Impact of Globalization on Income Distribution:
Empirical Analysis of Southeast Asia and China
Globalization can be defined as the ongoing economic, technological, social, and
political integration of the world that began after the Second World War. There are
several dimensions to this dynamic process, including the increased internationalization
of economic markets as reflected, for example, in trade and financial capital flows.
However, there are also institutional and social changes that are taking place within the
geographic borders of nation states, though these are much more difficult to quantify.
Institutional changes include modifications in policy, in industrial organization, and in
the administration of laws and regulations that govern the behavior of economic agents.
Globalization is impacting the institutional framework in both developing and industrial
countries; it is changing the way in which governments view their developmental role in
society.
The globalization that makes economic integration possible is desirable in itself.
Increased competition that induces changes in production in an economy will lead to
better allocation of resources, greater efficiency and productivity. In addition, advocates
of globalization argue, integration is good for people in material terms—that is why many
governments choose it. However, even if there is net benefit from globalisation for the
whole economy, some groups and sectors will lose. The net benefits are not shared
equally amongst the population and globalisation can increase inequities to the extent that
certain groups, sectors or regions, are able to participate and grow much faster than other
groups, sectors or regions within a country. Therefore, while the benefits of globalisation
are generally accepted, sceptics say that globalisation impacts liberty and democracy
while it makes some people who are already rich even richer, it does this by keeping the
poor in poverty. The judge is still out on assessing the impacts arising from globalisation
and more importantly how to best manage the risks and costs in order to maximize the net
benefit for all concerned. Thus, one of the crucial challenges facing many developing
and transitional economies is to balance the benefits of globalisation with the risks and
costs.
1
The experience of Southeast Asia has been advertised as a good example,
whereby rapid economic growth has been accompanied by improvements in income
inequality and reduction of absolute poverty. However, there is preliminary evidence that
these trends are starting to reverse themselves, and this occurred before the onset of the
financial crisis since the mid 1980s and more recently. This paper will analyze the
process of globalization in Southeast Asia and how it has impacted on growth,
development, inequality and distribution. The paper will focus on three major Southeast
Asian economies, Thailand, Malaysia, and Indonesia (TMI), which have experienced
rapid growth due to rapid liberalization and globalisation in the 1980s and 1990s,
including the economic boom in the 1990s(see economic map).
Southeast Asia’ s Economic Map
1. Experience of Southeast Asian economies with globalization
It is not simple to measure the overall effect of openness on economic growth.
Some economists think it is, and have produced a variety of much-quoted econometric
studies apparently confirming that trade promotes development. Studies by Jeffrey Sachs
2
and Andrew Warner at Harvard, by David Dollar and Aart Kraay of the World Bank, and
by Jeffrey Frankel of Harvard and David Romer of Berkeley, are among the most
frequently cited. These studies are enough to convince most economists that trade does
indeed promote growth. But a good number of economists, including some of the most
distinguished ones hold a different opinion.
In Southeast Asia, the early limited
liberalisation in the context of stable international financial conditions under the Bretton
Woods system fostered rapid and steady economic growth. The stable macro economic
conditions facilitated the process of industrialisation. The initial conditions of relatively
equal land distribution and agricultural growth led to a rapid reduction in poverty. While
poverty reduced rapidly, inequality increased.
The first stage: industrialization. At the first phase of opening in Southeast
Asia, it indeed promoted the economic growth. During the 1970s and into the 1980s, the
three economies experienced relatively high average growth rates consistently. Average
annual gross domestic product (GDP) growth rates exceeded 7 percent and 6 percent in
the periods 1970-80 and 1980-96, respectively, with the manufacturing sectors growing
fastest to become the most important contributor to growth in these economies. Exports
grew at double-digit levels annually over the period 1980-92, and average per capita
incomes increased greatly as a consequence. Hence, the mid-eighties have been portrayed
as a period of economic liberalisation and deregulation leading to economic recovery and
rapid growth and industrialisation. As a proportion of total growth, primary exports have
fallen sharply, while machinery and transport equipment production grew especially
strongly in the manufacturing sectors (see table 1).
