Chapter 2 – Introduction and Overview
factors, including public policy and
Economic Development in Asia
• East Asian miracle, a showcase of
development up until the Asian crisis.
• Asian crisis created a number of questions
about the continued viability of a rapid
growth profile for the region.
• Economies have begun to rebound.
• The enormous interest in the economic
development of postwar East Asia has
continued into the new millennium. The
regions recent economic history has been
marked by an “economic miracle” that
spanned several decades followed by a
severe financial and economic crisis.
Problems of widespread poverty and
economic inequality remain despite
significant economic progress.
• The development process began in Japan
when it opened its economy to increased
trade and investment. The rapid
industrialization that followed quickly spread
to the neighboring economies of South Korea,
Singapore, Taiwan and Hong Kong. Economic
growth in these newly industrialized
economies (NIEs), sometimes called the Asian
“tigers”, averaged 8 percent per year in the
three decades prior to Asian financial crisis in
1997.
• After the sharp economic contraction in 1998,
Difference between Development Economics and
the region rebounded rapidly. In South Korea,
other Branches of Economics
for example year-on-year industrial
production and gross domestic product (GDP)
increased dramatically in 1999 while stock
market value doubled in Thailand and
Malaysia.
• Social impact of the crisis has been
substantial.
• Future development will depend upon many
developments in industrial countries.
• This course looks at both the history and the
future outlook for the region.
• The financial crisis also hampered progress in
reducing poverty and addressing other social
issues. The human development gains in
health, education, poverty and equality and
the distribution of income achieved by East
Asia in the two decades prior to the crises
was eroded to some degree resulting in
slower growth.
• There is no doubt, however, that the
economies of East Asia are in the process of
recovering from the crisis and the region, as a
whole, will play a major role in the global,
high tech world economy that we are moving
towards in this new millennium.
• In South Asia, where the impact of the
financial crisis on the region was not as
severe, economic progress has accelerated
following a shift in policy in the late 1980s
and early 1990s. Nevertheless, this region
faces a number of challenges, including
further progress in reducing poverty and the
resolution of political disputes that have
drawn resources away from economic
development.
• It looks at all of the other branches of
economics within the context of economic
development.
• It uses the tools developed in other branches
of economics to analyze the problems and
challenges of economic development.
 Measuring Growth & Development as growth and development measures is based on
what is known as the “green” system of national
• Use of GDP and GNP and exchange rate
accounting. Green GNP is the informal name given to
comparisons lead to patterns of growth over
national income measures that are adjusted to take
time.
into account the depletion of natural resources (both
• Other methods such as purchasing power renewable and non-renewable) and environmental
parity can also be used to compare standards degradation.
of living.
EXCHANGE RATE METHOD
• Using measure of the amount of goods and
The exchange rate method between the local
services produced in an economy in a year,
currency and the U.S. dollar to convert the currency
we can get some idea about the standard of
into its U.S. dollar equivalent. A country’s GDP and
living in that economy. When the value of
GDP per capital would then be valued accordingly, in
these goods increases over time, there is
U.S. dollars.
economic growth. Gross Domestic Product
(the total value of production in an economy) PPP METHOD
or gross national product (GNP – which is GDP
The purchasing power parity method develops a cost
plus net factor income from abroad) is used a
index for comparable baskets of consumption goods
measure of the nation’s income or
in the local currency and then compares this with
production. The size of the total population
prices in the United States for the same set of
can be used to deflate it to per-capita terms.
commodities. A country’s PPP is defined as the
Other Measures number of units of the country’s currency required to
buy the same amount of goods and services that a
1. Human Development Index (HDI)
dollar would buy in the United States.
The United Nations Development Program (UNDP)
developed the HDI in the late 1980s and has been
publishing it since 1990. This index has three
components: per-capita income and two additional
measures-life expectancy at birth, and level of
educational attainment that combines adult literacy
and educational enrolment rates. These are added to
per-capita income, which is adjusted to reflect the
diminishing marginal use of money to obtain HDI.

2. HEALTHY LIFE EXPENTANCY

A measure used by the WHO summarizes the

expected number of years to be lived in “full health”.

3. GREEN GNP

One of the more recent approaches developed to

address the inherent shortcomings of GDP and GNP
Chapter 4 – The Asian Crisis and Recent
Developments
Start of the Asian Crisis
• June 1997, after a sustained attack on the
currency led by currency hedge funds, the
Thai baht sustained a large devaluation.
• Currency devaluations in Malaysia, Indonesia
and the Philippines followed in July.
(Malaysian ringgit, the Indonesian rupiah, and
the Philippine peso)
• The currency weakness extended to Australia,
Hong Kong and Korea currencies in October.
• While the currency parity with the US dollar
The Asian Crisis – The Bubble Economy
was maintained, the stock market fell by
about 30 percent of its value in a week.
The Asian Crisis
• By early 1998, currencies fell by 35% to 55%
for Korea, Philippines, Malaysia and Thailand,
and more than 15% for Singapore and
Taiwan.
• Indonesia suffered greatest fall of 80%.
• Equity prices also fell as a result of investor
uncertainty and currency volatility (Table 3.1).
• Thin and restricted equity markets
exaggerated the decline.
• Lack of hedging facilities forced investors to
reduce holdings dramatically.
• Interest rates were raised to help stabilize
currencies and liquidity was reduced.
• The result was a sharp decline in aggregate
economic activity in late 1997 and in 1998.
Explanations for the Asian Crisis
• There are three broad explanations, none of
them alone completely satisfactory.
• First, a speculative bubble in the housing and
equity markets arose which was funded and
sustained by excessive lending by the banking
system.
• Second, external sector difficulties emerged
including slow export growth, loss of external
competitiveness and rapid growth in current
account deficits.
• Third, capital flight and investor panic spread
across the region through a contagion
mechanism as a result of globalization.
• First, the bubble economy was the result of
interaction between lenders (mostly banks)
that borrowed offshore at high interest rates
and relend at higher rates to domestic
investors.
• The domestic investors borrowed extensively
to finance speculative investments in the
housing and equity markets.
• This created a speculative bubble that
depended on a stable exchange rate and high
profits.
• High profits became more improbable as the
boom reached its peak, which was further
undermined by the successive devaluations in
all the economies as the crisis unfolded.
• Banking weakness was reinforced by a lack of
competition and unsound lending practices.
• These included risky long term lending in local
currency using short term dollar loans from
overseas lenders.
 • When these borrowers defaulted it resulted
in the inability of the banks to repay these
short term dollar obligations.
• This banking crisis was also influenced by
moral hazard
• Moral hazard occurs when an agent takes
more risk because they are insured against
the negative consequence of such actions.
• In the case of the Asian financial crisis banks
thoughts that governments would insure a
stable exchange rate.
• They also might have thought that the
government would bail them out if they
found themselves in financial trouble
The Asian Crisis – External Sector Difficulties
• Second, as the bubble of the early 1990s
progressed, current account deficits also
grew as offshore borrowing increased.
• While exports were growing rapidly, this was
viewed as a sign of strong investment and
growth enhancing capital expansion.
• However, when export growth began to sag
in 1996 this large current account deficits
became a growing liability and worry for
international investors.
• Exchange rates were tied to the dollar and
exports were hurt in international markets as
the dollar appreciated in the mid 1990s.
Post-Crisis Experience
The Asian Crisis – Contagion Effects
• Third, there was a strong contagion effect as
the financial crisis spread across the region.
• Countries that had strong currencies and
economies, such as Hong Kong, Singapore
and Taiwan were also adversely affected.
• As the foreign exchange crisis unfolded, there
was a dramatic turn around in net private
capital flows to the region – from a $97 billion
inflow in 1996 to a $12 billion outflow in
1997.
• This $109 billion reversal was about 10% of
the GDP of the five most affected economies
– Indonesia, Korea, Malaysia, Philippines, and
Thailand.
• There was also a dramatic reversal in bank
credit which also amounted to about 10
percent of GDP.
• Together, the reversal of capital flows and
bank credit created a liquidity crisis that led
to a sharp fall in income and output.
• Indonesia, which had been a model of probity
and sensible policies was hardest hit by the
crisis as its exchange rate fell by over 50
percent and aggregate incomes fell
dramatically.
• This contagion effect was the result of
investors pulling out of many economies
simultaneously.
• The pressure that arose on all the currencies
of the region could have been a combination
of this contagion effect as well as a process of
“competitive devaluations” as investment
funds left the region.
• The impact of the crisis was fully felt in 1998
when all the crisis countries and most other
countries had negative or very small rates of
positive growth.
 • PRC and Taiwan were the only exceptions. • Some adverse effects on school enrollment
and on health indicators were observed.
• Equity prices also fell across the region in
1998. The Recovery Part 1

• Beginning in 1999, there has been a recovery

in growth and equity markets.

