’s influence, they appeared to sympathize with Japan’s proposal.

East Asia has triggered bilateralism prior to regional integration, notwithstanding the growing economic interdependencies. This development has been unfortunate in the sense that the deepening bilateralism has intensified international rivalries within East Asia—especially between the PRC and Japan. Generally speaking, bilateral FTAs offer a means by which Sino-Japanese rivalry can play out as each country seeks to develop its own competing network of diplomatic alliances to gain advantage and influence within the region. Such behavior was well demonstrated when the PRC forwarded its FTA proposal to ASEAN. Likely due to the pro-PRC tendency observed among ASEAN member countries, the proposal itself was seen as a first move by the PRC to help build its position as a future regional hegemon in East Asia. For this reason, Japan entered into counter-balancing FTA negotiations with ASEAN to compete for hegemony in the region (i.e., Japan-centered rather than PRC-centered integration) (Kagami 2003).

If this practice of inviting states to enter bilateral FTAs as countermeasures in reaction to other states’ moves continues, a defensive and adversarial economic diplomacy environment could hamper regional community building. What is worse is that such “competitive bilateralism” could also lead to a “hub-and-spoke” pattern of international trade within a region that centers on dominant “hub” powers (Park 2008). In East Asia today, there are two major and four minor competitors for this “FTA hub” position: ASEAN vs. Northeast Asia as blocs and/or ASEAN vs. PRC vs. Japan vs. Korea as individual entities. Should this competition intensify any further, even a dialogue on this issue at a regional level might become difficult.

Furthermore, this competition can result in something even worse than delays in the process over miscommunication: the absence of leadership and


of a driving force. Thus far, the process of East Asian regional integration has been led by ASEAN to launch ASEAN+3 as an extended form of ASEAN for addressing issues that require the attention of the three Northeast Asian countries. This format failed to realize the regionalization of East Asia. Despite an early start by ASEAN, the hard truth of their being a group of minorities, both in terms of politics and economic influence in the world, simply made the ASEAN countries incapable of “leading” the three giants from Northeast Asia. In this light, until the PRC, Japan, and Korea identify appropriate roles and responsibilities for taking up the leadership, this process of regional integration cannot properly progress.

This begs the question why the three countries from Northeast Asia—especially the PRC and Japan, who desire regional leadership—have not promptly taken the lead. Although the World Bank (2000) has pointed out that diverse political factors can be (and were) the main motives behind the expansion of trade blocs in the 1990s, it is also undeniable that East Asian regionalism has suffered—and continues to suffer—from various non-economic conflicts. Occasional political conflicts that involve territorial disputes and disputes over historical perspectives, differences in political systems, and lingering national sentiment toward unresolved issues from the Second World War prevent all three countries from taking a leadership role in the region. Thus, a happy reconciliation among the three Northeast Asian countries of the wounds from the past is necessary for the establishment of the EAFTA.

3. Channel of Regionalism Developing into Multilateralism

It is already internationally acknowledged that regionalism contributes to the development of multilateralism. As the conclusion of FTAs entails the liberalization of trade at least among FTA member countries, a liberalized market economy is formed and economic profits are produced, which overcome anti-liberalization sentiments and improve the protectionist atmosphere. Moreover, the conclusion of comprehensive agreements can be utilized not only to abolish trade barriers but also to advance national economies and to abolish unreasonable regulations. As the number of concluded FTAs increases, a market-friendly and liberalization-friendly atmosphere will be formed. As a result, WTO-led voluntary trade liberalization and multilateral trade negotiations can be made from a more active stance.


Although spaghetti bowl costs can be incurred in the presence of a very large number of agreements, the spread of regionalism will likely contribute not only to the liberalization of intraregional trade but also to multilateral trade liberalization. In a way, trade liberalization under FTAs may be politically easier than multilateral trade liberalization. The latter is trade liberalization for the whole world, whereas trade liberalization under FTAs is limited to imports from the participating countries in which external tariffs should be abolished. Estevadeordal and Suominen (forthcoming) proved this by analyzing the lowering of tariffs by 11 countries in Central and South America under FTAs and a multilateral system. As Figure 5.1 shows, the pattern of the lowering of preferential tariff rates was similar to that of the lowering of multilateral tariff rates, and the lowering of preferential tariff rates is shown to have led to the lowering of MFN tax rates.

According to Estevadeordal, Shearer, and Suominen (2008), growing numbers of FTAs in East Asia have merits in spite of slow progress toward forming a region-wide FTA. They allow countries in the region to achieve deeper trade liberalization than would otherwise be possible. They can also contribute to global trade liberalization through multilateralizing regionalism.

Figure 5.1: RTA Liberalization Drove MFN Liberalization in Latin America

MFN = most favored nation.

Source: Estevadeordal and Suominen (forthcoming).


The conclusion of FTAs can strengthen the implementation of the WTO commitments made by member countries. Most FTAs that were recently concluded encompass many aspects, such as market access, services and investment, trade rules, the protection of intellectual property rights, and government procurement, which are parts of the WTO system. More recent FTAs tend to have a similar structure and to become more closely related with the WTO rules. For example, in terms of the substantive aspects of FTAs, Korea has maintained a high degree of consistency. First of all, in line with Article XXIV of GATT 1994 and Article V of the General Agreement on Trade in Services (GATS), Korea has pursued comprehensive FTAs that cover all sectors and substantially all trade. Most of its FTAs, including those still under negotiation, cover trade in goods, trade in services, investment, and other topics.

Trade in goods spans market liberalization, rules of origin, and trade remedy rules, such as safeguards and anti-dumping and countervailing duties, customs procedures, sanitary and phytosanitary (SPS) measures, technical barriers to trade, and mutual recognition. Trade in services defines market liberalization, related rules on national treatment, market access, local presence and domestic regulations, and specific sectoral coverage (finance, telecommunications, etc.) and sector-specific rules. Chapters on investment, e-commerce, government procurement, intellectual property rights, competition, transparency, dispute settlement, and other topics are included in many FTAs.

Also, Asian countries have improved the content of FTAs over time. An analysis of the FTAs that the PRC has concluded distinctly shows this pattern. The FTA that the PRC concluded with ASEAN in 2005 involved the trading of goods, but the FTA that it concluded with Chile in 2006 also involved customs procedures and the trading of services. The PRC-New Zealand FTA in 2008 included content that had not been dealt with in the FTAs that the PRC had concluded with ASEAN, Chile, and Pakistan, as seen in Table 5.1. Of the FTAs that the PRC had concluded, the PRC-New Zealand FTA was the first comprehensive agreement by the PRC and included simultaneous agreements on services, investment, and negotiations on goods. With regard to the trading of goods, the PRC, for the first time, included a WTO tariff-evaluation agreement in its FTA with New Zealand, with which it initiated the likely inclusion of tariff evaluation in future FTAs. Meanwhile, the PRC’s economy has not yet been recognized as a full-fledged market economy, and it has incurred much trade friction due to its arbitrary tariff evaluation. Also, in the PRC-New Zealand FTA, a memorandum of understanding on


the environment and labor was signed, with which the PRC can begin to improve its environmental criteria and labor conditions.

The typical field in which an FTA can contribute to the development of a multilateral trade system is that of nontariff barriers. Most Asian FTAs

Table 5.1: Coverage of the PRC’s FTAs

ASEAN (2005)

Chile (2006)

Pakistan (2006)

New Zealand (2008)

Goods ○ ○ ○ ○

National Treatment ○ ○ ○ ○

Tariffs ○ ○ ○ ○

ROO ○ ○ ○ ○

Customs Valuation × × × ○

Customs Clearance × ○ × ○

Mutual Recognition × × × ○

SPS Measures ○ ○ ○ ○

Safeguard Measures ○ ○ ○ ○

AD and CVD ○ ○ ○ ○

Services × ○ × ○

Rules on Services × ○ × ○

Human Mobility × × × ○

Investment × × ○ ○

Intellectual Property Rights × × × ○

Government Procurement × × × ×

Others

Competition × × × ×

Environment × ○ × ○

Labor × ○ × ○

E-commerce × × × ×

Transparency × ○ ○ ○

Administration

FTA Committee ○ ○ ○ ○

DSU ○ ○ ○ ○

AD = anti-dumping, ASEAN = Association of Southeast Asian Nations, CVD = countervailing duties, DSU = dispute settlement unit, FTA = free trade agreement, PRC = People’s Republic of China, ROO = rules of origin, SPS = sanitary and phytosanitary.


include chapters on SPS measures and technical barriers to trade. Hygienic quarantine is an area that even international organizations such as the WTO typically cannot handle well. SPS, which is an agreement on the application to foods as well as animals and plants, stipulates that the trading of food cannot be refused if internationally determined criteria are met in four areas: food additives; pollutants (residual agrichemicals, heavy metals, and other pollutants); pathogenic bacteria; and toxins. In accordance with SPS agreements that became effective 1 January 1995, international standards for food have been forcibly applied but have not been well implemented due to domestic resistance. Individual countries can prevent imports of internationally traded agricultural food products by setting up domestic standards that are higher than international standards. The candlelight street demonstrations in Korea in May–August 2008, which protested against American beef imports, can be understood in the same context.

While FTAs can adopt different types of SPS measures that reflect the positions of member countries on the issue, most FTAs choose to adopt international standards regarding SPS measures, which refers to an agreement on the Application of Sanitary and Phytosanitary Measures. This means that member countries of FTAs make another commitment in complying with the WTO rule, which results in more active observation of the rule. For example, Chapter 8 of the Korea-Chile FTA defines “Sanitary and Phytosanitary Measures,” noting that the definitions and terms established under the following shall be applied: (a) Agreement on the Application of Sanitary and Phytosanitary Measures, which is part of the WTO Agreement (SPS Agreement); (b) Office International des Epizooties (World Organisation for Animal Health); (c) International Plant Protection Convention; and (d) Codex Alimentarius Commission.

Article 8.5 of the FTA describes “International Standards and Harmonization” by saying that “without reducing the level of protection of human, animal, or plant life or health, each Party shall base its sanitary and phytosanitary measures on relevant international standards, guidelines or recommendations, where they exist, with a view to seeking harmonization.”4

4 Section 2 of Article 8.5 of the Korea-Chile FTA notes that the Parties may adopt a sanitary or phytosanitary measure offering a level of protection other than the level that would be achieved through a measure based on an international standard, guideline, or recommendation, including a more stringent measure than the foregoing, if there is a scientific justification, or as a consequence of the level of sanitary or phytosanitary protection the Party determines to be appropriate in accordance with the relevant provisions of Article 5 of the SPS Agreement.


In this article, “relevant international standards” imply the SPS Agreement, Office International des Epizooties, International Plant Protection Convention, and Codex Alimentarius Commission, which are a part of the WTO system. This article is quite similar to the WTO SPS Agreement, which implies heavy reliance on the WTO system.

Pan-regional FTAs have aspects that contribute positively to multilateral trade negotiations, but they also have negative aspects. The European Union’s 27 member countries have taken a joint position on a regional basis in the Doha Development Agenda (DDA) negotiations. Given that 153 WTO member countries are participating in multilateral negotiations, the subjects of such negotiations are becoming complex, such that big regional blocs are reducing the number of participants in their negotiations to simplify such negotiations. Also, peer pressure, which causes passively participating countries to be active, can be expected. On the other hand, the conclusion of agreements can be delayed if selfishness sets in.

Asia is composed of diverse countries and accounts for a big share of the world’s trade volume, economy, and population. Thus, Asian regional coordination not only in the ongoing DDA negotiations but also in new multilateral negotiations can contribute to the speedy conclusion of these negotiations. In particular, with the higher positions of the Chinese and Indian economies in the world economy, the importance of Asia in multilateral negotiations is increasing. Thus, if an economic cooperation body for the entire Asian region is established and the joint positions of Asian countries in multilateral negotiations are explored, the multilateral negotiation structure will be simplified, which will facilitate the conclusion of negotiations.

4. Schemes of Asian Regionalism that Contribute to the Multilateral System

The ways by which Asian regionalism can contribute to the development of a WTO multilateral system can be classified as either Asia-specific or not related to the region. The most important objective is to pursue a high-quality, pan-Asian FTA, but a pan-regional FTA is not easy to promote. Through the currently implemented or promoted FTAs, however, a scheme that will contribute to the development of a multilateral system can be explored.


4.1 Side-By-Side Development of Multilateralism and Regionalism

With the delays in the conclusion of the DDA negotiations, regional trade agreements such as FTAs have been spreading worldwide. Moreover, the current recession in the world economy is raising fears of the return of protectionism and discriminatory regionalism not only in advanced countries, but also in developing countries. It is not desirable, however, that FTAs that are based on discrimination replace a multilateral trade system that is based on MFN statuses. Although the development of a multilateral system has been delayed and regionalism is being pursued to meet interests that cannot be secured with a multilateral system, top priority should be accorded to multilateralism. It is certainly the best trade policy for maximizing the benefits from the expansion of global trade, the liberalization of trade, the reinforcement of trade standards, and the resolution of trade disputes among member countries.

Accordingly, the world trade order should be based on a multilateral system, and the FTAs that individual countries promote under given circumstances should pursue greater trade liberalization than that which the DDA is considering. Thus, multilateralism and regionalism should be developed side by side. As previously discussed, FTAs can contribute to global trade liberalization, but because they have negative effects, such as spaghetti bowl costs, high-level FTAs that engender broader trade liberalization and that are more comprehensive should be promoted.

4.2 Compliance with Multilateral Standards for Regionalism

In general, the latitude in Asian FTAs for opening markets is not wide. An FTA that can hardly meet even the market-opening conditions stipulated in Article XXIV of GATT has been concluded.5 Although the regulation itself has unclear clauses, tariffs on at least 90% of trade transactions among the member countries (on a number of items and on a traded-amount basis) should be abolished within 10 years, and particular industries should not be exempted from liberalization. Some FTAs stipulate tariffs of less than 5% rather than

5 Section 8(a) of GATT Article XXIV notes that “a free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.”


a total abolition of tariffs. For example, AFTA targets 0–5% tariff rates, and the South Asia Free Trade Agreement (SAFTA), which came into effect in 2006, has similar clauses.

SAFTA allows India and Pakistan to reduce tariffs to 0–5% within seven years (10 years for other members). The FTA between India and Thailand specifies that tariffs for only 10% of all products be eliminated. The Japan-Singapore FTA ensures that Japanese agriculture will not be affected in any real sense. Only a 14% increase was made in the number of Japan’s zero-tariff commitments with regard to agricultural products, relative to its commitments in the WTO. Therefore, most of the non-ad valorem tariffs, which are to be eliminated, are to be maintained in spite of the distorting effects on domestic production patterns.6

4.3 Promotion of a Pan-Regional FTA

Despite the many FTAs that have been concluded in Asia in a short period of time, their economic effects are less than expected. For greater economic effects, high-level FTAs should be concluded, and pan-regional, multilateral FTAs must be promoted. In Asia, multilateral FTAs are being discussed, but the participation of the related countries is sluggish. In the long term, the economic integration of the Asian region must be revitalized. Throughout the Asia and Pacific region, discussions are underway on multilateral economic integration, as with the PRC-Japan-Korea FTA,7 the ASEAN+3 (Korea, PRC, and Japan) or +6 (Korea, PRC, Japan, India, Australia, and New Zealand) FTAs, and the Free Trade Area for the Asia-Pacific that is being discussed in the Asia-Pacific Economic Cooperation (APEC), and the governments of the countries involved should favorably consider this matter with a liberal attitude.

Apart from the existing discussion channels among the concerned governments, a permanent organization must be established among the PRC, Japan, and Korea, wherein the discussions on economic integration in the region can continue without interruption even if there are diplomatic

6 Refer to Cheong (2002) regarding the wide range of exceptions for agricultural products in the Japan-Singapore FTA.

7 In accordance with the agreements in the summits of Korea, PRC, and Japan, joint private studies on the feasibility of a regional FTA are underway. In 2008, studies on the direction, problems, and expected effects of the promotion of an FTA among these three countries were conducted.


confrontations among the countries concerned. Such an organization, tentatively named the Organization for East Asia Economic Integration Promotion, has been proposed by Jeong (2008). To ensure the reliability of this new organization, government officials of each member country, and—as far as possible—members of the private sector, such as businesspeople, scholars, and nongovernmental organizations, must participate in the organization. Although this new organization should be promoted with the PRC, Japan, and Korea as the central players, representatives of the US and the European Union could also participate in it. This promoting body should have the competence and authority to deal with economic integration in the industrial and financial sectors and to reinforce functional economic cooperation in each area.

4.4 Harmonization of the Rules of Origin

In RTAs, the adoption of strict and diverse rules of origin incurs economic costs. Two ways of unifying or standardizing the rules of origin of RTAs in the Asian region can be considered. One scheme is to lay down model rules of origin and have each RTA accommodate them. The other scheme is to form an organization that covers a broad range of issues on East Asian economic integration and to adopt a rational form of the rules of origin. Such rules of origin can be set up as a kind of model. Intra-regional RTAs can be recommended to use these rules even before the East Asian integrated body is formed. Meanwhile, the Harmonization Work Program for laying down non-preferential and uniform rules of origin has been underway in the WTO since 1995.8 Thus, when uniform WTO rules of origin are adopted and Asian countries adopt them as their FTAs’ rules of origin, spaghetti bowl costs will be considerably reduced.

In the preparation of model rules of origin that can be applied to Asian RTAs, objective and transparent rules should be established with regard to consistently controversial matters, such as the setting up of neutral rules of origin, the method of calculating the regional value content to determine the position of the intra-regional place of origin, the de minimis regulations and standards, the expanded application of accumulation, and the Integrated Sourcing Initiative.

8 Despite the extension of the time limit on several occasions, negotiations on uniform rules of origin have not yet been concluded. The WTO’s General Board of Directors designated as critical issues 12 areas out of 94 core policies that have not yet been resolved, on which negotiations are underway.


4.5 Removal of Nontariff Barriers

Tariff levels have been considerably lowered. In particular, tariffs on industrial goods have been distinctly lowered. In the DDA negotiations, the reduction of tariffs in the agricultural sector has become one of the core points of contention. However, the nontariff barrier is more serious than the tariff barrier. Unlike tariff barriers, nontariff barriers are difficult to quantify, and an international comparison of nontariff barriers is likewise not easy, which implies that it is not easy to handle nontariff barriers in multilateral trade negotiations. Such barriers can be more effectively handled through FTAs than through a multilateral system, and this is one way by which regionalism can contribute to the development of multilateralism. Under FTAs, if the trade system is improved, the improved system can be applied not only to the countries that participate in the FTA but also to virtually all WTO member countries, such that considerable benefits from the resolution of nontariff barriers can be expected. In particular, the Agreement on Technical Barriers to Trade, the Agreement on the Application of Sanitary and Phytosanitary Measures, customs procedures, and commodity price tariff evaluation in Article VII of GATT are included in FTAs. Further, since business enterprises in the FTA member countries closely monitor the implementation of these agreements, their implementation effects can be substantially improved.

The simplification of customs procedures can contribute to the expansion of international trade.9 With the expansion of one-stop service shops, in which standardized information on export-import customs clearance is input at a single place, single-window projects with simplified and standardized procedures should be developed and expanded.10

The WTO is preparing a customs data model to provide standardized electronic data, and the US, Japan, and Australia are actively participating in this process. The contents of this model must be reflected in the Asian FTA. To remove nontariff barriers, electronic trade must be expanded. FTAs that have been recently concluded include the promotion of electronic trade, for which the system of cooperation is stipulated. Internet and digital communication can be made available all over the world with the development of information

9 A single window is defined as “a facility that allows the parties that are involved in trade and transport to lodge standardized information and documents at a single point of entry to fulfill all import, export, and transit-related regulatory requirements” (United Nations Economic Commission for Europe 2005).

10 See United Nations Economic Commission for Europe (2006) for one such framework.


and communications technologies; and accordingly, enterprises have rapidly expanded their e-trade because in the present age, prompt access to information on international business situations is essential for enterprises to survive. Accordingly, national governments are doing their best to construct a base for e-trade through a global network and also feel the urgency for international cooperation. FTAs can lead to the development and expansion of the global network by enhancing the e-trade platform and by forming an Asian e-trade network and connecting it to the e-trade networks of other regions.

4.6 Support for the WTO Implementation System

Many Asian countries have joined the WTO over the last several years, but the Lao PDR has yet to do so. In Asia, economic cooperation is being promoted through the ASEAN+3 Summit Meeting, and diverse cooperation projects, such as support for intraregional development, support for the construction of trade infrastructure, and development of manpower, are underway. Also, diverse FTAs have been concluded among intraregional member countries, and the promotion of an ASEAN+3 or an ASEAN+6 FTA is being discussed. The level and comprehensiveness of the planned pan-regional FTA will most likely be set up in consideration of those countries whose trade conditions and trade infrastructures are the weakest.

The most basic trade infrastructure can be compliance with and implementation of WTO regulations. Reinforcement of the protocol for implementing the WTO system is one of the prerequisites for the conclusion of a high-level FTA. Marked differences and diverse stages of development across Asian economies have become obstacles for establishing an economic cooperation system. Official development assistance (ODA) to developing countries in Asia must be expanded, the ODA support system for the construction of trade infrastructures must be reinforced, and the WTO system must be implemented. The ODA scales of Japan, Korea, and PRC must also be increased. When trade infrastructures are reinforced, developing countries can also expand their participation in international trade. When their economies grow as their international trade expands, the approval ratings for their open economies are expected to rise. As a result, the political competence of the sphere of powers that support the open economies will expand, and the environment for the promotion of liberalization policies will improve. As a result, developing countries can actively participate in FTA negotiations and WTO negotiations and can ultimately contribute to the development of a multilateral system.


4.7 Reinforcement of the Public’s Support of Market Economics

An open market policy influences income distribution and entails the restructuring of weak industries, due to which it can hardly be a popular policy. Regardless of the international economic theories mobilized to explain an open policy, the contentions of anti-liberalization advocates have been more convincing for the general public in many countries. The US has been no exception. In the recent US presidential elections, President Barack Obama adopted a protectionist trade policy platform to protect jobs and made it clear that he opposed a Korea-US FTA on the grounds that the results of negotiations in the automobile sector were unsatisfactory. In part because Americans had been experiencing serious economic difficulties, Obama’s position won him many votes in the 2008 presidential election.

Despite today’s difficult political and economic environment, the best way of promoting an open trade policy is to induce participation in the global trend toward regionalism and to harvest the economic profits of opening up markets. Trade authorities should reinforce their efforts for improving the public’s recognition of the advantages of market economies and liberal policies. In particular, for promoting multilateral negotiations in the DDA, FTAs with big economic blocs, and pan-regional FTAs, the opposition from anti-liberalization political powers should be overcome through broader support from the public. To win the public’s support, the help of media organizations should be sought and lectures should be given to the public on the market economy. In the Korean government’s conclusion of an FTA with the US in April 2007, the Korean negotiators’ aggressive stance in the negotiations was made possible with the support of the Korean public.11

Popular recognition of the merits of a market economy will grow if business enterprises and consumers experience the benefits of market liberalization. In particular, no matter how low tariffs may be, if the domestic distribution structures are undeveloped, it is the middlemen who will enjoy the benefits of lowered tariffs, and welfare effects on consumers can hardly be expected. Accordingly, deregulation, such as the innovation of the domestic distribution structure, should be emphasized. Efforts should also be made to enhance the degree to which enterprises utilize existing FTAs.

