Tuesday, April 30, 2013

Inequality in Asia

How have some countries succeeded in avoiding widening wealth gaps?

Why do some countries experience inequality, while others sidestep it? Widening wealth gaps are a major worry for governments throughout developing Asia. Middle-income countries like the People's Republic of China, Malaysia, and Thailand see wealth gaps as a threat to economic growth and stability.

Further widening of these disparities could eventually provoke social unrest as governments grapple with ways - such as tax hikes - to skew the system toward the less affluent. The stakes are high. But a concerted anti-inequality program should be informed by how inequality has - and hasn't - evolved across the region.

Conventional wisdom views inequality as a by-product of rapid development, implying that governments are all but powerless to stop it.

Yet the economies that powered Asia's economic miracle - Japan; the Republic of Korea; and Taipei - all showed relatively low and steady levels of inequality during their rapid growth.

These economies remain relatively equitable today, comparing well on inequality with the developed economies of the West. The Gini coefficients of South Korea and Taipei increased only marginally through the 1990s and 2000s. Their experience is salutary for similar-sized and less developed economies looking to minimize inequality.

Avoiding inequality starts with getting agriculture right. Success in raising agricultural productivity is not just good for farmers. It underpins the entire process of industrialization.

Getting agriculture right means addressing problems of ownership as well as investment in irrigation, roads, technology, and other infrastructure. In Korea and Taipei, post-1945 land reform spurred the first surge in rural productivity. In the PRC and Vietnam, the return of family farming and price liberalization marked the first steps in the reform process and helped spur rapid rural growth.

However, ownership issues may now be hampering further rises in productivity through consolidation of farms and a substitution of capital for labor. After an initial surge in rural incomes in the PRC and in Thailand, they began to lag urban incomes driven by huge productivity gains from industrialization. Korea and Taipei did not follow this path. Why? Those governments put huge effort into rural development, focusing not only on using technology to boost land productivity, but also on making farm workers more efficient to release surplus rural labor to work at urban factories.

Additionally, these governments nurtured small-scale industries close to farming communities to create nonfarm earning opportunities. In the Republic of Korea, this took the form of the saemaul, or "new village" movement. Moreover, early in their growth cycles they used import controls to keep farm prices above world market levels. While this solution would not work today, it helped to raise farm incomes at the expense of urban consumers.

"The saemaul movement had an impact," says Donghyun Park, principal economist at the Asian Development Bank. "It allowed people in rural areas to do basic infrastructure improvements and help themselves. Many people still come to [the Republic of ] Korea to learn about this."

These achievements demonstrate the key role of government in setting goals and investing in transport, irrigation, and other infrastructure. They also show how small-scale industries can bring nonfarm employment to rural areas. Use of public funds to reduce regional spatial inequalities, as the PRC has done with its western region development strategy, can also yield dividends.

One corollary of success on the farm was extra manufacturing jobs at cities. In the Republic of Korea, further investments into industry fostered self-sustaining job creation. Rapid urbanization reduced the size of the rural sector, ensuring that regional wealth disparities did not become a major drag on the economy.

Problematically, the rapid urbanization seen in Korea and Taipei made possible by their early integration into the global manufacturing system cannot be replicated everywhere.

Large farm product exporters such as Thailand now face the challenge of ensuring healthy farm incomes without subsidizing prices. The PRC faces the same dilemma. Although farm exports are not significant for the economy overall, the nation's sheer size requires a high level of food self-sufficiency.

For these middle-income countries, raising farm labor productivity remains a difficult but key hurdle in the way of higher rural wages.

"There's a lot of scope for raising agricultural productivity in both [the People's Republic of] China and India," says Park. "It can be a relatively cost-effective way of improving rural incomes."

Investment in education and health is another key ingredient of inequality-light growth. After World War II, both Korea and Taipei had higher levels of basic education and sanitation than most of Asia. They built earnestly on those foundations, ensuring more years of secondary education rapidly per student, and universal access that underwrote a high degree of social mobility. In contrast, basic literacy issues have held back most of South Asia, while Southeast Asia presently grapples with the challenge of raising the standards of secondary and tertiary education. Improving gender equality in education and social policies is another key to reducing income inequality - by bringing more women into paid labor.

Education is also a key to a solid manufacturing base. Without it, urbanization becomes merely a transfer of people from low productivity farm jobs to low productivity jobs in the informal services sector.

Manufacturing industries must reflect the supply of labor. Inequality rises when capital is cheap, funneling investment toward capital rather than labor-intensive industries. The cost of capital was mostly high in the Republic of Korea early in its development. Egalitarian industrialization also demands that plentiful labor does not boost formal sector wages much higher than those in the informal sector, due to minimum wage laws.