• This recovery has been accompanied by a

significant amount of industrial and financial
restructuring.

• Many countries suffered from a high level of

Non-Performing Loans (NPLs).

• To deal with these NPLs, the most affected

countries created separate agencies to deal
with them. These Asset Management
Companies (AMCs) have taken many of the
bad loans and negotiated their liquidation. The Recovery Part 2

• Korea and Malaysia have been particularly
successful in reducing NPLs, enabling the
banking system to begin to extend new loans.
• Thailand and Indonesia have been only
moderately successful while in the
Philippines, the level of NPLs, though small
during the crisis, has crept up in recent years.
• Between 2002 and 2007 economic growth in
the Asian region accelerated, led by India and
China. Living standards increased and poverty
fell.
• Domestic demand and foreign trade were
both important factors in the resumption of
growth.

Social Impact of the Crisis • As the recover progressed financial

• The fall in output and employment created
hardships for many segments of the society in
the affected countries.
• There was significant reverse migration to
rural from urban areas as job opportunities
dried up.
restructuring proceeded and the financial
systems strengthened.
• The region has grown much richer in the
decade since the Asian crisis.
• China has emerged as a regional economic
powerhouse.

• Poverty levels increased between 1997 and • Half the GDP of the region and one third of
1998. exports originates in China

• Disadvantaged groups such as the poor,
women, children and the elderly were the
worse hit by the crisis.
• China joined WTO several years ago.
• Import GDP ratio is 34% in China versus 9%
for Japan.
 • Shows Japan is still somewhat protectionist.
• Middle income countries are being squeezed
by China.
• In Southeast Asia in particular.
• China is now the largest trader in Asia
overtaking Japan.
• China competes in many different
international markets from labor intensive to
skill intensive.
• Innovation and new products are drivers of
trade in Asia now.
• 60% of export growth in Asia is in new
varieties and products not more of the same
products.
• Geography and outsourcing are important
and locational advantages are shaped by
various factors.
• History, availability of manpower, availability
of capital, cost of shipping and agglomeration
economies all play a role.
• Shenzen in China and Bangalore in India are
examples of agglomeration economies.
• Export processing zones help create
incentives for high growth export
development and innovation.
The Recovery Part 3
• As the global economic crisis unfolds in 2009
Asia is being adversely affected.
• Slower growth in Asia in 2009 and perhaps
2010 is anticipated.
• There will be a slowdown in export demand
from Europe, Japan and the United States.
• Asia is in good shape to offset these
anticipated weaknesses in the foreign sector
with monetary and fiscal stimulus.
• Most countries cut interest rates in last four
months of 2008.
• Falling energy and food prices should
ameliorate any tendencies toward inflation.
• There has been general fiscal stimulus.
• China’s projected $850 billion additional
spending on infrastructure in next few years.
• East Asia and Southeast Asia have current
account surpluses.
• All countries in the region have ample foreign
exchange reserves.
• India could have a more difficult time than
the rest of the region.
• It has a large fiscal deficit which limits fiscal
stimulus.
• Lack of willingness of overseas lenders to
investment.
• As the global recession deepens greater cuts
in employment and exports in Asia.
• Could create greater social tension.
• Exacerbate poverty with reverse migration.
• Singapore, Hong Kong and Malaysia most
exposed to foreign trade.
• Both Hong Kong and Singapore adversely
affected in Asian crisis of 1997.
• Thailand’s prospects will also be adversely
affected by political uncertainty.
• Taiwan will have to fight its way through a
recession that has already begun.
 • Korea has a lot of household debt which
could slow the economy further.
• But a big fiscal stimulus and currency
depreciation of around 30 percent in 2008
which should boost exports.
• Volatility in many markets will restrain risk
taking and investment.
• Volatility causes sharp changes in balance of
payments
• Puts pressure on governments to adjust their
budgets to reflect these shifts.
• It creates uncertainty in the business
community
• Has a dampening impact on investment.
• The economic recovery continued into the
second and third quarter of 2009.
• Industrial countries and developing countries
in Asia all benefited.
• Stimulus packages were adopted by many
countries including fiscal and monetary
measures.
Agenda for Reform
• In the wake of the Asian crisis, there were a
number of reforms
• Continuation of the debt restructuring
process with help of AMCs.
• Arrangements of credit lines with the private
sector.
• Reform of exchange rate regimes to reduce
the chance of abrupt currency devaluation.
• The movement of hot money that takes
advantage of large short term interest
differentials was discouraged or made illegal.
Growth Projections
• Consideration of capital account reforms to
include possible taxes on short term capital
but where not approved.
• Possible controls on international portfolio
movements were also considered but not
implemented.
• Minimum international standards of financial
practice were implemented.
• Accountability and transparency of business
practices strengthened.
• Increased international surveillance to detect
possible future financial crises have been
considered but not implemented.
• Basle accords used to strengthen supervision
and regulation of banking systems.
• Introduce greater competition in financial
markets while strengthening prudential
regulations.
• Improve accounting and disclosure standards.
• Introduce greater flexibility and depth into
financial markets including greater hedging
and providing greater access for foreign
investors.
• Maintain open trading environments in
keeping with WTO and regional trading
arrangements.
• Look into ways of restraining FDI concessions
that distort incentives and distort the flow of
investment.
• Enhance the flow of technical expertise,
innovation and human capital flows and
exchanges.
• Continue to undertake research into the
process of financial and economic crises.
• In this section we explore prospect for future
growth and structural change.
• We begin with a simple growth model
• y = (ls) h + (1- ls) k + a
Education and health (h)
Governance, corruption, foreign investment
also important as indirect determinants of
TFP

• where y is growth income h is the rate of

change in education adjusted labor input, k is
the rate of growth in capital, ls is labors share
in income, (1- ls ) is capital’s share in income
and a is total factor productivity.

• If we assume that the capital to output ratio

is fixed in the short run then we can
substitute y for k on the right hand side of
this equation and rearrange

• y = h + a/ ls

• Income growth (y) is a function of the growth

of the labor force adjusted for improved
quality by higher education and better health
(h), the share of labor in total income (ls) and
TFP (a).

The rest of the section looks at various

assumptions about these factors and projects
growth into the future.

The main conclusion is that estimates for TFP

(a) in South Asia using the past tend to
underestimate the rate of growth.

We have also oversimplified because we

haven’t looked at saving potential.

You can read about this on pages 46 and 47.

By considering the factors in these simple

growth models we can get some insights into
what causes rapid growth.

