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Oxfam International Report
Growth with Equity:
An Agenda for Poverty Reduction
September 1997
Executive summary
Recommendations
East Asia's 'silent revolution': the central role of social policy

Growth and equity: the key to human development

The social policy 'fundamentals'} 

The central theme of this Oxfam International* Report is that rapid progress 
towards poverty reduction and human development is possible through policies 
which combine growth with equity. East Asia* demonstrates that policies which 
are good for equity are good for growth, and good at converting growth into 
poverty reduction. Over the past three decades the region has experienced the 
most rapid and sustained growth recorded this century. Less widely appreciated 
is the fact that economic success has been accompanied by a silent revolution in 
poverty reduction. More people have moved out of poverty more quickly than at 
any time in history. The message which emerges for governments which are serious 
about growth is clear: get serious about poverty reduction and human 
development. 

Equity is about more than the distribution of income and wealth. It is also 
about the creation of opportunities for health, education and production. 
Expressed differently, how the economic cake is cut matters, but so does how it 
is baked and who bakes it. Participation in production holds the key to equity 
and poverty reduction. East Asia's success has been achieved not through the 
'trickle down' to the poor of wealth created by others, but through the active 
participation of the poor as producers of wealth. Investment in the creation of 
opportunity for poor people has brought human development gains in its own 
right. But it has also acted as a springboard for economic success, unleashing 
the productive potential wasted by poverty. Once again, the message is clear: 
poverty is a source not only of social injustice, but also of economic 
inefficiency. As we show in this Report, high levels of inequality and poverty 
act as a brake on growth. 

**partie=titre Recommendations *partie=nil 
What are the policies for combining growth with equity and poverty reduction? 
Drawing on lessons from East Asia, we identify a three-pronged strategy 
involving: 
Public investment to create opportunities for health and education, with a 
focus on the provision of free and high quality basic services accessible to 
the poor; 
Industrial development strategies that maximize employment opportunities; 
Pro-poor rural development policies, including agrarian reform and 
infrastructural support for smallholders in production and marketing. 

**partie=titre Social policy recommendations *partie=nil 
East Asia's experience illustrates how policies in these areas can bring some of 
the international targets for human development within reach in an accelerated 
time-frame. The World Summit for Social Development agreed to work towards a 
reduction (from 1990 figures) of two-thirds in child mortality and 
three-quarters for maternal mortality by 2015. These rates of human development 
are far slower than those achieved in much of East Asia. 

The World Summit also endorsed the principle that all children should be in 
primary school by 2015. This time-frame is at least ten years too long and 
hopelessly inadequate for achieving sustained growth and human development. 
If more radical human development objectives are to be achieved, ambitious 
policy changes will be required. New public investment priorities which attach 
more weight to the needs of the poor, increased efforts at resource 
mobilization, and measures to enhance the quality of basic services are vital. 
However, not all of the problems are to be found on the supply side. Increased 
investment in services for people is vital, but so to is enhanced access to the 
services which are provided. In this context, recourse to cost-recovery, or 
user-charges, for basic services should be rejected, since they exclude poor 
people from services.
 
This Report recommends: 
The development of public health systems which are accessible to the poor, 
free at the point of entry and provide a comprehensive range of basic 
services; 
The attainment in all countries of free primary education with the objective 
of universal enrollment for primary education by 2005; 
Phasing out cost-recovery for basic health and education within five years. 

**partie=titre Funding recommendations *partie=nil
Some will object that poverty makes such ambitious goals unattainable. In fact, 
poor countries in East Asia - such as China and Vietnam - prove that low income 
levels need not be a barrier to human development. Among those most resistant to 
radical policy change will be governments in Africa and Latin America. Sadly, 
some of them have less difficulty tolerating corruption, subsidizing the health 
and education needs of the wealthy, and maintaining wasteful military budgets, 
than they do in mobilizing investment for poor people. For instance, governments 
in Africa are able to mobilize $14 per capita for spending on military hardware, 
compared to $3 for health. 

Funding these human development policies will take political action at a 
national and international level. 
This Report recommends: 
Governments in low income countries should spend no more than 2 per cent of 
national income on military budgets. If Africa were to reach this target it 
would release sufficient resources to double spending on primary health and 
basic education; 
At least 5 per cent of national income should be allocated to education, with 
90 per cent of the education budget allocated to primary and basic secondary 
education; 
A shift in spending priorities in health away from the tertiary sector and 
curative provision and towards primary level services and preventative 
provision.
 
The international community could also do far more. This Report recommends: 
The mobilization of resources for basic services (including health, education, 
and water supply) through the Highly Indebted Poor Country (HIPC) debt 
initiative. Deeper and accelerated debt relief should be provided to 
governments which undertake a clear commitment to transfer savings into basic 
services. For these governments, debt relief should be provided in a 
time-frame of 1-3 years (instead of six) with debt sustainability ceiling set 
at 15-20 per cent for debt service (instead of 20-25 per cent) and 150-200 per 
cent for debt stock (instead of 200-250 per cent); 
The mobilization of new resources for primary education through a 
re-allocation of aid budgets towards the primary sector. Five per cent of aid 
should be allocated to primary education by the year 2000. This would release 
$28bn in additional resources; 
More effective protection of priority social sector budgets under structural 
adjustment. 

For Africa we believe exceptional action is needed. We propose the development 
of an international plan of action to give Africa's children the opportunity for 
an education. The reason for the sectoral focus is simple: poverty reduction, 
growth and capacity to derive benefits from globalization depend decreasingly on 
natural resource endowments, and increasingly on human resource endowments, with 
education the primary resource. The reason for the regional focus: sub-Saharan 
Africa is now the only part of the developing world where the number of children 
out of school is going up as dramatically as the quality of education is going 
down. Failure to reverse this trend will accelerate the rate of Africa's 
marginalisation within the global economy. 

**partie=titre Industrial policy recommendations *partie=nil
Looking beyond the social sector, this Report proposes measures for promoting 
labor-intensive growth and achieving higher real wages through rising 
productivity and skills accumulation. The Multilateral Agreement on Investment, 
developed by the OECD, is identified as a potential threat, since it will hamper 
the efforts of governments to harness foreign investment to technology-transfer 
and national development priorities. Recent turmoil in East Asian currency 
markets points to another threat: namely, the absence of a viable framework for 
supervising speculative global capital markets, and for responding to the debt 
problems associated with them. At present, the International Monetary Fund acts 
as a global lender of last resort for countries facing problems related to 
capital-markets. However, its primary role is to secure repayments for creditors 
on Wall Street, rather than to ensure that the poor are shielded from the impact 
of adjustment. 

This Report recommends: 
The development of a multilateral investment code which recognizes the need to 
regulate investment in accordance with national development priorities; 
A small tax on international currency transfers to deter speculative currency 
trading and portfolio investment; 
The urgent development of a debt-relief framework for private capital market 
debt. As with the frameworks for commercial bank, multilateral and official 
debt, the principle of shared responsibility should be adopted, with creditors 
absorbing part of the cost. 

Rural development recommendations 
For most countries, rural development remains central to poverty reduction 
efforts. Once again, there are important policy lessons from East Asia, where 
rural poverty reduction provided a backdrop to rapid economic growth. The 
development of smallholder agriculture was vital because it increased efficiency 
and raised productivity, and because it spread the benefits of agricultural 
growth more widely.
 
This Report recommends: 
Agrarian reform, including land redistribution, to create egalitarian 
smallholder systems; 
Investment in marketing infrastructure and the development of rural credit and 
savings institutions; 
Protection of food systems from cheap imports to provide incentives for 
investment.
 
One of the central recommendations advanced in the Report is that the World 
Trade Organization should adopt a food security clause, allowing governments to 
protect their food systems up to the point of self-sufficiency. This 
recommendation emerges from Oxfam research into the impact of trade 
liberalization on vulnerable communities in the Philippines and Mexico, where 
imports are undermining rural livelihoods. 

**partie=titre East Asia's 'silent revolution': the central role of social policy *partie=nil 
East Asia's experience provides the backdrop to the case advanced in this Report 
for growth with equity as the key to poverty reduction. Thirty years ago much of 
the region was regarded as a 'basket case'. Poverty was deep and pervasive, 
average incomes were comparable to those in sub-Saharan Africa, and economic 
growth rates were slow. Commentators at the time, including a Nobel 
Prize-winning economist, confidently predicted a bleak future of increased 
poverty and accelerated economic decline. Subsequent events have shown that 
nothing in human affairs - including poverty - is inevitable. 

Since the 1960s East Asia has witnessed a 'silent revolution'. It is a 
revolution which has witnessed the fastest reduction of poverty for the greatest 
number of people in history. In the two decades after 1970: 
The incidence of poverty in the region fell from one-in-three to one-in-ten; 
Some 220 million people were lifted out of poverty while an additional 425 
million people were added to the region's population above the poverty line. 
The contrasts with other developing regions are striking. In South Asia, 
progress towards poverty reduction has stagnated since the mid-1980s. As we 
approach the end of the 1990s, there are more poor Latin Americans than there 
were at the start of the 1980s. And in sub-Saharan Africa the number of poor is 
growing in relative and absolute terms. Outside of East Asia advances in the war 
against poverty are being achieved slowly in some areas. In others they are 
being rolled back at a startling rate. This Report asks the question why East 
Asia has succeeded where others have failed. It is a question which ought to be 
of central concern to policy makers elsewhere.
 
Much of this Report focuses on concrete policy lessons. In a sense, however, the 
most important lesson is the most simple: 1.3 billion of the world's people live 
in poverty. This poverty world-wide represents not only a massive denial of 
basic rights, but also vast wastage of economic potential: it restricts markets, 
reduces employment, lowers investment and savings, and acts as a brake on 
growth. Put simply, poverty is as bad for economic efficiency as it is for 
social justice. As we approach the new millennium, poverty should be regarded as 
an unacceptable violation of rights and restriction of opportunities. Poverty 
should not be tolerated - and East Asia demonstrates that it need not be 
tolerated. 

**partie=titre No blueprint *partie=nil
No policy blueprint emerges from the diversity of East Asia's experience. What 
does emerge is a shared commitment to a three-pronged strategy for growth with 
equity, which we examine in this Report. The first strand involves public 
investment in health and education. This has brought human development gains 
which are important in their own right; and it has acted as a springboard for 
raising productivity and extending opportunity among the poor. The second strand 
is based on policies for labor-intensive growth, with economic expansion closely 
correlated with the development of opportunities for employment at rising real 
wage levels. The third strand involves redistributive rural development policies 
which create opportunities for people to respond to market opportunities. This 
Report examines each strand. 

The picture which emerges is, in most respects, highly positive. But East Asia's 
success is sometimes over-stated, with a blind-eye turned to its limitations. 
Throughout the region Oxfam International members work with marginalized groups 
such as small farmers, fisherfolk and indigenous peoples who have either been 
by-passed by growth, or become the victims of growth. The poor are treated 
shamelessly in many countries, evicted from their land to make way for mining 
companies, subjected to exploitative labor conditions, and denied a voice in 
national affairs. Poverty remains pervasive and increasingly concentrated in 
remote areas. In many countries, economic reforms in the 1990s have widened 
inequalities, with progress towards human development slowing. These are 
worrying developments. Recent turmoil in East Asian currency markets also 
reveals some underlying weaknesses in countries like Thailand that have 
encouraged speculative investment. 

More worrying still is the authoritarian governance which characterizes the 
region. Corrupt and unaccountable elites pledge their allegiance to 'Asian 
values' - in effect, a euphemism for suppressing basic citizenship rights, while 
pursuing vested interests and plundering public finances. Recently, the 
Malaysian Prime Minister has gone to the bizarre lengths of seeking an East Asia 
'opt out' for the UN Charter, claiming that individual rights need to be 
subordinated to the dictates of growth and government edict. 

What is missing from East Asia's success story - is progress in the development 
of participative political structures commensurate with progress in poverty 
reduction and human development. Ultimately, development is about more than 
economic growth and material welfare - and poverty has dimensions which go 
beyond income, health and education. The denial of human and political rights, 
powerlessness and the inability to influence decisions which affect your life, 
the impoverishment of the environment, and the absence of dignity, confidence 
and self-respect, and discrimination based on gender, are among the many faces 
of poverty. Other developing countries have much to learn from East Asia in 
matters of growth and equity. For their part, East Asian governments have much 
to learn about the aspirations and needs of their own people. 

**partie=titre Growth and equity: the key to human development *partie=nil 
The rate of growth has been central to East Asia's human development 
performance. Equally important, has been the conversion of growth into poverty 
reduction. For each percentage point of growth achieved in East Asia, the number 
of people in poverty has fallen by around 3 per cent. The equivalent figure for 
most countries in sub-Saharan Africa is slightly over 1 per cent. For most in 
Latin America it is less than one. The result: sub-Saharan Africa and Latin 
America have to grow faster than East Asia to achieve the same rate of poverty 
reduction. 

The consequences are of enormous significance, as demonstrated by recent 
experience in Latin America. Between 1990-1995 Latin American economic growth 
averaged slightly over 2 per cent per annum. Despite this growth, the number of 
poor people in the region rose from 197 million to 209 million. One-in-six 
households have remained in a state of indigence, unable to meet their basic 
needs. Growth in Latin America trickles down to the poor very slowly by 
comparison with East Asia. 

**partie=titre Income distribution *partie=nil 
Income distribution patterns help to explain why. For every $1 in wealth 
generated by economic growth in Brazil, the poorest 10 per cent of the 
population receives less than 1 cent - one-seventh of counterparts in countries 
such as Indonesia and Vietnam. Highly unequal countries have to grow much faster 
to achieve the same income gains for the poor. In order for the poorest 10 per 
cent of the population to receive an equivalent amount from income growth: 
Mexico's national income has to grow at four times the rate for South Korea; 
Brazil has to grow at seven times the rate of Indonesia; 
Zimbabwe has to grow at twice the rate of Vietnam; 
Kenya has to grow at twice the rate of Thailand. 

Distribution patterns can influence poverty reduction for better or for worse. 
The better case is illustrated by Malaysia, which succeeded in reducing 
inequality after 1970 and raising the income share of the poorest. The incidence 
of poverty, using national expenditure lines, fell from 60 per cent to 18 per 
cent. Worst case performers abound in Latin America. During the 1980s, 100 
million people were added to the ranks of those living below the poverty line in 
the region, while the share of national income accruing to the wealthiest 20 per 
cent of the population rose from a multiple of ten-times that of the poorest to 
twelve-times. Around one-half of the increase in poverty was accounted for by 
distributional shifts. 

Without a fundamental change in patterns of distribution, growth in Latin 
America will fail to make a dent in numbers living in poverty. The same is true 
for sub-Saharan Africa. Even on the World Bank's most positive (and least 
likely) growth scenarios, around one-quarter of the region will be living below 
the poverty line in forty-years time, pointing to the need for accelerated 
growth and enhanced equity. 

**partie=titre Equity is good for growth *partie=nil 
It is sometimes argued that there is a 'trade-off' between growth and equity, 
with gains in one area being possible only at the cost of losses in the other. 
This Report argues that there is no trade-off. On the contrary, the higher the 
inequity the less likely a country is to achieve sustained growth. Measuring 
countries for their performance on growth and equity (as indicated by Gini 
coefficients for income distribution), East Asia performs strongly on both 
counts. Some countries - such as Chile and Botswana - succeed in combining high 
growth with a high level of inequity. Others - such as India - combine low 
growth with relatively low levels of inequality. Most of sub-Saharan Africa and 
Latin America achieve the worst of all possible worlds: low growth and high 
inequality.
 
The association is not coincidence. High levels of income inequality reflect 
deeper inequalities in access to opportunities for health, education and 
production. These inequalities are a barrier to human development, and a brake 
on economic growth. Poor health and illiteracy limit the capacity of poor people 
to respond to market opportunities; and they lower productivity and restrict the 
development of skills needed to sustain growth. 

The case of India demonstrates the high social and economic costs associated 
with low human development. Progress in poverty reduction faltered in the second 
half of the 1980s, with the rate of poverty reduction for rural areas falling 
from 5 per cent a year to 1 per cent at the end of the decade. Economic 
liberalization in 1991 was intended to boost both growth and poverty reduction. 
It has done neither. Economic growth is slower than the average for the 1990s 
and the incidence of rural poverty has risen. The reason: India has made 
insufficient investment in expanding opportunity. Only around half of the 
population are literate and public health is poor. Both factors have hindered 
attempts to expand employment and raise skills levels. In rural areas, where 
three-quarters of the poor live, inadequate access to land and insecurity of 
tenure prevent the poor from responding to market opportunities. 

The contrast with China, which we draw in this Report is striking. This is not 
just because China has achieved levels of growth vastly in excess of those in 
India; but also because China had achieved literacy and public health levels 
better than those in India today almost three decades ago. High growth and 
poverty reduction are the consequence in part of the high returns to these early 
investments in human development. Once again, the lessons for sub-Saharan Africa 
and Latin America are clear: enhanced equity is a pre-condition not only for 
accelerated poverty reduction, but also for accelerated growth. 

**partie=titre The social policy 'fundamentals' *partie=nil 
Get the macro-economic policies right and all else will follow, including 
poverty reduction. The refrain is familiar, and it is based on comprehensively 
false premises which have produced profound policy failures. Too often, social 
policy is viewed as an appendage to economic policies, with the focus on 
providing welfare safety nets for those left out of the growth process. In East 
Asia, by contrast, social policy has been viewed as an integral element in a 
broader strategy for growth, creating the conditions for expanding opportunities 
for production. Without exception, the successful East Asian countries have 
built economic growth on social investment in human development. 
The results are readily apparent from a comparison of poor countries in East 
Asia with their counterparts elsewhere: 
Vietnam has an average income comparable to that in Nigeria, but average life 
expectancy is fifteen years longer, children are twice as likely to reach 
their fifth birthday, and literacy rates are twice as high; 
China has a per capita income roughly one-half of that in Brazil, but the 
average life expectancy of its citizens is four years longer; 
Indonesia has the same average income as Peru, but over 90 per cent of its 
citizens has access to health services. In Peru, the comparable figure is 56 
per cent - and the health services in question are vastly inferior across most 
of the country. 

Differences in initial starting points cannot explain the divergence in 
performance between East Asia and other developing regions. In the early 1960s 
Indonesia was poorer than many countries in Africa. Only one-in-three children 
attended primary school. Over the next decade school attendance doubled and 
universal literacy has now been achieved. One generation earlier South Korea had 
gone along the same path, achieving universal literacy by the mid-1960s. 
How were these gains achieved? External assistance was crucial in the early 
stages for both countries. There are lessons here for aid policy. Donor 
investment in education helped to prepare the groundwork for rapid growth, self- 
reliance and, within a short period of time, an end to dependence on aid. The 
message: good aid works. Economic growth was also important because it generated 
the resources needed to sustain increases in public spending on priority social 
services. 

More important still was a pro-poor pattern of public spending. Contrary to 
common assumption, East Asia is not a big spender in social policy relative to 
its income. Where it scores is in the efficiency of its spending, as measured by 
the human welfare outcomes: 
China and Peru: In China public spending on health is around $3 per capita - 
less than one-half of the level in Peru. With this smaller investment, China has 
achieved a maternal mortality rate which is one third of that in Peru and an 
under-five mortality rate which is 20 per cent lower. 
Indonesia and Brazil: On a per capita basis, public spending on health in 
Indonesia is 10 per cent of that in Brazil. For this smaller expenditure, 
Indonesia covers a larger proportion of its population with health services and 
regional differences are narrower. 

This Report points out that serious problems are emerging in social policy in 
East Asia. Market-oriented reforms, including charging for basic services, are 
excluding poor people from access to facilities. In separate boxes on China and 
Vietnam, the poor quality of services in both countries is highlighted, along 
with the widening gap between health provision for different regions. Several 
countries have also neglected the development of post-primary education, 
contributing to labor bottlenecks and rising inequalities. 

**partie=titre Bigger is not better *partie=nil 
The more positive lesson is that social policy in East Asia illustrates not so 
much the power of big spending as the potential in good spending. As a share of 
GDP, the region spends less than either sub-Saharan Africa or Latin America. 
What it does spend is concentrated far more heavily on primary and basic 
secondary education, and on low-cost primary health interventions of greatest 
benefit to the poor. 

Latin America is living proof of the principle that bigger social spending does 
not produce better outcomes. Only the OECD countries spend more of their 
national incomes on health and education. Yet 105 million of the region's 
citizens do not have access to even the most basic health care. On the basis of 
international comparisons with countries at similar income levels: 
Life expectancy should be 72 years rather than 69; and mortality of children 
under the age of five should be 39 per 1000 live births, rather than 47; 
The average period spent by children in education should be two years longer. 
Social policy in Latin American is a case study in neglect of almost criminal 
proportions. It is a neglect which costs lives. For instance, the shortfall in 
child mortality performance costs around 100,000 young lives annually. 
Like their counterparts in sub-Saharan Africa, Latin American elites prefer to 
concentrate public investment in universities and teaching hospitals which are 
inaccessible to the poor. In both regions, it is not uncommon for governments to 
spend less than 60 per cent of their education budgets on basic education. 
Governments in East Asia would regard anything less than 80 per cent as totally 
unacceptable.
 
What emerges from East Asia is an indictment of the social policy failures of 
sub-Saharan Africa, Latin America and South Asia. On a more positive note, the 
region's achievements point to the policies needed to advance human development 
and create the conditions for sustained growth, in conditions of widespread 
poverty. East Asia demonstrates that even the poorest developing countries can - 
and must - do far more for themselves in mobilizing resources for human 
development. The global community also has an obvious interest in creating the 
conditions for sustained growth and human development, since the alternative is 
to allow poverty to remain a source of instability and a barrier to shared 
prosperity. It too has much to learn from social policy in East Asia. The 
lessons for both national governments and the international community are the 
subject of this Report. 

