Economic Development in Asia Forward linkages are strong in industries such as
petroleum and chemical and some heavy industries and
Industrialization and Structural Change
Industrialization
Rapid industrial development is the key element of
structural transformation from an agrarian based rural
economy to a modern state.
In the Lewis-Fei-Ranis (LFR) model, capital
accumulation fuels the development of the industrial
sector (explains how the increased productivity in
agricultural sector would become helpful in promoting
industrial sector)
• Labor removed from agriculture does not affect
output much since there is a surplus of labor in the rural
sector.
• As labor moves from the traditional sector to
industry, overall labor productivity increases.
• Wages in industry are higher than they are in
agriculture resulting in
labor migration.
• The flow of labor to the city and to the
industrial sector provides a new gain to society.
• Once the stock of surplus labor is exhausted,
wages are driven up in both sectors.
• Terms of trade between the two sectors will
depend, to some extent, upon government policy.
• A delicate balance is necessary to keep
agriculture viable yet allow for investment in industry.
• Linkages between the two sectors are
important as backward linkages with suppliers in the
rural sector help both sectors to grow as industry
flourishes.
• Forward linkages help countries to upgrade
their industrial bases.
Linkages
Backward linkages are strong in industries such as
leather, clothing, textiles, food and beverages and
paper products.
also in some labor-intensive electronics.
Industrialization
• Choice of technology will be determined, under
competitive conditions, by the relative costs of capital
and labor.
• Economies of scale can be important in enabling
industries to move to the lowest point on the cost
curve.
• Exporting to foreign markets is one way to
achieve economies of scale, particularly if the domestic
economy is limited.
Economic Efficiency
• Despite economies of scale, overall economic
efficiency depends on a number of other factors
including management, marketing and distribution.
Technology is also important.
• To become efficient, it is often argued that new
industries need to be protected from competition
until they grow to be efficient enough to compete
internationally.
Infant Industry Protection
Such infant industry protection has been used to erect
tariff barriers and import restrictions in a number of
countries. [Refer Supplementary Article 5a]
Generally, the evidence from a number of developing
countries suggests that such protection increases
inefficiency rather than reduce it.
There are some exceptions in Asia, including Korea and
Taiwan.
Small Scale Industrial Development
• Small and medium scale industries (SMEs) are
generally more labor intensive.
• Given a good policy environment, SMEs can
thrive, particularly where large scale economies are not
necessary. Taiwan is a good example, where
outsourcing and international networking were used to
build up the industrial base.
Openness and Foreign Trade
• Foreign direct investment (FDI) can be an
important source of capital and expertise, particularly
for export-oriented industries in the early stages of
development.
• The issues of FDI and international trade will be
taken up more systematically in the next chapter.
The Asian Experience with Industrialization
• Unprecedented in economic history.
• Per capita income increased by about 7% per
year in the NIEs for 30 years.
• At the end of this period, incomes were four
times higher than in the base period.
• Industry’s share of income increased
dramatically.
The Asian Experience
• Some countries had high savings rates and
medium to rapid labor force growth (Russia and Spain)
but
they didn’t grow as fast.
• There was more to the Asian miracle than the
brute force of high investment and rapid growth in the
labor force.
• Innovation, better industrial organization,
growing globalization all contributed. [Refer
Supplementary Article 5b]
The Asian Experience
• This process of innovation and structural
change resulted in a dramatic shift in the composition of
industrial output.
• The share of manufactured goods increased as
did the share of exports (Table 5.2).
• Exports shifted quickly to light and heavy
industry from primary industry (Table 5.3).
• There was also a shift, from the 1980s, to more
