Asian experience on growth, employment and poverty: an ......Asian Experience on Growth, Employment and Poverty 2 3 See chapter 4 of Islam, 2006 for evidence on different developing

Preface

Page

I. Introduction 01

II. AnalyzingtheNatureandQuantifyingtheMagnitude oftheEmploymentLinkage 03 WhattoMonitor? 03

MeasuringandInterpretingtheOutputElasticitiesofEmployment 04

•Gross or Partial Elasticities 04

•Time series or Cross-Section 05

•How to interpret the magnitude of the OEEs 05

III. BroadFeaturesofthePoverty-ReductionPerformanceoftheCountries 06

IV. AnOverviewoftheFindingsoftheSpecificCaseStudies 08

•EastAsia •Cambodia 09

•China 11

•Indonesia 15

•Malaysia 18

•ThePhilippines 20

•Thailand 22

•SouthAsia

•India 25

•SriLanka 30

V. WhatdoestheExperienceoftheAsianCountriessayabout Growth-Employment-PovertyLinkage? 33 HowEmploymentIntensivehasGrowthbeen? 33

WhatcanbesaidabouttheCausesoftheDeclineinEmploymentIntensity? 37

TheOverallEmploymentPerformance 39

ChangeinEmploymentIntensityInducedbySupplyShift 39

Growth,Employment,InequalityandPoverty 40

AgriculturalEmployment 41

VI. ConcludingObservations 43

References 45

Contents

Preface

Since 2005, the Economic and Labour Market Analysis Department of ILO, Geneva and theAsia-Pacific Regional Programme on the Macroeconomics of Poverty Reduction (MPRP) ofUNDPRegionalCentreinColombo(RCC)havebeenworkingtogethertoundertakeaseriesofcountrystudiesinAsia,focusingonemploymentintensityofeconomicgrowthasameansof poverty reduction. These country studies covering Cambodia, China, India, Indonesia,Malaysia,Philippines,SriLanka,andThailandcontaindetailedempiricalanalysisoftrendsintheemploymentintensityofeconomicgrowthandoffactorsthatcouldexplaintheobservedtrends. They provide interesting insights into the reasons for low and in some cases thedecliningemploymentoutcomeofeconomicgrowthinAsia.

The objective of this publication is to bring together the main findings of the abovementioned studies which can serve as an important advocacy and dissemination tool.This synthesis paper highlights some of the key findings from these studies including thefollowing:

The employment intensity of growth (defined as the rate at which employment growswhenoutputgrowsbyonepercentagepoint)hasnotonlybeenlowbuthasbeendecliningovertimeinsomeofthefastestgrowingAsiancountries(e.g.,ChinaandIndia).Further,outoftheeightcountriesunderreviewhere,allwiththeexceptionofMalaysiaexperiencedtheproblemof inadequateemploymentgrowth,andtheproblemappearstohaveaggravatedinrecentyears.Insomecountries,e.g.,IndonesiaandSriLanka,inadequateoutputgrowthinrecentyearshavealsobeenaproblem;meanwhileinothers,employmentgrowthhasbeenlowdespitehighgrowthofoutput.

Whileourunderstandingofthecausesoflowanddecliningemploymentintensityofgrowthisstill inadequate,thispaperhighlightsafewfactorsthatemergefromthecountrystudiesmentioned above. One major factor is the transition towards a market-based competitiveenvironment(e.g.,inthecasesofChinaandIndia)thatnecessitatedeconomicreformswhich,inturn,ledtosheddingofexcesslabourandtheadoptionofacautiousapproachtonewhiring.Thesecondfactor isashift inthecompositionofoutputtowardslessemployment-friendlysectors which may have been caused by a change in the competitiveness of an economy.Third,policyenvironmentswithincountriesmayhavefavouredthegrowthofmorecapital-intensive sectors (or the adoption of more capital-using technologies). Likewise, small andmediumenterprises(whichareexpectedtobemoreemployment-friendly)mayhavebeenfacingadisadvantageouspolicyenvironmentsuchasintermsofavailabilityoffinance.

Insomecountries(e.g.,inMalaysia),relativefactorpricesmayhaveshiftedinsuchawayastocreateconditionsforashifttowardsmorecapital-intensivetechnologyorproductsthataremorecapital-intensivebynature.WhilesuchanoccurrencewouldberegardedasnaturaldevelopmentinanalreadylabourscarcesettingsuchasMalaysia,ifitoccursincountriesthatarestillcharacterizedby‘surpluslabour’,itwillbecomeaconcernforpolicymakers.

Thispapermakesthepointthatdistributionofincomehasworsenedinallthecountriesstudied,exceptinMalaysia.Thisimpliesthattherateofpovertyreductioninthesecountriescould have been higher if the income distribution remained unchanged. The worseningdistributionofincome,inturn,maylargelybeareflectionofpooremploymentperformance.