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Introduction
The silent revolution. Two flawed generalizations} 

Twenty-five years ago Mei Hong's parents left their village in China's 
north-west province of Xianjing and moved to the southern town of Shenzhen. Like 
millions of families in the developing world, they were attempting to escape 
desperate rural poverty. Today, Mei Hong works in Shenzhen's special economic 
zone, one of the country's fast expanding industrial areas. Life is hard, but 
living standards are far higher than those of the family left behind. Last year 
Mei Hong gave birth to her first child, Yu Lee - a name which means 'new hope'. 
The name is an apt description of what has happened to the poor in China. In 
1972, when Yu Lee's grandparents were leaving Xianjing, one in three Chinese 
lived in poverty, unable to meet their basic needs for food, clothing, and 
shelter. Illiteracy was widespread and infant mortality rates were high. Today, 
poverty afflicts less than one in ten Chinese. Children like Yu Lee are twice as 
likely to reach their first birthday and will live on average eight years longer 
than children born to her grandparents' generation. 

Yu Lee is the human face of a silent revolution which has swept over East Asia 
in the past three decades. It is a revolution which, built on the foundations of 
growth with equity, has resulted in the fastest reduction in poverty for the 
largest number of people ever witnessed in history - and it is a revolution 
which provides lessons for other regions. In a world where one in three people 
live in a state of absolute want, East Asia serves as a reminder that the war 
against poverty can be won. 

Not all of the lessons to emerge are positive. Economic development has been 
pursued under governments which, for all their political differences, share in 
common a deep hostility to the principles of democracy and accountability. 
Moreover, the growth which has driven poverty reduction has been accompanied by 
extreme forms of exploitation - notably of female labor - and environmental 
destruction. In Shenzhen, it has been estimated that one-half of all factories 
violate health and safety laws. Young women, driven to the city by extreme rural 
poverty, are required to work long hours in dangerous conditions, without even 
the most basic welfare protection. Industrial accidents are common, and trade 
union rights are almost non-existent. Outside of the factories, public health is 
threatened by high levels of water and air pollution. The problems which 
children like Yu Lee will face as a result of these harsh realities are as much 
a microcosm of East Asia's experience as are the opportunities she will have for 
a better life.

*partie=titre The silent revolution *partie=nil 
There are other limits to the East Asian success story. Some countries - notably 
the Philippines - have a poor record on growth and equity, reflected in a 
failure to significantly reduce poverty. Elsewhere, poverty remains deep and 
pervasive despite the achievements of recent decades. It is to be found in its 
most concentrated form among small farmers, the landless, fisherfolk, and 
indigenous or tribal communities, often located in remote geographical areas. 
Natural resource management has been subordinated to the reckless pursuit of 
growth, leaving a legacy of environmental destruction. In urban areas, the 
presence of sprawling slums is testament to the uneven distribution of the 
benefits from growth. Inequalities are widening in many countries. The 
economically powerful in East Asia have acquired all the trappings of Western 
consumerism, with imports of luxury goods flourishing. At the other end of the 
social scale, the poor, lacking political power, are often treated appallingly. 
The relocation of urban squatters, the eviction of farmers from their land, the 
violation of indigenous land rights in the interests of domestic and foreign 
investors, and the suppression of civil society are among the more visible 
outrages perpetrated against the poor. To add to these problems there are 
worrying signs that economic growth is slowing, along with progress towards the 
eradication of poverty. Recent turmoil in East Asian currency markets also 
reveals underlying weaknesses in countries like Thailand that have encouraged 
speculative investment. 

This Report examines the positive lessons to emerge from East Asia. It asks why 
the region has been so successful in combining high levels of growth with rapid 
progress towards poverty reduction. But the darker side of the East Asian 
miracle should not be forgotten. Poverty is about more than low incomes and 
social welfare indicators. It is also about an inability to exercise basic human 
and political rights, the absence of dignity, deprivation in knowledge and 
communication, environmental impoverishment and the violation of rights of 
women. In the international league table for poverty reduction, East Asia ranks 
at the top. On these broader indicators for poverty it would rank near the 
bottom. For other developing regions, the challenge is to learn from East Asia's 
success in advancing social and economic welfare. The challenge for East Asia is 
to develop more participatory approaches to development, in which the poor are 
given a political stake in society as well as an economic and social stake. 

*partie=titre Two flawed generalizations *partie=nil 
Generalizations about the underlying causes of East Asia's 'success' are fraught 
with problems. The diversity of the region's countries and peoples, their 
historical differences, and differences in social and economic policy suggest 
the need for caution. Nonetheless, generalizations abound. Two schools of 
thought dominate efforts to find the key to East Asia's success. First, there 
are those who claim that authoritarian governance has been the central factor, 
with human rights being sacrificed on the altar of economic growth. One variant 
of this view is that universal human rights, as provided for in the UN Charter, 
are 'individualist', and therefore inconsistent with 'Asian values'. These, so 
the argument runs, place society above individual rights. The Malaysian Prime 
Minister has recently gone so far as to propose that the UN abandon its 
commitment to universal rights in order to accommodate East Asia, claiming that 
continued economic and social progress requires the suppression of individual 
liberties. The second recurrent theme is that free market economic prescriptions 
are the critical factor in East Asia's success. In this account, trade 
liberalization, financial deregulation, and adherence to market principles have 
acted as a springboard to efficiency, growth and poverty reduction. The World 
Bank has used East Asia's experience - or, more accurately, its own 
interpretation of that experience - to draw up a checklist of good policies for 
export elsewhere. 

Both arguments suffer from a selective and inadequate interpretation of the 
evidence. Political factors are important in explaining poverty reduction in 
East Asia. But if authoritarianism were closely correlated with economic 
development, much of Africa and Latin America would be booming. In reality, the 
notion of 'Asian values' is a euphemism for the violation of human rights by 
political autocrats in pursuit of their vested political and economic interests. 
In Malaysia, Indonesia and Thailand exponents of East Asian values, receive 
funds from private interests, who claim repayments in the form of access to 
public funds and political favors provided at the expense of the poor. Leaving 
aside the wide variety of value systems in Asia, political protests in 
Indonesia, Thailand, and South Korea serve as a timely reminder that East Asian 
people, as distinct from their rulers, aspire to democracy. 

Economic liberalization is also a weak candidate for explaining East Asia's 
achievements. Governments across the region have adopted a wide variety of 
policies for regulating trade and investment, none of which conform to the 
free-market model favored by international financial institutions such as the 
World Bank. Moreover, Latin America and sub-Saharan Africa have embraced 
economic reforms with a conspicuous lack of success in terms of either growth or 
poverty reduction. 

Oxfam International rejects the view that the lessons from East Asia are located 
in the preference of regional elites for autocracy and their predisposition to 
human rights violations. These are sources of weakness which threaten economic 
performance and future progress towards poverty reduction, rather than a source 
of strength. Nor is it to be found in adherence to free market ideology. Markets 
have been important, but many of the policies advanced by the World Bank and 
others under structural adjustment conflict directly with those which have 
spurred poverty reduction and growth in East Asia. The real source of East 
Asia's success is located in policies based on a strong commitment to human 
development through public investment in health and education, the 
redistribution of productive assets and investment in the poor, and policies 
designed to achieve employment-intensive growth. Strong and mutually reinforcing 
linkages have been established between growth and poverty reduction, with the 
expansion of opportunities enabling the poor to produce their way out of poverty 
rather than awaiting the 'trickle down' of wealth produced by others. 
In this Report, we examine the preconditions for growth with equity and rapid 
poverty reduction, drawing upon the experience of East Asia. Part 1 examines the 
broad background to East Asia's performance. It identifies policies for 
expanding health and education opportunities, labor-intensive growth and rural 
development as the central policies for combining growth with equity. Part 2 
explains why growth and equity are important to poverty reduction. It points out 
that high levels of equity in the distribution of opportunities for production 
result in growth being converted into poverty reduction far more effectively in 
East Asia than other developing regions; and that high growth has been an 
outcome, as well as a cause, of progress towards equity and poverty reduction. 
The claim that there is a trade-off between growth and equity, with gains in one 
area being possible only at the expense of costs in the other, is challenged. 
Part 3 of this Report outlines the central role of social policy in creating the 
human development foundations for high growth and poverty reduction, contrasting 
the efficiency of social spending in East Asia with other developing regions. 
Five policy recommendations based on East Asia's experience are offered. In Part 
4, we turn to policies for labor-intensive growth in manufacturing, which 
include selective protection and the regulation of foreign investment. Part 5 
examines the importance of asset distribution to achieving growth with equity in 
rural development policies. It argues that, with supportive policies, 
smallholder production is inherently more efficient than large-scale 
agriculture, both as a vehicle for raising output; and as a means to the end of 
poverty reduction. Part 6 examines the limits to growth with equity in East 
Asia, with a focus on problems faced by Oxfam partners as a result of 
displacement, unregulated investment and social marginalization. 

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Part 1 - Three East Asian lessons
Lesson 1 Poverty is not inevitable: a message for 2000
Lesson 2 Growth with equity: the key to success
Lesson 3 Political commitment 
Interest in the East Asian 'model' has grown rapidly since the World Bank} 
 
claimed the region's record as testament to the success of free-market policies 
of the type associated with its structural adjustment programmes. In fact, the 
East Asian 'model' is an invention designed to sustain a myth. There is no 
single model: the countries of the region have followed a diverse range of 
policies, reflecting their particular historical, political, and economic 
circumstances. With varying degrees of success, most have combined growth with 
equity and poverty reduction. But different countries have followed different 
routes - and they offer different lessons. The myth attached to the East Asian 
'model' is that governments in the region have adhered to free-market 
prescriptions. To the extent that there is any shared feature of economic policy 
it is to be found in a shared rejection of ideologically-driven free market 
models. Indeed, many of the policies associated with structural adjustment are 
inconsistent with the policies which have achieved rapid growth and poverty 
reduction in East Asia. 

Attempts to discover the Holy Grail of specific policies which, designed in East 
Asia, will be applicable elsewhere are doomed to failure. That does not mean 
there are no lessons to be learnt. Latin America and sub-Saharan Africa cannot 
blindly follow an East Asian path. Differences in the administrative capacity 
and political composition of states, differences in history and in economic 
wealth will inevitably condition what is possible in different regions and 
countries. That said, Taiwan did not follow South Korea, Indonesia did not 
follow Taiwan, and China and Vietnam have not followed Malaysia. Each country 
has developed specific policies conditioned by local circumstances. There are 
insights from each country: but they are not the same insights in each case, and 
they vary over time. Three broad lessons suggest themselves emerging from the 
range of national experience in East Asia: they are that poverty is not 
inevitable, that growth with equity is the key to poverty reduction, and that 
success in poverty reduction depends on political commitment. 

*partie=titre Lesson 1 - Poverty is not inevitable: a message for 2000 *partie=nil 
The first lesson is the most important - and the most simple. It is that rapid 
progress towards poverty eradication is possible. Four decades ago, anybody 
predicting the social and economic advances which have been achieved in East 
Asia would have risked public ridicule. Average incomes in South Korea were 
lower than in Zaire or Sudan. In the early 1970s, the incidence of poverty in 
Indonesia and Malaysia was comparable to that in much of sub-Saharan Africa and 
South Asia - and both countries were heavily dependent on exports of primary 
commodities. A Nobel Prize-winning economist confidently predicted a bleak 
future of economic stagnation and rising poverty. Indonesia was a prime 'basket 
case' in the mid-1960s, racked by an unsustainable debt, heavily dependent on 
aid, suffering from hyper-inflation, and chronically dependent on imported food. 
The parallels with sub-Saharan Africa today are difficult to avoid. In 1968, the 
author of one of the most influential books on development economics concluded 
that Indonesia 'must surely be accounted the number one failure among the major 
underdeveloped countries'. He too predicted a future of slow growth and poverty. 

Subsequent events in Indonesia and beyond provide a powerful lesson that nothing 
in human affairs - including poverty - is inevitable. As we show in Part 3, 
progress towards poverty reduction and economic growth has been sustained at 
rates which are without historical precedent. As we approach a new millennium, 
the achievements of East Asia since 1960 merit serious reflection on the part of 
the international community. As we approach the end of the millennium, an 
estimated 1.3bn people - one-third of the developing world's population - live 
in poverty. Malnutrition afflicts half a billion people, contributing to the 
loss through infectious disease of 25,000 child lives every day. Over 110 
million children are denied the right to a basic education. As we approach the 
first decade of the twenty-first century, ending the human suffering associated 
with these cold facts is a moral imperative. Poverty should not be tolerated. 
What East Asia demonstrates is that poverty eradication is a practical 
possibility - and that poverty need not be tolerated. 

This first lesson is an important one for the international community. At the 
World Summit for Social Development in 1995, governments committed themselves to 
"the goal of eradicating poverty in the world through decisive national actions 
and international co-operation, as an ethical, social, political and economic 
imperative of humankind." Ambitious targets were set for reducing child and 
maternal mortality, increasing literacy, and reducing malnutrition. The 
Programme of Action adopted at the summit pledged by the year 2015 to: 
Reduce the incidence of extreme poverty by 50 per cent; 
Reduce infant and child mortality rates by two-thirds from their 1990 levels; 
Reduce by three-quarters maternal mortality rates; 
Achieve universal primary education in all countries. 

Targets such as these are important because they establish yardsticks for 
measuring progress. But global averages are not enough. Progress must be 
achieved on a country-by-country basis, with governments in all countries judged 
against their performance. Two factors will dictate the prospects for success. 
First, accelerated economic growth will be required for a group of more than 
one-hundred-and thirty developing countries. Second, increased investment in 
human development is both a requirement for accelerated growth, and a 
precondition for converting growth into poverty reduction. On both counts, East 
Asia provides insights into the policies needed to convert these pledges from 
idle rhetoric into meaningful action. 

*partie=titre Lesson 2 - Growth with equity: the key to success *partie=nil
The second broad lesson to emerge from East Asia is that growth with equity 
holds the key to poverty reduction. For too long, debates about the relationship 
between growth and poverty have been characterized by an air of unreality. On 
the one side there are those who are mesmerized by growth, regarding it as the 
ultimate vehicle for poverty reduction. On the other there are those who claim 
that growth leads only to continued poverty and widening inequalities. Both are 
slightly right - and both are very wrong. Economic growth is vital to poverty 
reduction. But growth can result in some people becoming worse off. Poor 
communities can be the victims of growth, for instance where they are displaced 
from their land by commercial investors. They can also be bypassed by growth, 
especially where they live in geographically remote areas. More broadly, 
wealthier people and regions tend to benefit more from growth than their poorer 
counterparts, with the result that inequalities widen. But none of this is 
inevitable. 

In short, economic growth, though essential for poverty reduction, is not 
enough. Policies are needed which enable poor people to participate in the 
growth process through the creation of opportunities. Markets are relatively 
efficient at allocating resources. But people enter markets with different 
endowments in terms of the skills and assets they bring, and they leave them 
with different rewards. Changing the pattern of rewards in a pro-poor direction 
requires prior action to change the distribution of assets and endowments. Less 
automatic still than the relationship between growth and income poverty are the 
linkages between growth and other aspects of human welfare, such as health, 
literacy, and life-expectancy. Where most of East Asia scores far more highly 
than other developing regions is in converting growth into poverty reduction and 
human development. This is precisely because economic growth has been combined 
with a high degree of equity in the distribution of income and - more 
importantly - access to opportunities for production, health, and education. In 
other words, the greater distribution of rewards from the market has been based 
on the redistribution of assets and endowments in favor of the poor. 
There is another reason for the positive interaction between growth and equity 
in East Asia. Bluntly stated, widespread poverty is grossly inefficient in 
economic terms, as well as being a violation of basic rights. Poverty reduces 
productivity, lowers the capacity for savings and investment, and restricts the 
development of dynamic markets. The cycle is mutually reinforcing in a negative 
direction. Lower productivity reduces incomes and future investment, which in 
turn reduces future output, income and investment flows. Reduced purchasing 
power limits market opportunities for other producers, acting as a disincentive 
for production and employment creation. Poverty and inequity creates negative 
linkages which are the mirror image of the positive linkages between growth and 
equity. 

The mechanisms for achieving growth with equity have been diverse. However, an 
important condition has been the creation of virtuous circles of growth and 
human development. Growth in East Asia has self-evidently been good for poverty 
reduction. But policies for poverty reduction have also been good for growth, 
creating the conditions for rising productivity and output. One of the reasons 
that countries such as India, Brazil, and Mexico have failed to sustain growth, 
or to convert growth into poverty reduction, is that they have failed to make 
the human development investments required. Where growth has occurred, it has 
trickled down to the poor at an abysmally slow pace. Meanwhile, the poor in East 
Asia have benefited from growth not because the gains have 'trickled down' to 
them, but because the development of their productive potential has been central 
to the growth process. Three inter locking policy elements have been crucial to 
the attainment of growth with equity and rapid poverty reduction: 
Getting the social policy 'fundamentals' right. Much has been written about East 
Asia's economic success. Less widely appreciated is the fact that this success 
was built upon social foundations prepared before economic growth began. 
Improved levels of literacy and advances in public health enabled poor people to 
participate in economic growth, and to share more equitably in its benefits. It 
also enabled them to contribute to growth through improved productivity and 
adaptability. In most countries, social policy and economic policy operate on 
different tracks: the former concerned with welfare safety nets and the latter 
with growth. In East Asia, investment in human capital has been made an integral 
part of growth-orientated economic policy. The focus has been not just on the 
provision of services, but on enhancing the access of poor people to these 
services. 

Rural development through redistribution. With significant exceptions, East 
Asian countries have high levels of equity in the distribution of income. Equity 
in asset distribution is the mirror image. Access to land, credit, and marketing 
infrastructure has enabled the rural poor to produce and invest their way out of 
poverty. In turn, redistributive reforms in these areas helped to unleash the 
productive potential of the poor, reinforcing a virtuous circle of high growth 
and a widespread sharing of its benefits. Dynamic smallholder agriculture, 
rather than large-scale commercial agriculture, has been one of the foundations 
for growth in East Asia. 

Coherent policies for labor-intensive manufacturing. In contrast to most 
developing regions, economic growth in East Asia has been associated with high 
rates of employment creation. To varying degrees and at different times in 
different countries, market-oriented approaches to efficiency have been 
important. But a characteristic of these approaches has been their long-term 
time frame. Selective protection, the regulation of foreign investment, and 
active industrial policy were all geared towards employment creation and 
improved productivity, which fueled rising real wages. Elsewhere, especially in 
Latin America and Africa, protection and investment controls have been designed 
to promote capital-intensive growth with scant regard for efficiency, often 
penalizing the poor in the process. The result has been slow growth and even 
slower rates of employment creation. Thus, countries such as Brazil, Mexico, and 
India have industrialized without significantly reducing poverty because they 
distorted interest rates, prices, and exchange rates to favor capital-intensive, 
rather than labor-intensive, industry. 

Success in achieving growth with equity depends upon the successful integration 
of these three elements into a coherent policy framework. They cannot be 
selected on a pick-and-choose basis. Macro-economic reforms aimed at promoting 
employment and growth are unlikely to realize their potential without prior 
investment in human capital. China and Vietnam have sustained high growth rates 
since the economic reforms of the late 1970s and mid-1980s respectively. But the 
human capital investment on which this growth was based was made two decades 
earlier. In India, by contrast, low literacy and poor public health, the twin 
consequences of grossly inadequate social policy, have resulted in the limited 
effect on growth and poverty of the economic reforms introduced in 1991. 
Similarly, countries such as Mexico and Brazil, have liberalized their 
economies, but the inequitable distribution of productive assets has resulted in 
slow growth, and in the exclusion of the poor from its benefits. To some extent, 
good social policy can compensate for the effects of inequity in asset 
distribution, but only partially so. In Zimbabwe, public investment in health 
and education has contributed to impressive gains in human welfare. However, 
highly inequitable patterns of land ownership have contributed to high levels of 
poverty and slow growth, which has in turn reduced the resources available for 
social investment. What Zimbabwe has discovered in the 1990s is that good social 
policies need economic growth to sustain them, as much as sustained growth needs 
good social policies. 

*partie=titre Lesson 3 Political commitment *partie=nil
To the three policy elements outlined above can be added a fourth. Political 
commitment is another pre-condition for achieving the successful integration of 
social and economic measures for poverty reduction. Pro-poor changes in policy 
direction in East Asia have often been a response to political crises. In 
Malaysia, the New Economic Policy was a response to the ethnic riots of the late 
1960s. Poverty and the marginalization of the Malay community was perceived as a 
threat to national security, and poverty eradication through growth with equity 
was made a core element of economic policy. In Thailand as in Malaysia, the 
sustained assault on poverty in the 1980s was a response to a growing awareness 
among the political elite of the threat posed by poverty, especially in the 
north-east of the country. Earlier, in the 1950s and the 1960s, South Korea and 
Taiwan embarked on radical land reform and public investment in part to head off 
similar threats posed by poverty. It is no coincidence that the one regional 
elite which has sought to contain poverty by protecting vested interests and 
failing to redistribute social and economic opportunities to the poor has 
suffered the lowest growth and the greatest instability. Unaccountable as the 
region's elites may be, they have displayed a keen instinct for political 
survival, recognizing the potential threat inherent in high levels of poverty 
and social inequality. 

Here, too, there are lessons for the international community. Too often the 
response to global poverty suffers from the Philippine's syndrome of investment 
in containment, rather than investment in the creation of opportunity. The 
European Union responds to the refugee flows, health problems and instability 
caused by conflict and social disintegration in Africa by investing in 
humanitarian aid for emergencies and tightening migration controls, instead of 
directing its development co-operation efforts at the social marginalization and 
poverty which is behind the emergencies. The US responds to poverty in Latin 
America by tightening its border controls and launching wars on smallholder 
producers driven to produce drugs by the lack of opportunity elsewhere. This is 
the politics of responding to symptoms rather than dealing with causes. East 
Asia demonstrates that the approach is flawed.