11 During the FTA negotiations, the Korean public’s approval rating for a Korea-US FTA was about 30% but, thanks to the Korean government’s active promotion, the approval rating rose to 60% toward the conclusion of the negotiations.


Likewise, efforts should be made to maximize the positive effects of FTAs, not only through the qualitative and quantitative assessment of the effects of FTAs, but also through smooth implementation of existing FTAs. To do this, governments must provide business enterprises with the information they need to actively utilize existing FTAs. Member countries should hold meetings of implementation committees regularly, as stipulated in the agreements, to evaluate the current conditions of FTA implementation and discuss schemes for future development.

5. Conclusion

The global economy has entered a recessionary phase due to credit distress and deterioration of the industrial sector, which was caused by the US financial crisis. The Asian economy has been affected, although it has continued to enjoy high growth. International cooperation to prevent a deeper financial crisis and to boost the global economy is proving effective to a certain extent, but it is expected that the world economy will not soon escape the trend of low growth. As a result, the prospects for the Asian economy, which depends heavily on exports, are gloomy. If the DDA is concluded, it will help to invigorate the world economy. However, the negotiation for the DDA is not likely to be concluded in the near future.

In terms of Asia’s stage of economic development, economic growth potential, and population size, the growth prospects of the region’s economy are better than those of the US and Europe. The task is to actualize these growth potentials and expand domestic demand. For this purpose, intraregional cooperation for the expansion of demand within the Asian region must be initiated. A pan-regional FTA can be formed to support this effort. In the long term, a system for financial cooperation within Asia, such as the Asian Monetary Fund, must be discussed. The level of trust among Asian countries is low, so no one country can lead pan-regional economic integration. The current urgency for forming a regional FTA can help overcome such problems. In particular, the EAFTA will help to enhance the growth potential of the East Asian economy.

The ASEAN+3 Summit Meeting has made much headway as an economic cooperation organization. However, practical discussions on regional integration are needed. It is more important to develop a consensus on the establishment of a pan-regional FTA than to fan controversies on an ASEAN+3


or an ASEAN+6 FTA. This is a difficult issue to resolve because of barriers such as wide gaps between member countries, differences in perceptions of market liberalization, and a struggle for leadership in intraregional integration. Because many countries have accumulated experience and expertise on FTAs, a pan-regional FTA can be promoted only when political agreements have been reached. When consensus on a liberalization policy is established in Asia, the region can play the role of promoting DDA negotiations and drive the conclusion of negotiations with other regions.

Most countries have not formed equally antagonistic structures between pro-FTA groups and anti-FTA groups. The voices that oppose FTAs and liberalization are loud, while the voices of FTA and liberalization supporters, such as business enterprises and others that can expect profits from liberalization policies, are too soft. This imbalance affects the political map in domestic politics, making the promotion of FTAs more difficult.

Why are the FTA supporters who can benefit from liberalization silent? In the case of Korea, the most important reason for this is the lack of involvement of Korean enterprises beginning from Korea’s choice of the country with which it would conclude an FTA. Because the government is doing well in aggressively promoting FTAs, business enterprises think they need not participate. In addition, they may not want to bear the emotional burden of facing the groups of people who may be harmed, including laborers and farmers.

Only when supporters of market-opening policies make their voices heard can the government actively participate in FTA and DDA negotiations. The ways by which “silent approval” can be converted into “proactive approval” should be explored. The participation of interested parties, such as business enterprises, in the course of decisions on trade policies should be expanded, and positive coverage by the media must be sought. The government should reinforce trust with the media by consistently conveying accurate information to the media.


References

Cheong, I. 2002. The Assessment of the Japan-Singapore FTA. Internal Discussion Paper. Seoul: Korea Institute for International Economic Policy. Korean.

Cho, J., and I. Cheong. 2008. Survey on Korean Companies on the Utilization of FTAs. Presented at a seminar by Korea Association of International Trade and Industries. November. Korean.

Estevadeordal, A., M. Shearer, and K. Suominen. 2008. Regional Integration in the Americas: State of Play, Lessons, and Ways Forward. Paper presented at the Multilateralizing Asian Regionalism Conference organized by ADBI and the Center for Trade and Economic Integration of the Graduate Institute of International and Development Studies, ADBI, Tokyo, 18–19 September.

Estevadeordal, A., and K. Suominen. Forthcoming. Bridging Regional Trade Agreements in the Americas. Washington, DC: Inter-American Development Bank.

Hiratsuka, D., I. Isono, and H. Sato. 2008. Findings from Japan Enterprise Survey of the Impact of FTAs: Escaping from FTA Trap and Spaghetti Bowl Problem. Paper presented at the Asian Noodle Bowl Conference and Technical Workshop on Impacts of FTAs on Business Activity in East Asia, ADBI, Tokyo, 17–18 July.

Jeong, S. 2008. Economic Integration in East Asia and the Roles of Korea. Paper presented at the conference on East Asian Economic Integration organized by the Institute for the Research of Advanced Korea, Seoul, 12 October. Korean.

Kagami, M. 2003. ASEAN-Japan Comprehensive Economic Partnership and Japan’s FTAs with Other Countries Including Korea and Mexico. Paper presented at the JEF/SIIA International Symposium, Singapore, 7–8 March.

Kawai, M., and G. Wignaraja. 2008. Asian Noodle Bowls: Are They Serious? Paper presented at the Multilateralizing Asian Regionalism Conference organized by ADBI and the Center for Trade and Economic Integration of the Graduate Institute of International and Development Studies, ADBI, Tokyo, 18–19 September.

Park, I. W. 2008. Regional Trade Agreements in East Asia: Will They Be Sustainable? Mimeo. Seoul: Korea University.

World Bank. 2000. Trade Blocs: A World Bank Policy Research Report. Oxford: Oxford University Press.

————. 2004. Global Economic Prospects, 2005: Trade, Regionalism and Development. Washington, DC: World Bank.

United Nations Economic Commission for Europe (UNECE). 2005. Recommendation on Establishing a Single Window, Recommendation 33, ECE/TRADE/352. Geneva: UNECE.

————. 2006. WCO Framework of Standards to Secure and Facilitate Global Trade. Geneva: UNECE.


1. Background and Purpose of Analyses

The debate is ongoing regarding the roles of regionalism and multilateralism in the world economy in terms of reinforcing the global multilateral trading system (under the WTO). We have discussed the “noodle bowl” phenomenon of FTAs in Asia. Fears persist that the FTAs existing in Asia will hamper the development of a multilateral trading system under the umbrella of the WTO. The growing economic integration of nations around the world through regional or global trade and investment has been accompanied by increasing overlap between bilateral FTAs and the multilateral trading system under GATT/WTO rules. Given the side-by-side development of regionalism and multilateralism, in what directions will regionalism be developed? Will it supplement multilateralism or make it more complicated? Not enough evidence exists to answer these questions. However, optimists say that if we account for the trade in the Asia and Pacific region over the last decade, Asian regionalism under FTAs has contributed significantly to the development of a multilateral trade system (Petri 2008). From that point of view, I quite agree with the statement of the authors that “it is desirable that regionalism and multilateralism be developed side by side, and that regionalism be developed in such a manner that it supplements multilateralism” (see p.99).

2. Status of Asian Regionalism

How complex is Asian regionalism today? In Section 2 of the chapter, the authors have described the real picture and analyzed Asian regionalism. From the foundation of the ASEAN FTA, the model of FTAs (ASEAN-plus agreements) was built. The chapter shows that one of the characteristics of

Comments

Pham Quy Long


Asian regionalism is that many FTAs with different contents were concluded in the region in a short time, and many FTAs are still under negotiation. The reasonable concern over having more FTAs is the potential spaghetti bowl costs due to overlapping FTAs and different or complicated rules of origin. I think that from the political economy perspective, FTAs in East Asia, understood as RTAs, were also influenced by the rivalry between Japan and the PRC for future regional leadership. The authors also mentioned the concept of an “FTA hub” position in which ASEAN vs. Northeast Asia compete as blocs and ASEAN vs. PRC vs. Japan vs. Korea compete as individual countries. However, which country should take the leadership role is still a controversial issue. Most of the focus is on the rivalry between the PRC and Japan as well as ASEAN for that position. Korea does not normally get considered as a possible future leader. For the first time, this chapter put Korea forward for consideration as a new candidate. Thus, it can be said that the regionalism in Asia in terms of RTAs or bilateral FTAs is still complicated and involves conflicts over non-economic factors rather than market-led motivations.

3. How to Reach Our Purpose?

The question is sometimes asked whether regionalism contributes to the goals of the WTO. RTAs are concluded basically to liberalize trade, a focus they share with the WTO. From that perspective, I agree with the authors’ argument that a market-friendly and liberalization-friendly atmosphere, formed as the number of FTAs increases, will facilitate intraregional and multilateral trade liberalization.

In Sections 3 and 4, the authors explained how regionalism in Asia can be a stepping stone to harmonize RTAs under WTO rules. I think that the following seven issues pointed out by the authors are crucial for dealing with the complicated status of Asian regionalism:•Side-by-sidedevelopmentofmultilateralismandregionalism•Compliancewithmultilateralstandardsforregionalism•Promotionofapan-regionalFTA•Harmonizationoftherulesoforigin•Removalofnontariffbarriers•SupportfortheWTOimplementationsystem•Reinforcementofpublicsupportofmarketeconomics

However, in order to reach the goal of Asian regionalism (i.e., RTAs) by


continuing to follow GATT/WTO rules and contributing to the development of the multilateral trading system, more than the issues mentioned above will need to be addressed.

From a political economy perspective, I offer the following additional suggestions.

First, we have been talking solely about the responsibility of Asian regionalism, seen as existing RTAs. It is correct that they should make adjustments to follow GATT/WTO rules. However, this is not fair. The multilateral trading system under GATT/WTO rules should be made more efficient and clear.

Second, regarding the objectives of Asian countries in participating in RTAs, their strongly economic motivation is doubtless. However, if we look more carefully at the economic and political atmosphere in East Asia as well as the world, we might have to give up our dream of building a global free trade and investment system in the near future. The failure of the DDA a few years ago was seen as strong evidence against the success of our efforts. Asian regionalism should move in a direction in which it can contribute to strengthening multilateralism under WTO rules. The governments in the region must find a balance between the economic and political benefits from joining regionalism. The process of international economic integration and globalization may make us vulnerable to developments in other nations. However, because there is no way to opt out of this trend, we must compromise to progress together.

References

Petri, P. A. 2008. Multitrack Integration in East Asian Trade: Noodle Bowl or Matrix? Asia-Pacific Issues 86. Honolulu, HI: The East-West Center.

VI1. Introduction: Why the Question?

Many readers may find the title of this chapter a little odd because any economic scholar would know that there can be no definitive answer to a question such as this. First, there has never been an agreement or consensus on the definition of a socially sustainable development. Second, even when socially sustainable development (SSD) is further qualified to mean an equitable and inclusive kind of SSD, it is still not clear as to what exactly “equitable and inclusive” mean here. Third, the question focuses on Asia, which is one of the most diverse and disparate continents in the world. It is difficult to definitively say something that is applicable to all countries in the region. However, this chapter presents a challenge worth taking on because it provides a good opportunity to explore the issues involved in the question, “How can Asia develop in a sustainable manner?,” and touch upon certain ideas and opinions that may lead to a wider discussion on proper development approaches and a deeper understanding of current development problems.

It is possible that the fundamental question of how a country or an economy develops is still the main concern of many development economists and practitioners, and that these people want to expand the knowledge of development beyond the causes or determinants of development. But some would still be unsatisfied with the basic explanations of economic growth and development of countries in Asia or elsewhere in the world. Recall the World Bank’s (1993) well-publicized work, The East Asian Miracle. While most scholars have accepted this work on several of these high-performing

How Can Asia Develop in a Socially Sustainable Manner?

Medhi Krongkaew

How Can Asia Develop in a Socially Sustainable Manner? 123


Asian economies (HPAEs)1 as very well researched and informative, many have questioned its applicability in other economies or in other regions. Even within the East Asian region itself, the explanation of growth and development in a contiguous or adjacent country can be different. Of course, the World Bank has realized the potential for discrepancies; indeed, it found that the diversity of experience, institutions, and policies among the HPAEs do not allow a model to be developed. Yet, the World Bank believed that some lessons for other developing countries could be learned from the East Asian experience, the first lesson of which is that it is essential to get the fundamentals right—i.e., a high level of domestic saving, broad-based human capital, good macroeconomic management, and limited price distortions providing the basis for growth. The second lesson is that careful policy interventions to accelerate growth should produce very rapid growth. This chapter attempts to further clarify or explain the sources and causes of dynamic growth in East Asia.

There are two more issues that need to be addressed in dealing with East Asian economic growth. The first is that, while it is clear why some economies are able to grow very fast, it is not clear how long it will take these economies to catch up with other developed economies. On this point, Ali and Zhuang (2007) showed that despite rapid growth, developing Asia’s income gap with the developed world remains astonishingly wide. In 2005, the average per capita gross domestic product (GDP) in 2000 constant United States (US) dollars for developing Asia as a whole was less than 3% of those of Japan and the US. Even for the People’s Republic of China (PRC), which experienced a 9% growth rate for more than 20 years, per capita GDP in 2005 was only 3.7% of Japan’s and 3.9% of the US’. These numbers suggest that developing Asia has a long way to go to reach the per capita income levels seen in the developed world. It must be noted that these developed economies are growing too and that they can find ways to further increase their own growth.

The second issue is that despite the fast growth, there is no guarantee that this is a quality growth. On this point, Krongkaew and Ragayah (2008) referred to the economic crisis in East Asia that started in Thailand in July 1997 as a wake-up call for many of these rapidly growing economies in East Asia to realize that rapid economic development not followed by a more mature institutional infrastructure and economic management system can lead to economic disaster. The 1997 economic crisis gave rise to at least two

1 The East Asian economies included in this study are Japan; Hong Kong, China; Republic of Korea; Singapore; Taipei,China; and newly industrializing Indonesia, Malaysia, and Thailand.


new thoughts on the ways in which a country develops its economy. One is that, despite the rapid economic growth experienced during the boom years, poverty can return quickly if the crisis results in the collapse of the real sector and ensuing extensive unemployment. The other is that problems of income inequality can no longer be ignored and relegated to the background in policy determination during the period of economic prosperity. There have been several crisis-hit countries where, in the past few years, poverty incidence fell because the average income of the people increased through increased employment brought about mainly by economic growth. However, often, that economic growth came as the result of inappropriate and unsustainable economic activities associated with a bubble economy (such as speculative movements in the stock market and speculative investment in the real estate sector). When the bubble burst, those economic activities died with it, causing a real reduction in income and welfare, and a real increase in poverty incidence. Furthermore, the economic prosperity of the bubble period overshadowed concerns for economic inequality. No one cared if his or her income was lower than those of others around them as long as their own income continued to rise. But the growing income inequality could be the pretext under which the top income group was able to engage in inappropriate and unsustainable economic activities, which further brought about economic disaster and, later, crisis.

In future economic management in developing economies, policymakers must not be blinded by the extent and speed of economic growth that characterized many East Asian economies in the past. Sustainable economic development should be characterized by a reasonable rate of growth of the economy, with price stability, satisfactory employment situation, adequate consumption growth of goods and services that promote health and long-term well-being, a stable government with sufficient public revenues and an appropriate and efficient public expenditure system, a concern for and preservation of the environment, and good prospects for future growth and development. The implications of the two issues mentioned above are that anti-poverty strategies would be made more conducive to long-term rather than short-term change and transitory poverty reduction, while, at the same time, at the very least, a basic social safety net be put in place to protect the needy. Perhaps even more importantly, the concern for equitable income distribution must be increased so that growing income inequality will no longer be tolerated but dealt with firmly; without equitable income distribution, sustainable development cannot be attained.


A more demanding development scholar could further argue that sustainable development requires more than the removal of absolute poverty and acceptable income inequality. The term “socially sustainable” should transcend economic boundaries and consider other aspects of social development. A few of these social conditions can be immediately mentioned. The guarantee of political freedom; equal political entitlement; freedom of speech, expression, peaceful assembly, and association as contained in the first few articles (i.e., Articles 1, 2, 3, 18, 19, and 20) of the United Nations (UN) Universal Declaration of Human Rights must come before any other conditions can be considered. Then, there must be a requirement that environmental protection and management of natural resources for present and future generations be included in the definition of SSD. Finally, SSD should include a society in which exists good governance both in the public and private sectors, where state officials do not use their offices to transfer public gains to their own private benefits (a general meaning of corruption), where corporations do not have to be told about corporate social responsibility because their good corporate practices and fairness already remove the need for such admonitions, and where the government is able to maintain an appropriate balance between private initiatives and state interventions.

These above problems and difficulties tempt one to wonder how Asia might develop in a socially sustainable manner. Unfortunately, however, the realistic situation in developing Asia is such that SSD may be difficult to attain in the near future. It is the main intention of this chapter to show why this may be the case. Several statements about the feasibility of SSD for Asia (and indeed for other developing regions of the world as well) are:

(i) As poverty remains in many Asian developing economies, the low-income position of the poor often gives rise to situations in which the government exploits the poor by initiating or instituting populist policies that add or generate income to these poor households or population without much regard to the efficiency of such policies, in exchange for the poor’s political support in a Western-style democracy through election and/or acquiescence of politicians’ corrupt behavior. When this happens, the chance of an economy developing into a socially sustainable system is less likely because the income growth in the short-term will not last and the politicians will make the most of the gains themselves.

(ii) Even when the government is genuine in its policies to help the country achieve long-term development, it may be restricted by the need to


appear successful in the short-term. As economic growth and expansion is often used and regarded as a first and easy sign of a government’s success, the GDP growth figure is often the main aspect a government is concerned about. Growth takes priority over other economic policies for a government’s own short-term image and SSD suffers as a result.

(iii) Poverty issues will become continuously less important in a growing economy because people’s increased income will automatically show a decrease in poverty problems as time passes. However, as long as the economy keeps growing, worsening income distribution will likely continue to go unnoticed by the general public because their immediate welfare will not be affected. Only when growth stalls and the lowest income groups start to feel the hardship might public unrest and upheaval result. This is one of the most serious hidden dangers of growth accompanied by increasing inequality.

(iv) Policies to engender inclusive and equitable growth are probably some of the most difficult policies for any economy, developed or underdeveloped. Although politicians and policymakers in most countries in the world normally come from high-income backgrounds, their reactions toward inclusive and equitable economic policies may differ, depending on whether they are in a developed or developing country. More equitable and inclusive developed countries may be more attuned to maintaining the existing equitable economic and social conditions in their countries, whereas the politicians and policymakers in developing countries with serious equity and inclusiveness problems to begin with may be less inclined to do anything to harm their favorable social and economic positions.2

(v) Policies and conditions associated with SSD such as environmental and resources preservation and improvement can be said to be very income elastic; that is, more will be demanded when income is higher. When a country is poor, these policies or conditions will not be demanded or will be demanded in insufficient quantity. Only when economic growth and future development has increased people’s income will these environmental and resource situations become important.

2 A good case in point is the situation in Thailand, one of the most unequal countries in the world among countries with the same level of economic development (in terms of the Gini coefficient, a well known index of income distribution); effective land reform has never been allowed to function, inheritance and estate tax legislation has never been allowed to pass the parliament, and income from capital gains through the stock market has been tax-free for the last 30 years.


(vi) In order to catch up with developed economies, developing Asian economies need to find policies and measures that contribute to long-term growth. Science and technology may be beyond the grasp of these developing economies in the short-run. However, failure to generate overall capability in the economy could result in a country depending on purchasing or using foreign technology without the prospect of creating or generating its own technology that could push the country forward. How can developing Asian economies find or develop their own technology?

(vii) Corruption often slows down the process of growth and development. Until very recently, fighting corruption in developing Asian economies (especially East Asian economies) was not a major policy undertaking. Anti-corruption policies may turn out to be one of the most important tools in bringing about SSD. Again, society may be indifferent, even averse, to the fight against corruption in the public and private sectors for the simple reason that the general public is the beneficiary of the populist policies of states and governments.

(viii) The economic crises in many East Asian countries in the late 1990s can be viewed as the outcome of several economic excesses in several respects. The easy money that accompanied a large influx of foreign capital, either through foreign short-term investment or short-term overseas borrowing by domestic borrowers, gave rise to careless spending and “living beyond one’s means.” The pain of economic crisis has taught many lessons to the people of these countries, but is it certain that this profligate behavior will not return? Does there need to be new thinking that could lead us to a safer and more sustainable development in the future?

This chapter aims to elaborate on the above feasibility and plausibility of SSD for developing Asian countries. Section 2 considers the meaning and scope of SSD, and the reason why it is still important as a development goal for any developing country. Section 3 looks at empirical evidence of economic growth and development of some East Asian economies, especially to substantiate or establish relationships between growth and other goals of economic development such as income distribution, and the reasons for difficulties in achieving SSD in Asian countries today. Once the sources of problems have been analyzed, Section 4 proposes or discusses the ways in which SSD could be installed in the Asian setting. Section 5 provides summary and conclusions.


2. The Meaning and Scope of Socially Sustainable Development

The term SSD may be relatively new, but it is being based on quite an old concept of sustainable development. In 1987, the term “sustainable development” appeared as the theme concept of the report of a special commission set up by the UN General Assembly in 1983 called the World Commission on Environment and Development. This influential report, which set the tone for the concern for environment problems like global warming today, describes the accelerating deterioration of the human environment and natural resources, and the consequences of that deterioration for economic and social development. Figure 6.1 depicts the concept of sustainable development as consisting of three interconnecting circles of social, economic, and environmental development, where the innermost part that shares the element of each type of development is termed sustainable development. This resulted in the widely accepted meaning of sustainable development—that is, “…development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” But even before that, the concern about the environment and the depletion of the world’s resources was already hotly debated as a result of a publication by the Club of Rome3 called “The Limits to Growth” (Meadows

Figure 6.1: Scheme of Sustainable Development at the Confluence of Three Constituent Parts

Source: Adapted from International Union for Conservation of Nature and Natural Resources (2006).

3 The Club of Rome is a think tank founded in Rome in 1968 by a group of successful scientists, businessmen, international civil servants, and other prominent individuals to study future development prospects.


et al. 1971). In the field of development, sustainable development has spawned several other related terms and concepts, such as human development, SSD, social inclusion and inclusive growth, social accountability, pro-poor growth, and social opportunity.

