Rural Asia: Beyond the Green Revolution · 8 Rural Asia: Beyond the Green Revolution one in three....

Rural Asia has undergone an unprecedented tech-nological and economic transformation in recent decades thathas dramatically improved the region’s food security, reducedpoverty, and raised incomes, even while the populationcontinued to grow rapidly. This transformation was initiatedby the green revolution in agriculture, the first major ex-pression of the application of modern science to Asia’sagricultural problems. Yet serious problems remain. Despitesubstantial rural-urban migration, Asia’s rural population(about 2 billion) continues to grow and the vast majority ofthem still depend directly or indirectly on agriculture, forestry,or fishing for their livelihoods. This is placing enormouspressure on remaining natural resources; many resources havealready been degraded to the point of declining productivity.At the same time, mainly because of the lack of developmentof supportive institutions, economic growth has not beenadequately translated into broadly improved welfare: healthand education services and infrastructure development havebeen inadequate in rural areas.

While the percentage of rural Asians who are poor hasdeclined substantially, a remarkable achievement, more than670 million rural people (one third of the rural population)still live in abject poverty. Most rural Asians must tolerate muchlower levels of health, education, and general well-being thantheir urban counterparts. Many more rural people will migrateto urban areas in the next decades, adding to the congestionand environmental problems of the cities. But with continuingpopulation growth, the number of rural Asians is not likely todecline any time soon; in fact there are likely to be 2.3 billionby the year 2020.

Unless something is done to relieve the pressure in rural

I INTRODUCTION

2 Rural Asia: Beyond the Green Revolution

areas, conditions will worsen further as more natural resourcesbecome scarce and are degraded and as discontent grows aboutwidening differentials between rural and urban income andquality of life. In some cases, there is even growing danger ofsocial conflict and violence over the use of remaining resources,forces that could tear at the social fabric of many Asiansocieties. These problems will be particularly severe in SouthAsia.

The rural transformation is clearly not yet complete. Akey challenge for national policymakers is to continue topromote rapid growth in rural areas while at the same timemaking growth more pro-poor and more environmentallysustainable. These three goals—rural growth, poverty reduc-tion, and sustainable management of natural resources—aredepicted as the three points of a triangle in Figure 1,the so-called “critical triangle”. The three goals are inter-linked, but whether the relationships between themare complementary or competitive depends critically onthe mix of policies and investment strategies that a countryfollows. Improvements in the quality of life for rural people,the ultimate objective of rural development, requires a highdegree of complementarity among the three goals of the criticaltriangle.

Many Asian countries have made good progress oneconomic and agricultural growth in recent decades, but thishas often been achieved at the expense of the environmentand without generating sufficient benefits for the poor. Butsuch tradeoffs do not have to be an inevitable outcome ofagricultural growth. When supported by the right kinds ofpolicies, investments, and institutions, technologically drivenagricultural growth can be used to reduce poverty, reverseenvironmental degradation, and improve the quality of lifefor all—“win-win-win strategies” that fulfill all three goalssimultaneously. More Asian countries can do a much betterjob in achieving such strategies for the future.

The current financial and economic crisis in parts of Asiahas reduced the availability of government funds for agricultureand rural areas and for social safety nets, spurred reverse

Introduction 3

Figure 1. The Critical Triangle

migration to rural areas, paralyzed financial markets, andchallenged accepted Asian thinking about governancestructures. It has become doubly important for Asianeconomies to design their strategies for rural developmentcarefully. The task is complicated by emerging new challengesthat will change the context in which Asia’s rural economyoperates. These include

• increasing forces of globalization, as trade barrierscontinue to fall and as new information and commu-nications technologies link more and more people intoa single “real time” world;

• a demographic transition resulting from severalfactors including declining fertility rates;

• a rapidly unfolding biotechnology revolution inagriculture;

• increasing scarcity of natural resources, especially landand water; and


• the need to reinvent governance structures and publicinstitutions in response to increasing demands for greaterdevolution and democratization of public decisions.

Some of these challenges will offer important newopportunities for growth, but if not properly managed theycould also have high costs for the environment and the poor.This is amply demonstrated by the current economic crisis inAsia: for example, inadequate governance structures,particularly over financial institutions, led to unnecessarilyadverse impacts from one supposedly positive aspect ofglobalization, the freer flow of private capital and technologyfrom abroad. Biotechnology will also offer important new andmuch-needed sources of growth in agriculture, but if theseare not properly managed, they may prove of little benefit tothe rural poor and potentially damaging to the environment.Other challenges such as deteriorating and depleting naturalresources and declining public expenditure on rural areas willmake growth more difficult and will need to be managedcarefully to avoid such outcomes.

The primary objective of this report is to provide guidanceto rural development specialists and policymakers on keyoptions for forging development strategies that will improvethe quality of life of the rural population in the years ahead inorder to successfully complete the ongoing rural transformationin Asia. The report is a synthesis of five background studiesprepared under the auspices of an Asian Development Bankstudy of Rural Asia undertaken during 1998/99. The richdiversity of experiences observed within rural Asia in recentdecades provides fertile ground for drawing lessons aboutwhich policies work and which do not work for achieving themultiple objectives of growth, environmental sustainability, andpoverty reduction. Asian countries clearly have much to learnfrom one another.

The report is structured as follows: Chapter 2 reviewsthe lessons from the rural transformation achieved so far.Chapter 3 discusses some of the most important emerging newchallenges for rural Asia and suggests how these might best

Introduction 5

be met. Chapter 4 analyzes future scenarios for Asia underalternative assumptions about levels of government commit-ment to rural investment and policy reforms; this chapter alsolays out a vision for achieving, by the year 2020, a rural Asiain which there is little or no poverty or malnutrition and inwhich natural resources are managed on an environmentallysustainable basis, and then provides guidance on what it wouldtake to achieve this vision. Chapter 5 contains the report’sconclusions and recommendations.

II LESSONS FROM THE RURALTRANSFORMATION

Developing Asia as a whole has made remarkableprogress since the food crisis years of the 1960s. Initiated bythe green revolution, there have been substantial gains in foodsecurity, poverty reduction, and per capita incomes. Toillustrate, the following dramatic changes occurred between1970 and 1995:

• Although human fertility declined almost universally,Asia’s population increased by 60% with the additionof over one billion people.

• But cereal production almost doubled. One of the mostremarkable aspects of the rural transformation wasthat nearly all the additional cereal production wasobtained from a doubling of yields. The cereal areaharvested barely changed, increasing only 4%. In otherwords, had cereal yields stagnated at the levelsprevailing in 1970, it would now take twice the croparea to produce the same amount of cereal output indeveloping Asia.

• Hence, instead of widespread famine, food availability(measured as calories available per person per day)increased by 24%.

• And, driven increasingly by urban-industrial growthfrom the 1980s onwards and by growth in the ruralnonfarm economy, incomes (measured as per capitaGDP) increased by 190%.

• These changes also had a profound impact on poverty.In 1975, nearly three out of every five Asians lived inpoverty, but by 1995 this ratio had fallen to less than


one in three. The absolute number of poor declinedby 28%, from 1,149 million in 1975 to 824 million in1995. These reductions in poverty would have beeneven more impressive if population growth had beenslower.

As shown in Tables 1 and 2, these impressive gainsmask considerable diversity of experience among countries.While some countries, particularly in Southeast Asia, haveroared ahead from poverty to middle income within a merethree decades, others in South Asia have lagged behind. Evenwithin countries that have done well in aggregate, the gainshave not been shared equally; many rural households,disadvantaged groups and resource-poor areas have been leftfar behind. For Asia as a whole, an intolerable number of ruralpeople still live in poverty. Women bear the maximum bruntof poverty and female-headed households are among thepoorest. There has also been serious environmental degradationin many areas. Some of this has been in the green-revolutionareas and is associated with the misuse of modern farminginputs. But much of the environmental degradation,particularly soil degradation and deforestation, has beenconcentrated in more backward areas that did not benefit fromthe green revolution. In these cases the problem was inadequateagricultural intensification, so that yield growth failed to keepup with population growth.

In thinking about approaches for achieving strategiesthat will improve the overall quality of life in rural Asia, it isuseful to begin with a conceptual framework showing howthe three goals of the critical triangle are impacted bygovernment policies and strategies (Figure 2). Outcomes forgrowth, poverty reduction, and environmental sustainabilityare determined by the private and collective decisions ofmillions of rural people. They make decisions every day aboutagricultural and rural nonfarm production that affect incomes,employment, wages, food prices, and the distribution of landin rural areas. These decisions in turn are affected by weatherand prior decisions about private investments in farm and rural

Lessons from the Rural Transformation 9

nonfarm businesses. Government impacts on the system inthree major ways. First, it invests in rural people (health andeducation), in rural infrastructure (roads, electricity,communications, irrigation, etc.), and in agricultural researchand extension, which in turn impact on private investment

Table 1. Indicators of Change in Asia, 1970 to 1995

Other Southeast DevelopingIndicator India S. Asia a P R Cb Asiac AsiaPopulation (millions)1970 554.9 156.2 834.6 204.4 1750.21995 929.0 293.9 1226.3 343.7 2792.9% Change 67.4 88.2 46.9 68.2 59.6Cereal Production (million metric tons)1970 92.8 25.4 161.1 33.8 313.21995 174.6 48.1 353.3 73.6 649.6% Change 88.1 89.3 119.3 117.8 107.4Per Capita Income (US $/Year)1970 241.0 187.0 91.0 351.0 177.01995 439.0 299.0 473.0 1027.0 512.0% Change 82.2 60.0 419.8 192.6 189.3Calorie Consumption ( Kilocalories/person/day)1970 2083 2184 2019 1945 20451995 2388 2274 2697 2596 2537% Change 14.6 4.1 33.5 33.5 24.1Cereal Area Harvested (million hectares)1970 100.4 21.3 91.1 25.0 237.71995 100.2 26.0 88.2 32.9 247.3% Change –0.2 22.0 –3.2 31.6 4.0Cereal Yield (t/ha)1970 0.925 1.197 1.769 1.352 1.3171995 1.743 1.846 4.007 2.237 2.627% Change 88.4 54.2 126.5 65.6 99.5

Notes :a Bangladesh, Bhutan, Nepal, Pakistan, and Sri Lankab People’s Republic of Chinac Cambodia, Indonesia, Lao People’s Democratic Republic (PDR), Malaysia, Myanmar, Philippines,Thailand, and Viet Nam

Sources: Population: FAOSTAT at http://faostat.fao.orgCereal Production, Area Harvested, Cereal Yield: FAOSTAT at http://faostat.fao.orgUpdated June 1998, Accessed September 1998.Calorie Consumption: FAOSTAT at http://faostat.fao.orgPer capita Income: World Bank. 1998. The World Development Indicators 1998 CD-ROM. Washington,

D.C.: World Bank.


and production in the farm and nonfarm sectors. Second,government sets policies about prices, land ownership,nonfarm activity, and credit availability and costs, which againimpact on private investment and production in the farm andnonfarm sectors and also on labor, land, and agriculturalmarkets and income determination. Third, governmentdetermines the type and effectiveness of public institutions thatimplement its policies and investment strategies. Theseinstitutions act as a filter that may facilitate or impede theeffective implementation of government strategies.

The role of institutions is crucial in this regard. Even well-conceived strategies and policies will not achieve their desiredgoals if the institutions that are to implement the strategiesare inefficient. The impact of well-functioning institutionsbecomes even more crucial when these institutions interactwith markets and help translate government policies for thebenefit of the markets and the private sector. The interactionof institutions and markets helps determine the outcome ofcrucial public investment. For example, access to resources

Table 2. Poverty Changes in Asia, 1975 to 1990s

South Asiaa PRCb Southeastc Asia Developing AsiaPoverty (millions)1975 472.2 568.9 108.1 1149.21990s 514.7 269.3 40.2 824.2Poverty (percent)1975 59.1 59.5 52.9 58.71990s 43.1 22.2 11.5 29.9

a India, Bangladesh, Bhutan, Nepal, Pakistan, and Sri Lankab People’s Republic of Chinac Cambodia, Indonesia, Lao Peoples Democratic Republic (PDR), Malaysia, Myanmar, Philippines,Thailand, and Viet Nam

Sources and Notes: The benchmark is the international poverty line, US$1 per day (Purchasing PowerParity, 1985 dollars). Data for the PRC, 1978, are for rural areas only. Data for South Asia, 1975, arebased on estimates derived from similar trends across different national poverty line estimates. Datafor Southeast Asia and the PRC, 1990s, are for 1995, while those for South Asia are for 1993.Ahuja, V., B. Bidani, F. Ferreira, and M. Walton. 1997. Everyone’s Miracle? Revisiting Poverty andInequality in East Asia . Washington, DC: The World Bank.World Bank. 1996. Poverty Reduction and the World Bank: Progress and Challenges in the 1990s;Washington, D.C.: The World Bank.


Figure 2. Impacts of Government Policies on Growth, Poverty,and the Environment


and technology, the benefits of health and education services,and ultimately the distribution of production gains will beinfluenced by how well institutions function and how theyinteract with markets.

The final link in the system is population growth.Population growth helps determine the consequences ofagricultural and rural nonfarm production, and thus thepossibilities for achieving growth that is pro-poor andenvironmentally sustainable. Rural population growth exertsa downward pressure on wages, farm sizes, and per capitaincomes and hence can contribute to worsening poverty andenvironmental degradation. Technological change inagriculture that raises labor productivity can offset partor all of these negative impacts, but only if labor productivitygrows faster than the agricultural labor force. The greenrevolution was successful in achieving this in many areas, butin some areas population grew faster so the welfare of thepoor stagnated or worsened despite gains in agriculturalproductivity.

Government investments in health, education, andrural infrastructure have an important bearing on fertility anddeath rates and rural-urban migration and hence on thegrowth of the rural population. These kinds of investmentsare often needed in addition to technological change inagriculture in order to resolve rural poverty problems. Withdeclining population growth rates, a demographic transitionhas occurred in much of Asia, particularly East Asia. Withdeclining fertility rates, the number of young children declinesand the ratio of workers to dependents increases. This resultsin a beneficial impact on growth and per capita incomes evenif labor productivity does not increase, and the faster thedemographic transition the greater the beneficial impact.

Although not shown in Figure 2, the levels ofachievement of growth, poverty reduction, and environmentalsustainability feed back over time to influence future populationgrowth rates, private investment, and production in the farmand nonfarm sectors, and even on government strategiesthemselves.


Several major clusters of lessons emerge from the RuralAsia Study that can form the basis for formulating strategiesthat will shape the future course of development, both economicand human, in rural Asia. These lessons can be summarizedas follows:

• Agricultural growth is a prerequisite for economicdevelopment in general and rural development inparticular.

• To reduce poverty and improve quality of life in ruralareas, agricultural growth must be both pro-poor andenvironmentally sustainable.

• Promoting the growth of the rural nonfarm economywill greatly enhance the pace of rural development.

• Efficient rural financial markets play a key role inpromoting rural development.

• It is necessary to ensure effective institutions for ruraldevelopment.

• To improve the overall quality of life in rural areas itis necessary to go beyond growth, poverty, andenvironmental considerations and directly addressspecific concerns of particular relevance to rural Asia.

Each of these is discussed in turn.

IMPORTANCE OF AGRICULTURAL GROWTH

Historically, all the successfully transforming economiesin Asia (except single-city economies like Singapore and HongKong, China) enjoyed successful agricultural revolutions priorto their industrialization. Most Asian countries began aspredominantly agrarian economies in which the agriculturalsector accounted for the lion’s share of national income,employment, and export earnings. After independence, mostAsian countries depended heavily on export crops andinherited a stagnant, low-productivity food-crop sector. Coping


with the twin challenges of low and unstable prices for theirexports and a growing inability to feed their populations wasthe key challenge for the newly formed governments. Withuncertain foreign exchange earnings and limited ability to payfor food imports, increasing domestic food production to assurefood security was a priority. Until the food problem was solved,the development of the nonagricultural sector was necessarilyconstrained.

A technologically driven transformation of theagricultural sector was a necessary condition for nationaleconomic growth. An agricultural revolution was needed notonly to overcome the food constraint, but also to provide anengine of growth on the scale required to initiate thetransformation of the national economy. The nonagriculturaleconomy was typically too small to play this role, even if itcould have depended on cheap food imports.

Rapid agricultural growth contributed to the economictransformation in a number of important ways. It suppliedbasic foods, raw materials for agro-industry, and exports andfreed up foreign exchange for the importation of strategicindustrial and capital goods. It released labor and capital (inthe form of rural savings and taxes) to the nonfarm sector. Itgenerated enormous purchasing power among the ruralpopulation for nonfood consumer goods and services andtherefore supported rapid growth in services and trade in ruralareas, and provided a nascent market for an emergingmanufacturing sector. It reduced poverty by increasing laborproductivity and employment in rural areas, by generatingmore remunerative opportunities for rural-urban migration,and by lowering food prices for all.

While an agricultural revolution was necessary duringthe early stages of the transformation, not all the countriesthat had successful agricultural revolutions went on toindustrialize and grow rapidly. Several other key factors arealso needed to enable countries to successfully convertagricultural growth into national economic growth. Amongthese requirements are the following:


• Agricultural growth must be equitable, so that it putsincreased purchasing power into the hands of the ruralmasses and not just a privileged few. Although thegreen-revolution technology was, in and of itself,basically scale-neutral, access to rural resources—particularly land—has been a key determinant of theequitability of agricultural growth.

• A well-developed infrastructure is required to fosterthe links between the farm and nonagricultural sectors.

• As agriculture develops and food security diminishesas a major constraint, countries need to move quicklytoward market liberalization and pro-trade and pro-investment policies. Protecting domestic industries andovervaluing exchange rates penalize agriculturalgrowth and impede the development of competitiveindustries that should be at the forefront of export-led growth. They also shield a country from the newtechnologies that are embedded in many imports andthat have the potential to raise economic efficiencyand competitiveness significantly.

• Strong rural financial institutions are required tomobilize resources and allocate them efficiently topromote a wide array of economic activities. Asagriculture develops, rural nonfarm activities becomemore dynamic. Both farm and nonfarm enterprisesand households demand a broad range of financialservices, including savings facilities, not just credit.

• Investment in human capital and especially in ruraleducation is necessary to ensure continued pro-ductivity increases in agriculture and to allow ruralworkers to be more readily absorbed in nonagricultureif necessary.

The earliest emerging economies in Asia were successfulin meeting these requirements. Several (Japan; Taipei,China;and the Republic of Korea) had major land reform that led toequitable agricultural growth; they also invested heavily inrural infrastructure and rural education and pursued pro-


growth macroeconomic and trade polices. The People’sRepublic of China (PRC) had a successful agriculturalrevolution from a technical perspective, but was only able totake full advantage of this once it moved to the ”householdresponsibility system,” which released labor to thenonagricultural sector and effectively put huge amounts ofadditional purchasing power into the hands of the ruralmasses. India and the Philippines have both had successfulagricultural revolutions, but have been slow to convert theseinto rapid economic growth. In India, agricultural growth hasbeen relatively equitable and rural infrastructure is welldeveloped, but the country has only recently begun to liberalizeits domestic markets and to move to pro-growth macro andtrade policies. The results are encouraging, with nationalincome now growing at more than twice the rate of recentdecades. In the Philippines, on the other hand, agriculturalgrowth has been highly inequitable, due mainly to the skeweddistribution of landholdings, and rural infrastructure remainsweak. Despite pro-growth macro and trade policies, overallperformance in growth and poverty reduction has beendisappointing because of the unequal distribution of wealth.

As the economic transformation of an economyadvances, agriculture’s share in national income falls quiterapidly and its importance for national economic growthdiminishes. The nonagricultural sector becomes the primaryengine of growth and is no longer so dependent on resourceflows from agriculture or on agriculture’s demand linkages.The economic problem is then to absorb workers released fromagriculture at a sufficiently rapid rate to stop agriculturalproductivity (and hence incomes) from lagging too far behindthe levels achieved in the nonagricultural sector. Typically,agriculture’s share of total employment falls much more slowlythan its share of national income, with the inevitable resultthat labor productivity, and hence per capita incomes, inagriculture lag behind the nonagricultural sector.

However, even though agriculture’s role in nationaleconomic growth changes as the transformation proceeds, itshould not be viewed as a “sunset industry”. Its importance


only declines relative to other sectors; total agricultural outputcontinues to grow steadily. Indeed, for many Asian countries,it must continue to grow if they are to continue to meet theirfood needs. Total production of livestock and horticulturalproducts has to grow even faster than the production of cerealsto meet changing consumer demands as incomes rise. Totalagricultural employment also increases until late in theeconomic transformation and in most Asian countries thereare more workers employed in agriculture today than at anyprevious time in their history.

Agricultural growth also underpins much of the growthand employment in the rural nonfarm sector, because of theimportance of its demand for farm inputs, marketing services,and agro-industry and because farm income accounts for thelargest share of total rural purchasing power for nonfood goodsand services. If agricultural growth were to slow down, it couldjeopardize national food security and increase childmalnutrition in many countries, cause significant newunemployment and poverty (particularly in agriculture andthe rural nonfarm economy), and slow nonagriculturalgrowth.

Agricultural growth must be accelerated in much ofAsia. For many countries this will require reversal of recentslowdowns in their agricultural growth rates. Although muchof the agricultural sector is private, a key lesson is that therequired growth cannot be left to the magic of the marketplacealone. While the private sector has been playing an increasinglyimportant role, the public sector must continue to play a keyrole in providing what have traditionally been “public goods”and this requires deliberate public interventions andappropriate and effective institutions to implement them. Themost important that are necessary for agricultural growth canbe grouped as follows:

• Innovation. Both public and private investments inagricultural research and extension are necessary toprovide a continuous stream of yield-enhancingtechnologies that can be profitably adopted by


farmers. The green revolution has run its course; newscientific breakthroughs, such as may be offered bybiotechnology, are now required to raise yieldpotentials. This is especially important because landand water are increasingly scarce in Asia and futureagricultural growth will increasingly have to comefrom yield-enhancing technologies on already croppedland.

• Infrastructure. Investments are required in a) physicalinfrastructure, especially irrigation, roads andelectricity (the importance of farm-to-market roadsin determining marketing margins, agriculturalprofitability, and farm diversification cannot beoveremphasized); and b) human infrastructure,especially education, nutrition, and health ofrural people to increase their well-being andproductivity.

• Inputs. Policies and investments must assure thatfarmers have access to a) key farm inputs (irrigationwater, fertilizers, seeds, etc.), b) efficient rural financialmarkets that can provide them with a broad range offinancial services at minimal transaction costs, and c)land through efficient sale and lease markets.Government’s role in these cases is primarily to createan enabling environment for the private sector tofunction efficiently.

• Institutions. It is essential to ensure the securing ofproperty rights to land and, where needed, giveproperty rights to women. This will encourage farmersto make long-term investments in land intensificationand conservation. It is also necessary to increasefarmers’ access to long-term credit to finance thoseinvestments. Public institutions that provide key publicgoods and services must be strengthened so that theyperform efficiently and are accountable to the peoplethey are intended to serve.

• Incentives. Nondiscriminatory price policies foragriculture, a progressive shift towards market


liberalization policies, including the removal ofrestrictions on imports and exports, and appropriaterisk management options are all needed.

MAKING AGRICULTURAL GROWTH PRO-POORAND ENVIRONMENTALLY SUSTAINABLE

Concerns about the adverse impacts of modern agri-cultural growth on the poor and on the environment havebeen widespread since the green revolution first began in the1960s. The key lesson that emerges from past experience isthat to be pro-poor, agricultural growth must be broad-based,involving small and medium-sized farms as well as large,women farmers as well as men, and backward rainfed areasas well as irrigated and high-potential rainfed areas. To ensuresuch broad-based agricultural development, policymakersneed to

• ensure more equitable access to land for both menand women farmers. This may require land reformwhere appropriate, the introduction of efficientmarkets for sale and lease of land if possible, and theprovision of secure ownership and tenancy rights asneeded;

• ensure that agricultural research focuses on theproblems of small farmers as well as large, and thatto the extent possible, new technologies are scale-neutral and can be profitably adopted by farms of allsizes;

• invest in clean water, nutrition programs, and humancapital, such as rural education, to improve theproductivity of rural people, especially poor peopleand women, and to increase their opportunities forgainful employment;

• promote a wide array of viable and sustainable ruralfinancial institutions that effectively and efficiently


meet the demand for financial services and that areaccessible to the broadest possible range of ruralresidents;

• ensure that agricultural extension and education, aswell as inputs and credit, reach women farmers andaddress gender-based constraints in land ownershipand access to credit, training, markets, and decision-making;

• ensure the participation of all rural stakeholders, notjust the rich and powerful, in setting priorities forpublic investments that they are expected to benefitfrom or to help finance;

• give higher priority to backward areas with highpopulation densities; and

• avoid subsidizing inputs, as such policies contributeto overuse and waste, and lead to their concentrationamong the rich.

The shift to more intensive farming systems has helpedrelieve the pressure on the land base and slowed the conversionof forest, hillsides, and other environmentally fragile lands tocropping. But it has also brought new environmental problemsthrough inappropriate management practices in the use ofirrigation water, fertilizers, and pesticides. These problems haveoften been worsened by inappropriate policies that subsidizedinputs, encouraging farmers to use these inputs in excess ofeconomically and environmentally appropriate levels. A lotof recent environmental degradation in rural areas has littleto do with modern farming systems, however. In particular, agreat deal of deforestation and land degradation has occurredin backward areas that did not benefit from the greenrevolution and was driven by insufficient agriculturalintensification relative to population growth.

Policy interventions that seek to overcome environmentalproblems in agriculture need to be based on a properunderstanding of why farmers degrade their environment.Why, for example, do farmers often seem to overgrazerangeland, deplete soil nutrients and organic matter, and


overuse irrigation water, pesticides, and nitrogen, when theseactions cause health problems and reduce future incomes forthemselves, their children, and the communities in which theylive? The answer lies with the incentives they face. Farmersare not irrational. On the contrary, they maximize income andminimize risk in a dynamic context and often under harshconditions and serious constraints. They degrade resourceswhen there are good economic and social reasons for doingso, i.e., when the benefits they obtain exceed the perceivedcosts that they, as individuals, must bear.

If the management of natural resources is to be improved,these economic and social incentives must be changed inappropriate ways. Several factors impinge on the incentivesfor managing natural resources. Policymakers can influencethese incentives in the following ways:

• Improve the management and regulation of naturalresources through institutional reforms and greaterdevolution of management decisions to resource usersor user groups, wherever possible.

• Ensure that farmers have secure property rights overtheir resources. In the case of common propertyresources, community management arrangementsshould be strengthened.

• Establish resource monitoring systems and ensure thatthose responsible for causing environmental degrada-tion are made accountable through appropriate taxesand charges.

• Correct price distortions that encourage excessive useof inputs including water and electricity. It is alsonecessary to educate farmers about the environmentaleffects of their actions, including “externality”problems where the consequences of environmentaldegradation are borne by people other than those whocause the problem.

• Ensure that agricultural research gives more attentionto broader aspects of natural resource management,including the problems of resource-poor areas.


Particular attention must be paid to increasing yieldsin resource-poor regions, to sustainable pest control,to soil and plant nutrient problems, and to geneticerosion within major food crops.

In order to achieve strategies that attain the multiplegoals of sustainable growth, poverty reduction, and improvedquality of life, it is not sufficient to target single goals of thecritical triangle irrespective of their consequences for othergoals. The aim should be to achieve a high degree ofcomplementarity among all three goals. For example, greaterinvestment in the health and education of rural people,especially women and girls, and in population control,improved performance by public institutions, more secureproperty rights over resources, and more open and liberalizedmarkets should contribute to growth as well as help poorpeople and improve the quality of life for all (See Box 1). Theyshould also reduce environmental degradation. Strengtheningthe management of common property resources would notonly help reduce poverty and environmental degradation butwould also increase the productivity of these resources andhence contribute to growth.

But there could also be tradeoffs between goals. Forexample, recommendations for public investment inagricultural research and extension have different andpotentially competing objectives when focused on differentgoals. To achieve more growth, agricultural research is bestfocused on the development and spread of yield-enhancingtechnologies in irrigated and high-potential rainfed areas wherethe returns to research have historically been the highest. Toreduce poverty and environmental degradation, on the otherhand, more research should be focused on rainfed areas,including many with low potential. But research for these areasis typically more complex and costly, and the net returns areless certain and more difficult to demonstrate. Given thatfunding for research is scarce, research institutions naturallyprefer to work on the problems of irrigated and high-potentialrainfed areas where they can expect to have a larger impact.


Part of the answer to this tradeoff is to allow the private sectorto do more of the research for irrigated and high-potential areaswhere returns to investment are high, and to redirect fundingfor public research to the problems of poorer people and regions.

Similar tradeoffs can arise in targeting more resourcesfor infrastructure investment in backward areas. Althoughthis can be very beneficial to the poor and can reduce some ofthe worst environmental degradation, it may well involve sometradeoff with growth. An equitable distribution of land hastraditionally been good for both growth and poverty reduction.This is because small farms have proved more efficient thanlarge farms in much of Asia. But in some countries farm sizesare now becoming so small that some consolidation may soonbe necessary to enhance efficiency and growth. This couldlead to another example where more growth is achieved atthe expense of the poor (See Box 2).

Pricing policies can have mixed outcomes for the threegoals of the critical triangle. Liberalized markets can be goodfor growth and poverty reduction, but may have unfavorableimpacts on backward areas with poor infrastructure becauseof their higher transport costs. Proper pricing of key inputslike water and fertilizer is good for growth and the environmentin most areas, but again, backward regions facing hightransport costs can suffer. Reduced access to key inputs likefertilizers may worsen poverty and soil fertility problems inbackward regions. There has been a tendency in manycountries in Asia to keep output prices depressed, particularlyto maintain low food prices for urban consumers. While pricestabilization policies do serve a purpose in reducing risk,keeping output prices low acts as a disincentive and results inloss of efficiency at the farm level. Setting the right prioritiesand envisaging the various outcomes of any policy becomecrucial.

The purpose of highlighting potential tradeoffs is not toargue against any of the three goals, but to help show whystrategies that target multiple goals are not always easy toachieve. Nevertheless, the available evidence clearly suggeststhat most Asian countries could do much better in reducing


Box 1 – The Role of Education and Health Care inImproving Quality of Life in Rural Asia

Education and health care are two basic factors that contribute toquality of life. Education provides a way for individuals toparticipate fully in the development of society; it allows a moreadaptable and productive work force that can adjust totechnological change. Similarly, good health allows individualsto participate fully in economic activities and permits an activeand reliable work force. Hence, education and health services areimportant components of government assistance in promotingdevelopment and welfare of rural populations in Asia. Indeed, thelack of such assistance in some countries is said to havecompromised the full benefits of the green revolution. Overall, theevidence shows that despite marked improvements over time inthe nature and availability of both health and education servicesand facilities in Asia, the benefits are enjoyed disproportionatelyin urban areas; rural populations are being left behind.

In education, there have been major changes in Asia overthe past few decades. Primary school enrollments have risendramatically; there has also been considerable growth insecondary and tertiary education. East Asian countries have thebest record of educational attainment; this has contributed greatlyto the exceptionally high income growth in these countries. Thelowest literacy rates occur in South Asia.

Improved health facilities, especially hospitals, andtechnology, particularly in mass immunization campaigns, havereduced mortality rates in Asia substantially. However, there aremarked differences between regions and countries and withincountries. The PRC, Sri Lanka, and Viet Nam have made dramaticsteps in improving health services by investing in countrywide

the necessity for such tradeoffs. Where tradeoffs cannot beavoided, however, the answer may have to be some sacrificein one or more goals, or an increase in the total resourcesallocated to rural areas (e.g., use additional resources for

(continued next page)


primary health care systems. As with education, South Asia lags,having the major share of the world’s malnourished children.