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Part 2 - Growth with equity and poverty reduction
From growth to poverty reduction
Income distribution and poverty reduction
Growth and equity: the 'trade-off' myth
Growth through redistribution}  

The facts of poverty reduction in East Asia speak for themselves. In 1970, 400 
million of the region's inhabitants, one-third of the total, lived below the 
poverty line. One decade later the incidence of poverty had fallen to one fifth. 
By 1990, the figure had fallen to one tenth. Over this period about 220 million 
people were lifted out of poverty, while an additional 425 million people were 
added to the regions' population. The contrast with other developing regions is 
difficult to avoid. In both South Asia and sub-Saharan Africa around one-half of 
people are in absolute poverty, as are one-quarter of Latin Americans. Had 
sub-Saharan Africa matched East Asia's rate of poverty reduction, 100 million 
fewer of its citizens would be living in poverty. 

The two most populous countries in East Asia, China and Indonesia, have made the 
most dramatic advances, accounting for the bulk of the reduction in world 
poverty. Between 1970 and 1990: 
China lifted 175 million people out of poverty while the population increased 
by 300 million. 

Indonesia lifted over 40 million people out of poverty while adding 60 million 
to its population. 

By 1970, the first generation of 'tiger' economies - the 'newly industrializing 
countries' (NICs) of North-East Asia such as South Korea and Taiwan - had 
already made rapid strides towards poverty reduction. The high levels of 
economic development achieved by these countries has tended to obscure the fact 
that all countries in the region have achieved high growth and poverty reduction 
from a starting point at which poverty was pervasive. In the mid-1960s, 
Indonesia's per capita income was lower than that of India, Bangladesh, and 
Nigeria. Poverty was widespread throughout the country. By the late 1980s, 
Indonesia's average income was 50 per cent higher than Nigeria's, 30 per cent 
higher than India's and 150 per cent higher than that of Bangladesh. Differences 
in income growth have been less significant than differences in human 
development. In 1960, life expectancy in Indonesia was 41 years - lower than in 
India, and about two years longer than in Nigeria and Bangladesh. Today, life 
expectancy is two years longer than in India, twelve years longer than in 
Nigeria and seven years longer than Bangladesh.
 
Income poverty is only one form of deprivation. It is closely related to other 
forms of deprivation in areas such as health and education, but the links are 
not automatic. As can be seen from Table 2, most countries in East Asia have 
achieved rapid advances in other areas of human development. In 1970, life 
expectancy in Indonesia was the same as in Africa. Now it is 12 years longer. In 
China and Malaysia average life expectancy increased by eight years in the three 
decades after 1970. Infant mortality rates for the region have fallen by almost 
half. 

Economic growth and rising average incomes have contributed to these gains, in 
part by creating additional resources for social investment; and in part because 
rising average incomes are positively linked to improved nutritional status. 
According to some accounts, the social achievements of countries in the first 
generation of NICs, such as South Korea, can be traced to differences in 
economic strength. Disparities in spending capacity are clearly important. South 
Korea spends almost $400 per capita on health care, while Uganda spends around 
$3. Inevitably, the disparity in spending contributes to disparities in health 
outcomes. As we show in Part 4, however, the quantity of spending cannot fully 
account for the differences in outcomes between East Asia and the rest of the 
developing world. It is often forgotten that many countries in the region 
achieve high levels of human development despite their low levels of average 
income. For instance, adjusted for purchasing power parity: 
Vietnam has an average income comparable to that in Nigeria, but average life 
expectancy is 15 years longer, children are twice as likely to reach their 
fifth birthday, and the literacy rate is twice as high. 

China has a per capita income roughly one-half of that in Brazil, but the 
average life expectancy of its citizens is four years longer. 
Indonesia has the same average income as Peru, but over 90 per cent of its 
citizens have access to health services. In Peru, the comparable figure is 56 
per cent - and the health services in question are vastly inferior. 
Vietnam provides positive proof that low income is not a barrier to progress in 
poverty reduction. Even with a per capita income of $200 - less than the average 
for sub-Saharan Africa - rapid advances in human welfare have been achieved. 
Since 1980, alone, life expectancy has increased by four years, and the Infant 
Mortality Rate has fallen from 57 to 42 per 1000 live births. Adult literacy is 
over 90 per cent, and 93 per cent of the population has access to health 
services compared to around one-half in Africa. Along with most of East Asia, 
Vietnam has achieved these advances through social and economic policies which 
create opportunities for the poor. This is good news for governments with a 
commitment to poverty reduction in other countries. For instance, the Government 
of Uganda is developing an integrated strategy for poverty reduction, including 
early moves towards the achievement of universal primary education (see Part 3). 
Vietnam, which has an average income only slightly higher than Uganda adjusted 
for purchasing parity, shows that its efforts can succeed. Viewed in a different 
perspective, the achievements of Vietnam, China and Indonesia are an indictment 
of governments' failures, in countries not only in the poor countries of 
sub-Saharan Africa and South Asia, but also in far wealthier countries such as 
Brazil and Mexico. 

Human development differences reflect differences in equity as well as growth. 
Poor people in East Asia have gained a bigger share in the production and 
distribution of wealth; and they have gained from social policies which have 
delivered basic services. Quality has been variable and there have been 
significant gaps in coverage. But measured against the yardstick of the human 
welfare gains associated with public investment, efficiency has been high, with 
strong human welfare returns for each dollar invested. We examine some of the 
reasons in Part 3. 

Accompanying East Asia's poverty reduction 'miracle' has been the more widely 
publicized 'economic miracle'. For almost four decades, countries in the region 
have sustained unprecedented rates of economic growth. The slowdown in economic 
growth in East Asia since 1996 and the recent currency crisis have prompted a 
wave of obituary notices on the economic 'miracle'. It remains to be seen 
whether these reports of the death of East Asia's economic success story are 
premature. However, the decline has to be set in context. Average GDP growth for 
East Asia in 1997 is projected at around 6 per cent, which is more than double 
the growth rates for sub-Saharan Africa and Latin America. Looking back over a 
longer period of two decades, national incomes have roughly doubled every six to 
eight years. 

 As Figure 2 shows, East Asia has separated from large swathes of the developing 
world by a yawning growth gap, which has been widening since the 1960s. That gap 
has continued to widen in the 1990s. In the first half of the decade, average 
incomes in the region have increased by over 8 per cent a year. In South Asia 
and Latin America, they have grown by around 2 per cent and 1 per cent 
respectively on average. In sub-Saharan Africa, income levels have shrunk. Only 
six out of 49 countries in the region (accounting for less than 5 per cent of 
its population) have reached higher levels of income in the 1990s than they had 
in the past. The resulting shift in relative incomes reflects Africa's growing 
marginalization. In 1965, average per capita incomes in the region were 60 per 
cent of the developing country average; today they are 30 per cent. Nor is it 
only Africa which is suffering the consequences of marginalization. Out of 167 
countries reviewed by the United Nations Development Programme (UNDP) for the 
1997 Human Development Report, 97 had lower incomes in 1996 than in 1990.  

*partie=titre From growth to poverty reduction *partie=nil 
Differences in growth rates have had an important bearing on regional 
differences in poverty reduction and human development. Growth matters to 
poverty reduction because it determines the size of the economic cake, or the 
goods and services which are available. In poor countries increases in the 
supply of income-generating resources are a necessary condition for improving 
entitlements to economic goods through employment and production. Without 
growth, it is impossible to sustain improvements in human welfare and achieve 
rapid poverty reduction. However, economic growth alone is an insufficient 
condition for advancing human development. Equally important is the distribution 
of growth. How the economic cake is divided between different groups in society 
- for instance, between rich and poor, or between men and women - has a critical 
bearing on poverty reduction. 

So, too, does a third consideration: namely, who participates in the baking of 
the cake, and on what terms. Economists often reduce social welfare questions to 
considerations of growth and income distribution. But the distribution of 
productive assets is also critical. These assets include not only what is 
conventionally described as physical or financial capital (i.e. land, productive 
inputs, savings, and credit), but also human capital. The latter includes 
education and health. Both are important as ends in themselves, because they 
enhance the quality of life and extend the range of choice for individuals. As 
such, they represent an important yardstick for measuring human development. 
They are equally important as means to the end of economic growth and equity. 
Improved access to education and better health enable poor people to contribute 
more fully to the growth process, and to participate more equitably in the 
opportunities which growth creates and the benefits it offers. In other words, 
the greater the degree of involvement in baking the cake, the better the 
prospect of a bigger slice. Equity in this wider sense is about more than the 
distribution of income. It is about the distribution of opportunities for 
participation in social and economic life, which is in turn influenced by the 
distribution of power at various levels: between rich and poor people, men and 
women, different regions, and ethnic groups, to name but four dimensions. 
Growth has acted as a powerful driving force for poverty reduction in East Asia. 
Without growth it would not have been possible to achieve the social advances 
which have been made. But these advances have not been achieved by growth alone. 
The quality of growth has been as important as the quantity. East Asia differs 
from other developing regions not only in its rate of growth, but in the rate of 
conversion from growth into poverty reduction. One way of capturing these 
differences is to compare the 'growth elasticity of poverty reduction', which 
measures the percentage decrease in the number of poor people associated with 
each percentage point of growth. In countries such as China, Malaysia, and 
Indonesia, every percentage point of growth reduces the number of poor people 
living below the poverty line by around 3 per cent, or more. For most of Africa, 
this declines to less than 2 per cent, and to 1.4 per cent for Nigeria, the 
region's most populous country. For Brazil, each percentage point increase in 
economic growth produces a reduction in the number of poor people of less than 1 
per cent. 

These figures have an obvious practical relevance because countries with a low 
growth elasticity of poverty reduction have to grow faster than those with 
higher elasticities in order to achieve comparable results. Between 1990 and 
1995 economic growth in Latin America averaged slightly over 2 per cent per 
annum. Despite this, the number of poor and indigent people in the region rose 
from 197 million to 209 million, according to the Economic Commission for Latin 
America (ECLA). Even less success was achieved in the reduction of indigence, 
defined as the inability to meet basic food needs. This fell from 18 per cent to 
17 per cent. As a result, one out of six households in Latin America would still 
not be in a position to satisfy basic nutritional needs, even if the entire 
household income was spent on food. Clearly, very little of the economic growth 
achieved during the 1990s in Latin America has trickled down to the poorest 
sections of society. The conversion of growth into poverty reduction appears to 
be at its weakest where the need for linkages is strongest. Apart from 
sub-Saharan Africa, Latin America is the only developing region in which income 
poverty has increased. Without dramatic changes in the quality of growth in 
Latin America, there is no prospect of achieving income poverty reduction on the 
scale required to meet desirable targets for human development. 
The same applies even more strongly to sub-Saharan Africa. Just under half of 
the region's population - around 219 million people - live below the income 
poverty line, rising to over 60 per cent in countries such as Zambia, 
Mozambique, and Burkina Faso. Numbers are increasing both in proportionate and 
absolute terms. According to highly optimistic World Bank projections, per 
capita incomes in the region will grow by 1.3 per cent for the next decade. Even 
if this target were reached, it would not be remotely adequate for reducing 
poverty on the scale required because of the weak linkage between growth and 
poverty reduction. At best, average incomes would double over the next 50 years. 
Assuming that current income distribution patterns remain intact, this would 
leave between one-quarter and one-third of the population below the poverty 
line. 

In South Asia, which is home to the greatest number of poor people, the linkage 
between growth and poverty reduction has been weak since the mid-1980s. Between 
1987 and 1993 the incidence of income poverty (measured against a poverty line 
of $1 per day), remained virtually unchanged at around 43 per cent. In countries 
such as India and Pakistan progress towards poverty reduction has stagnated in 
the 1990s, while the absolute number of poor people in the region has continued 
to rise. 

*partie=titre Income distribution and poverty reduction *partie=nil  
Differences in the distribution of income are central to inter-regional 
differences in poverty reduction. One way of viewing these differences is to 
compare the shares of national income going to the richest and poorest sections 
of society. Figure 4 summarizes data for 13 countries for illustrative purposes. 
Assuming that income from growth is distributed on the basis of existing 
patterns, it is possible to derive some striking insights into why growth and 
poverty reduction are so weakly correlated in some countries, and so strongly 
correlated in others. In the case of Brazil, which ranks fifth in the world 
league table for numbers in absolute poverty, for every $1 generated in growth 
the poorest 10 per cent of the population receive less than 1 cent, while the 
wealthiest 10 per cent receive 50 cents - double the amount received by their 
counterparts in Indonesia and Vietnam. Such patterns explain why it takes a lot 
of growth to bring a few benefits to the poor in Brazil and elsewhere in Latin 
America. East Asia too has an exception: the Philippines, where the income share 
of the richest 20 per cent is 11 times that of the poorest, compared to 5 times 
in Indonesia. Skewed income distribution has contributed to the poor performance 
of the Philippines in reducing poverty. In the two decades to 1990, poverty fell 
by 1 per cent a year, which was less than half the rate achieved by Malaysia, 
Thailand and, from a weaker economic base, Indonesia. More broadly, income 
distribution patterns provide an insight into why some countries have to grow so 
fast to achieve such little progress. In order for the poorest 10 per cent of 
the populations to receive the same amount of income from growth: 
Mexico has to grow at roughly four times the rate of South Korea; 
Brazil has to grow at seven times the rate of Indonesia; 
Zimbabwe has to grow at more than twice the rate of Vietnam; 
Kenya has to grow at over twice the rate of Thailand.
 
Changing patterns of income distribution can have important implications for 
poverty, for better or for worse. The better case is illustrated by Malaysia. 
Until 1970, economic growth in the country was relatively strong, averaging 6 
per cent in the 1960s, but accompanied by widening income inequality, with the 
share in national income of the poorest 20 per cent declining. Progress towards 
poverty reduction was slow, with about 60 per cent of the population estimated 
to be below the poverty line at the end of the 1960s. 'Trickle down' was not 
working for the poor. In 1971, the 'Economic Policy' (discussed further below) 
was adopted, placing equity and poverty reduction at the heart of government 
policy. Social programmes absorbed 60 per cent of budget spending, with a focus 
on smallholder producers and marginal areas. Growth increased, but not 
dramatically so. More dramatic was the reduction in the incidence of poverty. 
Using national poverty lines, this fell from 60 per cent to around 18 per cent. 
While Malaysia has remained one of the most unequal East Asian countries, 
improved income distribution was central to this achievement, with the income 
share of the poorest 20 per cent rising by one-third between 1973 and 1987. 
The worse-case scenario is provided by Latin America. During the 1980s, average 
incomes in the region declined under the weight of economic collapse and the 
debt crisis. Distribution patterns also changed in favor of the wealthy, with 
the average income of the top 20 per cent rising from a multiple of ten-times 
the income of the poorest 40 per cent to a multiple of 12. Over the same period 
an additional 100 million people fell below the poverty line. According to the 
Inter-American Development Bank (IDB) half of this increase in poverty was a 
direct consequence of the deterioration in income distribution. Such facts have 
an obvious bearing on the distribution of poverty. Indonesia has half of the 
average income of Peru. Yet in Peru about 50 per cent of the population live in 
income poverty - three times the level in Indonesia. If Indonesia had Peru's 
income poverty incidence, another 30 million people would be added to the ranks 
of poor. 

*partie=titre Growth and equity: the 'trade off' myth *partie=nil 
Policies to redistribute productive assets, and public investment in favor of 
the poor, are the obvious strategies for achieving more equitable patterns of 
income distribution. However, there is a widely held view that redistributive 
measures can be self-defeating in that they slow economic growth, thereby 
reducing the flow of resources needed to reduce poverty. There is, so the 
argument runs, a trade-off between equity on the one side and growth on the 
other. Is the argument credible? 

The evidence provided in Figure 5 suggests not. This clusters countries by 
measuring their performance on economic growth against income inequality as 
indicated by the Gini coefficient - a measure of how income distribution 
deviates from a hypothetical situation in which everybody has exactly the same 
income. Deviations from 0 (perfect equality) to 1 (total inequality) indicate 
the extent of inequality. At one level, the picture which emerges is 
inconclusive. Countries such as Botswana and Chile illustrate that it is 
perfectly possible to combine high growth with high levels of inequality, albeit 
with obvious costs for poverty reduction. Two East Asian countries - Malaysia 
and Thailand - veer towards this group. Others - such as India - demonstrate 
that it is equally possible to combine relatively high levels of equality with 
low growth. Most, however, succeed in achieving the worst of all possible 
worlds: high inequality with low growth. Much of Africa and Latin America fit 
into this category, although East Asia is not unrepresented. The Philippines, 
with its Latin American-style structure of land ownership, is a worst-case 
performer. At the other end of the spectrum, in the north-west corner of the 
scatter graph, lie the majority of East Asian countries, indicating their 
success in combining economic dynamism with equity. 

The message which emerges is clear: a high degree of inequity tends to be bad 
not only for poverty reduction, but also for growth. It follows that governments 
which are serious about growth should get serious about equity and 
redistribution. East Asia's experience demolishes the myth that there is a 
necessary trade-off between growth and equity, with gains in one area being 
achieved at the expense of sacrifices in the other. China is one of the world's 
fastest growing economies and also one of its most equal. Moreover, not only 
have the East Asian countries remained relatively equal by international 
standards, several - including Korea and Malaysia - have achieved improved 
equity with growth. More recently, income inequalities in the region have been 
widening in most countries. Recent economic history suggests that this trend is 
neither inevitable nor desirable. 

None of which is to deny that, for governments perverse enough to regard the 
option as desirable, that it is possible to combine high growth with worsening 
trends in income equality. But it is questionable whether high growth can be 
sustained over the long-term in the absence of progress towards human 
development and equity. It is even more questionable whether the costs of 
inequity in terms of weaker linkages between growth and poverty reduction should 
be regarded as acceptable. 

Chile illustrates the problems in extreme form. Despite an economic recovery 
starting in the second half of the 1970s and continuing (after a collapse in the 
early 1980s), the percentage of households living in poverty doubled between 
1970 and 1990. Income inequalities also widened, with the share of the richest 
10 per cent in national income increasing from 10 per cent to 37 per cent. The 
Gini coefficient increased from .45 to .57, one of the most dramatic increases 
in inequality of the post-war period. Falling real wages, the reversal of 
previous land redistribution measures, and a stringent stabilization programme 
were the main factors behind this trend. The rapid increase in growth achieved 
after 1984 is often cited as evidence that the trade-off between growth and 
equity, while painful, was necessary and unavoidable. In fact, the evidence can 
be interpreted differently. Economic growth did not accelerate until after 1986, 
coinciding with a move towards reduced inequality and poverty reduction. This 
trend has continued into the 1990s. In other words, growth has been accompanied 
by improvements in equity, while the initial deepening of inequality was 
accompanied by slow growth. Whatever the nature of the association between 
growth and equity, there can be little doubt that the depth of inequality in 
Chile has limited the potential for converting growth into poverty reduction. 
Income differences, reflected in the Gini coefficients used in Figure 5, 
represent only one way of capturing equity. However, income differences are the 
outcome of other patterns of inequality. The distribution of opportunities for 
employment, of productive assets such as land and credit, and of access to 
health care and education, are the more fundamental determinants of equity. They 
are also among the primary determinants of growth, helping to explain the 
picture summarized in Figure 1. Countries in Latin America, South Asia, and 
sub-Saharan Africa are slow growing in part because they are inequitable in 
their distribution of opportunities for human development.

If countries in East Asia demonstrate the benefits of positive linkages between 
growth and equity, India demonstrates the costs of negative linkages. From the 
mid-1970s to the end of the 1980s, the country made progress towards poverty 
reduction. However, during the second half of the 1980s, the rate of rural 
poverty reduction slowed from 5 per cent to 1 per cent a year, even as the rate 
of economic growth increased. The economic reform programme introduced in 1991 
was intended to boost economic growth, by reducing protection and bureaucratic 
controls on industry, and accelerate poverty reduction by creating new 
opportunities for the poor. It has done neither. After an initial spurt, 
economic growth rates for the 1990s have averaged below those achieved in the 
1980s, while the incidence of poverty in rural areas has increased, and in urban 
areas has fallen marginally. 

Why has India failed to translate growth into poverty reduction? Firstly, 
because in rural areas, where three-quarters of the poor live, inadequate 
efforts have been made to distribute opportunities. Land and tenancy reforms 
have not been implemented in most states, weakening the capacity of poor people 
to respond to market opportunities. Second, social policies have failed to 
provide access to health and education services needed to sustain growth with 
equity. There are exceptions: the state of Kerala has achieved literacy and 
infant mortality rates comparable to those of East Asia. But, at a national 
level, poor health and poor education have hampered efforts to develop 
labor-intensive industries and raise skill levels. The contrasts with China (see 
Box 3.1) are striking. The debate about the relationship between growth and 
poverty reduction will inevitably continue to provide employment opportunities 
for economists worldwide. In a sense, however, the debate is of dubious 
relevance. What East Asia's experience underlines is that, at the very least, 
growth can be successfully built on the foundations of improved equity and 
poverty reduction. There is no necessary trade-off between growth on the one 
side and equity and poverty reduction on the other. While causation is 
impossible to establish, East Asia's experience suggests that, at the very 
least, there is a positive association between growth and equity. It follows 
that governments that are serious about growth should get serious about 
improving equity, and about reducing poverty. 

*partie=titre Growth through redistribution *partie=nil 
Policies for growth and poverty reduction are mutually reinforcing, rather than 
contradictory. This is because widespread poverty represents a vast waste of 
productive potential, reducing output and productivity, limiting the scope for 
savings and investment, and restricting market opportunities. Simply put, 
poverty represents not only a denial of basic rights but a source of economic 
inefficiency. Overcoming that inefficiency should be a central policy objective 
for all governments. 

Redistributive social and economic policies are vital to the achievement of this 
objective. In the past, debates about distribution have tended to focus narrowly 
on income. When it became apparent some three decades ago that the 
'trickle-down' of wealth generated by growth was not happening in most countries 
at rates sufficient to make a dent in poverty levels, the World Bank elaborated 
a new approach under the banner of 'redistribution with growth'. The aim was to 
identify policies which resulted in poor people receiving a growing share of 
increments to national income. The redistribution of income was seen as the key 
to poverty reduction. 