With regards to SSD, a topic that is so important that the World Bank Institute has created a special website on the subject, there is technical reference to it dated as early as 2002. In August 2002, for example, the Department for International Development (DFID) of the British Government published a background briefing on SSD making a reference to the three-ring, or three-pillar, concept of sustainable development that this is an improvement over development that is based on economic aspect alone (Figure 6.1). But the DFID argued that the three-ring concept still ignores the political, legal, human health, demographic, educational, and technical dimensions, and obscures the links between them. The implication that “economy” and “society” are separated is misleading. Therefore, the DFID recommended replacing the three rings or three pillars with four dimensions as a better concept of SSD. These four dimensions include (DFID 2002):

1. Biophysical aspects of natural and manufactured goods and processes, and human biology;

2. Institutional aspects of formal and informal social, political, educational, and financial interrelationships;

3. Technical aspects of knowledge, tools, skills, and practices; and4. Ethical aspects of philosophical and attitudinal influences on policy

and behavior.ADB is another organization that has paid close attention to inclusive growth

which could be called its version of SSD. A few of ADB’s recent publications (Ali 2007; Ali and Zhuang 2007; Ali and Son 2007; Walton 2007) have focused on the main concept of this inclusive growth and attempt to devise ways to measure inclusive growth. Ali (2007) and Ali and Zhuang (2007), for example, mentioned that inclusive growth means growth with equal opportunities, or growth that focuses on creating opportunities and ensuring equal access to them. In other words, “growth is inclusive when it allows all members of a society to participate in and contribute to the growth process on an equal basis regardless of their individual circumstances such as religious background, parental education, or geographical location” (Ali and Zhuang 2007: 10). Another three-pillar concept of inclusive growth was given by Ali (2007) (Figure 6.2). In the figure, the three pillars upon which inclusive growth has


Figure 6.2: Three Pillars of Inclusive Growth

Source: Reproduced from Ali and Zhuang (2007).


rested are full, productive, and decent employment; social protection; and capability enhancement.4

Few other scholars have attempted to elaborate on their understanding of the SSD and inclusive growth. Lin (2004) argued that in most developing countries, if a government adopts an appropriate development strategy, it will be able to achieve dynamic growth and equitable income distribution during the development process. And this development strategy must follow what Lin calls the “Comparative-Advantage-Following Strategy” to achieve viability as opposed to the “Comparative-Advantage-Defying Strategy,” which would bring failure in the long run.5 A proper policy prescription by Lin is, therefore, a transition to a policy regime that facilitates industrial development alongside the country’s comparative advantage development in order to improve the country’s growth performance and to allow the poor to benefit from the growth. Hausman, Rodrick, and Velasco (2005) attempted to look at the reasons for “growth acceleration,” or determinants of fast growth, that do not contain a long list of reforms. The authors looked at binding constraints on growth rather than what is needed to achieve growth because they believed that growth accelerations happen when such binding constraints on growth are removed. This approach is known as growth diagnostics. And although SSD is not specifically discussed or analyzed in the original article, it is easy to see that once the policymakers set SSD as a development goal, growth diagnostics could be used to find constraints that prevent SSD from happening and remove them.6

While several development economists are preoccupied with the nature and realization of inclusive growth—i.e., how to spread the fruits of development to wider circles of people without compromising and sacrificing too much with the consequences of development (e.g., environmental damage, urban congestion, concentration of wealth and

4 Ali and Zhuang further elaborate that inclusive growth not only addresses the inequality issue, but also enhances the poverty reduction agenda. As they explained, “first, the impact of growth on poverty reduction is higher when the initial level of inequality is lower and/or inequality declines over time. Second, inclusive growth makes poverty reduction efforts more effective by focusing on creating productive employment opportunities and making them equally accessible for all, while addressing extreme poverty through social safety nets and, therefore, moving away from the targeting approach to development” (Ali and Zhuang 2007: 11).

5 Lin (2004: 8) defines viability in this way: “If, without any external subsidies or protection, a normally managed firm is expected to earn socially acceptable profits in a free, open, and competitive market, then the firm is viable. Otherwise, the firm is not viable.”

6 See Felipe and Usui (2008) for further explanation of the growth diagnostics approach.


income, etc.), many would go deeper into accepting a more “holistic” nature of development; that is, development that goes beyond income and its distribution to include other aspects of human welfare. In positive economics, development can be regarded as acceptable only in the Paretian sense—i.e., when one can be made better off without making anyone else worse off. However, in the real world, a trade-off between gainers and losers often exists so that social choice where the preferences of all individuals have been taken into account without anyone suffering from compromises or sacrifices is impossible. If this is true, then there can never be agreement on what constitutes true development.

To solve this impasse, many scholars have questioned the notion of the impossibility of social choice. Sen (1999) has argued for the possibility of social choice. This line of argument in which interpersonal comparison is possible and acceptable through what Sen calls “informational broadening,” or the knowledge that informs us of “…the real advantages and disadvantages of different persons, related to their substantive well-being, freedoms, or opportunities” (Sen 1998: 201). According to Clarke (2006: 152), human well-being can be studied or measured through the “operationalisation” of normative social choice theory where “…society’s choices, preferences and value judgments on issues of economic equity and efficiency, intergenerational equity, aggregation, justice, poverty measurement, and market perspectives versus social perspectives” can be considered.

The challenge by Sen has given rise to many new ideas on the understanding of economic growth and development. Clarke and Islam (2004a, 2004b) and Clarke (2006) proposed that human well-being can be measured in at least two ways: one is to measure human well-being as the fulfillment of hierarchical needs à la Maslow (1943) through the present value of the estimate of such hierarchical needs fulfillment, and the other is to measure human well-being through the present value of national income adjusted by the costs and benefits arising from achieving such economic growth.7

7 According to Clarke (2006), the present value of hierarchical needs fulfilment would be measured by:

Where HNF=hierarchical needs fulfilment, BN=basic needs, SN=safety needs, BLN=belonging needs, EN=esteem needs, SA=self actualisation, α1,…,α5=the weights assigned to each set of needs, r=discount rate, and t=time. The present value of the adjusted national income is measured by:

Where ANI=adjusted national income, NBt=net benefits, t=time, r=discount rate, Ect=economic factors, Ent=environmental factors, Sot=social factors, Pt=political factors, and Spt=spiritual factors.


In 2006, the United Nations University in cooperation with the World Institute for Development Economic Research organized a research project on “Measuring Human Well-Being” with an aim to provide a comprehensive and rigorous review of the concept and measurement of human well-being, with the main focus on the well-being achievement at the level of nations (McGillivray 2007). In 1996, Nanak Kakwani, a student of Sen, had already applied the practical knowledge of the measurement of human well-being to the national development of Thailand. The result of the study, which was later adopted by Thailand’s National Economic and Social Development Board (NESDB), has become one of the analytical tools to measure a country’s development performance and is still in use today. The Indicators of Well-Being so adopted consist of seven indicators: health, knowledge, working life, income and income distribution, environment, family life, and governance (NESDB 1997).8 Table 6.1 shows the characteristics of the Index of Well-Being, its components, and actual indicators used in the measurement of Thai development performance.

It is clear that SSD should include comprehensive elements of the original UN-World Commission on Environment and Development sustainable development and additional aspects of political development, good governance, and other social conditions of people’s jobs and lifestyles. The analysis of this will be taken up in Section 4.

3. Patterns of Growth and Income Inequality in East Asia

Like most developing countries in the world, Asian countries would like to achieve a high rate of economic growth so that their population may escape poverty and enjoy the benefits of higher incomes. The ways that Asian economies, especially East Asian economies, have attained their economic growth have been subject to much admiration and support, as mentioned earlier, and in such publication as the World Bank’s East Asian Miracle (World Bank 1993). HPAEs are diverse in natural resources, culture, and political institutions; they also differ in the degree of government intervention in the economy and the manner in which policies are shaped and implemented. Yet they were successful in achieving rapid growth with equity. Today, growth

8 The work by Kakwani for the Thai government on the Index of Well-Being can be found on the NESDB website at http://poverty.nesdb.go.th/poverty_new/doc/NESDB/uan_25490428104323.pdf.


Table 6.1: Index of Well-Being: Components and Indicators

Index Components Indicators

1. Health 1. Longevity2. Good health3. Fairness in the public health

system

1. Life expectancy at birth2. Percentage of healthy population on

annual basis3. Percentage of population with health

insurance or security

2. Knowledge 4. Widespread and equitable education

5. Quality of education

4. Average years of education of the population

5. Rates of enrollment of lower and upper secondary education

6. Test scores in Thai language, English language, mathematics and science

3. Working life 6. Full employment7. Work security

7. Unemployment rate8. Percentage of workforce with employment

welfare and covered by the social security system

4. Income and distribution 8. Income9. Distribution of income

9. Percentage of income-poor population10. Index of income distribution

5. Environment 10 Shelter and public utilities11. Safety in life and property12. Physical environment

11. Percentage of households with ownership of houses or accommodations

12. Percentage of households with piped water

13. Crime rate per capita14. Rate of drug addiction per capita15. Index of water quality16. Size of waste per capita per annum17. Ratio of forest area to total area

6. Family life 13. Relationship within members of the family

14. Economic self-reliance

18. Rate of divorce19. Rate of marriage registration20. Index of family cohesiveness21. Percentage of households having income

over expenditure of more than 10%

7. Good Governance 15. Ethical principles16. Participation17. Cost effectiveness18. Transparency

22. Percentage of civil servants penalized with disciplinary actions

23. Percentage of voter turnout24. Ratio of public expenditure to GDP25. Transparency International’s Corruption

Perception Index

Source: Krongkaew (1996).


with more equity is being replaced with growth and growing inequality, a situation that has become of great concern among development scholars and practitioners in Asia.

In what follows we will refer to a number of studies by a group of East Asian economists on the issue: how does the rapid economic growth of some East Asian countries contribute to or impact the status of income distribution of households and populations of these countries?9 The eight economies are: PRC, Indonesia, Republic of Korea (hereafter Korea), Malaysia, Philippines, Singapore, Thailand, and Viet Nam. These can be loosely classified into three groups: (i) Singapore and Korea are more advanced, newly industrialized countries; (ii) Indonesia, Malaysia, Philippines, and Thailand are developing, middle-income countries; and (iii) the PRC and Viet Nam are former socialist economies recently converted to market-oriented economic systems. The PRC is a unique case in which the country is a developing country in terms of economic development but with a potential to be a major economic power in East Asia, if not the world, in the near future.

The state of development in these eight East Asian countries is quite disparate (Table 6.2). As expected, Singapore and Korea rank first and second in terms of purchasing power parity (PPP) per capita gross national product (GNP). Malaysia, Thailand, and the Philippines enjoy the middle positions in the overall rankings with the PRC ranking higher than Indonesia and Viet Nam, which is in last place. The average growth rates of GDP for Singapore and Korea were also higher than any other East Asian economy that had emerged from the 1997 economic crisis. Economic recovery in Korea was unusually rapid, as its GDP growth rate was a very high (7.8%). The Chinese economy continues to grow very fast during this post-crisis period, with Viet Nam growing fairly well, at 4.1% per annum. Using Japan’s rates as a benchmark, Singapore’s PPP GNP per capita was 92% of the Japanese PPP GNP per capita, while Korea’s position was almost 64% of the Japanese PPP GNP level. The rest of East Asia is still far behind Japan in terms of PPP GNP per capita.

The last three columns of Table 6.2 show the average rates of growth of GDP of these eight countries from 1980 to 2000. The average growth of the Singaporean and Korean economies from 1980 to 2000 were almost the same at 7.4% and 7.3% per annum, respectively. The Association of Southeast Asian Nations-four (ASEAN-4) economies also grew quite well (around 5% to 6%),

9 The studies were undertaken by Alisjahbana et al. (2008), Balisacan and Piza (2008), Chia and Chen (2008), Choi (2008), Israngkura (2008), Pham (2008), Ragayah (2008), and Tian, Wang, and Liu (2008).


with the Philippines as the exception. Indeed, the Philippines’ growth was the lowest of our selected countries (only 2.2% per annum). The PRC had the highest GDP growth rate, exceeding 10% per annum in the two decades between 1980 and 2000. Viet Nam also grew very fast after it initiated a market-oriented economic system.

While the growth of the selected economies mostly exhibits similar patterns of high and sustained growth for most of the 1980s and 1990s, the same cannot be said about the patterns of income distributions in these economies. The distribution of income in these eight economies ranges from fairly equal, as in the case of Korea, to very unequal, as in the case of Thailand in the year 2000. In terms of Gini coefficient, the Korean income distribution shows the

Table 6.2: Size and Growth of Some East Asian Economies, 2000

Country GNP per

capita

PPP GNP

per capita

PPP per

capita as %

of Japan

PPP GNP

per capita

rank

Per capita

GDP Growth

rate 1999-

2000

GDP growth

rates,

1980-1990

GDP growth

rates,

1990-2000

GDP growth

rates,

1980-2000

Korea, Rep. of

8,910 17,300 63.9 2 7.8 8.9 5.7 7.3

Singapore 24,740 24,910 92.0 1 8.1 6.7 8.0 7.4

Indonesia 570 2,830 10.5 7 3.1 6.1 4.2 5.2

Malaysia 3,380 8,330 30.8 3 5.7 5.3 7.0 6.2

Philippines 1,040 4,220 15.6 5 2.1 1.0 3.3 2.2

Thailand 2,000 6,320 23.3 4 3.5 7.6 4.2 5.9

PRC 840 3,920 14.5 6 7.2 10.1 10.3 10.2

Viet Nam 390 2,000 7.4 8 4.1 4.6 8.1 6.4

Memo:

Japan 35,620 27,080 100.0

GDP = gross domestic product, GNP = gross national product, PPP = purchasing power parity, PRC = People’s Republic of China.

Source: World Bank (2002a, 2002b).


value of 0.317 in contrast to the value of 0.525 in the case of Thailand. Other countries in our study have their income distributions ranging between these two limits.

The mechanisms by which the process of economic growth and development affects income distribution in a country are varied. People arrive at different income positions through the differences in their capabilities. Those who have a higher level of education and skills are presumably able to do more difficult and more complex jobs, and therefore, may be more highly remunerated. Income can also be generated from different stocks of physical wealth. Therefore, those who have larger and higher quality stocks of assets may receive greater compensation from their assets. But even with equal physical and human capital or assets, different individuals may receive different compensation depending on different opportunities available to them. These unequal opportunities in lifestyle and work may be a major explanation for income inequalities in many economies and societies. As a major goal of economic development, each country should strive for both an increase in the average income and a more equal distribution of such income.

Table 6.3 gives a general picture of income distribution in the eight selected East Asian countries in the last 10 years or so. These income distributions represented by Gini coefficients are reported in all eight country papers.10 Not all the years are reported, usually because of lack of data for those years or the difficulties in using that data.

The rapid growth in the Chinese economy has resulted in a rapid increase in average incomes. As reported in Tian, Wang, and Liu (2008), the per capita annual income of urban households rose from 343 yuan in 1978 to 6,860 yuan in 2001, an increase of about 20 times, whereas the per capita annual income of rural households rose from 134 yuan in 1978 to 2,366 yuan in 2001, an increase of almost 18 times. This caused the number of people living in poverty in rural PRC to fall from 260 million people in 1978 to 34 million in 2001. But the rapid increase in average income and rapid fall in the number of those living in rural poverty were also accompanied by a rapid increase in income inequality. During this period, the traditional planned income distribution system was broken up. Following Deng’s policy of “Let Some Get Rich First” (Tian, Wang, and Liu 2008: 63), the market-driven distribution system has provided more incentives for productivity

10 The summary analysis of the eight countries is drawn from Krongkaew and Ragayah (2008).


and creativity, which has had significant impacts on changes in inequality of income distribution in the PRC.

The Gini coefficient of the PRC increased from 0.288 in 1981 to 0.349 in 1989 and 0.458 in 2000. In 20 years, the rate of change of income inequality measured by the increase in Gini coefficient was about 2.35% per annum. The urban-rural income gap in the PRC has continued to widen greatly in recent years. The average gap between urban and rural incomes was about 2.8 times in 2000, but if the value of social welfare received by urban households is factored in, the gap may increase to 4 times. According to Tian, Wang, and Liu (2008), the dual structure of the economy (i.e., urban-rural differentiation) and its ramifications is the root cause of the PRC’s income inequality. The unbalanced allocation of foreign direct investment has exacerbated this regional income inequality. Policy flaws such as lax taxation systems and monopolization of some industries have also contributed to worsening income inequality in the PRC.

Whereas the PRC may exhibit a typical case of Kuznets-type growth where inequality increases in the early period of growth, the situation is different in Korea. Korea has been one of the fastest growing economies in East Asia in the last two decades. Korea has gone from being one of the poorest countries in the world at the end of the Korean War in the late 1950s to transforming into one of the most advanced industrial economies in the world in the course of about four decades. Between 1980 and 1990, Korea grew at an annual rate of about 8.9% in real terms. Although the rate slowed during the 1990s, growth was still very high at 5.7%, making the overall growth rate over the last 20 years 7.3%. This achievement is no less amazing than the PRC’s.

As a result of many factors, among which are equalizing land reforms and economic assistance from the US, early Korean development was characterized by increased income equality as the economy grew. However, it appears that Korean income distribution has worsened after more than two decades of rapid growth. Some economists blame this on excessive demand for a highly trained labor force during the 1970s, which brought about a rapid widening of wage and salary differentials in favor of the highly educated.11 Overall, Choi

11 There are some disagreements in the way income data are used in Korea to measure income inequality. The official data, from the Urban Families Income and Expenditure Survey, only capture wages and salaries of urban workers. This has a tendency to show low income inequality. However, the worsening of income inequality in recent years, especially as a result of the recent financial crisis, is unmistakable. Nevertheless, the improved social welfare systems of Korea have helped workers who are affected by economic crisis to withstand the adverse impacts. Overall, the income inequality in Korea is much better than in many other East and Southeast Asian countries (Krongkaew 1994).


Table 6.3: Gini Ratios for Household Income in Eight East Asian Economies

Year Asian NIEs (New) ASEAN-4

Korea Singaporea PRC Indonesiab Malaysia Philippines Thailand Viet Nam

1961 0.49

(0.486)

1962 0.414

1964

1965 0.344 0.49

(0.491)

1966 0.498

1967 0.498

1968 0.429

1969

1970 0.332 0.513C

(0.502)

1971 0.480

(0.478)

1972

1973 (0.46)

1974 (0.45)

1975 0.448 0.451

(0.45) (0.426)

1976 0.391 (0.44) 0.34 (0.529)

(0.492)

1977 (0.46)

1978 (0.42)

1979 0.424 0.493

(0.42) (0.493)

1980 0.389 (0.41) 0.34

1981 0.443 0.288 0.33 0.443 0.473

(0.44) (0.453)

1982 0.357 0.465 0.465

(0.46)

1983 (0.48)


Year Asian NIEs (New) ASEAN-4

Korea Singaporea PRC Indonesiab Malaysia Philippines Thailand Viet Nam

1984 0.474 0.297 0.33 0.474

(0.47) (0.480)

1985 (0.46) 0.452

(0.446)

1986 (0.46) (0.500)

1987 (0.47) 0.32 (0.458)

1988 (0.400) (0.48) (0.445) (0.479)

1989 (0.49) 0.349

1990 0.436 (0.504)

1991

1992 0.284 0.536

1993 0.281 0.459 0.330

1994 0.285 0.46 0.521

1995 0.284 0.443 0.389 0.464 0.356

1996 0.291 0.375 0.366 0.516

1997 0.283 0.444 0.379 0.470 0.51

1998 0.316 0.446 0.386 0.509 0.348

1999 0.320 0.467 0.397 0.373 0.452 0.531

2000 0.317 0.490 0.458 0.51 0.525

2001 0.320 0.493 0.31 0.407

2002 0.312 0.505 0.33 0.461 0.505

2003 0.341 0.512

2004 0.344 0.517 0.462

2005 0.348 0.522

ASEAN = Association of Southeast Asian Nations, Korea = Republic of Korea, NIE = newly industrialized economy, PRC = People’s Republic of China.

Notes: a Up to 1989, for employed population, not households. From 1990, the figures are based on ranking of all

resident households by per capita monthly household income from work.b Employed expenditure, not income data.c Revised figure given in Malaysian Perspective Plan, 1991-2000, as reported in Ragayah (2008).

Sources: Figures not in parentheses are from the original article by Rao (1988). Figures in parentheses are from Krongkaew (1994). Figures after 1990 are from Ragayah (2005) and recent updates. This table is adapted from Ragayah and Krongkaew (2008).


(2008) reports that income inequality did not change substantially during the mid-1980s. From the late 1980s to the early 1990s, however, Korean income inequality was reduced and stayed at a low level in the mid-1990s. However, after the economic crisis in late 1997, income inequality suddenly increased and stayed at this level until recently. Although the Gini coefficients of Korea had increased as a result of the crisis, the overall level was only slightly worse than the situation in the early 1980s, which was still lower than the situation in the early 1960s when the Korean economy was just starting to develop.

Since the late 1960s, when Singapore established nationhood, income inequality was already quite high (with Gini coefficient of 0.498). It has since fluctuated between 0.41 and 0.49, with the average around 0.45; and in no year has it gone below zero (Chia and Chen 2008). Compared with Korea, the income inequality in Singapore is much more unequal, a fact probably explained by the wage structures for skilled workers, especially at the management level in both public and private sectors. Wages for skilled workers were already high in Singapore’s infancy and these wage differentials—based on the technical skills and professional character of the employment—has kept these income disparities at a high level. However, Chia and Chen (2008) cautioned that this relatively large inequality could be the result of the non-inclusion of benefits derived from subsidies on housing, education, health, and other income transfers to the lower income group.

Among the ASEAN-4 countries, it is obvious that Thailand and the Philippines have more unequal income distributions than do Malaysia and Indonesia. For Thailand, its relationship between economic growth and income inequality is a typical Kuznets curve-type; that is, income inequality was relatively low at the beginning of the 1960s, but it increased in step with the growth of the economy. The Thai Gini coefficient reached its highest level in 1992 and began to fall afterward. Unfortunately, the crisis in 1997 caused Thai income distribution to worsen. The Gini coefficient reached 0.531 in 1999, almost the same level as the peak period of 1992. The improvement in the average income position of the Thai people, especially in the lower income groups, after economic recovery in the early 2000s helped reduce the income disparity, and the Gini coefficient fell to 0.505 in 2002 (Krongkaew 1994; Krongkaew and Kakwani 2003).

In the Philippines, the Gini coefficient was already at a high level of 0.49 in 1961. This relatively high level of income inequality was somehow maintained throughout its forty years of development. The crisis of the late 1990s caused this income inequality as measured by Gini coefficient to go up to 0.51 (Balisacan


and Piza 2008). As Balisacan and Piza (2008) noted, the absence of high and enduring economic growth that was the single most important constraint to the pace of poverty reduction could also be a factor in the persistently high income inequality found in the Philippines. Policies such as better schooling, agrarian reforms, investment in land quality improvement, removal of price distortions, and so on not only could bring about reduction in poverty but could reduce persistent income inequality as well.

For Malaysia, the high growth rate of the whole economy associated with the intensive growth of the manufacturing sector (with double-digit growth between 1970 and 2000, with the exception of the 1981–1985 period) contributed to a drastic fall in the poverty level.12 This poverty reduction was also attributable to the New Economic Policy of 1970, which began to have positive effects on the existing increasing trend of income inequality. The Gini ratio rose from 0.513 in 1970 to a peak level of 0.529 in 1976; the ratio then began to fall, reaching the lowest level of 0.446 at the end of 1990. But from 1990, the ratio started to rise again. The crisis in 1997 managed to bring the Gini ratio down to 0.443 by 1999. (Ragayah 2005, 2008).

