Can the new members of ASEAN catch-up without domestic polarisation?

Jayant Menon 02 June 2013

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ASEAN is divided. So how many ASEANs are there? Most separate the newer, less developed members (such as Cambodia, Laos, Myanmar and Vietnam; known as CLMV) from the older ones (Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore; known as ASEAN6). As high-income countries, some would even put Singapore and Brunei in a separate, third category. Although the development divide within ASEAN is multi-faceted, a striking feature is differences in per capita incomes. In 2012, the per capita income of Singapore was about 50 times that of Cambodia, 40 times that of Lao PDR, and 35 times that of Vietnam (Menon 2013). More rapid economic growth in Cambodia, Lao PDR and Vietnam since the 1990s has reduced these income differences, while dramatically reducing poverty. Figure 1 clearly depicts the catch-up in per capita incomes of the Cambodia, Laos, Myanmar and Vietnam to that of richer Thailand. Rapid growth has been driven by trade, investment and other market reforms in the newer members, although Myanmar has only recently decided to embark on the same programme.

Figure 1. GDP per capita, PPP (constant 2005 international $) as a share of Thailand’s GDP per capita, 2000-2011

Source: World Bank World Development Indicators, April 2012.

In addition to market-oriented reforms, the fact that convergence is taking place should not be surprising. One reason to expect catch-up is the difference in the marginal efficiency of capital between poor and richer countries. With little access to capital, workers in poor countries have relatively low levels of productivity that can be raised substantially by increasing the amount of capital available to them by even small amounts. Unlike countries with higher capital-labour ratios, they have a longer way to go with capital accumulation before diminishing returns sets in. There is also the latecomer’s advantage, where late adopters of technology may be better positioned, because they can avoid mistakes, and learn and borrow in adapting technologies in a way that benefits them more than early adopters.

While income gaps are narrowing, they remain huge

Notwithstanding these achievements, there is still a long way to go. And much more needs to be done before the development divide is substantially narrowed. This challenge cannot be met by relying on programmes of assistance alone, such as the Initiative for ASEAN Integration (IAI; see Hill and Menon 2012 for details) or other bilateral or regional efforts. One reason is that unlike Europe, the better-off members of ASEAN, from which most of the funds would presumably have to come from, are either very small (Singapore and Brunei) or relatively small (Malaysia). The richest country in ASEAN, Singapore, does not even have a formal aid programme.

Further narrowing of these gaps will require an increase in the speed and breadth of policy reforms. With trade, the focus needs to shift to behind-the-borders measures that reduce trade costs through transport and trade facilitation. A gaping hole in the policy landscape in ASEAN is the failure to address labour migration adequately. Furthermore, ongoing demographic transitions will require greater capital inflow or labour outflow if massive unemployment is to be avoided. Capital inflows will only increase if there are substantial improvements in the investment climate. These changes will take time and since absorptive capacity is currently nearing its limit, it is an issue for the long run. Greater labour mobility will occur in the interim, but will require effective policy frameworks to be developed in both sending and receiving countries, if it is to be regulated. It would also help if a regional agreement that also deals with low-skilled labour could be struck. The current policy void on labour migration not only limits the benefits from trade and investment liberalisation, but increases the cost of structural adjustment. For Cambodia, Laos, Myanmar and Vietnam, the absence of a functioning exchange-rate mechanism due to varying degrees of dollarisation increases the importance of labour mobility in adjusting to economic shocks.

Convergence between but divergence within countries

While rapid growth in Cambodia, Laos and Vietnam has reduced per-capita income differentials with the other ASEAN members, the distribution of these gains have been uneven and income inequality within these countries has remained unchanged or worsened (Table 1). It would appear that inter-country differences in economic conditions are being narrowed at the same time that intra-country differences are being increased. All kinds of within-country inequities have remained stubbornly high or have increased, including rural-urban, along ethnic lines and across gender. What is alarming is the increase in polarisation, both economic and social, in these converging countries. These factors can threaten cohesion, and pose major risks to social stability. High and/or rising income inequality can also threaten growth itself, as well as the poverty elasticity of growth. How can these consequences of rapid growth be avoided, or at least minimised?

Table 1. Inequality and polarisation in ASEAN, various years

Note: Data unavailable for Brunei Darussalam, Myanmar, and Singapore. Sources: World Bank World Development Indicators.

A good starting point is to identify the factors driving the inequality in these countries. The Asian Development Bank (2012) identifies three key processes: technological change, globalisation, and market-oriented reforms. The link between inequality and growth is derived from the fact that all three are also considered as the primary drivers of growth. In other words, many of the factors driving rapid growth can also be linked to those driving inequality. These forces have tended to favour owners of capital over labour; high-skilled over low-skilled workers, and urban and coastal areas over rural and inland regions. All three factors are present in the Cambodia, Laos, Myanmar and Vietnam, although globalisation and market-oriented reforms are the dominant ones.

Catch-up without polarisation: Lessons from newly industrialising economies

If convergence at the expense of internal cohesion is seen as a hollow victory, then so too must the preservation of internal cohesion at the expense of convergence. Reducing growth in order to reduce inequality is not a sensible policy option. Similarly, reversing the trend towards greater openness and market orientation is not the way to go in order to redress inequality. How can we strike a balance between the two, where convergence can continue without further threatening internal cohesion? It is instructive to look to the experience of the newly industrialising economies, South Korea and Taiwan in particular, from the 1960s, when they underwent dramatic transitions. The switch from highly interventionist, import-substitution programmes to more market-friendly export-oriented reforms is a conversion that bears resemblance to what is being undertaken by Cambodia, Laos and Vietnam countries in their transition towards market economies. The experience of the newly industrialising economies highlights what can work rather than what cannot, since a distinguishing characteristic of the economic performance is the relatively equitable distribution of gains from rapid economic growth.