The export oriented strategy in manufacturing was often carried out along side
continued import substitution in selected areas and industries. As a result, a complex
protection structure occurred, which had a negative bias against exports and agriculture,
and inefficient and high cost production of manufactured goods. Growth of import
substitution industries also tended to be concentrated in urban areas and in capital
intensive production so that the benefit to labor and thus to poverty was limited. The
reduction in poverty and inequality is thus more due to other policies than the import
substitution industrialisation, and has more to do with policies to develop infrastructure
and agriculture and rural development.
3
Table 1. Thailand, Malaysia and Indonesia Economic Indicators, 1970-1995
Economies Economy
Per
capita
income
(US$)
1995 7080
3890 7.9
Malaysia
2740 7.1
Thailand
Indonesia 980 7.2
Average
annual
GDP
growth
(%)
851970
95
5.7
12
8.4
16
6.0
10
Manufacturing/ Agriculture/ Services/
GDP share (%) GDP
GDP
1980
1995
1980
1995
1980 1995
21
22
13
33
29
24
22
23
24
13
11
17
40
48
34
44
49
41
Sources: World Bank 1997
Thailand, Malaysia, and Indonesia(TMI) were all primary commodity exporters
and agrarian based economies in the 1960s and into the 1970s. These countries all
followed similar industrialization strategy of import substitution, followed by a
subsequent switch to export orientation. The focus is mainly on the unskilled labor
intensive exports which tends to be “pro poor” by absorbing large numbers for
employment and with lower education requirement (i.e. primary school level).
The government of Thailand emphasized the development strategy on agriculture
and import substitution(IS) industrialisation in the 1970s and up to mid 1980s. However,
in 1971 a policy of export orientation(EO) was introduced due to limitations of the import
of substitution policy given the small domestic market. The conflict between IS and EO
was not resolved until the mid-1980s. The 8.5 percent growth rate was impressive but a
large proportion of its exports were still from primary products, especially rice, rubber,
tin, and maize. By 1980 close to half of its exports were still from agriculture and only
22 percent from manufactured goods, which were mainly resource based.
Malaysia undertook a moderate IS strategy much earlier than the other Southeast
Asian countries. By 1970, Malaysia already incorporated an export-oriented(EO)
industrialization in tandem with its IS strategy since its small domestic market meant that
it quickly faced limits from the IS policy. It has also become evident that the IS industries
were producing inefficiently behind high tariff and non-tariff protection, with little
linkage to the other domestic industries. The 1969 riots and the serious regional and
4
ethnic imbalances in its development, as well as the recession in mid 1970s provided a
strong push for Malaysia to rethink its industrialization strategy.
Indonesia followed an inward looking import substitution industrialisation
approach up to the early 1980s, with the government playing a central role either through
state owned enterprises in heavy industries such as oil refining, cement, aircraft, steel and
fertilisers, or through regulations. Growth in the Indonesian economy during the 1970s
and into early 1980s can be attributed to import substitution industrialisation. Indonesia
began its deregulation and liberalisation process in response to the first session of oil
price decline in the early 1980s(see table 2).
Table 2: Changes in Industrialisation Approach of TMI
Thailand
Malaysia
Indonesia
1961-71(year)
1971 -86(year)
1986-(year)
IS add EO
81 capital goods
EO
1950-70(year)
1971 -85(year)
1986-(year)
IS (moderate)
Add EO
Add IS heavy ind.
Liberalisation
1967-73(year)
1974 -85(year)
1986-(year)
New order Some
IS EO
Liberalisation
EO Liberalisation
Note: IS is import substitution and EO is export orientation. TMI: Thailand, Malaysia and Indonesia.
Source: Adapted from Masuyama et al (1997)
All three economies also followed a stable and sound macroeconomic policy, with
inflation being kept under control.