In this Report we argue for a more integrated approach. Income distribution 
patterns are important, but they are the end result of the distribution of 
opportunities for production, employment, health care, and education. One of the 
reasons that East Asia's income distribution patterns are more equitable, is 
that countries in the region have created a wider dispersion of opportunities in 
each of these areas. This in turn has fueled economic growth. The contrast with 
other developing regions helps to explain some of the differences summarized in 
Figure 1. For instance, land distribution in most of East Asia is far more equal 
than in other regions. As a result, poor rural producers have had access to one 
of the productive assets needed to take advantage of market opportunities and 
contribute to economic growth, which has in turn been strongly correlated with 
poverty reduction. 

Countries with highly unequal land ownership patterns have suffered on both 
counts. Taking 15 countries with the most unequal distribution of land, World 
Bank figures indicate that two have sustained growth rates in excess of 2.5 per 
cent a year - an abysmal performance. More recent research has confirmed the 
negative impact of concentrated asset ownership for growth and poverty reduction 
in Latin America. According to the IDB, asset distribution has been the single 
most significant influence on growth in the region, retarding overall 
performance by about 2 per cent a year. 

Inequality in land ownership is one form of distribution which skews the 
benefits of growth against the poor. Another is inequality in opportunities for 
employment. In East Asia, the rapid growth of manufacturing industries has been 
associated with a high rate of job creation. Industrial development has been 
employment-intensive. It has also been associated with rising real wages. In 
Latin America and much of sub-Saharan Africa, by contrast, manufacturing growth 
has tended to be capital-intensive. In the 1990s, Latin America in particular 
has witnessed the emergence of jobless-growth, with an expansion of 
manufacturing output being associated with a decrease in employment. The 
unemployment rate for the region as a whole has been rising uninterruptedly 
since 1989 despite the recovery in economic growth. Accompanying this worrying 
trend has been a decline in real wages, with the result that 
poverty-in-employment has been increasing. 

The structural factors behind growth with inequality are strengthened by 
differences in access to health care and education. Poor health and low skills 
are important factors in reducing the productivity of the poor and hence their 
capacity to participate in growth on equitable terms. Here too, as we show in 
Part 3, East Asia has pursued public investment policies which have benefited 
the poor, while public spending patterns in much of Africa and Latin America 
have contributed to the exclusion of the poor from economic life. 

In this Report we argue that East Asia demonstrates the potential of a new 
development paradigm. The policy package associated with this paradigm can be 
summarized under the heading 'growth through redistribution', turning the old 
formulation on its head. Creating wealth on the foundation of highly unequal 
social and economic structures in the vague hope that the poor will ultimately 
benefit, has been tried, tested, and failed as a development strategy. The more 
effective strategy is to create an environment for poverty reduction and growth 
by redistributing assets and opportunities to the poor, enabling the poor to 
produce their way out of poverty. 

*{Mainstreaming human development: the social policy fundamentals 
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Growth with Equity
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Part 3 Mainstreaming human development: the social policy fundamentals
Lessons and cautionary tales from East Asia
Prioritizing primary education
Not by primary schools alone: Indonesia and Thailand
Progress and problems in China and Vietnam
The threat of a bad example: the Philippines

Quality and quantity in public spending
Prioritizing the poor
Bigger is not better
Skewing budgets in India ...
... and sub-Saharan Africa
Public access, financing and quality of service

Learning from East Asia: five policy guidelines} 

*partie=titre 1 - Lessons and cautionary tales from East Asia *partie=nil
'Get the macro-economic fundamental right and all else will follow.' The refrain 
is commonly heard in development debates. But it is based on false premises. 
Good macro-economic policies are needed to create the material wealth to meet 
human needs. The extent to which needs are met depends on the distribution of 
opportunities for production and employment - issues to which we turn in the 
next section. There is also a two-way link between growth and human development. 
Education supports growth by enhancing skills, productivity, and adaptability. 
Meanwhile, healthier and better educated people are capable of being more 
productive. The links between growth and human development can be mutually 
reinforcing. When they are strong, they create a virtuous circle. Increased 
growth generates resources for investment in health and education, which in turn 
yields benefits for economic growth. Conversely, inadequate or poor quality 
investment in health and education, slows growth and reduces the flow of 
resources available for public investment. Policies in East Asia have 
established strong linkages. These policies highlight the failures of 
interventions elsewhere and offer insights into the directions needed for 
reform. But while East Asia's success stands in stark contrast to performance 
elsewhere, complacency is unwarranted. There have also been major policy 
failures in East Asia, resulting in part from the unresponsive nature of policy 
makers. Moreover, there are disturbing signs of past gains being rolled back, 
with growing inequities in access to health and education. 

*partie=titre Prioritizing primary education *partie=nil 
One of the central features of East Asia's experience was a recognition, long 
before human growth theories recognizing the importance of human capital became 
fashionable, of the linkages between social and economic policy. Another was the 
sequencing of investment in human development and economic growth, so that rapid 
progress was made towards achieving universal literacy and improved public 
health in advance of growth. This meant that poor people were better equipped to 
respond to market opportunities as they emerged - and that they were able to 
claim a larger share of the benefits. It also meant that growth was built on the 
solid foundation of increasing skills levels, enabling productivity gains to be 
converted into rising real wages. 

South Korea set a trend which other countries followed. In the early 1950s, only 
13 per cent of the population had any formal schooling. Fifteen years later, 
over half of the population had been to primary school and 20 per cent to 
secondary school. Over the next 30 years, an average of five years was added to 
the time spent in school by children. There were also huge advances in teaching 
quality, with Korean children now achieving some of the highest scores on 
scholastic tests.
 
There are important lessons to be learnt from Korea about the financing of 
education - and about its potential benefits. The country started from a limited 
base. In 1960, it was still a poor country which was heavily dependent on 
foreign aid. That aid, provided by the US, financed a large proportion of the 
initial primary-school extension programme. Thanks in part to this early 
investment in education, Korea was able to generate the growth which reduced its 
future aid dependence. The lesson: good aid works. In this case, it created the 
conditions for growth, increased self-reliance, and reduced dependence on aid. 
As we suggest below, an international investment in getting Africa's children 
back to school through increased aid to education could have similar effects, 
with benefits for recipients and aid donors alike. However, Korea's advance was 
not achieved by aid alone. Because the benefits of growth were equitably 
distributed, and because the benefits of education in terms of employment and 
incomes became increasingly apparent, parents were willing and able to meet a 
large part of the cost of secondary education, while public finances were 
concentrated on primary education. Equity in access to education has been one of 
the keys to the high levels of equity in income distribution which have been 
maintained during Korea's economic boom. It is also one of the main differences 
between South Korea and countries such as Brazil. 

South Korea powerfully demonstrates the positive linkages which can be 
established between growth and education. Other countries in the region have 
also been aware of the crucial role of investment in education. One of 
Indonesia's greatest achievements has been the spread of basic education 
opportunities. In the early 1960s, only one-third of children attended primary 
school. The proportion doubled over the next decade to 60 per cent by 1973 - 
higher than in India or sub-Saharan Africa today. Enrolment is now almost 
universal. The illiteracy rate has fallen to 15 per cent from over 50 per cent 
in the late 1960s. These achievements were the result of an effort to increase 
the quality and quantity of services provided and - critically - to improve the 
access of poor people to those services. During the 1970s, the country embarked 
on a major drive to achieve universal enrolment, abolishing fees for primary 
schools, expanding the teacher-training programme, and building new schools. By 
the mid-1980s over 90 per cent of school-age children were in school. As in 
South Korea, external support was a major factor in Indonesia's social 
development programmes, accounting for over half of spending in the first 
five-year development plan (1969-1974), after which economic growth and oil 
revenues enabled the country to increase its own investments.
 
*partie=titre Not by primary schools alone: Indonesia and Thailand *partie=nil
Improved access to primary education was one of the keys to East Asia's success, 
providing people with the basic literacy needed to raise skills. However, the 
view that primary education is the single most important determinant of growth 
with equity is flawed. As production systems develop they demand higher levels 
of skill in order to sustain employment growth and rising incomes. This in turn 
requires that governments develop education systems which enable their citizens 
to climb the skills ladder. Universal primary education is the first step. But 
ignoring secondary education can be bad for growth and equity. The contrasting 
experiences of Indonesia and Thailand illustrate the point.
 
During the 1980s, economic growth in Thailand averaged more than the rate 
achieved in Indonesia. However, the rate of decline in the incidence of poverty 
was so slow in Thailand that it ended the decade with more people below the 
poverty line than there had been in 1980. In Indonesia, by contrast, the number 
of poor people declined from 47 million to 27 million. The fact that Indonesia's 
average per capita income was half of that in Thailand makes the difference in 
performance even more striking. 

Differences in education help to explain the apparent anomaly. Although both 
countries had achieved universal primary education in the 1970s, in Thailand 
enrolment growth at the lower secondary level was very slow and at the upper 
secondary level it was negative. In 1990, there were over 130,000 fewer pupils 
in secondary school than at the start of the decade. By 1990, the percentage of 
the labor force with only a primary education was lower for Thailand than for 
any other country in East Asia. As the manufacturing sector shifted from a 
low-skill to a higher-skills base, employment opportunities for people with only 
a primary education stagnated, while those for people with a secondary education 
expanded. Since the poor were heavily under-represented in secondary education, 
from which they were excluded by cost, the impact of growth on poverty reduction 
was thus weakened, while wage inequalities increased. 

More recently, there is evidence of a skills shortage acting as a constraint on 
growth in both Indonesia and Thailand. This points to a wider problem for the 
region. As economies move up the technological ladder, school leavers and adults 
with only a basic education will have a diminishing prospect of finding work in 
faster-growing and higher-wage sectors, with the wages of the unskilled falling 
progressively further behind those of the skilled. These problems are already 
evident in Thailand. After Chile, Thailand experienced the fastest-growing gap 
between the bottom and top ends of the labor market. This gap expanded by 50 per 
cent between 1987 and 1991, compared to 5 per cent in Indonesia, where the 
government prioritized spending in lower secondary education. 

*partie=titre Progress and problems in China and Vietnam *partie=nil
One of the most important lessons from East Asia is that poverty is no barrier 
to rapid improvement in human development. In the 1950s, probably fewer than 
one-in-five people in China and Vietnam were literate. By 1980 the figure had 
climbed to two-in-three. Today, literacy rates are around 90 per cent - 
comparable to those of middle-income countries in Latin America. Progress in the 
health sector was equally dramatic. By the end of the 1970s, China's rural 
co-operative health system covered about 85 per cent of the population, with a 
clinic in almost every village. There were about 1.6 million 'barefoot doctors' 
in place, or one to every 400 rural inhabitants - a higher ratio 
doctor-to-patient than in Canada last year. Admittedly, coverage was not uniform 
and the quality of service provided was limited and variable. But the 
availability of basic medical care, immunization, and a strong emphasis on 
preventative practice, contributed significantly to improvements in public 
health. Modeled on China's system, Vietnam's communal health-centers and village 
health-workers covered 90 per cent of the population by the mid-1970s. Once 
again, services were variable in quality and often unresponsive to public need, 
especially the needs of women. But the incidence of killer diseases such as 
diphtheria, tetanus, and polio, fell dramatically during the 1970s and 1980s, 
contributing to improved life-expectancy. 

East Asia's progress in health and education has not been achieved without 
setbacks - and immense challenges remain. In Vietnam, the public health system 
was chronically under-financed in the 1980s, leading to shortages of drugs and 
poorly motivated staff. When the health system was liberalized in 1986 many 
people decided to opt out of the public health system and transferred en masse 
to private health pharmacies. Attendance at public clinics has fallen by half 
since 1989 with a parallel shift towards self-prescription. Private spending on 
health is now some five times higher than public spending. Moreover, 
cost-recovery has been introduced for government clinics, which are being 
financed increasingly by patient contributions and drugs charges. One result is 
over-prescription, as clinics seek to maximize revenue; another is the exclusion 
of poor people, who are facing difficulties in meeting costs. 

The challenge of poverty reduction remains immense, and it is becoming more 
difficult as poverty becomes increasingly concentrated in remote geographical 
areas, and in zones not linked to the centers of growth. In China, the absolute 
numbers involved are immense. More than 2 million children are not in school, 70 
per cent of them women. Maternal mortality rates in interior districts are over 
202 per 100,000 live births, well over twice the national average. Meanwhile, 
for all the country's success in providing basic health services, it has been 
less efficient in preventative interventions. As many as 130 million people lack 
access to safe water, increasing their exposure to disease. This sobering 
picture underlines the scale of the task ahead. That task will be made more 
difficult by the increasing concentration of poverty in more remote areas and by 
the gender discrimination which is undermining opportunity for girls and women. 
There is an added danger that the gradual shift towards more market-oriented 
systems of social sector financing will erode the access of poor people to basic 
services, leading to a widening health and education gap. *{(see Boxes 3.2 and 
3.3).} 

*partie=titre The threat of a bad example: the Philippines *partie=nil
As in other areas, the Philippines serves as a reminder of the costs of 
inappropriate policy priorities. During the 1980s, the Philippines spent 
comparatively less than other East Asian countries on health. In the 1990s, 
health spending has increased. But only one-quarter of the budget goes to the 
primary health care system, which is most heavily utilized by the poor. The 
upshot is that 30 per cent of the country's population - 23 million people - 
have no access to health facilities. In areas such as the Cagayan Valley and 
Southern Mindanao, where the incidence of poverty rises to over 40 per cent, 
less than half of the population has access to health facilities, exacerbating 
the vulnerability of poor communities. Regional differences in health provision 
reinforce the effects of poverty. The National Capital Region of the Philippines 
accounts for over two-thirds of the country's spending on health. Ranked on the 
UNDP's Human Development Index, the region would be in the high development 
category, ranked 38. West Mindanao, one of the areas most poorly served by 
public health facilities, would be ranked next to Zambia at 136, with a life 
expectancy ten years below the national average. 

It is a similar picture in primary education. In theory, the Philippines 
achieved universal primary education at the same time as Korea. In practice, 
around one in three children who enter primary school do not complete it. 
Research carried out for Oxfam by a Philippines non-government organization, the 
Freedom from Debt Coalition, graphically illustrates the discrepancy. In the 
urban municipality of Bocaue, around 85 per cent of all children enrol in 
primary school. However, of the girl children who enrol, only 4 per cent 
graduate. Illness and cost were cited as the main reasons. Once again, 
under-funding is part of the problem. Despite having a higher per capita income 
than Indonesia, the Philippines spends less per capita on education. What it 
does spend is heavily skewed towards higher level facilities. In the tertiary 
sector, where most students can afford to pay, private spending by households 
has declined from 26 per cent to 22 per cent of public spending since 1986. In 
the primary sector, the share of households in overall financing has almost 
tripled, from 12 per cent to 31 per cent. In effect, primary education is being 
financed by an increasingly regressive and heavily disguised system of taxation 
on poor people, diminishing access to schools for their children and reinforcing 
their poverty. 
 
*partie=titre 2 - Quality and quantity in public spending *partie=nil
Why was East Asia able to make such rapid progress in social provision? Part of 
the answer is to be found in the growth-human development linkage. In the 1970s, 
health spending in Latin America absorbed roughly the same proportion of GDP as 
in East Asia. Today, Latin America spends more of its national income on health. 
However, differences in growth mean that East Asia has tripled its spending over 
the intervening period, while in Latin America health spending has stagnated in 
real terms. In turn, differences in social investment, notably in education, 
have contributed to differences in growth performance. According to some 
accounts, they are the single most important factor in explaining the divergence 
between East Asia on the one side, and Africa and Latin America on the other. 
For example, the IDB estimates that one-third of the growth gap between East 
Asia and Latin America can be traced to differences in primary school enrolment. 
For Africa, one World Bank study concludes that variations in primary school 
enrolment rates are the main factor behind the differences in growth between 
East Asia and Africa. The figures may be questioned - but the high rate of 
return to investment in education is not in doubt. 

Economic growth is important to social policy because it provides the financial 
resources needed for investment. Without growth, it is difficult to sustain 
improvements in human development over the long term. During the 1980s, Zimbabwe 
invested heavily in primary education and basic health. Both achieved impressive 
results in terms of improved literacy and public health. For instance, adult 
literacy rose from 62 per cent to over 80 per cent and life expectancy increased 
by five years. However, economic stagnation has contributed to a crisis in 
social sector financing, starving the social sector of the resources needed to 
maintain progress. Per capita spending has fallen sharply in the 1990s, and the 
country's health and education infrastructure is coming under severe strain. 
Health indicators in particular have started to deteriorate. What the Zimbabwean 
case demonstrates is that good social policy cannot substitute for 
macro-economic policies which sustain growth - neither is likely to succeed 
without the other. 

Initial differences in income are insufficient explanation for the differences 
in performance between most of East Asia and much of the rest of the developing 
world. Growth, then, has an obvious and important bearing on the capacity of 
states to deliver basic services. But the inadequacy of both explanations can be 
demonstrated by comparisons between the poorer countries in East Asia and 
counterparts elsewhere. To take three illustrations: 
China and Peru: 
In China, public spending on health is around $3 - less than one-half of the 
level of public health spending in Peru. With this smaller investment, China 
has achieved a maternal mortality rate which is one-third of that in Peru (95 
compared to 280 per 100,000 live births), and an under-five mortality rate 
which is 20 per cent lower. In Peru, over one-half of the population does not 
have access to even the most basic health services. For China the comparable 
figure is 15 per cent. 
Vietnam and Uganda: 
Public health spending in Vietnam is around $1.5 per capita, compared to 
slightly under $3 per capita in Uganda. But Vietnam has health outcomes which 
are far higher than would be expected based on international comparisons of 
countries at similar income levels. For Uganda the outcomes are worse than 
would be expected. The consequences are reflected in the fact that Vietnam's 
maternal mortality rate is 160 per 100,000 live births compared to over 1000 
in Uganda, the child-mortality rate (45 per 1000 births) is 50 per cent lower, 
while almost twice as many of its citizens have access to health services. 
Indonesia and Brazil: 
Public spending on health in Indonesia is less than 10 per cent of that in 
Brazil on a per capita basis. But Brazil's health system covers a smaller 
proportion of its population and regional differences in public health are far 
wider than in Indonesia. Indonesia has a lower under-five mortality rate. 

*partie=titre Prioritizing the poor *partie=nil
Such examples illustrate one of the main social policy differences between East 
Asia and other developing regions: namely, each dollar of investment has tended 
to secure a higher rate of human welfare return. By comparison with other 
developing regions, East Asia has not been a big spender on social policy. 

 
Measured as a proportion of GDP, both Latin America and sub-Saharan Africa 
invest more than East Asia in health and education (see Figures 6 and 7). What 
is remarkable about East Asia is not that it spends so much, but that it spends 
so little. Of course, one factor is that some countries in the region - such as 
South Korea and Taiwan - are spending a smaller part of a much bigger economic 
cake. But even when it was developing its social sectors in the 1950s and 1960s, 
the share of national income allocated to them was no higher than present 
levels. The more fundamental difference between East Asia on the one side and 
Latin America and sub-Saharan Africa on the other, is that governments in the 
latter region have tended to concentrate resources in facilities such as 
universities and urban teaching hospitals, which are inaccessible to poor 
people. In the case of education, governments in East Asia typically allocate 
less than 10 per cent of their total budgets to the tertiary sector, with 
primary and lower secondary education absorbing over 85 per cent of education 
spending. Few governments in Latin America or Africa match this ratio. Most 
spend less than 70 per cent of their education budgets at the base of the 
schooling pyramid, with the result that a larger share of social-sector public 
spending is allocated to higher- income groups. To this basic inequity can be 
added a wide range of regional, social, and other inequities which result in 
poor people being excluded from access to health and education resources. These 
are considered below. 

In the health sector, the differences in overall spending as a proportion of GDP 
summarized in Figure 6 provides an insight into one aspect of the social policy 
differences between East Asia and other developing regions. Another difference 
concerns the balance between public and private spending. East Asia has a high 
level of private insurance spending, notably in South Korea. However, this is 
channeled through government-regulated health providers, with much of the 
finance coming through social insurance schemes. Higher average income levels 
mean that individuals have more capacity to pay for health insurance. What is 
more striking is that almost half of health spending in sub-Saharan Africa, the 
region with the lowest average incomes, is private. For some in the World Bank, 
this high level of spending reflects the inherent superiority of private 
provision, and an illustration of innovative copying of East Asia. In Oxfam's 
experience it is the mirror image of the catastrophic failure of the public 
health system to provide a service which meets needs. In most countries in the 
region, the rising costs of health have placed services beyond the means of the 
poorest - a trend which has been reinforced by moves towards cost-recovery as an 
alternative source of health financing. In effect, this is a move towards 
regressive taxation, with poor people being forced to meet through private 
payments the costs of public services. As we suggest below, it is a move which 
poses major public health risks. An important policy objective for Africa should 
be the public financing of basic services, with a minimum package of 
preventative and curative interventions provided free at the point of entry to 
the system. We suggest below how the financing for such a package could be 
mobilized. 

*partie=titre Bigger is not better *partie=nil 
If living proof of the principle that 'bigger is not better' were required, it 
is duly provided by Latin America. Only the OECD countries spend more of their 
national incomes on health. Yet despite these high levels of spending, most 
countries in the region have health outcomes well below the average for 
countries with similar income levels. An estimated 105 million people do not 
have access to formal health care - a fact which helps to explain why around one 
million children under the age of five die annually from preventable infectious 
disease. Each year, more than 2 million women give birth to children without 
having received ante-natal care. In Brazil, the most populous country in the 
region, one-third of the entire population lacks access to health care. There 
are eight countries (Peru, Bolivia, Guatemala, Ecuador, Honduras, Haiti, El 
Salvador and Paraguay) for which that figure rises to 40 per cent or more. 
On the basis of international comparisons, the number of Latin Americans not 
covered by health systems is double what it should be. The resulting shortfall 
in provision costs lives. For the region as a whole life expectancy should be 72 
years rather than 69; mortality among children under the age of 5 should be 39 
per 1000 live births rather than 47. This figure translates into the loss of 
around 100,000 child lives each year. Some of the region's most populous 
countries are among its worst performers: 
In Brazil, life expectancy is four years shorter than would be expected for a 
country with its per capita income, despite the fact that overall health 
spending absorbs 7 per cent of national income. 
Child mortality rates in Mexico are 20 per 1000 higher than would be expected 
given the level of public spending on health. For Brazil and Bolivia the 
figure rises to 30 per 1000. 