Investment

TFP (a)

Labor force growth (ls)

Chapter 5 – Agriculture
Agriculture & Economic Growth
• Plays a key role in the process of economic
development.
• Rich source of factor inputs to feed the
growing labor force in the industrial sector
and other modern sectors.
• Major source of investment and capital
formation.
• Provides foreign exchange for acquisition of
foreign technology.
• Finally, agriculture provides a rich market for
the output of the modern urban sector.
• The transition from a primarily rural based
economy to an industrial economy requires a
strong agricultural sector.
• This is because a surplus from agriculture is
needed to fuel investment in industry.
Decline of the Agriculture Sector`
• Experience of a broad range of countries
indicates that the relative importance of the
agricultural sector to the economy diminishes
with growth over time.
• As income increases, share of agricultural
value-added in GDP and as a source of
unemployment declines.
Agricultural Transformation in Asia
• The decline of the agricultural sector
appeared to be directly proportional to
overall rate of economic growth.
• Agriculture’s share of output declined
gradually from over 60% in the 1950s in most
Asian countries to less than 20% by the
1990s.
• Growth in agriculture was high in countries
where overall growth was high and vice versa.
• The tendency for agricultural sector output to
fall as a percent of total output was also the
result of the Engle curve effect.
As income increases, a smaller than
proportional amount of this increase in
income is spent on agricultural products.
• Rapid rises in productivity in agricultural
sector such as through Green Revolution
contributed further to declining terms of
trade.
• The combination of low-income elasticity of
demand for agricultural products and sluggish
prices exerted strong pressure on resources
to move out of the sector.
• This facilitated and accelerated the migration
to urban areas where rapidly growing
industrial establishments required more
workers.
Productivity in Agriculture
• Labor productivity is usually higher in
agricultural sector than industry at the
beginning of the industrialization process.
• As industrialization moved forward,
industrial productivity exceeded agricultural
productivity, which still remained high.
• This provided a mutually reinforcing positive
impact on economic growth.
• In some countries, productivity came from
expansion of land/irrigation and in others
from improved yields using better crop
varieties.
• The experience in Asia was different from
that observed in other developing regions
 where agricultural productivity often
stagnated.
• Industrialization strategies in various Asian
countries had been financed in many cases by
internal savings generated primarily from
agriculture.
• One good example is Taiwan. In other cases,
such as Korea, overseas borrowing
augmented these savings from agriculture.
• Agricultural productivity in Asia exceed those
of Latin America and Africa.
• Growth in per capita food production in Latin
America and Near East fluctuated within 10%
range; whilst Africa showed a steady decline
over the last 20 years.
• In contrast, the growth of per capita food
production in Asia shows a steady increase
over time, increasing by nearly 40 percent by
the end of the period.
• The largest increments were achieved in the
late 80s and early 90s.
• Hence, its astounding agricultural productivity
presents a key link to the chain of
developments that led to Asia’s economic
success.
Agricultural Development in Monsoon Asia
• Monsoon agriculture requires extensive labor
input during planting and harvesting.
• Most agriculture was rain fed in the early part
of the 20th century.
Lessons and Policy Issues in Asian Agriculture
• Farms were small and population densities
high, conditions that were ideal for rice
cultivation.
• Traditional agriculture was quite efficient,
given its limitations.
• Irrigation and higher yielding varieties were
the keys to transforming traditional
agriculture and raising productivity.
• This transformation was required to lift
savings and to provide labor and investment
for the growing industrial sector.
• Adoption of more modern technology was
slowed by the risk averse behavior of small
farmers.
• Several new developments were key
components in the transformation to higher
yielding and more progressive agriculture.
• These included adoption of higher yielding
varieties, application of fertilizers, herbicides
and pesticides and greater use of irrigation.
• Other developments didn’t help much.
• These included changes in farm size and in
land tenure.
• Far reaching land reform was difficult, if not
impossible, and changes in tenancy
arrangements didn’t bring about any
uniformly significant gains in productivity.
• Macroeconomic policies were generally
supportive of agricultural development, and
the sector was not “squeezed” as it was in
some other developing region.
• Nevertheless there were still taxes on the
sector which were used to subsidize growth
in other sectors of the economy, particularly
industry.
• Subsidies to mechanization should be
removed.
• Once this is done, mechanization should be
left to the market, since its profitability and
 scope of applicability will depend upon local
conditions.

• Higher yielding varieties may have had an

adverse effect on income distribution.

• Further development in genetic engineering

are necessary to sustain growth in yields.

• These could involve breeding crops that are

disease resistant, drought resistant, flood
resistant and need less fertilizer.

• It would also involve greater transfer of

technology from industrial countries and
development of new varieties in Asia.

• Improved farm extension is needed to ensure

that new developments in seeds, crop
rotation and new varieties can be spread to
farmers efficiently and quickly.

• Greater emphasis on water conservation and

improved productivity.

• Genetically modified organisms (GMOs) are

becoming more important despite objections
from EU countries.

• Zero tillage an important new development

• Shift away from primary grains toward tree

crops, horticulture, fishing and secondary
food crops should be encouraged.

• The demand for protection of agriculture

varies inversely with the level of income and
the share of income going to agriculture.

• Developing countries must lobby more

effectively for the lowering and eventual
removal of these tariff barriers.
Chapter 6 - Industrialization and Structural Change • Choice of technology will be determined,
under competitive conditions, by the relative
Industrialization
costs of capital and labor.
• Rapid industrial development is the key
• Economies of scale can be important in
element of structural transformation from an
enabling industries to move to the lowest
agrarian based rural economy to a modern
point on the cost curve.
state.
• Exporting to foreign markets is one way to
• In the Lewis-Fei-Ranis (LFR) model, capital
achieve economies of scale, particularly if the
accumulation fuels the development of the
domestic economy is limited.
industrial sector.
Linkages
• There is a dramatic shift from agriculture to
industry. • Backward linkages are strong in industries
such as leather, clothing, textiles, food and
• Labor removed from agriculture does not
beverages and paper products.
affect output much since there is a surplus of
labor in the rural sector. • Forward linkages are strong in industries such
as petroleum and chemical and some heavy
• As labor moves from the traditional sector to
industries and also in some labor intensive
industry, overall labor productivity increases.
electronics.
• Wages in industry are higher than they are in
Economic Efficiency
agriculture resulting in labor migration.
• Despite economies of scale, overall economic
• The flow of labor to the city and to the
efficiency depends on a number of other
industrial sector provides a new gain to
factors including management, marketing and
society.
distribution. Technology is also important.
• Once the stock of surplus labor is exhausted,
• To become efficient, it is often argued that
wages are driven up in both sectors.
new industries need to be protected from
• Terms of trade between the two sectors will competition until they grow to be efficient
depend, to some extent, upon government enough to compete internationally.
policy.
Infant Industry Protection
• A delicate balance is necessary to keep
• Such infant industry protection has been used
agriculture viable yet allow for investment in
to erect tariff barriers and import restrictions
industry.
in a number of countries. [Refer
• Linkages between the two sectors are Supplementary Article 5a]
important as backward linkages with
• Generally, the evidence from a number of
suppliers in the rural sector help both sectors
developing countries suggests that such
to grow as industry flourishes.
protection increases inefficiency rather than
• Forward linkages help countries to upgrade reduce it.
their industrial bases.
 • 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.
 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]
 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
 Exports shifted quickly to light and heavy
industry from primary industry
 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.
 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.
 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
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.
 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  Only recently are social safety nets being
benefits perceived from living in the city. constructed in the Asian region.

 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.
Chapter 10 – Poverty & Income Distribution Some Issues in Measurement of Poverty:

Poverty and Income Distribution • Absolute vs Relative Poverty?

• Despite substantial economic growth in many • Which poverty line or ‘threshold’ to use?.
countries, poverty remains widespread.
• What is the depth of poverty? How is that
• Estimates vary but at least 1.4 billion people measured?
live in poverty worldwide (about 25% of the
• Household poverty or individual poverty?
world’s population)
This issue is particularly relevant when some
• The gap between the richest and poorest
household members are systematically deprived of
countries has grown.
food and shelter – often girls and women.
• Poverty tends to perpetuate itself since the
Measures of Inequality
children of the poor tend to remain poor.
• Inequality is pertains to the ‘fairness’ in the
• This is sometimes called the “vicious circle” of
distribution of income in the population
poverty.
• In other words, the gap between the rich and
• Poverty tends to be concentrated in countries
the poor
that are in the “tropics”.
• What is ‘fair’ and ‘not fair’ is highly subjective
• This has led some to believe in a “climate”
theory of development. • Objective measures satisfy certain criteria:

• 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.
• Nevertheless, the evidence is strong
(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.

