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Finance & Development, June 1978
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Growth and equity in East Asia: A survey of the problem of equity in Korea, Malaysia, the Philippines, and Indonesia, and policies that have been followed to ensure a broader distribution of the benefits of growth

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1978
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Parvez Hasan

East Asian countries are among the most dynamic developing countries in the world today. Between 1970 and 1975 the average per capita gross national product (GNP) of the region rose by 4.7 per cent a year—faster than any other developing area, except the Middle East (see Table 1). However, notwithstanding this growth, the distribution of its benefits has, in most East Asian countries, not been satisfactory. Employment has often not expanded sufficiently to reduce open and underemployment; as a result, absolute poverty remains widespread. On the other hand, there is evidence of at least a modest improvement in the living standards of the poorest 40 per cent and, in addition, a reduction in the incidence of absolute poverty. (Absolute poverty is defined here to mean income levels below those required to provide for adequate nutrition and expenditure for essential nonfood items.)

Table 1Gross national product and growth rate of selected East Asian countries, 1950-75
GNP per capitaGrowth rate
195019751950-601960-701970-751950-75
(In 1975 dollars)(In per cent per annum)
China, Rep. of2459304.85.95.75.3
Hong Kong5141,7603.67.64.25.0
Indonesia1132201.61.43.52.0
Korea1605602.66.48.25.1
Lao People’s Dem. Rep.6890 1-0.51.9
Malaysia3837600.83.94.32.7
Papua New Guinea2504701.74.02.32.5
Philippines1843803.22.13.72.9
Singapore2,4506.27.3
Thailand1443502.65.03.63.6
Viet Nam1561.70.5
Source: World Bank.—indicates data not available.

Provisional.

Source: World Bank.—indicates data not available.

Provisional.

Over the years, government policy in all four East Asian countries (Korea, Malaysia, the Philippines, and Indonesia) has shown increasing recognition of the fact that economic growth is a necessary but not sufficient condition for improving the economic welfare of the masses. It has, therefore, explicitly focused on the major issues of employment, poverty, income distribution, and regional development. The relative importance of these interrelated but distinct issues, however, varies greatly from country to country. This survey is essentially impressionistic; it does not pretend to examine the countries in a rigorously comparable way—mainly because defining such concepts as “poverty” and “equity” in different countries on a uniform basis is at best difficult and can be misleading (see note to Table 3).

Table 2Population groups: shares in national income(In per cent)
Top 20 per centLowest 20 per centLowest 40 per cent
Indonesia 152.06.817.3
Korea 244.57.117.7
Malaysia 355.04.112.4
Philippines 454.03.911.9
Source: Shail Jain, Size Distribution of Income: A Compilation of Data (World Bank, Washington, D.C., 1975), p. 65.

Data based on income recipients for 1971.

Data based on household income for 1970.

Data based on per capita income for 1970.

Data based on household income for 1971.

Source: Shail Jain, Size Distribution of Income: A Compilation of Data (World Bank, Washington, D.C., 1975), p. 65.

Data based on income recipients for 1971.

Data based on household income for 1970.

Data based on per capita income for 1970.

Data based on household income for 1971.

Table 3Poverty estimates, 1975
Poverty line

(In per capita income

in U.S. dollars)
PopulationNumber

of poor
Per cent of

population

below

poverty line
Distribution

of the poor

(In per cent)
UrbanRural(In millions)(In millions)UrbanRural
Indonesia1259513272551783
Korea 1150140353105050
Malaysia215215125401288
Philippines1801554217402179
Source: World Bank estimates.

Data for Korea pertain to 1974.

Note: The rough estimates of incidence of poverty in the above table are World Bank estimates using national household expenditure surveys as basic information sources. They are derived essentially by estimating the minimum income required to provide for adequate nutrition while allowing for a proportion of total expenditure for nonfood items. The per capita poverty line estimates thus arrived at vary substantially from a low of $95 for rural areas in Indonesia to $215 for Malaysia. The wide differences in the absolute poverty levels can be attributed to a number of factors: different national tastes resulting in different consumption baskets for miminum nutrition needs; different national prices for food and other essentials; and variations among countries in the proportion of income devoted to nonfood expenditures by their lowest income groups. For instance, while there are only moderate differences between countries in quantities of staples (in kilograms per capita) included in the minimum diet, there are very wide variations in the allowance for other food expenditures. Similarly, prices for rice and other staples vary greatly from country to country. In Korea, the provision for nonfood expenditure is much greater, presumably because severe winters there increase the minimum requirements of clothing and shelter. The factors mentioned above explain and justify to a large extent substantial differences among East Asian countries in the “monetary cost” of a minimum living standard. Nevertheless, in the author’s judgment, these poverty line estimates tend to exaggerate the extent of poverty in Malaysia and to understate it in Korea. It should be noted, however, that the World Bank estimate of the incidence of poverty in Malaysia (40 per cent) in 1975 is still lower than the official estimate (44 per cent) in the Third Five-Year Plan. The international comparisons implicit in the above table are, therefore, subject to substantial qualification.
Source: World Bank estimates.