“science” based industries such as electronics,
pharmeceuticals and biotechnology.
• The electronics sector began to feature
prominently in the exports and production of the NIEs
and in Southeast Asia.
• Growth followed an ‘S’ shape, accelerating
rapidly in the 1970s and 1980s.
Technological Transfer
• There were different patterns of technological
transfer.
• Korea and Taiwan followed a pattern of
producing locally for foreign firms to the foreign firms’
specifications or a combination of local and foreign
designs and specification. They did not form joint
venture or encourage foreign firms to set up
independent operations.
• Singapore and Hong Kong welcomed foreign
direct investment. Singapore had a more hands on
industrial policy by training and provision of
infrastructure.
• See Table 5.4 for comparisons of
openness, role of government and size of firms.
• Despite differences, four factors were common.
1. Low inflation and interest rates and high saving
rates.
2. Outward looking trade policies.
3. Forward looking human resources strategy.
4. Appropriate (for local conditions) government
industrial strategy.
Comparative Advantage and Industrialization
• The Asian industrial experience can be further
analyzed by looking at revealed comparative advantage
or by comparisons with best practice firms in industrial
countries.
• Such comparisons allow us to draw several
inferences. Some of them reinforce previous
observations.
Comparative Advantage
• The share of manufactured goods in total
exports increased dramatically.
• This shift in production corresponded closely
with a similar shift in production taking place in the
world economy.
• The export push began in labor intensive goods
and moved to electronics and other science based
exports.
• The pattern was more pronounced in East Asia
and Southeast Asia but was also observed in South Asia.
• Because of this shift, Asian countries were able
to gain market share of world exports over a twenty
year period (Table 5.5).
Role of Innovation
• If we break down the composition of output
growth in the NIEs and SE Asia:
- About 20% is due to labor force growth.
- As much as 25% or more is attributed to
educational improvements of the labor force.
• Innovation requires the active involvement of
labor since it requires a destruction of old ways of doing
things and creation of new methods and processes.
• Entry and exit of firms have to be facilitated in
order for innovation to take place efficiently and
smoothly
• Costs of entry and exit are high for larger firms
and are particularly high when large firms have a special
relationship with the government.
• In PRC, India, Vietnam and Indonesia, large
firms are kept in business because of the feared adverse
effects on employment.
• One method of facilitating entry into new
business and of attracting overseas FDI is through the
set up of Special Economic Zones (SEZs).
• Many countries in Asia have set them up.
Innovation
• SEZs can be extended to the notion of an
industrial cluster.
• 3 main kinds of industrial clusters are large
metropolitan agglomerations, small groups of firms with
similar interests and clusters with a few main producers
and their suppliers.
• Much innovation in Southeast Asia has been the
result of spending by MNCs.
• Innovation and technology transfer takes place
most often when capital equipment and components
are imported by export oriented manufacturing firms
• In East Asia, it has been generated internally
and with the help of strategic alliances with foreign
firms.
• Research is often conducted jointly with these
foreign firms.
• Innovation in marketing and distribution as ICT
and transportation efficiency gains have cut costs.
• State owner enterprises are notoriously slow to
innovate
• Labor intensive innovation can take place when
technical change is based on skill intensive industries.
• It is important that labor markets remain
flexible in order to facilitate labor absorption.
• Until the Asian crisis, most economies in the
NIEs and Southeast Asia were close to or fully
employed.
• The importance of private research and
development can not be overemphasized.
• The role of FDI has also been critical.
• State owned enterprises (SOEs) are not good at
R and D or innovation.
• 60 % of FDI in East Asia is in manufacturing.
• This is a much larger proportion than in
industrial countries.