Measures of Poverty The range, mean absolute deviation and coefficient

of variation and the variance of the logarithm of
• The head count ratio is the simplest and
income are some measures of income distribution
most widely used (q/n) where q is the
that have been used.
number of people below the poverty line and
n is the population size. • The so-called Kuznets income ratio is also
popular – the ratio of the income shares of
• Other measures include the poverty gap.
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
• 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
• 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
• Income distribution has improved in some
Asian countries
• Income is generally better distributed in Asia
than in Latin America
• Social indicators have improved in East Asia
and Southeast Asia – reductions in illiteracy,
higher life expectancy and lower infant
mortality
• Income distribution has improved in some
Asian countries
• Income is generally better distributed in Asia
than in Latin America
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
Inequality and Openness
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.
• 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 Aspects of Rural Poverty
take advantage of externalities in marketing
• Poverty is usually associated with the lack of
and distribution that help exporters lower
ownership of productive assets.
costs.
• Lack of physical resources in rural areas
The Unequal Burden of Poverty
relates primarily to land and agriculture.
• Women, children, the elderly and ethnic
• Education and educational opportunities are
minorities are more likely to be poor than
also low in rural areas and this inhibits
other groups.
mobility out of agriculture.
• Children are poorer mainly because the poor
• With little knowledge, the rural poor have
have larger families.
difficulty in adopting new technology.
• The elderly are poor because there is no
• Medical problems among the rural poor -
social safety net in most developing
stemming from limited access to clean water
countries.
and good sanitation - can sap resources.
• Ethnic minorities are poor because of
• Migrants from rural areas to the city
discrimination and because they are usually
constitute the bulk of the urban poor.
based in rural areas.
• Lack of human capital is the main reason for
• If you are a female, single parent from an
poverty in urban areas.
ethnic minority or a girl born into such a
family, your chances of being poor are • Poverty rates are lower in urban areas,
extremely high. despite the influx of migrants from the
countryside (Table 9.6).
• Why are people poor? No stock of human
and/or physical capital, and discrimination. • Poor in urban areas are primarily self-
employed or working in small scale
• Lower education and health are main reasons
establishments.
for higher poverty among women.
• These include food stalls, selling lottery
• Those who have skills and capital are more
tickets, newspapers and cigarettes, repairing
productive and are paid higher wages (or
cars and bicycles, street side shoe repair,
allocated more resources) in line with
operate pedicabs and motorized tricycles,
marginal productivity theory.
garbage collection and recycling.
• Within households, those who are denied
Labor Absorption & Employment
resources are generally the least productive
within the family – elderly, females and • Most Asian labor markets are characterized
children. by “market dualism”.
• Many of the decisions to share resources • Wages are much higher in the formal sector
within a family and in society in general are in than in the informal sector.
basic agreement with the principles of
allocation of resources.
 • Most of the poor are precluded from the Specific Policies to Address Rural Poverty
formal sector because of a lack of skill.
• Uplift the status of women including more
• Despite the experience of the miracle emphasis on truck farming and livestock and
economies, industrialization alone cannot be more education.
relied on to solve the unemployment problem
• Relax tenancy regulations allowing tenancy to
in the poorest countries.
expand and to be legalized.
• There has to be job growth in other sectors as
• Expand the availability of rural credit within a
well, including the service sector and in
market framework. Avoid expensive schemes
agriculture.
that lend money to the already rich absentee
• Restrictive wage practices that lift the landlord.
minimum wage above the acceptable
• Encourage labor migration out of
subsistence wage will serve to further limit
unproductive areas to urban areas or
employment growth.
overseas.
• Discrimination against those having highest
• Provide additional appropriate rural
rates of poverty – women, minorities and the
infrastructure such as roads in farming areas.
elderly who want to work – has to be
reduced. • Make sure exchange rates are not
overvalued, where these tax exports and
Policies to Further Reduce Poverty
subsidize imports.
• Removal of distortions that stimulate capital
• Establish property rights where possible –
intensive production technology such as
particularly for tenants who can sell these
subsidies and tax breaks, preferential tariffs
rights and use it to borrow in formal credit
and undervalued exchange rates.
markets at favorable rates.
• Redistribution of physical assets, insofar as
• Accelerate economic growth.
politically feasible, including land and physical
capital including buildings and equipment. • Provide a higher level of social services by
careful targeting – Kerala province of India
• Give the poor better access to education, on
and Sri Lanka are good examples.
the job training and short training courses to
develop specific skills. • Provide more economic opportunities for
slum dwellers or “squatters”- who comprise
• Implement a progressive tax program without
at least a third of urban residents in Asia
loopholes for the rich and also a tax on
intergenerational transfer of wealth. • Finally, develop a more rational land use
policy in urban areas that does away with
• Increase subsidies and direct transfers to the
rent controls, do away with large military
poor.
encampments in urban areas and provides a
reasonable amount of land for the poor to
relocate.
Chapter 11 – Human Resource Development: A
Focus on Education & Health
Human Resource Development
• In recent years, economists have come to
realize the importance of human resources in
stimulating economic growth
• This emphasis became more evident with the
rise of new technologies in computers,
telecommunications & the compilation, use &
dissemination of information
The Economics of Education
• Spending on formal education has increased
in many developing countries over the past
several decades
• This increase in education spending is due to:
– In part, a response to an increase in
the number of cohorts in the
schooling age groups
– A result of higher incomes in these
countries
• Because teaching is labor intensive, it has
suffered productivity losses compared with
other occupations
• In addition, real wages have fallen relative to
the average
• Attempts have been made to increase
productivity by:
– Raising class sizes
– Adopting split shifts
– Reduce spending on teaching
materials
– Using more distance learning
• In some developing countries, private schools
have flourished
• In particular, to teach specific skills like a
foreign language or computer related
techniques
• The risk from more private education is that
the equalizing effect of free & universal
public education will be compromised
• Those who can pay gets a better education
while the public educational system is
starved of resources
• Nevertheless, there has been a growth in
public spending on education, partly as a
result of growth in real income
– Estimates suggest that the elasticity is
somewhat less than one
– When income doubles, expenditure
on education rises by about 75%
• As the average level of educational
attainment increases, the average cost of
education per pupil also rises
- per capita costs of secondary &
tertiary education is higher than
those of primary education
Rates of Return to Education
• Evidence suggests that there are high rates of
return to education at all levels
• But there are diminishing returns, i.e. tertiary
education has lower returns per dollar
invested than secondary education
• Returns to primary education are the highest
• Education is considered a merit good, that is
there are external economies to education
 • Positive externalities arising from the
provision of education includes the value of:
 Being able to vote intelligently
 Following the rules set down by
society
 Making possible contributions to
society through culture, science, social
science & the arts that exceed private
returns of the individual
Private vs Social Returns to Education
(Micro Results)
• How can we evaluate education’s “net
benefits to society”?
• Social returns to secondary & tertiary
education, measured as the “value of being a
better citizen” because of literacy &
numeracy acquired, fall off quickly after
primary school
• Therefore the economic argument for
subsidies to secondary & tertiary
education is much weaker than is a
subsidy for primary education
• A further argument for less subsidy & more
competition at the tertiary level is:
• Private schools seem to be more
responsive to changes in demand
than are public schools
• In Asia, social returns to secondary & tertiary
education are moderately higher than
private returns
• This is because the public subsidy is a
relatively small share of total costs
• Subsidies are generally higher in Latin
America & Africa
• In low income countries, private returns tend
to be higher than social returns
Private vs Social Returns to Education
(Macro Results)
• Evidence from a wide cross-section growth
equation that adjusts labor for degree of
educational attainment don’t show a big
payoff to more education
• Contribution of labor (adjusted for education
attainment) is either negligible or even
possibly negative
• 3 possible reasons for the shown results:
o Differences in individual country
experience masks the true
relationship
o There is rent seeking & corruption
among graduates & that brings down
growth
o There is a stagnant demand for
educated labor, resulting in a
misallocation of resources
• While these results should not be ignored,
the evidence from Asia, with the possible
exception of bureaucracies in South Asia,
does not support these conclusions.
• Education, particularly secondary & higher
education, have played a key role in growth
& development.
• Education can be expected to play an even
stronger role in the future as highly skilled
labor becomes more important as an input
into the production process.
Education, Labor Earnings & Productivity other related variables that are
important in development.
• Briefly, there is a large body of evidence that
suggests that education & experience explain • A virtuous cycle of education & economic
a very large proportion of the variation in improvement occurs with an increase in
earnings in both industrial & developing women’s education.