It seems that the renewed high-growth period of the early 1990s in Malaysia created a new condition for greater income inequality, but the 1997 crisis dampened this condition, which resulted in a lower Gini ratio. But the trend of rising income inequality is apparent. One of the most delicate issues in Malaysia is its ethnic income distribution. Because the Chinese in Malaysia were generally economically better off than the indigenous Malays, the income disparities between the Malays and the Chinese were large in the early period of the New Economic Policy, but successive implementation of the state policy brought about equality among ethnic groups. However, the rate of decreasing income inequality is still considered slow. The continuation of state policy in the form of the National Development Policy for 1991–2000 as well as the National Vision Policy of 2001–2010 should see a greater reduction in income inequality in Malaysia due to the increase in government social expenditure.

Finally, Indonesia was another success story in terms of achievement in economic growth. From the start of its “New Order” government up to the 1997 economic crisis, Indonesian per capita income increased by almost four times. From 1976, for example, the number of poor people declined from 54.2

12 The share of agriculture in GDP declined rapidly from 29% in 1970 to 8.5% in 2000 while the share of industry in GDP increased from 31.4 to 40.3% in the same period.


million (about 40% of the total population) to 22.5 million in 1996 (about 11.3% of the total population) (Alisjahbana et al. 2008). The increased income of the average Indonesian resulted in a marked reduction in general poverty.

However, while the improvement in poverty reduction is clear, the improvement in income inequality is less clear. During the 1960s and 1970s, Indonesia’s income inequality as measured by the Gini ratio stayed at about the same level (0.34), and there appeared little difference in the inequality situation between the urban and rural areas. The oil boom and economic boom of 1974–1976 resulted in an increase in income inequality, in both urban and rural areas. The inequality trend was reversed in the late 1980s. The decline in income inequality persisted until the mid-1990s but then started to increase again from 1996. The available data for 1996, just prior to the economic crisis, shows that the Gini ratio stood at 0.36 overall (Krongkaew and Ragayah 2008).

The economic crisis resulted in lowering income inequality in Indonesia; this is because the Gini ratio is calculated based on household per capita consumption expenditure as a unit of measurement. The crisis reduced how much households spent per capita. The reduction is probably less noticeable among the poorer population than among the less poor population, bringing the gap in the distribution of expenditure closer. Indonesia is the only country in these study cases that used expenditure rather than income as a unit of measurement.

Even allowing for possible adjustments in measurement techniques, it could be argued that the problems of income inequality in Indonesia are less serious than, say, in Thailand. Still, the government has gone ahead with policies to address continuing concerns for poverty and income inequality (e.g., the regional autonomy and fiscal decentralization policy). At the same time, macroeconomic stability and growth have continued to be pursued. Given time, the overall problem of income inequality should be lessened.

As a new member of ASEAN, Viet Nam may still have a long way to go to catch up with Indonesia, Malaysia, Philippines, and Thailand, but this endeavor may progress quickly thanks to the country’s rapid increase in economic growth since its relatively recent conversion to capitalism. As a former socialist economy, the income inequality of Viet Nam has been low traditionally. As shown by Pham (2008), the Gini coefficient of Viet Nam was estimated at 0.33 in 1993, increasing to 0.348 in 1998. This increase may be small and it seems that the country’s growth in the 1990s was sufficiently broad-based. Pham believed that this increase in income inequality between 1993 and 1998 was


largely due to the widening of the rural-urban income gap. However, a more recent study by the National Center for Social Sciences and Humanities of Viet Nam (2001) has shown that the Gini coefficient for Viet Nam appears to have risen significantly from 0.356 in 1995 to around 0.407 in 2001. If this is so, then the growth of Viet Nam would follow the traditional Kuznets type.

In all, our sample case studies of selected East Asian countries have shown that these fast growing Asian economies suffered from increased income inequality during the decade or so of their development. In this section, we only touched upon one aspect of the development problem, namely growth that leads to greater inequality. In reality, there are other development problems that we have not discussed, such as serious and lingering poverty, environmental degradation, obstacles to technological progress, leakages and inefficiencies due to corruption in the public sector, and political instability brought about by the behavior of corrupt politicians as evidenced in the cases of Thailand and the Philippines.

4. The Ways Forward for Socially Sustainable Development for Asian Economies

This chapter proposes that the original concept of SSD as described in the Brundtland Report (UN 1987) be maintained and strengthened. First, the overall picture of the Brundtland Report will be re-examined. Then, the economic components of sustainable development will be emphasized on their ability to maintain stable growth, with continued reduction in poverty incidence, and improvement in income equality. The social components of sustainable development are stressed for their ability to increase the capability of the whole population. The environmental components of sustainable development could be re-evaluated through realistic and practical adjustments in people’s lifestyles. After these core principles of sustainable development are addressed, three more conditions will be added to make this fundamental sustainable development truly SSD. The three conditions are: (i) need for political development, (ii) requirement of good governance, and (iii) the hope and desirability of cultural and spiritual lifestyles. Finally, this section ends with a recommendation for the adoption of the Philosophy of Sufficiency Economy as a practical, real-life example of how an Asian country could arrive with SSD.

Based on the above conceptualization, the above-discussed SSD could be adapted to the format noted in Figure 6.3, in which the original three-rings


characteristics of sustainable development are encapsulated in additional boxes of political development, good governance, and cultural and spiritual lifestyles. Figure 6.4 gives a schematic explanation of the Philosophy of Sufficiency Economy as practiced in Thailand at present. The following accounts explain these diagrams.

4.1 Re-emphasis of the Traditional Concept

The Brundtland Report Briefly RevisitedIt has been more than 20 years since the Brundtland Report (UN 1987) made its influential impact on the world’s thinking on how countries should, and could, attain sustainable development. In considering the ways forward for SSD in Asia, it is useful to revisit the core principles of sustainable development contained in the Brundtland Report.

In Section 2, the oft-quoted definition of sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs was referred to. But equally

Figure 6.3: Scheme of Desirable Socially Sustainable Development

Source: Author’s own rendition based on International Union for Conservation of Nature and Natural Resources (2006).


important is the report’s focus on the necessity of economic growth, saying the problems of poverty and underdevelopment cannot be solved unless there is growth in which all developing countries can take part and are able to reap its large benefits. To be more complete, the report cites seven development imperatives as follows (UN 1987):

1. Reviving growth;2. Changing the quality of growth; 3. Meeting essential needs for jobs, food, energy, water, and sanitation; 4. Ensuring a sustainable level of population; 5. Conserving and enhancing the resource base; 6. Reorienting technology and managing risk; and 7. Merging environment and economics in decision making.

Figure 6.4: Sufficiency Economy and Globalization

Source: National Economic and Social Development Board (NESDB) (2003).


These development imperatives need no additional explanations, but in order to help policymakers plan necessary policy prescriptions for development, the report summarizes the requirements for sustainable development to include:•Apoliticalsystemthatsecureseffectivecitizenparticipationindecision

making;•An economic system that is able to generate surpluses and technical

knowledge on a self-reliant and sustained basis; •A social system that provides solutions for the tensions arising from

disharmonious development;•Aproductionsystemthatrespectstheobligationtopreservetheecological

base for development; •Atechnologicalsystemthatcansearchcontinuouslyfornewsolutions;•An international system that fosters sustainablepatternsof trade and

finance; and•Anadministrative systemthat isflexibleandhas thecapacity for self-

correction.

Growth Through Market-Based Efficiency and CompetitionThere are larger details in the main Brundtland Report but the above summary of how sustainable development could be reached is sufficient to use it as an anchor for our further discussion. One central feature that was referred to previously is the importance of economic growth. In managing an economy, the government or policymakers face the principal choices of capitalistic, market-based free competition, or socialistic, central-controlled types of policies. Although it is true that socialism appears to have lost out to capitalism in the selection choices of most countries in the world, this does not mean that socialism is dead. We have seen that while a free-enterprise capitalistic system is more conducive to bringing about greater efficiency and growth in resource allocation, income distribution is usually worse off than in socialistic, state-controlled systems. The optimal solution may be found in the judicious mix of the two policies that maintains the balance between efficiency and equity. This creates greater likelihood that SSD may be attained because the state or government could play a more active role in preventing or solving market failures in the free-enterprise system.13

13 In some countries, such as Thailand, the choice of economic system is written in the country’s constitution to make it difficult to change under the whim of politicians in power at the time. In Thailand, the first clause of Section 84 of the 2007 Constitution reads, in part: “The State…must support a free and fair economic system based on market mechanisms, and support the arrangement for sustainable economic development.”


Smart Anti-Poverty PoliciesPoverty problems are still prevalent in many Asian countries. Though a growing economy would necessarily bring down the incidence of poverty, the time it would take to see the positive effects of that growing economy would be too slow, and the suffering of the poor may be too great. Smarter anti-poverty policies are, therefore, urgently needed. This chapter suggests a three-pronged approach for alleviating poverty: (i) general economic growth and macroeconomic stability; (ii) specific, sectoral-based anti-poverty policies; and (iii) safety-net programs for the poor (Box 6.1).

The concept of poverty as based entirely on income level alone is often criticized for being insufficient to fully incorporate the meaning of poverty. As mentioned by Sen (1999), there may be good reasons to look beyond income poverty because there are variations in the poverty concept that make an income-based poverty concept inadequate. These sources of different variations may include personal heterogeneities (e.g., prone to illness), environmental diversities (e.g., living in a flood-prone area), variations in social climate (e.g., living in a high-crime area), and so on. To see poverty as capability deprivation can open up a new understanding of poverty. And, as mentioned earlier, there have been many recent studies of poverty as a multi-dimensional concept.14 However, Sen argues that it is unlikely that the perspective of poverty as income deprivation can be dispensed with in the empirical literature on poverty, even when the limitations of that perspective are entirely clear. Indeed, as Sen puts it, “in many contexts, the rough and ready way of using income information may provide the most immediate approach to the study of severe deprivation” (Sen 1999: 195). In sum, income poverty is still useful but one needs to be careful in its use for policy purposes.

Greater Efforts to Tackle Income InequalityEfforts to reduce income inequality could be the most important way in which Asian countries get closer to reaching SSD. Although income

14 Among the most well known studies using a multi-dimensional concept of poverty is the United Nations Development Programme’s (UNDP) Human Poverty Index (HPI). Rather than measure poverty by income, the HPI uses indicators of the most basic dimensions of deprivation: a short life expectancy, lack of basic education, and lack of access to public and private resources. The HPI concentrates on the deprivation in the three essential elements of human life already reflected in the Human Development Index: longevity, knowledge, and a decent standard of living. The HPI is derived separately for developing countries (HPI-1) and a group of select high-income Organisation for Economic Co-operation and Development (OECD) countries (HPI-2) to better reflect socioeconomic differences and also the widely different measures of deprivation in the two groups. A more recent literature on the multi-dimensional ideas of poverty includes Kakwani and Silber (2008a, 2008b).


distribution may be listed as an important development goal for any country, the goal of income inequality reduction is often neglected or relegated to a secondary position of importance when economic growth shows signs of slowing down, or the economy is facing macroeconomic crisis. Moreover, the impact of income inequality on the welfare of the people may be slow in its manifestation as compared to the impacts of other economic adversities, but the final outcome can be catastrophic if the pent-up suffering is long enough.

Economists have many ways of measuring and evaluating the size of the impacts of policy changes. The terms “pro-poor” growth and “pro-poor” policy

Box 6.1: Policy Responses to Poverty Problems

There are two “types” of poverty: (i) poverty on the demand side, and (ii) poverty on the supply side.

Demand-Side PovertyIn this first category, poverty is associated with, or caused by, the demographic or socioeconomic characteristics of the poor themselves. For example, they have little education, are in poor health, have large and dependent families, select or engage in occupations that yield insufficient returns, and so on. In this case, the principle of policy response in general would be to correct or improve these demographic and socioeconomic conditions pertaining to the poor so that they are in a better position to get more or better income or returns from their stock of human capital.

Supply-Side PovertyPoverty can be caused, not by the lack of human capital of the poor alone, but also by failures by the market and the government to provide necessary help. The environment surrounding the poor can bring about supply-side poverty in the form of inadequate or low-quality productive inputs or their lack of access, distortion, or discrimination in the markets against the poor; shortage or inefficiencies of public services to the poor; low returns for their production and services; and so on.

Under the framework of the two groups of poverty mentioned above, policy responses can be designed to provide a two-pronged attack. There are three general principles of poverty reduction that should be considered:

General Economic Growth and Macroeconomic StabilityGeneral economic growth provides an excellent condition for the poor to increase their income generally through increased employment and higher returns on


are of recent origin (Kakwani and Pernia 2000). The evaluation technique proposed in this article has been widely used by many scholars, researchers, and development practitioners. Box 6.2 gives a summary of how a trade-off between growth and equity can be measured. A pro-poor policy is one that reduces the incidence of poverty and improves income inequality at the same time.

Capacity Building for the NationsA country with a large proportion of its population illiterate cannot be expected to provide a full and intellectually profitable life. The people in a

their productive services. But this growth must occur within a framework of macroeconomic stability with low inflation and stable domestic and external balances. Development in various economic sectors should also be balanced and well coordinated so that there are no weak sectors that slow down other sectors, or strong sectors that could go astray if not properly monitored or regulated.

Specific Anti-Poverty PoliciesWhile general growth can bring about higher income and reduce poverty, economic growth alone may not be sufficient. Specific anti-poverty policies targeted toward the poor themselves may be needed. These specific anti-poverty policies include policies that raise the value of the stock of human capital such as more education, better skills, better health, and a general increase in individual or personal human capacity, and also policies that general better working conditions or environments favorable to the poor in their work or livelihood such as opportunities to increase productivity, improve access to quality inputs, generate better marketing opportunities and better prices, improve delivery systems of government services, and so on.

Safety Net Programs for the PoorWhen general economic growth and specific anti-poverty policies still fail to lift the poor from poverty, society and the economy must have places in the safety net of programs that provide temporary or short-term support to the poor. Food, clothing, primary health, and shelter are some of the basic necessities that people in any society or economy must be provided with by either the state, the private sector, or civil society.

Source: Krongkaew (2003a).


Box 6.2: The Growth-Equity Trade-Off: How to Measure It and How to Interpret the Results

The notion that growth is good for the poor is well accepted, and is said to be influenced by a well known study by Dollar and Kraay in 2001. However, as Kakwani (2000) and Kakwani and Pernia (2000) pointed out, the different types of growth may have varying effects on poverty. For some countries, growth-maximizing policies alone may be adequate to provide a satisfactory reduction to poverty, but for many countries there may be a need to have pro-poor growth policies with a focus on reducing inequality before, or concurrently with, a focus on increasing growth. This last notion is based on the belief that the degree of poverty reduction depends on both income and its distribution. The increase in average income reduces poverty and the increase in inequality increases it. Therefore, the change in poverty can be decomposed into two components: one is the growth component relating to change in mean income, and the other is the inequality component relating to change in income distribution.

Kakwani and Pernia (2000) have developed an index of pro-poor growth, which is based on a decomposition of total change in poverty into (i) the impact of growth when the distribution of income does not change, and (ii) the impact of income redistribution when total income does not change. Suppose η is the poverty elasticity with respect to growth, which is defined as the proportional change in poverty when there is a positive growth rate of 1%, then η can be decomposed into two components, ηg and ηI such that

η = ηg + ηI (1)

where ηg is the pure growth effect and ηI is the inequality effect. ηg is the proportional change in poverty when the distribution of income does not change, whereas ηI is the proportional change in poverty when inequality changes in the absence of growth. ηg will always be negative, meaning that a positive growth always leads to poverty reduction, with distribution remaining constant. ηI can be either negative or positive depending on whether change in inequality accompanying growth reduces or increases poverty. Growth will obviously be pro-poor if ηI is negative. Thus the degree of pro-poor growth can be measured by an index

φ = η / ηg (2)

φ will be greater than 1 when ηI < 0. Growth will be pro-poor when φ > 1, meaning that the poor benefit proportionally more than the non-poor—that is to say, growth has resulted in a redistribution in favor of the poor. This would be the first-best outcome. When 0 < φ < 1, growth is not strictly pro-poor (i.e., growth results in a redistribution against the poor) even though it still reduces poverty incidence. This situation may be generally characterized as “trickle-down” growth. If φ < 0,


economic growth actually leads to an increase in poverty. This is equivalent to what Bhagwati (1958) would call “immiserizing” growth.15

Index φ measures how the benefits of growth are distributed across a population. Suppose g is growth rate and θ is a poverty measure; the proportional change in poverty may be written as

∆θ/θ = ƒ(g, φ) = ƒ(g*, 1) (3)

where

∂ƒ(g, φ) / ∂g < 0 and ∂ƒ(g, φ) / ∂φ < 0

which implies that there are two factors that determine a country’s performance in poverty reduction. First, is growth rate g, which affects society’s mean income; second, is the pro-poor index φ, which relates to the distribution of benefits of economic growth. As there are two factors that affect poverty reduction, growth alone is not sufficient to achieve a rapid reduction in poverty unless it can be demonstrated that φ remains constant over time.

There are two more indices that should be noted. One is the Poverty Equivalent Growth Rate g*, and the other is the Growth-Inequality Trade-Off index (GITI). According to Kakwani and Son (2002), the Poverty Equivalent growth rate g* is defined as the growth rate that will result in the same proportion of poverty reduction with no change in income inequality—i.e., when everyone receives the same proportional benefits of growth. This Poverty Equivalent Growth Rate is shown as

g* = gφ (4)

It can be demonstrated that the magnitude of poverty reduction is a monotonically increasing function of g*, which implies that the larger g*, the greater the proportional reduction in poverty. This suggests that the performance of a country should be judged on the basis of its poverty equivalent growth rate, not by its growth rate alone. For example, if a country’s growth rate g is 9% and the pro-poor index φ is ⅔, then its effective growth rate in terms of poverty reduction is only 6% (9*⅔=6). If the same country achieves its growth rate of 9% but the proportional benefits going to the poor are more than those to the non-poor—in which case, suppose

φ is 1.2, then the effective growth rate will be 10.8, not 9%.

Growth is pro-poor when the poverty equivalent growth rate g* is higher than the actual growth rate g. If g* lies between 0 and g, then there is trickle-down growth, when the poor receive proportionally lower benefits of growth than do the non-

15 Normally, growth is expected to lead to greater enjoyment in life. But if growth results in greater suffering of the people, or more costs than benefits of growth to people, then this is an immiserizing growth (Bhagwati 1958).


poor, but growth still reduces poverty. When g* is negative, then growth leads to an increase in poverty.

For Thailand during the 1988 to 2000 period, the actual growth rates and poverty equivalent growth rates are as follows (Table 6.4):

It can be seen that the actual growth rate of per capita welfare (which is the per capita income adjusted for household needs) was 9.06% during 1988–1990, whereas the poverty equivalent growth rate for the head-count ratio was 5.5%. This means that 3.56 percentage points of growth were lost because the full benefits of growth did not go to the poor; the trend continued for the rest of the decade. Thus, it may be concluded that growth was not pro-poor during 1988–1990 and 1990–1992. However, growth became pro-poor during 1992–1994 and 1994–1996, when the poverty equivalent growth rates were higher than the actual growth rates.

Due to the 1997 financial crisis, growth in Thailand became negative for the first time during the 1996–1998 and 1998–2000 time periods. Per capita welfare declined at annual rates of 1% and 4.03% during 1996–1998 and 1998–2000, respectively. The poor suffered even more during the crisis as is indicated by the poverty equivalent growth rates, which were -2.7% and -5.1% during 1996–1998 and 1998–2000, respectively.

The other index we would like to refer to is the GITI. Kakwani (2000) developed a methodology to measure the trade-off between growth and inequality, which shows how much growth is needed in order to offset the adverse impact of an increase in inequality on poverty. This methodology is based on the idea of poverty elasticity with respect to growth and inequality. If θ is any poverty measure, then growth elasticity,

Table 6.4: Thailand’s Actual and Poverty Equivalent Growth Rates

Poverty Equivalent Growth Rate

Actual Growth Rate Percentage of Poor Poverty Gap Ratio Severity of Poverty

1988–1990 9.06 5.5 5.9 6.1

1990–1992 7.49 4.3 3.4 3.0

1992–1994 7.65 8.8 8.7 8.8

1994–1996 5.75 7.4 7.2 7.2

1996–1998 -1.00 -2.7 -2.5 -2.5

1998–2000 -4.03 -5.1 -6.3 -6.9

1988–2000 4.15 3.1 2.8 2.7


denoted by ηθ , measures the impact of growth on poverty when inequality does not change. Similarly, inequality elasticity, denoted by εθ , measures the impact of change in inequality on poverty, when the mean income does not change. Then the proportional change in poverty may be written as

dθ/θ = ηθ (dµ/µ) + εθ (dG/G) (5)

where µ is the mean income, and G is Gini ratio. The first term on the right-hand side measures the impact of growth on poverty, and the second term measures the impact of a change in the Gini index on poverty. The first term is always negative, as mentioned earlier, implying that inequality neutral growth will always reduce poverty. The second term is positive, implying that any increase in inequality resulting from growth will always increase poverty. Thus, in equating the total proportionate change in poverty to zero, the GITI presents itself as

GITI = (dG/G)/(dµ/µ) = -(εθ/ηθ) (6)

The interpretation of this equation is as follows. If, for example, GITI is equal to 3.0, it means that a 1% increase in the Gini index requires a growth rate of 3% in order to offset the adverse impact of the increase in inequality. The equation also means that by following pro-poor strategy, if we can reduce the Gini index by 1%, then this strategy is equivalent to having an additional 3% growth rate. This suggests that the larger the GITI, the greater the benefits of following the pro-poor strategy that would reduce inequality would be. Thus, the magnitude of GITI can give an indication of what development strategy a country should follow. The value of GITI for Thailand in 1998 is computed to be 4.04 (for the poverty gap ratio), which means that an increase of 1% in the Gini index will require a growth rate of about 4% in order that the incidence of poverty does not change. It also means that a reduction of inequality by 1% is equivalent to having a growth rate of about 4%. This result suggests that a strategy of inequality reduction will have greater pay-off for poverty reduction than than the strategy of promoting economic growth.16

To sum up, in the case of Thailand, pure growth effects alone were insufficient to label the growth of Thailand during the last four decades as “quality” or “pro-poor” growth because the resultant inequality that accompanied such fast growth has had deleterious effects on poverty reduction. This study should serve as a warning to present and future policymakers everywhere that inequality problems are not something to push aside and are more important than many people previously thought.

Source: Excerpted and adapted from Krongkaew and Kakwani (2003).

16 Kakwani (2000) has also shown that the relative importance of the inequality factor is much greater in Thailand than in many other East Asian countries such as Korea, the Philippines, and Lao People’s Democratic Republic (Lao PDR). Whereas the GITI for Thailand was 4.07 in 1998, the same index for the Philippines, Korea, and Lao PDR were 2.32, 1.23, and 0.94, respectively. Inequality problems in Thailand are much more critical than in many other East Asian countries.


country with SSD should be people with an adequate level of educational attainment (say, at least four years of formal education, or at least until a child is able to read and write, and know the basics of arithmetics), and the average level of education should rise with increased national income per capita. Contrary to the practices in some developing countries, not all high school graduates should go to colleges and universities, first, because not all of these school graduates are intellectually prepared for such a level of education; and, second, because there is no need for this to happen as secondary school graduates are still able to obtain gainful employment in the labor market with adequate compensation. However, any student who is intellectually capable of higher or specific education should be able to access the educational facilities of their choice with the help of the state through financing systems.