Once labor is no longer abundant, union demands for higher wages, along with better political representation, tend to reinforce equality and growth. Rapid wage rises, like those in Korea since the early 1990s, add to growth by spurring consumer demand and forcing companies to improve productivity. The low wage route to industrialization is not appropriate once labor is no longer in surplus. Indeed, it stifles growth and increases income inequality as income accrues to capital owners at the expense of average households.

There are no easy answers to reducing inequality that comes with economic growth. But the fundamental lesson appears to be implementing the right policies early in the growth cycle.

(Philip Bowring is one of the founders of Asia Sentinel. This appeared originally in Development Asia, published by the Asian Development Bank.)

Monday, April 29, 2013

Philippines peace talks fail

The Philippines says peace talks with communist rebels have collapsed and a target of ending the decades-long insurgency by 2016 is impossible to achieve.

Philippine President Benigno Aquino's administration is looking for a "new approach" following nearly three years of failed negotiations and a fresh surge in deadly violence, chief government negotiator Alex Padilla told AFP on Monday.

"We are at an impasse now. Whether we talk or not, the same violence continues, nothing has changed. So why will we force ourselves to talk?" Padilla said.

Aquino had said he wanted to seal a peace deal to end the 44-year insurgency, which has claimed an estimated 30,000 lives, before his term ended in 2016.

When asked about the timeframe, Padilla said: "That is gone."

The government and the rebels had initially raised hopes in early 2011 that they were on the right track when they announced after top-level talks in Norway that both sides were committed to signing a peace deal by June 2012.

But negotiations barely progressed after that.

Padilla blamed the Netherlands-based communist leadership, the National Democratic Front, for the failure, accusing it of setting new and impossible conditions for talks such as the release of captured senior rebels.

He said this had been a tactic of the rebels in more than two decades of peace talks with previous administrations, and questioned their sincerity in seeking peace.

Padilla said the government had not yet decided on its "new approach" for dealing with the rebels but it did want to re-open negotiations at some point.

The military estimates the rebels have only about 4,000 fighters nationwide, down from more than 26,000 at their peak in the 1980s.

However, they remain a danger, particularly in rural areas where they can count on support from local populations who endure the worst of the country's savage rich-poor divide.

The rebels have become more active ahead of next month's mid-term elections when thousands of local positions will be contested.

They killed two aides to a politician on April 20, and the military has accused them of extorting millions of dollars from many candidates in return for allowing them to campaign freely.
The military said in February that the rebels killed 164 soldiers, policemen, security forces and civilians in 2012.

El Indio: Big Broadband

Proposed activation of fixed broadband in each district reached by the Palapa Ring, resulting in a dramatic upgrade of the network speeds of local governments, schools and universities, banking systems and microcredit programs, the public health system, the central government’s citizens-facing institutions, mosques and warnets. It entails the creation of a smart device and powerful apps that will produce a mobile broadband and fixed broadband ecosystem, which enables individual citizens and institutions to interact with great impact.

While the world was focused on the Asean summit in Brunei last week, wondering what the leaders of the region would do about the South China Sea, something else, also of great importance, was taking place elsewhere, first in Bali and then in Jakarta.

The Bali part of it was the meeting of the APEC Telecommunication and Information Working Group (TEL), composed of the telecommunication and information technology ministers of 21 countries, which is now updating its strategic plans.

You don’t hear much of APEC TEL because when APEC is mentioned, you think of the Bogor Goals, which form a large part of the APEC story. Since the Bogor Goals of free and open trade and investment were adopted when Indonesia was chair in 1994, APEC economies have increased their trade volumes six-fold. Their GDPs each year have risen half a percent higher than the rest of the world. That’s big.

APEC TEL’s part of this story is also big but isn’t well known. Established in 1990, APEC TEL would shepherd the transition of the Asia-Pacific information infrastructure into an Asia-Pacific information society. Since 2000, APEC economies have reached the goal of tripling Internet access. They are now striving for universal access to broadband by 2015.

When APEC officials talk of connectivity, however, they talk of shipping, road networks, railway links and power systems — which are, of course, vital forms of connectivity. But the revolution of the future will not be any of these. It will be meaningful broadband. “Meaningful” because it’s affordable, accessible and empowering.

In Indonesia there’s a movement to leapfrog the country into massive broadband deployment. Guiding this movement are Dr. Ilham A. Habibie, a leading light in the aviation industry; presidential aide Wim Tangkilisan; and Craig Warren Smith of the Bangkok-based Digital Divide Institute.

Chairman, managing director and adviser respectively of the Meaningful Broadband Working Group, they interacted with APEC TEL in Bali.

I understand that after this interaction several APEC members, including China, Japan and Malaysia, are moving to make meaningful broadband a cross-cutting theme for the APEC Economic Leaders’ Meeting later this year.