economies
• The benefits of this include lowering infant
• There is also evidence that discrimination is mortality, raising health standards for the
also a powerful factor in influencing earnings entire family, increasing life expectancy,
reducing fertility, raising family earnings by
• When these two factors are put together,
increased female participation in the labor
they argue very strongly for removing
force.
discrimination as a way to raise income for
the poor segments of society • Studies show that a more educated woman
has greater bargaining power within the
• Education is seen as a important tool to lift
household.
incomes, alleviate poverty & improve
income distribution • this has resulted in more resources directed
to herself & her children,
• Education enhances productivity by:
• education and health outcomes for female
 Lifting the productivity of existing
children improve significantly
labor inputs
• Even where labor force participation is
 Reducing the cost of adjusting to a
suppressed, there is evidence that increased
change in the mix of inputs
education among women
 Increasing the ability of workers to
• impacts positively on infant mortality
adapt to new technology
• & general family health
• Education also enhances the ability to find
additional employment, such as during the Education in Asia
slack season in agriculture
• Changes in the dependency rate (proportion
Women’s Education under 15 & over 65 years old) have an
important impact on the ability of an
• There is a wide body of evidence that has
economy to raise the average educational
been accumulated in the past few decades
attainment
suggesting that:
• When the dependency rate is high,
• Women’s education may be the single
particularly the proportion under 15 years of
most important variable in lifting
age, the cost of raising the level of
standards of living in poor countries.
educational attainment is also high
• This is because women’s education
has a beneficial impact on so many
 • The NIEs & ASEAN countries show the largest
decline in dependency rates in the past three
decades (Table 10.1)
• There is a weak correlation between an
increase in per capita income and a nation’s
share of the budget for education
• The ratio of cost of tertiary to primary
education are much higher in South Asia, the
poorest region sampled (see Bangladesh,
India and Nepal in Table 10.3)
• China and Malaysia also have higher tertiary-
to-primary cost ratios compared to
Indonesia, Korea, the Philippines, Sri Lanka
and Thailand
• The private sector play a much bigger role as
a tertiary education provider in Indonesia,
Korea & the Philippines (Table 10.4)
• There does not seem to be any relationship
between the share of the private sector in
higher education & the level of per capita
income.
• Having said this, it is also true that the
poorest countries in the region all have small
private sector involvement in higher
education.
Trends in Enrolment Ratios
• Primary education has become widespread, if
not universal throughout Asia
• However the quality of this education can
vary substantially
• Efficiency of education (lack of over-age &
repeaters) is higher in richer countries
• Across Asia, the NIEs had a high mean
number of years of schooling for the
workforce.
• Gains in tertiary education were most
pronounced in the NIEs & the Philippines,
although the Philippines started at a high rate
in the 1960s compared with other countries
in Southeast Asia.
• In South Asia, the increase in enrolment
rates have been modest, particularly in
tertiary education, where they have increased
very little as a percentage of the cohort group
since the mid 1960s.
• In Southeast Asia, the most impressive gains
were in secondary education.
Improving Efficiency in the Delivery of Education
• An argument can be made for greater
privatization of the school system by
allowing the co-existence of private schools
with public schools
• Greater competition is believed to result in
greater efficiency
• Index of private financing & costs per capita
of public higher education are further shown
to be inversely related in Asia
• Rates of return to education decline with
years of schooling as expected (Table 10.7)
• Returns are normally highest for primary
education & lower for higher levels of
education
• However, the intrinsic merit good nature of
education is not that strong since social
returns are lower than private returns
• Based on the successful experience of the
NIEs, this strategy to have larger classes &
higher pay for teachers has paid off in terms
of a more efficient delivery of educational
services (Table 10.9 & Table 10.10)
Rates of Return to Education pupil/student ratios & decentralization of
authority over curriculum, management &
• A broader cross-cultural study of rates of
budgets are encouraged.
return suggests that rates of return to
education in poor countries has risen in the • Provision of a good school environment with
past few decades better material resources & more qualified
teachers is critical for developing countries.
• This may reflect the increased openness that
has made technology more accessible • There is a strong case for cutting the subsidy
throughout the world & raised the returns to to tertiary education in developing countries,
skilled labor in poorer countries including the brain drain problem, higher
costs per student & lower returns using the
Gender Disparities in Education
“merit goods” logic.
• Literacy rates between genders are very
• It is important to recognize that a balance
similar for many Asian countries with the
must be struck between various policy
exception of South Asia (Table 10.8)
objectives
• Enrolment rates are similarly biased toward
• If the educational system is to be used to
men in South Asia
address poverty & income inequality it may
• In several countries (Indonesia, Philippines & be useful to consider scholarships for gifted
Thailand), tertiary education is higher for poor students rather than an across the
women, a somewhat surprising result given board cut in subsidies to tertiary education
gender discrimination in so many other
• The provision of more private schools runs
aspects of economic life
the risk of creating an “educational divide.”
Major Policy Conclusions for Asia
• There are missing credit markets for
• Curbing population growth means lower education that should be addressed either
dependency ratios; this increases the ability through government program or greater
of the society to provide education with the access to bank loans.
same resource base.
Health & Nutrition
• It pays to educate teachers more intensively,
• Health, for our purposes, means absence of
to develop better classroom materials & to
illness & infirmity
pay teachers more.
• As indices of health (or illness), we use
• It pays to put money into education of
morbidity & mortality rates
females.
• Mortality is more closely monitored than
• It pays to introduce some private schools at
morbidity & is more easily defined
the tertiary level and/or reduce the subsidy
to tertiary education. • Infant mortality, life expectancy, crude birth
rates & crude death rates are also terms that
• To improve efficiency of the delivery of
are widely used
educational services, experiments with higher
Health Patterns
• Health conditions of populations have
improved gradually because of advances in
the medical fields
• Life expectancy has increased, infant
mortality has decreased & morbidity may
also have fallen
• Availability of safe water, sanitation,
immunization & access to medical facilities
have also improved in Asia & the world
Health & Economic Growth
• Health improvements & economic growth go
together
• Can their mutual causality be disentangled?
• The curve relating per capita income & life
expectancy has shifted up over time, but it is
still virtually flat after a certain level of per
capita income (Figure 10.5)
• Life expectancy rates in the poorer countries
have caught up rapidly with rich countries in
the 1960s owing to advances in medical
technology
• Poor health has an adverse impact on
labor productivity but is this a cause or
a consequence of economic growth?
• In some cases, improvements in the health
environment (malaria eradication) was
followed by economic development in several
Asian countries – including Thailand and the
Philippines
• In other cases, the causation is less clear
• The relationship between infant mortality &
economic growth is particularly strong
Aspects of Health (Environmental Health)
• In many developing countries, the spread of
infectious & parasitic diseases can be
effectively controlled by ensuring that people
have access to clean water & by the provision
of an adequate waste disposal system
• Experience has shown that such measures
have effectively controlled the spread of
waterborne diseases such as typhoid,
dysentery & cholera
• Improving housing conditions – ventilation &
space – can also minimize the spread of
tuberculosis. Health risks for these diseases
are exacerbated by the presence of urban
slums in developing countries
Aspects of Health (Malnutrition & Food
Consumption)
• What causes malnutrition & how could
nutritional improvements contribute to
economic development?
• The consumption of food, like any
other good or services, are
determined by three elements:
• Income
• Prices
• Tastes
• Engel’s law says that poorer households
devote a greater proportion of their budget
to food & that they have a relatively high
income elasticity of demand for food
• Within households, female children are
generally made to accept the greater
nutritional burden of adjustment to
unfavourable price movement
 • Many traditional societies have beliefs about • Lost productivity among infected
the health effects of various foods that are members of the workforce
not supported by modern nutritional science
• Lost income and potential savings of
• Soybean products, for example, are found to infected working-age individuals
be a cheaper source of protein than animal
• Reduction in the stock of human
products, yet families still demand meat
capital
Aspects of Health (Medical Facilities & Services)
• To control the spread of AIDs, control of the
• Medical facilities & services in developing spread from 4 high risk groups is required
countries are very inadequate in providing
• Some measures include:
for health needs of the population
• Promote the use of condoms among
• Public expenditures on health is much lower
sex workers & bisexual men
than those for education & defense
• Publicize the necessity for using
• Developing countries tend to spend far more
measures to protect against Aids such
on curative resources than on preventive
as condoms & not sharing needles
health care
• Make condoms & needles widely
Public Health Policies in Asia
available & at reasonable prices or
• Public health spending could be increased as else supplied for free in clinics
a proportion of total health spending to
• General promotion of HIV/AIDs
address needs of poor
awareness through public media &
• In Asia, infant mortality & income growth are NGOs as well as newspapers &
highly negatively correlated magazine articles