A number of key features and policies stand out:

  • The first lesson comes from initial conditions relating to a host of social indicators, particularly education but also health.

In particular, near universal access to quality primary and secondary education, combined with effective vocational and on-the-job training facilities, resulted in a productive and flexible workforce. With this they were able to avoid the skills shortage or mismatch that currently exists in the Cambodia, Laos, Myanmar and Vietnam, and other countries trapped in middle-income status. Therefore, an important barrier to be overcome in Cambodia, Laos, Myanmar and Vietnam is improving access to quality primary and secondary education, and vocational training. Increasing access to healthcare services must complement these changes.

This feature of the labour force, when combined with a conducive investment climate and sound macroeconomic fundamentals, accounts for the next determining factor:

  • In this environment, these countries could exploit their comparative advantage, and benefit from opportunities arising from labour-intensive light manufacturing activities.

Given the fact that labour is the most widely distributed factor of production in the economy, employment expansion and the subsequent increase in real wages contributed to reductions in both poverty and income inequality as the newly industrialising economies developed (Balassa and Williamson 1987, Fei et al. 1979, Athukorala and Menon 1997).

The third factor relates to distribution of land ownership and asset inequality. Deininger and Squire (1998) show that asset inequality, more than income inequality, can undermine not only growth but the effectiveness of pro-poor policies. South Korea, Taiwan and Japan had instituted significant land reforms that resulted in a fairer distribution of this critical asset, especially for low-income agricultural households, before their liberalisation programmes began. This facilitated the transfer of labor from agriculture to manufacturing during the ensuing structural transformation (Menon et al. 2011). Land reform remains an unfinished item on the policy agenda in Cambodia, Laos, Myanmar and Vietnam. Cambodia presents a useful example that illustrates the general problem: the lack of land titling has resulted in widespread deforestation as well as ‘land-grabbing’. In an ironic twist, rather than enjoying in the benefits from the land price boom, it has often made some of the most vulnerable worse off. Without clear or proper titles to prove ownership, many of the poor have been evicted or forced off their land.

The experience from newly industrialising economies, especially South Korea and Taiwan, suggests that all of these conditions or policies need to be in place before convergence with cohesion may be possible.1 These policies, combined with with other elements of an inclusive growth strategy, is required for convergence with cohesion (Menon et al. 2011). Currently, almost all of them are absent in Cambodia, Laos, Myanmar and Vietnam..

Conclusion

ASEAN remains divided in many ways. The most striking is the development divide that separates the newer members (the Cambodia, Laos, Myanmar and Vietnam.countries) from the original ones (Brunei, Indonesia, Malaysia, Philippines, Thailand and Singapore). Although more rapid rates of economic growth in Cambodia, Laos and Vietnam since the 1990s, driven by trade, investment and other market reforms, have reduced these income differences, huge gaps remain. Further narrowing of these gaps will require an increase in the speed and breadth of these and other policy reforms. Although rapid growth has resulted in convergence, it has also increased polarisation within countries. This can threaten social cohesion, as well as the sustainability of future growth. How can we strike a balance between the two, where convergence can continue without further threatening internal cohesion?

The experience from newly industrialising economies suggests that a number of conditions must be simultaneously met. The first relates to the need to invest in social infrastructure, especially education but also health, in order to produce a workforce more able to participate in the growth process. Second is the need to improve the investment climate, to increase capital inflow and labor absorption, along comparative advantage lines – this means labour-intensive manufacturing. Third is the need for land reform, to directly redress asset inequality, and to enhance incentives and productivity in agriculture, and facilitate factor transfer following structural adjustment. These policies need to be complemented with the other elements of an inclusive growth strategy in order to ensure convergence with cohesion.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.

References

ADB (2012), Asian Development Outlook 2012: Confronting rising Inequality in Asia, ADB, Manila.

Deininger, Klaus and Lyn Squire (1998), “New ways of looking at old issues: inequality and growth”, Journal of Development Economics 57, 259-87.

Hill, H and J Menon (2012), “ASEAN Economic Integration: Driven by Markets, Bureaucrats, or Both?”, in ME Kreinin and MG Plummer (eds.) The Oxford Handbook of International Commercial Policy, Oxford University Press, Oxford, 357-386.

Menon, Jayant (2013), “Is Convergence without Polarization Possible?: Narrowing the Development Divide in ASEAN”, Asia Pacific Economic Literature, forthcoming.

Menon, Jayant, Saby Mitra and Drew Arnold (2011) “Growth and Inclusion”, in H Kohli, A Sharma and A Sood (eds.) Asia 2050: Realizing the Asian Century, San Francisco, CA, Sage, 73-98.

Soukiazis, Elias (2002), “Some perspectives on the new enlargement and the convergence process in Europe”, Centro de Estudos da União Europeia (CEUNEUROP) Discussion Paper No.12.


1 That these factors are also preconditions for convergence is confirmed by the European experience (see Soukiazis, 2002).

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Topics:  Poverty and income inequality

Tags:  Asian trading blocs, Inequality, ASEAN

Lead Economist in the Economic Research and Regional Cooperation Department, Asian Development Bank

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