Data for Korea pertain to 1974.

Note: The rough estimates of incidence of poverty in the above table are World Bank estimates using national household expenditure surveys as basic information sources. They are derived essentially by estimating the minimum income required to provide for adequate nutrition while allowing for a proportion of total expenditure for nonfood items. The per capita poverty line estimates thus arrived at vary substantially from a low of $95 for rural areas in Indonesia to $215 for Malaysia. The wide differences in the absolute poverty levels can be attributed to a number of factors: different national tastes resulting in different consumption baskets for miminum nutrition needs; different national prices for food and other essentials; and variations among countries in the proportion of income devoted to nonfood expenditures by their lowest income groups. For instance, while there are only moderate differences between countries in quantities of staples (in kilograms per capita) included in the minimum diet, there are very wide variations in the allowance for other food expenditures. Similarly, prices for rice and other staples vary greatly from country to country. In Korea, the provision for nonfood expenditure is much greater, presumably because severe winters there increase the minimum requirements of clothing and shelter. The factors mentioned above explain and justify to a large extent substantial differences among East Asian countries in the “monetary cost” of a minimum living standard. Nevertheless, in the author’s judgment, these poverty line estimates tend to exaggerate the extent of poverty in Malaysia and to understate it in Korea. It should be noted, however, that the World Bank estimate of the incidence of poverty in Malaysia (40 per cent) in 1975 is still lower than the official estimate (44 per cent) in the Third Five-Year Plan. The international comparisons implicit in the above table are, therefore, subject to substantial qualification.

Korea: employment growth

Incomes are distributed more equally in Korea than in most other countries at the same stage of development (see Table 2). The reasons are partly historical: education has been widespread, and the land reform of 1945 resulted in fairly even distribution of assets. Further, the great success of a high-growth strategy based on labor-intensive manufacturing has substantially improved the employment situation and helped to reduce poverty. Indeed, Korea is an almost classic case in which the benefits from growth are distributed in the form of increasing employment opportunities. From 1963-75, employment grew at a rate of 3.7 per cent per annum, while average real wages grew annually at nearly 7 per cent. Even assuming some decline in the relative share of the lowest 40 per cent of income receivers, their per capita consumption, in absolute terms, has nearly doubled over the last 15 years.

Notwithstanding Korea’s impressive record of growth in employment, output, and consumption, however, distribution remains a major concern of economic policy. First, Korea’s labor force is likely to grow at somewhat over 3 per cent per annum for many years to come, because of the baby boom in the early 1950s. Second, recent studies suggest that even with rapid growth the basic trend in the 1980s may well be toward greater inequality in income distribution because the weight of economic activity will shift from rural to urban sectors where income inequality is more marked. Third, roughly 10 per cent of the population (slightly over 3 million persons) was below the poverty line in 1975. Fourth, in Korea, as elsewhere, rural incomes are generally lower than urban incomes. Because of lagging agricultural productivity, moreover, the gap between rural and urban incomes threatens to widen.

Even with Korea’s focus on high and extremely employment-intensive growth, however, government intervention has been and still will be necessary if the fruits of economic expansion are to be shared widely. The issues of rural/urban imbalance might have already become explosive without government efforts to ensure a reasonably high growth rate in the agricultural sector, and improvements in the agricultural terms of trade and in the quality of life in rural areas.

However, if the rural/urban income gap has not lessened, neither has it increased. In real terms there has been very substantial improvement in the living standards of most people. Furthermore, as a result of Sae Maeul Undong (New Community Movement), the majority of villages have easy access to such basic services as primary and middle schools, family planning services, electricity, community telephones, and roads.

The Korean Government continues to attach priority to policies encouraging high growth based on a labor-intensive strategy. The amount of capital employed per worker in industry has not increased much, if at all, during the last decade; even so, labor productivity has grown at an average rate of about 7 per cent per annum. If, as seems likely, the overall growth rate of GNP can be maintained at about 9 per cent for the next decade or so and industry can modernize without a substantial increase in capital intensity, the employment situation will improve considerably by the mid-1980s and the absolute number of persons employed in agriculture will probably begin to decline sharply. This will ensure a steady rise in real wages as well as a decline in employment in low-productivity occupations. Still, those who are below the minimum income level might require special attention, either in the form of transfer payments or subsidized prices for their consumer goods, or in increased access to social services. At the same time, efforts to improve the quality of life in rural areas and to increase nonfarm employment will have to continue. The Fourth Development Plan, finalized in 1976, reflects these concerns and proposes a very considerable expansion of social development activities.

