SOCIAL INCLUSIVENESS IN ASIA’S MIDDLE-INCOME COUNTRIES

Pedro Martins
Overseas Development Institute, London

Terry McKinley

Centre for Development Policy & Research, SOAS

Regional Workshop (sponsored by ADB, ILO and IPRCC) Jakarta, 13 September 2011

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Basic Motivation
The need to move from a Pro-Poor Growth Agenda to an Inclusive Growth Agenda  The central role of generating widespread Productive Employment in making growth more inclusive  Linking Growth and Employment to reducing Inequality as well as Poverty  Macroeconomic and Structural Policies play the dominant role in creating growth and employment  Social Policies and Social Protection play an essentially supportive role

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Basic Motivation

We examined a sample of 8 middle-income countries: China PR, India, Indonesia, Malaysia, the Philippines, Sri Lanka, Thailand and Viet Nam We were asked to investigate the role of: 1) social and municipal services, 2) labour market policies, and 3) social insurance Some of the major background sources:

 McKinley (2010) ‘Inclusive Growth Criteria and Indicators: An

Inclusive Growth Index for Diagnosis of Country Progress’, ADB  ADB (2005), The Social Protection Index for Committed Poverty Reduction, and its current revision

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Basic Motivation
 Other Relevant Recent Sources:  ADB (2010), Key Indicators for Asia and the Pacific, ‘The Rise of Asia’s Middle Class’  ADB (2011), Key Indicators for Asia and the Pacific, ‘Toward Higher Quality Employment in Asia’  In evaluating progress on inclusive growth, the McKinley 2010 paper places 50% weight on growth, employment and access to economic infrastructure, 25% on poverty and inequality, 15% on social policies (health, nutrition, education) and 10% on social protection  One of its main findings is that the Asia and Pacific region is still confronting problems of employment and inequality. A priority new area of research might be the links between inequality and the nature of employment
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Inclusive Growth Involves Adopting a Broader Equity Lens

Our paper does not focus merely on the income poor (e.g., those receiving less than $2 per day) – though this proportion ranges from 7% in Malaysia up to about 70% in India (ADB, 2010) We also focus on ADB’s ‘lower-middle class’ ($2-$4), who are vulnerable to falling into poverty, and the ‘middle-middle class’ ($4-$10) We do not emphasize the conditions of the ‘uppermiddle class’ ($10-$20) because its income share exceeds its population share We are concerned mainly with promoting growth with greater inclusiveness
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Converting Economic Growth into Productive Employment

Macroeconomic and Structural Policies are the primary levers for achieving this objective, through boosting both public and private investment Social Policies, Social Protection and Labour Market Policies play a supportive role: they facilitate people’s access to economic opportunities The classic structural transformation of developing country economies appears to have mutated into new, less employment-intensive forms, likely due in part to the increased globalisation of capitalism There is diminished domestic ‘policy space’ for governments as a result. A lack of ‘fiscal space’ to undertake economic policies is also a major concern.
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Converting Economic Growth into Productive Employment

The basic growth and employment trends are well known: 1) agriculture is diminishing as a sector but still remains the largest, 2) the service sector often appears to be the main driver of growth and employment, 3) industry has recently grown rapidly in some economies (China, India, Viet Nam) but not as rapidly as services in most economies
For example, in Developing Asia, agriculture still accounted for about 44% of total employment in 2008 (down from about 66% in 1990) Industry’s share had risen to only about 24% from 17% in 1990 Meanwhile, service’s share had risen sharply from 16% in 1990 to about 33% in 2008 (ADB, 2011).

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Sectoral Employment Shares
Employment by Sector Developing Asia Developing Europe Latin America & C. OECD Agriculture (%) Industry (%) Services (%)

1990
66.3 31.8 18.8 7.1

2008
43.5 14.3 16.5 3.9

1990
17.4 31.9 26.6 31.4

2008
23.7 28.0 24.2 24.2

1990
16.3 36.3 54.6 61.6

2008
32.9 57.5 59.2 71.9

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Converting Economic Growth into Productive Employment

What is troubling is the stubborn persistence of sizeable proportions of informal sector employment and vulnerable employment in economies that have been growing fairly rapidly, particularly in the 2000s
The share of informal workers in employment in 2008 was 67%, compared to 69% in 1990! The share of vulnerable employment (own-account and unpaid family workers) in 2008 was still 64% in Indonesia, 54% in Thailand, 44% in the Philippines and 41% in Sri Lanka

 

These trends portend difficulties in implementing social insurance and labour market policies, which are usually based on the participation of employees in formally registered firms An active employment-focussed economic policy agenda will be necessary
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Converting Economic Growth into Productive Employment

There has also been little change in the share of wage and salaried employees in total employment
The share of wage and salaried workers in total employment in 2008 was, for example, a little over 30%. This compares to a share that was a little under 30% in 1990!