Innovation, Education and Growth Convergence
• There was growth convergence between Asian
NIEs and industrial countries.
• This resulted from synergies created by
technology, education, openness and competitiveness.
• It is important that appropriate technology be
employed at each stage of the industrialization process.
• Research and development not only increases
with per capital income but it accelerates at an
increasing pace.
• Appropriate technology is more important than
state of the art technology.
Employment Growth and Industrialization
• Flexible wages and appropriate technology are
needed to absorb labor into industry quickly and
effectively.
• This enables employment to grow with output
without inflation.
• Most East and Southeast Asian economies were
fully or nearly fully employed for most of their growth
spurt.
• South Asia was not as fortunate as income
growth was not sufficient to reduce unemployment
dramatically.
Rural to Urban migration
• As industrialization proceeded, so did the
movement of labor from rural to urban areas.
• Harris-Todaro model predicts that
unemployment can coexist with rapid labor movement
to the city.
• This is because workers were willing to wait in
low paid and not fully employed positions in the city
waiting to get a job in the higher paid occupations.
• This seeming irrationality could have been the
systematic overestimation of prospects in the city.
• It could also have been the result of other
benefits perceived from living in the city.
• It is also possible that the lure of the city and
the stories told by their relatives that had just migrated
were enough to induce the young workers to migrate.
• The move would have appealed to the risk
takers in the countryside – likely to be the young and
adventurous rather than the secure and middle aged.
• Workers also migrate in order to provide
remittance income for their families at home.
Migration in Asian Countries
• Migration within/between Asian economies has
been primarily a function of wage differentials. [Refer
Supplementary Article 5c]
• International migration from the poorest to the
richest – Indochina, Philippines, South Asia to industrial
countries and the NIEs.
• Lots of restrictions in migration because of fears
of social disruption and tension.
• Rich countries are willing to take temporary
migrants for short term employment in low-skilled
occupations.
• Permanent migration is more likely for the
skilled and professional.
Government Policy
• Nurturing industrial growth depends on the
wisdom of industrial policy – infrastructure spending,
prudent infant industry protection, free labor markets,
attractive incentives for foreign businesses and
technology, use of special zones.
• Efficiency and welfare were traded off in the
early stages in favor of the former.
• Only recently are social safety nets being
constructed in the Asian region.
Summary
• Lewis-Fei-Ranis (LFR model)
• Discussion of the Asian experience with
industrialization
• Role of technological transfer and Innovation
• Rural to urban migration
• Government policies and strategies
 Economic Development in Asia
Poverty & Income Distribution
Poverty and Income Distribution
• Despite substantial economic growth in many
countries, poverty remains widespread.
• Estimates vary but at least 1.4 billion people live
in poverty worldwide (about 25% of the world‟s
population)
• The gap between the richest and poorest
countries has grown.
• Poverty tends to perpetuate itself since the
children of the poor
tend to remain poor.
• This is sometimes called the “vicious circle” of
poverty.
• Poverty tends to be concentrated in countries
that are in the “tropics”.
• This has led some to believe in a “climate”
theory of
development
• The “climate theory” receives support when it
is recognized that these regions in the tropics have
greater difficulties with diseases and also with achieving
rapid growth in agricultural productivity.
• Singapore, Thailand and Mexico are several
exceptions to this rule.
Measures of Poverty
• There are several ways to measure poverty.
• The head count ratio is the simplest and
most widely used (q/n) where q is the number of people
below the poverty line and n is the population size.
• Other measures include the poverty gap.
Some Issues in Measurement:
• Absolute v Relative Poverty?
• Which poverty line or „threshold‟ to use?.
• What is the depth of poverty? How is that
measured?
• Household poverty or individual poverty?
this issue is particularly relevant when some household