Employmentperformanceisstronglyinfluencedbymacroeconomicpolicies.Inanumberofthecountriesstudied,e.g., Indonesia,PhilippinesandSriLanka,highereconomicgrowthcouldat leastpartiallyhelpaddresstheproblemof inadequateemploymentgrowth.Quiteoften, disproportionately stringent macroeconomic stabilization programmes constraineconomicgrowthtotoo lowa level topermitsufficientlyhighrateofemploymentgrowthevenwithreasonablyhighemploymentintensity.Insuchcases,revisitingthemacroeconomicframeworkofthecountryconcernedmakesforastrongcase.

ThepaperofferscompellinginsightsintothereasonsforlowanddecliningemploymentoutcomeofeconomicgrowthinAsia.Bydrawingfromadiverserangeofsettingswithintheregion,weseeimportantlessonsthatcanbedrawntowardspovertyreductioninAsia.

RizwanulIslam ThangavelPalanivelDirector SeniorProgrammeAdvisorEconomicandLabourMarketAnalysisDepartment MDG-InitiativeInternationalLabourOffice UNDPRegionalCentreinColomboGeneva SriLanka

� An overview with special reference to the findings of some recent case studies

� The experience has been widely documented. See, for example, chapter 6 in Khan and Muqtada, 1997 andchapter4inIslam,2006.

2 ThismayseemtobeanunfaircommentontheperformanceofChinawhichiscreditedwiththemostrapidreductionofpoverty inabsolutenumberseverachieved.But,asdocumentedinKhan,2004,China’spovertyreductionhasbeenfarlessthanitcouldhavebeenforacountrywithsuchanastoundinggrowthrecord.Therehavebeenperiodsofrapidgrowthwhentheincidenceofpovertyremainedunchangedandoverallpovertyincidencecontinuestobehigherthanwhatitisincountrieswithcomparablerealincomepercapita.

I.Introduction

Theroleofemploymentastheprincipallinkthroughwhicheconomicgrowthistransmittedtothepoorandenablethemtoovercomepovertyhasbeenincreasinglyemphasizedintheanalysis of development policy in recent years. It has been realized that the magnitude ofbenefittothepoorderivedfromeconomicgrowthlargelydependsonthenatureandextentofemploymentthatgrowthgenerates.Itisalsorecognizedthatthereisnoautomaticandpre-determinedrelationshipbetweeneconomicgrowthandemploymentandthatnotallgrowthisequallyemploymentintensive.Increasingattentionhasthusbeendirectedtomeasureandlookforwaystoenhancetheemploymentintensityofgrowth.

In contemporary development literature there is a consensus that the best example ofpoverty-alleviatinggrowthinrecenthistory,perhapsintheentirehistoryofmoderneconomicdevelopment, is the experience of East Asia in the decades since the 1960s. The centralelementsofthisperformanceconsistedofaveryhighgrowthrateandahighemploymentintensityofgrowthinthe“growth-elastic”sectors,namelyindustriesandmodernservices.Toillustrate,intheRepublicofKoreaintheearlyphaseofgrowthspurtduringthe1970s,roughlycomparable to what is currently being experienced in countries like India, the elasticity ofmanufacturingemploymentwithrespecttovalueaddedinmanufacturing,wasapproximately0.7.Withsimilarelasticityinotherindustriesandmodernservicesandanannualgrowthrateofthesenon-agriculturalsectorsaveraging12to15percent,employment inthosesectorsgrewatarateofbetween8.4percentand10.5percentperyear.Withsuchrapidincreaseinemploymentinthesesectorsany“concealed”unemployment(low-productivityemployment)inagricultureandothertraditionalsectorswassooneliminated,settingthestageforarapidfall in absolute employment in agriculture (thus facilitating the so-called Lewis transition).Withthesimultaneousoccurrenceofthedemographictransition,thesecountriesexperiencedasharpriseinrealwages,broughtaboutbyafarfasterupwardshiftindemandforthaninthe supply of labour. Real wages increased at roughly the same rate as per capita income.Rapidincreaseinemploymentanditsremunerationwastheprincipalinstrumentforpovertyalleviation.�

More recent Asian experiences in development has shown countries growing at ratesexceeding thoseof theEastAsianpioneersduring thedecadesof theirmost rapidgrowth(Chinaduringthelasttwodecades)andequalingtheirperformanceingrowth(Indiaduringthelastthreeyears).But,thesuccessofthesecountriesinpovertyreductioncannotbesaidto be nearly as remarkable.2 One common and critical failure of these countries has been

AsianExperienceonGrowth,EmploymentandPoverty 2

3 Seechapter4ofIslam,2006forevidenceondifferentdevelopingregions.4 Islam,2006.ThecasestudiesincludefourcountriesfromAsia(Bangladesh,India,IndonesiaandVietnam),two

Africancountries(EthiopiaandUganda)andaLatinAmericancountry(Bolivia).5 Osmani,2006.6 Thesearenotthesummariesofthecasestudies,whichoftenarequitelengthy,coveringmanytopics,notallof

whichhavebeen,orneedtobe,dealtwithinasynthesisofthepresentkind.

the inability to make their growth sufficiently employment intensive. As shown below, theemploymentintensityofgrowthofthe“growth-elastic”sectorinChinahasbeendismallylowcomparedtowhatitwasintheEastAsianpioneers.