Malaysia: rural poverty

Malaysia has a surprisingly high degree of income inequality and absolute poverty, considering the level of per capita income and the relatively low pressure of population on land (see Tables 2 and 3). Poverty is heavily concentrated in rural areas, which contain 89 per cent of the total number of poor households (nearly 80 per cent of these are Malay households). The low productivity of small farms is a root cause of poverty in Malaysia. The overall level of agricultural development is, however, quite high because the plantation sector still accounts for one third of the value added in agriculture.

A major thrust of government policies during the last 15 years has been the accelerated growth of smallholder agriculture. Smallholder agriculture (including new land development schemes) has grown faster than the agricultural sector as a whole, which itself expanded at the very impressive average rate of 6 per cent per annum during 1960-75.

The Government has attacked the problem of poverty among the landless by investing heavily in new land development, selecting settlers from among the landless poor. Land development schemes have accounted for a large proportion of the job creation in agriculture during the last decade and will be responsible for one third of the incremental output of major agricultural crops between 1970 and 1980. Moreover, new land development during the 1970s is expected to provide more than half the total jobs likely to be created in agriculture and more than 10 per cent of the additional jobs in the economy. Finally, about 75 per cent of the old low-yield rubber on smallholdings had been replanted by the end of 1975 with improved high-yielding rubber. At the same time, the country’s two major irrigation projects (Muda and Kemubu) have helped increase rice output during the last ten years by well over 60 per cent—raising the household income of paddy growers, who are among the poorest rural groups.

In spite of this high rate of growth of smallholder output and productivity, rural poverty remains serious. A major problem has been the deterioration in the terms of trade of the rural sector, especially for the rubber growers. The real price of rubber dropped by nearly one third during the 1960s and by 7 per cent between 1970 and 1976, due to the secular downturn in international rubber prices. Moreover, the direct benefits of the land development schemes have, for a number of reasons, been confined to a relatively small number of rural households.

The major factors that will determine progress toward the eradication of rural poverty in Malaysia during the next five to ten years are the price trends of major agricultural exports; the pace of land development and the broadening of its direct benefits; and the acceleration of in situ agricultural development. But even in Malaysia the long-run alleviation of rural poverty will have to come from increasing nonagricultural employment. Over the next decade, the labor force will grow at a rate of over 3 per cent per annum. Fortunately, the manufacturing sector has continued to be a dynamic element in the economy—growing at an average rate of about 11 per cent a year since 1965. Manufacturing employment grew by nearly 7 per cent per annum during 1971-75 and accounted for nearly one fifth of the total new jobs. As a result, total employment grew from 2.6 per cent per annum in the 1960s to 3.3 per cent per annum during 1971-75, and the open unemployment rate had dropped to 7 per cent by 1975. Maintaining the momentum of manufactured exports in particular and manufacturing output in general will be crucial if the modest but real gains made during the last five years in reducing poverty and in spreading the benefits of growth are to be sustained.

In addition to eradicating poverty, the new economic policy of the Malaysian Government aims to raise the share of Malays in employment and ownership in the modern sector. At present, Malays are concentrated in the low-productivity rural sector, and the average Malay income is little more than half that of non-Malays. The Government recognizes, however, that the best way of attaining these goals, as well as alleviating poverty, is by a rapid expansion of the economy. The rate of investment, especially public investment, has been stepped up sharply, and the average annual growth rate of GNP increased to 8 per cent in 1970-76 from 6 per cent in the 1960s.

The prospects for maintaining GNP growth at 8-8.5 per cent per annum over the next decade are excellent, provided the incentives for private investment can be maintained. During the last two years GNP growth has remained sluggish, in part because of uncertainty about government intervention for ensuring increased Malay participation in the manufacturing sector. There are undoubtedly trade-offs in the short term between the pace of restructuring and selective intervention by the Government. Malaysia does not have a serious financial resource constraint and can, therefore, afford to rely more than many other countries on a high-growth strategy to ease its social problems. But since there are definite limits to implementation capacity in the public sector, a continued sluggish private investment will inevitably slow down the increase in overall employment opportunities and with it the absorption of Malays into the modern sector. The substantial overall income inequalities existing in Malaysia also suggest room for redistribution through fiscal means, especially as Malaysia has a fairly well-developed and elastic tax system.