In education, as in health, Latin America's achievements fall far short of the 
minimum which should be expected - and still further short of East Asia. Net 
enrolment rates for primary school are high, at over 90 per cent. However, this 
masks the poor quality of education provided, and the fact that the average 
child spends only three years in primary school. Using international comparisons 
again, the average period in education should be two years longer. Drop-out 
rates and repetition rates are high, so that fewer than half of the children who 
start primary school in any year finish it - and only one-quarter go to 
secondary school. 

Imbalances in public spending priorities are part of the explanation for Latin 
America's under-performance. Countries such as Brazil, Mexico, Bolivia and - 
most spectacularly - Venezuela load their education budgets towards the tertiary 
sector. Each of them spend around one-half of their education budgets on basic 
education - a level which governments in East Asia would regard as totally 
unacceptable, and inconsistent with the attainment of high growth and employment 
creation. In the health sector too, public spending in Latin America is heavily 
oriented towards high-cost, urban curative facilities, with liberal levels of 
subsidization provided for private health insurance. Such facilities are of 
marginal relevance to the prevention and treatment of poverty-related infectious 
disease suffered by the poor. As countries such as Vietnam and China have shown, 
major advances can be achieved in addressing such diseases through low-cost 
preventative measures and basic health provision at the community level. 
Across Latin America, high quality health and education is readily available - 
but only to those who can afford it. Among the communities with which Oxfam's 
partners in the region work, in the slums of Brazil, the southern states of 
Mexico, and the Andean highlands of Bolivia and Peru, basic services are often 
non-existent. Indigenous communities face extreme discrimination in their access 
to social sector provision. In Bolivia and Mexico children from these 
communities receive on average three years less education than other children. 
Regional differences in spending patterns are an important contributory factor. 
In North-East Brazil, life expectancy is 17 years shorter than the national 
average, putting it on a par with Haiti. One-fifth of children in the region do 
not attend school and illiteracy rates are double the national average. 
Rural-urban difference also contribute to the human welfare gap between rich and 
poor. In Bolivia, rural infant mortality rates are 94 per 100 live births 
(compared to 58 per 1000 in urban areas), rising to over 170 in Andean Valley 
regions. 

*partie=titre Skewing budgets in India *partie=nil 
Latin America demonstrates how the linkages between growth and human development 
can be weakened through poor social policies. While an extreme case, it is a 
sadly familiar story. It is not alone. In India, over half of the combined 
budgets of states and the federal government goes to curative health care, with 
a heavy bias towards urban areas. Another 15 per cent goes to the promotion of 
family-planning practices, with scant regard for women's reproductive needs. 
There are also great discrepancies in per capita health spending between states, 
with the most impoverished such as Bihar, Rajhastan, Madhya Pradesh, and Uttar 
Pradesh, receiving less than half of wealthier states such as Punjab. The 
systematic bias in favor of hospitals over primary health clinics, urban over 
rural provision, and contraception over women's health, is highly inefficient in 
relation to the needs of the poor. So, too, is a pattern of education spending 
which allocates less than 25 per cent of budget provision to the primary sector 
despite adult illiteracy rates in excess of 50 per cent. The costs of these 
spending patterns are reflected not only in the scale of social deprivation, but 
also in India's modest economic performance in comparison to countries in East 
Asia (see Box), with poor education acting as a brake on economic growth. 
*partie=titre and sub-Saharan Africa
 
Spending patterns in sub-Saharan Africa are equally disturbing. On virtually 
every human development indicator, the region is falling further behind the rest 
of the world. About three million children die annually from infectious 
diseases, most of which could be easily prevented through low-cost treatment. 
Maternal mortality rates are ten times higher than in East Asia and life 
expectancy is 20 years shorter. Perhaps most disturbingly of all in terms of 
future prospects, sub-Saharan Africa is now the only part of the developing 
world in which the number of children not attending primary school is 
increasing. By the end of the decade, an estimated 56 million 6-11 year olds - 
over half of the total - will be out of school (see Table 1). Of those who do 
enrol, probably more than one-quarter will leave before acquiring basic literacy 
skills. 

Unfortunately, instead of rising to the challenge of concentrating their limited 
investment resources in areas where they will produce the greatest social and 
economic gains, most governments prioritize investment in the wealthy. In 
Zambia, over 40 per cent of primary school children are not in the appropriate 
grade because of a lack of teachers, classrooms, and teaching materials. Yet 
less than half of the education budget is directed towards primary education. It 
is a similar story in Niger and Mali, where fewer than one-quarter of children 
get to primary school. In the health sector, most governments spend more than 
one-third of their budgets on central teaching hospitals, rising to around 
one-half in countries such as Uganda and Zambia. Considered in association with 
the high levels of poverty prevailing in Africa, such priorities help to explain 
the abysmal failure of health policy. On a more positive note, the Ugandan 
government's poverty reduction strategy has emerged as a beacon of hope for 
sub-Saharan Africa. That strategy has prioritized the attainment of universal 
primary education (see Box 3.4). The challenge for Uganda and the international 
community is to rapidly increase access to schools while at the same time 
improving the quality of education. For its part, the government of Uganda could 
mobilize resources by transferring funds from military spending and parastatal 
subsidies to primary education. One of the most effective supportive strategies 
for the international community would be to accelerate and deepen the debt 
relief provided under the Highly Indebted Poor Country (HIPC) debt initiative. 
 
*partie=titre Public access, financing and quality of service *partie=nil 
Consistent under-funding inevitably erodes the quality of services being 
provided - and hence the potential benefits to their users. In the case of 
education, poor households with limited resources inevitably weigh the costs of 
schooling against the perceived advantages it provides. School fees, uniforms, 
and teaching materials are the main direct costs. There are also important 
indirect costs, since children are an important source of labor. This applies 
especially to young girls, who are required to carry water, care for their 
siblings, and assist in the preparation of food. Where the facilities provided 
are inadequate, a household is less likely to invest scarce resources, and more 
likely to withdraw children from school, usually starting with girl children. 
The poor quality of basic services provided to poor communities is evident 
across the regions in which Oxfam works. Among the most important causes of 
drop-out and repetition are poor infrastructure, low attendance, lack of 
textbooks and other teaching materials, and the lack of pre-primary education. 
In sub-Saharan Africa, primary school is often a mud hut with a leaking roof, 
classes of 40 children to one teacher, and a chronic shortage of basic teaching 
materials. In Mozambique, per capita spending on teaching materials is around 70 
cents per pupil. The minimum package of books and pencils costs around $4. 
Inevitably, teaching quality suffers. Poor school maintenance is another 
powerful deterrent to attendance. In Honduras, only half of primary schools have 
access to safe water; in poor areas of Peru, such as the Andean highlands where 
Oxfam works with rural communities, it has been estimated that 2 per cent of 
schools have water, drains, and electricity. The resulting health risk to 
children leads to high levels of drop-out and non-attendance. 

National data often exaggerate the quality of education. For instance, Mexico 
has achieved universal enrolment for primary schools. Literacy rates are 
estimated at around 90 per cent. However, the definition of literacy is a 
restricted one - and much of the primary school system in poor areas is 
ill-equipped to deliver basic skills. In the states of Campeche and Chiapas, 
where there is a high concentration of poverty, one-third of schools provide 
only three grades of instruction, so that the majority of children entering 
school leave without having acquired basic literacy and numeracy skills. 
In the health sector, too, the quality and location of service provision is a 
major barrier to entry. In the Kibale region of Uganda, Oxfam's partners work 
with one community for whom the nearest health facility is around 18 miles away. 
One recent survey has shown that, even if it were closer, few people would use 
it. Drugs for the treatment of malaria (the main health problem) and other basic 
diseases are in short supply, and there is a perception of staff as being poorly 
trained and rude. On the staff side, poor morale is acknowledged as a serious 
problem. The problems are familiar across much of the developing world. Primary 
health care budgets have come under increasing pressure from a combination of 
factors, with slow growth and debt prominent among them. As in education, staff 
salaries have been cut dramatically, forcing medical personnel to take on other 
jobs, and training budgets have been cut. Such a background is not conducive to 
the delivery of high-quality services. 

Policy responses to problems in the financing and delivery of health and 
education have often had the effect of eroding the access of poor people to 
basic services. Three such policies are: 
Structural adjustment. These programmes are introduced to address financial 
crises which typically include problems of large budget deficits. In some cases, 
the resulting financial adjustment has fallen heavily on social sector-budgets. 
For sub-Saharan African countries undergoing adjustment reviewed by the World 
Bank, total social spending fell by almost 1 per cent of GDP, while the share of 
national budgets going into the social sectors fell from 25 per cent to 22 per 
cent. In some cases, per capita spending cuts have been very high: 
In Zimbabwe, per capita spending on primary health and primary education was 
cut by one-third from 1990 to 1995 under an IMF-World Bank adjustment 
programme. 

In Zambia per capita health spending fell by half between 1990 and 1994. 
Expenditure on primary school children is now less than half of the level of 
the mid-1980s.
 
In Tanzania, per capita health and education spending is one-third lower than 
the levels of the mid-1980s. 

Inevitably, public spending retrenchments on this scale have undermined the 
quality of service provision. The burden has fallen most heavily on poor people, 
who are unable to finance access to private-sector providers. In the health 
sector, per capita spending cuts have been introduced at a time when increasing 
poverty, HIV-AIDS, and the emergence of more deadly strains of infectious 
disease are raising the demands made on a shrinking system. 

Cost-recovery and creeping privatization: An increasing number of governments, 
especially in Africa, are attempting to generate revenues for health and 
education by charging for services - including, in many cases, the most basic 
services. Insufficient attention has been paid to the social consequences of 
this cost-recovery. Poor households are frequently forced into distress sales of 
productive assets in order to finance their health care. For instance, it has 
been estimated that 40 per cent of land sales in Kenya are a direct consequence 
of illness. By depleting their assets, poor households lower their future 
productive capacity, thereby increasing vulnerability to future health risks and 
diminishing the resources available for spending in other areas. More 
immediately, the effect of cost-recovery is to make basic services unaffordable 
to the poor: 
In Zambia attendance at one of the country's main teaching hospitals fell by 
half over the five years following the introduction of cost recovery in 1989. 
Participatory research carried out in 1995 concluded that: "in all sites 
user-fees have continued to place the formal health system beyond the reach of 
the poor." 

User-fees were introduced in Zimbabwe in 1991. By 1993, the number of babies 
born whose mothers had not registered for ante-natal care had increased by 30 
per cent. Mortality among these mothers was five times the national average. 
In Kenya, the introduction of user-fees led to a sharp drop in attendance at 
clinics for the treatment of sexually transmitted diseases. 

In education, as in health, households have been required to meet a growing 
share of costs out of private spending in the form of school maintenance fees 
and other charges; and the effect has been to exclude the children of the 
poorest households from access to schools.
 
Decentralization: Decentralization can have positive effects. It can locate the 
managers of basic service facilities closer to the users of services, making 
them responsive to local needs. Political and financial decentralization can 
also foster a sense of accountability, especially where there are opportunities 
for people to influence who holds office. However, decentralization can often 
have negative effects and potentially damaging unintended effects. In Brazil, 
financial decentralization has resulted in the transfer of responsibility for 
raising revenue from the center to states. The effects have been regressive, 
widening the financing gap between rich and poor states. Spending in the three 
wealthiest states is now six times higher per pupil as in the poorest three 
states. The unintended effects can be illustrated by Uganda's experience. The 
recurrent budget for education is now financed out of a block grant allocated by 
government to district authorities. However, it has been estimated that less 
than 30 per cent of this grant reaches schools. The cause: partly corruption, 
but mainly district authorities choosing to prioritize rural feeder roads over 
schools. The two cases respectively illustrate the need for financial 
decentralization, first, to be accompanied by redistributive measures, with the 
central government ensuring that poor regions do not lose out; and second, the 
need for measures to ensure effective implementation of national policy 
priorities with accountability. 

*partie=titre Learning from East Asia: five policy guidelines *partie=nil 
All countries face financial pressures in meeting needs for health care and 
education. Demand is potentially infinite and the supply of finance is limited. 
This is as true for the British National Health Service as for the health 
services of Africa. However, the tension between financial capacity and human 
need is far greater in developing countries. Viewed from a global perspective, 
the paradox is that countries with the highest incidence of illness and the 
greatest deficits in education have the most limited resources for addressing 
the problems. That said, almost all governments could do more, as could the 
wider international community. 

1Budget guidelines and composition of spending: There are no blueprints for 
either. Governments in countries with low levels of human development should 
probably aim to spend around 5 per cent or more of national income on education, 
and probably somewhat more than 2 per cent on health. More important is the 
quality and composition of spending, and the balance between private and public 
spending. Governments in East Asia have heavily concentrated public investment 
resources at the primary level, while charging for higher-level facilities. For 
countries which are a long way from achieving universal primary education and 
access to primary health care, international evidence suggests that a target of 
between 80-90 per cent of education spending should be directed towards primary 
and lower secondary levels, and at least 70 per cent of public spending in the 
health sector should be directed to primary facilities and preventative 
measures. 

2Public spending for public goods: Private providers are not good at providing 
basic health and education services to poor people for one very obvious reason: 
poverty exposes people to high risk of illness and is associated with limited 
purchasing power. Creeping privatization through cost-recovery similarly has the 
effect of excluding poor people from basic services. The costs of exclusion from 
basic health and education are high both for individuals, and for society. In 
sub-Saharan Africa well over half of recurrent spending on health and primary 
education is now made out of people's pockets, rather than being financed by 
public investment. In both sectors the aim should be to progressively shift the 
balance between public and private finance. For health, the focus should be on 
the provision, through public spending, of a basic package of low-cost services 
to prevent and treat the most common infectious diseases, with free maternal and 
child health services. In education, the initial aim should be to provide free 
primary education. The challenge is immense. But Uganda, one of the world's 
poorest countries, is in the process of showing that it is not insurmountable. 

3Diverting wasteful expenditure into social investment: Wasteful expenditure 
takes a wide range of forms. Three merit especially urgent attention: 
Military spending. In South Asia, India and Pakistan have some of the world's 
most impressive military hardware, along with some of its most depressing 
social indicators. The two facts are related. India spends more on military 
capacity than it does on health - and Pakistan spends more in this area than 
on health and education combined. In Pakistan, the ratio of military personnel 
to doctors is 9:1. In India the ratio is a lower, but still an appalling 4:1. 
By international standards, governments in sub-Saharan Africa are modest 
spenders on arms. But they still manage to mobilize $14 per person - roughly 
double what they spend on health and education combined. Converting tanks into 
primary health services would be one of the most effective ways to advance 
human development. For example, in 1994 Nigeria took delivery of 18 Vickers 
tanks from the UK at a cost of $150m. For considerably less it could have 
provided full immunization to the estimated 2 million children not currently 
covered. In Latin America, military budgets absorb less percentage of GDP than 
in any other developing region. That said, there are some extravagant 
exceptions. A case in point is Peru, which has recently purchased a dozen 
Mig-29 fighters from Belarus a cost of $350 million - roughly $2 per capita. 
This is considerably less than it spends on primary health care in the Andean 
highlands, where inadequate health provision poses a more immediate threat 
than aerial attack from neighboring states. 

Targets should be set for reducing military spending in order to finance 
priority social spending. On average, countries in sub-Saharan Africa and 
South Asia currently allocate 3 per cent or more of GDP to what is 
euphemistically described as 'defense'. The aim should be a ceiling of between 
1 and 2 per cent. For sub-Saharan Africa, a 1 per cent reduction in military 
spending would release sufficient resources to double health spending. 
Corruption. This is not the sole preserve of poor countries, but some of the 
poorest among them have developed it into an art form; and the costs of 
corruption in terms of lost opportunities for human development are far higher 
in poor countries. For example, the estimated $400 million which Kenyan 
politicians have diverted into foreign bank accounts in recent years would 
finance the budgets for primary health care and primary education, with 
something to spare. Taking responsibility at the highest political level for 
ensuring greater transparency and accountability in public finance should be 
treated as an urgent political priority. National commissions charged with 
investigating and publicly reporting on evidence of corruption would be a step 
in the right direction.
 
Parastatal subsidization. Public finances are often swallowed on a huge scale 
by loss-making parastatals, most of which provide limited employment to a 
small number of people at enormous cost. In Zimbabwe, subsidies to the loss 
making national iron and steel company have remained intact, while the health 
and education budgets have been heavily cut. This suggests misplaced 
priorities. In Uganda, state subsidies to loss making parastatals amounted to 
$270m in 1995 - 5 per cent of GDP. This represented four times the amount 
spent in that year on education and five times the amount spent on health. 
4Mobilizing public finance through progressive taxation: Governments often 
claim that the universal provision of basic services is unaffordable because of 
limits on revenue-raising capacity. Structural adjustment programmes, which tend 
to recommend reduction in marginal income tax and corporate taxes, reinforce 
this view. The assumption in both cases is that high tax is bad for growth. So, 
it might be added, is the inadequate provision of basic services. In fact, the 
costs of meeting basic services is more modest than is often assumed - 
comprehensive primary health care coverage in poor countries, according to the 
World Bank, would cost around $12 per head. Meanwhile, the capacity of 
governments to raise revenues is less limited than is often assumed. 

 This is especially true of income tax in Latin America. On average, governments 
in Latin America collect 14 per cent of their GDP in tax. The comparable figure 
for East Asia is 16.8 per cent. Income differences cannot explain the 
discrepancy. Mexico has a higher average income than Thailand, but collects 2 
per cent less of GDP in tax. Average income in Peru is twice that in Indonesia, 
but the government collects 3 per less of GDP in tax, despite grossly inadequate 
social investment levels. The problem is not solely one of low tax, but also of 
poorly targeted tax. In Latin America the incidence of taxation is heavier for 
the poor than the wealthy because of the level of dependence on consumption 
taxes. Taxes on income, property, and financial assets, where marginal tax 
increases are more progressive, are low. For example, Brazil collects less than 
5 per cent of GDP in tax, which is half the level of Malaysia (which has a 
similar average income) and Indonesia (where average incomes are one-third 
lower). 

In some cases structural adjustment programmes have been accompanied by improved 
tax policies. In Uganda, improved tax administration has enabled the government 
to increase the share of GDP collected as revenue from 5 per cent to 13 per cent 
since 1985. This has enabled it to finance an increase in spending on health and 
education while meeting its stabilization targets for low inflation. In 
Zimbabwe, by contrast, reductions in corporate, commercial, and top income-tax 
rates lowered the collection of taxation by 3 per cent of GDP over the period 
1990-1995 - an overshoot of targets agreed with the IMF. The efficiency gains 
were questionable. Commercial farm land in particular is heavily under-taxed in 
Zimbabwe, leading to a poor allocation of resources as well as a loss of revenue 
for investment in social priority areas. The devastating impact of reduced 
investment in health and education on poor people in Zimbabwe, and the adverse 
consequences for long-term growth, suggest a misplaced sense of priorities, in 
which stabilization targets have taken priority over investment in human 
capital. 

Specific taxes can be developed to mobilize funds for social-sector provision. 
For instance, South Korea levies a small tax on interest and dividends to 
finance part of government spending on education. In countries such as Zimbabwe 
and Brazil, a similar tax on commercial farm-land would be good for both equity 
and efficiency. 

5Supportive international action: Development co-operation could play a 
central role in helping to meet targets for improving health and education. 
Debt relief: Debt servicing is among the least productive expenditures of all. 
As we have shown in earlier Oxfam International Briefing papers, it is also one 
of the heaviest burdens on budgets in poor countries. In countries such as 
Tanzania, Zambia, Mozambique, Honduras, and Nicaragua, debt repayments absorb 
more than one-fifth of total government revenue, dwarfing the amounts spent on 
primary health and education. In Mozambique, debt servicing will be absorbing 
over 40 per cent of Government spending by the year 2000 - some four times the 
likely level of spending on health and education. 

The Highly Indebted Poor Country (HIPC) debt initiative could help to resolve 
the debt crisis. One problem is that the time-frame (six years for most 
countries) is too long, and the targets for debt sustainability have been set 
unrealistically high. Another is that no linkage has been established between 
debt relief and initiatives to promote human development. Oxfam International 
believes that the HIPC framework could be used to provide positive incentives 
for poverty reduction. Debtor governments who commit themselves to converting 
savings from debt into social priority investment should be rewarded with deeper 
debt relief and an accelerated time-frame. More specifically: 
Debt relief should be provided within three years, rather than the six years 
currently stipulated; 
Debt relief should be deepened to the range of 15-20 per cent for debt service 
(from the present 20-25 per cent range), and to 150-200 per cent for the debt 
stock to export ratio (from the present range of 200-250 per cent). 

In this context, Oxfam International has proposed a debt for poverty reduction 
contract under which debtor governments would be granted privileges on a 
conditional basis - the main condition being that they allocate funds in a 
transparent manner to achieve targets for improving human welfare outcomes. 
International aid: In South Korea and Indonesia, aid played a crucial role in 
financing primary education. In time, improved access to education led to higher 
growth, improvements in human development, and reduced dependence on aid. Good 
aid, as this example demonstrates, improves self-reliance. At present, however, 
aid policy suffers from a lack of commitment to maintain spending, and from poor 
quality. Recent years have witnessed steep declines in aid spending. For the 
OECD countries as a group, development assistance has been reduced by 18 per 
cent in real terms since 1990 to its lowest level since the early 1950s - around 
0,27 per cent of their combined GDP. One area in which aid can bring the most 
tangible benefits is in carefully targeted social provision with a focus on 
poverty reduction and human development. Unfortunately, most aid - like most 
government spending in poor countries - is poorly allocated. Education is the 
single largest sector, accounting for 10 per cent of total aid. Unfortunately, 
only 0.6 per cent goes to primary education. The share of health in the OECD's 
collective aid budget has fallen to around 5-6 per cent, or around half the peak 
reached in the early 1980s. International co-operation to get the world's 
children into school would be a highly effective use of aid - and sub-Saharan 
Africa an obvious starting point. Donors should set a target for doubling the 
share of aid allocated to primary education by the year 2000 - which would 
release around, $28bn in new resources. Debt relief specifically linked to 
education provision could be used to mobilize further resources. In both cases, 
concrete timetables should be drawn up for increasing school enrolments and 
reducing gender differences in enrolment. Allied to improved allocation in 
government spending, which should be a condition for support under the 
initiative, this would bring the targets agreed at the 1995 Social Summit within 
reach. 