This indicates little real structural transformation in employment, which should have led to both broadbased and higher-productivity employment  The central challenge is not to raise labour productivity, as some would suggest; this is already happening in some isolated sectors  Real wages do not necessarily rise with labour productivity partly because of the pressures of international competition on labour costs

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Converting Economic Growth into Productive Employment
 

The real challenge is to raise labour productivity along with broadening formal-sector employment This would entail an active role for the allocation of public investment, particularly in economic and social infrastructure that stimulates private investment This would also likely imply the use of public incentives to induce financial institutions to direct credit to certain purposes (innovation) or certain sectors (those potentially competitive) These policies combine demand-side stimulus with longer-term supply-side impacts on expanding the economy’s productive potential
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Demographic Change and Employment in Asia

 

Trends in the elderly dependency ratio [65+/(1564)] show that the Asian population is ageing, with particularly high ratios already in China, Sri Lanka and Thailand (about 10%)– although these are still far from Japan’s 34%. Conversely, the youth dependency ratio (under 15s) is experiencing dramatic falls, suggesting a smaller working-age population in coming decades. However, many countries still currently have high labour force growth rates (above 2% per year) These trends have important social and economic implications, especially for mobilising fiscal resources and supporting the retired. They will pose major problems for social insurance schemes
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The Role of Labour Market Policies

ADB’s Social Protection Index indicates that labour market policies represent a small share (1-10%) of total social-protection expenditures in Asia Most such policies are geared to serving the needs of regular workers in established (formally registered) private-sector enterprises (in addition, of course, to civil servants in the public sector) Such workers are a minority of the total employed – even though increased labour flexibility is putting them under intensified pressure Whatever policies are implemented for these workers, they are not highly likely to have significant economy-wide impacts
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The Role of Labour Market Policies

Our working assumption is that formal-sector workers (public and private) tend to be part of ADB’s ‘middle class’ ($2-$20) In China PR 47% of regular wage employees were in the ‘middle-middle class’ and another 31% were in the ‘lower-middle class’ (2002) In the Philippines, 31% of such workers were in the ‘middle-middle class’ and another 31% were in the ‘lower-middle class’ (2006) In poorer India, however, 36% were in the ‘lowermiddle class’ and 31% were moderately poor ($1.25-$2) (2005)
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Distribution of Regular Employees
Self-Employed Wage Employment Per capita Country Income Own-Account Casual / Regular / Unempl. Employers (2005 $ PPP) Workers Temporary Permanent <$1.25 32.7 6.0 51.3 20.1 28.4 $1.25-$2 41.5 21.8 37.4 31.2 37.0 $2-$4 22.7 45.1 10.7 35.5 27.8 India (2005) $4-$10 2.9 24.2 0.6 12.1 6.4 >$10 0.2 2.9 0.0 1.2 0.4 Total 100.0 100.0 100.0 100.0 100.0 <$1.25 21.5 8.6 15.8 5.0 13.8 $1.25-$2 26.3 18.5 21.1 9.0 19.7 $2-$4 37.2 39.7 38.9 30.9 42.6 China (2002) $4-$10 13.7 27.6 21.7 47.0 22.3 >$10 1.2 5.5 2.5 8.1 1.6 Total 100.0 100.0 100.0 100.0 100.0 <$1.25 25.2 13.3 22.1 10.5 12.2 $1.25-$2 28.0 20.4 28.7 16.6 21.1 29.7 31.5 31.3 31.3 38.9 Philippines $2-$4 (2006) $4-$10 14.9 25.6 15.4 31.1 24.2 >$10 2.1 9.2 2.5 10.5 3.5 Total 100.0 100.0 100.0 100.0 100.0 Total 32.7 41.5 22.7 2.9 0.2 100.0 12.8 17.6 35.0 30.0 4.6 100.0 18.3 23.4 31.3 21.6 5.4 100.0

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The Role of Labour Market Policies