For most of the 1970s and into the 1980s the
exchange rates remained linked to the US dollar either with a fixed exchange rate or with
a managed float system. Currency adjustments in the form of devaluations were
undertaken in situations of current account deficits and combined with other measures,
succeeded in boosting exports. The governments in Southeast Asia also responded to
adverse shocks by introducing budget cuts and attempting to raise tax revenues. All of
them with different approaches also continued to develop agriculture sectors, including
focusing on the development of rural areas.
5
The second stage: trade and foreign investment liberalization. Following the
first stage, export orientation was already introduced in sequence and to various levels,
with the IS strategy in all the three economies. However the major shift and more
aggressive EO drive occurred in the mid-1980s while the price of their natural resource
exports collapsed. A world wide economic recession also preceded the collapse of the
price of oil in 1986. The need to diversify its export base became the main thrust of
policy.
Due to some international factors at that time, such as GATT and later the WTO
rules, the ASEAN free trade agreement, and the pressure from the major importing
country like US, since mid-1980s the Southeast Asian economies deregulated and
liberalised trade barriers and investment restrictions more broadly. They also shift their
policy to focus on macroeconomic, trade and foreign investment to develop export
industries and improve efficiency of resource allocation in line with comparative
advantage.
The main macro economic policy adjustments were devaluation of the exchange
rate, fiscal consolidation often combined with monetary policy adjustments. By and large
these countries were able to maintain stable inflation. The main drive of trade policy was
to remove protection in stages, by first changing non tariff barriers to tariff equivalents
and then beginning a process of tariff rationalization and reduction. This was
accompanied by measures to facilitate exports such as ensuring customs procedures and
other bureaucratic bottlenecks were removed as impediments, and did not impose an
additional cost to exporters who have to import inputs. Thus, the situation of export
oriented industries co existing with import substitution industries continued, while these
countries began to reduce the trade barriers.
All the countries competed to attract foreign investment which were thought to be
important to provide export market access and know-how for export oriented industries.
Deregulation of foreign investment was linked to export orientation, so that removal of
restrictions or provision of incentives was linked to investments, which exported a certain
percentage of their production. All the economies linked the most attractive set of
incentives and the least restrictions in ownership and operations, to the extent of export
6
orientation. At the same time all the countries began to liberalise the financial sector and
capital account with quite different approaches and extent of openness. Indonesia already
had an open capital account since 1969, with little controls or even reporting requirement.
In this period of liberalisation after the collapse of the Bretton Woods system,
growth in GDP was even more rapid, but the whole growth experience was unstable.
Unprecedented GDP growth was followed quickly by a steep climb in investment in nontraded and unproductive sectors — giving rise to the bubble economy, unsustainable
growth and a financial crisis. A huge literature analysing the crisis has blamed the crisis
on the government’s failure to manage the impact of the liberalisation, while an equally
huge literature has attributed the volatility of the international financial system as being
the major cause of unstable growth.
Table 3: Foreign Direct Investment Flows to TMI (Billions of dollars)
1980
0.2
0.9
0.2
1.2
Thailand
Malaysia
Indonesia
Crisis
Countries
World 46.3
1985
0.2
0.7
0.3
1.4
55.7
1990
2.4
2.3
1.1
7.2
1993
1.8
5.0
2.0
10.6
1994
1.4
4.3
2.1
10.2
1995
2.1
4.2
4.3
13.8
1996
2.3
5.1
6.2
17.5
1997
3.7
5.1
4.7
17.6
1998
7.0
3.7
-0.3
17.2
203.1
219.4
253.5
328.9
358.9
464.3
643.9
Note: Indonesian data includess undetermined amount of debt and crisis countries comprises of Korea,
Indonesia, Malaysia, Philippines and Thailand
Source: Table. 3.7 World Bank (2000) and drawn from UNCTAD, World Investment Report, various
issues
Liberalization and financial crisis. globalisation led to rapid rates of growth of
GDP as well as exports, and by all measures of openness these economies had become
more integrated with the world economy. The improved investment climate and the
opening up of financial sector, led to unprecedented amounts of capital inflows into these
countries. Net private capital inflows into Indonesia increased more than 10 fold in the
1990s from less than $1 billion in 1989 to close to $11.5 billion in 1995. FDI growth,
especially in export oriented investments, were dramatic. Thailand also became the main
recipient for the new inflows of direct foreign investment which increased fifteen times
between 1985 and 1990, and played an important role in the export drive in the mid
1980s to mid 1990s period. In Malaysia, capital inflows channeled through the stock
7
market and the banking system, financed the growing current account deficit which were
due to the growing proportion of non tradables being produced using imported inputs.