Within countries, there is a general bias toward theprovision of government-funded education and health facilitiesin urban areas, where they can be provided more easily and withmore political advantage. The private sector has becomeincreasingly involved in providing services, but again has focusedon urban areas.

In rural Asia, education is clearly seen as the key toimproving life, for example by enabling access to urban work andattaining social mobility. However, most rural populations haveinadequate access to education due to such constraints as distance,costs, gender and social bias, lack of parental motivation, andcultural and language bias in curricula. Lack of teaching qualityand poor facilities in rural schools are common additionalproblems. Local communities and educational institutions areusing innovative approaches to raise funds, but with privateinvestment in education growing, public-sector funds thus savedcould be reallocated to rural areas.

As with education, health services in rural areas receiverelatively less government assistance than in urban areas. Thereis a need to identify and bring about the use of more cost-effectivetechnologies appropriate for the large rural areas found in mostAsian countries. Nongovernment organizations and village healthworkers are being used in some countries, but the governmentneeds to guide these approaches and to reallocate public healthfunding to rural areas where the private sector response isinadequate.

Source: Bloom, D. E., P. H. Craig, and P. Malaney. 1999. The Qualityof Life in Rural Asia. Hong Kong: Oxford University Press.

Box 1 (continued)

investment in backward areas rather than cutting investmentin high-potential areas).


TAPPING THE POTENTIAL OF THE RURALNONFARM ECONOMY

The rural nonfarm economy is an extremely importantpart of rural Asia. It accounts for a large proportion of totalrural employment (the range is from 20 to 40 percent) and totalrural income (from 25 to 50 percent) in Asia. It is also animportant source of income for women, small farmers andlandless workers, as well as for the urban poor in rural towns.Formal manufacturing activities only account for a small part

Box 2 – The Land Reform Debate

Land reform or the lack of it is frequently cited as a factorinfluencing both agricultural growth and the distribution of itsbenefits in Asian countries. The striking negative correlationbetween landholding and poverty has led many analysts to believethat the roots of poverty lie in the structure of landholding. Viableland reform policies are based on land redistribution and/ortenancy reform. Land reform has been advocated on both efficiencyand equity grounds.

Land redistribution involves transfer of the control of landfrom large landholders to landless labor or smallholders. Whilethis process might seem likely to result in loss of farm efficiency,several studies have shown a negative relationship between farmsize and yields per hectare, implying that within limits, small isbeautiful. For agricultural growth to be equitable, a prerequisite isequitable distribution of land.

Tenancy reform can be effected either by regulation oftenancy contracts or by confiscation of land from the owner togive to the tenant. The present sharecropping system is deemedboth inefficient and inequitable: lack of property rights discouragesfarmers from investing in technologies that conserve and increaselong-term productivity growth, while the landlord’s share of the



of rural nonfarm employment in most Asian countries, typicallyless than 20 percent. Most rural nonfarm employment arises inservice, trade, and household manufacturing activities. Theseare dominated by small, part-time, mostly family businesses thatare highly labor-intensive. These activities depend to a largeextent on local and regional demand and tend to grow rapidlyin the context of rapid agricultural growth.

Past experience shows that to enhance the growth ofthe rural nonfarm sector, it is necessary to

• Give high priority to broad-based agricultural growthbecause this is the most important impetus for mostrural nonfarm activity. Equitable and broad-based

harvest is generally set at an unfairly high level. However, thesystem serves to apportion the risk between tenant and landlord,and the latter may provide some inputs and access to credit.Evidence for the inefficiency of sharecropping seems to beconclusive.

Many land reform laws have been enacted. Where politicalwill has been lacking implementation is the problem: land ceilingshave been set too high; loopholes are common; tenants have beenevicted when legislation has been pending. Data on the effectivenessof reform itself are scarce. What little evidence there is, however,shows that land reform does reduce the rural poverty gap.

East Asian economies have achieved the most significantreforms. Elsewhere, the difficulties of implementation suggest thatalternative means of reform be sought, for example, progressivetaxation on land and access to credit for land purchase by landlesspersons.

Source: Rosegrant, M. W., and P. B. R. Hazell. 1999. Transformingthe Rural Asian Economy: The Unfinished Revolution. Hong Kong:Oxford University Press.

Bloom, D. E., P. H. Craig, and P. Malaney. 1999. The Quality ofLife in Rural Asia. Hong Kong: Oxford University Press.

Box 2 (continued)


agricultural growth is not only desirable for bothgrowth and poverty reduction within agriculture, butthe impact is multiplied to provide additional benefitswithin the rural nonfarm economy (See Box 3).

• Develop rural infrastructure. Villages need to beconnected to local towns so that agricultural inputsand outputs can flow freely and so that people cango shopping. Rural towns also need good in-frastructure, especially roads, electricity, schools,sewers, water, and communications, in order to attractnew firms and to grow. In particular, rural areas mustnot be allowed to be left behind in the use of moderncommunications technology to forge links with largermarkets. Since the transaction costs of poor in-frastructure are borne unequally by the poor,improvements help level the playing field for the mostdisadvantaged.

• Promote a legal and regulatory environment (e.g., tosecure property rights and enforce contracts) that willhelp to promote trade, commerce, and manufacturing.

• Provide training in relevant technical, entrepreneurial,and management skills. The rural nonfarm economyprovides much of its own training through apprentice-ship schemes and on-the-job learning, but in anincreasingly technical and communications-orientedworld, specialized training schemes (e.g., computing,accounting) are needed, including training for women,who dominate many service and trading activities.

• Pursue industrialization policies that foster thedevelopment of all kinds of rural nonfarm firms andnot just manufacturing. Despite the relatively smallimportance of manufacturing in rural employment,policymakers have been enamored of this sector; ruralindustrialization policies have showered manufac-turing firms with all kinds of preferential tax, subsidy,licensing, and regulatory benefits, as well as withtargeted and subsidized credit and technical assistanceprograms. Moreover, these policies have typically


favored larger capital-intensive manufacturing firms(the lure of the shiny rice mill or shoe factory), andneglected small labor-intensive firms and informalhousehold manufacturing activities. It is necessary tolevel the playing field, to revamp rural industrial-ization policies to a) be more inclusive, perhaps byredefining them as “rural enterprise” policies; and b)to remove all unnecessary subsidies and protectivepolicies that prevent rural firms from becomingcompetitive in the marketplace.

To help ensure that growth of the rural nonfarmeconomy is pro-poor, it is necessary to offer training andfinancial services to all kinds of nonfarm businesses, includingsmall, informal, part-time, home-based and women-headedestablishments. Many of these establishments do not haveaccess to credit, especially in their start-up phase, and ruralfinancial markets should be strengthened to ensure that allcreditworthy firms do have access to financial services.Targeted and subsidized credit programs have not been effectivein achieving this goal (see below). Some rural nonfarm activitiescontribute to environmental pollution and degradation (e.g.,tanneries, silk and cloth dyeing, and charcoal production). Tominimize these negative effects, it is necessary to establish andenforce appropriate environmental safeguards. In addition,introducing safer and more efficient technologies in suchindustries almost always results in lowering pollution as well.

CREATING EFFICIENT RURAL FINANCIALMARKETS

In order to boost agricultural growth, reduce poverty,and promote equity, governments in most Asian developingcountries have intervened to provide assistance to small-scalefarmers. A major component of such assistance has been


Box 3 – Linkages Between Agricultural Growth and TheRural Nonfarm Economy

In the process of rural transformation, the expansion of the ruralnonfarm economy is one of the most important steps by whichagricultural growth generates economic growth. In its early stageof transformation, the nonfarm economy produces mainlyregional nontradable goods and is therefore dependent onagricultural production and farm incomes for its demand. Thefarm sector can contribute to the growth of the nonfarm sectorthrough linkages with production, consumption, and factormarkets.

As agriculture grows, it will use more inputs supplied bythe nonfarm firms. At the same time, it stimulates forwardproduction linkages in the nonfarm sector by providing rawmaterials for processing and distribution. Demand for inputsvaries across agricultural zones and with technological change.Irrigated agriculture demands considerably more inputs than rain-fed agriculture, while mechanized and animal traction systemsrequire more tools, equipment, and repair services than do hand-hoe cropping systems. Technological change strengthens thelinkage as it increases the demand for modern inputs, e.g.,improved seeds, fertilizer, and pesticides.

As farm incomes grow, consumption increases; moreimportant, it diversifies into nonfood goods and services, manyof which are produced by rural nonfarm firms.The strength of theconsumption linkages depends not only on the level of per capitafarm income, but also on how that income is distributed. Broad-based agricultural growth involving small and medium-sizedfarms has the strongest consumption linkages to the rural nonfarm


massive programs of targeted and subsidized credit throughstate-owned banks and other programs. Several rationales havebeen given for such subsidized and targeted credit: that smallfarmers cannot afford market interest rates, that low real ratesof interest are essential for agricultural growth, and that lowinterest rates can compensate to some extent for thedisadvantages faced by smallholders in input and output


economy, since it allocates larger shares of farmers’ incrementalincome to locally produced goods and services.

Agriculture also affects the rural nonfarm economy throughthe labor and capital markets. Agricultural wages determine theopportunity cost of labor in the nonfarm sector, while seasonalityof labor demand in agriculture affects availability. Nevertheless,wages can increase if the nonfarm economy is expanding due toincreased demand and increasing labor productivity. This is a“pull” situation where the nonfarm sector is attracting labor outof the farm sector to better-paying jobs. Therefore, wages in thenonfarm sector will be higher than wages in the agricultural sector.

A converse situation can occur if there is a growing surplusof rural workers that the agricultural sector is unable to absorb atthe prevailing wage. Workers are “pushed out” of agricultureinto low-productivity work in the rural nonfarm economy. Sincethe push is from agriculture, farm and nonfarm wages are likelyto be the same.

Data from selected Asian countries (Bangladesh, India,Indonesia, Pakistan, Thailand) show a positive relationshipbetween agricultural income and the nonfarm share of total ruralemployment. Studies of rural areas in Asia estimate regionalincome multipliers ranging from 1.5 to 2.0: for each dollar increasein agriculture’s value added, there is an additional $0.5 to $1.0increase in the value added of the nonfarm sector; 67 to 80 percentof this increment is due to household consumption linkages.

Source: Rosegrant, M. W., and P. B. R. Hazell. 1999. Transformingthe Rural Asian Economy: The Unfinished Revolution. Hong Kong:Oxford University Press.

Box 3 (continued)

markets because of distortions in input and output prices, poorinfrastructure, and other factors.

In the 1960s and 1970s such programs may have seemeda justifiable political response to the failure of existing marketsto provide efficient sources of credit to meet the demand forfunds. Time has shown government credit programs to behugely expensive, however: their interest rates were not


adequate to cover the true cost of providing the credit. Hencethe programs made the institutions providing them highlyfragile and financially unsustainable and created a continuingdemand for subsidized funds in order for them to continueoperations. With their overriding emphasis on credit, theprograms failed to mobilize the rural savings that resulted fromdynamic and diversified growth in rural areas. Finally, theyfocused almost exclusively on agriculture and neglected thegrowing rural nonfarm sector.

Even by their own highly uneconomic standards,government-subsidized credit programs have failed, reachingonly a small proportion of their targeted groups—and ingeneral not the poor or women—let alone of the potentialmarket for rural financial services. In most countries the bulkof the subsidized credit has gone to those who need it least:large landholders; most smallholders still continue to sufferfrom lack of access to institutional financial services. Inaddition, subsidized credit has proved highly inequitable,because the built-in subsidies are directly proportional to theamount of the loans: large loan, large subsidy; small loan, smallsubsidy; no loan, no subsidy. Subsidized credit has invited rent-seeking and political manipulation and thus has adverselyaffected governance of the financial institutions.

It is high time for Asia to shift the emphasis to market-oriented financial services for the rural sector and do awaywith the subsidized-credit paradigm. Several Asian developingcountries, notably in Southeast Asia, have indeed undertakena paradigm shift to more of a market approach to rural finance,but many have not and are paying the price in the form ofcostly, poorly performing institutions. There is an urgent needto promote the development of efficient rural financial marketswith the institutional capacity to mobilize savings effectivelyand efficiently, leverage funds in the commercial markets,provide credit based on prudent banking principles in cost-effective ways, reduce their own transaction costs as well asthose of their clients, improve management information andaccounting systems, and manage risks to expand their services(See Box 4).


The transition to more efficient rural financial marketsrequires

• an improved policy environment that permitsfinancial institutions to adopt pricing policies basedon commercial considerations and eliminates politicalinterventions in their operations;

• creation of an adequate financial infrastructure,including an effective legal and regulatory frameworkand reliable information systems to reduce informationasymmetry in financial markets;

• the rehabilitation or closing down of government-owned agricultural and rural development banks thatdo not enjoy adequate autonomy and that lackprofessional managers to improve their services andmake them financially viable and sustainable;

• investments in infrastructure and communications todrive down the transaction costs of providing financialservices in rural areas; and

• the use by governments of new mandates, incentivestructures, and staff training in existing financialinstitutions to develop their institutional capacity torespond efficiently to market demand: to create a moreclient-oriented service mentality, promote competition,offer a broader range of financial services includingsavings accounts, and to serve nonfarm rural peopleas well as farmers, women as well as men.

There is a need for efficient, cost-effective financialservices for the poor, especially for poor women. Because ofthe unique difficulties of servicing the rural poor, includingwomen, governments will have to continue to assistmicrofinance institutions in improving their commercialorientation and outreach effectively and efficiently throughmarket-friendly policies. At the same time, other financialinstitutions should be encouraged to expand their services tothe poor where it can be done on a commercial basis.


Box 4 – The paradigm shift in rural finance

A move away from government-subsidized credit programsbegan in some Asian countries in the early 1980s as a result ofthe negative evaluations of these programs and the financialdrain they imposed, along with the success of some microfi-nance projects. Microfinance organizations in some countriesintroduced innovations that reduced lending costs and riskswithout the collateral normally required by banks; large numbersof poor borrowers had access for the first time to formal financialservices.

The paradigm that emerged—the financial marketapproach—limited the market to financial mediation rather thanbeing a tool to stimulate production, compensate for distortionsin other markets, and alleviate poverty. In this paradigm, the fundsources are mainly voluntary savings deposits rather thangovernment and donors; the institutions strive for sustainability,rather than depending on subsidies themselves. The problem ofpolitical intrusion is thus removed and real interest rates arecharged on loans to borrowers, who are selected based oncreditworthiness rather than on their “preferredness”. Borrowersare seen as clients choosing products rather than as beneficiariesof subsidized loans. Evaluation of success in the new paradigm


ENSURING EFFICIENT INSTITUTIONS FORRURAL DEVELOPMENT

An important lesson has been that good policies andinvestments can go sour not because they are poorly conceived,but because the institutions that implement them don’t workwell. There is a need to reengineer some public institutions,both to improve their performance and to better clarify theirroles in a changing world. With the rapid emergence of theprivate sector in direct rural investment and an increasingly


is based not on credit impact on beneficiaries, but on theperformance of the financial institution in terms of sustainability,breadth and depth of outreach, and quality of services.

Suprisingly, many countries have made little progress inadopting the new paradigm. However, three “flagship”institutions—the Bank for Agriculture and AgriculturalCooperatives (BAAC) in Thailand, the unit desa system of BankRakyat Indonesia (BRI-UD), and the Grameen Bank (GB) inBangladesh—illustrate the possibilities. These institutions eachserve millions of rural clients. BAAC is the most successful, havingreached about 90 percent of Thailand’s farmers, directly orindirectly, in 1996. All three provide loans: to individuals in thecase of BRI-UD, to groups in GB, and to both individuals andgroups in BAAC. BRI-UD and BAAC accept savings deposits.while GB has compulsory savings. Of the three, only BRI-UD issubsidy-free and could have reduced its yield on loan portfolio in1995 from 31.6 percent to 16.3 percent and still have remainedindependent: the other two institutions need to increase theirnominal interest rates to become free of subsidies.

Source: Meyer, R. L., and G. Nagarajan. 1999. Rural FinancialMarkets in Asia: Paradigms, Policies, and Performance. HongKong: Oxford University Press.

Box 4 (continued)

constrained public-sector capacity, there is a need to reorientand reform public institutions so that their approach is lesstop-down and market-inhibiting. As agricultural and ruraldevelopment become more location-specific and decentralized,public institutions must be able to cope with, and respond to,a higher level of farmer and community participation. Thiswill require much greater attention to the processes ofgovernance, devolution, and local capacity building. Theseissues are discussed in chapter III.

While sufficient investment for rural development isnecessary, the institutional context within which this


investment is made will determine to a large extent howeffective the investment is and whether it achieves the desiredgoal. Similarly, the impact and efficiency of policies will alsobe determined to a large extent by the institutional frameworkwithin which the policies are implemented. Institutions caninteract positively with policy and it is only through anappropriate link with the institutional framework that properimplementation of policies will be achieved.

Institutions develop as a response to the societies in whichthey operate and thus will vary with changes in social andcultural norms. These differences notwithstanding, there arecommon roles that all institutions must play in promoting thegoals of rural development, such as providing goods andservices of several kinds and enforcing laws, rules, and propertyrights; these roles do not vary widely from one society to thenext. Moreover, because institutions have developed over longperiods of time and are heavily influenced by social customsand norms, there is a tendency for institutions to suffer frominertia and to be generally slow to change their structure,practices, and behavior. This is true even when the externalenvironment within which the institutions operate demandssuch changes. Another manifestation of this problem is thatinstitutions tend to become suboptimal from both an individualand social or community perspective and can impede theprocess of development through the misuse, misallocation, orwaste of scarce resources. Under such circumstances it becomesnecessary to ensure change through appropriate interventionand action.

The way in which institutions regard and handle equityissues, especially gender issues, can greatly influence both thedesign and implementation of policies. For example, if the rolesthat women are expected to perform in the work force arelimited by social and cultural beliefs, such a perspective willgreatly influence policies to generate employment. Thus itbecomes very important to change institutional views regardinggender roles if rural employment for women is to be broadened.It is necessary to develop an institutional framework for genderand to seek ways to achieve gender equity and empowerment.


Without these, the institutionalized structures that produceinequality and poor outcomes for women are unlikely tochange. Autonomy and self-determination are goods thatshould be available to all, regardless of gender. In addition,access to education and jobs is not simply a means to betterlife outcomes, but is part of the very definition of a high qualityof life.

There is a close relationship between the politicalframework and system and the functioning of institutions.Political systems and structures help shape the incentives forpolicymakers that will ultimately help influence the design ofpolicy and its impact on development and the quality of life.There is also a close link between political institutions andeconomic governance. The quality and delivery of goods andservices will be determined by the ways in which these servicesare provided. The trend toward decentralization—thereassignment of at least some authority and functions fromthe central government to lower levels such as provincial andlocal governments—has been a deliberate move to helpimprove economic governance. By being more democratic andmore suited to the needs of local communities and individualstakeholders, decentralized structures are expected to be moreefficient and transparent.

Decentralization involves the transfer of political,administrative, and financial functions and this requires majorinstitutional change in the way the economy operates.Decentralization must be accompanied by capacity buildingat the local level if it is to succeed and achieve its desiredobjectives. It is not an alternative to central governmentfunctions, which must also be suitably altered, but acomplement to achieve greater efficiency and equity. It requiresmuch greater efficiency and coordination and necessitates moreinvolvement of communities, civil society, nongovernmentorganizations (NGOs) and the private sector (See Box 5).

One of the main features of social organizations and civilsocieties is their institutionalized patterns of behavior developedin the pursuit of common or community goals. To build uponthese patterns in a positive manner is to develop what has


Box 5 – The Trend Towards Decentralization

Decentralization and/or devolution of government services indeveloping countries has become increasingly common in the pastfew decades. This trend mirrors the generally successfuldecentralization that has taken place in a number of industrializedcountries, such as New Zealand, Poland, and Hungary. In Asia,it is usually closely associated with the move away from highlycentralized systems of government, with reform movementsmarked by demands for more competitive politics and greaterpopular participation in government. In countries as disparate insize and political systems as the Philippines and Nepal, therehave been recent forceful moves to decentralize government. Inothers, such as Mongolia, which are setting up democraticgovernment structures for the first time, decentralized governmenthas become the model to follow.

Demands for decentralization are not new in many Asiancountries. In recent years new factors have emerged that haveaccelerated the process, however. One is the impact ofglobalization. Better communications have made people at alllevels of society more aware of what is happening in their owncountries, as well as what is occurring globally. In this rapidlyshrinking world, comparisons and informed judgments are mucheasier to make and more opportunities are available to be involvedin governance. A second factor is the impact of the enormouseconomic and social changes that have occurred in the last 20years. Liberalization, privatization, and other market reforms allrequire a different mode of governance. In addition, these changeshave also underlined the limited capacity of central governmentsto handle adequately all the demands placed on them. Allied toboth of these factors is the growing demand for participation.Although this varies among countries, many local communitiesare no longer satisfied to accept the dictates of a central government.There is a strong, growing voice for participation in governance.The perceptions of donors, which reflect the thinking of major



sources of development financing in many countries, have alsochanged. Traditionally dealing only with central governments intheir lending operations, believing that central governments alonehad both the responsibility and capability to manage development,donors have recently shifted to supporting better governance andwith it, greater local participation and autonomy.

Consequently, decentralization of government is nowsought in nearly all Asian developing countries. It encompassesthe transfer of both administrative and financial authority, sincewithout adequate fiscal resources it will not work. It also involvesthe participation of local civil society, whether citizens’ groups ornongovernment organizations (NGOs).

Yet decentralization is not a panacea that will solve allproblems. It requires full political will. Unfortunately, while thiswill is often expressed in rhetoric, it is not always backed up withfull commitment. Political will alone is also not sufficient. Clearlegal and administrative mandates are also highly desirable. Thetime needed for their establishment, however, may just createexcuses for inaction by central authorities. Thus, morefundamentally, decentralization requires intensive interactionamong stakeholders. But the process has no universal blueprint,given the varied and usually complex political, administrative.and social systems found in the developing countries.

Decentralization also has dangers. If not well managed,central governments could lose control over the macroeconomyas the result of uncoordinated local decisions. Regionaldisparities could be exacerbated, leading to economic and socialtensions. Local governments could also fall under the sway ofparticular local interests, thereby undermining state power andaccountability. Thus, decentralization is a double-edged sword.It is clearly the way to go, but it is not a simple or quick remedy.

Source: Ammar Siamwalla. 1999. The Evolving Roles of State.Private, and Local Actors in Rural Asia. Hong Kong: OxfordUniversity Press.

Box 5 (continued)


come to be known as “social capital”. Social capital can helpimprove the efficiency of society by facilitating cooperation,trust, tolerance, and networks to channel governance.Sensitivity to the political, social, cultural, and institutionalcontext (all of which are linked) and improving upon theexisting norms of behavior in ways that enhance social capitalare essential for policymakers. Such awareness can lead to anappreciable increase in the social and economic return oninvestment and help in improving the functioning of markets.

IMPROVING THE OVERALL QUALITY OF LIFE INRURAL AREAS

Growth in per capita incomes is perhaps the single mostpowerful means of improving the quality of life. This impactis even greater when income growth is equitable and involvesthe poor and when incomes improve without degrading theenvironment. But improving the quality of life goes beyondthese three goals. As illustrated in Figure 3, the quality of lifeis also impacted by past investments in health, education, andrural infrastructure; by policies that promote greater genderequity and the empowerment of rural people; and by theavailability of effective safety-net programs. These factorscontribute directly to improvements in the quality of lifebecause they are things that people value in their own right.But these factors also contribute indirectly to the quality oflife by making people more productive and moreenvironmentally aware and hence increasing their con-tributions to growth, poverty reduction, and better manage-ment of natural resources. This is a virtuous cycle in whichhappier, better-fed, and better-educated people are able to domore to further improve the quality of their lives. The converseis a vicious cycle in which deterioration in the quality of lifereduces people’s abilities to improve their lives, leading tofurther deterioration in the quality of their lives, etc.


Figure 3. Determinants of the Rural Quality of Life


Government investments and policies to enhance thequality of life directly are particularly important for the poor andfor women, because the trickle-down benefits from growth maytake too long to realize. In order to achieve higher quality of lifein rural Asia, as well as striving for the three goals of the criticaltriangle, policymakers need to undertake the following:

•� Raise levels of public investment in people (education,health, nutrition, etc.) and in infrastructure (roads,electricity, communications, etc.), which may have togo beyond their immediate economic justification (i.e.,based on their expected impact on growth). Policiesand investments for slowing population growth, crime,the use of drugs, and the spread of HIV/AIDS areparticularly important.

• Target the poor through specific programs, such asland redistribution and tenancy reform, improvedaccess to education and training, greater investmentin infrastructure for resource-poor areas where manyof the poor are concentrated, and improved andcleaner energy sources.

• Target gender inequities. Such policies must go beyondthe simple provision of more schooling, health services,financial services, and employment for women andgirls, important though these are, and tackle theinstitutional and cultural biases that result indiscrimination against women in the first place. Thiswill require changes in land and labor laws to removelegal constraints on women’s participation in decisionmaking, improve their inheritance and ownershiprights to land, increase their access to credit, andprovide equal employment opportunities. It will alsorequire more enlightened education programs for theyoung and greater empowerment of women inpolitical processes (See Box 6).

• Create efficient safety nets to help the chronically poorwho are unable for various reasons (e.g., disability, age,lack of basic skills or assets) to help themselves out ofpoverty and to provide a measure of income insurance


Box 6 – The Positive Impact of Gender Equity on Qualityof Life

The view of gender issues as a component of quality of life inrural Asia does not simply mean looking at relative outcomes formen and women or whether there is discriminatory access. Rather,it means viewing gender as a social institution that organizes theopportunities that are open to people and defines their socialroles. The situation of rural Asian women points to the paramountimportance of gender in an examination of quality of life becauseit raises the question: Whose quality of life?

Extreme gender inequality, which takes myriad formsincluding denying women access to health care, education, and jobs;physical and psychological abuse of women; and female infanticide,selective abortion, and nutritional deprivation also characterize manyparts of rural Asia, especially South Asia. For many, being femaleand living in rural areas is doubly discriminatory. Indeed, in manyAsian nations the gender gap in schooling, literacy, health, socialparticipation, and wages is driven by the rural sector. For example,in Nepal, while urban boys aged 15 to 19 outnumber their femalecounterparts in school enrollment (45 percent versus 32 percent), thegap is much more pronounced in rural areas (25 percent versus 6percent). In India, urban women can expect to live about three yearslonger than men, but there is no gender difference in rural lifeexpectancies. In many countries the combination of high femaleinvolvement in agriculture in rural areas and the large gender gap inagricultural wages puts rural women at a disadvantage. Theseexamples demonstrate that gender gaps in core quality of life indicatorsare larger in rural Asia than in urban Asia.

One of the most formidable challenges facing rural Asiainvolves overcoming strong and persistent gender inequalities,especially in South Asia. Improving women’s quality of life willhave a multiplier effect for society as a whole. Increasing women’s


for rural people in areas subject to catastrophic climaterisks like drought. Financial markets should not beused to supply so-called loans to those affected bydisaster when there is no real intention to collect;


education not only raises their own quality of life, but also thequality of life of other family members and even of society at large.Policies that promote gender equity, such as establishing femalequotas for elected office, may have a symbolic importance if inforcing men to find and groom women for office, it makes themquestion previously held ideas of gender. The presence of womenin governing bodies may also force citizens to rethink their notionsabout women’s capabilities or encourage other women to becomesocially active.

Increasing gender equity may also make the process ofdevelopment more sustainable. For example, women’s schoolinghas a bigger social multiplier on family health than men’sschooling, because of women’s roles as mothers, wives, anddaughters-in law. Similarly, mothers’ level of educationalachievement (which has a higher impact on children’s schoolperformance than their father s’ level) may eventually translate intohigher wages for children when they enter the workforce. Anotherreason education for women appears to have positive effects onhealth and other outcomes is that it empowers women to makenontraditional decisions, like controlling their fertility.

Targeting programs and policies to women can also resultin lower fertility, an important step in improving overall ruralquality of life. Higher rural fertility is partly explained by women’spoor access to education and job opportunities. Increasingeducational opportunities for girls by providing better access toschools, enforcing compulsory school attendance, or providingscholarships can therefore have long-term demographic benefits.Creating labor market opportunities and providing microcreditfor women, as they raise the value of women’s time, will alsomake children more costly and therefore bring down fertility rates.

Source: Bloom, D. E., P. H. Craig, and P. Malaney. 1999. The Qualityof Life in Rural Asia. Hong Kong: Oxford University Press.

Box 6 (continued)

grants should be the preferred form of support,disbursed by agencies designated for the purpose.

• Support more democratic institutions and greaterparticipation of rural people in public decisions thataffect their lives.

III MEETING THE CHALLENGESOF THE FUTURE

While some Asian countries struggle to catch up, therest will need to continue to increase incomes and the qualityof life in rural areas. This will have to be done even as ruralpopulations continue to grow. Failure to do so will lead toaccelerated migration to the cities, a process that will have itsown social and environmental costs, and a growing risk ofsocial conflict and violence over the use of natural resources.Rapid economic growth must continue in order to providethe means to solve these problems. But at the same time thatgrowth must be equitable and environmentally sustainable.As already seen in Chapter II, past experience suggests somekey elements for these strategies. These need to be more widelyadopted.

The recent financial and economic crisis in Asia hasprovided some important lessons and undeniably altered theway in which governments and policymakers need to tacklethe problems facing their economies. Rural Asia, in particular,will be challenged by the legacy of the economic crisis for sometime to come. The East and Southeast Asian countries thathave been most affected by the crisis will need time to recoverfrom the loss in real income and the necessarily drastic cuts ingovernment investment in rural areas. Many investments havelong lead times (e.g., agricultural research) and the conse-quences of the cuts will take many years to work themselvesout; they will also impede agriculture’s ability to respond toimproved incentives for growth as a result of the currencydevaluations. In addition, there has been reverse migrationback to rural areas in some of the hardest-hit countries;reassimilating these people will take some time to complete. It


will also take time to reconstruct domestic financial marketsand hence to restore the flow of credit to businesses andconsumers. Governments and donors need to give high priorityto restoring these investment fundamentals in the crisiseconomies.

Another legacy of the crisis that must be confronted isthat the severe immediate negative welfare effects may beintensified and prolonged. The negative social effects of thecrisis have been compounded by a lack of social safety netsfor the newly unemployed and the newly poor. Traditionalsocial systems that have supported the poor in the past,including close family ties, community support, and the abilityto return to subsistence agriculture, have been weakened bythe development of a dynamic urban economy. New safety-net systems have not been put in the place of traditional systems.Social unrest in Indonesia indicates how fragile and growth-dependent the social equilibrium has become in many of therapidly developing Asian economies. None of the crisiseconomies except the Republic of Korea has an unemploymentbenefit scheme or other social-welfare programs.

The economic distress has also generated a crisis ofconfidence that may reverberate more widely in Asia. Sinceinstitutional failures were at the heart of the crisis, the keylesson is not that market-led growth is bad, but that moreappropriate governance structures for key institutions areneeded for managing it. Effective safety-net programs need tobe in place to protect vulnerable people in times of crisis: publicinvestment in key public goods must be sustained.

Evidence indicates that women are disproportionatelyaffected by all social dimensions of the crisis and are in thegreatest need of safety nets. The traditional gender difficultiesfaced by women have been exacerbated by the crisis. Inaddition, women tend to be the first laid off when companiesfeel the pressure of labor costs (on the other hand, they tendto find work in the informal sector more easily, they tend towork in the less affected export-oriented sectors, and they aresometimes substituted for more expensive male labor); girlsare pulled out of school before boys; and women face

Meeting the Challenges of the Future 47

increasing difficulties in providing social services for theirfamilies.

Along with recovering from the economic crisis, andlearning from it, Asian countries must also adapt to a changingworld, one that will be increasingly impacted by

• globalization;• demographic transition;• an unfolding biotechnology revolution in agriculture;• increasing water scarcity and land degradation; and• the need to reinvent governance structures and public

institutions.