Arms transfers: Ultimate responsibility for excessive military spending rests 
with those who authorize it. However, those who supply the weapons are not 
blameless - and more than four-fifths of all arms transferred are provided by 
permanent members of the Security Council. Action is needed to tackle the supply 
side problems through restrictive arms codes aimed at reducing the transfer of 
weapons, including small arms. More generally, aid donors should seriously 
reconsider the wisdom of supporting governments which prioritize military 
spending over the health and education needs of their people.

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Growth with Equity
Contents PreviousNext

Part 4 - Employment and manufacturing
Manufacturing export growth
Growth and employment
The background to East Asia's success

Selective protection and import substitution
The regulation of foreign investment
Selective liberalization
High savings

Some Mexican lessons for East Asia
National and international action to end instability
Some broad policy lessons} 

East Asia's experience has been at the heart of a protracted debate about the 
role of the state in industrial development. Two competing models have emerged. 
The first is that of a minimalist state, in which the limited nature of 
government intervention has been stressed. While the extensive nature of past 
state intervention is acknowledged in this model, it is claimed that trade 
liberalization, financial deregulation, and adherence to market signals have 
been the primary determinants of rapid growth. The second model has stressed the 
central role of the state as a promoter of industrial development, with trade 
barriers and investment controlling the order of the day. East Asia is typically 
cited as an illustration of the former approach, and Latin America and Africa of 
the latter. 

Reality is more prosaic. East Asian countries have adopted a wide range of 
industrial policies, which vary from case to case and over different time 
periods. What they have shared in common is a commitment to achieving full 
employment at rising real wage levels. Trade, investment, and industrial 
policies have been tailored to this objective, with state interventions aimed at 
optimizing market outcomes and employment opportunities. Working towards full 
employment has been an explicit policy objective. 'Free markets', in the sense 
usually ascribed to industrial development in East Asia, have been conspicuous 
by their absence. 

*partie=titre Manufacturing export growth *partie=nil 
Various features of East Asia's success in manufacturing are well known. In the 
1960s, South Korea and Taiwan achieved industrial growth rates in excess of 10 
per cent a year. The second wave of 'tiger' economies - Indonesia, Malaysia, and 
Thailand - has followed hard on their heels, making the transition from 
dependence on primary commodities to emerge as major manufacturing exporters. 
The share of manufactured exports in total exports has grown from less than 6 
per cent in all three countries to 41 per cent for Indonesia, 61 per cent for 
Malaysia, and 77 per cent for Thailand. In the last 25 years, the share of the 
industrialized countries in global manufacturing value-added has fallen from 88 
per cent to 80 per cent - almost all of this shift is accounted for by the rise 
of East Asian exports. 

 Export growth has been central to the rise in living standards experienced 
across East Asia (see Figure 9). On a per capita basis, the value of exports has 
risen by 14 per cent a year in the 1990s, compared to a rise of 7 per cent for 
Latin America and a fall of 1.6 per cent for Africa. The difference is partly 
related to the composition of exports. Today, the share of manufactured goods in 
Africa's exports is less than 10 per cent, and dependence on primary commodities 
has hardly changed over the past three decades. During the 1980s, deteriorating 
prices for primary commodities erased around 5 per cent of sub-Saharan Africa's 
regional GDP. More broadly, dependence on exports characterized by low 
value-added has contributed to a situation in which the forty-four Least 
Developed Countries, accounting for 10 per cent of the world's population, have 
seen their share of international trade shrink by half - to 0.3 per cent of the 
total - over the past decade. Like sub-Saharan Africa, Latin America remains 
heavily dependent on primary commodities (which account for over one-third of 
export earnings), while its share of world manufacturing trade has stagnated at 
4 per cent since 1970. 

 Success and failure in international trade have been major factor in explaining 
global trends in income and poverty. Because international trade has been 
growing faster than world output, it has acted as a dynamic engine of growth. 
East Asia has benefited because the region has successfully participated in 
global markets, so that the share of trade in GDP has been rising steadily. 
Moreover, most countries in the region have succeeded in raising the value 
content of their exports by moving into increasingly sophisticated, 
knowledge-intensive areas of production such as electronics, machine tools, and 
computing equipment. For most countries in East Asia, success in international 
trade and the development of more diverse and more sophisticated export 
structures has been closely related to success in attracting foreign investment. 
This began in the mid-1980s. But as Figure 10 demonstrates, foreign capital 
inflows accelerated in the 1990s. Today, four countries in East Asia - China, 
Malaysia, Indonesia, and Thailand - account for around 40 per cent of capital 
flows to developing countries. At the other end of the spectrum, sub-Saharan 
Africa accounts for less than 1 per cent. 

It is not only by comparison with sub-Saharan Africa that differences emerge. 
Latin America has also attracted huge inflows of private capital in the 1990s. 
However, a far higher proportion of these inflows have been invested in 
speculative, rather than productive, activity. Unlike East Asia, Latin America 
has been spectacularly unsuccessful in channeling foreign investment either into 
labor-intensive production, or into the transfer of skills and technology. 

*partie=titre Growth and employment *partie=nil 
Between 1986 and 1993, employment in East Asia increased by more than 3 per cent 
a year - a figure which was well in excess of the rate of growth in the labor 
force. Rapid increases in manufacturing output were accompanied by rising real 
wages, averaging between 3 per cent and 6 per cent a year. The contrast with 
Latin America is instructive. Between 1991 and 1995, regional growth in Latin 
America averaged 3 per cent per annum, modest by comparison with the 1970s but 
double the average rate of the 1980s. Over the same period, the unemployment 
rate for the region rose, despite the economic recovery. The inverse 
relationship between growth and employment creation has been a characteristic of 
most countries, with the most extreme case being that of Argentina, where a 3 
per cent growth rate has been accompanied by a 7 per cent rise in unemployment. 
Earlier, we pointed to the 'poverty-reduction elasticity of growth' as a major 
feature distinguishing East Asia from other developing regions. East Asian 
growth has a high elasticity for poverty reduction, in part because the 
employment elasticity of growth is higher. The latter is an indicator of the 
relationship between value-added by manufacturing output growth and the creation 
of employment. For countries such as Mexico, Brazil, India, Pakistan, and the 
Philippines, each percentage point of manufacturing growth produces less than 
one-half of the employment creation experienced in countries such as Indonesia 
and Malaysia. The reason is that: the former countries have achieved industrial 
development by relying on capital-intensive growth. Perversely, employment 
opportunities have been restricted by policies penalizing labor-intensive 
industries, such as high import barriers for basic technologies and other 
imported materials needed to improve productivity. Small-scale industries with 
an export capacity have been forced to purchase from high-cost local suppliers, 
while over-valued exchange rates have further compromised their competitiveness. 
Employment and investment opportunities have been lost as a result.
 
Another explanation for East Asia's success and Latin America's failure in 
translating growth into poverty reduction is that, in the latter case, real 
wages have not increased with output growth in many countries. For the region as 
a whole, real wages were lower in 1995 than in 1981, reflecting the weak linkage 
to growth. Even where jobs are created in the formal sector, there is no 
guarantee that wages will be sufficient to reduce poverty. According to one 
recent report from the Economic Commission for Latin America, a high and growing 
proportion of the poor in the region - more than 40 per cent in some countries - 
are now employed. This reflects the rise of low-waged, often seasonal employment 
in agriculture, with women workers in particular suffering a combination of low 
wages and weak social welfare protection. In Chile, the majority of the poor are 
employed. Whereas in East Asia the pattern is one of growth built on rising 
productivity, with the gains being passed on in the form of rising real wages, 
in Latin America, the pattern is one of low-productivity, low-skill employment, 
with stagnating real wages. 

*partie=titre The background to East Asia's success *partie=nil 
There has not been a single route to East Asia's success in developing a 
manufacturing base capable of sustaining rising real incomes and employment 
level. Still less, has the outcome been the result solely of macro-economic 
management. Social policies and the extension of educational opportunities have 
been crucial to economic growth. This Report does not attempt to review the wide 
range of national policies pursued. Once again, however, some broad trends can 
be identified. Four of the most important are the following: 
*partie=titre (I)  Selective protection and import substitution *partie=nil  
Most countries in the region developed their manufacturing base behind high, but 
carefully structured, protective barriers. During the 1950s and the first half 
of the 1960s South Korea developed a labor-intensive manufacturing industry 
protected by direct import controls. However, trade policy was more liberal for 
the essential imports needed to increase productivity. After the mid-1960s, 
government policy combined import protection with export promotion, providing 
companies with time-bound support in the shape of subsidized credit and 
preferential access to foreign exchange. In both South Korea and Taiwan, exports 
surged after the early 1960s, yet the trade regime was a model of controls 
designed to promote domestic investment. Less successful as a model of import 
substitution was Indonesia, where average tariffs in excess of 500 per cent 
prevailed in the 1970s, shielding domestic companies that were uncompetitive and 
dominated by vested interests. Not only did the manufacturing sector fail, at 
this stage, to make a contribution to exports, there is evidence that it slowed 
overall growth rates and limited employment creation. By the early 1980s, 
subsidies to loss-making state enterprises accounted for 30 per cent of GDP. In 
Malaysia, the Proton car has become a symbol of the problems and potential in 
import substitution. This is the product of a joint venture between the state, 
domestic investors, and foreign transnational companies. After the venture 
almost collapsed in the 1980s, by the early 1990s, domestic suppliers were 
providing 80 per cent of components and exports began to increase, providing a 
stimulus to investment and employment. 

*partie=titre (ii)  The regulation of foreign investment *partie=nil  
East Asia has been a focal point for direct foreign investment since the 
mid-1980s. Initially, the impetus came from the 1987 Plaza Accord, which 
devalued the dollar against the yen and gave Japanese companies an incentive to 
relocate to production sites with weaker currencies. Even before this, however, 
Malaysia had combined import protection with generous incentives to foreign 
investors under its New Economic Policy. These investors concentrated their 
activities in the electronics sector, where basic assembly operations led the 
export boom. One of the few requirements was that foreign investors cover the 
costs of their imports through their export earnings - a measure designed to 
protect the balance of payments and limit competition for local capital 
resources. In Indonesia, the surge in direct foreign investment after the early 
1980s was accompanied by imports of new technologies which led to a dramatic 
increase in exports of textiles, clothing, and footwear. From different policy 
perspectives, both South Korea and Singapore tightly regulated foreign 
investment. South Korea prohibited foreign majority-ownership, reserving 
strategic industrial sectors for domestic investors who were provided with 
incentives for building local capacity. In Singapore, foreign investment was 
encouraged, but channeled into high value-added areas such as fibre optics, 
banking, and precision technologies. Foreign investors were required to meet 
standards for training local staff and transferring technologies. Other 
countries have been less successful in integrating foreign investment. Under the 
New Economic Policy, Malaysia provided generous incentives to foreign investors. 
At one level the results were impressive. The share of manufactured goods in 
exports rose from 12 per cent to almost 80 per cent between 1970 and 1990, with 
electronic goods assembled by Malays leading the way. Employment more than 
doubled and real wages rose at rates in excess of 3 per cent a year. However, 
Malaysia failed to develop linkages between domestic producers and foreign 
enterprises, which operated in an import-export enclave. Technology and skills 
transfer was limited. With Malaysia now facing growing competition from 
cheaper-labor economies in the region, these policy failures have emerged as a 
threat to continued prosperity. 

*partie=titre (iii)  Selective liberalization *partie=nil  
Starting from South Korea in the late 1960s, most East Asian countries have 
moved towards more liberalized systems, often under external pressure. 
Malaysia's Industrial Master Plan (1986-1995) relaxed the import controls of the 
New Economic Policy, although import barriers remained high and foreign 
ownership in domestic industries was limited. In Indonesia, liberalization 
started in 1983, but progress in this direction has been limited. Disputes 
between the Indonesian government and the industrialized countries over the 
protection afforded to the national car industry, underlies the growing tension 
between industrial policy in the region and international trade rules. In most 
areas of manufacturing, there has been little liberalization in the 1990s. It is 
a similar story in Thailand, although tariffs in most areas remain low by 
international standards. 

As the above account suggests, there are dangers in attempting to draw universal 
lessons from East Asia. There are also dangers in over-stating the region's 
success. Thailand has been highly ineffective in developing the infrastructure 
for transport, training, and research and development which was crucial to the 
success of South Korea and Taiwan. Failure to upgrade labor skills has reflected 
the deeper failure of state policy in education discussed earlier. In Malaysia, 
the economy remains heavily dependent on foreign capital and technology for its 
manufactured exports. Linkages between the export-oriented transnational company 
subsidiaries and the rest of the economy remain exceptionally weak. Both 
countries have suffered from a failure to develop more integrated industrial 
structures. The same is true of Indonesia, where the bulk of foreign investment 
is concentrated either in unskilled assembly operations, which create jobs but 
offer little by way of skills transfer; or in extractive industries such as 
mining, which create few jobs and wreak environmental havoc, in return for 
increased foreign exchange earnings. 

Reliance on cheap labor as the main source of export growth has also brought 
with it intra-regional tensions. Wages are higher in countries such as Malaysia, 
Thailand, and Indonesia than in Vietnam or China, raising the specter of a 
massive relocation of capital - and employment - as these countries develop. 
Some electronics companies have already relocated from Malaysia to Vietnam. So 
far, however, there is limited evidence of footloose foreign investors shifting 
the location of production sites. Even in labor-intensive sectors, the costs of 
establishing operations are relatively high, as are the costs of relocation. 
This is a deterrent to relocation. But if exaggeration is unwarranted, so too is 
complacency. Clothes retailers in Europe, for instance, are shifting their 
sourcing towards countries with lower wage levels. 

*partie=titre (iv)  High savings *partie=nil 
Another of East Asia's strengths has been its capacity for savings. Average 
savings rates in the region are around 30 per cent, compared to under 20 per 
cent in Latin America. Low-income China saves an extraordinary 40 per cent of 
national income - middle-income Mexico saves 15 per cent. These high levels of 
savings have enabled investment to be financed domestically, reducing exposure 
to the problems of debt and dependence on aid which have characterized Latin 
America and Africa. 

*partie=titre Some Mexican lessons for East Asia *partie=nil 
Uniquely in the developing world, East Asia has combined sustained and rapid 
economic growth with stability. Central banking authorities have played a 
crucial role in maintaining low inflation and the stable exchange rates which 
are essential to export success. Contrasts between the 'smoothly adjusting' 
experience of East Asia and the roller-coaster of hyper-inflation and 
devaluation in Latin America have become the stuff of text book macro-economics. 

Recent turmoil in some of the previously most stable markets has called into 
question the continuation of the East Asian success story. After a protracted 
export and investment boom between 1990 and 1995, 1996 witnessed a sharp decline 
in export growth. Overall export growth in 1996 fell to 5 per cent from 22 per 
cent the previous year, prompting some to anticipate a Mexican-style collapse. 
The two countries worst affected are Thailand and Indonesia, which have been 
among the least successful in converting investment into rising productivity. 
Current account deficits have widened to alarming levels in some countries. 
While there is no benchmark for a sustainable current account, deficits in 
excess of 5 per cent of national income are a source for concern in almost any 
situation. The Philippines and Indonesia are approaching this mark; Thailand has 
gone far beyond it, with a deficit equivalent to 7 per cent of national income. 
Policy makers in all three countries have turned a blind eye to the impending 
crisis for at least three years. Investment levels have been high, but an 
increasing share of activity has been concentrated in speculation rather than 
production. Property markets and stock exchanges have boomed, acting as a magnet 
for foreign capital. In Thailand, local companies and financial institutions 
built up dollar debt while interest rates were low, using much of it to finance 
a building boom. In the two years to 1996, foreign borrowing by Thai financial 
institutions doubled to $77bn. As the current-account deficit widened in the 
face of the fall in exports, and the government turned to high interest rates to 
maintain the value of the baht, a financial crisis swiftly ensued. Manufacturing 
sectors were also hit hard by the rise in interest rates, with unemployment 
levels rising and output growth falling. Thailand's foreign exchange reserves 
were depleted by an ultimately unsuccessful effort to fend off devaluation. 
The Philippines, Indonesia, and - less spectacularly - Malaysia were all forced 
to follow Thailand in devaluing. In each case, the combination of speculation, 
rising foreign debt, and a slowdown in exports has contributed to the problem. 
Between 1993 and 1996, Indonesia's foreign debt increased from $90bn to $105. 
With exports growth slowing and debt servicing already absorbing one-quarter of 
export earnings, serious external debt problems loom on the horizon for the 
first time in 20 years. Having emerged belatedly from the debt crisis of the 
1980s, the Philippines also faces acute dangers, partly as a consequence of a 
reckless stock market boom. Between 1994 and 1996 alone, the traded value of 
stock increased from $13bn to $25, much of it going into office blocks. 
Parallels with the Mexican crisis can be over-stated given the high level of 
savings activity in East Asia, but the warning lights are clearly visible. 
There is now a real danger of the financial crisis being converted into a social 
crisis. The Philippines and Thailand have already been forced to turn to the 
International Monetary Fund (IMF) for assistance. This does not augur well for 
poverty reduction. In Mexico, the IMF 'rescue plan' came complete with a fiscal 
austerity package which threw the economy into reverse gear, decimated social 
programmes, and led to a massive increase in unemployment. Real wages are not 
expected to recover until after 2000 (see Box 4.1). What are the policy lessons 
to emerge?       
      
*partie=titre National and international action to end instability *partie=nil 
For political leaders in the region there is a need to curb currency 
speculators, who provide a convenient scapegoat for domestic policy failure. 
Financial deregulation, the weakening of currency controls, and inadequate 
regulation of stock markets has created a climate in which speculative activity, 
domestic and foreign, has flourished. That said, speculative investments and 
currency trading in pursuit of quick profits has contributed to the crisis in 
East Asia, just as it did in Mexico. Domestic policy reforms alone will be 
unable to address these problems, which are a consequence of the globalization 
of world capital and currency markets. The deregulation of capital markets, 
cheap telecommunications, the development of a wide range of financial 
derivative products, and instant access to markets through electronic trading, 
has fundamentally shifted the balance of power between governments and 
speculators in favor of the latter. Daily turnover on foreign exchange markets 
has reached $1.2 trillion dollars, pointing to a concentration of financial 
power against which even the world's richest countries are not immune. 

There is scope for limiting the destructive capacity of currency speculation. 
For instance, a uniform tax on foreign exchange transactions of around 0.25 per 
cent would be sufficient to erode the small margins and currency alignment 
shifts exploited by speculators. The incidence of taxation would fall heaviest 
on yields from short 'round trips' where speculators send a portfolio of 
currencies around the world stopping off en route to take speculative profits. 
Long-term direct foreign investment would be relatively unaffected. Governments 
in Europe, Latin America, and now East Asia have all suffered heavily at the 
hands of currency speculators - and they share a common interest in adopting a 
tax designed to curtail their power. 

Another international problem is the absence either of effective regulatory 
structures, or institutional arrangements for responding to crises as they 
emerge. The transformation of global markets has proceeded at a rapid pace, 
without the development of global financial institutions to supervise markets 
and report on capital flows. A formal institution with real authority is 
genuinely needed. Such an institution would need the political authority to 
demand full disclosure from public financial institutions and private markets, 
and to restrict speculative trading activity. Turning to the question of crisis 
management, the Group of Seven countries were persuaded by the Mexican crisis to 
make the IMF the global lender-of-last resort. 

It was a bad choice. The IMF responded to the Mexican crisis by ensuring that 
foreign investors were repaid, while the costs of adjusting to the financial 
collapse were transferred to the poor in the form of reduced employment and 
lower public spending on health and education. The interests of Wall Street were 
given precedence over the needs of poor Mexicans. This followed the pattern of 
IMF debt-management in the 1980s, when repayments to commercial bank creditors 
were given priority over social and economic recovery. The danger now is that 
the Mexican 'rescue' model will be imposed on Thailand, with the interests of 
the poor sacrificed to those of foreign speculators. What is needed is a more 
equitable approach to debt management, in which speculators absorb part of the 
costs of the debt crises to which they contribute. 

*partie=titre Some broad policy lessons *partie=nil 
There are no blueprints for successful industrial policy to be drawn from East 
Asia. As in other areas, however, there are some broad lessons of relevance to 
national and international policy formulation. 

One lesson is that 'big bang' approaches to liberalization, in which trade 
restrictions are withdrawn across-the-board, financial systems deregulated, and 
foreign investment controls abandoned, are unlikely to succeed. In much of 
sub-Saharan Africa and Latin America, labor-intensive industries have collapsed 
under the weight of competition from imports. Much of the textile industry in 
West Africa falls into this category. Meanwhile, the deregulation of finance and 
investment can have the effect of concentrating growth in areas - such as 
financial services - where employment linkages are weak. 

The pace and sequencing of reforms is important. So, too, is the composition of 
employment and production in the sectors subject to liberalization. The case of 
Mexico illustrates in extreme form how unbalanced liberalization and reckless 
financial deregulation can concentrate the benefits of liberalization on the 
rich and the costs on the poor. More generally, trade liberalization cannot be 
pursued successfully in the absence of adequate social policies. Countries such 
as Thailand, Indonesia, and China began a process of liberalization after they 
had invested heavily in attempting to raise the skills levels of their work 
forces. In Latin America, trade liberalization has been pursued without 
sufficient attention being paid to policies needed to improve productivity 
through education and skills training. Trade liberalization has often cost jobs 
rather than created opportunities. 