The large current account deficits financed by short term flows made Southeast
Asian economies vulnerable to sudden reversals. In 1997, financial crisis occurred and
had a severe impact on these economies. The contraction and slowdown in growth
experienced in 1998-99 has meant setbacks in real terms for these countries, especially
Indonesia being the hardest hit and still undergoing sluggish recovery. However, none of
these economies have chosen to respond by slowing down on globalisation. In fact
Thailand and Indonesia are continuing on a comprehensive program of structural and
institutional reforms, which were to a large part mandated by the IMF bail out packages.
In contrast Malaysia did not choose to go on an IMF package and did introduce some
temporary measures to reduce its vulnerability to external shocks.
The challenges faced by the Southeast Asian economies are great. Everyone
agrees that the pace of globalisation and increased competition are not going to stop and
will probably accelerate due to technological changes and excess global production
capacity.
Continued growth will depend on maintaining their economies open and
participating in the globalisation process, but as the crisis demonstrates, to do so in a
sustained manner, countries have to learn to manage the risks and down side of increased
integration of their economies with the world economy. Volatility of growth will increase
with openness to trade and capital flows, and countries cannot avoid fluctuations in
growth due to external factors totally. Countries need to minimize the volatility such as
through sound macroeconomic management policy, good governance, transparency and
accurate and timely information, a sound financial system and flexibility of factor
markets and so on.
2. Impact of Globalization on Income Distribution
The consequences of globalisation and liberalisation for growth, poverty and
income inequality in Southeast Asia are quite complicated and also quite contingent.
Malaysia, Thailand and Indonesia have relied more on resource rents to alleviate poverty,
though growth has also been important.
Export-oriented industrialisation, driven
8
primarily by foreign capital in Southeast Asia, has helped reduce unemployment and thus
raised household incomes in these economies. Poverty alleviation in these economies has
been facilitated by rapid growth. Poverty, both urban and rural, has generally continued
to decline in these economies. All these economies introduced policy instruments to
alleviate poverty and, income distribution improved to a lesser extent.
Southeast Asia economies had high levels of poverty incidence and inequality at
the beginning of their industrialisation process in the early 1970s. During the 1970s and
into the 1980s, with the exception of Philippines, these economies experienced relatively
high average growth rates at above five percent consistently.
Despite experiencing
similar growth rates, trends in poverty and inequality of distribution differed.
Indonesia and Malaysia continued to experience decline in poverty levels.
Whereas in the case of Thailand, poverty incidence declined from the mid-1970s to 1981,
but rose again in mid 1980s. The fluctuations in poverty incidence have been mainly due
to fluctuations in agriculture commodity prices. As for the pattern of inequity, the Gini
coefficient declined consistently for Malaysia and Indonesia throughout the period.
Inequity in Thailand rose for the entire period, as a result of widening differential
between rural and urban households. Indonesia and Malaysia provides the more typical
picture of inequality first increasing then decreasing with economic development.
Whereas, Thailand provides the opposite picture with the rise in inequality for most of
the period (see table 4). Poverty alleviation can be achieved by economic growth which
changes the overall level of income or by improving income distribution which changes
the dispersion of distribution. Growth was the predominant factor in reducing poverty,
but reduction in inequality also assisted poverty incidence in the case of Malaysia for the
whole period and for Indonesia in the later period of 1978-84.