This chapter will lay out options for meeting the newchallenges of the future in ways that exploit their growthopportunities, but which are also pro-poor and environ-mentally sustainable.

MANAGING GLOBALIZATION

Globalization offers opportunities for further economicgrowth in Asia. Market-oriented policies that have favoredeconomic liberalization, open markets, and integration withthe global economy have been very successful for both ruraland general economic development in Asia. The process ofglobalization, including increased interlinkages across countriesand expanded trade, financial, and information flows, providesnew technologies and markets and new sources of finance.But globalization and economic liberalization carry with themrisks that have been driven home by the Asian economic crisis.These risks include

• the inability of many domestic industries to competein the short term;

• the potential destabilizing effects of uncontrolledshort-term capital flows;


• increased exposure to price risk; and• worsening inequality as many poor people and

backward regions get left behind.

To avoid the pitfalls of globalization and economic liberal-ization, each of these risks needs to be addressed and policiesand strategies adopted that negate or minimize them.

Competition

World markets are ruthlessly competitive and offerlittle succor to the weak and inefficient. Some sectors in manyAsian economies are not well positioned to compete in worldmarkets and in some cases (e.g., Central Asia) whole countriesare not yet ready. The pace of economic liberalization musttherefore take into account the institutional capacities andpolitical realities in each economy. Some of the less developedeconomies of Central Asia and South Asia may need amanaged transition period in which agriculture and domesticindustries can gear up to compete and during which atechnological dynamism can be established that will helpensure that they can continue to compete over time. Theemerging evidence from economic reform in Central Asia andEastern Europe suggests that more rapid and comprehensivereform can be conducive to a quicker economic turnaroundand faster growth (although, maybe, at a higher short-termsocial cost).

The PRC, on the other hand, has had great success witha gradual approach, yet success was arguably best in theagricultural sector, where reform was fastest, and much lessso in the state-enterprise sector, where reform was slowest.Viet Nam undertook highly successful and relatively rapideconomic liberalization and stabilization reforms in 1989, buthas encountered difficulties in the slow-reforming state-enterprise sector. Gradual reform typically allows for a morecomprehensive reform process, but a lack of urgency forthorough reform can bring about inappropriate and incomplete


reforms or lead to stop-and-go periods, as the PRC hasexperienced during its protracted reform process. Nevertheless,political and social stability during the transition process maybe as important to success as economic stability and maydictate a more gradual approach to reform than is optimalfrom the point of view of efficiency.

The newly industrialized economies of East Asia offersome important lessons about industrialization policies formanaging the transition. Many of them used directedinterventions to promote specific industries, such as targetedcredit, export promotion, tax benefits, and import protection.It was expected that these policies would also create spilloverbenefits to other industries, help enhance the overallcompetitiveness of the economy, and raise the futuretechnological level of the economy. But the results of thesepolicies have been quite mixed, especially in the long run. Manyindustrial policies were implemented without a sound analysisof the market failures they were intended to correct; theyignored market signals in attempting to achieve efficiencies;they underestimated the informational requirements necessaryfor effective intervention; they overlooked the limited capacitiesand capabilities of government; and they overestimated thehuman and other resources available to build efficientindustries. Moreover, attempts to transfer the “lessons” of thiskind of industrial policy to the rest of developing Asia havebeen largely unsuccessful.

Protection of some industries by definition penalizesother industries. A clear example of this is the rural nonfarmsector. Recent macroeconomic policy reforms that havebenefited the agricultural sector should have led to positivegrowth multiplier benefits for the rural nonfarm economy. Thepolicy reforms have also favored tradable goods productionin general, and this should have been directly beneficial tomuch rural industry. But policies to assist the rural nonfarmeconomy have still generally favored manufacturing ratherthan service activities and large- rather than small-scale unitsof production. In many cases, small firms have effectively beenplaced at a competitive disadvantage against their larger-scaled


rivals (for example, they do not receive the same subsidies andtax benefits), and this has encouraged more capital-intensivepatterns of development than is optimal.

A better approach to dealing with the uncertainties ofglobalization can be described as market-friendly policies. Theycan be considered as an intermediate approach, more proactivethan laissez-faire policies and more cautious than activeindustrial policy. Market-friendly policies focus on theliberalization of trade, accompanied by decreased governmentregulation and intervention, and thus less rent-seeking—allconducive to the functioning of a market economy. Undermarket-friendly policies, exporters face fairly uniformincentives for exporting commodities across industries; bothimports and capital flow should be gradually liberalized asinstitutional capacity improves; and the fiscal deficit and shareof government expenditures in GDP are maintained atcomparatively low levels. Rather than favoring specificindustries, governments should focus primarily on prudentialregulation and provision of public goods, particularly throughheavy investment in infrastructure and human capital. Themarket-friendly approach encompasses macroeconomicstability, human capital formation, openness to internationaltrade, and an environment conducive to private investmentand competition.

Destabilizing Capital Flows

Flows of private capital from abroad are fickle and canbe destabilizing if not properly managed. Most concretely, theeconomic crisis raised serious questions about the convertibilityof short-term foreign capital inflows. Foreign direct investmentand other long-term, relatively stable investments makesignificant contributions to economic growth, but the benefitsof short-term international capital are small and uncertainbecause, unlike foreign direct investment, short-term capitaldoes not bring along technology and management innovations.Moreover, when savings rates are already high and marginal


investment is misallocated, short-term capital greatly increasesthe vulnerability of the economy. Management of internationalcapital flows should therefore focus on the creation of anenvironment conducive to long-term investments anddiscouraging to short-term capital inflows. Tax incentives andother distortions that favor short-term inflows over long-terminvestments should be eliminated. Moreover, the importanceof sequencing of reforms was shown by the high costs ofmoving to free convertibility of short-term capital beforeeffective financial intermediation and prudential regulationwere in place. Both prudential regulation of currency positionsof banks and strengthened supervision of these regulationsand other risk-management procedures are required. In thoseAsian developing economies that are plagued by weakinstitutional capacity and financial systems, selective controlson short-term capital may well be appropriate. Temporary,market-oriented controls on short-term capital inflowscombined with domestic reforms and greater disclosure mayhelp reduce the frequency and magnitude of shocks.

Price Risks

There is also the possibility of increased price andeconomic risks as domestic markets become less insulated fromglobal forces, although the evidence of this is highly mixed.While there should be an immediate increase in price risk fordomestic producers when a country’s price stabilizationpolicies are dismantled, this may eventually be more than offsetby greater stability in world markets as more countries liberalizeand pool their market risks.

Some evidence for this is to be found in a recent FAOstudy of changes in interyear price variability of cereals from1972 to 1996. The study concluded that there had not beenany increase in interyear variability in world cereal markets.Recent price changes do not appear to manifest anythingunusual and are not outside the range of normal annualvariations. Furthermore, analysis of the intrayear cereal price


variability showed that, if anything, the tendency is towardsa decline in variability.

But even if domestic producers are confronted byincreases in price risk, there are better ways of managing suchrisks than returning to trade protectionism and costly price-stabilization polices. Futures and options markets now existfor key agricultural commodities in many industrializedcountries and are also beginning to emerge in developing Asia.These markets can offer an efficient and cost-effective way ofmanaging price risks.

In order to reach the mass of small Asian farmers,however, new forms of financial instruments need to be createdwithin Asian countries. Appropriate intermediaries (e.g., banksor farm cooperatives) could offer forward price contracts tofarmers and then use national and international futures andoptions markets to hedge the associated price risks.

Worsening Inequality

Globalization leads to growth that often favors the middleclasses over the poor and urban over rural areas. This is not tosay that the disadvantaged do not gain; globalization can bringnew employment and tighter labor markets and it can openup new opportunities for commercial agriculture even in moreremote areas. But there is risk that the gains may be highlyskewed and that the distribution of income may worsen.Moreover, economic downturns associated with the higherrisks of greater exposure to world commodity and capitalmarkets inevitably impact more severely on the poor.

Avoiding worsening inequalities will require adequateinvestments in rural infrastructure (especially roads, transport,and communications), in human capital (education, specializedtraining, and health), and in social safety-net programs (seealso the first part of this chapter).


MANAGING DEMOGRAPHIC TRANSITION

Demographic factors have played a major role in Asia’sgrowth in recent decades, and will continue to do so well intothe next century. More importantly, demographic changes willcontinue to influence the quality of life in the coming years.For example, because of population aging and cultural shifts,traditional forms of caring for the elderly in rural Asia may beinadequate in the future. Policies that rely on family welfaresystems are therefore unlikely to address future needsadequately, and policymakers must develop ways to createand fund rural pension systems before they are actuallyneeded.

Rural Asia accounts for more than a third of the world’stotal population and almost two thirds of Asia’s population.Even though rapid rates of urbanization are bringing downthe rural-to-urban population ratio in Asia, rural populationswill continue to grow in absolute terms. While Asia’s populationis still increasing, the rate of growth is declining as fertilityrates steadily fall. As fertility rates fall, the number of youngchildren declines and the ratio of dependents to working-agepeople gradually decreases. Declining fertility also creates abulge in the age pyramid, since the cohort just before thedecline in fertility rates becomes the largest cohort, with eachsucceeding cohort having fewer numbers. When this largecohort reaches working age, dependency ratios will fall evenfurther. As a result, per capita incomes will increase evenwithout productivity increases, as long as the ratio of workersto dependents increases.

The economies of East Asia and, more recently, South-east Asia have already reaped or are reaping the benefits ofthis “demographic gift”. The changing demography hascontributed to the rapid rates of economic growth in East Asia,which had the earliest and most rapid demographic transitionin Asia. Southeast Asia is now beginning to experience theeconomic growth impacts of its changing demography. South


Asia, where fertility declines have been the slowest, willgradually begin to experience the effects of the transition aswell, although its impact will be weaker because of the moregradual demographic transition.

While Asia as a whole has experienced and will continueto experience this boost from the changing age structure, ruralareas within Asia have been less successful at accomplishingthe necessary demographic transition. Accelerating thetransition in rural areas provides a way for countries to createa rural demographic gift, thereby enhancing both growth andquality of life in rural Asia.

In any country, a whole host of factors linked to thecommunity’s social and economic environment influence thefertility rate. The importance of providing family planningservices as part of a package of reproductive health servicescatering to clients’ needs has become increasingly apparent.More than just efficient family planning programs arenecessary to lower fertility rates, however. Raising women’seducation status and increasing their job opportunities havebeen most effective in bringing down fertility rates. Poor accessto education and the lack of efficient labor markets for womenin rural areas thus help explain higher rural fertility. Increasingeducational opportunities for girls in rural areas can have long-term demographic benefits; creating job opportunities forwoman in rural areas will help raise the value of women’stime and thereby increase the costs of bearing more children.Since an important motivation for having children is to provideeconomic security for parents in their old age, providing aviable and efficient alternative in the form of pension plansand safety nets would reduce the dependence on children.

Initially, the impact of the demographic transition onboth growth and the quality of life will be beneficial. Thebenefits, however, will be temporary. As the population ages,the bulge cohort will reach retirement age and old-agedependency will rise. This will start to have a negative impacton growth unless families and governments begin to preparefor it now. In Asia the family has been the main source ofsupport for the elderly; this is particularly true in rural societies.


With smaller families and competing economic needs loomingin the near future, investing in a better education for childrenis called for now so that they will be able to bear the financialburden of the future more easily. Demographic changes alsomean that the elderly in rural Asia will require additionalservices, particularly medical services and the financialwherewithal to gain access to these services. Rural socialwelfare programs will be needed and rural societies will haveto gear up to caring for the elderly.

Overall, demographic factors currently at work in ruralAsia will have a powerful influence on several dimensions offuture quality of life. Changes in fertility and migration patternswill be coupled with cultural changes associated withmodernization, urbanization, and globalization. Demographicchanges are predictable and thus provide decision makers withthe opportunity to take them into account while designingpolicies that can responsibly address the far-reaching changesthat the demographic transition is sure to bring. The challengeis to address these concerns now so that future problems areminimized.

MANAGING THE BIOTECHNOLOGYREVOLUTION IN AGRICULTURE

The unfolding biotechnology revolution in agriculturehas the potential to dramatically transform agriculturalproduction and processing in the future. Early benefits will beseen in modest yield increases, reduced dependence onagricultural chemicals for pest and weed control, increaseddrought resistance in crops, and better-quality and morenutritious food. This could be followed by much moresignificant breakthroughs in crop and livestock yields, newtypes of crops, control of major diseases in livestock, nitrogenfixation in cereals, and new types of processed foods. As withthe microcomputer revolution of the 1980s, developments mayaccelerate much faster than the experts think.


If successfully tapped, the biotechnology revolution couldmake an extremely important contribution to future agri-cultural growth and food security in Asia. In fact, it may offerthe only viable way of restoring adequate levels of growth incrop yields in the decades ahead. The green revolution hasalready run its course in much of Asia; yield growth for majorfood grains has become sluggish. It is seldom profitable forfarmers to aim for more than 50 percent of yield potential asexpressed in experimental-station yields; this level has alreadybeen reached in many irrigated areas. Conventional plantbreeding is running out of options for providing the neededbreakthroughs in yield potentials, but biotechnology isbeginning to open up new sets of possibilities. Like manyrevolutionary developments, however, biotechnology alsobrings new risks and problems.

Most current agricultural biotechnology research isbeing undertaken by a handful of multinational companiesand caters to the problems of rich farmers and developed-country consumers. Few outputs from this research will beappropriate for most Asian countries. For example, cropvarieties with built-in herbicide resistance would require muchgreater reliance on herbicides than is common in Asia, wheremost weeding is still done by hand. Moreover, crop varietiesthat incorporate Bt genes for insect pest resistance need to besurrounded by buffer zones of non-Bt varieties if insects arenot to become resistant. This may be hard to enforce in manyAsian countries.

But the biggest limitation is that hardly any biotechnologyresearch is being undertaken on many of Asia’s basic foodcrops or on the problems of small farmers. Even in Asiancountries with the strength to develop biotechnologyprograms, such as India, research emphasis is often placed onexport crops. The private sector is unlikely to change its focusbecause it perceives limited potential to reap profits fromworking on many of these problems. If Asian countries are totap more fully into the biotechnology revolution, they will needto expand their own national and regional capacity toundertake some of this research.


Greater local capacity will also be essential for formingeffective partnerships with relevant multinational companiesand biotechnology research centers in developed countries.Several international initiatives are already attempting toimprove Asia’s access to biotechnology research. For example,the Rockefeller Foundation launched its Rice BiotechnologyNetwork in 1985 with the aim of improving national capacity.After a slow start, some of the International AgriculturalResearch Centers (e.g., The International Rice ResearchInstitute and The International Crops Research Institute forthe Semi-Arid Tropics) are also beginning to become moreactive players in biotechnology research. They may soon beable to serve an important intermediary role betweenmultinational companies, developed-country research centers,and the needs and capacities of national agricultural researchsystems in Asia. These developments are at an early stage,however, and Asian countries need to make a much moreconcerted effort to tap into the biotechnology revolution. Thiswill require allocation of additional public funds for agriculturalresearch, as well as staffing up for biotechnology research.

The public sector will need to play a particularlyimportant role in ensuring that small and disadvantagedfarmers and resource-poor areas are not left further behindby the biotechnology revolution. Private companies have littleincentive to work on the problems of these groups, since thelatter are the least likely to be able to afford new and improvedseeds or to use additional inputs like herbicides. Publicly funded(though not necessarily publicly conducted) research will becrucial for these groups.

Another worry for Asia is that biotechnology is beingused in developed countries to genetically engineer substitutesfor some of the region’s traditional export crops. This couldeventually prove costly in terms of lost export earnings. Forexample, rapeseed plants with more than 35 percent lauratein their oil have now been produced in the US and are expectedto provide a cheaper alternative to coconut and palm kerneloil. Such losses in competitive advantage will take place notonly between developed and developing countries, but also


between smaller developing countries without biotechnologycapacity and those developing countries that have it.

Biotechnology also brings new risks associated with therelease of genetically modified material into the environment(e.g., gene jumping, new pests) and from the consumption ofgenetically modified foods (e.g., allergic reactions, toxins). Theserisks are not well understood and they provoke a great deal ofanxiety among some segments of the public. National institutionsmust have the capacity to evaluate these risks and to implementand rigorously enforce appropriate regulatory systems.

Biotechnology is also associated with a thorny set ofintellectual property rights issues. Property rights over geneticresources are needed to reward private companies for theirefforts in developing improved varieties. But if these rightsare inappropriately defined, they could lead some countriesto lose ownership rights over their own indigenous geneticresources. These concerns have been reinforced in recent yearsby patents issued in the US for frivolous claims to turmeric,neem and basmati rice that essentially gave private companiesownership rights over underlying indigenous genetic materialfrom Asia. Such patents are often overturned when challengedin US courts, but require costly litigation by Asian countries.

Another problem is that as more countries try to assertclaims over their indigenous genetic resources (as agreed atthe International Convention on Biodiversity), the free flowof agricultural genetic material between countries may beimpeded. The high-yield varieties of cereal crops associatedwith the green revolution incorporated genes from a numberof countries; these were freely exchanged through publicresearch institutions to the benefit of all countries that couldgrow the crops. There is a growing danger that it will becomeincreasingly difficult to share genetic material in this way andthis could slow or impede future genetic improvements.

The development of an international system ofintellectual property rights in agriculture is still in a state offlux, with the US taking an aggressive lead. Asian countriesneed to take a position that balances the interests of private-sector companies (both foreign and domestic) whose products


they would like to use with protection of their own rights ofpublic access to indigenous genetic materials at home andabroad. This probably means they will need to implementpatent laws to protect rights to novel and significantlyimproved genetic material. As far as possible, however, theyshould try to uphold the FAO’s 1984 International Under-taking on Plant Genetic Resources that states that these are a“common heritage of mankind”. There is enough commonalityof interest so that Asian countries should work together anddevelop a common negotiating position on these issues.

MANAGING LAND AND WATER SCARCITY ANDDEGRADATION

Finite quantities of land and water in Asia suitable foragriculture limit the scope for bringing new natural resourceson line for food production. In addition, some contraction inland and water resources for agriculture, due to rising pressureto divert resources already in agriculture to nonagriculturaluses, may partially offset any expansion. Moreover, environ-mental degradation of areas already in production candampen growth in food supplies by eroding the productivecapacity of the natural resource base; any new areas broughtunder production may be even more susceptible to degradationthan are current areas.

Land degradation is a serious problem in both favorableand less favorable environments in Asia. On the one hand,intensification of agricultural production in irrigated andfavorable rainfed environments, combined with sometimesflawed incentives due to inappropriate policies and weakenforcement of laws and regulations, has caused substantialenvironmental degradation. Meanwhile, in resource-poorareas, continuing population growth and a scarcity of goodland have forced the expansion of cropped area into forestedand woodland areas and onto steeper slopes, with increasingsoil erosion. A third type of environmental degradation that


could expand dramatically is waste disposal and water qualityproblems caused by intensified livestock production.

Agricultural intensification per se is not the root causeof lowland resource-base degradation, but rather intensi-fication combined with an inappropriate policy environmentthat has encouraged monoculture systems and excessive orunbalanced input use. Trade policies, output price policies,and input subsidies have all contributed to the unsustainableuse of Asian lowlands. The dual goals of food self-sufficiencyand sustainable resource management have often beenmutually incompatible. Policies designed for achieving foodself-sufficiency have undervalued goods not tradedinternationally, especially land and water resources, leadingto salinity build-up, waterlogging, and nutrient mining.Subsidies have encouraged environmentally damaging misuseof inputs.

In the less favorable areas, mining of soil fertility, soilerosion, deforestation, and loss of biodiversity impose high costson those who depend on these areas for a living. Soil erosioncontributes not only to lower yields on site, but also to siltationproblems downstream, reducing the capacity and productivityof reservoir and irrigation schemes and thereby affecting aneven broader area. Likewise, deforestation in upper watershedregions can also have broader effects, for example bycontributing to flooding problems in lowland areas. Theseproblems are already serious in many “hot spot” areas in Asiasuch as the foothills of the Himalayas, sloping areas in thesouthern PRC and Southeast Asia, and the forest margins ofIndonesia, Malaysia, Viet Nam, Cambodia, and the LaoPeople’s Democratic Republic (PDR).

With rapidly increasing demand for meat and livestockproducts in much of Asia, pressure on livestock productioncould cause similar or more severe environmental degradationin this sector. Fisheries production has also increaseddramatically in response to increasing demand and this hasled to severe strains on Asia’s aquatic resources (See Box 7).Modernization of the traditional livestock production systemsin many Asian countries will require huge investments to


improve feeding potential, ensure a suitable animal environ-ment, and provide other modern production and processingtechnology. As with intensive crop agriculture, however, theintensification of livestock production poses potentially severeenvironmental challenges. Production of livestock generateswaste by-products that under some conditions can be recycledbut, when animal concentrations are high, can become aserious pollution problem. Livestock and feed production uselarge quantities of water, not only as a direct input, but alsofor waste disposal. The high concentration of industriallivestock production has the potential to produce substantialorganic discharges that are in excess of the carrying capacityof the surrounding environment.

Policies that mitigate or even reverse negativeenvironmental effects in the crop sector and help preempt largerproblems in the livestock sector include the removal of trade,macroeconomic, and price distortions in input and outputmarkets and the establishment of price incentives or regulationsto reduce the production of environmental externalities in bothsectors. Establishment or improvement of secure property rightsto land and water is also essential for improvement in theincentives for resource conservation. These environmentalpolicy reforms in higher-potential areas for crop and livestockproduction must continue to receive attention, since Asia willcontinue to rely on these areas for its food production anddegradation there poses a relatively greater threat to the foodsupply.

In the less favorable environments, it is the pressure toexpand area under production, rather than intensification,that frequently causes degradation. In the short to mediumterm, intensification for these areas may be the best strategy,but because these areas are more fragile environmentally,intensification must be undertaken in a manner that preservesthe environment. This will mean greater investment intechnologies and policies suited to the diverse conditions thatcharacterize low-potential areas, as well as efforts to link thoseareas to the broader economy so that the benefits of marketreform reach them as well. As in high-potential areas, land


Box 7 – Increasing Pressure on Aquatic Resources

Fisheries production in Asia, both the capture and culturesubsectors, grew remarkably in the two decades to 1996, at a fasterpace (4–5 percent per year) than did Asian food crops (3.5–4percent per year), and much faster than fisheries production inthe rest of the world, which declined from 2.6 percent in 1977–1986 to only 0.3 percent in 1987–1996. Asia now accounts formore than half of the world’s total fisheries production. Chinahas emerged as the dominant producer in both subsectors, withmore than half of its total production coming from aquaculture.

At the global level, marine production exhibits a picture ofgeneral ill health. About 35 percent of the world’s major fisherieswere showing declines by 1994; only about 40 percent couldincrease their production levels. The main causes are the open-access nature of most fisheries and subsidy-drivenovercapitalization that have led to overfishing and excess fishingcapacity, resulting in a global crisis in fisheries. Even increasedproduction may hide deeper problems: increased squidproduction, for example, is attributable to declines in populationof demersal fish, which are their predators. This trend of fishingdown the food chain may have a long-term and perhapsirreversible impact on the ecological balance of marine ecosystems.Freshwater fisheries production worldwide is unlikely to increasesignificantly and faces increasing constraints from populationpressure, mainly through pollution and inadequate access anduser rights.

In Asia, overfishing has worsened during the last twodecades. Catch rates in Thailand are down to only 6–10 percentof peak levels; catches of a number of large and small pelagicstocks (such as tuna and herrings, respectively) have declined,


degradation in low-potential areas can be reduced throughimproved property rights to land.

Although land degradation is of overriding importancein some geographic regions within Asia, probably the mostsevere environmental challenges facing Asian developingcountries are water scarcity and quality. Water scarcity is


while the proportion of juveniles of commercial species and of“trash” fish has been increasing.

In Asia, as elsewhere, there is a need to re-orient capturefisheries toward conservation and sustainability. Fisheries policiesneed to include not only production goals but also socioeconomicand ecosystem aspects and to take into account other users ofcoastal and inland aquatic resources. The dilemma policymakersface, between increasing production to meet growing demand andself-restraint and conservation, remains a difficult one to resolve,however.

Asia accounts for 90 percent of world aquacultureproduction, about two thirds of which is in fresh water andbrackish water. The phenomenal growth of the culture subsector,nearly 12 percent per year in the decade 1987–1996, is likely tocontinue for some time, because there are still untapped potentialareas, while new technology, such as genetic improvement andhatchery techniques, holds the promise of further gains. Someforms of aquaculture have had a severe negative environmentaland socioeconomic impact, however: shrimp farming has entaileddestruction of mangroves, water pollution, land dereliction,saltwater intrusion onto adjacent lands, and the introduction ofexotic species and diseases in coastal waters. Inevitably, growthof both the freshwater and brackishwater culture subsector willbe constrained by availability of and competition for suitableunpolluted water and by the environmental impact of cultureoperations themselves.

Source: Mingsarn Kaosa-ard and Benjavan Rerkasem. 1999. TheGrowth and Sustainability of Agriculture in Asia . Hong Kong:Oxford University Press.

Box 7 (continued)

increasing, and within the next decade or two will approachcrisis levels in many Asian countries, where there will simplynot be enough water to meet everyone’s needs for all or partof the year. Growing water scarcity is resulting largely fromrapidly growing demands for agricultural, industrial, and


household purposes, while the potential for expanding suppliesis diminishing. There is much greater competition betweenurban and rural uses of water. Water-shortage problems arealso aggravated by worsening environmental conditions relatedto deteriorating water quality, degradation of irrigated land,insufficient levels of river flow for environmental andnavigation purposes, upstream land degradation, and seasonalflooding. Pollution of water from industrial waste, poorlytreated sewage, and runoff of agricultural chemicals, combinedwith poor household and community sanitary conditions, is amajor contributor to disease and malnutrition.

These problems are important throughout Asia: waterscarcity is more of a seasonal constraint in the monsooncountries of East and Southeast Asia but a year-round problemelsewhere. Water-scarcity and -quality issues are especiallysevere in Central Asia (e.g., the Aral Sea) and parts of SouthAsia. In order to deal with these problems and to avert waterscarcities that could depress agricultural production, causerationing of water to household and industrial sectors, damagethe environment, and escalate water-related health problems,new strategies for water development and management areurgently needed.

A large share of the water that is needed to meet newdemand must come from water saved from existing usesthrough comprehensive changes in policies related to waterand institutional reforms. Such changes will not be easy, becauseboth long-standing practice and cultural and religious beliefshave treated water as a free good and because entrenchedinterests benefit from the existing system of subsidies andadministered allocations of water. But it should be pointedout that the types of policies needed to improve watermanagement are broadly applicable to other environmentalproblems as well. In the broadest sense, these are policies toimprove the flexibility of resource allocation in agriculture:

• Removal of subsidies and taxes that distort incentivesand encourage misuse of resources.

• Establishment of secure property rights and invest-


ments in research, education and training, and publicinfrastructure.

• Better integration of international commoditymarkets.

• A greater inclusion of populations in developingcountries into these markets.

The most significant reforms will involve changing theinstitutional and legal environment in which water is suppliedand used, to one that empowers water users to make theirown decisions regarding use of the resource, while providingcorrect signals regarding the real scarcity value of water,including environmental externalities. The precise combinationof new investments and water management reforms will varydepending on the location, level of institutional and economicdevelopment, and degree of water scarcity. But the key elementsof the reform include

• holistic water management at the river basin level;• user-managed irrigation;• water use rights, pricing, and markets; and• groundwater management.

Each of these is discussed further below.

River Basin Management

The watershed, or river basin, is the hydrologic unit thatincludes the key interrelationships and interdependencies ofconcern for water management, as represented, for example,in the linkages between upstream and downstream water users.Competition for limited water resources occurs betweendifferent stakeholders/sectors and at different levels: amongfarmers within an irrigation system; between irrigation systemsin the same river basin; between the agricultural sector andother rural uses, such as fisheries or domestic water supply;and more and more often between agricultural and urban and


industrial users and uses. Environmental uses also enter thecompetition. Upland watersheds are source areas for surfaceand groundwater recharge, while downstream agriculture andurban development are directly dependent on water suppliesfrom the upper watershed.

In many regions, poor management of watershedsthrough deforestation, the eradication of perennials, and otherhuman interventions in upland areas can lead to soil erosionand decreases in agricultural productivity; siltation of reservoirsand irrigation systems; adverse impacts on fisheries, wildlife,river habitat, and recreational water uses; water pollution;flooding of lowland areas; and reductions in water supply forirrigated agriculture, hydropower, industrial, and urban uses.The factors shaping the competition for water use at the riverbasin scale include economic and population growth; changesin technologies and the environment (including climatechange); changes in the social, legal, institutional, and politicalenvironment; and changes in the physical, technical, andeconomic environment.

Because of these complex interrelationships, integratedwater management at the river basin level is the foundationfor the sustainable management of water resources. The mainroles of the public sector in water management are

• to define and implement a strategy for managingwater resources that includes stakeholder participation;

• to provide an appropriate legal, regulatory, andadministrative framework;

• to guide intersectoral allocations; and• to develop water resources in the public domain.

It is at the river basin level that water allocation decisionsmust be made across the major competing demands ofagricultural, municipal, and industrial users. Investments andallocation decisions in one part of the basin affect activities inother parts of the basin. As a result, policy instruments designedto make more rational economic use of water resources needto be applied at this level. Improved water management at


the river basin level will require considerable strengthening ofrelevant public institutions and improved tools for planningand monitoring purposes.

User-Managed Irrigation

In many countries, poor performance of agency-managed systems, together with fiscal pressures frommounting operations and maintenance costs, has provided amajor stimulus for transferring management responsibility forboth irrigation and domestic water-supply systems fromagencies to user groups. In the Philippines, inadequate localfunding, exacerbated by shrinking donor-agency contributionsand declining revenues due to farmers’ failure to pay irrigationfees, prompted the national government to transfer systemmanagement to the farmers. This management transferprogram initially focused on small-scale systems with traditionsof strong farmer involvement and later expanded to larger-scalepublic systems.

A major advantage of the user allocation strategy is itspotential flexibility to adapt water delivery patterns to meetlocal needs. Having more information on local conditions thanagency staff, those directly involved in a sector’s water use donot have to rely on rigid allocation formulas. For example,based on the soils’ water-retention capacity, certain fields maybe given more water than others. User organizations may alsoconsider local needs for watering animals, bathing, washingclothes, or various small enterprises, needs that a sectoralagency has no mandate to meet. The result can beimprovements in either output per unit of water or in equityor both.

User-based institutions can be constituted as irrigationdistricts, groundwater districts, cooperatives, irrigatorassociations, village-based organizations, or more informallyconstituted user groups. Studies of such farmer-managedirrigation systems have shown a wide diversity of rules forwithin-system allocation: by timed rotation, water depth, land


area, or shares of the flow. In the domestic water-supply sector,user-based allocation is seen in community wells and hand-pump systems, as well as in a growing number of moresophisticated systems controlled by water and sanitationassociations.

Among a wide range of factors affecting the viability oforganizations for water management, property rights are acritical factor. In the past, system turnover of infrastructureand management of systems has often failed because of flawsin internal structural features or external factors that affectthe viability and sustainability of water-user associations inmanaging irrigation systems. The cohesive force of propertyis important in many aspects of water management, but isespecially critical for allocation. User groups cannot makedecisions regarding water if they have no de jure or de factorights over the resource. Property rights, which can beownership of the actual irrigation facilities and/or water rights,form the basis for relationships among irrigators, whichbecome the social basis for collective action by irrigators inperforming various irrigation tasks.