Realistic Environmental Preservation PoliciesConcern for the environment may be remote from the immediate consideration of those living in poverty. It may be necessary for the state to initiate environmental policies that balance the minimum level of tolerance for environmental exploitation and the use of the products of the environment. For example, poor squatters may be allowed to stay in forest reserves and utilize forest products for subsistence living, but a plan in which these squatters could also help to maintain or preserve future growth and rehabilitation of the present forest could be devised.

4.2 The Need for Political Development

On looking back, it is interesting to note that development economists in the post-war period did not talk much about political development at all when they discussed economic development or how a developing country attains the status of industrialized (developed) country. It is possible to conclude that development economists did not see political development as an important or critical factor for a country to transform from a basically agrarian economy to a mainly industrial economy in which a change in economic structure and how resources are allocated are more important. On the contrary, many political scientists studying development in the post-war period often noted the lack of political stability in many of these newly industrializing countries, and despite the catching up of these developing countries with developed countries in terms of per capita GNP there still exist


vast differences between the two categories with regards to other aspects of development such as income inequality, social disruptions, and ecological degradation.17 Huntington (1968), for example, noted that the violence and instability characteristic of the post-World War II era was in large part the product of rapid social change and the rapid mobilization of new groups into politics coupled with the slow development of political institutions.

What is political development, then, and how does it impact on the SSD of today? Huntington (1965, 1968) and Huntington and Weiner (1986) again saw political development as the institutionalization of political organizations and procedures, or the growth of institutions competent to deal with the strains of social mobilization and political participation. Deutsch (1961) defined political development as the process in which major clusters of old social, economic, and psychological commitments are eroded or broken and people become available for new patterns of socialization and behavior. Park (1984) understood political development to be the capacity of the political system to satisfy the changing needs of the members of the society. More recently, Acemoglu and Robinson (2006) saw political development as the path that political institutions take over time toward democracy. And according to Acemoglu and Robinson, in analyzing political issues, there are four main paths of the movements toward democracy: the first leads from non-democracy gradually and inexorably to democracy and stays there (Britain is the best example of such a path); the second path, once created, quickly collapses (Argentina is an example); the third path is one in which a country remains non-democratic but is not challenged because people are sufficiently satisfied under the existing political institutions (Singapore is often regarded as belonging to this type of political development); and, finally, a country that is non-democratic as well as unequal and exploitative, and the political rulers or elites find democracy so threatening that they use violence and repression to avoid it (South Africa before the collapse of the apartheid regime is a good example of this path).

Huntington (1965) observed a phenomenon that was a puzzle to many scholars. According to the author, instead of a trend toward competitiveness and democracy, there was an “erosion of democracy” and a tendency toward

17 There are several studies, new and old, by political scientists on political development and democracy and democratization. See, for example, Deutsch (1961), Huntington (1965, 1968), Huntington and Weiner (1986), Pye (1972), Higgot (1983), Park (1984), Przeworski et al. (2000), Hood (2004), and Kingsbury (2007).


autocratic military regimes and one-party regimes. And instead of stability, there were repeated coups and revolts; instead of unifying nationalism and nation-building, there were repeated ethnic and civil wars. More than 40 years later, TIME magazine (2009) asked basically the same question: “Why democracy is failing in Asia.” What TIME magazine has observed is that despite the fact that most Asian nations now hold elections, true democracy still eludes the region. Situations in Thailand; Malaysia; Korea: Taipei,China; Bangladesh; Pakistan; and even India are often cited as indicative of underdeveloped democracy or political development, so much so that the writer of the magazine is forced to ask: “Given the events of the past year, are Asia and democracy compatible?” (TIME 2009: 32).

In a similar vein, Leftwich (1993, 2002, 2008), has argued for almost two decades that development in Third World countries is not a stable one because these countries still lack the type of democracy that is practiced in the West that would allow for development to progress and take hold. While it may be believed that modernization and development may bring about democracy or greater democracy, Leftwich (1993) believes that democracy is a necessary prior or parallel condition of development, not an outcome of it. The kind of liberal-democratic polity as seen in the West may be seen to contain mature and stable “liberal democratic institutions, declining social inequalities, a flourishing civil society, a widening policy consensus, a secular and bureaucratic ideology, and the extension and institutionalization of civil and human rights…” (Leftwich 1993: 612). Even with this kind of democracy it is still insufficient to guarantee sustainable development until “good governance” is acquired through some or all of the following features: an efficient public service; an independent judicial system and legal framework to enforce contracts; the accountable administration of public funds; and independent public auditor, responsible to a representative legislature; respect for the law and human rights at all levels of government; a pluralistic institutional structure; and a free press.

The need for political development in Asia is too complex to be discussed in this chapter. Suffice it to say that economic development unmatched by commensurate political development in the form of people (i.e., the electorate, politicians, and state officials) knowing or understanding their political rights and duties, and having not fallen into the traps of election frauds—especially vote buying and selling, influence peddling, and conflicts of interests—the unscrupulous use of power of the majority and the disrespect of the rights of the minority, nepotism, favoritism, cronyism of those in power, and so on, will


not lead to development of a socially sustainable sort. It is true that poverty can lead to apathy or indifference in political development and poor people in the country could be subject to exploitation by unscrupulous politicians (e.g., through policy corruption or other kinds of populist policies). But poverty reduction without a change in positive political outlook of the poor people would not be enough. A new SSD must include satisfactory political mechanisms and arrangements so that the appropriate type and degree of democracy may be undertaken in a country.18

4.3 The Importance of Good Governance

While necessary political development will equip a country and its people for SSD, it is still not sufficient for reaching this goal if the country lacks good governance. The United Nations Development Programme (UNDP), which was one of the first international organizations to popularize the concept of governance in development, defines governance as the exercise of economic, political and administrative authority to manage a country’s affairs at all levels. Sound governance or good governance, therefore, describes governance that is, among other things, participatory, transparent, accountable, effective, equitable, and promotes the rule of law. There are at least five major organizations or entities involved in the issues of governance: the state, the public sector, the private sector, civil society, and individuals. Individuals are citizens of a country, and together with other individuals either alone or in groups, form civil society. Civil society is defined to include formal and informal enterprises in the marketplace such as commercial firms, banks, self-employed merchants, and traders as well as employed labor. What is not included in the private sector would fall under the public sector whose institutions are known as the state. So, the state and the public sector are often classified as belonging together in one group, whereas the private sector and civil society are often classified together in another group.

The UNDP distinguishes the following core characteristics of sound governance (UNDP 1996: 6–7):•“Participation. All citizens have the opportunity to have a voice in

influencing decision-making, either directly or through legitimate

18 We could benefit from the idea of the “Justice as Fairness,” by John Rawls, which argues that basic political freedom of the people must come first before economic or social policy to give maximum assistance to the least advantaged group of a population. See Rawls (1971).


intermediate institutions that represent their interests; such broad participation is built on freedoms of association and speech, as well as capacities to participate constructively.

•Rule of law. Legal frameworks are established that are fair and enforced impartially for all citizens. Particularly important are laws related to human rights.

•Transparency. Processes, institutions and information bases are directly accessible to those concerned with them, or sufficient information is provided to enable those concerned to understand and monitor them; transparency is built on the free flow of information.

•Responsiveness. Institutions and processes attempt to serve all their stakeholders optimally, given limited resources.

•Consensus orientation. Sound governance mediates differing interests to reach broad consensus on the nature of what is in the best interest of the good of the group and, where possible, on particular policies and procedures.

•Equity. All people have access to opportunities to improve or maintain their well-being.

•Effectiveness. Processes and institutions produce results that meet needs while making optimal use of resources.

•Accountability. Those who make decisions in government, the private sector and civil society organizations are accountable to the public as well as to institutional stakeholders; the precise nature of accountability differs depending on the institutional level, whether it is internal or external to an organization, and the societal sector, e.g. government bureaucracy, political bodies, business, or civil society organizations.

•Long-term vision. Both leaders and the broad population have a long-term perspective on sound governance and human development along with a sense of the requisites of such development.”While the UNDP’s concept of good governance is generally accepted as

an important component for SSD, one specific requirement is missing: the absence of a warning against corruption in the public sector. This is a big issue that has become a central concern around which many activities are organized for many international organizations, including the UN, ADB, World Bank, International Monetary Fund, and Organisation for Economic Co-operation and Development (OECD). Probably one of the most important events involving international efforts and cooperation to fight corruption is the adoption of the United Nations Convention Against Corruption (UNCAC)


by the UN General Assembly in October 2003. This convention is a direct response to the UN’s concern about the seriousness of problems and the threats posed by corruption to the stability and security of societies, undermining the institutions and values of democracy, ethical values, and justice, and jeopardizing sustainable development and the rule of law.19 Five areas that the UNCAC will cover are:

1. Corruption prevention where dedicated anti-corruption bodies may be established to deal with various measures to prevent corruption;

2. Criminalization of corruption which goes beyond basic forms of corruption such as bribery and embezzlement of public funds to include trading in influence and laundering of the proceeds of corruption;

3. International cooperation where members agree to cooperate with one another on the prevention, investigation, and prosecution of offenders;

4. Assets recovery where stolen and ill-gotten assets may be seized and repatriated to the original member state; and

5. Technical assistance where provisions on training, material and human resources, and research and information sharing may be made available to members.

This was not the first time that an anti-corruption agreement has been reached by an international organization or group of countries. The World Bank is one of the most distinguished and forceful pushers for worldwide anti-corruption activities. At the annual meetings of the World Bank and the International Monetary Fund in October 1996, for example, James Wolfensohn, the then-new president of the World Bank, labeled corruption as a “cancer” on the global economy, and said that it was time to “put teeth” into the World Bank’s efforts to address it (World Bank 2002c: 86). In the aftermath of this annual meeting, the World Bank prepared a report on an integrated anti-corruption strategy that it formally endorsed in 1997.20

In Asia, ADB joined hands with the OECD to launch the ADB/OECD Anti-Corruption Initiative for Asia-Pacific in 1999 (ADB/OECD 2001). The Anti-Corruption Action Plan for Asia-Pacific developed in the framework of this initiative set out the goals and standards for sustainable safeguards

19 As of early 2009, there were 140 signatories to the UNCAC. Of these signatories, 129 have already ratified the convention and become state parties to the convention. More information on the convention is available at: http://www.unodc.org/unodc/en/treaties/CAC/signatories.html.

20 This became known as the 1997 Anti-Corruption Strategy Paper (World Bank 1997).


against corruption in the economic, political, and social spheres of countries in the region. The plan addresses corruption under three pillars: (i) developing effective and transparent systems for public service, (ii) strengthening anti-bribery actions and promoting integrity in business operations, and (iii) supporting active public involvement. To date, 28 countries and economies from the Asia and Pacific region have endorsed the plan and have agreed on an implementation mechanism to achieve the standards it has set out.

In all, it could be concluded that good governance in the public sector is often overlooked in most discussions about SSD; indeed, corruption in the public sector could be one of the most critical factors influencing the long-term growth and development of a country. From the existing data and information provided by such organizations—for example, Transparency International’s corruption perception index—it is possible to see a simple correlation between the level of development and the absence of corruption in the country. In other words, more-developed countries are more likely to have less corruption than less-developed countries, and vice versa. In theory, people with adequate means for living are less inclined to acquire more wealth and income through corrupt means. Therefore, anti-corruption efforts should be among the most urgent items to address in Asian countries.

4.4 The Hope for Satisfactory Cultural and Spiritual Lifestyles

Rather than being a necessary precondition for SSD, the achievement of satisfactory cultural and spiritual lifestyles of the people in any country may be a “by-product” condition once other previous conditions, such as political development and good governance, have been met. In other words, having social harmony where people are able to develop their cultures and traditions and enjoy their respective lifestyles is the effect of a situation rather than the cause of it. And once satisfactory cultural and spiritual lifestyles have occurred, they are likely to reinforce further SSD.

Previously, it was suggested that in any country and in any type of development, the people or population of that country must be given basic human rights as stipulated in the Universal Declaration of Human Rights adopted by the UN General Assembly on 10 December 1948. The declaration contains three parts: (i) civil and political rights; (ii) economic, social, and cultural rights; and (iii) solidarity rights. It is upon the achievement of the second and third groups of rights that a person may have a satisfactory cultural and spiritual lifestyle.


To elaborate: the First Level rights include such rights as the right to be free from discrimination of any kind; the right to life and liberty, the right to free opinion and expression of that opinion, the right to peaceful assembly and association, and the right to participate in the government of the country either directly or indirectly through election. The Second Level rights consist of such rights as the right to have an education, the right to employment and protection from unemployment, and the right to adequate living standards for oneself and family. And the Third Level rights include such rights as the right to freedom of choice in self development in political, economic, social, and cultural areas; the right to live under good environment, and the right to participate in activities that aim at the preservation of humanity. 21

4.5 The Practicability of a Sufficiency Economy

In this section, the chapter will recommend a practical approach that is believed to bring about SSD in the real world. This practical approach to SSD is the “Philosophy of Sufficiency Economy” suggested by King Bhumibol Adulyadej of Thailand to be used in his country in the aftermath of the 1997 financial crisis (that started in Thailand). The crisis faced by Thailand then was similar to the crisis that began in the US recently—i.e., in that it involves careless overexpansion of the economy, excessive consumption, and spending far beyond one’s means, and the failure to take care of the risks involved. The lessons learned over a decade ago have equipped the Thai economy to weather the current global slowdown well enough to say that the prospective impact of the global crisis on the country this time is likely to be less troublesome. No doubt, the philosophy of sufficiency economy, which has been the principal development guideline in Thailand since the 1997 crisis, must have contributed something to this.22

The best literature on the philosophy of sufficiency economy is produced by Thailand’s NESDB, which is charged with the duty to prepare an economic and social development plan for Thailand every five years.23 According to the

21 It may be said that the classification of basic human rights into three levels reflects the true nature of human evolution and development. That is to say, individuals in a society should be given basic rights to life and liberty first, to be followed by the right to be free from economic deprivation, and finally the right to enjoy spiritual freedom and individual lifestyles.

22 See Appendix for a theoretical discussion on how to understand the sufficiency economy in terms of standard economic principles.

23 See http://www.sufficiencyeconomy.org/en/.


NESDB, the following statements can be used to explain the true nature of a sufficiency economy (NESDB 2003):

Regarding the Form and Function of the Sufficiency Economy•“Sufficiencyeconomy”isaphilosophythatservesasaguidefortheway

of living and behaving for people of all levels toward the “middle path;”•Asanagenda,thesufficiencyeconomydeliversthemiddlepathasthe

“economic life guiding principle,” i.e., a secularized normative prescription, but not a religious statement of faith;

•Forapplicationdomain,thesufficiencyeconomyisscalable,withuniversaldomain applicability: individual, household, community, project, business, management, institution, polity, society, nation state, region, humanity, and biosphere;

•Asthefoundationforaneconomicframework,thesufficiencyeconomyis complete, governing everything from motivation (utilities, drives, etc.) to criteria (goals, objectives, etc.) to behavior (production, consumption, investment, etc.) to system (collectivity, connectivity, etc.), and can be said to, at least implicitly, address all issues within a dynamic setting.

Regarding the Working Definition of the Sufficiency Economy:•“Sufficiency”entailsthreecomponents:moderation,reasonableness,and

requirement for a self-immunity system, i.e., ability to cope with shocks from internal and external changes;

•Twounderlyingconditionsarenecessarytoachievesufficiency:knowledgeand morality;

•Forknowledgeconditions,thesufficiencyeconomyrequiresbreadthandthoroughness in planning, and carefulness in applying knowledge and in implementation of those plans;

•Formoral/ethicalcriteria,thesufficiencyeconomyenforcestheconditionsthat people are to possess honesty, while conducting their lives with perseverance, harmlessness, and generosity.Based on the above statements, the NESDB concludes that the sufficiency

economy is a holistic concept of moderation and contentment. It sets out to shield the people and the country from adverse shocks and acknowledges interdependency among people of all professions as an approach, against the backdrop of interdependence and globalization. The philosophy emphasizes the wise use of knowledge with due consideration. Its values include integrity, diligence, goodwill, and sharing. Finally, it seeks to achieve balance and


sustainability. Figure 6.4 captures the basic essence of this philosophy, which, in 2007, has received recognition from the UNDP as an alternative development policy that many developing countries could consider (UNDP 2007).

However, as a philosophy, the sufficiency economy does not provide a ready-made handbook or manual from which a development practitioner could follow step-by-step guidelines on how to reach a desired state of SSD. This development practitioner may have to draw practical lessons from the three concepts of moderation, reasonableness, and self-immunity.

Consider the following example of the use of the philosophy of sufficiency economy in a typical situation of a farmer in Thailand. A typical rice farmer in Thailand owns his own plot of land, but the area of land is generally quite small, around six acres per family. A new agriculture theory that is part of the philosophy of sufficiency economy would suggest that he divide the use of this land into four parts with a proportion of 30/30/30/10: the first 30% of the land to be used for rice cultivation; the second 30% designated for field and garden crops; the third 30% to serve as water catchments; and the remaining 10% for the family’s home and storage. In this way, this farmer is protected against some external shocks as he allocates his resources and their uses well. Through time, he could improve his productivity and grow more than his family consumes, allowing him to sell the surplus. The farmer may want to enter into some kind of production cooperative to save on the costs of farm inputs and to increase the farm’s productivity with farming machinery. He may expand his farm acreage by renting or purchasing new land, while always relying on the reasonableness of each decision, immunizing himself against future problems, and thinking about moderation in his family’s consumption. The growth may be slow, but it will be stable, and along with overall economic growth and responsible and effective government, his life and the life of everyone in his family should improve; they will be happy under the general guidance of the philosophy of sufficiency economy.

5. Summary and Conclusions

The main aim of this chapter is to seriously consider the source and meaning of the question: How can Asia develop in a socially sustainable manner (i.e., equitably and inclusively), and subsequently to answer such a question by reviewing the development experiences of some East Asian countries. The chapter starts with a reference to a widely accepted notion that most Asian


economies, especially East Asian economies, have been relatively more successful than developing economies in other regions of the world due to the fact that these successful Asian economies have followed a path of development based on a free-market system and affiliated economic and social conditions such as openness, macroeconomic stability, human resource capacity building, and appropriate interventions of the state. However, the chapter has pointed out that, despite the fast growth, most Asian economies still possess a relative small level of command over resources measured by such commonly accepted indicators as GDP per capita compared to most developed economies. This alone makes it difficult for these countries to achieve an SSD defined as traditional sustainable development in social, economic, and environmental fields, plus additional requirements in political development, good governance, and support for a harmonious livelihood of the population. It is difficult because SSD may require that the income and wealth of the people in those countries are adequate to begin with. Moreover, the relatively low income situations of the citizens are being made worse by income inequality, a factor that greatly reduces the chances of achieving SSD. The political structures of these countries that lack the maturity of democracy as practiced in developed countries often give rise to abuses of power by politicians and political leaders, and the misuse of public funds through various populist policies. The associated corruption problems in political and public sectors have made it less likely that people at large will be able to enjoy the benefits of growth; the ill-gotten gains by politicians and state officials further exacerbate the already unfair distribution of income.

The chapter chooses one specific issue in the relationship between growth and equity in some East Asian countries and reports on the outcome of comparative studies by a group of East Asian economists. The result confirms what was referred to earlier, that is, the eight countries selected for this chapter (PRC, Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand, and Viet Nam) have exhibited similar growth policies and patterns (e.g., market-based, free-enterprise systems, with rapid income growth rates but a growing inequality in income distribution). This result calls for the necessity of public policy that will create growth with equity. The possibility of a “pro-poor” policy is discussed, including many other policy prescriptions that can be used to bring about SSD. The chapter comments on the continuation of market-based economic policy, suggests a smart anti-poverty policy, emphasizes the importance of transparency and integrity in public sector governance, encourages the building up of human resources and capability of the people through continuous and


variegated educational activities, protects the environment in realistic and cost-effective ways, promotes political development that raises awareness among the people on the proper rights and duties of citizens, and finally recommends the sufficiency economy as a practical philosophy that, once applied, can lead to SSD.

In conclusion, SSD is what Asian countries must strive for. Realistically, however, many countries in South and Southeast Asia still face great difficulties in achieving full-fledged SSD in the near future. One can even go so far as to say that such a goal is nearly impossible given the level of development these countries are currently at. But this is not a valid reason or rationale to be discouraged by the countries’ leaders and policymakers. It seems that what is needed most in these countries is not a different economic policy (market-based economic philosophy will take care of that), but rather uncorrupted political systems, where people enjoy basic human rights and the true nature of democracy is understood; where politicians, political leaders, and state officials are honest and do their jobs according to established codes of conduct; and where the corporate sector observes fair competition and fair play in their business activities, which, when done properly, absolve these firms from the requirements of corporate social responsibility. This leaves the government to act as an arbitrator of any societal conflicts that may occur among all sectors in the society, and the far-sighted leader for the social and environmental future of each country. Finally, the chapter suggests the sufficiency economy as probably the best solution to problems facing the feasibility or plausibility of SSD.


Appendix: The Philosophy of Sufficiency Economy24

The economic crisis of 1997 affected everyone in Thailand, including the king. Seeing many of his subjects suffering from the pains of the economic crisis, he advised that the Thai people should change the economic philosophy of their livelihoods so as to be able to cope with economic adversity and to withstand future economic insecurity. The Thai king’s words have become known as the philosophy of sufficiency economy, and have been used as the guiding principle in Thailand’s current national economic and social development plan.

This philosophical statement can be summed in just one paragraph and the following is the author’s own translation of that paragraph:25

Sufficiency economy is a philosophy that guides the livelihood and behavior of people at all levels, from family to community to the country, on matters concerning national development and administration so that the ‘middle way’ is observed, especially economic development that keeps up with the world of globalization. Sufficiency means moderation, reasonableness, including the need to build reasonable immunity system against any shocks from the outside as well as from the inside. In so doing, one must rely on intelligence, attentiveness, and extreme care to use all kinds of knowledge in making plan and in carrying out every step of its implementation. And at the same time one must build up the spiritual foundation of all people in the nation, especially state officials, scholars, and business people of all levels, to be conscious of moral integrity and honesty, and to strive for appropriate wisdom to live the life with forbearance, diligence, self-awareness, intelligence, and attentiveness, so as to maintain the balance and readiness to better cope with rapid physical, social, environmental and cultural changes from the outside world.

The above statement has lent itself to several interpretations by various groups of people. First of all, the extreme interpretation that a self-sufficient economy means a completely self-reliant economy or autarky can be dismissed outright. An autarchic system is a system whereby a country intends to rely

24 See Krongkaew (2003b).25 All quotes from the king’s speeches in the Appendix can be found in Piboolsravut (2003, vol. 3).


on itself or its people to produce all it can without depending on others. It may do that voluntarily (e.g., cutting off contact with the outside world) or by necessity (e.g., because it is incapable of generating contact with the outside world). In the king’s words, “…This self-sufficiency does not mean that every family must grow food for themselves or to make clothes for themselves. That is too much. But in a village or sub-district there should be a reasonable amount of sufficiency. If they grow or produce something more than they need they can sell them. But they do not need to sell them very far; they can sell them in nearby places without having to pay high transport costs.”