• Causation is unclear but health outcomes are Important considerations in HIV/AIDS containment
closely interrelated with speed of
• Wealth Matters!
development
• Education Matters!
• Medical services with higher positive
externalities should be subsidized - Having more wealth and higher levels of
education lead to a better understanding of the
HIV/Aids in Asia
disease – how it is contracted and its devastating
• HIV/AIDS prevalence in Asia has increased in consequences – and this leads to less risky behavior
the last decade and pose significant
- once HIV penetrates society, the poor and the
constraints to development in the region
uneducated are at highest risk
• 4 high risk groups: sex workers & their
- wealthier, more educated married women
clients, drug users & men who have sex with
tend to speak to their husbands more about avoiding
other men
AIDS
• HIV/AIDS impacts on the economy via …
• Policy Implications – preventative

• There is a need for highly targeted

information campaigns tailored for the poor
and the uneducated

• Increase incomes through greater

employment opportunities for all

• Keep education levels high – get more

children and young adults to attend school
for more years.

• Policy Implications – curative

• HIV/AIDS treatment and drugs need to be

• made available to sufferers at reasonable

prices

• Increase R&D efforts in treatment & drug

development
Chapter 12 – Globalization and the New
Economy
• Globalization refers to the ongoing social,
political and economic integration that has
been taking place since World War II
• Trade, investment, tourism, intellectual
property, telecommunications, financial
transactions are a few of the areas where
globalization has taken place
• In Asia, these trends are evident in the
growing importance of APEC, ASEAN and
foreign trade and investment
• Globalization and the increasing usage of
information communication technology has
caused changes to the traditional methods of
production and operations
• It has resulted in “The New Economy” which
is relatively more knowledge and
technological based
World Trends in Globalization
1. International Trade
 International trade has expanded
rapidly
 It has been increasing twice as fast as
world income in the 1980s and 1990s
on average
 It has also been substantial for large
land-based economies where trade
has traditionally been a smaller
percentage of GDP
2. Financial Flows
 Financial flows have increased
dramatically and volatility has also
increased
 Short term flows have gone in cycles –
big inflows in the second half of 1970s
and also in late 1980s and early 1990s
 Short term portfolio flows and
international loans fell in second half
of 1990s with advent of the Asian
financial crisis
 Liberalization and globalization has
also worked on capital outflows.
 The growth of capital flows has been
more volatile than the growth of
trade
 While trade balance has to add up to
zero, capital can flow in one direction
in a particular year or period
 For example, net capital inflows grew
faster than net capital outflows in the
1990s (Table 11.2)
3. Foreign Direct Investment (FDI) and
Multinational Enterprises (MNE)
 FDI serves as a way to link best
practice international MNEs with
domestic producers
 From next to nothing in the 1970s, FDI
in both developed and developing
countries has risen at a dramatic rate
 By 2000, annual FDI inflows totaled
around
US$830 billion world wide, with
nearly 25% going to developing
countries
 This is about 2.7% of world GDP, an
enormous
transfer of investment funds
 FDI inflows have been resilient to
external shocks such as the two oil
shocks and recession in developed
countries
 However in 2001, it started slowing
down due to the slowing world
economy and sluggish international
stock markets
 Multinational enterprises (MNE) are
the main vehicles for FDI
 They engage in cross border
production and transactions – no
other entities do this
 FDI is only one aspect of these MNEs
 Production is the other main aspect of
their activities
 Defined using a cut off of at least 25%
of output/sales being outside the
country of origin, MNEs are estimated
to produce about 25% of world
output
 Globalization has also resulted in the
tremendous rise in cross-border
mergers and acquisitions (M&As)
since 1990s
 There is considerable debate about
the impact that MNEs have on
developing countries
 Supporters say that MNEs bring
technology and organizational skills
that are transferred to domestic
companies
 Critics argue that MNEs don’t transfer
the state of the art technology and
they repatriate funds to their home
country
 They are footloose and can leave
when other offshore locations look
more attractive leaving the developing
country without tangible benefits
from the FDI
 As noted in Chapter 6, MNEs are more
efficient and there is little evidence
that they have systematically
transferred this efficiency to local
Asia and Globalization
firms
 On the other hand, those countries
where there hasn’t been significant
inflows of FDI (except Korea & Japan),
have been unable to develop new
technology and have not grown
rapidly
 Conclusion is that MNEs are, on
balance, an effective way to
implement new technology and
develop greater efficiency
4. Labor Migration
 Globalization also involves the
movement of labor as well as capital
 Push factors that lead to international
migration include flight to avoid
persecution at home, to avoid war or
other social disruption and to seek a
better life economically
 Pull factors include greater freedom,
better standards of living and to be
with family
 Globalization has not had a significant
impact on international migration in
the past few decades
 Why? – because of restrictions on the
inflow of labor on the part of the
recipient country
 As the labor forces of the developed
countries age, there will be an
increasing need to import labor in the
working age categories
 This is particularly true for Japan,
followed by some countries in Europe
and finally North America and
Australia/New Zealand
 Are they making adjustments to
attract workers in
these age groups and with needed
skills from developing countries?
 Only in a few industrialized countries
 Trade within Asia has risen dramatically
 The Asian share of exports to Japan has
generally decreased, sometimes quite
dramatically (Table 11.5)
  There has been a shift of the balance of
trade in favor of Southeast Asia and East
Asia, particularly NIEs and PRC
 There is rising importance of PRC as a
major trading partner with other Asian
countries
 External trade has also grown
dramatically particularly from PRC to rest
of world (Table 11.6)
 Capital inflows to Asia have been more
rapid than to any other developing region
 In recent years, the flow of FDI has moved
rapidly toward greater China, particularly
the PRC
 There has been a squeeze on the FDI
flows to East and Southeast Asia
 Though there has been an increase in the
round tripping of capital flows into PRC
through Hong Kong and Taiwan
 Labour migration within Asia has
increased with the relaxation of
restrictions and growing regional
integration
 Flows of international assistance has
fallen and is primarily confined to South
Asia in recent years (Table 11.10)
Globalization Experience (India)
Globalization Experience (PRC)
 Reforms in PRC began in late 1970s,
including one child policy, which reduced
population growth dramatically, paving
the way for reforms in the industrial
sector later on
 Reforms in agriculture in 1980s –
household responsibility system – helped
establish markets and pricing system for
agricultural products
 This was followed by development of
town and village enterprises (TVEs)
 They grew at a rate of 30% per year in the
1980s
 These developments prepared the
economy for trade reforms, FDI and
export led growth
 Trade and FDI rose as a result of 3 sets of
reforms:
 First, licensing of foreign trade
corporations and domestic firms with
trading rights both increased
dramatically
 Second, liberalization of FDI with
formation of special economic zones
on the coast, particularly in the south
 Third, greater freedom in foreign
exchange transactions – relatively
free monetary moments on the
current account of the balance of
payments (but not the capital
account)
 Eventually these changes in regulations
led to the accession of PRC to WTO
 This will lead to greater relaxation of
trade restrictions, penetration of the
domestic market by foreign firms,
deregulation of state owned enterprises
and further commercialization of
agriculture
 India’s external economic relations were
highly regulated for most of the years
after WW II, up until the 1990s
 There were many nationalized industries,
including the financial sector
 Government had to give licenses to
transact business, and the expansion of
industrial capacity!
  All of these regulations smothered
initiative, transfer of technology and
innovation
 It was only when the country was close to
bankruptcy in the early 1990s that the
bureaucratic nightmare began to unwind
 Regulations have been reduced and
competition introduced in some sectors
 Rupee was devalued and made
Globalization Experience (Philippines)
convertible on the current account
 Efforts made to reduce the role of public
sector
 Some private banks were allowed entry
 Regulations on FDI relaxed and tariffs
lowered
 Still a long way to go to make the
economy fully competitive and with
competition allowed
 Labor markets are still controlled and
there isn’t a good exit policy for business
 Regulations on FDI are still cumbersome
and state industrial sector is still strong
Globalization Experience (Malaysia)
 Malaysia initially favored import-
substitution strategies and the
development of heavy industries
 There was a switch to export-oriented
trade regime in the mid-1980s after
noting the importance of foreign markets
to economic growth
 Reforms such as liberalization of foreign
investment
and privatization were carried out
 International best practices, such as ISO
certificates, were introduced
 Partnerships with private sector were
established to
further boost growth in the IT industry
 Most initiatives appear to be in place
 It appears to be seen if its degree of