members are systematically deprived of food and
shelter– often girls and women.
Measures of Inequality
• Inequality is pertains to the „fairness‟ in the
distribution of income in the population
• In other words, the gap between the rich and
the poor
• What is „fair‟ and „not fair‟ is highly subjective
• Objective measures satisfy certain criteria:
(i) independence of scale and the size of the
population.
(ii) It should also be sensitive to transfers of income
within the income distribution at all income levels.
(iii) An additional desirable feature is
decomposability – that is, the measure can be broken
into several different components.
The range, mean absolute deviation and coefficient of
variation and the variance of the logarithm of income
are some measures of income distribution that have
been used.
• The so-called Kuznets income ratio is also
popular – the ratio of the income shares of the poorest
20% and richest 20% of the population.
• The most widely used measure, however, is the
Gini coefficient, which varies between 0 and 1.
• The Lorenz curve is a graphical representation
of the relationship between the cumulative share of
income and the cumulative share of the population
(Figure 9.2).
• The Gini coefficient can be derived from the
Lorenz curve. It is the ratio of the area between the 45°
line and the Lorenz curve to the total area in the
triangle formed by the X and Y axes and the 45° line.
Trends in Poverty and Inequality
• Using a poverty line of US$ 1.00 per day and
US$2.00 per day, the World Bank has compiled a
number of poverty measures for countries around the
world (Table 9.1).
• By continent: Africa is the worst off, followed by
Asia and then Latin America
• In Asia: of the 9 countries shown in Table 9.1 &
using the
$1.00 a day cut off, only India has a HCR > 30% i.e. 30
percent of the population is in poverty
• In Africa: there were 3 countries out of 7
sampled have HCRs greater than 30% (all three were in
fact over 55%!)
• In Latin America: there were 4 out of 10
countries sampled have HCRs greater than 30%
Trends in Poverty
• Within Asia, dramatic reductions in poverty
occurred in
the last 30 years (see Table 9.2 & 9.3).
• Poverty alleviation outcomes have been most
impressive in East Asia, in many countries in Southeast
Asia and Sri Lanka.
• There has been less progress in all other South
Asian countries.
Trends in Social Indicators & Income Distribution
• Social indicators have improved in East Asia and
Southeast Asia – reductions in illiteracy, higher life
expectancy and lower infant mortality (Table 9.4).
• Income distribution has improved in some Asian
countries
• Income is generally better distributed in Asia
than in Latin America (Table 9.5).
Trends in Income Inequality
• Another way to look at the distribution of
income is by considering the income shares of the
lowest and highest 20 percent of the population (Figure
9.6).
• Of the countries in this table, the richest 20
percent of the population has at least a 35 percent
share in the nation‟s income.
• Inequality is worst in Vietnam and Malaysia,
where almost 50% of the nation‟s income accrue to the
richest quintile of the population
Poverty Elasticity
• The rate of change in poverty divided by the
rate of change in income defines the elasticity of
poverty with respect to income, Ep.
Ep = rate of change in poverty rate of change in income
• In many Asian countries, these elasticities are
less than 1.
• Poverty elasticity in Asia is thus inelastic
suggesting that a substantial increase in income is
needed to reduce the
rate of poverty.
The Kuznets Curve
• “How does income inequality change as income
changes?”
• The Simon Kuznets’ Curve says that inequality
follows an inverted U shape – inequality is low at low
levels of income, then deteriorates rapidly as income
increases (with development); inequality levels improve
again at higher levels of income.
• This inverted U shape is explained by the
greater variation in incomes that come about during the
early phases of industrialization
• There is virtually no evidence of a Kuznets curve
for countries that have a large number of observations,
with the exception of England, which did have an
upsurge in inequality during the industrial revolution.
• For a cross-section of developing countries,
there is greater evidence of an “inverted U” shape for
income distribution.
• This may be because of Latin America, where
incomes are average and income inequality is large.
• When Latin America countries are removed
from the study, no “inverted U” is observed.