Some people have attempted to link this new sufficiency economy with the so-called “Gandhian Economy” along the lines of a system proposed by Mahatma Gandhi that is based on family- or village-level, small-scale enterprises and traditional methods. This system may have been appropriate to India at the time of its independence, when its people were poor and technology was limited. But in modern times, this policy may be too restrictive as the policy calls for families to do many things themselves using simple tools and machinery (e.g., using traditional spinning wheels to make cloth). Perhaps the basic idea of Gandhi’s simple life—a life unencumbered by modern needs and modern technology—could make the lives of Indian people happier. But in the much more open world of today where countries in the world are closely linked with one another, the self-sufficiency proposed by Gandhi is too extreme.

Some people are trying to understand this new idea of sufficiency economy using the knowledge and applicability of Buddhism. In Buddhism, life, especially spiritual life, is enhanced by the cutting down of excessive wants or greed. True happiness may be attained when a person is fully satisfied with what he or she has, and is at peace with himself or herself. To strive to consume more would lead to unhappiness if and when the consumption is not satisfied or falls short of expectation. A sufficiency economy in this context would be an economy fundamentally conditioned by basic needs, not greed, and restrained by conscious efforts to cut down consumption. This is probably acceptable insofar as it does not reject welfare gains from consumption altogether.

On looking back, it was discovered that the Thai king has talked about this issue of the sufficiency economy since 1974. In his usual birthday speech in December 1974, he wished that everyone in Thailand had “sufficient to live and to eat.” This was indeed a precursor to today’s topic. The king followed up this issue by saying again that “…The development of a country must be by steps. It must start with the basic sufficiency in food and adequate living, using techniques and instruments which are economical but technically sound.


When this foundation is secured, then higher economic status and progress can be established.”26 This is very good and very clear because it has shown that the king does not deny economic progress and globalization, which some people have interpreted his sufficiency economy philosophy to lead away from. Indeed, in Thai, the word “globalization” is used in the statement on sufficiency economy that the king has endorsed. The notion that the sufficiency economy is anti-globalization should be put to rest forever.

Still there are attempts from various segments of the Thai population to separate or dissociate this new sufficiency economy from the realm of mainstream economics that stresses economic rationality and efficiency in resource allocation. It is very obvious that the king’s sufficiency economy theory is not the type of economy that one can find in an ordinary mainstream economics textbook, but it would be inaccurate to interpret this to mean that this new sufficiency economy is the antithesis of mainstream economics in every respect. The sufficiency economy may still be understood within the framework of mainstream economics (of economic rationality and efficiency in allocative choices). The difference is not in the type, but in the degree or magnitude of economic behavior. The king used the phrases “middle path” and “middle way” to describe the pattern of life that every Thai should lead; a life dictated by moderation, reasonableness, and an ability to withstand shock. Is there any policy in mainstream economics that best captures the spirit of this philosophy?

How can we use our own understanding of optimization in economic science to explain the sufficiency economy? It is possible to see the theory as consisting of two states of affairs: one is the inevitability of facing a globalized world in which economic efficiency and competition are the rules of the game; the other is the need to have economic security and the ability to protect oneself from external shock and instability. In the first instance, it must be acknowledged that there are opportunity costs involved with all decisions. Specialization and division of labor are still valuable because the opportunity costs of doing everything individually rather than benefiting from comparative advantages would be higher. The laws of comparative advantage and gains from trade still work in today’s world, but it would be foolish to specialize without basic needs security (e.g., food, shelter, and clothing). This is when the second issue in the sufficiency economy theory must be addressed because

26 Information from Puntasen (1999).


it concerns the basic capability of the people in the country to take care of themselves. The optimization principle applies when addressing the question: How much of our time and energy should be devoted to the first and second issues, respectively? In other words, how many resources should be allocated to producing for trade based on the comparative advantage principle, and how many for basic security? The best mix between the two allocations would be the optimal state of affairs.

On the allocation of time for some economic purposes, the Thai king suggested that we did not have to mobilize all our efforts to an attempt to be a newly industrialized country. Referring to the point made earlier about all-out specialization, one can see that there is no conflict between the two concepts—that is, between being a sufficiency economy and a newly industrializing country. The same conformity can be seen also in another of the king’s statements that using only one quarter of those time and efforts would be sufficient to reach a self-sufficient economic status. The king’s suggestion has indeed provided a starting point in the economic optimization process. The “one quarter time and efforts” idea needs to be studied to find out whether it represents the optimal mix between the attainment of the first and second states of affairs. Some countries may need more, some less, but the relevant economic question is how to get an optimal mix of resource allocation that both satisfies economic growth as well as basic needs and security.

Under the above economic framework, it is possible to see that there is a correlation between what the king has proposed and the possible interpretation of the sufficiency economy theory under mainstream economic principles. One should note that the last clause in the philosophy of sufficiency economy, which states that “…[all Thais] must posses integrity, honesty, and appropriate knowledge so as to be able to lead the life with patience, perseverance, diligence, wisdom and prudence, to maintain balance and be ready for the rapid material, social, environmental, and cultural changes from the outside world.” Here, the word “balance” may be understood to mean the optimal mix alluded to above.


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The key message of Medhi Krongkaew’s chapter is that while economic growth in Asia’s developing countries, particularly those in East and Southeast Asia, has been quite remarkable in comparison with the growth seen in other regions of the world, progress in achieving SSD has been muted by either rising income inequality or by persistently high levels of inequality in incomes and opportunities in many countries. The chapter emphasizes the need for wide-ranging reforms, especially political reforms, in order to achieve SSD. The chapter suggests “ways forward” to achieving SSD in these countries, offering Thailand’s “Sufficiency Development” paradigm as one such way.

Krongkaew defines SSD by extending the concept of conventional sustainable development (i.e., mainly the interface of the economy, environment, and society) to include political processes, culture, and ethics, thereby presenting an all-embracing approach to thinking about development. The approach has its appeal, especially for popular discussions and for the media. However, the concept falls short of fully covering the critical policy choices and key drivers to achieving poverty reduction and equity, especially in fiscally constrained and resource-poor countries.

Poverty and inequality are multi-dimensional concepts. Hence, characterizing the “SSDness” of countries (i.e., measuring the various dimensions of SSD) has to go beyond the conventional focus of the economic development literature on income-based measures of poverty and inequity. While recognizing this concern, Krongkaew almost exclusively focused on country-level income measures. Given his definition of SSD, it would have been useful to show inequality indicators of human functionings (e.g., literacy, life expectancy), opportunities (e.g., education, health, technology, basic infrastructure), and quality of governance (e.g., corruption index, economic freedom index). The evidence at both cross-country and

Comments

Arsenio M. Balisacan


subnational levels27 is quite compelling that there is usually no one-for-one correspondence between income and expenditure measures, on the one hand, and human development and social outcomes, on the other.

Heterogeneity in the responses of poverty reduction to growth, even for countries at similar income levels, is a key feature of recent development experience. Initial conditions—including institutions, geography, and asset inequality—matter a lot. This suggests that critical constraints to poverty reduction vary not only across countries but also across space and sub-population groups within a country. Put differently, there is likely no one-size-fits-all pathway to SSD in the developing world. The challenge for each society is to identify the key policy levers required to bring about sustained growth and poverty reduction. Such identification may be usefully informed by, say, a growth and poverty reduction diagnostics exercise, such as that suggested by Hausman, Rodrick, and Velasco (2005).

The Philippine development experience is a case in point. Poverty reduction is remarkably slow in the country compared with its neighbors, even after taking into account differences in economic growth rates. The speed of poverty reduction also varies substantially across geographic areas (i.e., provinces, regions, and between urban and rural areas). “Poverty reduction diagnostics” indicate that the distribution of the benefits of basic social services, especially education, health care, and infrastructure, has accrued mainly to the non-poor, and that a variety of commercial policies and institutions has stifled growth in the demand for assets owned by the poor, that is, mainly labor (Balisacan 2007). Many programs commonly identified with equity objectives (e.g., agrarian reform, credit, food price subsidy programs) have had, in practice, little direct impact on poverty reduction. These programs have had many leakages to the non-poor, were administratively costly to implement, and encouraged unintended rent-seeking processes.

To the extent that great income inequality in a society is a binding constraint to SSD, understanding the sources of that inequality is key to achieving SSD. It has become a common practice to employ decomposition analysis to gain such an understanding. A key empirical regularity in the literature is that, globally, it is inter-country inequality (i.e., differences in mean per capita income) that accounts for the bulk of global income inequality. However, within a country, inter-group inequality accounts for only a relatively small

27 See, for example, Kanbur, Venables, and Wan (2006).


part of national inequality. Indeed, it is inequality within individual groups that typically explains much of the inequality. This is the case for Asian countries. This distinction could have helped clarify the comparative policy discussions in the chapter.

To be sure, spatial disparities are not necessarily non-SSD. Given agglomeration economies and factor mobility, the spatial concentration of economic activities leading to differential patterns of growth across regions or areas of the country may be inevitable and even desirable from an overall economic growth perspective. However, to prevent unreasonable spatial disparities in welfare during the development process, the priority should be to improve market links between the leading and lagging regions through greater factor mobility, particularly labor mobility. Improving access to social services, particularly education and health care, in lagging regions should also be part of any development agenda.

Finally, the suggestion that Thailand’s “Sufficiency Economy” approach be seen as a pathway to SSD is a bit premature in the absence of empirical grounding.

References

Balisacan, A. M. 2007. Local Growth and Poverty Reduction. In The Dynamics of Regional Development: The Philippines in East Asia, edited by A. M. Balisacan and H. Hill. Cheltenham, UK: Edward Elgar.

Hausman, R., D. Rodrik, and A. Velasco. 2005. Growth Diagnostics. Cambridge, MA: Harvard University. Available: http://ksghome.harvard.edu/~drodrik/barcelonafinalmarch2005 .pdf.

Kanbur, R., T. Venables, and G. Wan, eds. 2006. Spatial Disparities in Human Development: Perspectives from Asia. Tokyo: United Nations University Press.

VII1. The Challenges to Sustainability in Asia

The population, economy, and environment in Asia are changing rapidly. With these changes comes a growing demand for basic goods and services—such as clean water, energy, education, and healthcare. Increased pressures from outside—such as economic globalization and climatic change—make it a daunting task for anyone interested in understanding how these changes can be influenced in order to promote sustainability of the region. Yet, ignoring the need to find and implement sustainable development strategies for Asia runs the risk that people and countries in the region will be overrun by these changes, with governments failing to deliver on the hopes and aspirations of ever more people, present and future.

Given the need for sustainable development strategies for Asia, this chapter concentrates on the following three interrelated issues that impact the effectiveness of interventions to address current trends: (i) continued growth of the population, especially in urban areas; (ii) growing contributions of Asian countries to global climate change, as well as the ramifications of climate change for local economies, societies, and the environment; and (iii) fixation on economic growth as a solution to the very problems for which growth is one of the root causes. Each of these issues is presented in the following three sections of this chapter, with Section 2 focusing on population growth and urbanization trends, Section 3 addressing climate change, and Section 4 distinguishing the policy goals of economic growth from those of development. Based on a discussion of these issues, this chapter presents in Section 5 a framework for

Promoting Sustainability Under a Changing Climate in Asia 179

Promoting Sustainability Under a Changing Climate in Asia

Matthias Ruth


analysis and policy guidance that draws on principles and insights from the natural sciences to inform the economics of sustainable development. The chapter closes with a brief summary and suggestions for strategies to tackle the interrelated social, economic, and environmental challenges faced in Asia under rapidly changing climatic conditions.

2. Population Growth and Urbanization

World population has grown from 2.5 billion in 1950 to 6.7 billion in 2008. An increasing share of that population is living in developing countries, with India and the People’s Republic of China (PRC) combined now accounting for about 37% of the world total (Population Reference Bureau 2008). Adding Indonesia, Pakistan, Bangladesh, and Japan to the picture, six of the ten most populous countries in the world are in Asia.

In line with global population trends, urbanization continues to increase. The world has seen a fifteenfold increase in urban populations since the beginning of the twentieth century. Both total and urban populations at all levels of development are rising, though at a decreasing rate. Consistently, wealthier and more-developed nations are characterized by greater levels of urbanization, though the majority of urban growth is occurring in lesser-developed countries (United Nations Development Programme [UNDP] 2003, 2006; World Bank 2005). Indeed, the rate of urbanization in the least-developed places is as much as seven times that in the most-developed nations (UNDP 2003), with Asian countries accounting for some of the highest urbanization trends (Table 7.1).

Approximately half of the world’s population now lives in urban areas, with more than 50% living in cities of less than 500,000 people (McGranahan and Marcotullio 2006). Though some of the world’s largest cities have experienced a slowing of growth rates in recent decades, the average size of the world’s one hundred largest cities has increased from 200,000 in 1800 to 5 million in 1990 (Cohen 2004). This trend in urban expansion is anticipated to continue as transportation and communication networks, two of a city’s most extensive infrastructure systems, expand outside of traditional inner-city boundaries (Grimm et al. 2008).

In addition to purely demographic changes, a suite of environmental conditions influence urbanization and are affected by it. Most cities are located, and are primarily growing, in coastal zones, in part because of the importance


of access to natural resources and transportation networks in an increasingly globalized world. Population densities in coastal areas are approximately 45% higher than global average densities (McGranahan and Marcotullio 2006). As the size and makeup of cities change, new urban economic and social inequalities come to the fore and new pressures on the local environment are created. For example, increased demand for land often leads to settlement in ecologically vulnerable areas or to an increased imperviousness (i.e., paved and built-up surfaces) in the urban landscape. As a result, the ability of wetlands and forested areas to protect coastal zones, floodplains, and rivers is reduced, and the likelihood of flooding is increased, with all its associated impacts on housing structures, transportation networks, and supply and quality of water. These trends are most pronounced in Asia, where approximately 60% of the more than 4 billion people live within 400 km of the coast. In some

Table 7.1: Urbanization Trends in Asia

GDP per capita

PopulationUrban

PopulationProportion Urban

Estimated Increase inUrban Population

(PPP in US$) (million) (million) (%) (%) (%) (million) (%)

2003 2005 2005 1950 2005 20302005-2030

2005-2030

World 6,453.60 3,172.00 29 49 61 1,772.70 56

Asia 3,917.50 1,562.10 17 40 55 1,102.20 71

Malaysia 9,512 25.3 16.5 20 65 78 10.8 66

Thailand 7,595 64.1 20.8 17 33 47 14.6 70

PRC 5,003 1,322.30 536 13 41 61 341.6 64

Philippines 4,321 82.8 51.8 27 63 76 34.8 67

Sri Lanka 3,778 19.4 4.1 14 21 30 2.4 59

Indonesia 3,361 225.3 107.9 12 48 68 80 74

India 2,892 1,096.90 315.3 17 29 41 270.8 86

Viet Nam 2,490 83.6 22.3 12 27 43 24.5 110

Pakistan 2,097 161.2 56.1 18 35 50 79.3 141

Cambodia 2,078 14.8 2.9 10 20 37 5.8 197

Bangladesh 1,770 152.6 38.1 4 25 39 48.4 127

Lao PDR 1,759 5.9 1.3 7 22 38 2.3 177

GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, PPP = purchasing power parity, PRC = People’s Republic of China, US$ = United States dollar.

Sources: United Nations (2003, 2004); United Nations Development Programme (2005).


countries, such as Indonesia and Viet Nam, almost all of the population is coastal (Hinrichsen 1998, 1999).

Increasingly it is cities, rather than countries, that compete with each other on the national and international stage for capital to support their growth and development, and in the markets for the goods and services they produce. The associated growth in economic activity is strongly correlated with higher demands for energy and increased emissions of greenhouse gases. As a result, cities are both the main contributors to climate change as well as victims of changing climate conditions. The following section documents in more detail the contributions of Asia and its cities to climate change and the extent to which climate change contributes to and magnifies national and urban vulnerabilities.

3. Climate Change Contributions and Ramifications in Asia

Two issues surrounding climate change concern policy and investment decision makers, now that scientific consensus about its anthropogenic causes has emerged. The first of these is reducing emissions of greenhouse gases, most notably carbon dioxide (CO2), from burning fossil fuels. Addressing emissions will be essential to stem the tide—figuratively and literally—that is heading Asia’s way. However, even if greenhouse gas emissions could instantly be reduced to zero, a second issue remains to be addressed, namely past emissions, which will continue to impact the climate because the mean residence time of most greenhouse gases exceeds one hundred years, and because the atmosphere, oceans, and land respond only slowly. As a result, a prudent strategy for the region as a whole would be to reduce emissions of greenhouse gases while preparing for some form of climate change. Given the unique role of cities in social and economic development, as well as their contributions to environmental change at the local and global scale, opportunities for leadership at the city level arise, with benefits that may extend well beyond their geographic scope nationally, regionally, and globally.

3.1 Energy Use and Greenhouse Gas Emissions

Urbanization means concentration of people and economic activity. With concentration can come opportunities for more efficient production and consumption of materials and energy, in part because higher densities alleviate


the need for transportation and other transaction costs, and in part because cities present accumulations of labor, knowledge, creativity, and financial resources that can be brought to bear on the environmental, social, economic, technological, and institutional challenges faced by the local population (Ruth and Coelho 2007). Local policymakers can take advantage of the factors that drive city competitiveness to prepare for climate change impacts. Concentration in cities of infrastructure, labor, services, buyers, and sellers can facilitate “knowledge spillovers” and innovation (World Bank 2005).

Such economies of scale and scope, however, are not automatically realized, but are frequently the result of gradual fine-tuning of operations at all levels of a city’s hierarchy—from households to businesses to local and regional government, often within the opportunities and constraints provided by national policies. In part, these cost savings from agglomeration in urban areas are a direct result of the fact that savings are realized by private entities—the firms that produce goods and services; the labor employed in the production process; or the capital markets, which involve global players with global, rather than local interests. In contrast, the costs of agglomeration have historically been spread over the population as a whole and have become the responsibility of government agencies, or attention to them is postponed until some undetermined point in the future in the hope that by then economic growth will have helped generate the resources needed to compensate for compromised environmental quality and quality of life.

However, rapid geographic, economic, and population growth can readily overwhelm efficiency gains, and empirical evidence is mounting of their adverse effects on individual countries, regions, and cities. For example, while urbanization rates in the PRC are relatively low compared to those in the United States (US), the European Union (EU), and Australia and New Zealand, the rate of change in urbanization and the ratio of per capita primary energy demand to regional averages in the PRC are significantly larger (Table 7.2). As a result, energy consumption in the PRC’s cities is disproportionately higher than in its hinterlands. But even in the PRC, large differences can be observed between cities’ energy use per unit of gross regional product (Figure 7.1).

The relatively high ratio of per capita energy demand in cities relative to regional averages, combined with the strong reliance of developing countries on energy sources rich in carbon content per heat value (such as wood, wastes, coal, and oil), contributes to the fact that these countries are making considerable and increasing contributions to global greenhouse gas emissions. For these reasons, and obviously because of their size, three of the top five countries


emitting CO2 from fossil fuel burning are located in Asia (Table 7.3), with the PRC’s emissions well on their way to topping the list globally.

Given the magnitude and rate of growth of energy use and greenhouse gas emissions, there is intense competition among cities in the PRC and in

Figure 7.1: Per-capita Energy Demand and Gross Regional Product in Selected PRC Cities, 2006

PRC = People’s Republic of China, US$ = United States dollar.

Source: Dhakal (forthcoming).

Tons

of O

il

US$ at Market Exchange Rate

Table 7.2: Overview of City Energy Use and Urbanization Rate in Regions and Countries, 2006

RegionShare of city primary energy demand in regional total

Ratio of city per-capita primary energy demand to regional average

Urbanization rate

United States 80% 0.99 81%

European Union 69% 0.94 73%

Australia and New Zealand 78% 0.88 88%

China, People’s Rep. of 75% 1.82 41%

Source: International Energy Agency (IEA) (2008).


several other Asian countries to attract investments that can help slow or even reverse observed trends. As a consequence, cities are acting to address concerns about energy security and local air pollution. Interventions by city authorities on energy matters tend to concentrate on four major fronts:•Cleanenergy,especiallyencouraginggreaterpenetrationofnaturalgas

and limiting the use of coal, other high-carbon fuels, and wastes as energy sources in the household and commercial sectors.

•Actionintheenergysectortofacilitateeconomicstructuralchangefromprimary to secondary industries and toward an enlarged tertiary sector.

•Promotingenergyefficiency.•Improvingpublicandmasstransportationsystems.

3.2 Impacts and Adaptation Needs

Even if greenhouse gas emissions were brought to zero worldwide in the near future, the ramifications of past emissions would continue to be felt for centuries because of the long lifetime of greenhouse gases in the atmosphere and time-delayed responses of terrestrial and aquatic ecosystems (Intergovernmental Panel on Climate Change [IPCC] 2007). As a consequence, mitigation

Table 7.3: Carbon Dioxide Emissions from Fossil Fuels Burning in Top Ten Countries, 2006

Country EmissionsMillion Tons of Carbon

Share of Global Total %

Unites States 1,656 19.8

China, People’s Republic of 1,480 17.7

Russia 437 5.2

India 391 4.7

Japan 342 4.1

Germany 221 2.6

Canada 177 2.1

United Kingdom 171 2

Republic of Korea 130 1.6

Mexico 123 1.5

All Other Countries 3,249 38.8

Global Total 8,379 100

Sources: Compiled from Marland, Boden, and Andres (2007); BP Amoco (2007).


efforts need to be accompanied by adaptation strategies to help reduce the vulnerabilities of societies and their economies. Particular vulnerabilities surround agricultural production, infrastructures in coastal zones, water supply and treatment systems, adequate and reliable energy supply, and public health, all of which are discussed in more detail below. Also of concern, though not specifically discussed here, are the impacts of climate change and population pressures on the health of ecosystems.

AgricultureAgricultural crops and practices have long been fine-tuned to local environmental conditions. As these conditions change, agricultural yields may be affected. Climate change—most notably changes in temperatures and precipitation—directly affects growing conditions, and changes in the frequency and severity of extreme weather events increase uncertainty for farmers about optimal crop choice, timing of planting and harvest, and other management practices. A study by Cline (2007) assessed impacts of climate change on agricultural productivity under business-as-usual assumptions. One of his calculations assumed no fertilization effect from higher CO2 concentrations. With such an effect, adverse trends would be moderated or reversed. However, climate does not stop changing once favorable growing conditions are reached. Rather, rising temperatures, changes in freezing conditions, and more frequent and severe droughts and downpours raise the vagaries under which agricultural production decisions are made, and contribute to changes in disease and pest prevalence, as well as to changes in regional and global markets as the competitive landscape is altered. As a result, fundamental changes in the agricultural sector are anticipated that may undermine its ability to supply food to growing populations, particularly in urban areas (Parry et al. 1999).

Sea Level RiseSea level is an obvious concern for cities situated on coasts, where rising water levels and storm surges can cause property damage, displacement of residents, disruption of transportation, and wetland loss. Already a nuisance for coastal communities globally, it is estimated that sea level rises and associated impacts will affect five times as many residents by the 2080s as they did in 1990 (Nicholls, Hoozemans, and Marchand 1999). Projected sea level rise is associated with significant loss of land in coastal regions. For example, a 1 m sea level rise would mean a loss of nearly 21% of land in Bangladesh and slightly over 17% in Viet Nam (Nicholls and Mimura 1998). The impact of this loss


extends beyond displacement of significant shares of the local population. For example, a significant share of rice production occurs in areas susceptible to a 1 m sea level rise (Hoozemans, Marchand, and Pennekamp 1993).