implementation is effective and
sufficient
 Some problems to be overcome:
o For e.g. opposition from local Chinese
business groups over the
establishment of English as medium of
learning in schools
 Philippines have actively developed an
export-oriented sector, mainly
agricultural based, to repay foreign debts
incurred since 1960s
 Trade reforms did not really take off until
the early 1990s
 Domestic manufacturing production was
further stimulated with the setting up of
export process zones
 In the early phases, exports were mainly
concentrated in primary commodities
such as food crops, minerals and timbers
 There has been a rise in manufactured
exports in recent years
 In addition, the government has also
established the Foreign Investment Act
which attracted substantial capital inflows
 Previous protected inefficient state
industries and the banking sector were
deregulated
 Land reforms were also carried out to
improve the domestic effectiveness of
agricultural sector – which accounts for
2/3 of the workforce
 Such policies have generally improved
Philippines’ level of openness and
competitiveness
 Philippines has an added advantage in its
skilled and relative low-cost English
fluent labor force
 However, political uncertainty in
Philippines is a cause of concern
  It would greatly affect the level of
investors’ confidence
 And more would also need to be done for
income distribution and provision of
infrastructure in Philippines
Has Globalization been Good for Developing
Countries?
 Some criticisms include:
– Industrial countries do not transfer
enough technology to developing
countries
– Intellectual property of industrial
countries is protected at the expense
of developing countries
– Subsidies to farmers in industrial
countries
are in violation of free trade
 The structure of aid, technological
transfer and local content requirements
makes it difficult for agricultural
exporters to move up the ladder to
export manufactured goods
 International agencies have not served
the interests of developing countries
 Restrictions on immigration is still
prevalent
Globalization and global crisis of 2008 and 2009
 Many countries now have export to GDP
ratios of over 40 percent (China, Korea,
Philippines, Thailand and Vietnam) and
others over 100 percent (Hong Kong,
Malaysia and Singapore).
 This increased export dependence means
that a slowdown in demand from
industrial countries is having a strong
negative impact on economic growth
throughout the Asian region.
 China dominates the rest of Asia as well
as the US and the European Union in
terms of the share of Asian exports by
destination (see Table 11.8)
 FDI inflows have fallen as a result of the
global crisis.
 There are adverse impacts on wealth and
eventually on consumption and
investment.
 A further decline in FDI would have
significant repercussions in Asian
countries.
 A fall in portfolio investment has an
adverse impact on household assets and
consumption.
 Remittance income will also be adversely
affected.
 There are no indications that the growth
of China and the growing
interrelationships with the rest of the
Asian region are having a detrimental
impact on the growth on Southeast Asia
and the rest of East Asia.
 There is, however, a continuing
relationship with the industrial countries
in Asia (Japan), Europe and North
America.
 As the global recession has spread from
the US to Europe and to Asia, the need to
adopt a global strategy for restoring the
global economy to balance becomes
increasingly more evident.
Information Technology and the “New Economy”
 The nature of the new economy in
industrial countries emphasizes three
developments:
o Globalization of business – more than
half of world output is now
“contestable” – subject to
competition from external producers
 o Growth of information technology
and the knowledge economy – now
the driving force in growth,
supplanting durable goods
o These developments have led to rapid
growth in productivity, reduction in
costs and growth of international
value chains
 Production platforms are now worldwide
 Because the “new economy” is based on
knowledge based innovations and
technology, many of the developments
have extensive external economies,
which can lead to increasing returns to
scale
 More easily accessible information results
in more competition, scale economies,
lower costs of transport and information
 All of these should help
increase labor productivity
 Estimates made of labor productivity
gains in the US in the late 1990s
convinced many economists that this was
indeed the case and that it might have
lowered the unemployment rate
consistent with low inflation
 However, since the downturn of 2001 and
the bursting of the high tech stock
bubble, there have been revisions in this
thinking
 Still IT, transportation and other
developments have created a lot of new
products and many high
tech service sector jobs and
products
Asia and the “New Economy”
 Potential impact of the new economy on
Asia
 Growth of trade will create more jobs
 Skill intensive exports will grow
(programmers, internet experts, website
designers, other computer technicians)
 Internet could create a more level playing
field, although risks of digital divide exist
 Greater payoff in education
 Greater opportunities for venture capital,
mergers and acquisitions, foreign
partnerships, strategic alliances
 Historically open economies with limited
resources are in a make or break situation
 These include Hong Kong and Singapore
 Those with resources have been slower to
buy into the “new economy”
o E.g. Indonesia, South Asia
 Other countries are in between
 Large countries have a bigger challenge
 The digital divide is greater and PRC is
reluctant to let the Internet be free in the
country
 Policies for promoting the “new economy” in
Asia include:
o Encouraging a strong entrepreneurship
culture
o Closing the digital divide. Local
businesses should be encouraged to
undertake more training in ICT
o Develop and increase the use of IT in
global production networks
Agenda for Reform (Growing Globalization)
 A more flexible agenda for IMF in dealing
with developing countries
 Reduction in conditionality in making loans
by IMF and World Bank
 Greater consideration of environmental
issues in world forums
 Wider application of debt relief in the poorest
countries
 Recognize interests of poor countries in
international negotiations
Chapter 14 – The Political Economy of
Development in Asia
Cooperation, Altruism and Ethics
• This perspective allows us to explore other
motivations for individual behavior, such as
the interests of others and society.
• Altruistic behavior can put the interests of
others on an equal plane with our own self-
interest.
How Do We Model Altruism?
• Put altruism as a taste variable in the utility
function.
• Allow altruism to be modeled as cooperative
behavior in “prisoner dilemma” situations
• Altruism as quid pro quo - regarded as
reciprocal/conditional altruism - in return for
a favour.
• Altruism may be a genetically inherited trait
using sociobiology arguments.
• Altruism may be a moral duty ala Kant’s
”categorical imperative.”
Advantages of Altruistic/Cooperative Behavior
• Can raise level of welfare if income and
wealth are shared – redistribution effect.
• May stimulate intergenerational transfers and
increase educational expenditures for
children.
• May increase saving and investment – life
cycle effect to have intergenerational
transfers.
• Better family life with greater social
responsibility and less concentration on
narrow self interest.
• Better care for elderly.
• Financial support for extended family – serves
to replace/augment social security.
• Reduces the problem of moral hazard.
• Reduces problems of principle/agent and
asymmetric information.
• Reduces problem of crime and corruption.
• Improves business ethics (Ford Pinto, Exxon,
Enron, tobacco companies).
• Taking positions on issues as informed
citizens (environment, health care,
sentencing of criminals).
• Avoids free rider problem.
How Does Altruism/Ethics Alter Economic Analysis?
• We can augment economic analysis by
including altruistic or cooperative or
communitarian values in the objective
function of individuals.
• We can also try and go beyond economic
analysis and develop a synthesis with other
disciplines such as sociology and
philosophy/ethics.
Corruption and Bribery
• Corruption and bribery are used to pursue
self-interest outside the legal framework.
• In the principal agent model, the one who is
seeking to bribe is the principal and the
official who is being bribed is the agent.
• The contract is awarded openly but bribe is
given privately.
• Corruption is believed to be worse in the
present era in the developing countries.
• Corruption and bribery reduce economic Corruption and Bribery in Asia
efficiency, create rent seeking and reduce
• Corruption/bribery in Asia is highly correlated
welfare.
with the level of income and rate of growth in
• They divert funds from worthwhile projects income (Table 13.3).
to large projects where bidders for contracts
• Countries of East Asia are the least corrupt
can be bribed.
and South Asia the most corrupt based on
• Also they can reduce growth – Barro found a reports of various international agencies.
“rule of law” variable was an important
• The pattern of corruption in Asia has
determinant of the rate of growth in cross-
changed over time (see Table 13.3)
country growth regressions.
• The Philippines has become relatively less
• The index specifically measures the attributes
honest in both Transparency International
of government such as quality of
and Global Competitiveness Report rankings
bureaucracy, political corruption and risk of
government expropriation. • Korea has become relatively less corrupt than
it was in the late 1990s.
• Corruption can be analyzed dynamically using
game theory or the theory of epidemics. • The rest of the countries have maintained the
same relative position give or take one place.
• There may be multiple equilibria for the level
of corruption – such as northern Italy and How To Deal With Corruption
southern Italy – as the result of a shock to
initial conditions. • Impose stiff penalties on offenders.