Water user groups also tend to be stronger if they buildupon existing social capital or patterns of cooperation. Groupsare likely to be stronger if they are homogeneous in backgroundand assets (though heterogeneity can be managed). Usergroups must have a demonstrable effect in improving watercontrol and farm profitability to ensure that the benefits tofarmers outweigh the costs of participation. Particularly crucialto success is a supportive policy and legal environment thatincludes establishment and adjudication of secure water rights,the monitoring and regulating of externalities and third-partyeffects of irrigation, and the provision of technical andorganizational training and support.

Water-Use Rights, Pricing and Markets

Irrigation water in nearly all of Asia has been subsidizedand in many cases provided free. Farmers therefore have little


incentive to economize on its use. Two major environmentalproblems in intensified areas—land degradation due to salinitybuildup and waterlogging and the buildup of increasinglyresistant pests due to excessive reliance on monoculture rice—are directly related to the virtually free provision of water tofarmers. Increasing water-use efficiency through opportunity-cost pricing or market valuation of water would havesubstantial environmental benefits and would not adverselyaffect yields; yet this leverage for improving the sustainabilityof the resource base has rarely been utilized in Asia.

In principle, markets in tradable water rights may haveconsiderable efficiency and other advantages over otherallocation mechanisms. These include

• empowerment of water users by requiring theirconsent to any water reallocation and compensationfor any water transferred;

• security of water rights tenure to users, which canencourage investment in water-saving technology;

• provision of incentives for users to consider the fullopportunity cost of water when making allocationdecisions, including its value in alternative uses; and

• provision of incentives for water users to account forexternal costs imposed by their use, reducing thepressure to degrade resources.

Water markets could, therefore, play a key role in reducingenvironmental degradation by providing incentives for waterconservation.

Despite these potential benefits, constraints tobroad-based water market approaches are significant in mostof Asia. The unique physical, technological, and economiccharacteristics of water resources pose special problems forestablishing tradable water rights and developing markets forsuch rights. Because of both environmental concerns and largerpublic interests, regulatory mechanisms for large-scale wateruse would have to be carefully designed. The fundamentalimportance of water to farm production and income raises


serious equity concerns when major shifts in water allocationare considered. Multiple reuse of water creates the likelihoodof significant third-party externalities, that is, spillover effectson other people’s welfare from water trades, creating furtherdifficulties in enforcing and regulating trade in water.Moreover, surface irrigation in much of Asia consists of verylarge systems serving many small farmers. Development ofwater markets at the farm level under these conditions wouldbe difficult, because measurement of deliveries to largenumbers of end users, in order to charge by volume of wateruse, requires a combination of technology and monitoring effortthat is not cost-effective under these conditions.

Because of these complexities, establishment of marketsin tradable water rights is likely to be a longer-term solutionin much of Asia, will be more extensive for groundwaterirrigation, and for surface-water irrigation systems will beconcentrated (at least initially) around major urban areas. Butmarket-type incentives in water allocation could bestrengthened through innovative approaches that wouldcombine the benefits of water markets and user management.Although appropriate institutions would need to be designedfor specific countries and regions, the wholesaling of relativelylarge blocks of water to user groups or privately run irrigationsubunits could establish appropriate incentives for waterallocation. The user group would then be responsible forinternal allocation of the water, and could resell water thatwas saved through efficient use. The price charged for waterunder this allocation method would have to be high enoughto improve cost recovery for irrigation and to encourageconservation of water. Water prices can also include pollutionor effluent charges in order to reduce the incentive to pollute.

Groundwater Management

Sustainable development of groundwater resources alsooffers significant opportunities for many countries. The massiveexpansion of private-sector tubewell irrigation in India,


Pakistan, and Bangladesh is the most successful example ofprivate-sector irrigation development in the developing world.Private tubewells have grown most rapidly in areas wherethere are reasonably good roads, where research and extensionsystems operate, and where credit and electric or diesel energyare accessible. Private tubewells have largely developed in andaround the command areas of large surface-irrigation systems,because deep percolation losses from the surface systemsrecharge the aquifers for tubewells.

Principles for groundwater management reform aresimilar to those for surface water, including the introductionof economic incentives and user involvement in the allocationprocess. Successful approaches in the western United Statesappear surprisingly appropriate for conditions in much of Asia.The approaches have employed a variety of instruments toinfluence water demand, including pumping quotas (usuallybased on historical use), pumping charges, and transferablerights to groundwater. The governance structure in the waterbasin (shared aquifer) establishes water rights, monitoringprocesses, means for sanctioning violations, representativeassociations of water users, financing mechanisms foradministration and management, and procedures for adaptingto changing conditions. Key elements for the success of thisgovernance structure are that it is agreed upon and managedby the water users; that it is responsive to local conditions;that it operates with available information and databases,rather than requiring theoretically better but unavailableinformation; and that it adapts to the evolving environment.

Effective and sustainable management of groundwaterwill also require that policy distortions in other sectors thatimpinge on groundwater use are corrected. Subsidies to dieselfuel and electricity used for pumping and subsidized creditfor purchasing pumps and engines, which have been prevalentin parts of South Asia, can encourage the wasteful use ofgroundwater and aggravate problems with declining watertables.


BUILDING GOOD GOVERNANCE AND SOCIALCAPITAL

Asian societies are changing. With rising incomes andglobalization, there is increasing demand for more competitivepolitics and greater popular participation in government. Thereis increasing demand for more democratic forms of governanceand for greater devolution of the management of publicresources to local governments and organizations. Greaterparticipation is an important contributing factor to the qualityof life (See Figure 3, p. 41).

The demand for improved governance is also driven bysome of the failures of the past. The Asian financial crisis, forinstance, has exposed serious weaknesses in financial andcorporate oversight and pervasive corruption in high places.People not only want a greater say in public decisions, butalso more accountability in the way funds are spent. Thesechanging expectations about governance have led to anincrease in political activity, an increasing visibility fororganized civil society, and an increasing importance for NGOs.

At the same time, the nature of many public goods ischanging, as are the options for supplying them. Asbiotechnology becomes more important, for example, moreaspects of agricultural research are being privatized and thisrequires some rethinking about the role of publicly providedagricultural research. The removal of parastatals and theprivatization of agricultural marketing and service provisionhave also reconfigured the role of the public sector to one ofregulation rather than supply. In the case of education andhealth care, both directly related to the quality of life, house-hold demand for services increases rapidly with income andthe private-sector response in provision is already veryapparent in Asia’s urban areas. There is need to reconfigurethe roles of the public and private sectors and of civil societyin providing many public goods and services so as to makethem more cost-effective and efficient and to better meet thechanging needs of rural people. In the case of merit goods


such as education, basic health care, and water supply, apublic-sector role in provision will have to be maintained forbypassed regions and the rural poor, whose limited consumerwherewithal prevents a satisfactory private-sector response.

Good Governance

Good governance embraces the concepts that authorityis based on the rule of law, that its policies are transparent,that it is accountable to society, and that it is based on institu-tions and not on individuals. Institutional reform to providegood governance is a complex and long-term process thatrequires both improvement in public administration and public-sector management and movement toward more diversifieddelivery of services that is responsive to stakeholders. Public-sector management should be improved to enhance transpa-rency and accountability, improve efficiency and effectiveness,and reduce opportunities for corruption. Managementinformation systems, audit functions, and procurement systemsshould be upgraded to strengthen the capacity of governmentsto monitor expenditures; ensure control over disbursements;and reduce costs, fraud, and abuse. Pay increases and improve-ment in employment conditions for civil servants could reducethe incentives for illicit behavior. Improved procedures forrecruitment and promotion could help avoid the abuses ofpatronage, nepotism, and favoritism and help foster thecreation of an independent, meritocratic civil service.

Fundamental reform of the relationship between thepublic sector and the recipients of public-sector services is alsonecessary. A diversified approach to delivery of services thatwould involve government, the private sector, civil society, andreligious institutions can help reduce the risks of relying ononly one delivery channel.

To diversify delivery successfully, it is important also toreform the “demand side” for services. Generation of effectivedemand for public services and monitoring of public-sectorperformance is enhanced by a pluralistic society with rights


to associate and to organize interest groups that have accessto information about government services and programs.

Governments would reduce implementation problemsand enhance public support for their programs by easing accessto information and allowing affected communities theopportunity to voice their concerns. Decentralization of servicesto local or community-based institutions can be an importantcomponent of good governance, but should not be seen as apanacea: local elites may have weaker rather than strongertechnical resources at their disposal and greater opportunitiesfor corruption and lack of transparency.

NGOs can play an important role in good-governancereforms on both the supply and the demand side. Traditionally,NGO activity has concentrated on the supply side: deliveringservices or assisting the public sector in operating its programs.But NGOs are increasingly becoming involved in the demandside: helping communities articulate their concerns andpreferences, negotiating with official bodies in order to amplifythe community “voice,” and mixing technical operational skillswith information-intensive communication, advocacy, andnetworking to enhance the influence of poor people.

Effective NGOs can improve governance in several ways:

• by encouraging government ministries to adoptsuccessful approaches developed within the voluntarysector;

• by educating and sensitizing the public about theirrights and entitlements under public programs;

• by acting as a conduit to the government for publicopinion and local experience;

• by collaborating with official bodies;• by influencing local development policies of national

and international institutions; and• by helping government and donors fashion a more

effective development strategy through strengtheninginstitutions, carrying out staff training, and improvingmanagement capacity.


NGO involvement may not always be a positive forcefor good governance, however. Some NGOs and governmentshave long histories of mutual mistrust. If an NGO operatesaccording to predetermined principles coupled with presetplans of action, it could both overlook the real needs and desiresof local communities and alienate local and nationalgovernment agencies. In addition, if NGOs act in isolation,setting up their own fiefdoms, good governance can behindered rather than encouraged.

Changing Roles

In the current enthusiasm for market liberalization,privatization, and the increased participation of civil society,it has become fashionable to think that the smaller the role ofthe public sector the better; as a result budgets for many keypublic-sector services have been cut to critical levels. Centralplanning is rightly dead, but countries still need organizedand rational approaches to the provision of key public goodsand services in rural areas. The private sector has insufficientincentive to provide many rural infrastructure and socialservices (e.g., roads, irrigation, electricity, communications,clean drinking water, schools, health centers and hospitals),or to undertake much of the needed agricultural research(particularly for poorer farmers and regions), because it cannotfind ways to charge for, and hence capture, a sufficient amountof the benefits that these investments generate. Nor does theprivate sector have any incentive to regulate itself to ensureefficient and competitive markets, to ensure the safety of thepublic, or to correct environmental externality problems.

Government has a crucial role to play in providing thesekinds of public goods and services. However, the role ofgovernment in financing public goods and services needs tobe distinguished from its role in supplying them. There areincreasing opportunities in Asian countries for governmentsto contract out the provision of many public goods and servicesto private firms and NGOs. This can often lead to greater


efficiencies, cost savings, and improved accountability to end-users.

The innovative institutional and policy reforms requiredfor water management that were described in the previoussection show the complex blending of public sector, market,and civil society that can lead to improved performance.Another example of such synergistic cooperation can be seenin the area of agricultural research. It is likely that the shareof private investment in agriculture will increase in the future,but the public role remains essential; decentralization ofresearch and dissemination of the technology generated byresearch would be highly beneficial. A number of developmentscould increase the role of the private sector in agriculturalresearch in Asia. The private sector’s ability to capture thebenefits of research results has increased, now that hybridsare being increasingly used and policy barriers to private-sectorinvolvement are being reduced. Biotechnology innovations arelikely to further the scope for private-sector involvement. Inseveral countries the private seed sector has emerged as thedominant supplier of finished varieties for a number of crops.Policies to further increase private-sector involvement requirecontinued attention; while many research activities requirethe long-term continuity of a public or semipublic institution,the potential for contracting for research should be exploredmore vigorously.

Private-sector research, however, has generally shownlittle interest in solving the critical issues involved in increasingbasic yield potentials in wheat or rice varieties adapted to Asianagroclimatic zones or in developing hybridization proceduresfor additional crops. Moreover, there are some “orphan”commodities, mostly tropical crops, fruits and vegetables,where the private sector makes no investments. Contractingentire long-term research agendas to the private sector istherefore probably impossible, and a significant and sustainedpublic role in funding agricultural research will be necessary.

The growing complexity and agroclimatic specificity ofagricultural technology suggests also that the division ofresponsibilities and working relationships among international,


national, and subnational research centers needs to bereexamined with a view to increased efficiency. Decentral-ization of research regionally and to the farm level, based onagroecological characterization, may be the most effectiveapproach, because it provides better farmer input and feedbackto upstream researchers and policymakers. Improvement inlinkages between public agricultural research and smallresearch firms and informal farmer research could have highpayoffs. Farm-based research often specializes in choosingvarieties that are specific to microenvironments and can behighly complementary with formal research systems.

Similar opportunities exist to out-source, privatize anddecentralize parts of the supply of many other public goodsand services, including agricultural extension, foodgrain andfertilizer distribution, education, and health. In all cases,governments need to proceed with a clear understanding ofthe comparative advantages and strengths of the differentactors to be involved and with agreement on methods forfinancing their implementation, monitoring their performance,and ensuring their accountability.

Rural social services deserve specific mention becauseof their importance as quality-of-life indicators. There is afundamental “urban bias” in the provision of these goods byboth the public and private sectors. The per capita cost of pro-vision is much lower among concentrated urban populations.With traditional public-sector-dominated provision, the ruralareas have suffered through the inadequacy of accessibility,quality, financing, and management of social services. But whileprivate provision of education and health care has often grownexplosively in urban areas because of the rapid growth ofhousehold income and demand, this has not occurred in ruralareas, where incomes are lower and delivery costs are higher.The result is that the natural substitution of private- and public-sector roles that is evident in urban areas has yet to emerge asstrongly in the countryside. Governments therefore shouldconsider the extent and likelihood of persistence of urban biaswhen decisions are made about the allocation of scarce publicresources between urban and rural areas.


The role of government is changing. While it was seenin the 1960s as the main provider for society’s needs, changingconditions, both domestically and internationally, have revealedits limitations and there is better understanding of whatgovernments can and cannot do effectively. Governmentfinancing capacity is increasingly constrained. The privatesector, local governments, communities, and NGOs haveemerged as important partners in rural development. Thechallenge for Asian governments during the next century willbe to manage their own transition from direct providers ofgoods and services to facilitators and regulators of private andcivil-society activity. This will require responsible, flexibleinstitutions and governance structures that encourage growthand at the same time ensure that private actors perform withpublic and social interest in mind.

IV ALTERNATIVE FUTURESFOR ASIA

While the agriculture sector has declined relative to othersectors of the economy as the economic transformation in muchof Asia has taken place, it continues to grow—and mustcontinue to do so if countries are to meet their food needs intothe 21st century. Agricultural growth also underpins much ofthe growth and employment in the rural nonfarm sector. Ifagricultural growth were to slow down, this could jeopardizenational food security and increase child malnutrition in manycountries, cause significant new unemployment and poverty(particularly in agriculture and the rural nonfarm economy),and slow nonagricultural growth.

ALTERNATIVE SCENARIOS TO 2010: NO ROOMFOR COMPLACENCY

Some of the future consequences of neglect of agriculturecan be demonstrated with simulated results from the IMPACT(International Model for Policy Analysis of AgriculturalCommodities and Trade) model of the global food sectorcreated by the International Food Policy Research Institute.The model was used to compare projections to year 2010 if a)governments become more complacent than they are todayabout agriculture, cut back further on their rural andagricultural investments, and don’t make needed policyreforms (a “low-investment, weak-reform” agenda), or if b)governments give greater importance to agriculture and ruralareas, invest more, and accelerate the needed policy reforms


(a “high-investment, strong-reform” agenda). Results arecompared to a baseline scenario that assumes that there willbe no significant policy changes from the present: a “business-as-usual” agenda.

To contrast the two scenarios, model simulations werespecified involving symmetric and contrasting changes in keymodel parameters from the baseline. These relate toassumptions about the growth rate for nonagricultural GDP(plus or minus 25 percent); public investment in agriculturalresearch and in health, education, and sanitation (plus or minus10 percent); population growth (high versus low UnitedNations estimates); rates of soil erosion (plus or minus 0.05percent); growth in irrigated area (zero or plus 5 percent by2010); and agricultural water use (plus or minus 10 percentby 2010). It is important to note that these changes from thebaseline are really quite modest and represent relatively smallchanges in the amounts of public investment in agricultureand the rural sector. These parameter changes are summarizedin Table 3.

Because Asia plays a major role in world food markets,neglect of the agricultural sector leads to significant increasesin the world and Asian prices of basic foods (by 20–30 percentfor cereals, 30–60 percent for roots and tubers, and 5–8 percent

Table 3. Alternative Policy Scenarios

Change, 1999–2010, Low Investment High Investmentvis-à-vis baseline Weak Reform Strong ReformNon-ag GDP growth –25% +25%Public investment inagricultural research –10% +10%Public investment in health,education, sanitation –10% +10%Population growth scenario UN ‘high’ UN ‘low’Rate of soil degradation-yieldeffect –0.05% +0.05%Irrigated area No growth + 5%Agricultural water use –10% +10%

Alternative Futures for Asia 81

for livestock products). This in turn leads to a decline of 3percent in the per capita availability of food in Asia comparedto the baseline results (Table 4). On the other hand, the moreoptimistic scenario leads to significant world and Asian pricedeclines (16–27 percent for cereals, 25–40 percent for rootsand tubers, and 4–7 percent for livestock products) and a 4-percent increase in the per capita availability of food.

The difference between the pessimistic and optimisticscenarios is best exemplified by the predicted number ofmalnourished children in 2010. This number is a good indicatorof many other measures of poverty and deprivation. It is alsoa good lead indicator of future poverty because childhoodmalnutrition impairs mental and physical capacities for life.Under the baseline assumptions, there will be 113 millionmalnourished children in developing Asia by 2010, down from140 million in 1993 (Figure 4). The number declines to 76 millionunder the more optimistic scenario, but increases to 141 millionunder the more pessimistic scenario—a difference of 65 millionmalnourished children. The differences are particularlyimportant for India and the rest of South Asia, wherecomplacency would leave large numbers of childrenmalnourished.

The key point from these results is that it does not takemuch backsliding by governments to lead to unacceptableoutcomes within a decade. There is no room for present or

Table 4. Per Capita Food Availability Under Different PolicyScenarios (Kilocalories per day)

20101993 Low High

Baseline Investment/ Investment/Weak Reform Strong Reform

Developing Asia 2,488 2,734 2,646 2,842PRC 2,680 3,008 2,913 3,096South Asia 2,370 2,599 2,510 2,719India 2,397 2,644 2,559 2,764Southeast Asia 2,525 2,707 2,626 2,838


Figure 4 Alternative Scenarios: Number of MalnourishedChildren

0–5 years of age, millions

future complacency. Even a business-as-usual approach will stillleave an intolerable number of malnourished children in 2010.On the other hand, it only takes a relatively modest increase ingovernment commitment to agriculture and rural developmentto lead to a much more favorable situation by 2010.

Note: a Low Investment/weak Reform; b High investment/Strong Reform

Alternative Futures for Asia 83

A VISION FOR COMPLETING THE RURALTRANSFORMATION

All the above scenarios leave very large numbers of peoplein poverty and between 76 and 141 million malnourishedchildren in 2010. The levels of projected deprivation areparticularly onerous in South Asia. If just a modest increasein government commitment to rural investment and policyreform could save tens of millions of children from malnutritionin the years ahead, then what would it take to eradicatepoverty and child malnutrition entirely by the year 2020?

IFPRI’s IMPACT model was used to obtain anapproximate answer to this question. The results show thatthere are development pathways that could eradicate virtuallyall child malnutrition in Asia by 2020, with only 45 millionmalnourished children remaining by 2010 and 8 million by2020 (Figure 5). However, to achieve these reductions, mostAsian economies would have to grow at rates close to the peaksexperienced by Asia’s most dynamic economies in recentdecades (8–10 percent per annum), and projected agriculturaloutput would have to increase by 75 percent in South Asiaand by 50 percent in East and Southeast Asia. Among otherthings, this would require that cereal yields grow at 1.45percent per year in East Asia, at 1.90 percent per year inSoutheast Asia, and at 2.44 percent per year in South Asia.Even if world markets could accommodate this level ofeconomic expansion in Asia, it would also require that Asiangovernments undertake significant new investments inagriculture and rural areas and a 50-percent increase in socialspending.

This analysis suggests that child malnutrition couldreasonably be eradicated in the PRC and Southeast Asiawithin the next two decades, but for South Asia, more realisticstrategies will need to take a much longer view. This has theadded advantage that it would permit population policies anddemographic trends to play a more effective role, as it wassuggested they would in Chapter III’s description of the

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On the threshold of the 21st century, Asia stands, if notat a crossroads, then at a point of decision. Unprecedentedrates of rural and national economic growth have transformedmany parts of rural Asia, but not all developing Asia sharedin this transformation.

In the face of this challenge, the completion of the ruraltransformation of Asia will take renewed efforts on the partof governments. Successful economies must not turn awayfrom their market orientation, but rather support the private-sector role where that is possible and supplement it where it isnot. Meeting the challenge must also involve a renewal ofgovernance itself: transparency, responsiveness, anderadication of corruption are all keys to sustained growth inthe next century.

Governments will also have to increase the level ofproductive investment made in rural infrastructure,agricultural research and extension, education, and health,as well as expand the reach of social safety-net programs. Asignificant part of these costs could be met in some countriesby reducing wasteful public expenditure in rural areas,particularly on subsidies for credit, fertilizers, pesticides,electricity, and irrigation water. These subsidies may haveplayed an important role in launching the green revolution,but today they are rarely needed and can be counterproductive,because they create incentives for the overuse of water andfarm chemicals, leading to environmental degradation. Thereis also considerable scope for “getting more with less” byimproving the efficiency of many of the public institutions thatimplement public investments. This again requires changes in

V CONCLUSIONS ANDRECOMMENDATIONS


governance structures, with increased transparency andaccountability to key stakeholders and greater roles for theprivate sector, user groups, and NGOs where they can betterprovide the required services. There is also scope for raisingmore revenues from rural people through user fees and localtaxation and for cofinancing through lotteries and the sale ofsavings bonds. These kinds of changes might provide much ofthe financing needed for rural areas in the future, but theywill take time to implement. If poverty and malnutrition areto be meaningfully reduced within the next generation,additional allocation of central government funds will almostcertainly be required, at least in the immediate future.

Rural development strategies must aim at achievingmultiple objectives. While the primary concern is povertyreduction and improving the quality of life of the ruralpopulation, the strategies that will lead to these outcomes(“win-win-win strategies”) must be broad-based and far-reaching. Some of the main elements of the strategies,recommended by the study, include the following:

• Maintaining sufficient levels of public investments inagricultural research, rural infrastructure, education,and health so as not to jeopardize the future.

• Reducing or eliminating wasteful public expenditureon subsidies that are either biased against rural areasgenerally or tend to help mainly better-off ruralresidents.

• Adopting rationalized agricultural pricing policies thataim at providing stability to reduce risk but that donot discriminate against rural producers for the benefitof urban consumers.

• Undertaking major institutional reforms, includingimprovements in management and administration ofpublic institutions, increased transparency and ac-countability of public-sector activities, movementtoward more diversified delivery of services, and theprudential regulation of financial institutions andcorporations.

Conclusions and Recommendations 87

• Creating effective safety nets to protect vulnerablepeople during crisis times and to prepare for thelonger-term effects of the changing age structure.

• Adopting taxation and interest-rate policies that areconducive to long-term investments but discouragethe kinds of short-term capital flows that aggravatedthe effects of the 1997 financial and economic crisis.

• Investing more in agricultural research, especially bio-technology, since most present activity in this field isconducted by multinational companies and neglectsAsia’s crops and problems.

• Managing natural resources holistically, e.g., watermanagement at the river basin level, user-managedirrigation, and establishment of water-use rights, pricing,and markets, to anticipate and cope with impendingproblems of scarcity.

• Facilitating effective roles for NGOs and civil societyin carrying out good-governance reforms, on both thesupply and demand sides.

While the specter of famine that threatened Asia in the1960s has not returned in the 1990s, widespread poverty andmalnutrition still coexist with great wealth. Completion of therural transformation, radical reduction in poverty, andimprovement in food security in Asia hang in the balance.They are attainable, if complacency is resisted.

APPENDIX 1RURAL ASIA STUDY:BACKGROUND

The Study was designed as a team effort utilizing ADBstaff and international experts. The Study was implementedunder the guidance of an ADB interdepartmental steeringcommittee comprising several heads of departments, withoverall responsibility lying with the Agriculture and SocialSectors Departments (East and West regions).

To address the diverse issues satisfactorily and in acomprehensive manner, five thematic subject areas wereidentified to provide the analytical and empirical backgroundon which the Study’s recommendations would be based.Working groups comprising ADB staff were set up to broadlydefine the scope and coverage of each of the themes. The fiveworking groups acted as counterparts to the internationalexperts recruited to prepare the background reports, providingguidance to the experts and reviewing their output. Thebackground reports prepared under the Study and the expertsresponsible are as follows:

Transforming the Rural Asian Economy:The Unfinished Revolution

Mark W. RosegrantPeter B. R. HazellInternational Food Policy Research Institute

The Growth and Sustainability of Agriculture in AsiaMingsarn Santikarn Kaosa-ardBenjavan RerkasemChiangmai University


With contributions byShelley GrastySunil S. PednekarPaul AugerThailand Development Research Institute FoundationApichart Kaosa-ardKanok RerkasemChiangmai University

Rural Financial Markets in Asia: Paradigms, Policies,and Performance

Richard MeyerGeetha NagarajanOhio State University

The Quality of Life in Rural AsiaDavid BloomPatricia CraigPia MalaneyHarvard Institute for International Development

The Evolving Roles of the State, Private, and LocalActors in Rural Asia

Ammar Siamwalla, Thailand Development ResearchInstitute

With contributions byAlex Brilliantes, University of the PhilippinesSomsak Chunharas, Health Systems Research Institute,

ThailandColin MacAndrews, Associates in Rural Development,

USAAndrew MacIntyre, University of California, San DiegoFrederick C. Roche, Asian Development Bank

A panel of external advisers was constituted to reviewand comment on the approach and methodology of the studyand the terms of reference for each of background reports.

The external advisers also reviewed the drafts of the back-ground reports. The external advisers to the Study were

A. Z. M. Obaidullah KhanBangladesh Centre for Advanced Studies

Klaus LampeFormer Director General, International Rice Research

Institute

Justin Yifu LinChina Center for Economic Research, Peking University

Meryl WilliamsInternational Center for Living Aquatic Resource

Management

In addition, external reviewers were appointed,including prominent members of academe and senior policy-makers, to review each of the background reports and toprovide expert guidance. The external reviewers were

Report 1: Walter Falcon, Stanford UniversitySaeed Ahmed Qureshi, former Secretary of Finance,

Government of Pakistan

Report 2: M. S. Swaminathan, former Director General,International Rice Research Institute

Yujiro Hayami, Aoyama-Gakuin University, JapanRattan Lal, Ohio State University

Report 3: J. D. Von Pischke, formerly with the World BankNimal Sanderatne, National Development Bank,

Sri Lanka

Report 4: Frances Stewart, University of Oxford.

Appendix 1: Rural Asia Study: Background 91


Report 5: Ha-Joon Chang, University of CambridgeYoginder Alagh, Member of Parliament, India

The preparation of the background reports included fourworkshops held at ADB’s headquarters in Manila. Aninception workshop in May 1998 initiated the work on thebackground reports. The international experts and the workinggroups presented the outline of each background report. Thesewere commented on by the external advisers and discussedby members of the interdepartmental steering committee andother ADB staff before being finalized.

The first drafts of the theme papers and commentsreceived from the external reviewers were discussed at amidterm workshop in November 1998. At the workshop theworking groups discussed in detail with the experts all thecomments received and made suggestions for improvementsto the papers, in terms of analytical content, connecting themes,policy recommendations, etc. In addition, a detailed timetablewas prepared for the completion of the papers.

An interim workshop was held in January 1999 todiscuss the revised drafts of the reports and to ensure that allcomments received had been adequately reflected in therevisions. The workshop also initiated discussion on the struc-ture and content of an overview report that would bringtogether the major findings, policy recommendations, andlessons learned from each of the background reports. The mainmessages from the background reports would be synthesizedinto a set of policy recommendations and strategic prioritiesand challenges facing ADB’s developing member countries.

At a final workshop in March 1999, the backgroundreports were presented by the international experts to a largegroup of participants comprising senior policymakers fromADB’s developing member countries, international organi-zations, international and locally based nongovernment or-ganizations, donor agencies, and members of academe, alongwith ADB staff. The five background reports were edited byJohn Maclean and Sara C. Medina and submitted to OxfordUniversity Press for publication.

Following the workshop, the experts, the working groups,and the heads of the Agriculture and Social Sectors departmentsintensively discussed the major issues and policy recommen-dations that would be included in the overview report andagreed upon an outline and structure for the paper. Based onthis discussion and outline, Peter P. R. Hazell and Mark W.Rosegrant prepared the first draft of the overview report,which was reviewed by ADB staff.

The draft overview report was presented at a seminarat the Bank’s 32nd Annual Meeting. The seminar providedan opportunity for rural development experts to discuss andexchange ideas on appropriate rural development strategiesand policy options for ADB’s developing member countries.Based on the comments received and the discussion duringthe seminar, the overview report was revised. Various revisionswere suggested by members of the working groups to ensurethat each of the themes’ main messages has been adequatelyreflected in the overview.

Finally, the overview report was reviewed by ADB staffand revised by Shahid N. Zahid, project officer for the Study,to reflect all the views and comments received. The report wasedited by Sara C. Medina and readied for publication.