Income inequality. While poverty has remarkably improved over last decades,
income distribution has worsened. Before the currency and then financial crises of 1997
induced a regional recession in 1998, liberalisation had not significantly increased
poverty in the region (except perhaps in Thailand), but seems to have been accompanied
by worsening inequality in Malaysia and from earlier on in Thailand (table 4). Although
poverty in these economies continued to fall with rapid growth, productivity gains and
9
declining unemployment, income inequality has been worsening in Southeast Asia from
the 1980s. Liberalisation since the 1980s seems to have adversely affected income
distribution in the region. Rising income inequality under essentially liberal conditions in
the past have reemerged as the economies of the region have liberalised once again.
Deregulation, reduced government intervention, declining commitment to earlier
redistributive mechanisms, and greater government efforts to meet investor expectations
have probably all contributed to increased inequality in the region. Recent and current
trends suggest the likelihood of worsening inequality in the future. Redistributive policies
have been discouraged by liberalisation as well as renewed commitments to protecting
property rights, aggravating social inequality in these countries. More liberalisation is
likely to further exacerbate such regressive trends.
Table 4: Changes in Inequality in TMI
1962
1968
1971
1975
1980
1985
1988
1990
1992
1994
1996
1998
1999
Thailand
45.6
48.2
53.5
42.6
45.3
50.0
49.3
51.3
53.1
51.8
51.1
50.8
53.0
1976
1978
1980
1981
1984
1987
1990
1993
1996
1997
1998
Malaysia
Urban Rural
35
31
38
34
36
31
33
29
32
28
32
26
34
25
33
26
36
27
na
na
na
na
Total
34
38
34
33
33
32
32
34
36
38
37
1970
1976
1979
1984
1987
1989
1990
1995
1997
1998
Indonesia
Urban Rural
50.5
46.9
51.2
50.0
50.0
48.2
46.6
44.0
44.9
42.7
44.5
40.9
Total
51.3
52.9
50.8
48.0
45.6
44.5
44.6
46.2
47.0
46.8
Source: Mari Pangestu: Social impact of globalisation in Southeast Asia, OECD, 2000.
The pattern of inequality trends also reversed from the previous periods, with
Thailand experiencing a decline in inequality and Malaysia and Indonesia experiencing
an increase in inequality over the 1990s. During the 1985-88 period, growth led to a
substantial reduction in poverty and more than offset the increase in poverty incidence
due to increased inequitable distribution. However, in 1988-91, the worsening of income
distribution engaged the effect of growth on reducing poverty. In the 1991-94 period,
both growth and improvement in distribution contributed together to reduce poverty
10
incidence. However, inequality has worsened again since 1994 and inequality of
distribution worsened again between 1994-97.
Income inequality in Thailand worsened till 1992, except for 1988 and this was a
temporary reversal due to exceptionally high agriculture prices. However, the Gini
coefficient declined during the 1992-96 period, as has the difference between Bangkok
and Northeast per capita incomes. The improvement in income distribution has been
attributed to the tight labor market leading to a rise in real wages in the formal and
manufacturing sector. Differential access and inadequate investment in the secondary
level education remain the basic cause of inequity as it was during the previous period.
The government’s shift of emphasis to secondary education in the 1990s has not worked
its way to the labor market.
Rural – urban disparity. In the Southeast Asian countries, 60-70 percent of the
poor remain predominantly in rural areas. However, the number of urban poor has risen
due to rural-urban migration. Furthermore the initial incidence of rural poverty was
higher than urban poverty for all the economies in the first part of the 1970s, but the
disparity between urban and rural poverty was the highest in Malaysia with incidence in
rural areas being three times that of urban areas. In Thailand incidence of rural poverty
was about twice that of urban poverty. While in Indonesia the incidence of rural poverty
was only slightly higher than urban poverty.