Then in Jakarta late last week, Ilham Habibie and Wim Tangkilisan led a meeting of stakeholders in the Indonesian broadband movement, including the cabinet secretariat, senior government officials and representatives of civil society and the academe. The meeting received Smith’s 240-page Meaningful Broadband Plan to make broadband a platform for Indonesia’s socioeconomic and environmental reform. The movement is now going over the plan prior to submitting it to President Susilo Bambang Yudhoyono at the end of May.

The plan envisions the activation of fixed broadband in each district reached by the Palapa Ring, resulting in a dramatic upgrade of the network speeds of local governments, schools and universities, banking systems and microcredit programs, the public health system, the central government’s citizens-facing institutions, mosques and warnets. It entails the creation of a smart device and powerful apps that will produce a mobile broadband and fixed broadband ecosystem, which enables individual citizens and institutions to interact with great impact.

The program will be piloted in Pekalongan on the north coast of Central Java before it is extended to 200 others connected to the Palapa Ring. Its impact is expected to be immense in the delivery of good governance and in the fight against corruption, in education and in every economic activity. It will not only increase GDP. It will bring about social equity.

It will be up to Yudhoyono when the plan is presented to him at the end of May — whether meaningful broadband remains an idea that must wait for its time, or he makes it the heart of his legacy.

Jamil Maidan Flores is a Jakarta-based writer whose interests include literature, philosophy and foreign policy. He is an English language and writing consultant of the Indonesian government.

The Russian Bear Embraces Japan

Moscow welcomes Abe for talks on the Kuriles

China's foreign policy has earned another stunning defeat. Beijing's ramping up of its threats to Japan's ownership of the Senkaku (Diaoyu) islands may have pleased the people at home - though even that is questionable - but its combination of military build-up and nationalist rhetoric has now led to yet another reaction, this time by Russia.

Just when China and to a lesser degree South Korea have been conducting their usual war of words about visits by ruling party members to the Yasukuni shrine, Moscow has been welcoming Japan's nationalist-minded Prime Minister Shinzo Abe. This is not only the first such visit in a decade but is leading to resumption of a dialogue between the two on their own territorial dispute, the Kurile Islands, which were seized by the then Soviet Union in 1945, in the waning days of World War II.

It has long appeared short-sighted for both nations to let this quarrel stand in the way of improving relations, which would clearly be of benefit to both, threatened in different ways by the rise of China - in the Russian case by the settlement of many Chinese in its thinly populated Far East and Eastern Siberia regions. At one point during Boris Yeltsin's time in office, settlement of the islands issue had seemed a possibility. But a revival of nationalist sentiment in Russia under President Vladimir Putin and the deterioration in Russia's relations with the west put relations with Japan back into cold storage.

So it is doubly interesting now that Russia is warming to Japan even as its relations - or at least those of Putin - with the west continue on a downward trend. There are evidently two main reasons for this. The first is obviously the rise of Chinese power. The second is economic. Russia not only wants Japan (and South Korea) as destinations for its energy and minerals. As commodity prices fall, Moscow needs to spur growth in the other sectors of its economy. Japan is an obvious place to look for technology and investment so it Abe is being accompanied by a large delegation representing Japan's major business houses.

Whether the Japanese can find many investment opportunities, particularly in the Far East, is open to question. Japanese generally have long had a rather low opinion of things Russian and the resurgence of nationalism in Japan, which has been stoked by China, could be an insuperable barrier to settlement of the Kurile issue. Nonetheless the visit points to the increasing complexity of geopolitics in northeast Asia.

It also represents a setback for China which had seemed to have developed strong mutual interests in limiting US influence. This was reflected in its participation in the Shanghai Cooperation Organization a grouping with the twin aims of keeping militant Islam in central Asia at bay and doing so independently of the US. It was also reflected in Russian sales of advanced military aircraft to China.

While Moscow will continue to make all the correct noises about friendship with China, the Abe visit and the renewal of talks on the Kuriles come on top of Russia's efforts to bolster its old friendship - and military cooperation with - Vietnam just as the time when Hanoi has been seen in the front line of resistance to China's ambitions to own the South China Sea.

As for Japan it hopes that Russia also still has some vestiges of influence in North Korea - or at least would play a positive role if there were any signs that Pyongyang was itself moving to a more flexible position. After all the alarms about nuclear tests and rocket launches, the Korean situation seems calmer. Having shown what a tough young guy he can be, maybe Kim the Third will focus on economic development, in which relations with Russia and Japan can be a useful balance to those with China and South Korea.

Russia and Japan are both declining powers that are belatedly coming to see the need for protecting their futures rather than letting old antagonisms stand in the way of mutual aid. China's bizarrely aggressive posturing over the past year or more has been the catalyst. Asia Sentinel