Saltwater intrusion into ground and surface waters is a critical problem that impacts the availability of potable water and that can spread harmful pollutants throughout urban water systems. Cases of saltwater intrusion are nearly ubiquitous among coastal cities, documented in diverse environments including the Thailand coast, as well as both PRC and Vietnamese deltas (IPCC 2001). Costs of desalination are high at approximately US$1.00/cubic meter (m3) to generate potable water from seawater and US$0.60/m3 to convert brackish water, compared to US$0.02/m3 for freshwater chlorination (Zhou and Tol 2005).

Flooding, Storm Water Drainage, and Sewage SystemsThe frequency and severity of flooding has generally increased in the last decade compared to 1950–1980 flood data, along with the frequency of floods with discharges exceeding one-hundred-year levels (Kron and Berz 2007). Although there is variation in regional predictions among different forecasting models, it is generally accepted that both trends will continue, especially in Asia (Milly et al. 2002; Fox 2003). More frequent and severe precipitation events are predicted to cause greater incidence of flash flooding and urban flooding.

Floods are one of the most costly and damaging disasters, and will pose a critical problem to city planners as they increase in frequency and severity. In addition to the obvious structural damage and loss of life they can cause, floods can short-circuit transformers, disrupting energy transmission and distribution; paralyze transportation; impair clean water supply and treatment facilities; and can accelerate the spread of waterborne pathogens (IPCC 2001; Ruth and Rong 2006). Socioeconomic models of future flood damage in cities independently predict vast increases in damage spending due to climate change in the absence of adaptive infrastructure changes (Kirshen, Ruth, and Anderson 2005; Hall, Sayers, and Dawson 2005; Choi and Fisher 2003).

Combating these problems requires consideration of structural flood defenses (e.g., river diversion, reservoirs, and embankments) and of emergency alert system and response service preparedness. Among the most effective ways to prepare for, and deal with, some forms of flooding events, however, are improvements in social networks and communication channels (Lange et al. forthcoming). Given the extent to which virtually all aspects of urban


life depend on water, floods will moreover challenge the abilities of planners and managers, who are charged with providing reliable services in the face of a highly variable climate.

Hydrological changes can also stress the capacity of drainage infrastructures, sewage systems, and water treatment facilities in cities. Heavy precipitation events wash urban pollutants into rivers and lakes, and can reduce water quality in reservoirs by increasing turbidity (Frederick and Gleick 1999; Miller and Yates 2006). Low river flow during times of drought amplifies the concentration of chemical and heavy metals, with potential implications on ecosystem health and recreational opportunities (IPCC 2001). As intense precipitation occurs more often, urban planners will have to confront multifaceted problems of controlling and managing precipitation inflows and protecting existing water supplies.

Urban runoff and failures of combined sewer overflows and municipal sewer plants can all introduce pathogens into water systems that pose a variety of health risks; documented cases globally range from wound infection to kidney failure (Nuzzi and Waters 1993; Rose et al. 2001). Sea level rise combined with increasing frequency of severe weather events can cause sanitation problems when urban infrastructures are not prepared to accommodate sudden influxes of water, leading to contamination of drinking or recreational water from sewage backup and introduction of microbial/chemical agents and biotoxins (Rose et al. 2001).

Increasing Water DemandHigher air temperatures and more frequent droughts can cause increasing water demand for household and industrial use in urban areas (IPCC 2007). Although modeling evidence has not shown these increases to be dramatic (Protopapas, Katchamart, and Platonova 2000), effects may be exacerbated as population growth occurs in cities. This phenomenon has significant regional variation, making it difficult to predict its impact on a given area based on global or broad regional estimates of temperature change, for example. Modeling estimates for the US have suggested large costs will be associated with meeting increasing demand as temperatures rise through 2060, while studies on Greece have predicted decreasing costs under certain climate change scenarios (Morrison and Mendelsohn 1998; Cartalis et al. 2001). Regional variation has proven significant at the state level in the US, emphasizing the need to understand not only the anticipated regional effects of climate change, but also the differences in manifestation of these impacts for various urban


sectors (e.g., waste management, manufacturing, and services) (Sailor 2001). Little analysis is available for Asian countries, yet the challenges are likely to be more pronounced in this region, given the more dramatic increases in population, urbanization rates, and economic growth.

Equally important is the analysis of demand relative to supply in a given environment. Estimates for gross demand increases that can be met by current levels of supply may not necessarily be met by future supply, if it is restricted by severe weather, pollution, or other climate change impacts. In fact, when relative demand is considered in concert with additional stresses from the agricultural sector, it becomes clear that many parts of the world will be forced to confront infrastructure changes over the next several decades. For example, model results, including population and climate change projections, estimate large increases in relative demand in the northeastern US, the majority of Latin America, sub-Saharan Africa, Eastern Europe, and the Middle East (Vorosmarty et al. 2000).

EnergyThe discussion of energy issues in the context of climate change has largely focused on the contribution of fossil fuel burning to changes in atmospheric greenhouse gas concentrations, and the mitigative strategies that may be employed to reduce emissions. However, the energy sector is not only a contributor to climate change, but is also directly affected by it. Increases in mean temperatures, and particularly in the frequency and severity of heat waves, will drive up demand for space cooling and refrigeration, which in turn will mean investment in the capacity to meet peak load demand. Even if wintertime temperatures increase as well, thus reducing the demand for energy part of the year, the financial needs to support capacity increases will not be eliminated (Amato et al. 2005). Additional challenges come from the fact that electricity generation and distribution are less efficient during high-temperature episodes, and because reduced water availability for cooling and ambient air quality during such episodes may further impose technical and regulatory constraints on the electricity sector, as well as on those parts of industry that generate their own heat, steam, and electricity.

Heat-Related Mortality and DiseaseAside from deaths due to natural disasters, increasing temperatures can affect mortality in a number of ways including heat-induced mortality, famine, exacerbation of non-infectious health problems, and spread of infectious


disease. Heat waves are likely to increase in severity and duration in the future, contributing to heat mortality in both developed and developing countries. Shortages of electricity for cooling, due to inadequate peak load capacities and reduced generation and distribution abilities, may further add to the physical stress on local populations.

As population sizes and infrastructure investments in cities increase, and as climate change requires increases in energy use for space conditioning and refrigeration, the combination of energy use and the associated emissions of air pollution and waste heat into the urban environment create urban heat islands—areas with above-normal temperatures compared to urban hinterlands. These urban heat islands, in turn, trigger further increases in energy use and declining local air quality, and have been found to impact regional precipitation patterns and wind speeds (Arnfield 2002). As a result, urban heat island effects add to stress on ecosystem and human health, and magnify the adverse impacts of climate change.

The spread of infectious disease stands as one of the most profound and universal problems associated with increasing air and water temperatures. The World Health Organisation attributes at least 150,000 annual deaths to disease issues associated with climate change that has occurred since the 1970s, and extends its analysis to estimate that death rates from climate-induced disease may double by 2030 (Patz et al. 2005). Warming climates favor many pathogenic agents and their vectors, often extending life cycles, increasing reproductive rates, or allowing for range expansion. Diseases of particular concern include malaria, dengue fever, plague, and West Nile virus.

Drought associated with long bouts of heat and reduced precipitation may contribute to regional loss of crops, contributing to malnourishment, especially in the developing world (Patz et al. 2005).

4. Distinguishing Economic Growth from Economic Development

The difference between economic growth and economic development has long been recognized in the scientific literature (Boulding 1966; Daly and Umaña 1981) yet is frequently blurred in public discourse and policy debate. Growth refers to increases in the size of an entity, and in the context of an economy is typically measured by changes in the volume of marketed goods and services produced in a given year. A typical indicator of economic activity


is gross domestic product (GDP). In contrast, development implies qualitative improvements and, because quality is more difficult to judge, has less well-defined measures associated with it.

One increasingly used measure of development is the genuine progress indicator (GPI), which attempts to capture the contributions that non-marketed goods and services make to society (such as household labor) and subtracts expenditures needed to overcome adverse impacts of economic growth (such as health expenditures for air pollution) or losses of ecosystem services (such as flood control and water filtration functions of wetlands). Empirical evidence suggests that for many countries, while GDP continues to increase, improvements in the quality of life as measured by the GPI may slow and even decline for high rates of economic growth (Talbarth, Cobb, and Slattery 2006).

A second type of indicator of qualitative changes associated with economic activity is the ecological footprint (Jorgenson 2003), which attempts to capture the extent of the ecological impact humans have, measured by the area required to produce crops, animal products, wood, and paper; to harvest fish and seafood; to provide land for housing and infrastructure; and to sequester the carbon dioxide emitted from energy consumption. The larger the footprint, the more extensive is the draw of a particular region on global resources. Large parts of the world have increased their ecological footprints since 1961, with parts of Asia, particularly its coastal regions, having some of the highest impacts on ecosystems (Global Footprint Network 2006). One factor contributing to worsening ecological footprints is the increased demand for ecosystem services to support economic growth in general, and to support an increased concentration of production and consumption levels in urban areas in particular (Figure 7.2).

5. Sustainability Challenges for Research, Investment, and Policymaking in a Changing Climate

The discussion above highlighted some of the challenges to sustainable development that come from rapid population and economic growth. In many ways climate change is a “threat multiplier,” magnifying already existing vulnerabilities of societies, economies, and the environment. Attempting to address the climate change challenge without addressing existing social and economic conditions, or the ongoing degradation of ecosystems, will mean


falling short of any goal to promote sustainability. Conversely, when viewed through the climate lens, threats from climate change strengthen the mandate for local, regional, national, and international public and private sector entities to tackle social, economic, and environmental challenges associated with economic growth that undermine the potentials for true development. Insights from economics, properly informed by the biophysical constraints under which

Figure 7.2: Urbanization and GDP Per Capita in Relation to Size of Global Ecological Footprint

GDP Per Capita and Total Ecological Footprint

Urban Population and Total Ecological Footprint

GDP = gross domestic product, US$ = United States dollar.

Sources: World Development Indicators Online (2007); Loh and Wackernagel (2004).

2000

US$

Ecol

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al F

ootp

rint

Foot

prin

t

% o

f Tot

al


economic growth and development take place, can play an important role in informing investment and policy choices.

5.1 Standard Perspectives on Economic Growth as a Vehicle Towards Improved Environmental Quality

To date, strategies to promote economic development in Asia and elsewhere have, in essence, been economic growth strategies. The underlying worldview has been one in which increases in economic activity create the wealth that enables society to tackle social and environmental challenges of ever-greater scope (Figure 7.3). As societies increase their ecological footprint, interest in maintaining an adequate supply of resources from, and relations to, more distant places is increasing. Furthermore, as population densities increase and urbanization continues, interest grows in maintaining some form of ecosystem

Figure 7.3: Progression of Environmental Concerns with Changes in Economic Wealth

Source: Author’s own rendition.


integrity outside urban areas to balance the loss within cities. Missing from this worldview is the explicit recognition that regional and global challenges can only be addressed through local action, and that the viability of urban and non-urban environments are fundamentally interrelated. Therefore, a regional and global problem focus necessitates involvement of investment and policy decision makers at the local level.

Recognizing that economic growth draws down the natural resource base and environmental waste absorption capacities on which economic activity depends, economists have long emphasized the role of technological progress in cutting resource use and waste generation through improved end-use efficiencies. Most notable in this context is the notion of an “environmental Kuznets curve” (Kuznets 1955, 1998), which posits that the relationship between income and inequality follows an inverted U-shape. The environmental Kuznets curve suggests that pollution levels will increase with income but some threshold of income will eventually be reached, beyond which pollution levels will decrease (Grossman 1995). Much of the empirical support for the environmental Kuznets curve comes from cross-sectional analyses of carbon emissions from countries at different stages of development.

The underlying logic behind the environmental Kuznets curve presumes environmental quality to be a normal good, demand for which increases as income increases. Economies of scale, resource-saving technological changes in the extractive and manufacturing sectors, trade liberalization leading to “out-migration” of dirty processes, and development of regulatory mechanisms and institutions all are seen to contribute to a country’s improved environmental quality as economic development takes place (Panayotou 1993; Komen, Gerking, and Folmer 1997; Suri and Chapman 1998; Andreoni and Levinson 2001). If the logic of the environmental Kuznets curve was to hold, many of Asia’s environmental challenges, in particular its contributions to rising atmospheric concentrations of greenhouse gases, would soon be addressed.

Methodological and empirical controversies surrounding the environmental Kuznets curve aside, its insights are based on correlations among historical data from diverse sets of countries that by no means establish causal relationships, let alone inevitable development trajectories for regions or nations. Rapid rates of urbanization, increases in affluence of local populations, and investment in infrastructure that is bulky and long-lived may result in a “rebound effect,” where emissions begin to rise again after some high level of income is reached. Income inequality, in turn, may add to the complexity of the environment-development relationship (Williamson 1998). More


homogeneous societies may experience less inclination to use consumption as a means of internal differentiation, while in more economically-stratified societies larger pressures may exist to “keep up with the Joneses.” However, the reverse argument could be made as well—the more homogenous the society, the more people may seek methods of internal differentiation through, for example, resource-intensive conspicuous consumption. A high correlation between resource-intensive consumption and energy use, in turn, translates into high emissions of greenhouse gases. The need for equitable distribution of income and opportunities, long recognized as a development goal, returns as a new challenge in the context of environmental sustainability.

5.2 Alternative Views on the Functioning of the Economy

A wide range of alternative economic models have emerged in the twentieth century, based either explicitly or by analogy on insights into the principles that guide changes in the larger ecosystem within which economies are contained (Daly 1973; Ruth 1997). Building on these principles can provide suggestions for how to promote economic development, particularly in the light of climate change. Four of these insights are discussed here.

Building on Concepts from Nature Natural processes exhibit a tricky balancing act between competition, cooperation, and coordination on the one hand, and elimination on the other hand. Individual species carry out this balancing act when filling the niches opened, or left open, by others. For a species to be able to adjust, individuals must have opportunities to deviate from the norm. Deviations from the norm are essential to exploring alternative, more efficient, and more effective means of utilizing resources, and to maintaining or increasing population size. Failure must not only be allowed, but the willingness of individuals to embark on paths that may lead to failure must be encouraged for sustainable development to occur. In the end, however, nature cares about the community, not the individual—those who are not fit for a given environment will have reduced reproductive success or be weeded out from the system.

If indeed nature stresses the long-term viability of populations and communities over the short-term gain of individuals, and if humanity will ultimately be required to follow principles similar to those that contribute to sustainability in nature, then this has far-reaching implications for the economic, legal, and ethical underpinnings of society. For example, profitability


for individuals—and the ability to seek out profitable strategies—must be encouraged in ways that yield net benefits both for the individual and for society. Legal systems must be effective in penalizing individuals who use resources at the expense of others. Tax codes must encourage entrepreneurial risk taking without providing any means to roll over to society the cost of failure, should it occur. The cost savings to businesses generated by rapid urbanization, for example, needs to enable concomitant investment in infrastructures and services to facilitate sustainable development, rather than to socialize the associated cost while profits are privatized.

The Roles of Efficiency and Effectiveness in Decision Making Efficiency and effectiveness are important guides for decision making—efficiency requires the highest productivity per unit of a resource; effectiveness requires attaining the highest utility from what is used. Systems that are highly efficient are not necessarily effective—they often reduce redundancies for purposes of cost savings, and as a consequence become brittle and unstable, collapsing when faced with unanticipated changes in their environments.

Historically, decision makers have tried to ensure continued performance of highly efficient systems by controlling the environments in which they operate. A prominent example is food production on the basis of monocultures, which are prone to massive pest outbreaks. Avoiding failure has typically meant strictly controlling physical, chemical, and biological conditions through irrigation and use of fertilizers and pesticides. As the cost of, and limits to, environmental control become increasingly apparent, and as climate variability broadens the conditions under which agriculture operates, research is returning to the crops themselves, making them, through breeding and genetic engineering, more efficient in variable environments. As the larger, systemic effects of genetic engineering become apparent, societal acceptance has become a major stumbling block for modern agriculture. With increased societal concerns about the potential environmental and health implications of using new crops, attention must increasingly focus on the socioeconomic environment within which food production and consumption take place.

The Need for Adaptive and Anticipatory ManagementSince biophysical, technological, and socioeconomic environmental conditions always change, and since, typically, not all the information necessary to identify the best management decisions is known, some researchers and practitioners have called for an iterative process of data collection, interpretation, and


adjustment of management decisions as we learn more about system behaviors. This type of adaptive management has been promoted, for example, for management of water resources, fisheries, and wildlife (for examples see Gilmour et al. 1999; Gunderson 1999; Johnson 1999; Lee 1999; and Pinkerton 1999). The underlying management paradigm is a coevolutionary worldview, which recognizes that natural systems and human systems adjust to each other’s behavior. It is minimally forward-looking, recognizing that uncertainties increase as time horizons and spatial scales increase, and emphasizes the need for adjustments as hitherto unknown system features and behaviors are revealed.

However, some systems are characterized by long temporal and spatial lags between action and system response, as well as high degrees of complexity and irreversibility. These are often the cases that pose major challenges to sustainable development. In such cases, adaptive management may not be the best approach. For example, in the case of industrial or infrastructure systems, investments are lumpy and turnover rates are low. Waiting until the ramifications of one decision are known before new decisions are made is often impossible. Instead, management must be anticipatory. Actions must be taken well in advance of knowing likely future environmental conditions and must be robust under a wide range of possible futures. Since humans have the capability to explore—theoretically and with scaled experiments—various potential futures, their position is in sharp contrast with nature, where “management” follows a trial-and-error, “adaptive” approach.

Examples of cases where current management is clearly not anticipatory range from land use planning to infrastructure design. Expansion of cities along steep slopes without natural buffers to surrounding ecosystems, into wetlands, and along coasts often occurs irrespective of available knowledge about the long-term potentials for soil erosion, spread of wildfires, and flooding, all of which may be exacerbated by the presence of human settlements and continued climate change. Insurance premiums are set on the basis of historical risk and do not take into account the changes in risk that settlements and climate change induce. As a result, they subsidize unsustainable land use patterns. Similarly, infrastructures are designed to withstand one-hundred-year floods—events that have the probability of occurring once in a hundred years. Since climate change affects both the frequency and severity of extreme weather events, what is currently considered a one-hundred-year flood may, by the end of this century, occur as often as once every ten years. While many infrastructures planned and built today will likely still be in use then, those


that have been designed with static definitions of a one-hundred-year flood will be woefully inadequate to provide services under new climate conditions. As a consequence, adapting to climate change will mean costly replacements and retrofits that could have been avoided had some basic understanding of possible climate futures been taken into account (Kirshen et al. 2005).

The Need for Holistic Impact Assessments One way to think about system interventions is with respect to their reach and complexity. Simple interventions with short (geographic or temporal) reach affect only a small number of individuals, and the relationship between intervention and effect is fairly immediate. The greater an intervention’s complexity and the longer its reach, the more important it becomes to broaden its scope as well, so as to not get blindsided by challenges that lie outside the narrow focus of technical interests and expertise. For example, seeding of clouds to influence precipitation or deliberate injection of aerosols into the atmosphere to influence global climate may work very well from an engineering perspective and may even be highly cost effective, but both are likely to raise objections if there are sentiments, legal/liability issues, or institutional constraints that are not taken into account at the outset. An engineering or economic solution that is blind to ethical, moral, emotional, legal, or institutional constraints is really not a solution at all. Such constraints, however, have frequently served as excuses for engineers and economists to remain busy while blaming others for failing to solve the problem.

Many of the current procedures for impact assessment; deliberative processes for conflict resolution; and large-scale, dynamic modeling of system change meet some of these requirements. Few, if any, integrated assessments, however, are “holistic” enough to help foster sustainable development, particularly under rapidly changing environmental conditions.

6. Summary and Conclusions

The discussion above has highlighted some of the well-known relationships among economic growth, urbanization, resource use, and climate change that currently play themselves out in Asia and around the globe. Given the rapid socioeconomic changes in many Asian countries, however, opportunities exist to shape resource use, and to make improvements in people’s quality of life and the health of ecosystems in ways that support long-term and sustainable


development. It is a general perception, however, that investments to combat global climate change undermine efforts to promote the development of Asian countries. Two main reasons for this perception have been identified above: First, addressing the root causes of climate change—emissions of greenhouse gases—may mean diverting resources from the remainder of the economy toward changing technologies or reducing output, thus undermining growth in standards of living. Second, dealing with the impacts of climate change on agriculture, infrastructures, water resources, energy systems, and public health will require investment in adaptation strategies, again diverting resources away from consumers.

Both of these reasons rest on the presumption that economic growth is needed to support social and economic development, and that economic growth can help overcome the very problems it creates. Both reasons also succumb to the fallacy that there are no costs to inaction. However, not engaging in mitigation efforts means continuing wasteful resource use practices; not engaging in adaptation efforts means neglecting existing vulnerabilities to climate vagaries.

Three sets of recommendations for policy and investment making emerge from the observations above. One set of strategies should reduce existing deficiencies in the social, economic, and environmental realm. Clearly, strategies that strengthen the social capital in cities, regions, and nations in Asia will help develop coping mechanisms needed for all kinds of challenges to the livelihoods, safety, security, and well-being of people, not just for climate impacts. Similarly, strategies that emphasize economic effectiveness over efficiency—by maintaining or increasing the diversity of businesses and redundancies of infrastructure systems—can help reduce vulnerabilities to outside influences, including climate change. Recognizing and supporting the contributions of ecosystems to society and the economy will be essential to maintaining the diversity in assets needed in the long run—from provision of goods and services that have no immediate substitutes (such as pollination services) to those that work in conjunction with economic assets or that can even substitute for them (such as wetlands providing flood control functions).

A second set of strategies needs to focus on the reduction of greenhouse gas emissions. Since high emissions are synonymous with inefficient energy conversion and irreversible loss of valuable assets (e.g., fossil fuel reserves, or financial capital needed to gain access to those reserves), strategies to cut greenhouse gas emissions can help lay the footprint for more sustainable energy conversion and use.


A third set of strategies ought to help prepare society for the impacts of climate change to which society is already committed because of past activities. Typically, this means upgrading existing infrastructures, updating institutional procedures, retreating from flood zones and other vulnerable areas, and generally employing lower-risk strategies. Even without climate change, such strategies make good economic sense for countries on a rapid development trajectory because they will result in a more conservative approach to risks and uncertainties. Conversely, the more countries place their assets—social, economic, environmental—in jeopardy, the less sustainable their development will be.

A wide range of policy instruments are available to stimulate investment in social capital, more effective infrastructures, healthy ecosystems, and sustainable energy supply in an adaptive society. Examples include regulatory approaches, taxes of “bads” (such as energy use, emissions, and waste generation) rather than “goods” (such as labor and capital), or cap and trade schemes in which emission allowances are auctioned off, generating revenues for governments to reinvest in the economy and society. The argument is frequently made that, by their very nature, such policy interventions are regressive, impacting less affluent parts of society more than others. What is frequently missed, however, is that in the absence of market corrections, economically and socially disenfranchised groups, the elderly, the young, and the sick are likely to suffer disproportionately, particularly when faced with impacts of climate change.