Investment policy can play a crucial role in raising skills levels. In South 
Korea, foreign investment was tightly controlled in the interests of developing 
indigenous capacity. In Singapore, it was regulated to ensure that skills and 
technology were transferred. The danger now is that new international rules 
designed by the industrialized countries in the interests of powerful 
transnational companies will limit the capacity of governments to regulate 
foreign investment in the public interest. Under the Multilateral Investment 
Agreement on Investment (MAI) drawn up by the OECD as the framework for a 
multilateral agreement, governments will be prevented from establishing controls 
in areas such as profit repatriation, technology transfer, local-content 
requirements (under which investors are required to source their operations from 
local firms), skills training, and balance-of-payments provisions (i.e. controls 
requiring foreign investors to cover the costs of their own imports). These are 
the very controls which have enabled East Asian countries to successfully use 
foreign investment for the creation of long-term growth and employment. 
Surrendering sovereignty in this area will carry the threat of a wave of 
anarchic-capitalism, in which governments effectively lose the capacity to 
regulate economic life in the interests of their citizens. 

Export opportunity is an often neglected component of the East Asian success 
story. The first generation of 'tiger' economies emerged during a period in 
which world trade was expanding and becoming increasingly open. Today, many of 
the poorest countries face a bewildering array of tariff barriers. Under the 
Uruguay Round these barriers were reduced, but by considerably less for 
developing countries than for developed countries. In areas such as textiles, 
leather, oilseeds, and other agricultural goods, import barriers remain a 
powerful deterrent to diversification. Removing that deterrent would do much to 
enable poor countries to trade their way into recovery. 

International action is also needed to remove the millstone of foreign debt, 
which has been happily absent from the collective necks of the East Asian 
countries. The burden is most serious in sub-Saharan Africa. If South Africa is 
excluded, the region's debt-to-export ratio is 327 per cent, compared to a World 
Bank sustainability ceiling of 200-250 per cent. High levels of debt overhang, 
which this figure reflects, act as a major deterrent to investment. Meanwhile, 
debt servicing - amounting to around $10bn annually - has the effect of reducing 
the foreign exchange available for essential imports, hampering the 
competitiveness of local industries. The Highly Indebted Poor Countries (HIPC) 
debt initiative could act as a spur to growth by reducing debt overhang and 
increasing import capacity. However, it provides insufficient debt relief over 
an unacceptably long time-frame. A further problem is the requirement that 
potentially eligible countries comply with IMF stabilization programmes, which 
have a poor track record in restoring growth and investment.

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Part 5 - Rural development through redistribution
Land reform as an engine of growth
Success and failure in agrarian reform
Building an enabling environment
Food dumping threats
Institutional credit
Some policy lessons}

Rapid industrial development has been one of the hallmarks of growth with equity 
and poverty reduction in East Asia. Investment in human development was a 
precondition for the region's accomplishments, creating the foundation on which 
countries were able to develop labor-intensive industries and then, through 
innovation and rising productivity, make the transition to more sophisticated 
areas of production. The social and macro-economic policy foundations for East 
Asia's success were discussed in the previous two sections. Here we discuss the 
third: the redistribution of productive assets and the creation of opportunities 
in rural areas. Policies in this area enabled poor people to participate in 
growth as producers and investors, rather than as passive beneficiaries of 
income transfers from the top down. Allied to other pro-poor policies, 
redistribution helped to unleash the productive potential of poor people and to 
spread the benefits of growth more widely, demonstrating again that poverty 
reduction can be a cause as well as an outcome of faster growth. 

The success of East Asian countries in reducing rural poverty has been achieved 
partly through developments beyond the agricultural sector, through migration to 
urban centers, and industrial employment. Policies within the rural sector have 
also been important. Most importantly, rural development and poverty reduction 
have been built on policies and programmes which support smallholder 
agriculture. In varying ways, Korea, Taiwan, Indonesia, Malaysia and - more 
recently - China and Vietnam have all followed this strategy. Each of these 
countries broke up large-scale holdings and encouraged their development into 
smallholder systems. As a result, the share of crops grown by smallholders 
increased. Redistributive land reform was part of a wider strategy. Each of the 
East Asian countries also invested heavily in agricultural infrastructure and 
technology for smallholders. Specific interventions have included investment in 
marketing infrastructure and services, the creation of rural credit and savings 
facilities, protection against cheap imports, and price stabilization. This 
smallholder strategy has not sacrificed efficiency for equity. Evidence from a 
number of countries confirms the superior productivity of smallholder 
agriculture. It also points to stronger linkages between smallholder production 
on the one side, and employment creation and poverty reduction on the other. 
The dramatic decline in rural poverty in East Asia makes the region a compelling 
model for others to follow. This is especially true of countries where highly 
concentrated land structures sacrifice both efficiency and equity to the power 
of vested interests. 

The majority of poor people in developing countries - well over half outside of 
Latin America - depend on agriculture for their livelihoods. In Latin America, 
the rural poor are a minority, but their poverty is far deeper than in urban 
areas. In all developing regions, inadequate access to land is one of the 
primary causes of rural poverty. According to the Food and Agricultural 
Organization of the UN, over one-third of smallholders in sub-Saharan Africa and 
Asia subsist on plots too small to support their families. Another 180 million 
people worldwide are landless, and among the poorest of the poor. 

Access to land is one of the most basic requirements for participation in 
growth. Another is access to markets. Poverty is often concentrated in areas 
where inadequate access to rural feeder roads, and poor storage facilities 
restrict livelihood opportunities. In most cases, investment in marketing 
infrastructure is concentrated around commercial (usually irrigated) farm areas, 
while more marginal (usually rain-fed) areas are bypassed. The same applies to 
public investment in agricultural research. Staple food crops such as sorghum, 
millet, beans and cassava, which are grown and consumed by poor people, are 
given a low priority. This is reflected in the slow rate of increase for 
production and yields, and is an important factor behind rural poverty. Access 
to capital can act as another constraint on production. Institutional finance is 
unavailable to around 80 per cent of rural households in developing countries. 
Women farmers have the worst access of all. In Africa, women farmers account for 
almost two-thirds of the agricultural labor force and 80 per cent of food 
production, yet they receive only 1 per cent of the credit provided to 
agriculture. To the structural problems can be added wider policy problems. For 
instance, prices are often biased against agriculture, with over-valued exchange 
rates reducing the price for competitive food imports and depressing the local 
currency value of exports. 

The failure of governments to remove the multiple constrains on the productivity 
of the rural poor is rooted partly in an unwillingness to challenge powerful 
vested interests and risk political instability; and partly in a conviction that 
smallholder agriculture is less efficient than large-scale-commercial 
agriculture. Evidence from East Asia suggests that the risk assessment is 
flawed, and that the efficiency assessment in comprehensively wrong. *{(see Box 
5.1).}  

*partie=titre Land reform as an engine of growth *partie=nil 
Radical land redistribution, the elimination of absentee land ownership, 
resettlement, and the imposition of land ceilings have acted as powerful forces 
for empowerment and the creation of opportunities for the rural poor across much 
of East Asia. In the 1950s, South Korea and Taiwan followed Japan in introducing 
reforms which displaced landlords, set limits on land ownership, and gave 
tenants a stake in the land. From 1960-1970, hundreds of thousands of 
smallholders were resettled on large-scale plantations in Malaysia and given 
titles to individual plots. The result was a marked reduction in the inequality 
of land holding. Indonesia started out with a more equal land structure, but it 
too embarked on a major resettlement programme over the same period, with 
plantations being broken up and parceled out to smallholders. From a different 
political direction, China and Vietnam broke the power of landlords by 
collectivizing land-holdings. The end result of these reforms is that East Asia 
has the world's most equal system of land ownership. The Gini coefficient for 
land distribution (as for income, this moves from 0 [perfect equality] towards 1 
as inequality increases) is 0.33 compared to 0.70 for Latin America. Land 
redistribution enabled poor rural households to impart a new dynamic to the 
growth process. 

'Getting the prices right' by removing distortions against the poor was part of 
the story - but only one part. Until the late 1970s, farmers in China were 
required to work collectively and deliver their surpluses to government. In 
effect, they were government employees receiving a wage dictated by the state. 
Private initiative was stifled and production stagnated. The situation changed 
dramatically with the introduction of the 'household's responsibility' system, 
under which households assumed responsibility for individual plots. Marketing 
remained in the hands of the state, but households were allowed to sell their 
produce separately and retain the income. This provided peasants with greater 
incentives to increase output and productivity. Agricultural growth accelerated 
to over 7 per cent a year in the six years after 1978 - double the average for 
the previous ten years. Meanwhile, the incidence of rural poverty, measured 
against the national minimum food consumption poverty line, fell from 28 per 
cent to less than 10 per cent as rural incomes doubled over the same period. 
Good access to land and productive inputs, the highly developed marketing 
infrastructure, and a well-financed programme of agriculture research meant that 
poor people were in a position to respond to - and benefit from - market 
opportunities. 

The same picture emerges from Vietnam, where rural producers participated in a 
collective system of labor which limited incentives. By the mid-1980s, the rural 
economy was in crisis and food self-sufficiency in steep decline. As in China, 
rural communities were locked into a situation of egalitarian stagnation. This 
changed in 1986 when Vietnam followed the Chinese example. Under doi moi 
government retained a quasi-monopolistic position in the marketing of rice, but 
individual households were given responsibility for their own piece of land - in 
effect, decollectivizing their labor. The results were astonishing. Within six 
years Vietnam was the world's third largest exporter of rice after Thailand and 
the US, with agricultural output rising at rates of over 6 per cent a year. In 
both cases, there was a high level of participation in the expansion of the 
rural economy with the benefits widely - if unequally - shared. 
      
*partie=titre Success and failure in agrarian reform *partie=nil 
East Asia points to the potential inherent in land reform. However, there are 
many examples of land reform failing because of poor design and inadequate 
attention to supportive measures, such as the development of marketing 
infrastructure. Prior to post-war China and Vietnam, the Mexican land-reform 
programme of the 1930s was the most equitable in history. It failed to empower 
peasants economically because associated development measures were weak. The 
same fate befell the limited land-resettlement programme introduced after 
independence in Zimbabwe. Productivity on resettlement farms remains lower than 
in comparable communal land areas. In the Philippines, a Comprehensive Agrarian 
Reform Programme law (CARP) was passed ten years ago. Its express purpose was to 
enhance smallholder access to land. This is an imperative for poverty reduction 
in the Philippines, where 36 per cent of land is controlled by 2 per cent of 
producers. Yet ten years on, less than one-third of the land earmarked for 
redistribution has been transferred, pointing to a failure of political will. 
But if failure has characterized much of the land reform introduced outside of 
East Asia, there are success stories to confirm the lessons from the region. One 
is West Bengal, where the implementation of land ceiling laws resulted in land 
transfers to 1.4 million people. Another 2.1 million tenants benefited from 
Operation Barga, a legislative programme launched in 1978 to fix the share of 
the crop that could be claimed by landlords, provide security of tenure, and end 
arbitrary evictions. In total, around half of all households in West Bengal 
benefited from the reforms - over 40 per cent of the total number of 
beneficiaries in India. Effects on production have been positive. In pre-land 
reform West Bengal production growth was around 30 per cent lower than the 
national average, and well below the state's rate of population increase. During 
the 1980s food grain output rose at 3.4 per cent compared to a 2.7 per cent 
national average. Human development indicators also improved. Central to the 
success of West Bengal's programme was popular participation in the 
implementation of reforms. Village panchayats, or councils, provided a political 
base for the state government, registering claims and titles and defending the 
rights of beneficiaries. As such they played a central role in redistributing 
power from landed elites to an alliance of small farmers and the landless poor, 
creating the political conditions in which land reform could succeed. 

In situations of extreme land inequality and high levels of rural poverty, there 
is no alternative to land redistribution as a first step towards poverty 
reduction. The case of Zimbabwe, where inequality in land ownership has excluded 
the rural poor form opportunities to participate in markets, graphically 
illustrates the problem. While it is an extreme case, it has similarities with 
Kenya and neighboring countries where land ownership is becoming more 
concentrated. It is also not untypical of the type of land ownership patterns 
found in Latin America, where agrarian reform has been long delayed but remains 
an imperative for poverty reduction. 

If the case for land reform is so strong in social and economic terms, why is it 
so unwillingly embraced by governments? Largely because of the power of vested 
interests. In Brazil, less than two per cent of landholders own over 80 per cent 
of cultivable land. The largest 35,000 alone own an area equal in size to 
Germany, France, Spain and Austria, with Switzerland thrown in for good measure. 
At the other end of the rural hierarchy are up to 4 million landless, or 
near-landless rural households. Many were uprooted to make way for large 
commercial estates in the 1970s, when Brazil emerged as a major power in 
agricultural export markets. The country is now one of the largest suppliers of 
high-protein animal feedstuffs to Europe. Meanwhile, impoverished rural 
households are unable to feed themselves, their nutritional needs occupying a 
lower priority in national policy than the nutritional needs of European cows. 
Since the mid-1980s, popular demands for land reform have been growing in force. 
The Movimento do Trabalhadores (MST) has emerged as a major force, supporting 
occupation as the first step towards social justice and a more rational land 
system. Political support for the MST has been growing, in part as a consequence 
of recognition that Brazil's land system is grossly inefficient as well as 
grossly unjust. Only 14 per cent of the commercial farms land is under 
cultivation, wasting one of the country's prime assets. In principle the 
government now recognizes the strength of the MST's demands, but is moving 
slowly - offering to settle up to 200,000 people by the end of the decade 
instead of supporting a radical programme of land redistribution. Its hesitation 
is rooted not in economic logic, but in the power of national and provincial 
elites and vested interests.       

*partie=titre Building an enabling environment *partie=nil 
Land redistribution is a potential first step towards poverty reduction and 
improved efficiency. It is not a stand-alone strategy. To varying degrees, 
governments in East Asia have attempted to support rural livelihoods and promote 
productivity through a mixture of price incentives and infrastructural support. 
An important objective in most cases has been the attainment of national 
self-sufficiency through smallholder producers, with national food systems 
protected against competition from imports. 

The case of Indonesia is instructive. In the decade from the mid-1970s to the 
mid-1980s the country went from being the world's largest food-deficit country - 
importing over 2 million tons of rice annually - to self-sufficiency. Public 
investment in irrigation, the promotion of heavy-yielding varieties of rice, and 
a phenomenal increase in the use of artificial fertilizers were central to this 
achievement. So, too, was price stabilization. The government marketing agency - 
the Bulog - operated a food reserve which enabled it to keep prices above a 
floor and below a ceiling. It was also given sole authority to import grains, 
ensuring that cheap imports did not drive down local prices below the agreed 
floor. This reduced the risks of investment, and raised returns to smallholder 
rice farmers, helping to accelerate the move towards self-sufficiency. 

Not all governments in the region have succeeded in protecting rural producers 
against fluctuations in world prices. In Thailand, the government was less 
effective during the 1980s in providing price support, with damaging 
consequences for rural poverty. In the mid-1980s, subsidized over-production and 
export dumping by the United States and the European Union reduced world prices 
for food grains to their lowest levels since the 1930s. Rice was one of the 
commodities affected, with the US using its Export Enhancement Programme to 
expand market shares. In Indonesia, the Bulog protected producers from the price 
slump by effectively banning imports. In Thailand, authorities allowed domestic 
prices to fall to international levels. Rural poverty increased sharply in 
Thailand, especially in the poor rice-producing areas of the north-east, while 
it continued to decline in Indonesia. Meanwhile, productivity gains began to 
slow in Thailand during the second half of the 1980s as a result of declining 
investment. 

Contrasts between countries in East Asia and the rest of the developing world 
are marked. In much of sub-Saharan Africa and Latin America governments have 
systematically encouraged cheap food imports as a means of reducing food prices 
for urban populations. While Indonesia was using its oil revenues in the 1980s 
to invest in the productive potential of its food producers, Nigeria went in the 
other direction, using oil revenues to finance food imports. Between 1975 and 
1985 it made the transition from being self-sufficient in basic staples to 
become sub-Saharan Africa's largest importer. The rest of sub-Saharan Africa 
followed a similar pattern. Production of local food staples such as cassava and 
millet fell by an average of 1 per cent per capita over the two decades up to 
1990. Competition from cheap - usually subsidized - imports has been an 
important factor reducing incentives to producers in many countries. Dependence 
on the same imports has increased at an alarming rate. Today, sub-Saharan Africa 
spends around one-third of its foreign exchange earnings on imported foodstuffs. 
This represents a huge diversion of import capacity in a sector where, with 
adequate support, smallholder farmers could achieve national food self-reliance. 
It also leaves the region in a precarious food security situation, with foreign 
debt and trade problems jeopardizing the capacity to maintain imports. 

*partie=titre Food dumping threats *partie=nil 
The evidence from East Asia suggests that protection against subsidized food 
dumping is crucial to the development of rural prosperity and poverty reduction. 
However, international trade arrangements have emerged as a potential obstacle 
to effective action. In Mexico, the national maize market is being liberalized 
under the North American Free Trade Agreement - a move which will bring domestic 
maize producers into direct competition with (subsidized) farmers in the US 
Mid-West. Since most Mexican peasant farmers grow corn on poor rain-fed land 
with low yields (one-quarter of the US average) and little investment in inputs, 
corn imports from the US will undermine local producers. According to one study, 
over 2 million livelihoods could be lost as a result, most of them in rain-fed 
areas where the highest incidence of poverty is to be found. 

From a different direction, similar threats face some of the poorest producers 
in the Philippines. Under the Uruguay Round world trade agreement, the 
Philippines has committed itself to removing import quotas for corn and 
replacing them with tariffs, which will be reduced by half between now and 2004. 
Projections suggest that cheaper imports from the US and Thailand will lower the 
household incomes of corn-producing households by, 15-30 per cent. The social 
costs could be high. Around 1.2 million households in the Philippines depend on 
income from corn sales for their livelihoods, concentrated in Mindanao and the 
Cagayan Valley. It has been estimated that around one-quarter of these 
households could lose their livelihoods as a direct consequence of market 
liberalization. The social costs will be enormous. Around half of corn producing 
households live below the poverty line. Infant mortality rates in both of the 
main producing regions are among the highest in the country. Apart from the 
direct effects on corn-producing households, the wider rural economy will suffer 
as falling incomes translate into reduced demand for locally-produced goods. 
Mexico and the Philippines illustrate wider problems associated with 
liberalization in markets characterized by high levels of rural poverty. Weak 
competitiveness in the smallholder sectors of both countries is partly a 
consequence of inadequate support to smallholders. In the Philippines, public 
spending on rural infrastructure is lower as a share of GDP than in any other 
Asian country. Over half of the country's barangays lack all-weather roads, 
raising the costs of marketing. Roads are particularly poorly developed in the 
corn producing regions of Mindanao, which is one of the reasons for the low 
competitiveness of domestic produce against imports. 

In both countries, trade liberalization is seen by governments as part of a 
wider strategy to boost economic growth by forcing domestic food producers to 
compete against imports, while expanding agricultural exports. From a 
distributional perspective the problem with this approach is that the winners 
from export opportunities are not necessarily the same as the lose from import 
liberalization. In Mexico, the growth point for the export-oriented part of the 
rural economy is located in the irrigated districts of the North Pacific Coast, 
the valleys of El Bajo and the coastline along the Gulf of Mexico. Production is 
dominated by a few thousand large commercial farms exporting fruit and 
vegetables to the US. Meanwhile, the smallholder sector is collapsing under the 
weight of government neglect and competition from imports. In terms of land use, 
the fruit and vegetable sector accounts for about 6 per cent of cultivated area, 
but 40 per cent of the value of exports; the maize sector accounts for half of 
cultivated land, the majority of peasant livelihoods, and only 20 per cent of 
output. Rain-fed smallholder areas, where the majority of losers will be found, 
will inevitably be subject to out-migration, with a growing number of women 
joining a rural labor force employed on a casual basis on commercial farm 
estates. The overall effect will be to widen the gap between rich and poor 
producers, and between the 'misery belt' in the South and wealthier states 
linked to the US economy in the North. 

'Protectionism' in agriculture is not an inherently pro-poor strategy. In 
Nigeria, large-scale commercial wheat farmers have absorbed huge subsidies, with 
a few producers benefiting at the expense of the many. By contrast, because the 
vast majority of rice farmers in Indonesia are smallholders, infrastructural 
investment, extension services, and price support had positive distributional 
effects, while at the same time helping to underpin the attainment of food 
self-sufficiency. Another strength of price support in Indonesia was the fact 
that domestic prices were maintained at prices which were not wildly out of line 
with (unsubsidized) world market prices, limiting costs and acting as a check on 
efficiency. 

Whatever the broad case for and against protectionism, the case for 
liberalization in world markets as they presently operate is weak. These markets 
are dominated by the OECD countries, which collectively spend around $180bn 
annually on agricultural subsidies, including export subsidies. This represents 
around 40 per cent of the total value of their farm output. The US, the world's 
largest exporter and a 'crusader' for free trade in agricultural matters, spends 
in excess of $16bn annually in subsidizing production and exports. The European 
Union spends considerably more. Faced with competition on this scale from the 
treasuries of the world's wealthiest countries, smallholder farmers in the 
developing world will inevitably suffer lost livelihood opportunities and lower 
incomes. 

*partie=titre Institutional credit *partie=nil 
Along with agrarian reform and appropriate pricing policies, access to credit is 
another part of the integrated strategy for growth, equity, and poverty 
reduction. Research has consistently shown that poor producers are a good risk 
and are able to secure high returns on limited investment. Repayment rates for 
small-scale credit schemes in excess of 90 per cent are not uncommon - and they 
are not matched by a comparable repayment performance on the part of subsidized 
credit agencies serving large-scale producers. From a broader livelihoods 
perspective, credit services can provide assistance in times of crisis, averting 
the need for households to engage in distress sales of assets, and provide the 
investment resources that enable people to seize market opportunities. In 
Vietnam, the number of borrowers from the Vietnam Bank of Agriculture increased 
seven-fold in the first half of the 1990s, to over seven million people, as 
rural producers responded to the opportunities created by market reforms. 
Credit, however, is only one part of the equation. The poor can also save, and 
their savings can provide the resources needed to develop credit facilities at a 
local level. Where available, savings services enable people to store wealth as 
an insurance strategy, to accumulate funds for future investment in areas such 
as education and production, and to secure a return on their assets. 