Philippines: sources of inequalities

By almost all indicators of equity, the situation in the Philippines appears to be difficult. The difference between the incomes of receivers of the highest and lowest incomes is not only large (see Table 2) but, at least until 1971, has tended to grow. A large proportion of the Philippine population, about 40 per cent, lived in absolute poverty in 1975 (see Table 3); of the total number of poor, 80 per cent lived in rural areas. The disparities in income among regions are also substantial. In the late 1960s, over 60 per cent of manufacturing value added was concentrated in the Manila area. Employment has barely kept pace with the rapid growth in the labor force and there has been downward pressure on real wages. But even in the 1960s, the incomes of the poorest 40 per cent in the country were growing at 1 per cent a year; this increased to at least 2 per cent a year during 1971-75, partly, to be sure, as the result of an improvement in agricultural terms of trade.

Uneven income distribution was partly traceable to the historical incidence of unequal landholdings. The pattern of industrial growth during the 1950s and 1960s under protectionist policies, fiscal incentives, and subsidized interest rates compounded the problem. Industry was located predominantly in the Manila area, focused on processing imported goods for the home market, and generated relatively limited employment. The development of agriculture and the provision of infrastructure were comparatively neglected. Further, population has grown by nearly 3 per cent per annum during the past three decades, accompanied by a gradual decline in the amount of new land available. The amount of land harvested per inhabitant decreased from 0.29 hectare in 1960 to 0.25 hectare in 1970, and will decline further to 0.20 hectare by 1985, resulting in the substantial problem of landless labor.

The Government has recently undertaken a number of programs designed in part to reduce economic disparities and absolute poverty. The real level of public investment has nearly quadrupled since 1971 and now constitutes 6 per cent of GNP compared with less than 2 per cent a few years ago. There has been a conscious effort to devote a greater proportion of investments in infrastructure to the less developed regions. Over the past two years, regional planning offices have been engaged in a large-scale effort which will provide analysis of the problems of the poorer regions and strategies to deal with them. Current policy aims at greater dispersal of industry by region and by scale. New industrial plants, except for export-oriented industries, may not be established within 50 kilometers of Manila. The Government is attempting to promote medium-scale and small-scale industries through assistance in project development and special credit programs.

The Government has also established a program of land reform, aimed at one of the largest poverty groups in the country, the approximately 1 million tenant farmers on rice and corn land. The reform consists of the transfer to their tenants of landholdings in excess of 7 hectares, and the enforcement of leasehold (rather than sharecropping) on holdings less than 7 hectares. There are also agricultural credit programs for providing seasonal production inputs to small farmers without collateral who were previously unable to get credit. Food production has increased significantly since the introduction of these programs, although loan recovery has been quite poor.

In the final analysis, however, the success in tackling poverty, in the Philippines, as elsewhere, will depend on the trends in overall output and employment. The labor force expanded at an average rate of 2.2 per cent per annum during 1965-75, and is likely to grow by about 3 per cent per annum during the next decade. To create about 5 million additional jobs during 1975-85, compared with about 3 million during 1965-75, is thus the major challenge facing the Government. Even if agriculture grows at 4 per cent per annum, it will absorb less than 25 per cent of the increment to the labor force. Manufacturing employment must grow by 4 per cent per annum over the next ten years, compared with 2 per cent per annum achieved during the past decade. The increasing orientation of manufacturing toward labor-intensive production for export thus appears crucial for attaining essential improvement in income distribution.

Indonesia: population pressure

About 55 per cent of the Indonesian population live in absolute poverty (see Table 3). Over 80 per cent of the total number of poor (nearly 60 million persons) live in the rural areas—nearly three fourths of them on Java, Madura, and Bali.

A major problem in Indonesia is the extreme pressure of population on the land, particularly on Java which accounts for less than 10 per cent of the land area, but where nearly two thirds of the Indonesians live. The trend is toward smaller farms and increasing fragmentation. Thirty per cent of the farms are already less than 0.25 hectare, accounting for 10 per cent of the total farm area. Eighty per cent of the farms are of less than 1 hectare. The number of landless and near landless is increasing and has been roughly estimated at one third of the rural labor force. Various surveys show that almost two thirds of the families in some Javanese villages must rely on employment away from their farms.

The Government of Indonesia has attempted to tackle the problem of rural poverty in two main ways. First, credits and other inputs have been offered at subsidized prices to increase the output of rice. Second, a rural development program known as INPRES has been established, which includes funds for provincial, district, and village development, primary schools, public health, forestry, and markets. The projects are primarily oriented toward providing social services and raising agricultural production. The program can only be regarded as a temporary solution to the rural employment problem, but it undoubtedly provides an important income supplement to the rural and urban poor.