Extending employment protection legislation does not seem promising: its enforcement is weak de facto Passive labour market policies, such as unemployment insurance, have become a more popular vehicle, but mainly as counter-cyclical tools during crises and on a limited basis Active labour market policies appear to be the best option, providing long-term support to employmentboosting economic policies as the main driver:
Training and skill development (to access higher-quality jobs) Public Works Programmes geared to building infrastructure

 

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The Role of Social Insurance

Social Insurance is easily the dominant form of social protection in Asia, accounting for 55-92% of all expenditures across our eight MICs (2005)
The largest item is pensions, half to two-thirds of total socialinsurance expenditures across our sample Next most important is health insurance, but less than 20% of social-insurance expenditures across our sample

A central problem: social assistance is directed towards the poor, while social insurance is directed to a minority of middle-strata workers There is a sizeable ‘missing middle’ of the labour force that is not being served by social protection
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Social Protection Spending
Social Insurance (% Total) Country China, PR India Indonesia Malaysia Philippines Sri Lanka Thailand

Pensions
63 58 .. 68 64 47 ..

Health Insurance 18 1 .. 15 13 0 ..

Total
84 60 71 92 79 56 ..

Social Assistance (% Total) 7 23 25 7 4 13

Labour Market (% Total) 7 10 1 1 0 1 ..

SP Spending (% GDP) 4.6 4.0 1.9 3.9 2.2 5.7 ..

Viet Nam

..

..

55

31

8

4.1

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The Role of Social Insurance
 

This ‘missing middle’ remains vulnerable to a wide array of risks to their livelihoods and well-being The especially vulnerable ‘lower-middle class’ ($2$4) – often composed of the urban self-employed, casual or temporary wage workers, small farmers and informal-sector workers – is not well served by either social assistance or social insurance Some of the countries in our sample, such as Sri Lanka and the Philippines, have undertaken to reach the large grouping of informal-sector workers, but with limited success Contributory schemes seem unlikely to succeed because of these workers’ low and variable incomes
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The Role of Social Insurance

Any contributory schemes would have to be significantly complemented by tax financing to be effective programmes Financing ‘social pensions’ seems problematic since even many formal-sector pension programmes face financial problems (partly due to population ageing) Some countries, such as Malaysia, the Philippines and Indonesia, appear to have had some success in extending health insurance
Our Recommendation: expand health insurance to both the poor and the vulnerable non-poor. But this will require expanding government revenue (relying perhaps on broad coverage of indirect taxation and some beneficiary contributions)
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The Impact of Social and Municipal Services on Inclusiveness

Most of our MDG-related focus on social and municipal services has been concerned with poverty reduction, with the most striking shortfalls in coverage evident in rural areas However, accelerated urbanisation and rapid but ‘job-deficient’ economic growth linked to globalisation point towards new priorities

We need to focus more on urban areas (but not just on ‘slums’ since there is a growing general problem of inadequate or expensive urban housing)  We also need to focus more on the vulnerable non-poor as well as the poor – the ‘lower-middle’ and ‘middlemiddle’ strata facing increasing relative deprivation with regard to such services

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The Impact of Social and Municipal Services on Inclusiveness
Most of our standard indicators for health and education tend to be poverty-focused (e.g., underfive mortality, malnutrition, literacy)  We need to utilise indicators, such as life expectancy (or life expectancy beyond 60 years), which register progress across a broader segment of the population  We also do not focus enough on access to economic infrastructure and services (electricity, roads, transportation, ICT), which are vital to growth  For education, we need to shift our attention to secondary education and above: these levels will provide the education and skills that support and promote higher-quality employment

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The Impact of Social and Municipal Services on Inclusiveness
For both healthcare and education, households appear to be shouldering an increasing share of the costs, either opting for private schools or paying more out-of-pocket for public services  Thus, the ‘upper-middle’ and ‘upper-class’ households will likely gain superior access to services  Such trends will exacerbate inequalities in access that will tend to reinforce widening inequalities in access to productive employment  Strengthening broad effective access to at least secondary education (and vocational education) appears to be a key social policy now that can support the leading role of economic policies in promoting an employment-intensive trajectory of economic development

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Thank You

Pedro Martins

Overseas Development Institute, London p.martins@odi.org.uk

Terry McKinley

Centre for Development Policy & Research, School of Oriental and African Studies tm9@soas.ac.uk

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