• The issue of worsening inequality as a necessary
condition for growth is still unresolved.
• What we do know is that lifting rates of growth
is an effective way to deal with poverty.
• We also know that income distribution changes
only slowly over time.
• Furthermore, a dramatic shift in income
distribution would be required to achieve the same
impact on poverty reduction as a doubling of the rate of
economic growth.
• Therefore it may be better to pursue growth
objectives just so long as they do not have a strong
negative impact on income distribution.
Inequality and Openness
• World Bank data suggests that the intensity of
trade (trade openness) and income distribution are
inversely related.
• This suggests that there may be a “virtuous
cycle” going on in East Asia.
• Human capital has been developed and income
distributions improved within the context of an open
and dynamic export-based orientation.
• The World Bank study also suggests that having
a substantial natural resource base may serve to inhibit
the rate of growth.
• While the level of average education is about
the same in Latin American and Asia, it may be that
resource-based economies have not been able to fully
utilize human capital in new and dynamic industries
requiring skill and know how.
• Trade openness allows Asian economies to take
advantage of externalities in marketing and distribution
that help exporters lower costs.
The Unequal Burden of Poverty
• Women, children, the elderly and ethnic
minorities are more likely to be poor than other groups.
• Children are poorer mainly because the poor
have larger families.
• The elderly are poor because there is no social
safety net in most developing countries.
• Ethnic minorities are poor because of
discrimination and because they are usually based in
rural areas.
• If you are a female, single parent from an ethnic
minority or a girl born into such a family, your chances
of being poor are extremely high.
• Why are people poor? No stock of human
and/or
physical capital, and discrimination.
• Lower education and health are main reasons
for higher poverty among women.
• Those who have skills and capital are more
productive and are paid higher wages (or allocated
more resources) in line with marginal productivity
theory.
• Within households, those who are denied
resources are generally the least productive within the
family – elderly, females and children.
• Many of the decisions to share resources within
a family and in society in general are in basic agreement
with the principles of allocation of resources.
Aspects of Rural Poverty
• Poverty is usually associated with the lack of
ownership of productive assets.
• Lack of physical resources in rural areas relates
primarily to land and agriculture.
• Education and educational opportunities are
also low in rural areas and this inhibits mobility out of
agriculture.
• With little knowledge, the rural poor have
difficulty in adopting new technology.
• Medical problems among the rural poor -
stemming from limited access to clean water and good
sanitation - can sap resources.
Aspects of Urban Poverty
• Migrants from rural areas to the city
constitute the bulk of the urban poor.
• Lack of human capital is the main reason for
poverty in urban areas.
• Poverty rates are lower in urban areas, despite
the influx of migrants from the countryside (Table 9.6).
• Poor in urban areas are primarily self- employed
or working in small scale establishments.
• These include food stalls, selling lottery tickets,
newspapers and cigarettes, repairing cars and bicycles,
street side shoe repair, operate pedicabs and motorized
tricycles, garbage collection and recycling
Labor Absorption & Employment
• Most Asian labor markets are characterized by
“market dualism”.
• Wages are much higher in the formal sector
than in the informal sector.
• Most of the poor are precluded from the formal
sector because of a lack of skill.
• Despite the experience of the miracle
economies, industrialization alone cannot be relied on
to solve the unemployment problem in the poorest
countries.
• There has to be job growth in other sectors as
well, including the service sector and in agriculture.
• Restrictive wage practices that lift the minimum
wage above the acceptable subsistence wage will serve
to further limit employment growth.
• Discrimination against those having highest
rates of poverty – women, minorities and the elderly
who want to work – has to be reduced.
Policies to Further Reduce Poverty
• Removal of distortions that stimulate capital
intensive production technology such as subsidies and
tax breaks, preferential tariffs and undervalued
exchange rates.
• Redistribution of physical assets, insofar as
politically feasible, including land and physical capital
including buildings and equipment.
• Give the poor better access to education, on the
job training and short training courses to develop
specific skills.
• Implement a progressive tax program without
loopholes for the rich and also a tax on
intergenerational transfer of wealth.
• Increase subsidies and direct transfers to the
poor.
Specific Policies to Address Rural Poverty
• Uplift the status of women including more
emphasis on truck farming and livestock and more
education.
• Relax tenancy regulations allowing tenancy to
expand and to be legalized.
• Expand the availability of rural credit within a
market framework. Avoid expensive schemes that lend
money to the already rich absentee landlord.
• Encourage labor migration out of unproductive
areas to urban areas or overseas.
• Provide additional appropriate rural
infrastructure such as roads in farming areas.
• Make sure exchange rates are not overvalued,
where these tax exports and subsidize imports.
• Establish property rights where possible –
particularly for tenants who can sell these rights and
use it to borrow in formal credit markets at favorable
rates.
• Accelerate economic growth.
• Provide a higher level of social services by
careful targeting – Kerala province of India and Sri Lanka
are good examples.
• Provide more economic opportunities for slum
dwellers or “squatters”- who comprise at least a third of
urban residents in Asia
• Finally, develop a more rational land use policy
in urban areas that does away with rent controls, do
away with large military encampments in urban areas
and provides a reasonable amount of land for the poor
to relocate.

Pledge to end poverty

Members of indigenous people’s groups in Isabela City

in Basilan pledge to contribute to poverty eradication
during the 2009 Global Stand Up campaign, which
earned for the Philippines a place in the Guinness Book
of World Records and a special citation at the 2010
MDG Summit. (Photo: City Government of Isabela)
more

United Nations Development Programme

•http://www.ph.undp.org/content/philippines/en/hom
e.html

• Poverty Reduction

• The Programme promotes and enhances

partnerships with government, civil society and the
private sector to reduce poverty and achieve the MDGs
by 2015. As of 2009 the Philippines had a poverty
incidence of 26.5% of population against a 2015 target
of 16.6%. This means that from 2010 to 2015, an
estimated 10 million poor Filipinos must rise above
poverty.

Summary

• Measures of poverty and inequality.

• Poverty and income distribution in Asia.

• Relationship between inequality, openness and

economic growth.

• Who are the poor?

• Suggested policy recommendations.