• Corruption may be an inverse function of • Provide adequate financial rewards for

economic development. government officers.

• Little has been written on this topic. • Keep better and more accurate records.

• However it has been found that higher • Appoint higher quality bureaucrats and
incomes and more stringent penalties helps judges.
to reduce corruption and richer countries
• Make promotion based on performance, not
have both.
who you know.
• A surrogate measure of corruption is
• Reduce the discretion of any individual –rules
economic openness. The more open the
based systems.
economy, the greater the flow of information,
and the less opportunities for corruption. • Cut down red tape/size of bureaucracy.

• Openness and economic freedom seem to be • Start an anti-corruption agency.

highly correlated with economic development
• Legalize corruption and sell/auction the right
to collect taxes for a fixed sum of money?
Role of Education System and Parents • Some argue that religion also has an impact –
the Buddhist connection. But what about
• Have classes on ethics and cooperative
Myanmar?
behavior in schools.
• Circle of influence where altruism plays the
• Review and discuss such systems as they have
biggest role begins in the family. If we believe
evolved in Asia – PRC, Indonesia, Singapore,
that these kinds of altruistic behavior are
Philippines for examples.
beneficial both economically and culturally,
• Spend more time with children since time then these values should be cultivated
spent with children seems to increase the throughout the society.
tendency for altruism to develop in both
Corruption experience in Asia
parent and child.
• Philippines – both petty corruption and grand
Ethics and Economic Analysis
corruption seem to be endemic.
• Economic theory tells us almost nothing
• Estimates range up to 30 percent of national
about income distribution.
budget lost to corruption.
• Must rely on ethics/justice to make these
• Vote buying and illegal gambling are other
sorts of judgments.
aspects.
• Rawls says that justice is achieved by the
• Immigration by those frustrated by lack of
society moving in a way to maximize the
progress.
income of the poor.
• This may provide a safety valve.
• This is different from Pareto although it may
be consistent with Pareto in some cases. • Social weather stations monitors corruption
and attitudes toward corruption.
• Rawls wants to make the poor better off
without making others worse off. Pareto is • Business is fed up with corruption.
more general.
• Ombudsman may get popular support along
• There are many proposals made for how to with other agencies (see Table 5.7 in Future
improve income distribution (Table 13.4). Perspectives

Application of Ethics, Justice and Income • Thailand has a culture of patronage.

Distribution to Asia
• Societies where income distribution was
more equitable had higher rates of growth
than societies where income was less
equitably distributed
• But it is difficult to make changes to income
distribution quickly.
• Gifts of good will are a tradition.
• This has morphed into a culture of corruption.
• Transparency International suggests
corruption not as high as Indonesia and
Philippines.
• Local economists estimate 4 to 5 percent of
government budget lost to corruption.
• Prostitution, drugs, guns, gambling – all illegal • More high ranking officials involved over
- also sap resources. time.

• Public sector procurement may be inflated by

as much as 40 percent – comparable to the
• Corruption in financial institutions which are
level in the Philippines.
state owned and without competition.
• Recent efforts to curb corruption may be
• Bribery for infrastructure spending to expand
paying off.
into western provinces – railroads, power,
• Middle class and business are fed up. education.

• Korea has made a lot of progress in dealing • Illegal taxes on farmers.

with corruption with the growth of income
• Money allotted for resettlement misdirected.
and the middle class.
• Spread of market has resulted in more
• Many officials convicted and former president
corruption.
arrested.
• SOEs bribe to get contracts to compete with
• Citizen’s coalitions have played a role.
private sector.
• Transparency International index has slowly
• Devolution of power means that more bribes
improved.
are required to get things done.
• Political contributions of Chaebol are still a
• Outcomes of bribes are less certain in a
worry.
decentralized system.
• China has a tradition of gifts to elders and
• India has extensive history of corruption.
those in power (Guanxi).
• Large bureaucracy and lots of red tape is a
• Distribution of goods on two track system
fertile ground for corruption.
created opportunities for corruption.
• Transparency International in depth survey
• Level of corruption has increased every since
suggests the bribery is endemic.
Transparency International began surveys in
early 1980s. • 50 to 80 percent of 14,000 people
interviewed had a direct experience of bribing
• As forces of capitalism have strengthened so
someone in police, land tax dept, judiciary.
has corruption
Policies in Asia for the future
• SOEs are big offenders.
• Deregulate and liberalization of economy.
• Worse than corruption of smaller private
sector enterprises. • Reduce size of civil service.
• Prosecutions show embezzlement and • Enhance business transparency.
bribery and misappropriation of funds
accounted for 80 percent of criminal cases. • Financial sector reforms to allocate resources
through markets not the bureaucracy.
• Stress efficiency in public sector.

• Reduce nepotism

• Leave a paper trail and increase strength and

clout of auditors.

• Computerization wherever possible.

• Reform political process, so that politicians

don’ t require big contributions to get
elected.

• Freedom and corruption not necessarily

related (see Table 5.11)

• This is sometimes attributed to the

intellectual and political divide in poorer
countries where middle class is small.

• For the poor good politics revolves around

personal dignity.

• Estrada was loved by the poor – he treated

them with respect and dignity.

• Thaksin had his support in the countryside

even though he was wealthy.

• Honesty divide a real possibility.

• Taiwan, Korea, Hong Kong and Singapore are

on one side of he divide.

• All the rest are on the other.

• Need to get them to the “right” side of the

honesty divide.