RURAL ASIA STUDY: ASSOCIATED BANK STAFF

Rural Asia Secretariat

Core GroupYang Weimin, (Co-Chair), Director, Agriculture and Social

Sectors Department, EastAkira Seki, (Co-Chair), Director, Agriculture and Social Sectors

Department, West(Note: replaced Eustace Nonis, Former Director, Agriculture

and Social Sectors Department, West)Hans-Juergen Springer, Deputy Director, Agriculture and

Social Sectors Department, EastM. E. Tusneem, Deputy Director, Agriculture and Social

Sectors Department, West



Bradford Philips, (Project Manager), Manager, Agriculture &Rural Development Division, East

Shahid N. Zahid, (Project Officer), Senior Sector Specialist,Agriculture and Social Sectors Department, East

Arjun Thapan, Senior Project Specialist, Agriculture and SocialSectors Department, West

Frederick Roche, Senior Project Economist, Forestry andNatural Resources Division, East

William Ferguson, Senior Executive Officer, Agriculture andSocial Sectors Department, West

StaffCristina M. Gamboa, Senior Operations AnalystElizabeth S. Tan, EconomistLaura S. Britt, EconomistLilibeth C. Perez, Administrative Assistant

Interdepartmental Steering CommitteeYang Weimin, (Co-Chair), Director, Agriculture and Social

Sectors Department, EastAkira Seki, (Co-Chair), Director, Agriculture and Social Sectors

Department, WestShoji Nishimoto, Director, Programs Department, EastGeert Van der Linden, Director, Programs Department, WestVladimir Bohun, Director, Infrastructure, Energy and Financial

Sectors Department, EastChristine Wallich, Director, Infrastructure, Energy and

Financial Sectors Department, WestA. Timothy Peterson, Director, Operations Evaluation OfficeBasudev Dahal, Director, Office of Pacific OperationsKazi F. Jalal, Chief, Office of Environment and Social DevelopmentYoshihiro Iwasaki, Chief, Strategy and Policy OfficeJungsoo Lee, Chief Economist, Economics and Development

Resource Center

Working GroupsTheme Paper 1Shahid N. Zahid, (Chair), Senior Sector Specialist, Agriculture

and Social Sectors Department, East

(Note: replaced Sultan Hafeez Rahman, Senior Economist,Programs Department, East)

David Edwards, Assistant Chief Economist, Project EconomicEvaluation Division

Richard W.A. Vokes, Senior Programs Officer, ProgramsDepartment, West

Carl Amerling, Senior Project Economist, Agriculture & RuralDevelopment Division, East

Xianbin Yao, Senior Programs Officer, Programs Department,East

Hua Du, Economist, Programs Department, WestMandar Jayawant, Economist, Agriculture & Rural Develop-

ment Division, East

Theme Paper 2Dimyati Nangju, (Chair), Lead Agronomist, Agriculture and

Social Sectors Department, WestNjoman Bestari, Agricultural Economist, Forestry and Natural

Resources Division, EastSiew Tuan Chew, Senior Project Specialist, Agriculture & Rural

Development, Division, EastRobert J. Dobias, Senior Environment Specialist, Office of

Environment and Social DevelopmentHenry Tucker, Project Specialist (Forestry), Forestry and Natural

Resources Division, West

Theme Paper 3Nimal Fernando, (Chair), Senior Project Economist (Microfinance),

Agriculture & Rural Development Division, WestTakashi Matsuo, Project Economist, Agriculture & Rural

Development Division, WestRaymond Renfro, Senior Project Economist, Agriculture &

Rural Development Division, West

Theme Paper 4Indu Bhushan, (Chair), Project Economist, Education, Health

and Population Division, West(Note: replaced Arjun Thapan, Senior Project Specialist,

Agriculture and Social Sectors Department, West)



Bruce Carrad, Senior Programs Officer, Programs Department,West

Benjamin Loevinsohn, Senior Health Specialist, Education,Health and Population Division, West

Manoshi Mitra, Social Development Specialist, SocialDevelopment Division

Etienne Van de Walle, Senior Economist, Project EconomicEvaluation Division

Theme Paper 5Frederick Roche, (Chair), Senior Project Economist, Forestry

and Natural Resources Division, EastPratima Dayal, Project Economist, Agriculture & Rural

Development Division, WestNaved Hamid, Senior Strategy and Policy Officer, Strategy

and Policy OfficeArthur McIntosh, Senior Project Engineer (Water Supply),

Water Supply, Urban Development & Housing Division,West

Patricia Moser, Senior Advisor, Office of the Vice President(East)

Robert Siy, Senior Economist/Programs Officer, Office ofPacific Operations

APPENDIX 2TRANSFORMING THE RURALASIAN ECONOMY: THEUNFINISHED REVOLUTION—SUMMARYMark W. Rosegrant and PeterB. R. Hazell

Much of Asia faced a desperate situation in the 1960s.Agriculture was the major source of income and employmentfor most of the population, but its productivity was low andstagnant. At the same time, populations were growing rapidly,leading to accelerating demands for food and a rapidlyincreasing number of rural workers to employ. Many countriesfaced critical and increasing food security problems and thedoubly difficult challenge of trying to absorb an increasinglabor force while simultaneously increasing labor productivity.The food crisis in India during the mid-1960s was indicativeof a worrying situation that existed more broadly across Asia,and of the increasing dependence of many Asian countrieson food aid for their survival.

Since then, a quiet revolution has transformed much ofrural Asia, driven by public policies and strategies that hadclear impacts on agricultural and economic growth, poverty,and the environment. An economic transformation started inthe countryside, but spread to the non-farm rural economy,then the general economy, fueled by a process of agriculturaldiversification and commercialization driven by newtechnologies that dramatically improved agricultural output.Instead of plunging into a Malthusian spiral of rapid population


growth and famine, the Asian rural and general economyunderwent a dramatic transformation over the past 30 years,achieving a speed and level of agricultural, rural, and overalleconomic development in most Asian countries that farexceeded expectations. In South Asia, famine was averted andmore, as cereal production rose by 93 percent between 1970and 1995, while using only 4 percent more land, boosting percapita food supply from 2,105 to 2,361 calories per day. Gainsin East and Southeast Asia were even more impressive: there,cereal production increased by 118 percent between 1970 and1995 while using only 4 percent more land, pushing per capitacalorie supply up from 2,004 to 2,675 calories per day. Indeveloping Asia, annual incomes per person nearly tripled,from $177 to $512 between 1970 and 1995: rising in the People’sRepublic of China (PRC) from $91 to $473, in Indonesia from$207 to $706, and in India from $241 to $439 (all figures in1987 real dollars). These strong upward trends in both incomesand agricultural production have contributed to rapidreduction in poverty despite increasing population pressure:in 1975, six out of ten Asians lived in poverty, but by 1993,only two out of ten East Asians and four out of ten SouthAsians did.

Despite these remarkable successes, Asia continues toface major challenges. A devastating financial and economiccrisis struck East and Southeast Asia in 1997, raising doubtsthroughout Asia about the sustainability of rapid growth. Atthe same time, the public sector’s role in growth has comeunder fire, as budgets get cut back, governance issues are aired,and the latitude for country-level policy making seems to havebeen narrowed by the globalization of the world economy. Inaddition, some negative environmental effects of past growthhave emerged that threaten to at least slow the pace of furthergrowth. Potential solutions, such as the revolution inbiotechnology, are feared to carry their own threat to theenvironment.

The financial and economic crisis in East and SoutheastAsia cast doubt over continued rapid growth throughout theregion. Against this background, the challenges to future

growth loom large, as obstacles limit the expansion of bothwater and land available for agriculture, as well as yields intraditionally resource-rich as well as resource-poor areas. Still,lessons learned in the process of the rural transformation thusfar point the way toward a future where economic growthand inroads against poverty continue, even as threats to theenvironment are lessened. Yet such a successful future hingescritically on policy choices: they exist alongside alternative,bleaker futures for agriculture and the rural economy in Asiaif nothing, or not enough, is done.

AGRICULTURAL GROWTH AND THE ECONOMICTRANSFORMATION

While stable macroeconomic policies, a pro-marketorientation, export-oriented trade policies, and significantpublic investments in education and infrastructure have beenfundamental to economic growth in Asia, the fact is thatbroader economic growth has been built on a foundation ofsuccesses in agriculture. Aside from the city-states of Singaporeand Hong Kong, China, the economies that grew earliest andfastest were precisely the ones where the earliest stages ofeconomic growth were fueled by a takeoff in agriculturalproduction. Rapid agricultural growth proved a formidableengine for beneficial effects that permeated the rest of theeconomy through several paths to spark growth in the ruralnonfarm and urban sectors.

Since green revolution technologies boosted productionusing less labor without requiring a lot of capital, agriculturallabor could more easily flow to areas of promise in other sectors,food prices fell, and the economy had less need to import foodand could even export it, freeing up foreign exchange for otheruses. Higher incomes from agriculture caused domestic marketsto expand. Growth in the nonfarm economy came to outpacethat in agriculture as rural areas began to diversify and inmany countries the manufacturing sector grew rapidly as well.

Appendix 2: Transforming the Rural Asian Economy 99


In fact, rapid agricultural and economic growth has beenthe key to dramatic reductions in both total poverty and ruralpoverty in most of Asia over the past three decades. Sincepoverty is largely a rural phenomenon and since many of thepoor depend, directly or indirectly, on the farm sector for theirincomes, growth that raises agricultural productivity and thereturn to farm labor is particularly important in reducingpoverty. Countries with the most rapid agricultural growth,the PRC and Indonesia, have had the most rapid reduction intotal poverty, while the countries with slower agriculturalgrowth, such as India, have had slower reductions in poverty.Agricultural growth also drives rural poverty reduction: withinIndia, differences in the growth rate of average agriculturaloutput per hectare were important in explaining cross-statedifferences in rural poverty reduction between 1958 and 1994.The initial endowments of physical infrastructure and humanresources, which reflect public spending priorities, have alsoplayed a major role in explaining the trends in rural povertyreduction. Higher initial irrigation intensity, higher literacy,and lower initial infant mortality all contributed to povertyreduction in rural areas, but raising the incomes of the poorand thus lifting people above the poverty line requires broad-based economic growth. The countries that have been mostsuccessful in attacking poverty have achieved rapidagricultural growth and broader economic growth that makesefficient use of labor and have invested in the human capitalof the poor.

Yet not all countries underwent the transformation—growth in agriculture spurring on yet more rapid, broad-basedgrowth economy-wide, with dramatic reductions in poverty—equally successfully or equally quickly. Countries less successfulin adopting a broad-based green revolution, whether becauseof constraints to adoption of the technologies themselves or tothe avenues for growth that followed adoption, developed lateror more slowly, leading to the broad disparities among andwithin Asian economies.

AGRICULTURAL DIVERSIFICATION ANDCOMMERCIALIZATION

The rural transformation—and the initial impetus forbroad-based economic growth—began for most Asian countriesin the mid-1960s with the emergence and spread of the greenrevolution: crop technologies accompanied by large investmentsin irrigation. Rice and wheat yields increased dramatically,leading to rapid growth in productivity in agriculture and infood supplies, increases in rural employment, rising per capitaincomes, commercialization of agriculture, reductions in ruralpoverty and malnutrition, and a sharp decline in dependenceon food aid. The technological revolution in agriculture hasinduced a shift from subsistence farming to commercial, profit-oriented farming. This shift has been reinforced in manycountries by rapid national economic growth, trade liberal-ization, and urbanization. The share in production generatedby specialized enterprises for crop, livestock, poultry, andaquaculture products has increased rapidly in many countries.Rapid technological change, improved rural infrastructure,and diversification in food patterns support a more diversifiedmarket production, leading to specialization at the farm orunit of production level.

Concerns have arisen over possibly adverse consequencesof agricultural commercialization and diversification on thewelfare of the poor, but the process has usually been beneficialto the poor; appropriate government policies, moreover, canalleviate many of the possible adverse transitional conse-quences. Further advances in crop productivity and manage-ment, for example, brought to the farmer via extension, wouldallow farmers to make better use of the natural resources theyhave access to, without contributing unnecessarily toenvironmental degradation. Policies that secure farmers’ rightsto natural resources such as land and water would likewisetranslate into incentives for more productive invstment thatalso conserves those very resources. Adding further to farmers’flexibility in the face of economic shifts would be investmentsin education, health, and sanitation.



THE RURAL NONFARM TRANSFORMATION

As agricultural production grew and commercializationproceeded, rural nonfarm activities prospered and diversified,with particularly strong growth in agricultural processing andrural trade and services. With incomes on the rise throughoutrural areas, consumer demand for nonfarm goods and servicesalso went up, stimulating growth in those rural economicactivities that are not agricultural. Today, the rural nonfarmeconomy, which accounts for 20–50 percent of total ruralemployment, has become increasingly important, with ruralnonfarm income a growing source of income for rural andfarm households as development proceeds. The benefits ofgrowth have spread from the rural nonfarm economy to theurban economy, contributing to its growth and transformationin turn.

Without village access to rural towns and marketplaces,effective demand linkages within rural regions cannot beestablished nor the benefits of nonfarm economic growthspread. Other essential ingredients are effective localgovernment, legal and financial institutions, and investmentsin general education to help rural people diversify successfullyinto nonfarm activity.

SOURCES OF AGRICULTURAL GROWTH

The rural transformation was fueled by the technologicalrevolution in Asian agriculture and has been based on rapidgrowth in both input use and productivity. The greenrevolution substantially increased agricultural outputbeginning in the late 1960s. Growth rates in input use aredeclining, however, as many regions in Asia are reaching highlevels of input use, and growth in total factor productivity (ameasure of increases in output not accounted for by increasesin inputs) has also recently slowed in much of the region.

One of the biggest factors behind declining productivitygrowth has been the relative neglect of public investment inagricultural research during the 1980s and continuing intothe 1990s. With the burden on productivity-driven growth forthe future, this trend is more than worrisome. Private researchalso yields substantial public benefits, and private investmentin agriculture is likely to increase in importance, if policyreforms continue to improve the incentives for privateinvestments by eliminating price distortions and strengtheningproperty rights. Market failures and social objectives willcontinue to call for an important role for public investment inagriculture, however. In particular, a sustained public role infunding agricultural research will be essential.

THE EVOLUTION OF CEREAL AND LIVESTOCKSUPPLY AND DEMAND

Dramatic shifts in food-demand patterns in Asia haveaccompanied the commercialization of agriculture. Risingincomes and rapid urbanization are changing the compositionof demand. Direct per capita food consumption of maize andcoarse grains are declining as consumers shift to wheat andrice with increasing incomes, and again from rice to wheat aslifestyles change with urbanization and further incomegrowth. Offsetting this trend somewhat, particularly for maize,is growth in demand for cereals as animal feed, as these samechanged lifestyles and higher incomes have driven stronggrowth in per capita and total meat consumption, especiallypoultry and pork.

Cereal production growth in developing Asia has slowedsince the early 1980s due to declining world cereal prices andto factors related to the increasing intensification of cerealproduction. Declining cereal prices have caused a direct shiftof land out of cereals and into more profitable croppingalternatives, and have slowed the growth in input use, andtherefore yields. Probably more important in the long run,



declining world prices have also caused a slowdown ininvestment in crop research and irrigation infrastructure, withconsequent effects on yield growth. Environmental andresource constraints have also contributed significantly to theslowdown in yield growth. The use of high levels of inputsand the achievement of relatively high cereal yields(particularly for rice and wheat) in parts of Asia have made itmore difficult to sustain the same rate of yield gains, as farmeryields in these regions approach the economic optimum yieldlevels. At the same time, increased intensity of land use hasled to increasing input requirements in order to sustain currentyield gains. Moreover, environmental degradation accompany-ing crop intensification does raise some concerns for ability tomeet even a decelerating demand growth.

Rapid growth in demand for livestock will put greatpressure on livestock production systems in Asia. For thelivestock sector in Asia to continue its growth, some majorchanges in the way livestock is produced—by whom, on whatscale, with what technology, and with what quality guaranteesfor the broader market—will need to take place. The lowproductivity of traditional smallholder animal husbandry willno longer suffice. Still, this path does hold greater risk for theenvironment; policies to help overcome these challenges musttake that threat into account.

IMPACTS OF TRADE, MACROECONOMIC, ANDPRICE POLICY ON AGRICULTURE

Beginning in the 1980s, the significant productionincreases achieved through the green revolution, plus achanging global trade environment, enabled many countriesto adopt a broader definition of food security and to graduallyreform both price policies and trade and macroeconomicpolicies, moving toward trade liberalization. This long-termpolicy evolution was temporarily interrupted in the early 1990swhen the competitive position of agriculture and other tradable

sectors began to erode due to the dramatic appreciation inreal exchange rates in East and Southeast Asia (and asignificant but smaller appreciation in South Asia) as a resultof macroeconomic policies and the massive influx of short-term foreign capital.

However, the sharp depreciation of currencies in severalcountries in East and Southeast Asia during the financial andeconomic crisis beginning in 1997 eliminated effective taxationof agriculture caused by real exchange rate overvaluation andshould provide a significant stimulus to agriculture in thesecountries. The continued reform of trade and macroeconomicand price policies to create a level playing field across economicsectors and across agricultural commodities and to provide astimulating environment for agricultural exports would providefurther incentives for efficient agricultural growth.

ECONOMIC REFORM IN ASIAN TRANSITIONECONOMIES

Two distinct groups of transitional economies can beidentified: first, the PRC plus the centrally planned economiesof Southeast Asia—Viet Nam, Cambodia, Myanmar, and theLao People’s Democratic Republic—and second, the CentralAsian Republics and Mongolia. The challenges facing thesecountry groups and their economic performances are quitedistinct. In the PRC and Southeast Asia, market-orientedreforms have generated rapid growth in the rural economythat has helped to stimulate broader economic growth. InCentral Asia, attempts at economic reform have beenhampered by the devastating economic depression thatfollowed the disruption of prior economic relationships withthe Soviet Union.

The agricultural sector has played a pivotal role indetermining the early pace of reform and constitutes animportant backbone for the acceleration of economic growthin transition economies. Moreover, rapid growth in the



agriculture sector helped cushion the adverse impacts of initialdislocations due to reform in the nonagricultural sectors,providing for a degree of income stability at the onset of thereform process. Because of the crucial role of agriculture inthe transition process, market-oriented reforms in the CentralAsian transition economies must be accelerated, but in a waythat enhances the capacity of agriculture to act as a buffer asother macroeconomic policy reforms affect other sectors.Required reform measures include a comprehensive land reformand restructuring of both state and collective farms, removalof state intervention, and liberalization of input and outputmarkets, as well as the rebuilding of banking and financialservices for agriculture.

For both groups, the existence or early creation of aneconomic, legal, and social enabling environment responsiveto policy reforms and conducive to openness and investmentsis essential for all types of reform measures undertaken duringthe transition process. Trade liberalization in particular canhelp jump-start aspects of the transition and has been key tothe relative success of the East Asian transition economies vis-à-vis the Central Asian economies.

THE FINANCIAL AND ECONOMIC CRISIS INEAST AND SOUTHEAST ASIA

After years of extraordinarily rapid growth, several Eastand Southeast Asian economies in 1997 entered a period ofeconomic crisis that jeopardized at least short-term economicgrowth. The crisis was caused by a deterioration infundamentals, including significant real appreciation ofcurrencies and large and growing current-account deficitsfinanced with the accumulation of foreign debt. Concern overfundamentals and a sharp drop in export performance inducedan international financial panic that led to massive withdrawalof short-term international capital and caused widespreadfinancial crisis and real or de facto bankruptcies for banks

and firms, which could not repay the very large amounts offoreign currency-denominated foreign debt. The withdrawalof international capital together with the virtual collapse ofdomestic bank capital was an enormous contractionary shockto the real economies of the crisis countries.

The financial and economic crisis has had severe negativesocial impacts in the affected countries, including decliningincomes and increasing unemployment, rising absolute poverty,increases in malnutrition, increased pressure on already under-served rural areas, and declining social services and threats toeducation and health status, in particular of children andwomen. The impact on the rural economy has been mixed,with depressed incomes and employment in some nonfarmrural activities, but improved incentives due to devaluationthat have stimulated agriculture. In the short run, the relativebuoyancy in the rural economy has served as an importantbuffer that has reduced the negative impact of the financialcrisis on the poor. The long-run effects of the crisis on agricultureremain uncertain, in particular whether the countries canconvert the ongoing agricultural export boom to long-termgrowth in production and trade. In the wake of the economiccrisis, the public sector faces crucial challenges to enhancetransparency and accountability, improve efficiency andeffectiveness, and reduce the opportunities for corruption—all governance issues that the crisis itself pointed up as factorsthat are now constraining sustained economic growth.

ENVIRONMENTAL AND RESOURCECHALLENGES TO FUTURE GROWTH

Rapid agricultural growth has had unintendedconsequences for the environment. Agricultural intensificationper se is not the root cause of lowland resource-basedegradation, but intensification combined with an inappro–priate policy environment has encouraged monoculturesystems and excessive or unbalanced input use. Trade policies,



output price policies, and input subsidies have all contributedto the unsustainable use of Asian lowlands. The dual goals offood self-sufficiency and sustainable resource managementhave often been mutually incompatible.

Environmental pressures are increasing because existingland and water resources are under threat from rapidurbanization, which will increasingly withdraw land fromagricultural production and create pressure for reallocationof water now used in agriculture. Moreover, capacity forexpansion is limited by suitable land for cropping on the onehand and high costs of developing new water supplies on theother. The productivity of the existing land base is not assured,due to land degradation from soil erosion from wind and water,chemical degradation (loss of nutrients, soil salinization, urban-industrial pollution, and acidification), and physical degrada-tion (compaction, waterlogging, and subsidence of organicsoils). Nor is productive use of water guaranteed, as some ofthe limitations from inefficient use of water are compoundedby problems of inefficient or aging irrigation systems. Waterscarcity is increasing and within the next decade or two, manyAsian countries will approach crisis levels, where there willsimply not be enough water to meet all their needs for all orpart of the year.

Reforms must be tailored to specific locations, butimportant elements include the establishment of secure waterrights of users; decentralization and privatization of watermanagement functions to private companies or user groups;and the use of incentives, including markets in tradableproperty rights, pricing reform and reduction in watersubsidies, and effluent or pollution charges.

CHALLENGES FOR LESS FAVOREDENVIRONMENTS

All Asian countries will need to continue to increase theirlabor productivity in the rural sector in the years ahead,

although the nature of the challenge will be different forcountries at different stages of economic transformation. Forthe poorer countries, where agriculture is still the dominantsource of employment and population growth is still high, thechallenge will be to create the additional jobs needed to absorbthe expected growth in the rural labor force, while at the sametime increasing labor productivity, and hence the opportunitiesto reduce poverty and raise living standards. This challengewill be particularly daunting for less favored, resource-poorareas that have not shared significantly in the benefits of rapidgrowth.

While past agricultural development strategies in Asiahave been spectacularly successful in many countries, largeareas of less favored environments have been neglected andlag behind in their economic development. These lands arecharacterized by lower agricultural potential, often becauseof poorer soils, shorter growing seasons, and lower anduncertain rainfall, but also because past neglect has left themwith limited infrastructure and poor access to markets. Despitesome out-migration to more rapidly growing areas, populationsize continues to grow in many less favored areas, and thisgrowth has not been matched by increases in yields. The resultis often worsening poverty and food insecurity problems andwidespread degradation of natural resources (e.g., mining ofsoil fertility, soil erosion, deforestation, and loss of biodiversity)as people seek to expand the cropped area. These problemsindicate that, on poverty and environmental grounds alone,more attention will have to be given to less favored lands insetting priorities for policy and public investments. Thesuccessful development of less favored lands will require newand improved approaches, particularly for agriculturalintensification.



LESSONS LEARNED – TOOLS TO FACE NEWCHALLENGES

Public policies are all-important in creating theenabling environment for market-based agriculturaldevelopment.

While the last three decades have been remarkable forthe failure of central planning and a turn toward market-oriented economic development in Asia, the experience of thepast three decades has also demonstrated the paramountimportance of government in implementing an enablingenvironment for market-based development, and in particularfor investing in the critical public goods of agricultural research,rural infrastructure, and education.

Agricultural and rural growth have been drivenfundamentally by public investment in agricultural researchand extension to generate productivity- and income-enhancingtechnologies, by public investment in expanding irrigated areaand in rural infrastructure; and by the existence (orintroduction) of secure property rights to land. These policieshave provided the main sources of productivity growth andfacilitated rapid growth in input use. The continuedprofitability of public investment in agricultural researchstrongly indicates that governments are underinvesting inresearch. While the rates of return on each public investmentor policy separately have been high, taken together the returnis even higher, given the synergies they create for broad-basedgrowth.

As agricultural growth took off, other factors wereincreasingly important to sustaining and enhancing thisgrowth, including economic liberalization, especially trade andmacroeconomic reform and deregulation of agriculture;development and liberalization of rural financial markets; andinvestment in the social sectors, particularly education, health,and nutrition. Macroeconomic stabilization and trade

liberalization have been essential components of the policy-reform process for both agricultural and general economicgrowth in Asia. Openness to global markets and internationaltrade allows the economy, according to its comparativeadvantage, to catch up technologically and to adapt the laborforce and capital stock to changing factor endowments. Tradeliberalization directly boosts trade growth and instillscompetitive, market-oriented behavior in the transitioneconomies.

Policies are needed for dealing with the unintendedconsequences of Asian rural growth.

The policies outlined above will be necessary but notsufficient to continue rapid growth in Asia in light of newchallenges, as unintended negative consequences of agri-cultural growth have grown in magnitude to pose seriousproblems. Chief among these unintended consequences areenvironmental degradation and growing regional disparitiesthat threaten to isolate resource-poor areas and prevent themfrom sharing in growth.

Two main types of environmental degradation haveoccurred in Asia. In irrigated and favorable rainfedenvironments, intensification of agricultural production,combined with sometimes flawed incentives due toinappropriate policies, has caused substantial environmentaldegradation. In resource-poor areas, continuing populationgrowth and a scarcity of good land has forced the expansionof cropped area to encroach on forested and woodlandareas and expand onto steeper slopes, with increasing soilerosion.

In order to promote economic growth and redresspoverty and environmental problems, then, Asian policy-makers will need to pursue appropriate and sustainablemethods of agricultural intensification for both high- and low-potential regions. This dual strategy will be particularlychallenging if government budgets for investment in agriculture



and rural areas continue to remain tight; striking the rightinvestment balance between irrigated and rainfed regions, andbetween high- and low-potential rainfed areas will beparticularly important. While out-migration and economicdiversification should become increasingly important in thedevelopment of areas with low agricultural potential,agricultural intensification will often offer the only viable wayof raising incomes and creating employment on the scalerequired in the near future.

Policies are needed to overcome weakness ingovernance in the public sector so economies canhandle new challenges.

Beyond unintended consequences of past growth,additional reforms in the Asian economies will be necessaryto face the new challenges of today. First, as highlighted bythe economic crisis, weakness in governance in the public sectorand beyond has become an impediment to rapid growth. Aconcerted effort to rectify the severe weaknesses in governancerevealed by the economic and financial crisis in East andSoutheast Asia is needed to get the region back on track forcontinued economic growth. Governance reforms must seekgreater transparency and accountability in public-sectoractivities while improving efficiency and effectiveness; reducingthe opportunities for corruption; and fostering the creation ofan independent, meritocratic civil service. Reform in thedelivery of services involving government, civil society, andreligious institutions in a diversified strategy would help reducethe risks of relying on only one delivery system.

Second, as underscored by recent agricultural research,new growth in crop productivity is unlikely to come exclusivelyfrom traditional breeding techniques, but via a newbiotechnology revolution, with potential threats to theenvironment that must be taken into account at the time ofthe revolution (rather than in its wake, as we are now doingwith the green revolution). As reemphasized almost daily with

rapid international flows of factors, continued economicgrowth will also depend upon countries’ ability to effectivelymanage globalization.

But how much of this growth in productivity will takeplace in Asia, and with what public-sector role whenbiotechnology research is currently dominated by the privatesector in developed countries, remain open questions and willdepend on effective public policy. It will be crucial to increasebiotechnology research aimed at the situations prevalent indeveloping countries. Facilitating some new institutionalarrangements between developed and developing countriesand in developing country research institutes would be a move,perhaps by international agricultural research centers, to fosterlocal biotechnology capacity, sharing of information acrosscountries, and collaboration with private-sector partners byremoving unnecessary barriers to the free movement of plantmaterials, clarification of biosafety regulations, and provisionof improved property rights protection for new products.

Finally, apart from this new technological revolution butcertainly in the face of it, trends in the late 1980s and early1990s of declining growth in investment are particularlyalarming. Public investment must continue to play a primaryrole in Asian agricultural research, because private companieswill not invest in essential crops, such as wheat and rice, wherethey cannot achieve adequate returns. The declining trend inpublic agricultural research should therefore be reversed, whileprivate investment in research can play a key role for othercommodities.

ALTERNATIVE FUTURES FOR ASIANAGRICULTURE AND FOOD SECURITY

Projections of long-term food security in Asia show thatper capita availability of food in Asia will increase and realworld food prices will be steady or declining slowly for themain food commodities, under a baseline scenario that projects



continuation of existing agricultural and social sector policies.However, these positive aggregate outcomes hide the massivehuman suffering that would continue under the business-as-usual baseline scenario. Despite gains from trade and the overallability of the world’s productive capacity to meet effectivedemand for food, there is projected to be only slow improve-ment in food security in Asia as measured by the number ofmalnourished children, with 113 million children sufferingfrom malnutrition in 2010, including 83 million in South Asia.

Moreover, food security is vulnerable to relatively smalldeclines in policy efforts relative to the business-as-usualscenario. Policies that moderately disfavor agriculture andnatural resources, reduce social investment, and moderatelyslow economic reform lead to much worsened food-securityimpacts compared to the baseline. Complacency towardagricultural and social investments risks severe negative foodsecurity impacts. Conversely, the results shown here indicatethat a significant assault on child malnutrition in Asia couldbe mounted within the boundaries of plausible long-termperformance of the Asian economies. Moderate but importantreductions in child malnutrition can be achieved throughrelatively small improvements in income growth, investmentin agricultural research and irrigation, improved water policy,reductions in environmental degradation, slower populationgrowth, and increases in social investments. But the near-elimination of child malnutrition will require policy reformand public investment that produce dramatic long-term gainsin income growth, agricultural productivity, and socialindicators. Although the precise set of policy reforms and thepriorities and magnitudes of increases in investments requiredto eliminate child malnutrition would need to be determinedin detail for each country, the results here indicate that thethree foundations for success are broad-based economicgrowth, growth in agricultural production, and investmentin social services including education and health. Failure inany of these three areas will severely hamper efforts toeliminate child malnutrition.

In the face of this challenge, the completion of the ruraltransformation of Asia will take renewed efforts on the partof governments. Successful countries must not turn away fromtheir market orientation but rather support the private-sectorrole where possible and supplement it where not. But it mustalso involve both continued economic liberalization to bringmarket forces to bear on economic development processes andeffective and efficient government to provide an appropriateinstitutional, legal, and policy environment for market-orienteddevelopment. Governments must both invest in and facilitateprivate-sector investment in agricultural research, education,infrastructure, and other public goods, and relinquish otheractivities best undertaken by the private sector or civil society.Indeed, government has a role to play in developing a moreeffective distribution of responsibilities among these actors.

The challenge for governments in today’s Asia, both foreconomies in transition from central planning to marketorientation and for those that have already experiencedsubstantial growth via market reform, are daunting. For, asthe recent economic downturn and globalization processeshave underlined, governments must dramatically improvegovernance in the face of increasing global economiccomplexity in order to sustain agricultural growth and ruralgains as an engine for broader development. Success willrequire a renewal of governance itself: transparency,responsiveness, and eradication of corruption are all keys tosustained growth in the next century.


APPENDIX 3THE GROWTH ANDSUSTAINABILITY OFAGRICULTURE IN ASIA—SUMMARY

Mingsarn Santikarn Kaosa-ard andBenjavan RerkasemWith contributions by Shelley Grasty,Apichart Kaosa-ard, Sunil Pednekar,Kanok Rerkasem, Paul Auger

The performance of Asian agriculture in the last twodecades has indeed proven to be a real Asian miracle. This isdemonstrated by the fact that Asia has been able to meet theincreased demand for food of more than one billion additionalpeople over that time despite earlier predictions of major foodshortages and starvation. This success was to a large extentmade possible by investments in technology and infrastructure,especially roads and irrigation, extension systems, andinstitutional reforms that revitalized market incentives. Centralto this success was a package of technology comprising high-yielding crop varieties, fertilizers, chemically oriented cropprotection, and good water control. The package wasproduced for the major food crops, namely rice, wheat, andmaize. Because of the revolutionary nature of the high-inputhigh-output technology package, its extraordinary effect onagricultural production is often referred to as the greenrevolution.


The green-revolution package was based on powerfultechnology that offered a remarkable increase in yields, whichwere many times greater than the yield of the more productivetraditional varieties. However, it has experienced second-generation problems. Some symptoms of unsustainability havealso been detected by scientists in the intensive monocroppingaspect of the system. High input use has led to increased pestresistance and health problems. The green-revolutiontechnology was designed for production in more favorableenvironments only, especially in areas with good access towater. Critiques of the green revolution have considered thehigh input nature of the package not only to be unsustainablebut also inequitable.

As the Asian population continues to grow, albeit at adecreasing rate, the already large population base of Asiameans that the total number of people to be fed in the futureis enormous. At the same time, natural resource constraintsto further increases in production are becoming morediscernable as competition for their use, both as inputs and assinks, has led not only to increased conflicts between the publicand private sectors but also to conflict within the public andprivate sectors themselves.

This volume seeks to answer two questions. First, is Asianagriculture sustainable, and if there is some indication ofunsustainability, what are the causes? Secondly, what is therole of agriculture in helping to find a way to sustainabledevelopment?