Effective credit and savings institutions providing micro-finance can enhance 
the position of the poor by providing a secure haven for savings, with interest 
payments preventing their erosion through inflation; and by decreasing risks and 
facilitating productive investment. In the absence of credible financial 
institutions, poor people develop their own informal savings and credit 
arrangements. There are an infinite variety of informal 'self-help' saving 
schemes operating in communities across the developing world, and an equally 
infinite variety of informal lending schemes. In some cases, especially where 
creditors enjoy a monopolistic position, the latter can be highly exploitative. 
Non-government agencies have become extensively involved in credit provision. 
Perhaps the best known example is that of the Grameen Bank in Bangladesh, which 
provides credit to 2 million people, most of them women who would otherwise be 
excluded. At the other end of the scale are a wide range of small-scale 
initiatives. In the Eastern Province of Zambia, Oxfam works with women farm 
co-operatives of between ten and fourteen members, supporting revolving credit 
funds. This is an area in which four out of every five households live in 
poverty, and where formal credit is largely absent. The revolving credit funds 
have enabled women farmers to borrow at subsidized interest rates to purchase 
seeds, tools and other necessities. Repayment rates have been high, suggesting 
that the credit has been turned into productive investment. 

In Mexico, another of Oxfam's partners, the Regional Union of Support to Farmers 
(URAC), has developed an integrated savings and credit system servicing 5000 
members. Its interest rates are broadly linked to those in the wider market, but 
it provides services which small producers are unable to get from commercial 
banks, whose transaction costs and charges are prohibitive for small savers. 
Because URAC - like the Bank Ralcycat Indonesia (BRI) - mobilizes local savings, 
it is less dependent on support from external donors or borrowing in local 
markets to finance loans. Only savers are entitled to borrow, creating a sense 
of ownership. Recent research by Oxfam has shown the important role played by 
URAC in enabling its members to survive in hard times (for instance, in the 
event of seasonal unemployment or sickness), to meet the cost of school and 
health fees, and to finance investment. 

But despite the many success stories and a wildly exaggerated press, 
micro-finance projects have their limits. Targeting the poor is administratively 
difficult and costly. In some cases the intended beneficiaries become 'carriers' 
for non-target groups. This is a problem for the Grameen Bank, where recent 
research has shown women borrowers assuming repayment responsibility for funds 
transferred to men. Ultimately, however the real problem with micro-credit 
projects is that they will always be insufficient to meet the needs of the poor. 
Many schemes are unsustainable, in that they are heavily dependent on external 
funding and what amount to interest rate subsidies which, if extended, would 
render them unaffordable. What are needed are financial institutions which, 
operating in local and national markets, can mobilize local savings and provide 
credit through arrangements adapted to meet the needs of the poor. 

Indonesia provides an example of one such institution in the shape of the Bank 
Rakyat Indonesia (BRI), a state owned commercial bank which began to develop 
operations in rural areas during the 1970s. Until the mid-1980s, the BRI 
suffered from many of the same problems as rural banks in other developing 
countries. Little attention was paid to the mobilization of savings, which 
restricted the funds available for lending. Most loans went to local elites, who 
were considered low risk, while the vast majority of the rural poor borrowed on 
informal markets at far higher interest rates. Arrears and losses were high, 
bringing the BRI to the verge of collapse by the early 1980s. 

From 1983, the BRI's management initiated a radical change of direction, with 
the focus shifting from credit delivery to financial intermediation. New savings 
programmes were developed to provide services to small savers who required a 
combination of security and easy access. In 1984, rural savers with the BRI were 
numbered in tens of thousands, with deposits amounting to less than $0.2m. 
Today, the institution has 13 million deposit accounts holding $2.4bn. Over half 
of these savers have deposit accounts of less than $12, underlining the success 
of the BRI in providing services relevant to the poor. By successfully tapping 
these rural savings, the BRI has been able to increase its lending operations, 
although loans account for less than one-fifth of savings deposits - a fact 
which underlines the importance of savings outlets for the poor. Interest rates 
are far lower than those charged on informal markets but linked to market rates. 
Once again, most loans to individuals are small and for short terms of 10-12 
weeks. Over one-third of the BRI's borrowers have incomes below the poverty 
lines. In addition to individual loans, the BRI also capitalizes 5000 
village-level banks. 

The BRI is living proof of the fact that market-based credit and savings 
institutions can work as agencies for growth and poverty reduction, mobilizing 
the savings of the poor for investment by the poor. 

*partie=titre Some policy lessons *partie=nil 
The most important rural development lesson from East Asia is that, given an 
opportunity, smallholder farmers can produce their way out of poverty and feed 
their countries. Opportunity is the operative word. Access to land, investment 
in infrastructure, access to credit and savings institutions, and protection 
from unfair competition are all elements in the range of smallholder strategies 
developed in East Asia. These strategies have shared in common a concern to 
build on the initiative and potential of peasant farmers. Positive policy 
lessons emerge for other countries: 
Improve efficiency and equity through land redistribution 
Highly unequal land systems are economically inefficient and socially 
disruptive. Support for land redistribution as an element of a wider agrarian 
reform strategy should be made central to poverty reduction initiatives. 
Create savings and credit institutions for the poor 
Poor producers can save, and they are highly efficient investors. Most, however, 
are denied access to savings and credit agencies, creating losses for efficiency 
and equity. Developing institutions which are accessible to the poor and deal in 
small amounts at low transaction costs is vital. 

*partie=titre Provide transport and marketing infrastructure *partie=nil  
Because poor producers are often located in marginal areas poorly served by 
roads, they face difficulties in gaining access to markets and inputs. They are 
disadvantaged through the lower prices for their output which accompany higher 
transport costs, while the rest of society loses through lower levels of output. 

*partie=titre Respond to needs and build on local knowledge *partie=nil  
The Green Revolution resulted in major productivity and income gains for 
producers of rice, wheat and maize. Millions of smallholders benefited. By 
contrast, yields for crops such as sorghum, millet, and cassava, produced by the 
majority of the poor in Africa, have stagnated. New innovations are needed which 
focus on crops produced by the poor. These innovations should build on 
indigenous systems of cultivation and focus on previously neglected areas such 
as tree crops, inter-cropping, pastoral agriculture, and communal agro-forestry. 

These are some positive lessons. Others have drawn more dubious lessons. For 
instance, the World Bank cites East Asian experience as 'proof' of the need to 
privatize and individualize land holding. It claims that this is the only way to 
increase productivity and generate higher levels of credit through the use of 
land as collateral. The argument is flawed. Private land titles are not a 
pre-condition for rural credit or for raising productivity: neither China nor 
Vietnam have private land titles. Where private land titles are introduced, they 
carry the risk of marginalizing poor communities whose land rights are rooted in 
communal, tribal, or ancestral rights, which are often difficult to enforce. In 
Zambia, Oxfam works with communities who became landless as a consequence of 
land privatization, with the state selling their plots to commercial interests. 
The more sensible option, followed in Tanzania, is to recognize a variety of 
land rights and to focus on providing security in occupancy. 

A second questionable lesson wrongly derived from East Asia is that trade 
liberalization is vital to rural development. For staple food producers, 
protection from subsidized competition is needed to create investment, 
production and employment opportunities. To this end, the World Trade 
Organization should adopt a food security clause allowing countries to protect 
their domestic food systems up to the point of national self-sufficiency. The 
liberalized countries could further improve matters by agreeing to a 
comprehensive ban on the dumping of agricultural exports.

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Growth with Equity
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Part 6 - The limits to growth with equity
Regional inequalities 
Displacement problems 
Environmental destruction 
Exploitative labor practices and denial of workers' rights 
Social policy roots of economic problems}  

Much of this Report has focused on the positive lessons to emerge from East 
Asia. But not all the lessons are positive - and some are decidedly negative. 
While the region may, with significant exceptions, have achieved a high degree 
of equity by comparison with other developing regions, there have been limits to 
equity. Behind the tower blocks, expensive hotels, and fashion boutiques which 
have sprung up in the financial centers of Bangkok, Manila, and Jakarta, nestle 
slums which would not be out of place in Bolivia or Ethiopia. In the Central 
Highlands and Northern Uplands of Vietnam, Oxfam works with tribal communities 
who are being bypassed by the benefits of growth and left increasingly further 
behind the rest of the country in human development terms. In Cambodia and the 
Philippines, Oxfam's partners work with indigenous people who are being 
displaced by domestic and foreign investors granted concessions over their 
ancestral lands. In China, economic reforms have created new opportunities, 
along with new social pressures. Income inequalities are growing, progress in 
human development is slowing, and the rural-urban divide is widening, as is the 
human welfare gap between coastal and interior provinces. 

Across East Asia, rapid growth and urbanization have been accompanied by social 
marginalization. While the "wealth gap" in most countries may not be wide by 
international standards, there is a pervasive sense of a "social justice gap". 
That gap is revealed in the violence experienced by poor people in the name of 
development, and in widening social differences between rich and poor. The 
displacement of small farmers to make way for development projects, the 
violation of the land rights of indigenous groups and ethnic minorities in the 
interests of powerful domestic and foreign investors, and violent relocations of 
urban squatter settlements have been part and parcel of the drive for growth. 
Natural resource mismanagement has been of epic proportions. Forests have been 
denuded in the interests of maximizing short-term foreign exchange gains, 
without regard either to the human costs - or to the interests of long-term 
growth. Communities have suffered at various levels. Forced displacement, the 
loss of land and access to communal resources in forests are among the more 
immediate costs associated with the ruthless prioritization of growth over human 
needs. Less immediately apparent are the wider costs associated with 
environmental destruction. Soil erosion, the siltation of waterways and the 
destruction of coastal resources are all consequences of natural resource 
mismanagement. Had the economic costs in terms of reduced productivity and 
output of forestry destruction been computed into Indonesia's national accounts 
in the 1970s, growth rates would have been 2-3 per cent lower. The social costs 
are less amenable to national accounting devices. 

One of the tragedies of East Asia's experience is the failure of governments to 
learn from past mistakes. In fact, these mistakes are now being exported within 
the region, notably by Malaysian logging companies entering Cambodia. This 
reflects a wider failure to develop more participatory and accountable political 
structures. The poor have little voice and little access to justice, leaving 
them at the mercy of political structures in which corruption, vested interest 
and the subordination of public finances to the accumulation of private wealth 
reign supreme. 

From Oxfam's perspective, East Asia demonstrates that development is about more 
than economic growth and material welfare. It is also about securing wider 
citizenship rights: including the right of people to have a say over their 
future and over the formulation of policies which affect their lives. Such 
rights are denied on a massive scale in East Asia. Yet in the absence of moves 
towards full civil and political rights, future human development and economic 
growth will be jeopardized. 

The following section provides a brief summary of the development failures in 
five areas. 

*partie=titre Regional inequalities *partie=nil 
A common feature of growth in East Asia has been its concentration around urban 
industrial areas and more commercial agricultural areas. Rural-urban differences 
are becoming more pronounced, and communities living in geographically isolated 
areas are being left further behind: 
During the 1990s, Vietnam has experienced average annual growth rates 
averaging 6-7 per cent. However, one-third of aggregate economic growth has 
occurred in Ho Chi Minh city alone. At a provincial level, 14 out of 53 
provinces, containing almost one-fifth of the population, experienced negative 
per capita income growth. The health, education and income gap between these 
provinces and the lowland delta areas is widening rapidly, with minority 
groups in particular being left behind. 

In Thailand rapid economic growth has been centered almost entirely on 
Bangkok. In no other country of comparable size is manufacturing industry and 
the locus of growth so heavily concentrated. Average per capita incomes in 
Bangkok are now twice the national average and 15 times the level in the 
north-east of the country, where poverty is most concentrated. While the 
benefits of growth have been overwhelmingly urban, the majority of the 
population - and an even bigger majority of the poor - are rural. This 
explains why the share of national income accruing to the richest 10 per cent 
of Thai society has risen from a multiple of 17 times to 38 times that of the 
poorest 10 per cent since 1981. 

The image of China as a burgeoning industrial superpower is partially 
accurate. But it is an image based on Shanghai and the coastal provinces of 
Jiangsu, Zhejang, Shandong and Guangdong, which account for two-thirds of 
industrial output and over 95 per cent of the foreign investment flooding into 
the country. Rural areas close to these cities have experienced rapid income 
growth and poverty reduction. Poverty is becoming increasingly concentrated in 
remote mountainous and interior regions of the north, north-west and 
south-west. In Tibet, the illiteracy rate is 44 per cent - three times the 
national average. As in Vietnam, minority groups are facing particularly 
serious forms of marginalization. Yunnan province in the south is home to 3 
per cent of China's population and 10 per cent of those living in poverty. Of 
this group, around three-quarters are from minorities. 

East Asian governments have yet to resolve the problem of spreading 
opportunities more widely to marginalised areas. Regional planning, 
redistributive public spending policies to favor poorer regions, increased 
investment in health, education and marketing infrastructure, and incentives for 
investors to create employment opportunities away from current growth zones are 
among the options available. However, most governments have failed to achieve 
significant advances. In the extreme case of Thailand, failure to promote a 
wider dispersion of manufacturing activity and to develop transport and 
production infrastructures has emerged as a major barrier to growth. 

*partie=titre 2Displacement problems *partie=nil 
Not all of the problems associated with rapid growth are to do with the absence 
of investment in marginal areas. Some are the direct result of the wrong sort of 
investment. In the province of Ratnakiri in Cambodia, commercial logging 
operations and the development of commercial agricultural estates is causing 
widespread displacement. In Yadao district, Oxfam's partners, who are working 
with the threatened communities, report that 4,500 people have been displaced in 
recent months by a 20,000 hectare concession to produce palm oil granted to 
Malaysian--Cambodian joint-venture. The venture will employ no more than 450 
people. Malaysian and Indonesian companies have also been given extensive rights 
for commercial logging. In 1995, one Indonesian firm was granted a concession of 
1.4 million hectares. The potential threat to local communities and the 
environment on which they depend is enormous. Yet the legal framework for 
recognizing and protecting the rights of indigenous people is lacking. 

The concentration of industrial investment in restricted areas has added to the 
threat of displacement. In the Philippines, the largest of the growth zones 
being developed under the government's modernization plan - Philippines 2000 - 
links the five provinces of Cavite, Laguna, Batangas, Rizal, and Quezon in the 
CALABARZON growth zone. Domestic and foreign investors are being provided with 
huge tax incentives to establish industrial plants in the zone, which they are 
doing on a large scale. At the southern tip of the zone, in Batangas, the 
results are evident in spiraling land prices, which have tripled over the past 
two years. The result: vulnerable communities are being evicted from their land 
to make way for speculators and assorted projects. According to the Community 
Extension for Research and Development, an Oxfam International partner which is 
working with the threatened communities, around 6,000 people are facing eviction 
in Batangas alone. Many are fisher communities who have been living in the same 
villages for generations. The same scenario is being played out in thousands of 
sites across the Philippines and elsewhere in East Asia. 

The energy demands created by rapid industrialization pose a further threat. In 
China, the National Congress has approved plans to create a dam system on the 
Yangtze River. The aim is to create 18000MW of electricity, making the scheme 
the largest ever hydroelectric project. However, 140 towns and thousands of 
villages will be flooded, displacing a huge population and destroying a vast 
area of fertile agricultural land. It is unlikely that the displaced communities 
will be adequately compensated or provided with alternative sources of 
livelihood. 

*partie=titre 3Environmental destruction *partie=nil 
East Asia has a long legacy of growth policies which have failed to consider 
social and environmental costs. Resource-rich countries such as Indonesia, the 
Philippines and Malaysia, recklessly exploited exhaustible reserves of timber 
and minerals to maximize short-run growth. Like the rights of displaced 
communities, the long-term consequences in terms of lost productivity resulting 
from soil erosion, siltation, and the destruction of coastal waters were not 
recorded in national accounts. The degradation and depletion of natural 
resources in rural areas has limited livelihood opportunities in agriculture, 
fisheries and forest areas. More recently, the consequences of rapid growth have 
been apparent in industrial pollution. 

According to a recent World Bank study for Indonesia, the discharge of 
industrial pollutants will increase ten fold over the next two decades. The 
same study estimated that the population of Jakarta suffered losses estimated 
at $500m annually as a result of the health costs of air and water pollution. 
In China's industrial centers water, sanitation and electricity services are 
under severe strain. Industrial pollution has become particularly severe for 
surface water. Of 131 rivers surveyed in 1993, 65 were seriously polluted. 
Large discharges of industrial pollutants and pollution accidents (of which 
around 300 are recorded annually) have severely depleted fish stocks. As the 
Chinese economy continues to expand, pressures on the environment will become 
more severe. 

Left unchecked, the environmental damage from pollution and the over-extraction 
of natural resources will undermine the basis for growth with equity in East 
Asia. Unfortunately, most governments in the region suffer from the 'grow first 
and clean up the environment later' syndrome. That said, there are some positive 
signs. Indonesia has phased out subsidies on chemical fertilizers, subsidies on 
energy inputs have been reduced, and most countries have the savings and 
investment resources needed to develop cleaner technologies. The next step 
should be towards full environmental cost-accounting, with governments seeking 
to ensure - for instance, through tax policies - that producers are penalized 
for causing environmental damage; and that market prices are brought into line 
with the wider environmental costs of production. 

*partie=titre 4 Exploitative labor practices and denial of workers' rights *partie=nil 
Rising real wages and the growth of employment have been positive aspects of the 
East Asian experience. Considerably less positive have been the continued denial 
of basic workers' rights, and exploitative labor practices. Most countries in 
the region restrict basic rights of association and independent trade union 
action. In Indonesia, China, Thailand, and South Korea, independent trade union 
leaders are subject to arbitrary arrest, and in some cases torture and lengthy 
imprisonment. The right to strike is severely curtailed Women face special 
problems, ranging from direct wage discrimination to health and safety risks. In 
countries such as Indonesia, Thailand, and Taiwan, women workers frequently earn 
between 20-30 per cent less than male counterparts for doing similar work. 
Labor-intensive industries in Indonesia often recruit female labor - including 
child labor - from distant rural villages, transferring women to factory 
compounds. 

While most countries have impressive industrial health-and-safety guidelines, 
these are widely ignored. In 1993 two events cast a shadow over East Asia's 
export boom. The first was a fire in the Kader factory in Thailand, which killed 
188 and injured 469 mainly female workers. The second was another fire, six 
months later, at the Zhili toy factory in Shenzhen, China, which killed 87 
people. Both factories were producing toys for export to the US and Europe - and 
in both cases health-and-safety standards had been fatally compromised to reduce 
costs and enhance competitiveness. The incidents were the tip of an iceberg. 
Each year, thousands of workers are killed or maimed in the booming export 
industries of China, Indonesia, Thailand and other countries. Most are women, 
most are working in factories where even the most basic trade union rights are 
denied, and most are the victims of policies which allow employers and foreign 
investors to compromise the safety of workers in the interests of expanding 
exports. 

The increasing mobility of capital has enabled foreign investors to graft the 
most productive technologies on to highly exploitative labor systems. In 
Indonesia, the Nike Corporation employs 100,000 people, mostly women, who 
produce one-third of the company's annual footwear turnover. Basic labor rights 
are denied and wages are low. In the mining sector (see Box 6.1) foreign 
investors collude with the government in depriving vulnerable communities of 
their land rights in order to exploit mineral and forestry resources. Without 
moves to enhance labor rights and to develop higher standards for foreign 
investment, East Asian countries are likely to face growing pressures from 
political coalitions in the industrialized world who regard labor exploitation 
as being an unacceptable source of competitive advantage. 

*partie=titre 5 Social policy roots of economic problems *partie=nil 
Powerful as the lessons from East Asia are, there are warnings signs that social 
policy is in urgent need of renewal in a number of countries. This applies 
especially to Indonesia and Thailand - two of the three countries at the 
epicenter of the recent crisis in foreign currency markets. The Philippines, the 
third country, does not merit inclusion in the East Asian success story, but it 
too is a testament to the economic consequences of poor social policies, having 
subjected its education system to gross neglect. In all three countries, the 
recent slowdown in economic growth and associated currency problems are 
associated with social policy failures. 

Both Indonesia and Thailand have made major advances in education, achieving 
near-universal primary school enrolment and near-universal literacy for young 
age groups. However, Thailand has the lowest secondary school enrolment rate in 
the region, closely followed by Indonesia. Moreover, Indonesia spends a good 
deal less than other countries on education as a percentage of GDP - less than 
one-third the next lowest country, which is the Philippines. As a percentage of 
budget allocations, Indonesia spends less than one quarter as much as countries 
such as Malaysia and Korea. The consequences are reflected in poor quality 
education and high drop-out rates. While over 90 per cent of the population 
start primary school, almost one-third fail to finish. Drop-out rates are higher 
for girls than boys, although this gender difference is narrowing. The real 
gender gap is revealed in the fact that 25 per cent of girls receive no 
schooling - twice the proportion of boys. 

How has inadequate investment in education contributed to the present crisis? 
First, both Indonesia and Thailand have experienced serious bottlenecks for 
skilled labor, hampering efforts to attract investment in more sophisticated, 
higher-value-added areas of production. In neither country has social policy 
prepared the way for the transition to higher levels of economic development in 
the way that it did for the transition from agriculture to labor-intensive 
industrialization. This has raised questions about whether export growth can be 
sustained in the longer term. Second, failure to climb the technological ladder 
has left Indonesia and Thailand facing intense competition for foreign 
investment from countries such as China and Vietnam where wages are lower. 
Failure to progressively raise levels of education and human development will 
raise the specter of a growing number of countries becoming locked into low-wage 
competition, with standards being driven down towards the lowest level, across 
the region. The challenge is to improve the quality of social provision and 
access to it. However, efforts to improve quality are hampered by the failure of 
governments to respond to public demands. In the cases of China and Vietnam, the 
public have responded by voting with their feet, bypassing state services in 
favor of private-sector providers. This trend is contributing to growing 
inequality since the poor are unable to afford private options.