There is considerable overlap and synergy among all three strategies. Identifying those overlaps and synergies can make these problems more tractable and can improve the benefit-cost ratios of individual actions. Also, even though the need to address the root causes of climate change and its ramifications will add additional dimensions to the investment and policymaking process, this will simply magnify already existing deficiencies. Alleviating those deficiencies means reducing the threat-multiplier effect of climate change and enhancing the sustainability of the development process.


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1. Introduction

Professor Matthias Ruth’s chapter first describes the relationships between economic growth, urbanization, resource use, and climate change. It then suggests an alternative to the conventional view that investments to combat global climate change undermine efforts to promote development in Asia. The chapter concludes by recommending three sets of strategies for policy and investment.

The first set of strategies aims at reducing existing deficiencies in the social, economic, and environmental realms. The second set, which focuses on cutting greenhouse gas emissions, is to help lay the groundwork for more sustainable energy conservation and use. The goal of the third set is to help prepare society for the impacts of climate change to which it is already committed because of past activities. This chapter also emphasizes the considerable overlap and synergy among all three strategies.

Most of the author’s observations and suggestions about sustainable development issues in Asia are highly tenable. As a result, these comments will look more closely at the conventional view on the relationship between environmental conservation and economic development, and at the Environmental Kuznets Curve.

2. Can We Overcome the Trade-Off between Environmental Conservation and Economic Development?1

It has been widely believed that economic growth fuels the expansion of job opportunities and social welfare. If this is still true, and if we also recognize

Comments

Kazuhiro Ueta

1 Section 2 is based on Ueta and Mori (2007).


the need for environmental conservation, we must investigate a way to overcome the trade-off between environmental conservation and economic development in order to improve our quality of life. One of the major issues in the field of environmental economics is how to integrate the management of environmental conservation and economic growth. Some environmental economists and policymakers have proposed ideas to solve this issue in the past quarter century.

One of these ideas is a “decoupling” policy, which promotes the decoupling of the economic growth rate and environmental burdens arising from economic growth, and is already being carried out in developed countries, including within the European Union. The concept of environment and growth decoupling can be broken down into two types. One type is realized through technological innovation (e.g., dematerialization theory). The other type relies on social structural reform (e.g., ecological tax reform).

Dematerialization theory is based on the concept in ecological economics that the amount of material used to produce goods and services can be reduced considerably through technological improvement. “Factor Four,” a concept proposed by Weizsacker, Lovins, and Lovins (1995), aims at accomplishing a fourfold increase in current levels of eco-efficiency by doubling wealth and halving resource use. Eco-efficiency and resource productivity are new indices of the relationship between economic growth/wealth and environmental burden/resource use. New terminology, such as cleaner production, zero emission, and inverse manufacturing, has also been generated by these ideas. The question now is what kind of policy and institutional reforms should be introduced to realize the innovation mentioned above.

The Porter hypothesis, proposed by Porter and van der Linde (1995), is another approach that emphasizes technological innovation as the key to resolving the environment and competitiveness debate. The Porter hypothesis puts great emphasis on the effectiveness of environmental policy in accelerating technological innovation, resulting in greater competitiveness of products and companies. According to this hypothesis, environmental policy should not have a negative impact on the economy, but can stimulate innovation and enhance the development of technological capability.

An idea more closely related to social structural reform is the ecological tax reform proposed by Binswanger et al. (1983). The tax reform they proposed would impose higher tax rates on energy and use the increased revenue to reduce the social security burden of job growth. In the early 1980s, the


environment became an important political issue in Germany because of the strong ecology movement, which included the establishment of the Green Party. Binswanger et al. did not object to the incorporation of ecological values into public policy; however they requested an end to unemployment, another challenge faced by European society. They designed their ecological tax reform to accomplish both goals at the same time by generating a “double dividend:” one dividend for environmental conservation and energy savings through taxation, and another dividend for job growth through tax revenue. A type of double dividend tax similar to the idea proposed by Binswanger et al. (1983) is actually being executed in Germany.

We should take note that these methods for overcoming the trade-off between the environment and economic growth were designed primarily with the economies of industrialized countries in mind, and that they take only the national economy into consideration.

3. A Critique of the Environmental Kuznets Curve2

One important step toward sustainable development is the “de-linking” of the relationship between economic growth and pollution. The Environmental Kuznets Curve (EKC) hypothesis offers a rationale for the proposed de-linking: it claims that there exists an inverted U-shaped relationship between a variety of indicators of environmental pollution or resource depletion and the level of per capita income. This relationship suggests that economic growth will take care of the environment automatically, despite immediate and long-term losses in environmental assets.

The EKC hypothesis explains the de-linking process by examining five factors (de Bruyn and Heintz 1999): (i) increased marginal benefit to consumers from a healthy environment, and from changes in their consumption activities and preferences—which may affect firms’ production activities; (ii) institutional and policy changes—often supported by voting, though susceptible to lobbying activities by businesses; (iii) increased environmental efficiency through technological and organizational changes—often backed by increased capital stock; (iv) economic structural changes in the agricultural, industrial, and service sectors; and (v) international relocation.

2 Section 3 is based on Mori and Ueta (forthcoming).


Empirical studies suggest that the turning point for de-linking comes when per capita income reaches US$3,000–10,700 for sulfur dioxide (SO2), and US$3,280–9,600 for suspended matters (Shafik 1994; Grossman and Krueger 1995). Country-specific studies have found that industrialized countries de-link economic growth and pollution when they tackle industrial pollution. For example, Japan succeeded in de-linking gross national product (GNP) growth and increased pollutant emissions. It achieved an 82% decrease in SO2 and a 22% reduction in nitrogen dioxide emissions from 1970 to 1992, while enjoying GDP growth of 140%. Japan also de-linked GNP growth and increased CO2 emissions in the late 1970s and 1980s. This de-linking was realized primarily through end-of-pipe technology, cleaner production, greater eco-efficiency of production patterns, and technological progress. The country’s manufacturing sector, which includes pollution-intensive industries such as iron and steel, heavy metals, chemicals, and ceramics, improved the energy efficiency of its production processes between 1974 and the late 1980s. The energy efficiency of its electric and electronic products has also improved significantly. Japan suffered from industrial pollution during the 1950s and 1960s. However, fueling its firms’ efforts to combat pollution were immense pressure from local residents, corresponding policy changes at the local and national levels of government, and the upsurge in the price of crude oil caused by the oil crisis of the 1970s. These empirical and country-specific studies provide counterevidence to the Club of Rome’s report Limits to Growth (Club of Rome 1972), which predicted food and resource shortages, and impending catastrophe as the result of economic growth.

Developing countries can potentially benefit from an “advantage of backwardness” during the early stages of economic development, thereby avoiding serious pollution issues that industrialized countries have experienced. They could potentially: (i) obtain more accurate scientific information on the relationship between pollutants and environmental impacts; (ii) adopt less-polluting and less-resource-intensive technologies and production processes that industrialized countries have developed; and (iii) learn from other countries’ experiences with environmental policy, institutions, management, and land-use planning, in order to establish an investment location policy that would promote investment in less-pollution-intensive industries (O’Conner 1994). Munasinghe (1999) insists that environmental policy that seeks to align subsidy levels and resource prices with long-run marginal costs, impose taxes on pollution, and establish better-defined property


rights, will improve the environmental quality at a lower per capita income level. Dasgupta et al. (2002) suggest that economic liberalization and public disclosure of firms’ pollutant discharge are also beneficial to improving the environment. These policy measures can help developing countries to build a tunnel in the EKC (Munasinghe 1999) if special consideration is given to timing and sequencing.

Critiques of the EKC can be classified into the following three categories: (i) the econometric method of the EKC, (ii) the explanatory power of the determining factors of the EKC shape, and (iii) the range of environmental pollution and pollutants for which the EKC is applicable. The comments below focus on the latter two.

Regarding the explanatory variables of the EKC hypothesis, recent studies offer little support for the view that economic growth alone is the solution to all environmental problems. There is no established agreement as to the explanatory power of any individual driving force. Most contingent valuation studies have found an income elasticity of demand for environmental services smaller than unity. This is especially true in societies with low levels of literacy and education, and for pollutants whose effects are not apparent until after several years of accumulation. Changes to policy (including environmental policy) have often been made only after civil society’s movement toward democratization has become fierce. The Republic of Korea and Taipei,China, as well as countries in Central and Eastern Europe are good examples of how environmental movements have led to democratization movements, and of how democratization has led to the creation of institutions for protecting the environment. However, to date, there is no empirical evidence that satisfactorily explains the relationship between democracy and environmental improvement. Technological and organizational changes are critical to raising environmental efficiency, but are typically realized only for pollutants for which cost-effective technologies exist or are developed. In addition, increased eco-efficiency is often offset by production and consumption growth, resulting in an N-shaped curve. In Japan, for example, a “re-linkage” of real GNP and CO2 occurred after 1990, despite the successful reduction of CO2 emissions per unit of generated electricity by Japanese electric power companies.

For which pollutants is the EKC hypothesis useful? Shafik (1994) suggested that meaningful EKCs exist only for concentrations of biological oxygen demand, total suspended particulate, and SO2, among the ten environmental indicators listed in the World Development Report 1992. In addition, the pollution-income relationship calculated from cross-country data could not


accurately forecast trends in air and water quality in a single country study of Malaysia (Vincent 1997). This implies that EKCs are unable to reliably predict if any given developing country will improve the environment, even if they go beyond the turning point.

Moreover, the EKC hypothesis is unable to determine if improvements to local air and water quality are the result of international or inter-regional relocation of pollutants, or of a change from one type of pollutant to another. This often happens when firms apply end-of-pipe solutions. Flue-gas desulferization, for example, can virtually eliminate SO2 emissions, but it produces fly ash, which must be disposed of as industrial waste. SO2 and nitrogen dioxide emissions may be reduced when a coal-fired thermal plant is replaced with a nuclear power plant, but the latter generates radioactive waste, increasing the environmental risk to people nearby. Wastewater treatment plants can clean up the water, but in so doing generate sludge that must be disposed of very carefully because it contains heavy metals. This aggregate waste, comprising solid waste and CO2 emissions, can mean per capita waste has not declined. Global environmental sustainability cannot be ensured if relocation and displacement can explain much of the environmental improvement in industrialized countries.

This leads to the greatest criticism of the EKC hypothesis: even if economic growth can be associated with improvements in some environmental indicators, this does not imply that the earth’s resource base is capable of supporting indefinite economic growth (Arrow et al. 1995). Degradation or loss of the earth’s resource base, or ecosystem resilience, is irreversible. A loss of ecosystem resilience will cause discontinuous change in ecosystem function, irreversible change to the set of options open to present and future generations, and an increase in the uncertainties associated with the environmental effects of economic activities.

These changes tend to affect most adversely the poor in developing countries, due to their heavy reliance on environmental resources (Dasgupta 2001). Without a high level of literacy or knowledge of sustainable uses of environmental assets, the poor are incapable of maintaining their standard of living once they lose environmental resources. To mitigate the adverse impacts of environmental degradation and improve the well-being of this group, the socio-economic mechanism of its causes and effects should be clarified.


4. Concluding Remarks: Toward Sustainable Development in Asia

More comprehensive public policy, including a “Green New Deal,” is necessary for sustainable development to revitalize a global economy suffering from a financial crisis. This implies that theoretical and empirical research on multi-level environmental governance needs to be developed to explore how sustainable development can be realized.

References

Arrow, K., et al. 1995. Economic Growth, Carrying Capacity, and the Environment. Science 268: 520–521.

Binswanger, H. C., et al. 1983. Arbeit ohne Umweltzerstörung: Strategien für eine neue Wirtschaftspolitik. [More Employment without Distraction]. Frankfurt, Germany: Fischer Taschenbuch Verlag.

Club of Rome. 1972. The Limits to Growth: A Report for the Club of Rome’s Project on the Predicament of Mankind, edited by D. H. Meadows. New York, NY: Universe Books.

Dasgupta, P. 2001. Human Well-Being and the Natural Environments. Oxford, UK: Oxford University Press.

Dasgupta, S., B. Laplante, W. Hua, and D. Wheeler. 2002. Confronting the Environmental Kuznets Curve. Journal of Economic Perspectives 16(1): 147–168.

de Bruyn, S., and R. Heintz. 1999. The Environmental Kuznets Curve Hypothesis. In Handbook of Environmental and Resource Economics, edited by J. C. J. M. van den Bergh. Cheltenham, UK: Edward Elgar.

Grossman, G., and A. Krueger. 1995. Economic Growth and Environment. Quarterly Journal of Economics 110: 353–377.

Mori, A., and K. Ueta. Forthcoming. Beyond Green Growth: Sustainable Development in East Asia. In Pursuing Green Growth in Asia and the Pacific, edited by R. K. Chung, H.-H. Lee, and E. Quah. Seoul: Thompson Learning.

Munasinghe, M. 1999. Growth-Oriented Economic Policies and their Environmental Impacts. In Handbook of Environmental and Resource Economics, edited by J. C. J. M. van den Bergh. Cheltenham, UK: Edward Elgar.

O’Conner, D. C. 1994. Managing the Environment with Rapid Industrialisation: Lessons from the East Asian Experience. Paris: Organisation for Economic Co-operation and Development.

Porter, M., and C. van der Linde. 1995. Toward a New Conception of the Environment-Competitiveness Relationship. Journal of Economic Perspectives 9(4): 97–118.

Shafik, N. 1994. Economic Development and Environmental Quality: An Econometric Analysis. Oxford Economic Papers 46: 757–773.


Ueta, K., and A. Mori. 2007. Environmental Governance for Sustainable Development in East Asia. Kyoto Economic Review 76(2): 165–179.

Vincent, J. E. 1997. Testing for Environmental Kuznets Curves within a Developing Country. Environmental and Development Economics 2: 417–431.

Weizsacker, E., A. Lovins, and H. Lovins.1995. Factor Vier. Doppelter Wohlstand, halbierter Naturverbrauch. [Factor 4]. Munchen, Germany: Droemer Knaur.

VIIIThe current crisis has ramifications over the long term, leading to substantial and lasting changes for the world economy. Key to this transition is the ability of developed and developing countries to work together to solve some of the big issues presented not just by the current global economic crisis, but by ongoing food and commodity price issues, multilateral and regional trade concerns, and the mandate to achieve environmental sustainability.

The panel was chaired by Masahiro Kawai. Members of the panel were Iwan Azis, Bambang Brodjonegoro, Inkyo Cheong, Ram Upendra Das, Cielito Habito, and Jean Pisani-Ferry. Each was charged to identify pressing topics for the region.

Inkyo Cheong: “Trade as Asia’s Pillar of Economic Growth”

Intra-regional and global trade have facilitated East Asia’s rapid growth. Other Asian countries have joined the bandwagon of regionalism and globalization, using trade expansion to become middle-income countries. Cheong voiced his strong support for a region-wide free trade agreement in Asia as a stepping stone toward multilateralism. The conclusion of the Doha Development Agenda negotiations would have the most significant and positive impact on global trade. However, with the outbreak of the current global financial crisis, he

Panel Discussion 213

Panel Discussion1

How can Developed and Developing Countries Work Together to

Tackle the Big Economic Development Issues?

1 The chapter is based on the panel discussion held at the conclusion of the conference.


argued that Asian countries should try to create some internal demand within the region in order to sustain trade growth.

Cielito Habito: “Asia and the Western World”

Habito summed up his views in three statements: (i) Asia has much to learn from the Western developed world, (ii) Asia has much to give to the Western developed world, and (iii) Asia has much to teach the Western developed world.

From this global crisis, there is much that Asian countries, especially developing countries, can learn from the mistakes or pitfalls of the Western developed world. First, there are significant lessons to be learned from the pitfalls of financial market management: the need to manage excessive risk taking; the need to correct flaws in incentive systems, including reward systems for managers; and the need to look at stronger transparency mechanisms. Another pitfall is that of unwarranted protectionism. While it may be politically popular among lobby groups, it can be counterproductive. Finally, there is the pitfall of unsustainable development, meaning the tendency of countries to embark on strategies that amount to grow now, clean up later, or grow now, redistribute later. Asians can take advantage of their late-comer status and avoid making these mistakes.

Second, there is much that Asia can give to the Western developed world, especially in the context of the global economic crisis. There is a need for net resources to flow from the developing to the developed economy. Asia is being looked to by troubled economies in the West for the capital flows they need to stabilize financial markets. The work of Fehr, Jokisch, and Kotlikoff (2005), using results from their intertemporal and global computable general equilibrium models, indicated that because of demographic forces and low savings rates, fiscal systems in rich countries were bound to collapse in the foreseeable future, and that Asian economies, especially the big ones, would become the saviors of Western economies. Asia’s rapidly growing markets, rising per capita income and population, and increased regional economic integration have led to net increases in aggregate demand for the products of the Western developed world. This indicates that Asia is being looked upon as a valuable market by the Western developed world.

Finally, there is much that Asia can teach the Western developed world, particularly in the area of sustainability. Sustainability is ingrained in Asian


culture as a very basic, natural lifestyle—whether based on Confucian ethics, Buddhist principles, or Asian religions—and the values of sustainability have been moving to the West by osmosis. Habito argued that as the inherently sustainable cultures of Asia have been “corrupted” by Western values of utilitarianism and hedonism, many discussions have pointed out the need to bring back some indigenous value systems, legend practices, and lifestyles. As media organizations like Cable News Network (CNN), British Broadcasting Corporation (BBC), and Music Television (MTV) have been purveyors of the West’s unsustainable lifestyles, Asians need one or two major Asian media organizations that are as globally ubiquitous so that there are channels that can teach the world what sustainability really means—Asian style.

Ram Upendra Das: “Interface between the Developed and Developing Worlds”

Das cited three dimensions on which an interface could be built in the context of cooperation between the two worlds. First, interdependencies in capital and labor between developed and developing countries should be examined. Another possible priority area is the exploration of new trade theories on intra-industry trade that can be expanded from trading goods to trading intra-sectoral services. Finally, trade conflicts between developed and developing World Trade Organization member countries are a paramount topic of discussion.

Iwan Azis: “Dialogue of Equals”

Azis argued that with respect to developing and developed countries, the key phrase is “dialogue of equals.” The Group of Twenty (G20) meeting on 15 November was the first meeting that put top leaders of many countries—developing and developed—on equal footing. As already mentioned, there is much that Asia can teach Western countries and the rest of the world. Thus, this is the right time for developed and developing countries to discuss strategic issues as equals. The G20 meeting is the beginning of good things in the coming years and provides a golden opportunity to explore alternative ways of tackling the issues in today’s economic landscape.


Bambang Brodjonegoro: “Opportunities for Asia Amidst the Global Financial Crisis”

Brodjonegoro stated that the crisis would provide East Asia with a chance to emerge as the third largest economy in the world, after the United States (US) and Europe. In order to realize this goal, three critical issues will have to be part of a cooperative process among the more developed Asian countries, as well as with developing economies.

First, a healthy financial sector is necessary, but is not a sufficient condition for economic development. Now is the time to discuss the idea of establishing an Asian Monetary Fund. This would provide a conduit to bring “home” foreign exchange reserves and stabilize currencies throughout the region.

Second, it is quite clear that fossil energy sources are limited and, thus, that there is a need to create a grand design for bioenergy development in the region. Cooperation between developed countries and developing countries in this area is vital. The food versus energy dilemma should also be avoided. A dichotomy between crops intended for food security and crops intended for energy security should be properly designed; otherwise, we could face simultaneous food and energy insecurity.

Finally, developed countries should not use developing countries exclusively as suppliers of production inputs, but should also empower them to create higher value-added products so that all parties derive equal satisfaction from trade in the chain of production. In the current World Trade Organization arrangement, there have been debates on this kind of arrangement. For example, in the cacao trading system, the major chocolate producers in Europe prefer not to import processed cacao from Indonesia, Ghana, or Ivory Coast. They prefer to import raw cacao from those countries and try to prevent developing countries from producing processed cacao. While this benefits the major producers in Europe, it also creates less value-added for cacao-producing countries. These are the critical issues that have to be addressed by developed and developing countries.

Jean Pisani-Ferry: “Consensus on Globalization and Climate Change”

Pisani-Ferry spoke about three urgent matters. The first is reviving growth. The world has experienced, in a way, very successful globalization over the


previous decade. However, the consensus around globalization remains fragile, in spite of the economic benefits to date, which include gains in purchasing power. The world economy is suffering from a major blow and the longer it lasts, the more the consensus will be undermined.

Second, is addressing how globalization works. In principle, there is much to commend financial globalization in terms of growth and potential ways of smoothing adjustments. However, some of the outcomes of globalization have not been satisfactory to all. For example, it has rerouted capital flows from poor to rich countries—which is certainly not desirable, and has brought a great deal of instability to Asia, Latin America, and now the major economies. Given this, the net benefit of financial globalization is being questioned, and an agenda of regulatory reforms is crucial in order to sustain globalization.

Finally, climate change is a major challenge due to its evolutionary nature. Climate change involves major issues of redistribution across generations and countries against a backdrop of significant uncertainty. There are remaining uncertainties with regard to the cost and impact of action versus inaction. The intellectual framework that favors consensus is not in place, but all the major challenges are present. Developed and developing countries have to deal with this problem; it is as real as the other immediate problems.

Masahiro Kawai: “ADBI’s Study on the Global Financial Crisis”

Kawai discussed the need to take an in-depth look at the causes and implications of the global financial crisis, which largely originated in the US and quickly spread worldwide. The global financial crisis exposed the shortcomings of the current system and highlighted the need for financial sector supervision at national, regional, and global levels. The contribution of Asia in resolving the global economic crisis is not only the Keynesian type of response, but mostly structural reshaping of the Asian economy. This needs to be emphasized. Asia’s exports of final manufactured goods, as well as the expansion of intra-regional trade of parts and components, have relied on external markets. As demand from the US is expected to shrink as a result of a consumption adjustment, how Asia should adjust is going to be a major issue. Kawai strongly supports the creation of a more domestic and regional demand-oriented Asian economy.


References

Fehr, H., S. Jokisch, and L. J. Kotlikoff. 2005. Will China Eat Our Lunch or Take Us to Dinner?—Simulating the Transition Paths of the US, EU, Japan, and China. Boston University Department of Economics Macroeconomics Working Paper WP2005-009. Boston, MA: Boston University.


Asia’s C

ontribution to Global Econom

ic Developm

ent and StabilityA

DB

Institute

Asian Development Bank Institute, Tokyo, Japan

The Asian Development Bank Institute (ADBI), located in Tokyo, is a subsidiary of the Asian Development Bank (ADB). It was established in December 1997 to respond to two needs of developing member countries: identi�cation of e�ective development strategies and improvement of the capacity for sound development management of agencies and organizations in developing member countries. As a provider of knowledge for development and a training center, ADBI serves a region stretching from the Caucasus to the Paci�c islands.

ADBI carries out research and capacity building and training to help the people and governments of Asian and Paci�c countries. ADBI aims to provide services with signi�cant relevance to problems of development in these countries.

ISBN 978-4-89974-030-8

Asian Development Bank InstituteKasumigaseki Bldg. 8F3-2-5 Kasumigaseki, Chiyoda-kuTokyo 100-6008, Japanwww.adbi.org

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