SUSTAINABILITY OF ASIAN AGRICULTURE

An investigation into production performances over thepast two decades has revealed some early indications ofunsustainability. Firstly, the growth of yield per unit area ofsome major staple crops is demonstrating a declining trend,and this slowdown is most obvious for rice. Secondly, there isa demonstrated preference among farmers to diversify away

from the major staple food crops and into high-value crops,such as horticulture and oil crops, and from the high-yieldingvarieties to varieties of higher eating quality. Thirdly, the benefitsof the green revolution have been largely confined to favorableenvironments or resource-rich areas. Therefore, farmers in lessfavorable environments (LFEs) continue to rely on extensivefarming for their living.

In the livestock sector, especially the relatively fast-growing monogastric sector, market-driven growth has beenparticularly rapid in urban centers and has led to the intenseconcentration of production units in periurban centers. Thishas resulted in increased pollution and health risks, to suchan extent that long-term growth may not be sustainable. Thereis a role here for the public sector to coordinate production sothat waste discharges can be recycled as an energy source orbe put to more efficient uses.

Marine fisheries reveal the most troubling picture.Although their growth has been strong, their long-termsustainability, especially that of coastal fisheries, is greatlythreatened by overfishing. Catches per unit effort in someoverfished waters are only a small fraction of what they werethree decades ago. Some species have become extinct in theirtraditional locations. Coastal and inland aquaculture isthreatened by pollution from outside sources. In addition,inland aquaculture is constrained by the availability of waterof suitable quality.

FACTORS DETERMINING SUSTAINABILITY OFASIAN AGRICULTURE

Environmental degradation related to agriculture is aproduct of technological and policy failures. High-inputtechnology creates onsite second-generation effects that canbe corrected by improved research, development and extension(RD&E). In LFEs, the lack of appropriate technology is a majorsource of environmental degradation. A lack of appropriate

Appendix 3: Growth & Sustainability of Agriculture 119


policy and institutions, as well as lax law enforcement, is themain source of external costs and the wasteful use of resources.

Intensification-induced declines in productivity growthin intensive and monocropping systems have been suggestedas a possible threat to future growth in crop production, butthese could be solved by adjusting the current mode of crop-based and laboratory-oriented R&D to field- and farmer-basedtechnology transfer systems. Many of these problems, however,can be solved by improved field-level knowledge, better cropmanagement, and better communication between farmers andR&D officials. Agricultural R&D and technology transfer willhave to be sufficiently adaptive and responsive to dealeffectively with these problems as they arise. This becomeseven more challenging when dealing with agriculture in LFEs,which have benefited only marginally from the greenrevolution.

The sustainability of Asian agriculture will depend onthe prudent use of natural resources and careful considerationfor the environment. The natural resource base of Asia is nowunder great stress, which will become even greater as thepopulation continues to increase. Investment in environ-mentally sensitive technology is needed to ensure sustainability.The current constraints related to natural resources are notthe result of limits on supply but rather of managerial andinstitutional problems. The solutions to the current problemsin sustainable agriculture no longer simply lie in technology,but also in institutional reform.

Sectoral policies, especially policies related to naturalresources, are outdated and lag behind the socioeconomicchanges that have altered the patterns of resource use.Throughout Asia, water resource management has beenfragmented and project-based. Both surface and groundwaterare mostly under open-access regimes that encourage wastefulusage. This in turn may lead to waterlogging and salinityproblems. In Asia, water pricing has been adopted by manycountries but mainly only for the purpose of paying for theoperation and maintenance costs of irrigation, rather than asa basis for allocation purposes. Key factors for developing the

long-term sustainability of both the agricultural and theagriculture-based sectors are the removal of policy distortionsand institutional constraints in the natural resource sector, andat the same time promotion of participatory management.

In the past, technology was used to circumvent the needfor policy and institutional reforms that may have beeneconomically and socially desirable but politically impractical.In the future, appropriately designed technology will remaina very important tool, but it cannot solve all of the problemsand sometimes creates problems of its own. Importantly, thegreen revolution has bypassed LFEs, which make up a largepart of the agricultural area of Asia.

CHALLENGES AND OPPORTUNITIES FORENHANCING AGRICULTURAL GROWTH ANDSUSTAINABILITY

The LFEs and fragile ecosystems that are prone todegradation pose some of the most significant challenges fortechnology producers and policymakers. These areas tend tobe associated with poverty, making long-term investments byindividual farmers for productivity enhancement throughconservation activities unattractive.

Another challenge lies in dealing with environmentalissues in the arena of international trade in agriculturalproducts, especially in issues related to phytosanitation. Fordeveloping Asian countries in Asia wishing to exportagricultural products to their high-income trading partners,especially countries in the European Union, agricultural tradeis no longer simply an outlet for surplus production; farmsand their processed products need to be tailored to meet thespecific phytosanitary requirements of the consuming country.This issue demands special extension and education on optimalpest control and farming techniques, as well as on sanitationcontrol facilities such as landing sheds for small-scale fisheries.



Exporters to the United States have to adapt to muchless predictable trade-related environmental requirements andrestrictions, which are often more the result of pressure fromenvironmental movements than actual government policy.These requirements and restrictions may not be related toproduct characteristics but to production processes themselvesthat are required to be environmentally friendly.

ASIAN AGRICULTURE: TOWARDS 2010

The next decade will not bear witness to a great leapforward in productivity gains for the major food crops.Nevertheless, there should be substantial aggregate increasesfrom the incremental gains from better technology manage-ment (related to crops, soil, and water use) in both favorableand less favorable environments. Biotechnology can offer manyopportunities in facilitating research, reducing costs, andshortening the time taken for research projects. Increased publicinvestment in technology, including biotechnology, is essentialin agriculture-based industries, not just in agriculture itself.These industries offer more possibilities for processing, theadded value of which is higher than that of the basic agri-cultural commodities, and therefore possess strong economicpossibilities for developing Asian economies.

Under the business-as-usual scenario, high growth in theyields of food crops, especially rice, will not be sustainable. Thisis mainly due to the high costs associated with maintaininggrowth and the continuing diversification out of basic food cropsand into crops with higher profit margins. The high costs asso-ciated with maintaining growth are the direct results of poormanagement and environmental degradation. If the currentinstitutional management policies remain unchanged, theavailability of water will increasingly constrain the potential forsustainable growth. As the competition for water between differ-ent users increases, water will inevitably be shifted away fromagriculture, where the marginal product of water is relatively low.

The coastal, aquatic, and wilderness resources that areessential food items and contribute to the livelihood of the poorwill be mostly depleted. Furthermore, more farmers in resource-poor and coastal areas will be left further and further behindas the world continues to move into the electronic age.

A desirable future is considerably different from thesituation described above. It is one in which Asia is free fromhunger and Asian agriculture has an increased and sustainablecapacity for more equitable and greener growth. Greenergrowth is growth where increases in productivity do not ariseas a result of the unsustainable use of natural capital and theenvironment. Production increases should come about throughhigher yields per unit area, and not simply through increasingthe area of land under cultivation. Equitable growth is growthwhose benefits reach all sections of the community, even thepoorest of the poor. As food security on the Asian continentbecomes a diminishing concern, more attention needs to bepaid to the elimination of hunger and malnutrition. Agriculturewill no longer be mistakenly perceived as a sunset industry,but as a vibrant life- and growth-support system. Agriculturewill be viewed as a sector that offers income-generating andemployment opportunities, not only as the sector of last resort.

In order for this future to be realized, the main priorityfor governments will be to strengthen their policies andinstitutions regarding natural resources. The overextractionof open-access resources and multiple-use conflicts will haveto be resolved through a combination of economic, legal, andsocial instruments. Responsible agriculture and fishing willhave to become the prevailing codes of conduct. Theconservation of natural resources and the environment willhave to be additional national objectives, and biophysicalplanning will have to be the norm rather than the exception.

The public sector must actively continue to supportinvestments in education and technology. Large infrastructureinvestments will be based on rigorous cost-benefit analyses,with due recognition being given to social and environmentalcosts and payoffs. The public sector, however, will notnecessarily continue to be a direct provider of public goods,



but rather promote and facilitate private investment and adoptthe role of regulator for the purpose of providing a level playingfield for private operators, from individual farmers tomultinational corporations. Government operations will be lesslabor intensive as the labor-intensive activities of maintenanceand monitoring are privatized or devolved to local organ-izations. The public agricultural agencies will be more flexibleand adaptable, and will adopt a more managerial role.

RECOMMENDATIONS

This paper recommends priority strategies in three areas:integrative technology production and transfer, less favoredenvironments and fragile ecosystems, and natural resourcesand environmental management.

Strategies for Integrative Technology Production andTransfer

The challenge facing technology production is no longersimply to further raise the yield ceiling of food crops infavorable environments. It is to ensure that the technologywill enable profitable (low-cost) production for farmers andthat the output will be affordable to consumers, especially thepoor. For LFEs, technologies will have to be tailored to meetlocal needs and particular deficiencies in local resources.

A three-pronged approach is recommended. First,technological production and management need to takepotential environmental impact into account. Technologyshould have the objectives of resource conservation andproduct enhancement. Second, the technology production andtransfer system must be focused on the end-users, the farmers.This implies the need for two-way communication betweenfarmers and RD&E agencies. Third, technology will have to bebased on modern science, but local and traditional knowledgecan and should be harnessed and combined with formal

science. Compared with the existing system, the approachrecommended is more location-oriented than crop-centered.

Sustained increased public investment is necessary inR&D, both in conventional R&D technologies and inbiotechnology. This is especially true for rice, which hasexperienced the sharpest decreases in yield growth. Aninternational management system or code of conduct thatrecognizes and protects traditional or prior users’ rights tothe knowledge they have developed, while also providingsufficient incentives for private R&D initiatives, is required inorder to maintain the free flow of genetic material tointernational research centers.

Strategies for Less Favorable Environments and FragileEcosystems

Asia’s less productive croplands, which also tend to bethe most poverty-stricken areas, have been bypassed by thegreen revolution: clear evidence that the widely adopted green-revolution technology is inappropriate there. Further publicinvestment, in the form of inputs for the recapitalization ofthe land (with phosphates or the buildup of organic matter,for example) as well as for RD&E, towards social andenvironmental, as well as economic, goals may be essentialfor the generation of further growth.

Recommended objectives for breeding programs includea) enhancing phosphorus utilization efficiency, with or withoutincreased tolerance to soil acidity, and b) increasing droughttolerance. Other objectives could include better adaptation toparticular problems that have already been identified forspecific LFE locations, such as tolerance to salinity for salt-affected areas or boron efficiency for much of Asia’s highlyleached soils in both the uplands and lowlands.

The highest priority should be given to breeding forphosphorus efficiency and drought tolerance in rice; and insoybeans and the other major grain legumes, for phosphorusefficiency, with or without increased acidity tolerance. Im-proving boron efficiency would be the most cost-effective way



to increase wheat yields in some of Asia’s poorest areas, inclu-ding Bangladesh, the southwestern PRC, northeastern India,and Nepal. Breeding programs to improve boron efficiencywould also help to raise the yield ceilings of Asia’s major pulses,including green gram, black gram, lentils, and chickpeas.

Attempts to increase the productivity of cropping systemsin a sustainable manner in LFEs will call for an integrativeapproach to natural resource management or INRM. INRMhas three important elements: a) a holistic focus on the entireecosystem rather than on individual fields; b) farmerparticipation in the R&D process; and c) recognition thatsocial/institutional solutions are often required in conjunctionwith, in addition to, or instead of technical solutions.

Another essential element of the holistic managementof cropping systems in LFEs and fragile ecosystems is themonitoring of key offsite effects. The measurement of, forexample, stream siltation, forest cover, biodiversity, stream flow(both quantity and distribution), and the incidence of forestfires, would provide quantitative indicators with which thesuccess or failure of management could be judged. It is,however, essential that an appropriate set of criteria beavailable to each level of management, whether it be at thefarm, community, catchment, or watershed level.

Strategies for Natural Resource and EnvironmentalManagement

In order to achieve sustainable agriculture, it should benoted that in the long term, natural resources and theenvironment are necessary components of all three prioritystrategies. The difference is that in the first strategy, theconservation of natural resources and the environment is oneof the objectives of R&D, with the expectation that newtechnology involving onfarm practices will minimizeenvironmental impact both on- and off-farm, and thattechnological innovations will be environment enhancing. Inthe second strategy, the technological management packageaddresses landscape-level management, for example, micro-

watershed management. It also requires local institutionalsupport that is recognized by law. In the third strategy, it ismanagement at the macro scale, e.g. at a bioregional level suchas a river basin. This level of management would take care ofcumulative subbasin impacts. Under this approach, interac-tions between different resource uses would be taken intoaccount and trade-offs would become more transparent. Anexample of a larger-scale bioregional planning is the basindevelopment plan for the Mekong River Basin under whichtransnational boundary impact can be managed.

This strategy will only be accomplished in the longer termand a few preparatory steps are necessary. First, the presentsystem, which is based on administrative boundaries, must bereadjusted to one that is based on biophysical and regionalboundaries for the purpose of gathering information relatedto natural resources and local environments and theirinterrelationships and interactions. Second, the identificationof “hot spots” is necessary. Hotspots are of two types. Thefirst consists of those areas important to long-term agriculturalsustainability, e.g., spawning grounds, biodiversity-richhabitats, and fragile ecosystems. The second consists of areasof high growth where sustainability indicators are showingearly warning signs of degradation. Once this information isknown, planning at the bioregional level can proceed. Theplanning process will have to encompass economic, social, andenvironment considerations concurrently.

At present, environmental planning is often a stand-aloneprocess, with the ministry of environment attempting to be thesole guardian of natural resources and environment. Under theproposed strategy, growth and sustainability issues and thecorresponding growth-oriented development and conservationprojects are juxtaposed, prioritized, selected, and scheduled.Environmental and social impact assessments will also have tobe undertaken at the planning level, prior to implementation.

Under this approach, the management of natural resourceswill be at the bioregional level by river-basin committees consistingof representatives from subbasins, for example. The organizationshould be bottom-up, i.e., starting with subbasin committees at



the lowest level. Each country should start with the region ofhighest economic and environmental priority, or with the highestlevel of multiple-use conflicts.

The proposed approach would comprise participatoryplanning, the establishment of principles for the allocation anduse of natural resources and their management, zoning, anddevelopment of land-use plans. The issues of rights to the useof natural resources and the protection of those rights wouldhave to be specified and established.

Wherever the capacity for effective local government andsocial organizations exists, the devolution of some respon-sibilities, i.e., local water resources, fire protection, and commu-nity forest management, has proven efficient and effective forboth allocation (in the case of water) and conservation practices.The principle of the devolution of rights to and increasedresponsibilities for different resources to local communities andgovernments would have to be specified, acknowledged, andlegalized.

Where local organizations and social capital do not exist,the identification of existing constraints and targets forcapability building are necessary for the achievement of long-term growth. In either case, a check-and-balance system fromthe central government continues to be necessary in order toassure transparency and accountability.

Also recommended are corresponding changes inagricultural and other policies.

Agriculture RD&E Policy

LFEs will have to become target areas for productivityimprovement. Priorities will have to be determined through aholistic approach, in which the evaluation of the cost-benefittrade-offs will involve the farming stakeholders.

The current top-down RD&E system will have to bereversed into one that starts locally, with commensuratefunding increases to local agencies. A farmer-focused RD&Esystem will have to be designed at the district level. Local

agricultural colleges could be drawn into association with localRD&E systems. Rewards for scientists and extension officerswould be based on the field performance experienced byfarmers. R&D funding need not necessarily be limited to publicagencies but could be extended to learning institutes, NGOs,and private companies on a competitive basis.

A pilot project, in which extension activities would beopen to competition between the private sector, NGOs, andrelevant government agencies, could be undertaken in agricul-turally advanced areas. It would be under the supervision oflocal governments, farmer cooperatives, or water users associa-tions, as appropriate. In such a situation, a block grant couldbe provided to the implementing organization. In the longerrun, the contribution of farmers, especially those in resource-rich and agriculturally advanced areas, to the extension systemwould gradually assume more importance than governmentgrants. The willingness of farmers to pay would also serve tohelp as a measure of the value of the extension system.

Continuous capacity building is one of the indispensablecomponents of an effective RD&E system. Scientific staff needto be constantly upgrading their skills in order to keep up withinternational progress. Distance education and extensionthrough the television and radio media could be introducedfor junior, senior, and women farmers. Farmer-to-farmertransfers could also broaden the perspectives not only of otherfarmers but also of extension officers.

Natural Resources and Environment Policy

Natural resource policies tend to be among the mostoutdated policies in many developing Asian countries. Thefirst priority for reform is for these policies to reflect fully thescarcity value of natural resources. This includes the value ofnatural resources both as inputs and as sinks. In other words,the open-access regimes that prevail despite resource scarcitywill have to give way to systems where resources are properlyvalued and priced. The costs of such factors as pollution, whichare currently external, will have to be internalized.



In Asia, the water sector and the coastal and oceanresources sector are two natural resource sectors that arepriority sectors for reform. At present, the instruments usedto correct for market failures in these sectors are mainly legaland regulatory instruments, implemented under command-and-control regimes. The continuous deterioration of naturalresources and the environment to date is a manifestation ofthe fact that these regimes are no longer effective in achievingboth growth and sustainability objectives concurrently.

Other instruments, such as economic instruments,concessions and property rights, pricing, charges, fees, andtransferable development rights, need to be employedappropriately. Social instruments can also be very useful inattracting public attention to sustainability issues and,especially where voting is important, in creating the grassrootsdemand for reform that is essential for effecting reforms.

Other Policies

Equally important is the need to remove price distortionscreated by other policies that favor the use of environmentallyunfavorable practices, for example, State subsidies for waterand fertilizers and unwarranted outbreak subsidies foragrochemicals, fossil fuels, and electricity. The removal of thesedistortions would decrease the wasteful use of resources,encourage the use of greener energy, and increase the incentivesfor using integrated pest management, soil and waterconservation, and alternative technologies. The same is truefor the removal of distortions in output prices throughprotection, export taxes, price guarantees, and income supportprograms that encourage the expansion of environmentallyunsound practices. New national priorities and publicexpenditure policies will need to incorporate environmentalconsiderations. Impact assessment should become an integralpart of national and sectoral policies as well as projectimplementation.

Project Implementation

The reforms described above require action at the policyand institutional levels. Reform is also required at the projectimplementation level. First, cost-benefit analyses should berigorously applied during the project inception phase. Second,the potential environmental impact must be fully accountedfor and included in the cost-benefit calculation. Third, publichearings must be a component of the approval process.

With a few exceptions, notably the People’s Republic ofChina and Viet Nam, which have implemented drastic policyreforms following the introduction of their open-door policies,past development efforts in most Asian countries haveemphasized infrastructure development rather than policyreforms to improve the effectiveness, transparency, andaccountability of government machinery. Technical solutionswere and continue to be preferred to social and economic ones.The current practices of international lending agencies thatrequire policy reforms as part of sector loans should becontinued. For some countries, this has become the onlychannel through which sensible policies can be implemented,with decreased resistance from vested interest groups that areonly interested in preserving the status quo. However, the prosand cons of policy reform and the likely impact should be mademore transparent to those concerned if not to the public atlarge.


APPENDIX 4RURAL FINANCIALMARKETS IN ASIA:PARADIGMS, POLICIES, ANDPERFORMANCE—SUMMARY

Richard L. Meyer and GeethaNagarajan

Rural Asia has undergone a fundamental economictransformation during the past three decades. Economicgrowth rates have been particularly high in East and SoutheastAsia, and even the slower-growth countries have madeprogress. This growth has been accompanied by rapidstructural transformation of the rural economy, decline in therelative importance of agriculture, increased use ofsophisticated capital inputs in agricultural production, greaterspecialization in production, explosive growth of rural citiesand towns, and an emerging heterogeneous rural nonfarmeconomy. However, the development of rural financial marketshas lagged. Their performance has been poor and, in mostAsian countries, they are ill-prepared to serve rural areas inthe 21st century.


ECONOMIC TRANSFORMATION AND RURALFINANCIAL MARKETS IN ASIA

The Commercialization of Agriculture

The green revolution fueled the structural transformationof rural areas. The new technologies expanded agriculturalproduction and induced demand for fertilizers, chemicals, andother purchased inputs. Commercialization of production ledto the rise in marketable surpluses with increased marketingof agricultural inputs and outputs. Cash incomes rose for manyfarm households, market exchanges substituted for barter, andthe rise in use of money as the medium of exchange helpedintegrate the rural with the urban economy. In addition,decisions regarding product choice and input use evolved fromsubsistence to a profit-maximization orientation. Integratedfarming systems were often replaced with specialized cropand livestock enterprises. Highly specialized large-scaleplantations are now found along with small farms that combinefarm and nonfarm enterprises to increase and diversify incomesources.

Markets and the Critical Role of Finance

Structural transformation requires markets to facilitatethe division of labor in which one producer specializes in oneactivity and trades with others who have differentspecializations. Markets integrate specialized producers andconsumers so that they can engage in transactions involvingan increasingly heterogeneous set of goods and services. Asstructural transformation progresses, markets for land, labor,capital, and finance emerge, multiply in number, and becomemore complex in response to the greater variety of goods andservices demanded. Markets with varying degrees of efficiencyhave emerged in the developing market economies of Asia.The transition economies, however, are experiencing difficultiesin creating markets and supportive institutions, and this

constrains agriculture from contributing more fully toeconomic growth.

Financial markets contribute to economic growth. Theprimary function of the financial system is facilitating resourceallocation across space and time in an uncertain environment.Finance is used to reduce risk, allocate resources, monitormanagers and exert corporate control, mobilize savings, andexchange goods and services. When these functions areperformed well, they contribute to economic growth throughtwo channels: capital accumulation and technologicalinnovation. Limited access to financial services can constraineconomic development. For these reasons, governments anddonors have devoted vast resources to developing financialsystems in low-income countries during the past three decades.

Policymaker Perceptions about Rural Finance

In the 1960s and 1970s, many Asian policymakers didnot believe that a farmer’s ability to self-finance investmentswould lead to a socially optimum rate of growth. They perceivedthat the potential of the green revolution would not be realizedunless farmers could access an elastic supply of funds at morereasonable interest rates than available from informal sources.These views provided the rationale for directed and subsidizedagricultural credit programs along with strong support forinput- and output-marketing projects. The BIMAS project inIndonesia and Masagana 99 in the Philippines are examples;both failed, imposing great losses on the financial institutionsthat participated in them.

DEVELOPING RURAL FINANCIAL MARKETS

High Costs and Risks in Rural Areas

The directed-credit approach to supplying agriculturalloans did not properly recognize the especially difficult

Appendix 4: Rural Financial Markets in Asia 135


problems of providing financial services in rural areas. Ruralbank clients are more dispersed than urban clients and oftendemand only small loans and savings accounts, such that per-unit transaction costs are high for the financial institutions.Information costs for providers and users are higher becausetransportation and communication infrastructure is usuallyless developed. Agricultural loans are often consideredinherently risky because of production and marketing risks,and the returns on farm investments are often low because ofurban-oriented agricultural policies. Loan repayment byfarmers may be contingent on borrower ability to meethousehold consumption requirements. Many potential clientshave little loan collateral, and property rights to land may behard to enforce. Although farm households engage in a varietyof enterprises, the geographic concentration of crops andlivestock results in high covariance of household incomes,which makes returns for local institutions vulnerable to localdisasters.

The Changing Paradigm for Developing Rural FinancialMarkets

The failure of many credit projects led to a paradigmshift in some developing countries. The paradigm of directedand subsidized lending has been gradually replaced by a newone oriented towards financial-market efficiency. The mainfeatures of the old and new paradigms are summarized inBox 1. Some Asian countries are using ideas from the newmarket-oriented paradigm, while others cling to the olddirected-credit approach. Evidence of the new thinking is foundmore often in microfinance than in rural finance policies.

The perspective offered by the changing paradigm isuseful for identifying weaknesses in policies and programs inmany developing countries. However, it has shortcomings asan analytical tool for determining the nature of specificproblems that individual countries face in resolving bottlenecksin their rural financial markets. For example, the issue of anappropriate regulatory and supervisory framework for rural

Box 1 – Primary Features of the Old and New Paradigms

Features Directed Credit Financial MarketParadigm Paradigm

Problem definition Overcome market Lower risks andimperfections transaction

costs

Role of financial Promote new technology Intermediatemarkets Stimulate production resources more

Implement State plans efficientlyHelp the poor

View of users Borrowers as Borrowers andbeneficiaries selected depositors asby targeting clients choosing

products

Subsidies Large subsidies through Small subsidiesinterest rates and loan Createdefault independentCreate subsidy institutionsdependence

Sources of funds Governments and Mostly voluntarydonors deposits

Associated Designed for donors Designed forinformation managementsystems

Sustainability Largely ignored A major concern

Evaluation Credict impact on Performance ofbeneficiaries financial

institutions

finance and microfinance is not addressed, nor are legal issuesnor the appropriate method for subsidizing institutionaldevelopment without creating subsidy dependence.



Creating Financial Markets in Transition Economies

Creating sustainable finance in transition economiesinvolves a complex process of rapid transformation from aState-planned to a market-based economy; it means creatingnew institutions, adapting existing institutions, and dismantlinginefficient institutions and overbuilt capacities. The Asiantransition countries are heterogeneous. On the one hand, thePeople’s Republic of China (PRC) and Viet Nam embarked ona gradual transition in the 1980s with microeconomic reformspreceding macroeconomic reforms. The banking sector in thePRC captures rural surpluses for use in financing projectsincluding rural industrialization. On the other hand, theCentral Asian republics became independent countries onlyin the 1990s, and macroeconomic reforms dominated the firstphase of transition, which was limited to liberalization of theeconomy and redistribution of the State-owned assets. Thesecond phase of transition involves creating financialinstitutions, developing skills, and accumulating knowledge.The situation in the Kyrgyz Republic described in this volumeshows how rapid changes in property rights and liberalizationof prices and foreign exchange are being implemented. Thebanking sector is expected to play a role in the privatizationstrategy.

The transition countries need financial reforms in twomajor areas. First, they need to improve the efficiency of theirbanking sectors by reducing bureaucratic interference andoverdue loans, unclogging payment systems, strengtheningregulatory and supervisory systems, developing legal systemsthat can enforce contracts and inculcate financial responsibility,reducing corruption, and improving the skill level of the staffto assess and manage risks. Second, they need to reducesystemic problems in their financial markets to increasecompetition, by reducing insider control of financial institutions,developing capital markets, reducing the political hold oninstitutions, reducing barter transactions, and reducingbarriers to entry for private banks and nonbank financialinstitutions.

Building Rural Financial Markets

In recent years, financial institutions have been evaluatedon the dual objectives of outreach and sustainability. Generallyspeaking, a financial system meets more of society’s objectivesand merits the allocation of scarce resources if it

• serves many clients;• serves many poor clients;• provides a large range of services;• costs the users as little as possible;• provides services over a long period of time; and• can be sustained with only a minimum of support from

nonusers or taxpayers.

These should be the objectives of the policies andprograms for rural financial markets. The priorities fordeveloping rural financial markets form a three-prongedframework: creating the policy environment; building financialinfrastructure; and institutional development.

Creating the Policy Environment. Many directed-creditprograms were introduced in environments hostile to creatinghealthy financial markets: macroeconomic instability producedhighly variable inflation rates; repressed interest rates preventedcharging cost-recovery rates on loans; and high reserverequirements discouraged deposit mobilization. Limits on bankbranching and on creating new banks restrained competitionamong rural financial institutions. Cheap food policies,subsidized food imports, farm price controls, unfavorableagricultural terms of trade, and distorted foreign exchangerates contributed to this negative environment. Policy reformsare necessary to create an environment conducive for financialmarkets. Some countries may greatly improve their financialsystems through systemwide reforms, but in other cases, moredirect proactive measures will be required to build the financialinfrastructure.

Building Financial Infrastructure . Building financialinfrastructure was largely overlooked in the old agricultural



credit paradigm, but it has now emerged as one of the toppriorities for improving rural finance. Frequently, it is moreimportant than supporting a specific financial institutionbecause improved infrastructure contributes to the entirefinancial sector, not just to institutions targeted for directassistance. Information, legal, and regulatory systems representparts of the infrastructure that directly affect financialtransactions, while transportation and communicationsystems, particularly in rural areas, indirectly affect the costsand risk of finance.

Institutional Development. Institutions may not developautomatically because of improvements in the environmentand financial infrastructure. Institution building may berequired in order to take advantage of the newly emergingopportunities and markets. If financial services are to bebroadly based, some groups, such as women, small farmers,and microentrepreneurs, may find that they are disadvantagedin responding to market opportunities. Providing support toinstitutions that target these groups, particularly in their initialstart-up phase, may yield high social returns, provided thatthe subsidies received are for specific institution-buildingpurposes and are transparent, time-bound, and linked toperformance. Ultimately, individual institutions need toexperiment with alternatives to find methods of operation thatfit their objectives and capabilities.

WHAT HAS BEEN LEARNED ABOUTDEVELOPING RURAL FINANCIAL MARKETS INASIA?

Learning from Failure

The directed-credit paradigm employed by most Asiancountries in the 1960s and 1970s had the followingcharacteristics:

• Interest rates for farm loans were subsidized and loansfor small farmers were set at especially low rates.

• The source of funds for most programs was thegovernment and donors. Local savings mobilizationwas largely ignored.

• The objective of government policy was to increasethe supply of loans made to farmers with littleattention given to institutional sustainability.

• Production packages, in which credit was treated asan input like seeds and fertilizer, were created forfarmers.

• Credit was targeted for “productive purposes.” Loansfor consumption and rural nonfarm enterprises wereignored and, in some cases, prohibited.

• Credit programs were often aimed at small farmersand employed supervised credit through cooperativesas a means to ensure that it was used properly.

• Cooperatives were the primary credit channels inmany countries, while commercial banks andagricultural development banks were more importantin other cases.

• Transaction costs for lenders and borrowers werelargely ignored.

• Some programs eventually broadened their targetgroups from small farmers to the rural poor.

The Emergence of New Views

Research conducted on many failed directed-creditprojects provided the following conclusions:

• Agricultural credit is not a direct input in agriculturalproduction, but is provided as the result of a processof financial intermediation. Financial services are asimportant to rural nonfarm enterprises as they are tofarming.

• Credit is fungible; it is costly and difficult to targetend-use effectively.



• A policy of maintaining positive real interest rates isthe most important element in improving ruralfinancial market performance.

• Use of savings to finance loans will diminish or erasepatronal relations that currently exist betweenborrowers, intermediaries, and financial authorities.

• A reduction in dependence on external funds willdecrease the politicization of rural financial markets.

• Broadening financial intermediation will increasecompetition among formal and informal lenders andreduce any monopoly profits that may exist. Informalfinance plays an important role in providing savingsservices and small loans for consumption andemergency purposes.

• The aim of analysis should be to provide a betterunderstanding of the factors affecting the performanceof financial institutions, rather than an attempt tomeasure credit needs or impact at the farm level.

• Reforms in financial market policies are more oftenblocked by political obstacles than by economic forces.

Lessons from Microfinance for the Poor

Microfinance emerged in the late 1970s and severalprojects for lending to the poor produced results superior tomany of the old-paradigm agricultural credit projects.Microfinance organizations (MFOs) designed importantinnovations that enabled them to expand the frontier offinancial markets in developing countries. These innovationsreduced lending costs and risks and permitted MFOs to servepoor clients successfully without the collateral normallyrequired by banks. This experience contributed to the emergingnew paradigm. The techniques used by successful MFOsinclude the following:

• Loan sizes—loans are small in size, made for only afew weeks or months, to be used mostly for workingcapital purposes.

• Interest rates for farm loans were subsidized and loansfor small farmers were set at especially low rates.

• The source of funds for most programs was thegovernment and donors. Local savings mobilizationwas largely ignored.

• The objective of government policy was to increasethe supply of loans made to farmers with littleattention given to institutional sustainability.

• Production packages, in which credit was treated asan input like seeds and fertilizer, were created forfarmers.

• Credit was targeted for “productive purposes.” Loansfor consumption and rural nonfarm enterprises wereignored and, in some cases, prohibited.