Table 5. Rural-Urban Poverty Incidence and Gini Coefficients, 1970-1993 in TMI
Country
Poverty Incidence
1980 1985 1990
1970
1976
Thailand
Rural
Urban
43.0
16.0
36.2
12.5
25.8
7.5
35.8
5.9
Malaysia
Rural
Urban
58.5
21.3
50.9
18.7
37.4
12.6
Indonesia
Rural
Urban
58.5
50.7
na
na
44.6
19.7
Gini Coefficients
1980 1985 1990
1993
1970
1976
1993
33.9
6.7
na
na
na
na
na
na
na
na
na
na
na
na
na na
27.3a
8.5a
22.4
8.3
18.6
5.3
0.469
0.503
0.500
0.529
0.482
0.501
0.440
0.466
0.409
0.445
na
na
na
na
18.5
8.3
na
na
0.34
0.33
0.31
0.36
0.31
0.38
0.28
0.32
0.26
0.32
0.26
0.33
Notes: a – 1984; b – 1972; c – 1982; na – not available.
Sources: Jomo K. S.: GLOBALISATION, LIBERALISATION, POVERTY AND INCOME
INEQUALITY IN SOUTHEAST ASIA, adapted from table 5, OECD, 2000.
11
As for differences in urban-rural poverty, there were important reversals in the
tendencies of earlier periods (table 5). In Indonesia, and Malaysia poverty in urban areas
declined much faster than rural areas, which indicates that urban areas probably benefited
more from the boom during these years of rapid globalisation. In Indonesia this led to the
outcome of urban poverty levels being lower than rural poverty levels, which is a reversal
of the trend for much of the 1970s and into the late 1980s. In Malaysia the outcome is
that rural poverty is now five times as high as urban poverty incidence compared with
three times in the previous period. In contrast, the decline in poverty in Thailand was
marginally faster in the rural areas compared to urban areas and this has been attributed
to rural workers being absorbed by the fast growing urban sector, and who also tend to
send remittances back to the rural areas. Wage earnings and remittances accounted for
around a quarter of all rural incomes, with the proportion rising higher among the lower
income groups.
More specifically, in Indonesia, due to the labour market adjustment during this
period was rapid but not rapid enough, labour moved from rural to urban areas, but the
movement was not fast enough and labour market tightening was relatively limited in
rural areas, both urban and rural inequality measures rose during this period leading to a
rise in the total Gini coefficient right up to 1997, just prior to the crisis. The increase in
real wages in rural areas was at a much slower rate than the national average. Problems
with rural and agricultural economy also contributed to the worsening equity indicators.
Off-farm employment and income failed to function as an equalizing effect on rural
incomes as in the previous decade. The decline in government oil revenues in the mid and
late 1980s led to less spending for agricultural development in rural areas. The
programme to provide massive agricultural subsidies in the effort to maintain rice selfsufficiency was no longer sustainable.
In Malaysia, rural-urban income differentials widened during the 1990s. Inter
racial income imbalances has also widened. The rural-urban income differentials had
initially decreased but again widened during the 1990s. The structural transformation of
the Malaysian economy has increased the rural income per capita from RM51 in 1973 to
RM260 in 1995. The urban income per capita has also increased but at a lower rate
12
compared to the increases experienced for the rural income. In 1973, the urban income
per capita was RM104 and in 1995, it was RM 519. Overall, the income differential
between rural and urban was large whereby in 1995, the mean capita income of the rural
sector was only 50 per cent of that in the urban sector.
In Thailand, the incidence of poverty declined faster in urban areas compared
with rural areas throughout the period, especially Bangkok reflecting the concentration of
industrialisation and growth in Bangkok and the surrounding. Thus in Thailand rural
poverty incidence remained double that of urban poverty incidence.
Regional disparity. There are also geographic differences in the distribution of
poverty incidence and inequality within each of these countries.
Inequality between regions is acute in Thailand. In terms of GDP growth, share
of GDP, poverty incidence, and average per capita income, the difference between the
highest per capita region (Bangkok) and the lowest per capita region (North-East) was
around 7 times in 1982 and by 1992 it had become 9 times. The central and Bangkok
area was so much better off compared with the other regions. The Northeast region was
the worst off. The Northeast region had the highest poverty incidence. The northeast was
poor due to scarce resources, low rainfall, poor soil conditions and lack of investment in
physical (e.g. irrigation) and human capital (e.g. education). Poverty incidence also fell
much faster in the Bangkok and areas surrounding it. Bangkok has the lowest poverty
incidence in Thailand with incidence of poverty of less than half a percent by 1996. In
contrast the northeast region has the highest poverty incidence at 10 percent, and the
highest concentration of poor people.