Maintaining the momentum of rice production and INPRES programs appears essential. The Government recognizes, however, that there are definite limits to the absorption of additional labor in agriculture, particularly in Java. Labor productivity is already very low there, average yields per hectare are high, and the use of new technology in rice production is likely to reduce the traditional intensity of labor use. Additional job opportunities will, therefore, have to be provided by Java’s nonfarm sector and agriculture on the other islands.

Migration

The two elements which should play a much greater role in job creation in Indonesia in the future are (1) an accelerated land settlement and migration program—to bring unutilized land on the islands outside Java and Bali into smallholder food and tree crop production; and (2) accelerated growth in labor-intensive manufacturing output, both for the domestic and the export market.

Indonesia’s migration program aims at resettling a total of 500,000 families before 1983. The implementation of this ambitious program will require strengthening infrastructure and agricultural services in the provinces chosen for the migrants, and careful selection of the land for settlement. According to some rough estimates, without any net emigration about 600,000 additional jobs will have to be created annually on Java during the next decade. At best, migration will reduce this number by 10-15 per cent. Accordingly, accelerated job creation in industry and other nonfarm occupations deserves the highest priority. In recent years there has been heavy investment in capital-intensive projects for which commitments were made by Pertamina, the national oil company. The reorientation of the investment program to more labor-intensive small-scale projects is urgently needed, especially in industry.

Strategy for equity

The eventual eradication of poverty, even in the relatively prosperous East Asian countries, will not be easy. Malaysia, which has good natural resources and a relatively well-formulated plan for poverty eradication, hopes, at best, to reduce the incidence of poverty from 40 per cent in 1975 to 17 per cent by 1990. While the nature of poverty differs from country to country, the vast majority of the poor are concentrated in rural areas and are either landless labor or very small farmers. But even in countries where land remains to be developed, notably in Malaysia and Indonesia outside Java, only a small fraction of future employment can be provided in agriculture. This is partly the result of the rapid growth in population in the 1950s and 1960s in many countries, which means that the labor force is growing substantially above past trends.

These problems need to be attacked on a broad front through strong political commitment and interventionist policies. Even with very rapid growth, it seems that the problems of poverty, employment, or regional backwardness are unlikely to be solved purely through the working of the market forces.

First of all, there is a need to ensure a growth rate of smallholder agriculture of at least 4–5 per cent per annum if the income disparities between rural/urban areas are not to widen greatly and if a substantial impact is to be made on the incomes of the poorest groups within the foreseeable future. This target will not be easy to achieve and will require improved access for small farmers to irrigation, fertilizers, seeds, credit, and extension services. The problem of farms in rainfed areas will be particularly difficult to tackle because the technology is less certain. The allocation of land for the landless and very small farmers, for instance, can be a powerful means of redressing poverty and improving income distribution, but this is not always feasible. Agricultural growth alone will not guarantee the desired increase in incomes. As the experience of Malaysia shows, productivity gains can be almost wiped out by decreases in international agricultural prices.

Improving the quality of life in rural areas and increasing in the less developed regions social services such as education and health and improved infrastructure, roads, electrification, and water supply should be an integral part of a comprehensive program to ensure equitable distribution of growth benefits. Korea has been particularly successful in improving conditions in the rural areas and these relative improvements have helped to mitigate the effect of sizable rural/urban income differences.

In the long run, a substantial reduction in the growth rate of the population can help to reduce poverty and relieve the pressures on the job market. Even with satisfactory agricultural growth, agriculture can be expected to absorb only a fraction of the prospective growth in the labor force of East Asian countries. This points to the importance of maintaining high manufacturing growth with special attention to labor-intensive industries. Substantial expansion of labor-intensive manufacturing output for exports will be a key element in eradicating poverty.

It also seems that the overall growth rates of GNP required to absorb a labor force growth rate of over 3 per cent per annum, as well as a minimum income growth for the poorest, might well be in the range of 7-8 per cent per annum. In countries where the prospects of buoyant industrial growth are not very good for the medium term and where the problem of landless labor is serious, especially instituted work programs can supplement the income and employment opportunities of the poor.

Finally, in order to deal effectively with the problems of poverty, regional development, and employment, detailed monitoring systems should be developed. At present, information is lacking in most countries, even at a relatively aggregative level, about trends in output and productivity of small-scale agriculture, agricultural terms of trade, off-farm employment opportunities, rural wages, landless labor, and other poverty groups and rural/urban and interregional migration rates. The result is that the discussion of issues remains at a general level and precise formulation of programs and policies to attack poverty suffers.

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