• Credit programs were often aimed at small farmersand employed supervised credit through cooperativesas a means to ensure that it was used properly.

• Cooperatives were the primary credit channels inmany countries, while commercial banks andagricultural development banks were more importantin other cases.

• Transaction costs for lenders and borrowers werelargely ignored.

• Some programs eventually broadened their targetgroups from small farmers to the rural poor.

The Emergence of New Views

Research conducted on many failed directed-creditprojects provided the following conclusions:

• Agricultural credit is not a direct input in agriculturalproduction, but is provided as the result of a processof financial intermediation. Financial services are asimportant to rural nonfarm enterprises as they are tofarming.

• Credit is fungible; it is costly and difficult to targetend-use effectively.



• A policy of maintaining positive real interest rates isthe most important element in improving ruralfinancial market performance.

• Use of savings to finance loans will diminish or erasepatronal relations that currently exist betweenborrowers, intermediaries, and financial authorities.

• A reduction in dependence on external funds willdecrease the politicization of rural financial markets.

• Broadening financial intermediation will increasecompetition among formal and informal lenders andreduce any monopoly profits that may exist. Informalfinance plays an important role in providing savingsservices and small loans for consumption andemergency purposes.

• The aim of analysis should be to provide a betterunderstanding of the factors affecting the performanceof financial institutions, rather than an attempt tomeasure credit needs or impact at the farm level.

• Reforms in financial market policies are more oftenblocked by political obstacles than by economic forces.

Lessons from Microfinance for the Poor

Microfinance emerged in the late 1970s and severalprojects for lending to the poor produced results superior tomany of the old-paradigm agricultural credit projects.Microfinance organizations (MFOs) designed importantinnovations that enabled them to expand the frontier offinancial markets in developing countries. These innovationsreduced lending costs and risks and permitted MFOs to servepoor clients successfully without the collateral normallyrequired by banks. This experience contributed to the emergingnew paradigm. The techniques used by successful MFOsinclude the following:

• Loan sizes—loans are small in size, made for only afew weeks or months, to be used mostly for workingcapital purposes.

• Repeat loans—incentives are given to clients tomaintain good repayment records by rewarding themwith (almost automatic) repeat loans. For somelenders, the size of the first and repeat loans is setaccording to a predetermined formula.

• Loan repayment schedules—frequent payments arerequired, often weekly or monthly, to enable closemonitoring of borrower performance.

• Interest rates—interest rates and fees are high, usuallymuch higher than those charged by conventionallenders, and are usually positive in real terms.

• Loan officer efficiency—loan officers frequently handle75 to 100 borrower groups or 200 to 500 individualborrowers. Financial incentive schemes for employeesstimulate high levels of efficiency.

• Loan collateral—many MFOs use a lending processinvolving peer group formation and peer monitoringas a substitute for conventional loan collateral to reducetransaction costs and risks. MFOs that use the moreconventional individual lending technology accepthousehold goods and other assets with high-use valueto their clients as collateral.

• Decentralized lending procedures—the procedures forscreening applicants and processing loans are simple,with considerable autonomy given to loan officers,who are required to maintain close contact with theirclients.

• Loan delinquencies and losses—MFOs frequentlyreport loan recoveries of 95 percent or more.Computerized systems are often used to produce dailyrepayment reports so loan officers can take correctiveaction at the first hint of unexplained delay in theirclients’ payments. Some MFOs offer interest rebatesfor on-time or early repayments, and others chargepenalty interest for late payments.



Present Status of Rural Financial Markets in Asia

A surprisingly large number of Asian countries havemade relatively little progress in adopting the new paradigm.There are important exceptions, but the primary problemstoday are similar to those two decades ago:

• Interest rates on rural loans are often too low to coverthe costs and risks of lending. Some MFOs charge rateshigh enough to cover most costs, but regulations andpolitical pressure have kept rates low for manyagricultural lenders.

• Many countries have resisted adopting a marketapproach to rural finance. Targeted programs,subsidized refinance funds, and restrictions onclientele served still exist. The sustainability of financialinstitutions continues to be a secondary objective.

• Many rural financial institutions are weak and existonly because of subsidies. Nonperforming loans are aserious problem and sap their vitality.

• Savings mobilization is still relatively neglected.• Policymakers continue to be largely preoccupied with

the problems of agriculture and overlook the broaderdemand for financial services by the rural nonfarmeconomy.

• Most rural financial institutions are ill-equipped tomake long-term loans and to use new information andcommunications technologies characteristic of modernbanking.

Three Successful Rural Financial Institutions in Asia

Three Asian institutions have been extensively studiedbecause their performance has been far superior to most ruralfinancial institutions in the developing world. They are theBank for Agriculture and Agricultural Cooperatives (BAAC)in Thailand, the unit desa system of Bank Rakyat Indonesia(BRI-UD), and the Grameen Bank (GB) in Bangladesh. The

three have achieved good outreach and sustainability. Outreachrefers to the increased degree of market coverage of low-incomegroups that were previously without access to formal financialservices. It includes both a horizontal dimension (breadth ofoutreach or number of clients served) and vertical dimension(depth or level of poverty of clients). Sustainability refers tothe ability of a financial institution to supply financial serviceson a continuous cost-covering basis without external subsidies.A sustainable institution covers its costs, including operatingexpenses, loan and inflationary losses, and the cost of funds,without external subsidies. It makes a profit to compensateowners, to accumulate reserves against future losses, and tofund new investments. Subsidy dependence is the inverse ofsustainability, and the calculation of a subsidy dependenceindex (SDI) has been used effectively to evaluate the degree ofsubsidization received by financial organizations.

All three institutions have millions of clients with loans;BAAC has been the most successful, as it reaches more than80 percent of the country’s farm families. It has a largerportfolio than the other two because of its larger average loansize. It also performs well in reaching the poor as seen in therelationship between average loan size and the country’s GDPper capita. BAAC and BRI-UD have about the same amountof savings mobilized, but the number of savers is much largerin BRI-UD. Moreover, the total amount of BRI-UD savings farexceeds its loan balance, while BAAC and GB rely on othersources for a significant share of their total lending. Unlikethe other two, Grameen does not actively promote voluntarysavings, but it is particularly successful in reaching poor womenclients with loans. BRI-UD is by far the most profitableinstitution. In 1995, it could have reduced the yield on its loanportfolio from 31.6 to 16.3 percent and still have remainedfree of subsidy. BAAC would have had to raise its averageyield on loans from 11 to almost 15 percent, and GB wouldhave had to raise its rates from 20 to 33 percent to be free ofsubsidy.

These institutions show, first, that institutional devel-opment requires a long-term commitment because strong



institutions are not created overnight. Second, goodinstitutional design is important, but the policy environmentand financial infrastructure are also important. Third, marginalclientele can be reached if the correct approach is used. Fourth,extensive outreach can complement the objective of financialsustainability. Fifth, microfinance is not a panacea; it oftenserves women better than men, is most cost effective wherethere is a dense population, and works best with small short-term loans repaid in frequent small installments. Therefore,rural financial institutions cannot meet their objectives bysimply mimicking microfinance.

Problems in Implementing the New Paradigm

The Asian region faces two sets of problems that mustbe overcome before it adopts the new financial marketsparadigm. First, it is making slower progress in commercializingrural finance and microfinance than Latin America. The causesof this problem include controlled interest rates, influentialleaders who do not have a clear vision of developing market-driven financial services, and particular situations, e.g., severalcountries are in transition; some have frequent naturaldisasters; some are conflict-affected; some have poortransportation and communication; some have religionsopposed to high interest rates; and finally some have hugeareas and heterogeneous populations.

The second problem is that several countries wereparticularly hard-hit by the economic and financial crisis inAsia that began in 1997 and that has set back economicprogress, raised questions about the policy of economicliberalization, and created uncertainty about how the financialsystem, including rural financial institutions, will be regulatedin the future.

RECOMMENDATIONS

The experiences of the three institutions mentioned above,along with analyses of other financial institutions, revealcrucial factors that enable them to achieve outreach andsustainability. These factors are presented in terms of the three-pronged framework mentioned above—policy environment,financial infrastructure, and institutional development—andtwo special challenges for institutional development and donorissues are added.

Creating an Appropriate Policy Environment

Although the urban bias of economic policies in Asiancountries has been reduced, several policies influence theprospects for developing sound rural financial markets.

• Interest Rates. Interest rates are controlled in somecountries while in others financial institutions arereluctant to raise rates even when they arederegulated. BRI-UD determines its own rates andfollows a policy of covering costs. The low-interest-rate policies of BAAC and GB are well intentioned,but the cost of this policy for the institutions is thatthey cannot become self-sufficient. When someinstitutions are subsidized, market-oriented institutionscannot compete. This problem is worsening inIndonesia because of special subsidized projectscreated in the wake of the financial crisis. The freedomto set interest rates is often linked to the freedom toselect clients. Subsidized-credit projects usually carryrestrictions about the target groups to be served, whichimplies that the lender ends up with a risky,undiversified portfolio. Financial institutions need theflexibility to set interest rates consistent with costs,risks, and competition.



• Loan Targeting and Institutional Support. Financialinstitutions need the flexibility to select their ownclients; if institutions participate in targeted andsubsidized projects, the subsidy should be used tostrengthen the institution, rather than be passed toborrowers as lower interest rates.

• Emergency Loans. Financial institutions are a poorchannel through which to allocate subsidizedemergency loans to alleviate social and economiccrises, because such funds are usually intended to bequickly disbursed without careful attention to clientselection, creditworthiness, or recovery enforcementprocedures.

• Institutional Independence and Political Interference.Countries that desire strong rural financial marketsmust find ways to shield rural financial institutionsfrom well-intended but detrimental politicalinterference.

Building Financial Infrastructure

Projects to build public institutions that reduce the costof financial intermediation may generate high returns becausethey benefit the entire financial system. Experience has shownthat governmental support is vital for two sets of supportinginfrastructure:

• Legal and Regulatory Systems. Prudential regulatoryand supervisory systems need to be strengthened inmost countries and the inefficiencies of legal andjudicial systems reduced so that contract enforcementis less costly and less time-consuming.

• Information Systems. All countries need to review theinformation systems that support finance, becausereducing information costs will lower costs for allfinancial institutions and drive down interest rates.Some information systems need to be supported bygovernments because they are public goods. Universal

identification systems are important so that clients ofan institution can carry their credit history from onelocation to another.

Institutional Development

Institutional development requires a commitment byowners and managers to establish good quality and efficientclient-oriented services:

• Client Preference. Institutions must determine whatproducts and services are demanded. Greaterappreciation for client preferences will encourage loanrepayment.

• Autonomy. Financial institutions require autonomy toadopt the new market-oriented paradigm and to hirewell-trained staff, pay high salaries, use incentivesystems to motivate efficiency, and decentralizedecision making to reduce transaction costs for clients.

• Efficiency and Costs. Competition is increasing insome markets, so financial institutions must strive toimprove efficiency and reduce the costs of theirservices. Improved efficiency will also permit chargingthe lowest possible interest rates and fees consistentwith financial sustainability.

Two Special Challenges for Institutional Development

There are two special challenges that need to be dealtwith as part of institutional development in several countries:

• Rehabilitation. There exist failing or poorly performingagricultural development banks, cooperatives, andcredit unions that consume resources and may causenegative spillovers that damage other institutions.They represent a potential resource in the form ofinstallations and staff that could be salvaged. However,



the conditions required for successful rehabilitationare frequently not met. Decisions are required to eitherclose them if that is the best alternative, or rehabilitatethem so that they can perform better.

• MFOs. Existing MFOs may have the potential to beupgraded to serve the rural market, but this requiresinstitutional strengthening and an appropriateregulatory framework so that they can legally mobilizesavings. A decision is needed in countries where theyare important to determine which ones have thecapacity to expand in rural areas, and to providesupport for them to do so.

Major Issues for Donors

Donor organizations are in a strategic position todisseminate best practices, encourage the exchange ofinformation, and build a consensus for reforms. They mustjudiciously determine which situations are conducive toinstitution building for rural financial institutions, and whichare better suited for structural adjustment projects to supportpolicy changes.

FINANCIAL MARKETS FOR THE TWENTY-FIRSTCENTURY

The rural financial markets in Asia are generally not ina strong position to support modernization of rural economies.Financial dualism appears to be increasing in many countries.Urban financial markets are modernizing at a faster rate thantheir rural counterparts. Larger farms and agribusinesses obtainfinancial services from these modern urban financial institu-tions, while most small farmers and rural nonfarm enterprisesmust rely largely on savings and informal finance. A digitaldivide is emerging that separates those using modern computersand communication technologies from those who do not.

Many rural financial institutions are weak and dependon subsidies. They lack professional competence to evaluatecredit risks and they operate in environments that are notsupportive. Asian agriculture will be at a disadvantage relativeto that in other regions and countries with more advancedfinancial systems. Fortunately, the Asian region has a few goodfinancial institutions that are well advanced and can serve asmodels for others. Successful microfinance experiences offerinsights into how finance can be successfully extended intorural areas. Moreover, several countries have highly trainedpersonnel who could create new technologies and manageinstitutions if they were given the opportunity, flexibility, andfinancial support. It is up to the governments in the region tosupport them. Asian policymakers must do a far better job inthe future than they have done in the past three decades inorder to create appropriate environments, build financialinfrastructure, and develop institutions necessary for strongmarket-based financial systems to serve rural farm andnonfarm enterprises and households.


APPENDIX 5THE QUALITY OF LIFE INRURAL ASIA—SUMMARY

David E. Bloom, Patricia H. Craig, andPia N. Malaney

Policymakers today have an extraordinary opportunityto secure a bright future for the people of rural Asia, whocurrently number 2.3 billion, or nearly 40 percent of the totalworld population. By investing in health, education, and ruralinfrastructure; by establishing institutions to promote ruraleconomic growth; and by seizing the opportunities presentedby a rapidly changing world, they can fulfill the promise of abetter life for these people.

This conclusion is based on extensive research on thequality of life (QOL) in rural Asia. This research hasmultidisciplinary conceptual foundations and incorporates awide range of real-world analyses, including cross-countrycomparisons, household survey data, focus groups of ruralwomen and men in several countries, case studies, andliterature review. On the basis of this research, there are fivemain messages:

• The QOL is a much broader concept than income percapita, which is the standard indicator of apopulation’s stage of development. QOL, which is theproper focus of the development process, has manycomponents, most of which are linked and tend to bemutually reinforcing. The QOL perspective suggests


that a range of powerful instruments for ruraldevelopment is available that extend beyond theconventional, but undeniably important, measuresdesigned to promote agricultural productivity.

• Rural Asia has made great strides in terms of QOL inrecent decades, but much remains to be done. Despiterapid population growth, rural Asians have, onaverage, enjoyed higher incomes, greater longevity,better health, and improved education. However,huge pockets of abject poverty persist. Hundreds ofmillions of people lack access to sanitation, safe water,or health services; stunting, wasting, and social andphysical insecurity are prevalent in many parts of theregion. Extreme gender inequality, which takes myriadforms including denying women access to health care,education, and jobs; physical and psychological abuseof women; and female infanticide, selective abortion,and nutritional deprivation also characterize manyparts of rural Asia, especially South Asia.

• The challenge of improving QOL is not insurmount-able. Compelling evidence indicates that QOL benefitsdirectly from increasing social spending on health,education, and nutrition; developing rural infras-tructure and financial institutions; promoting theinvolvement of rural people in the political process;and, perhaps most important, improving the statusof women. The evidence also suggests the existenceof powerful synergies among these policy initiatives,whose implementation is no less important than theirdesign.

• The wisdom and appropriateness of past policies andprograms must be examined in light of a new anduncertain future. Many traditional determinants ofrural QOL, such as population growth, will operatewith a different intensity. In addition, potent newinfluences, such as the emergence of many highlyeffective NGOs, a dramatic increase in the elderlyshare of the population, and the HIV/AIDS epidemic,

are appearing on the scene. The broad context withinwhich rural development must occur is alsoundergoing fundamental change because of, forexample, globalization, democratization, technologicalchange, and the knowledge revolution.

• Rural Asia faces four particularly strong challengesrelated to poverty, aging, globalization, and genderequity, respectively. Policymakers must give priorityto poverty alleviation and focus on both agricultureand other sectors. This is particularly importantbecause demographic trends project a future increasein the proportion of the population that is of workingage. If countries do not absorb these additions to thework force into productive employment, the ranks ofthe socially excluded will swell. Political instabilitycould also result. As the population ages, a secondchallenge will gradually emerge, which is providingold age security. Addressing that challenge requirescreating new institutions now, with the recognitionthat changing them later as the elderly share of thepopulation grows may be politically infeasible. Third,as globalization proceeds, policymakers will need toensure that the rural sector is not left behind and willbe protected from new risks. Finally, achieving genderequity is crucial to enhancing the QOL, both directlyfor girls and women, and indirectly through thecontributions they make to well-being at all levels ofrural society.

THE GOAL OF DEVELOPMENT

The goal of development is to improve people’s lives inways that are efficient and sustainable. The QOL perspectivefocuses on the many factors that influence the ability ofindividuals, families, and communities to lead fulfilling lives.One of the most important of these factors is income. Not only

Appendix 5: The Quality of Life in Rural Asia 155


does increased income make people better able to freethemselves from basic wants such as food or shelter, but italso expands their choices about how they will live their lives.However, income is only part of the story. Whether people arehealthy and whether they can develop their innate capacitiesthrough education also matter. At the aggregate level, healthand education levels are not completely determined by income.Some countries exhibit relatively high levels of education andhealth status despite being poor, while some wealthy nationshave relatively low levels of health and education. This indicatesthat what countries do with the wealth they have, that is,what policy choices they make, are a crucial determinant ofQOL.

QOL is also to some extent a moving target in the sensethat the results of development define subsequent perceptionsof what constitutes achievable QOL goals. In addition, newcircumstances may reveal new QOL concerns. For example,as countries become wealthier through industrialization,pollution becomes an issue for the QOL of their inhabitants.We also argue that people’s ability to influence their lives byparticipating in the decisions that affect them is another aspectof QOL.

The argument put forward here is that QOL is not aseries of unrelated but desirable outcomes, but rather that QOLdepends on interlinked processes. Certainly, income, health,and education by themselves have direct, positive effects onQOL. However, they are also interrelated. The most commonlyperceived link at the individual level may be that betweeneducation and income: increases in education lead to increasesin income, all else being equal. However, increases in incomealso tend to raise education levels, because governments andindividuals have more money to invest in education. Similarly,health and education are associated, and the links betweenthe two are important. Poor nutrition also slows cognitivedevelopment and is related to poor performance in school.There are also links between political participation and otherQOL determinants. People who are more educated tend tofeel less exploited and powerless in their interactions in the

public sphere and have a greater sense of being able toinfluence decisions that affect their communities. Income levelsalso seem to affect participation, because higher income levelsare associated with higher social status and greater politicalawareness.

In addition to the various components of QOL, the linksamong those components also deserve attention as they arecrucial in determining the effects of different policyinterventions. While standard cost-benefit analyses take thedirect impact of policy interventions into account, theirinterlinkages imply that directed investment in areas withfeedback effects, such as health and human capital, can havelarge impacts on the overall QOL. Specifically, theseinterlinkages point to a crucial policy issue: the possibility oftaking advantage of multiplier effects through relatively small,but targeted, investments in such areas as education andhealth. The goal of such investments is to produce virtuouscycles of increasing QOL. Better educated populations arehealthier, more productive, and wealthier. As they go on toacquire more education and better health, an upward spiralof improvement is generated. Policymakers should also notethat this process can operate in reverse. Failure to invest inpeople prevents them from escaping a trap in which pooreducation, poor health, and poverty reinforce each other.

QUALITY OF LIFE ACHIEVEMENTS ANDCONTINUING GAPS IN RURAL ASIA

In most countries in Asia, as in the rest of the worldgenerally, QOL tends to be lower in rural areas than in urbanareas. Lower school enrollment rates, higher infant mortality,lower life expectancy, and lower wages all contribute to thediscrepancies rural inhabitants experience. Although progressin improving rural QOL has been relatively slow, the fact thatmost QOL indicators for rural Asia have not deteriorated inthe face of rapid population increase is a major achievement.



Two facts are especially noteworthy: First, rural-urbandisparities in income per capita tended to increase between1970 and 1995. Second, the Human Development Index, whichembodies education levels and longevity in addition to income,exhibited a larger increase in the more rural Asian countries.These findings indicate that the combination of improvementsin rural life expectancy and human capital acquisition (mainlythe expansion of primary education) outweighed rural Asia’srelative income decline. Insofar as standard analyses of incomeper capita support fundamentally different conclusions thanthe more encompassing measures of QOL, these results providea powerful justification for adopting a broad QOL perspective.

These changes were taking place at a time of greatdemographic shifts. In 1970, 1.5 billion people lived in ruralAsia, representing 45 percent of the world’s total populationand 78 percent of Asia’s population. Because of rapidurbanization, by 1995 the dominance of Asia’s rural populationhad declined to 39 percent of the world’s population and 68percent of Asia’s population. During the same period,notwithstanding this decline in its relative size, the populationof rural Asia increased by nearly 600 million people. Thispopulation boom imposed enormous pressure on livingstandards in rural Asia in terms of competition for resources.In essence, rural Asia has been struggling to climb a series ofdescending escalators. In light of these pressures, especiallythe need to provide services and livelihoods for many morepeople, the gains made in schooling, life expectancy, increasedaccess to health care, etc., in the last quarter of a century areimpressive. In terms of QOL, rural Asia has also fared wellcompared with rural populations in other developing regions.

At the same time, the absolute QOL shortcomings inrural Asia, as well as the persisting gaps between rural andurban Asia, should be cause for concern by policymakers.Nearly 0.5 billion rural Asians, especially in South Asia, lackaccess to safe water and to health services. To put this figurein perspective, it is approximately equal to the entire populationof Latin America in 1995. Even more daunting, the estimatesalso suggest that some 1.76 billion rural Asians, primarily in

the People’s Republic of China (PRC) and South Asia, lackaccess to sanitation facilities. Access to basic services isespecially high in Central Asia, mainly because the newlyindependent states have high rates of access dating back towhen they were part of the former Soviet Union.

Country-specific rural-urban comparisons of variousQOL indicators highlight important rural deficiencies. Forexample, in many Asian nations educational indicators revealthe marked superiority of urban areas: in Bangladesh theurban literacy rate of roughly 60 percent is double that in ruralareas; in Nepal almost half of urban 10- to 14-year-olds areenrolled in school compared with barely a quarter in ruralareas; while in the PRC the mean gap in rural-urban educationalachievement is 4.6 years, a difference that has remainedconstant for two decades. In reality, the gap in achievement isprobably worse than indicated by these statistics because theydo not take the rural-urban quality gap into account. Qualityissues are a significant problem in rural areas, where thepopulation’s geographic dispersion and relative isolation makesaccess to well-educated, trained teachers particularly difficult.

The inherent difficulties in providing high-qualityeducational services to rural areas indicate the need for newand innovative approaches. For instance, building links withlocal NGOs can enable governments to involve communitiesin the education process, thereby enhancing both the demandfor and the supply of high-quality education. Note that theprovision of educational services is fundamentally a Stateresponsibility, and should by no means be left to NGOs.However, these organizations are often in a position to improvethe level of services the government provides.

The differences in health between urban and rural areasare also striking. Even though Asia has achieved dramaticincreases in life expectancy, where statistics are broken downby urban and rural residence, the disadvantage of ruralinhabitants in terms of their life chances are evident. In therural province of West Nusa Tenggara, Indonesia, for example,life expectancy is ten years lower than the national average,while rural Indians can expect to live about seven years less



than their urban counterparts. Rural Asians also face a gap inhealth care access, as exemplified by the proportion of birthsthat are attended by doctors. Rural women are much less likelyto have access to trained personnel when they deliver theirchildren than their urban sisters. In terms of their reproductivehealth, rural women also have less access to family planningand reproductive health services. While many Asian countrieshave successfully provided access to such services in urbanareas, this has been harder to achieve in rural areas, wherepopulations are more dispersed.

The situation of rural Asian women points to theparamount importance of gender in an examination of QOLbecause it raises the question: Whose quality of life? For many,being female and living in rural areas is a double burden.Indeed, in many Asian nations the gender gap in schooling,literacy, health, social participation, and wages is driven bythe rural sector. For example, in Nepal, while urban boys aged15 to 19 outnumber their female counterparts in schoolenrollment (45 percent versus 32 percent), the gap is muchmore pronounced in rural areas (25 percent compared with 6percent). In India urban women can expect to live about threeyears longer than men, but there is no difference in rural lifeexpectancies by gender. In countries such as Nepal, Sri Lanka,and Thailand rural women are much more likely to be unpaidfamily workers than urban women. In many countries thecombination of high female involvement in agriculture in ruralareas and the large gender gap in agricultural wages becauseof gender-typing of jobs puts rural women at a disadvantage.In the Philippines, while the gender pay gap in urban areashas fallen during the last two decades, it has remained constantfor rural women. These examples demonstrate that gendergaps in core QOL indicators are larger in rural Asia than inurban Asia.

Policymakers have a number of strategies andinstruments at their disposal to help close some of the QOLgaps outlined here. One strategy is to expand the partnerswith whom governments work to provide or deliver QOL-enhancing services. In many Asian countries, NGOs have

emerged as vital sources of information and ideas, builders ofsocial capital at a decentralized level, and effective deliverersof services that address basic needs. Notwithstanding theirritation NGOs sometimes cause because of the advocacy toolsthey employ and their occasionally strong political orientation,there is now ample evidence that NGOs are simply better thangovernments at performing certain functions that the privatesector does not have the incentives to undertake. For thisreason, it would be worthwhile for many Asian governmentsto review their public policies toward NGOs, with a view toliberalizing them. International donors can also play animportant role in creating opportunities for NGOs todemonstrate their value.

Decentralization is another strategy and is one that hasmany advocates in the development-policy community. Thebenefits reside in allowing those who most are affected bydecisions to have a greater voice in making them, whichpromotes participation and can result in greater efficiency byallowing people to make investments in what they most need.In the long run, decentralization should also contribute togreater local capacity to plan, manage, and implement policies.There are some drawbacks that policymakers should attemptto minimize. Specifically, fiscal decentralization may exacerbateregional inequalities; the inability of small communities to raisesufficient funds to provide services suggests that in manyinstances, local management, combined with financing fromthe central government, may make the most sense. In addition,understanding that short-run problems are likely to occurbecause of the lack of local capacity is important and shouldnot be taken as evidence of failure. Rather, designingdecentralization initiatives that take this into account and buildin mechanisms to overcome it are indispensable.

To overcome many QOL gaps, policymakers also havesome specific instruments at their disposal. The problem oflack of income can be tackled by expanding microcreditprograms, in particular, by encouraging the private and non-profit sectors to make loans, using established examples ofsuccessful programs as their guide. Although many successful



programs concentrate on loans related to agricultural production,developing loan schemes for nonagricultural purposes, includingcommunity infrastructure, is important as well. Land reformprograms are also a potential tool. Because the structure oflandholding is so closely linked to poverty, implementing legalreforms and creating incentives to lead to more equitablelandholding patterns is an option for improving QOL.Changing regulatory structures to secure equal inheritance andownership rights for women is crucial, although achievingbroader redistribution or structural change through regulationappears to be more difficult. Achieving some amount ofredistribution through the use of progressive taxation shouldalso be possible. Other policies, such as ensuring access to creditat reasonable interest rates, can enable some landless people topurchase land and break out of the cycle of poverty.

Targeted social spending is another instrument availableto policymakers. Because women’s education is so stronglylinked to positive QOL outcomes for themselves and theirfamilies, where schooling gaps between men and women exist,more resources need to be devoted to educating girls. This maymean hiring more female teachers (because in some areas,parents are hesitant to send girls to schools with male teachers)or subsidizing families to keep their daughters in school.Similarly, women’s health initiatives have a large social payoffin terms of overall QOL. All over rural Asia, reproductive healthservices lag behind those in urban areas, and the unmet needfor family planning is generally higher. Closing these gaps isan important investment in creating a virtuous cycle ofenhanced QOL.

Infrastructure investment, particularly for roads,electricity, telecommunications, and provision of safe water,is also a key area for investment. In many cases, however,rather than direct government provision of such infrastructure,a preferable role for the State might involve creating incentivesfor private provision. Especially important is dismantling Statemonopolies and cutting inappropriate taxes on infrastructuregoods and services.

QUALITY OF LIFE CHALLENGES FOR RURALASIA

Remedying rural Asia’s longstanding QOL deficiencies isnot the only task for policymakers. They will also be confrontedby new situations and will need to develop plans to set andmeet new priorities. These may be the most important challengesthe region faces to achieving a higher QOL as it heads into thenext century. Ensuring that the promise of rural Asia is notbroken means that policymakers must make a commitment tomeeting these challenges.

Poverty Reduction

Perhaps the most crucial area for improving QOL in ruralAsia is poverty reduction, which is linked to better provisionof services and improved individual well-being. Achieving thisdemands a multipronged strategy that focuses on increasingproductivity in all sectors, creating more jobs, investing inhuman capital, and promoting good management of thechallenges posed by ongoing demographic changes. Devisingstrategies to raise productivity in agriculture, and especiallyin rural manufacturing and services as agriculture comes tooccupy a less important position in the rural economy, is a keymeans of rural poverty reduction, as is absorbing labor in thosesectors. The relative expansion of the working-age populationduring the next several decades is a demographic gift thatcan help achieve growth and alleviate poverty, but only ifproductivity and employment increase to absorb thispopulation. Social safety nets are also needed to alleviate thesuffering associated with both episodic and chronic spells ofpoverty.



Old-Age Security

The expansion of the working-age population, combinedwith lower mortality rates, points to another major challengefacing rural Asia in the future. As this group of people ages,the issue of the old-age dependency burden will begin tosurface. This has the potential to have a negative effect oneconomic growth unless families and governments begin toprepare for it now. While observers often see the Asian familyas a force promoting social stability and as a provider of socialwelfare for its members, demographic change is likely to strainthis traditional institution. The costs of caring for the old arelikely to rise as working individuals have fewer siblings withwhom to share the financial burden, which may weaken thetraditional arrangement between the generations to providecare. Migration, the growth of the mass media, andurbanization may also promote cultural change, especially theformation of nontraditional attitudes such as individualism,which may also lead to a weakening of the family welfaresystem. Under this scenario, rural Asia faces the dauntingprospect of significant unmet need for the care of its elderly.

The aging of the population and declining mortality andmorbidity mean growing numbers of the “oldest old,” oftendefined as those older than 75 or 80. This period of life isassociated with decreasing functionality and mobility andgreater dependence. The need for local services is especiallyacute for this population, because their limited mobility meansthey are less able to travel long distances to access services. Inaddition, because their children are likely to be elderlythemselves, they will have fewer economic resources fromcurrent earnings and a diminished ability to care for their agedrelatives.

These changes point to two major policy challenges:providing income and services for the old in the future. Savingsand pension systems must be developed now to address theneed for future income for the elderly, although to do sopolicymakers need to overcome some problems. In rural Asia,providers of credit such as NGOs and other microcredit

organizations have typically not mobilized savings. This meansthat incentives and capacity building for managing depositsneed to be created. Financial market controls would help toensure the soundness of most pension systems, strengtheningan already overwhelmingly strong set of arguments in favorof such controls. The second challenge is providing services,especially medical care. The rural health care system will needto be retooled to some extent. Village health workers and NGOstaff, who tend to focus on children’s and reproductive health,will need to be trained in geriatric medicine. Decisions abouthealth care services, such as where to locate them, and prioritieswill also be affected by the needs of an aging population.