Regional comparisons for Indonesia show that urban inequality was worse in
urban areas in Java compared to off Java. The worsening expenditure distribution in
urban areas is consistent with the worsening of relative poverty in urban areas during this
period indicating that the benefits of the oil boom was probably enjoyed more by the
capital intensive sectors in urban areas in Java.
In Malaysia, half of the poor households are concentrated mainly on the Northeast
side of Malaysia. There were geographical differences in poverty incidence, the lowest
being in Peninsular Malaysia and the highest being in Sabah, with three times the poverty
13
incidence as Peninsular Malaysia, and Sarawak with two times the poverty incidence of
Peninsular Malaysia. The rise in poverty in Sabah has been due to the influx of illegal
immigrants and possibly to reduced expenditure allocations by the government in the late
1980s and mid 1990s. As for income inequality, the most equal income distribution was
found in Johor with a Gini coefficient of 38.6, whilst the highest Gini coefficients were
found to be in the East Malaysian states of Sabah and Sarawak with coefficients of 45.9
and 44.8 respectively. The rich states of Selangor and Terengganu also had high Gini
coefficients of 44.8 and 45.7 respectively. The more unequal income distribution in the
richer states is due to the fact that workers from other states migrate to these states in
search of higher paying jobs.
3. Links between Economic Growth and Income Distribution
Questions of growth and distribution have often been considered in terms of
trade-offs between the two. It may be necessary to develop a clear approach to growth
and distribution issues in the face of liberalisation, including globalization.
A number of academics have conducted studies to understand and measure the
relationship between greater openness to trade and investment, growth, income
distribution and poverty. All the studies conclude that it is difficult to isolate
globalization as having the positive effect on growth, inequality and poverty. The
outcome depends on a number of related factors such as the country’s tradition, initial
conditions, its geographic location and the complementary policies that accompanied the
process of opening up. The general point is that it is the combination of policies that
matter for growth and the type of growth which leads to better social outcomes. Countries
should not pursue openness for the sake of liberalisation and openness, it should be part
of their development strategy and bearing in mind the combination of initial conditions
and policy choices, the outcome can be more or less equitable and proper.
The experience of Southeast Asia provides an example of where growth resulted
from more open policies and was accompanied by reductions in poverty. However, the
record is mixed with regard to improvements in equity and disparities between regions,
urban rural, ethnic groups remain and in some cases worsened as a result of the growth
pattern. Inequity improved in Malaysia and Indonesia, and deteriorated in the case of
14
Thailand during the period of rapid growth based largely on IS strategy. The main reason
for Malaysia and Indonesia’s relative success in reducing inequity, has been a set of
complementary policies that goes beyond simple trade liberalisation and incorporated
agriculture and rural development policies. The impact of growth on income distribution
and poverty depends on the package of policies used to achieve growth and the extent it
is relevant the distribution policies adopted.
Evidence shows that poverty reduction in Southeast Asia has mostly been due to
growth. In the case of Indonesia, 70 percent of the decline in poverty in Indonesia over
the 1978-84 period, was accounted for by growth, and the remainder due to
improvements in inequality of distribution. However, how inclusive and distributed the
growth, also mattered. Increased inequities can offset the contribution of growth to
poverty reduction, and lead to a result of a net increase in poverty such as with the
experience of Thailand over the 1975-86 period and the Philippines in the 1988-91
period.
The familiar message that globalisation and liberalisation is not an ends but a
means to achieve growth with equity is reinforced by this broader approach, whereby
liberalisation policies needed to be accompanied by complementary policies and that
gradually reforms do not work. Problems began to be experienced in the booming years
as the more comprehensive reforms in the financial sector and with capital flows were not
done with the right institutional and legal frameworks being in place.