Globalization

Another major challenge facing rural Asia is theglobalization of the world economy, as trade grows andmovements of capital and labor across national andinternational borders increase. The integration of the ruraleconomy into the global economy is increasing in theagriculture sector as farmers grow traditional food crops forthe world market or shift into cash crops. Such integration ispositive for the rural sector, because this type of diversificationcarries with it the potential for higher incomes. At the sametime, however, there is greater risk associated with thepossibility of shocks occurring in the global economy, forinstance, the ongoing Asian financial and economic crisis.

Because global integration is likely to continue,policymakers need to consider ways to protect their economiesfrom the negative aspects of globalization, which means,among other things, spreading risks, both across individualsand over time. One way to diversify risk over time is toencourage saving, which helps individuals and communitiesweather economic shocks and loss of income. At the sametime, however, as a means of diversifying risk, local or regionalefforts tend to be inadequate. Crop failures, natural disasters,or even regional economic crises are likely to overwhelm local



savings institutions because they affect all members at the sametime. One solution could be to create international insurancemechanisms. Transnational policymakers, such as theAssociation for Southeast Asian Nations, need to considercreating insurance-based safety nets that operate across largeregions or continent-wide. Doing so would mitigate the risks ofglobalization and lessen the burden on areas hardest hit by shocks.

In an era of globalization, forward-looking policymakersmust also consider such QOL issues as labor standards andfree markets. Like a social safety net, labor standards are bestdealt with across countries rather than within individualnations, because the lack of common standards may promotea race-to-the-bottom dynamic, whereby all countries lowertheir standards in order to compete in the international tradearena. In addition, workers may be uninformed about the long-term risks that their work entails, and therefore be unable tomake good choices about where to work. Even if theyunderstand the health and safety risks, in the absence of otherjobs they may have no alternatives. International laborstandards can help address this problem, although ensuringthat the social benefits exceed the social costs of the regulationsis important. Promoting freer markets, while not specificallya rural issue, would benefit the rural sector. In this respect,the continued barriers to capital mobility and lack of opennessare problems that many Asian nations need to address. Interms of issues and policies linked to economic openness, suchas tariffs and quotas, hidden import barriers, and capitalcontrols, most developing Asian nations fare extremely poorlycompared with more developed economies.

Gender Equity

Finally, one of the most formidable challenges facing ruralAsia involves overcoming strong and persistent genderinequalities, especially in South Asia. Improving women’s QOLwill have a multiplier effect for society as a whole. Increasingwomen’s education not only raises their own QOL, but also

the QOL of other family members. For example, women’sschooling has a greater positive impact on family health thanmen’s schooling, because of women’s roles as mothers, wives,and daughters-in law. Similarly, mothers’ level of educationalachievement (which has a higher impact on children’s schoolperformance than their fathers’ level) may eventually translateinto higher wages for children when they enter the workforce.

By targeting programs and policies to women, lowerfertility can also be achieved, which is important for improvingrural QOL. Higher rural fertility is partly explained by pooraccess to education and the lack of job opportunities for womenin rural areas. Increasing educational opportunities for girlsby providing better access to schools and implementing suchpolicies as compulsory school attendance or providingscholarships for girls can therefore have long-termdemographic benefits. Creating labor market opportunities forwomen will also make children more costly, as they raise thevalue of women’s time. Microcredit programs that lendprimarily to women, such as the Grameen Bank or theBangladesh Rural Advancement Committee, can thereforebring down fertility rates, not only directly by transmittingtheir social message that small families are desirable, but alsoindirectly by providing women with job opportunities.

CONCLUSION

As policymakers working on rural Asia chart a courseto the next century, they face a bright future, but must alsonavigate rocky shoals and uncharted waters. The uncertaintylies in fundamental shifts that are taking place in both thenature of rural life and in ideas about how to improve it. Giventhe ongoing demographic, cultural, and political changes takingplace in rural Asia, the past can provide only limited guidancefor future action.

The future focus must be on the centrality of QOL as thegoal of rural development. The older vision of improved



agricultural productivity and income growth being thedominant pathway to improving QOL no longer makes sensein light of the determinants of economic growth and of QOLpresented in this study. It fails to recognize the myriad of non-income factors that influence QOL and also neglects thestimulus to economic growth provided by QOL improvements.A recognition of this calls for policymakers to rethink theirstrategies for growth, in which attention to gender equity andbetter health and education must figure prominently.

At the same time, the context within which decisionsare made is changing. Demographic trends reveal a new setof needs and priorities that policymakers cannot ignore. Thedecision-making environment is also increasingly characterizedby the global trends of democratization and decentralization.These trends almost certainly mean that pressures for greateraccountability are likely to grow and governments will haveto pay more attention to QOL. New social actors such as NGOsare likely to have a larger voice, and policymakers need tolearn how to benefit from their experience and effectively workwith them, rather than view them as adversaries whoserecommendations need to be resisted. Globalization andtechnological change also bring with them new possibilitiesfor rural development.

Policymakers face enormous challenges in adapting torural Asia’s new needs and possibilities. There is tremendouspromise for the future of the region, but considerable peril aswell. What has been highlighted here are some of the likelydirections and prominent influences and their QOLimplications. Clearly, the new challenges associated with thedevelopment of rural Asia call for new strategies. Devisingthese in an open and rational way that addresses ever importantsocial and political realities is the key to unleashing the promiseof rural Asia and securing it a bright future.

APPENDIX 6THE EVOLVING ROLES OFSTATE, PRIVATE, AND LOCALACTORS IN RURAL ASIA—SUMMARY

Ammar SiamwallaWith contributions by Alex Brillantes,Somsak Chunharas, ColinMacAndrews, Andrew MacIntyre, andFrederick Roche

This volume reviews the evolution of paradigms andpractices since the late 1970s with respect to the roles of theState and the public sector in rural development. A specificobjective is to identify areas of future comparative advantage,both for the State and for the more recent additions to the castof actors in rural development: local governments, commu-nities, community-based organizations, nongovernmentorganizations, and the private sector itself. In general, thevolume takes the perspective that, from the standpoints of theefficiency and quality of the goods and services provided, ruralproductive activities should be privatized and localizedwherever possible. Hence, a second objective is to assess whatthe residual roles of the State should be in order to create andsustain an appropriate enabling environment that is consistentwith the objectives of efficient growth, equity, and environmentalsustainability.

Most of the economic development literature and practicethrough the 1960s assumed as a matter of course that central


governments would plan, initiate, and finance economicdevelopment and that the role of the countryside was mainlyextractive, i.e., it would provide wage goods (cheap food),surplus labor, and taxes to support urban-based development.As the lead actor in development, the central Government hada clear role: it would deliver development to the people. Forthis task, it was provided with considerable financial andtechnical backing from the donors. While the approach hadits successes, it also had many hard lessons, the main one beingthat by the early 1970s there had been little materialization ofthe widespread improvements in living standards and humanwelfare that the word development ought to imply.

Then, in the early 1970s, there came a nexus of crisisand opportunity. Because of bad weather and internationalpolitics, world foodgrain and energy prices skyrocketed. Inagriculture, the green revolution came to the rescue totransform the agrarian scene in much of Asia. Composed of asimple package of inputs—seed, fertilizer, and water, with adash of pesticide and credit—the green revolution technologyreadily lent itself to top-down dissemination, thus constitutinghistory’s greatest success story of government-led agriculturalgrowth. It was only with the coming of the green revolutionthat economists and planners began to recognize thecontributions of a progressive agriculture sector to overalleconomic growth. Because much greater food security wasfor the first time within reach, and using the opportunitiesopened by this technology, governments abandoned theextractive approach and, as never before, lavished resourceson the rural areas in the form of subsidies to fertilizer,irrigation, and other inputs.

But it was also evident by the 1980s that Asia’s less favoredagricultural regions had been largely bypassed by the greenrevolution. By the early 1990s, the top-down, one-size-fits-allapproach to agricultural research and extension had run outof steam. Rates of growth of foodgrain yields were declining,while the difference between experimental yields and yieldson Asia’s best farms had greatly narrowed. Moreover,increasingly prominent, at least in the eyes of the donors, were

the concerns about environmental sustainability, bypassedregions, disadvantaged socioeconomic groups, and thesustainability of costly development interventions inagriculture.

A second set of equally profound trends emerged in thelate 1980s. The Asian miracle of export-oriented industrialgrowth began to transform the urban areas of East andSoutheast Asia. This development was led by the private sector,but supported both by state-financed infrastructure and, fromthe late 1980s, by the widespread progress that governmentshad achieved in macroeconomic stabilization and inliberalizing investment and capital markets. The secular declinein agriculture’s share of national income accelerated. The shareof government expenditure in GDP also began to fallgradually—faster in some of the transitional economies—inpart because of urban-industrial growth and in part becauseof austerity in state budgets. The Asian economic crisiscommenced in 1997, and has, for the time being, arrested thesetrends. The crisis has provoked new thinking about the rolesof the State as a promoter of development, as the mainmacroeconomic stabilizer, and as the provider of goodgovernance.

THEMES AND ISSUES

Background to the Evolving Paradigms andPractices of Rural Development

This section sets the stage for the book’s arguments bydescribing the principal sources of rural dynamism. The firstof these, the dynamics of agriculture and food supply, includesthe fact that while food security, especially in cereals, is notthe urgent concern it was 20 years ago, thanks to the greenrevolution and the subsequent growth of agriculturalproductivity and rural incomes, foodgrain supplies mustcontinue to increase 1.5 percent annually for the next 25 years

Appendix 6: Roles of State, Private, and Local Actors 171


in order to maintain that security. This at a time when thegreen-revolution model of state-led agricultural developmentis running out of steam and its inadequacy in rainfed and lessfavored areas has become obvious, when agriculture’s shareof GDP and hence relative economic importance is declining,and when poverty alleviation has risen in governments’priorities and agriculture’s strategic role in achieving it isbelatedly being recognized. The State will need to reconsiderits priorities and comparative advantages in the agriculturalsector, first recognizing that agriculture is fundamentallyunyielding to direct state planning and control, beingdetermined more by incentives than by fiat. Creating anappropriate incentive and regulatory structure to encourageprivate-sector investment and sustainable, market-led growthand focusing direct public interventions more on bypassedregions and disadvantaged groups in the population are likelyto be the State’s major new challenges.

The green revolution, growing rural incomes, and urban-industrial growth linkages have led to rural nonfarm develop-ment, comprising mostly nontradables produced by householdsand microenterprises. The phenomenon has been almost entirelyled by the market; state efforts to promote rural industrializationhave largely failed. The State’s provision of infrastructure—roads, electric power and telecommunications—and ruraleducation to provide local people with the tools to takeadvantage of rural nonfarm opportunities has been and is likelyto remain its major role in facilitating such growth.

Factors in the macro and global environment includethe provision by the State of basic macroeconomic stability.Since the 1980s, there has been a nearly universal liberalizationof markets and in the 1990s, an increasing economicinterdependence engendered by globalization. These largetrends, plus the chaos and uncertainty arising from the Asianfinancial and economic crisis that began in 1997, have mademacroeconomic stability a more difficult achievement and haveprompted a rethinking of the State’s roles in managing capitaland financial markets, in providing social safety nets, and,more fundamentally, in providing good governance.

Development has engendered profound demographic,social, and political developments, including rapid urban-ization, greater labor mobility, and the dissolution of traditionalfamily and community institutions and cohesiveness. It hasalso led to a decline in human fertility that is positivelycorrelated with the rates of economic growth, urbanization,and social development (as measured by infant mortality,education, and female labor-force participation), but that hasnot yet, because of the momentum of the young age distribution,led to an actual decline in population. Political institutionshave also changed, though less widely: democratic institutionsand more competitive politics have attained seemingpermanence in many countries. The human rights movementhas added to the impetus for greater openness and account-ability and sometimes contributed to grudging, but ultimatelymeaningful, political change.

Finally, the Asian financial and economic crisis that beganin 1997 has arrested growth in much of the region, with rippleeffects that were felt around the world. The crisis created strainson the rural economies as they were forced to absorb workersdisplaced from urban employment. It resulted in depreciatedexchange rates that have given a boost to agriculturalproduction, exports, and employment. It restricted even morethan previously the resources available for investment inagriculture and rural development. Finally, it eroded confidencein government and intensified attention to four principles thatare now accepted—among many donors at least—as buildingblocks of good governance: accountability, participation,predictability, and transparency. Although the crisis may providea pause, the relative economic role of agriculture will continueto decline, but the sector will remain strategically important,particularly in lower-income, slower-growing countries.



Roles and Actors in the Provision of Rural Goodsand Services

With the demise of the assumption that the centralGovernment plays the paramount role in setting policies foragriculture and rural development, new players have emergedand are becoming more active in shaping these policies in Asiansocieties. This section sets out various types of collective action,or functions, required for rural development and then describesthe actors, or institutions, that serve as instruments for thedelivery of these requirements.

For a rural economy to function and develop there mustbe goods and services of several kinds. Public goods are thosethat are nonrivalrous (what one person consumes does notsubtract from what is available to others to consume) andnonexcludable (if the goods are produced, it is impossible toprevent people from consuming them). Sanitation services arean example of a pure public good. Local public goods are thosewhose nonrivalry and nonexcludability impact only a limitedgeographical area. Private goods and services are those wecommonly refer to, comprising three-fifths of an economy’sresources. In addition, there are merit goods, which are thosedeemed too important to be limited by the size of a person’s orhousehold’s income; these may include food, health servicesand education.

A second requirement is macroeconomic stability—afunction seemingly far removed from rural areas and clearlya task to be performed by the central Government, butimportant because of the need to keep real exchange ratevariations within bounds and thus maintain decent terms oftrade for agricultural products.

A third requirement is the reduction of poverty and other“social justice” concerns, which are connected with theprovision of the merit goods described above because of theinability of many Asian households to meet their own basicneeds. These concerns provide a rationale for state interventionin otherwise private economic and social activities.

Finally, there is the requirement of providing rules and

rights, especially property rights, to limit people’s behaviorwith regard to the resources of rural areas. Some of these arecovered by the country’s legal system; others evolve from rulesadopted by local communities about access to forests orallocation of water. Property rights assigning control of anasset to an individual or community involve state propertyrights, private property rights, common property rights or open-access resources, and communal property rights. All these areespecially important in rural Asia, where property rights inland that have legal clarity and are properly enforced are stillrare, even in market economies.

Attention then turns to a taxonomy of the variousinstitutions and actors in rural development, beginning withcentral governments in all their many forms and theirconstituent parts, politicians and bureaucrats. Politicians, andespecially national political leaders, are an immensely diverselot, so this discussion focuses on two major types: those whosecountries have little political competition—the People’sRepublic of China (PRC), to take the most notable example—and who don’t have to worry about being reelected; and thosewho are constrained by the need to win votes; India providesan example of the second type. Whether running for office ornot, though, politicians have found themselves having tomobilize the rural population in a show of support for theregime. In all countries except the PRC, which erased andrefashioned the traditional rural social structure, this has meantaccepting the existing social structure and relying on thetraditional rural elites to deliver political support. This has alsomeant that the great mass of rural people have remainedlargely unmobilized in most of Asia, since rural politicians havepreferred patronage politics to policies that actually aid ruraldevelopment or poverty alleviation, such as land reform.

Bureaucrats also have great influence on what happensin rural areas, but as a rule, over time, they have become lessand less well paid, less and less competent, and more andmore corrupt. It is little wonder that governments are becomingless capable of undertaking and implementing rational policiesin the countryside.



Local governments, meaning mostly villages, may be bestequipped to carry out many of the requirements of ruraldevelopment, but have played only a small role, partly becausegovernments rarely have personnel other than teachers in localcommunities and those are given little power and few resourcesto undertake any serious collective tasks, despite much talk ofdevolving power to them. Villages sometimes take collectiveaction upon themselves, especially if they possess “socialcapital,” a form of social cohesion that derives from pastinteraction in carrying out communal activities. The otherintervening layers of government—district, region, province,state—have even less social wherewithal to carry out ruraldevelopment activities than villages.

Nongovernment organizations vary in the scope of theiroperations in rural areas, but almost all of them evolved fromcharitable organizations, usually with a religious orientation.They are closer to the poor than the other actors discussedhere and their stance tends to be politically radical. Becauseof their ideology, their relations with governments tend to beprickly. While their performance in rural development is oftenmore cost-effective than that of governments, they are notautomatically more cost-effective, and their claim that theyreach the poorest of the poor is not borne out.

The for-profit private sector in rural development,including business corporations and rural nonfarm activitiesby farm families themselves, can only function within anestablished legal framework; the recent Asian economic crisishas shown that laws with respect to private-sector institutionsare outmoded and need reform. The township and villageenterprises (TVEs) that have grown so spectacularly in ruralareas of the PRC and that have contributed greatly to ruralwelfare and strengthened local governments by providing themwith resources for social investment and rural infrastructureprojects are often cited as models for other parts of Asia. Buttheir development is associated with features unique to thePRC, including the immobility of the rural population andthe lack of a private sector.

Finally, multilateral lending agencies, notably the Asian

Development Bank and the World Bank, are of considerableimportance in Asian rural development, both as a source offinance and also as a source of policy thinking and eveninfluence on policy choices. Lending decisions reflect theinfluence of vested interests in the donor countries as well ascurrent economic and development thinking in their capitals.Unfortunately, loans to agriculture, traditionally dominatedby irrigation projects, have not performed as well as loans to“harder” sectors.

Devolution and Decentralization: IndividualCountry Experiences

Devolution and decentralization of public administra-tion have become much-discussed goals and processes in manyAsian countries in the past two decades. While the concept isnot new, the forces motivating decentralization today reflectnew factors that have emerged in recent years, including theimpact of globalization, especially the improved access toinformation by more people, even in remote rural areas; thegreatly changed economic and social context brought aboutby liberalization, privatization, and other market reforms; andthe growing social and political demands for voice andautonomy. The changed priorities of donors, including a newwillingness to support better governance and accommodatelocal participation and autonomy, have also helped makedecentralization a popular option for rural development.

Decentralization, encompassing the transfer of bothadministrative and financial authority, is now happening inmany countries. While it is no panacea—indeed it can provedestabilizing, leading to loss of control by central governmentsover the macroeconomy and exacerbating regional disparities—if properly planned and managed, decentralization can bringsubstantial benefits: it can strengthen the overall capabilitiesof government, better match the provision of governmentservices against local needs, more effectively support and utilizethe local economy, bring government closer to people, and,



through participation, create more responsive and hopefullymore capable systems of government.

The prerequisites for successful decentralization includethe following:

• first and foremost, full political will—unfortunatelyexpressed more often in rhetoric than in action;

• eschewal of procrastination: the difficulties inherentin such a complex and location-specific process shouldnot be used as an excuse for inaction by centralgovernments;

• full participation and consultation by and among allstakeholders, involving NGOs and the private sector;

• clarity and precision in enactments and in thedevolution of responsibilities;

• political as well as administrative and financialtransfer of functions; and

• adequate financial support and capacity building.

The experiences of decentralization in three Asiancountries—Indonesia, the Philippines, and the PRC—areexamined, with particular emphasis on the effectiveness ofdecentralized services related to rural development. The casestudies show how the process of decentralization has beenshaped by the different political, social, and physicalcircumstances of each country.

Indonesia, reflecting strong political pressures, is rapidlymoving forward to decentralize its government system. It hasa history of revising its institutional arrangements by bringingin broad legislation and slowly, over a long period, allocatingthe necessary resources to bring about full implementation.Its present decentralization policy has its dangers: if not wellimplemented and funded it could fragment the country’spresent fragile unity. During implementation, time must beallowed so that clear relationships can be established betweenthe various levels of government and ways worked out to meetthe significant differences, whether economic, social, or political,between different areas.

The Philippines has also gone some way in the past tenyears in decentralizing selected central government functionsto the local level, especially to local governments, that havehelped them respond to the unique needs and demands oftheir very diverse localities. Coordination between levels ofgovernment has also improved. There are still a number ofproblem areas, including slow financial devolution, theperceived lack of capabilities of local government officials, andthe strong resistance of central government bureaucrats totransfer to remote areas; but the political impetus for devolutionremains and decentralization should continue towards fullimplementation.

The PRC’s decentralization over the past two decades,while considerable, has been more de facto than formal andlegalistic, the result of experimentation and lessons learnedfrom it. The decision to end mandatory crop quotas and thesystem of collectives resulted in local authorities (at variouslevels from provinces downwards) undertaking initiatives thatproduced considerable rural decentralization and economicliberalization.

EVOLVING ROLES IN THE PROVISION OF KEYGOODS AND SERVICES

In this part, detailed attention is given to four rural goodsand services that have been instrumental in Asia’s economicprogress: agricultural research and extension, irrigation, themarketing system for rice and fertilizer, and education andhealth services. In addition to directly influencing ruraldevelopment, these goods and services lend themselves to arange of alternative financing and provisioning arrangementsinvolving the State, local governments, rural communities andcommunity organizations, and the private sector.



Changing Technology and Its Impact on Researchand Development

The enormous impact of the green revolution onagriculture led to greater investment in agricultural researchand extension systems. It has also introduced additional playersin rural development: international agricultural researchcenters (IARCs), which have contributed mightily to theadvancement of agricultural technology in Asia, andmultinational for-profit corporations, which today dominatedevelopments in biotechnology.

Investment in research has been socially profitable andgovernments need to maintain their involvement. Theorganization of that research will differ depending on thegenetic makeup and reproductive characteristics of crops: forself-pollinating crops, public-sector research is essential becausethere is no way for-profit institutions can recover researchcosts; for cross-pollinating crops and small animals, private-sector research can be profitable; and for trees and largeanimals, farmers themselves should usually be credited withwhat improvement occurs.

Public institutions used to have a monopoly inagricultural research, but two developments have altered this:first, biotechnology, which introduces the multinationalcorporations as significant new players, and second, thereduced focus on genetic improvement and the increasingimportance of research to resource management. The rise ofbiotechnology has changed genetic improvement research agreat deal and will no doubt add to the pool of knowledgeand technologies for agriculture in the future. Its entry ontothe scene is also introducing inherent biases in favor ofproprietary technologies and away from most tropical cropsgrown extensively in Asia such as cassava, coconuts, andspecialty crops such as spices and tropical fruits; there is alsoa bias in favor of labor-saving genetic manipulations, whichwould be counterproductive for much Asian agriculture.Central governments will need to increase their capability inbiotechnology; they and the IARCs should focus resources on

the Asian “orphan commodities” in which there is likely to belittle private developed-country investment.

The issue of intellectual property protection has beenoverblown, at least in agriculture. The benefits to developingcountries of adopting intellectual property protection are atbest minor. Moreover, the limited empirical evidence suggeststhat the adoption of intellectual property protection leads, atbest, to only modest increases in private investment inagricultural technology development.

Research on resource management is highly location-specific, making the concentration of work in centralizedresearch and experiment stations inappropriate. Similarly, inextension, the top-down package approach to public extensionwas appropriate during the green revolution, but no longerhas as great a role to play. In the future, since technology willbe much more knowledge-based and even more location-specific, the need for extension services will be of a differentkind. The extension system should be devolved away fromthe center as much as possible, with the local governments incharge of the public system and the private sector (particularlythe NGOs) encouraged to participate.

Irrigation Management under Resource Scarcity

The future of irrigation is assessed in light of Asia’semerging water scarcity. Irrigation accounts for 70–80 percentof Asian water diversion and investment in it claimed by farthe largest share of public investment in agriculture duringthe green revolution. Failure to maintain the systems adequately,coupled with recent constraints in state financing, hasprompted a variety of approaches to devolve and privatizethe development, or at least the management, of individualschemes. On the other hand, the increasing scarcity of wateris likely to require enhanced State regulatory roles in theallocation of water and the resolution of conflicts over its use.

The landscape of water management is characterizedby the water basin as the macro unit, with the upper basin as



an area where small-scale gravity systems have typically beendesigned and built by traditional communities of farmers, oftenlong before the advent of modern rural development. Insensitivestate intrusions on such systems, with new designs andmanagement systems, have resulted in their disuse,modification, or even destruction. New or traditional, small-scale systems have proved to work better when farmers’ viewsand participation have been solicited; “coproduction” by publicagencies and participating communities has been shown tobe an effective management strategy. The results of the turnoverof responsibility to communities, however, has been somewhatmixed, showing little evidence that operations and manage-ment quality has improved or that turnover has improvedagricultural productivity.

The lower floodplains of large river systems are usuallycharacterized by large-scale irrigation systems designed andbuilt by the State. These have generally not shown the benefitsthat were expected from feasibility studies. While they are ofa size and scale not to be candidates for turnover tocommunities, it is reasonable to expect that users shouldcontribute at least some of the costs of such systems. User fees,however, have had disappointing rates of success, largelybecause there is little linkage between the fees and the costsand quality of the services provided.

In addition to surface water management, groundwaterirrigation, in the form mainly of shallow tubewells, hasprovided a dramatic episode in Asian rural development,especially as an example of successful private investment.Bangladesh and Indonesia show that farmers, left tothemselves and when water tables permit, will have a strongpreference for the relatively cheap, simple, and flexibletechnologies exemplified by shallow tubewells.

Water is becoming increasingly scarce in Asia. Eventhough agriculture is hardly the most prodigal water-usingsector, it is coming under increasing pressure to release waterfor the nonagricultural sectors. Irrigated agriculture will tendincreasingly to be a residual claimant of water, and so willcome under increasing pressure to economize and to provide

a holistic and participatory integration of multisectoral waterpolicy, development, and management. Under presentcircumstances, augmented supply schemes of irrigation andstorage capacity are not feasible because of declining returnsto investment, rapidly growing nonagricultural competitionfor water, and greater weight given to social and environ-mental factors. Supply management mainly concerns thecompeting goals of irrigation and electricity generation in thesame water system. Demand management focuses on creatingincentives for allocating water efficiently among competinguses. One way is by levying charges for water, but this ofteninvolves putting a market value on what is traditionallyregarded as a common good or open-access resource, a valuethat can be very difficult to measure. Another way is by creatinga market for tradable rights to water to be managed by publicofficials, community-based associations, or even privatecompanies working under contract. A prerequisite for such ascheme, however, would be the establishment of principlesfor clarifying such rights. Either way, the establishment of aneffective pricing system would help increase the field efficiencyof water, at present only an average 50 percent, and encourageconservation.

The Political Economy of Foodgrain and FertilizerDistribution

Since World War II, almost all Asian governments haveintervened heavily in the management of foodgrain suppliesboth for reasons of food security, especially to meet the needsof the poorest consumers for what is considered a “meritgood,” and for reasons of political economy, to obviate theneed for higher urban wages as a component in the profitabilityof industrial investment.

The combination of the green revolution and the foodcrisis of the 1970s resulted in government interventions inagricultural input markets as well, notably in the fertilizertrade. The interventions, especially when coupled with the



provision of rural credit, proved extremely inefficient andcostly; as food supplies and prices eased in the later 1970s theoriginal argument—a variant on the infant-industry protectionrationale—soon outlived its usefulness.

Many countries, however, particularly in South Asia,have chosen to maintain targeted food subsidies in order toprotect the poor. These have taken two forms: stabilization ofprices, a policy pursued in many Southeast Asian countriesvia the storage of grains against times of seasonal scarcity andthe maintenance of floor prices to producers and ceiling pricesto consumers; and procurement and targeted subsidies toguarantee supplies, more prevalent in South Asia.

While there is a clear case for government interventionto ensure that society’s nutrition objectives are attained, thecase is less clear for widespread market intervention to stabilizethe prices of foodgrains. In fact, by concentrating on pricestabilization, governments have misdirected their efforts,failing to deal with more serious problems related to foodconsumption and nutrition in their societies, which are notgetting the attention they deserve because resources arediverted to activities that are attended by lots of political clamor.

More efficient, market-based approaches exist asalternatives to the State grain-trading organizations, but theirapplication has been and will continue to be tempered by thepolitical scene, in particular the structure of incentives facingpolicymakers and the balance of voting power between ruraland urban areas. The impact of political institutions on theissues of foodgrain price stabilization and farmer incomesupport are analyzed in detail for the cases of Thailand,Malaysia, and Indonesia.

Rural Human Capital

Social services—education, health care, water supply,and sanitation—are important in raising the quality of life inrural areas and helping to reduce poverty. There have beenmajor changes in both education and health in Asia over the

past few decades reflecting the rapid growth in the region. Ineducation, primary schooling enrollment has risen drama-tically, with levels of 100 percent reached in many Asiancountries. In health care, there are improved facilities, especiallyhospitals, and the harnessing of developing technologies toprovide large-scale immunizations. Such social services alsoprovide the long-run foundation for economic and socialdevelopment.

Regional differences in education and health levels reflectfour features:

• a marked urban bias in the availability of services;• the rapid growth of private-sector involvement in the

education and health sectors;• the changing role of government brought about by

the huge increases in the cost of these services andthe more and more clearly limited capacity of govern-ments to handle increasingly complex societies; and

• Asian income growth and its implications for consumerwillingness to pay for health and education services.

Education and health are highly desired “goods” foralmost all households, so it is appropriate that consumerwillingness to pay be exploited as incomes rise. Thus, therelatively slow increase in rural incomes that is expected tocontinue in the future argues for greater allocation of publicresources to the needs of the rural areas.

As the basis for formulating revised policies for providingeducation and health services in rural areas of Asia, four aspectsshould be considered:

• accessibility, both physically and as a result of lowpopulation densities and lack of affordability;

• quality, of both educational and medical personnel inrural areas and the conditions of rural schools andmedical facilities;

• financing; and• management.



Securing future financing for education and health carewill require governments to consider what they can and shouldfund. In the health sector, it will necessitate some reassessmentof policies, especially those allocating funds to the wrong typesof services and to the wrong population groups: at present,for example, funds are provided for interventions of low cost-effectiveness such as cancer surgery instead of to critical andvery cost-effective interventions to contain infectious diseases;in addition, by providing the best health services to urban areas,governments are in effect subsidizing health care to the moreaffluent sectors of society and neglecting the poor.

Given the predilection for private-sector funds to go tourban areas and for the more affluent consumers who canafford to pay for these services to be located there as well,governments should focus their public funding in rural areas.Even this reallocation of public funding may not be adequate,however. The involvement of NGOs, the enlistment of commu-nity support, cost sharing, local taxes for education, and evenrevenue-earning activities (by schools) are among the possibili-ties being considered and tried out in various parts of Asia.

Conclusions

With the entry of new actors into the area of ruraldevelopment such as NGOs, local communities, andmultinational biotechnology corporations, it bears re-emphasizing that the main old actor—the State—nonethelessretains many of its traditional roles, as well as acquiring severalnew ones. The old roles of the central government, for whichthere remains an unambiguous need despite the appearanceof new actors, include the following:

• Taxation and macroeconomic stabilization:? provision of pure public goods, such as basic agri-

cultural research;? creation and facilitation of new markets, for example

in water, which at times may require . . .

? provision of enabling legal frameworks, includingthe establishment and clarification of propertyrights; and

? monitoring of the markets for private goods,including the establishment of quality standards ingoods such as agricultural chemicals, private healthcare, and education.

• Establishment of disclosure requirements for civilsociety organizations.

Even in those tasks that remain squarely in the public sector’sdomain, however, the central Government’s performance willhave to be more nuanced and sensitive to the existence of otheractors than was the top-down approach of other times.

The central Government will also have tasks that willincreasingly have to be shared with other actors, such as thefollowing:

• Ensuring that every individual in society, especiallythe poor, is able to meet his or her basic needs. It willneed to work closely with local governments toincrease the accuracy of targeting and with the for-profit private sector, to ensure the efficiency of thephysical distribution mechanism.

• Managing “large” irrigation structures. To do so it willhave to work closely with communities of water users,perhaps turning over lower-level operations andmaintenance functions.

• Providing (or providing the financing for) elementaryeducation and primary health care, again workingwith local communities and perhaps also with NGOs.

• Taking the initiative to devolve powers to local levelsof government, especially where these do not yet existor are very weak. This will mean engaging in a long,complex process requiring careful preparation,extensive consultation, and meticulous planning,followed by firm political commitment, steadyimplementation, and above all, adequate finance.


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