By and large the experience of Southeast Asia appears to prove that a policy of
openness and liberalisation led to achievement of rapid growth rates and growth has been
the main explanation for the decline in poverty rather than due to changes in inequity. In
fact there were periods such as Thailand in the 1975-86 period where rising inequities
offset poverty decline due to growth, and led to an increase in the incidence of poverty.
4. Measures to Face the Challenge of Globalization
The international economic phenomena associated with globalisation are quite
varied and require specific responses. In so far as international economic liberalisation is
inevitable, there is a need to give due consideration to sequencing issues on the one hand
as well as pro-active initiatives or supply responses on the other.
Southeast Asia
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countries’ governments are barely equipped to deal with the very complicated and
detailed agenda associated with globalisation. Thus, these countries should consider the
following measures to reduce the negative effect of globalization.
The optimal role of government is increasingly a dynamic concept. To remain
successful, institutions must adapt strengthening public investment in human and
physical capital which can still play a critical role in stimulating economic development,
while it is recommended that the role of government in coordinating resource allocation
be generally diminished; establishing stable, credible macroeconomic policies that are
critical to efforts to limit volatility in capital markets; strengthening prudential
supervision and regulation in financial system and capital account, and eliminating
implicit guarantees to prevent financial institutions from taking excessive risks.
Cohesion and cooperation among such governments have declined significantly since the
seventies, especially on economic issues. It will be necessary to restore such cooperation
and mutual support for a practical alternative to the emerging status. Trade liberalization
played a major role in stimulating development in many Asian Countries. Further
progress in this area will reinforce the trend toward globalization that has been so
beneficial, so government should reduce trade barriers and improve trade policy.
Globalization will be accepted most readily if its benefits are widely shared. In
light of these developments, it is important to consider possible measures to try to sustain
poverty decline and reduce inequality in the face of continued pressures for trade,
financial and investment liberalisation, and especially with the unprecedented regional
recession in the aftermath of the 1997-8 currency and financial crises. Poverty alleviation
and redistribution policies are still needed. Evidence from the region suggests that efforts
targeting poor groups—e.g., land reform, subsidized housing, and subsidized access to
education—have been successful and should be encouraged elsewhere. For the short
term, insurance against shocks is needed. These include short-term safety nets for those
unable to work, and public works programs for those who are in need of the money.
These social safety net programs should be targeted to maximize efficiency, although
experience in Southeast Asia demonstrates that this is difficult. Micro credit programs are
an important element of these programs to avoid distress asset sales. Moreover, these
social safety nets need to be in place prior to a crisis if they are to be effective. In the
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long run, policies are required to foster the accumulation of forms of human capital that
are useful in a globalized world. The ability to respond quickly to global changes will be
more important. This means less focus on vocational training and more on basic
education, particularly for women, who because of their family obligations are least able
to reeducate themselves as adults.
Reference:
Jomo K. S.: GLOBALISATION, LIBERALISATION, POVERTY AND INCOME
INEQUALITY IN SOUTHEAST ASIA, OECD Development Centre, 94, rue ChardonLagache, 75016 Paris 30, November-1 December 2000
Mari Pangestu: Social impact of globalisation in Southeast Asia, OECD Development
Centre, 94, rue Chardon-Lagache, 75016 Paris, 30 November-1 December 2000
The Economist: Globalisation and its critics, Sep 27th 2001
The Economist: Survey Southeast Asia, Feb. 14, 2000
Pasuk Phongpaichit and Isra Sarntisart: Globalisation and Inequality: The Case of
Thailand, OECD Development Centre, 94, rue Chardon-Lagache, 75016 Paris, 30
November-1 December 2000
Tubagus Feridhanusetyawan: GLOBALIZATION, POVERTY AND EQUITY IN
INDONESIA, OECD Development Centre, 94, rue Chardon-Lagache, 75016 Paris, 30
November-1 December 2000
Mohammed B. Yusoff, Fauziah Abu Hasan, Suhaila Abdul Jalil: Globalisation,
Economic Policy, and Equity: The Case of Malaysia, OECD Development Centre, 94,
rue Chardon-Lagache, 75016 Paris, 30 November-1 December 2000
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