TheInternationalLabourOrganization(ILO)hasstronglyfocusedontheroleofemploymentlinkinggrowthandpovertyreductioninitsrecentanalyticalandempiricalwork.Anumberofitsstudiesduringthelastfiveyearshavedocumentedthatslowemploymentgrowthhasbeenamajorcorrelateofslowornegativepovertyreductionintheentiredevelopingworld.3Slow employment growth has been due both to slow growth of the economy and to lowemploymentintensityofgrowth.WhileinLatinAmerica,sub-SaharanAfricaandthetransitioneconomiesofCentralAsia,theprincipalproblemwasslowgrowth,eveninrapidly-growingcountries likeThailand prior to the Asian crisis, the premature decline in the employmentintensityofgrowthwasreducingthepoverty-alleviationeffectofgrowth.AveryrecentILObook, incorporating seven country case studies on growth-employment-poverty linkage,concludes that slow employment growth was an obstacle to poverty reduction that mightotherwise have been achieved. Almost without exception, slow employment growth wasassociatedwithlowemploymentintensityofgrowth.4

A different kind of study, by Osmani (2006), shows that the elasticity of manufacturingemployment,withrespecttomanufacturingoutputinAsia,hassharplydeclinedorremainsdismallylow.5 Asiaasawholeexperiencednegativegrowthinmanufacturingemploymentduring the 1990s, an outcome driven largely by the negative growth of manufacturingemployment inChinaduring thedecadeof itsextraordinarily rapidgrowth. Inmostof theotherAsiancountriesgrowthofmanufacturingemploymentwaspositivethoughlowerthanduringtheprecedingdecade.Indiawasararecaseofincreasedelasticityofemploymentwithrespecttooutputinthe1990sascomparedtotheprecedingdecade,buttheabsolutelevelofelasticitywasverylow.

ThispaperisanattempttoupdatetheAsianexperienceonthelinkagebetweengrowth,employmentandpoverty.Apartfromfocusingonanumberofanalyticalissues,itupdatesandattemptstodeepenthelessonsofpastfindingsbydrawinguponanumberofrecentcasestudiesonthesubjectcomingfromthecollaborationoftheUnitedNationsDevelopmentProgramme(UNDP)withthe ILO.Section II isconcernedwith issuesof thenatureandmeasurementofthemagnitudeofemploymentlinkage.SectionIIIdiscussesthebroadfeaturesofgrowthandpovertyreductioninthecountriesincludedinthenewsetofcasestudies.SectionIVhighlightsthemajorfindingsofthecasestudiesaddinginsightsfromthefindingsofotherstudies(e.g.,theILOcasestudiesinIslam,2006).6SectionVevaluatestheAsiandevelopmentexperienceinthisareaandseeksinsightsforfuturedevelopmentpolicy.SectionVIconcludesbybrieflyhighlightingtheimportantfindings.

3 An overview with special reference to the findings of some recent case studies

7See,however,thecasestudyofThailandwhichsuggestssucharole.8Forexample,seetheChinacasestudy.9Seechapter4ofIslam,2006.

II. AnalyzingtheNatureandQuantifyingtheMagnitude oftheEmploymentLinkage

Thecentralityof theroleofemployment intransferringthebenefitsofgrowthtothepoorderivesfromthefactthat labour isabouttheonlyresource inwhichthepoorarerelativelyabundant.Theyownlittlephysicalcapitalandwhentheyhaveaccesstosuchcapital,itisusedasafactorthatfacilitatestheuseoftheirlabourandnotasanassetthatisloanedfordirectfactorreturntoaugmenttheirincome.7Theroleofpublictransferforpovertyreductionhasbeenonthedeclinefordecadesand,exceptforthelimitedcasesoflabour-poorhouseholds,thishascometobeconsideredaninefficientmethodofpovertyreductioninthelongrun.Numerous studies have established that poor households are less able than richer ones totakeadvantageoftheopportunityofdomesticandinternationalmigration,therebylimitingtheiraccesstoprivatetransferasasourceofincome.8Forthepoor,theproductiveuseoftheirplentifulfactor,labour,istheprincipalwaytoovercomepoverty.

WhattoMonitor?

There are several ways that labour income can be augmented: (i) an increase in wageemployment;(ii)anincreaseinrealearningfromwageemployment;(iii)anincreaseinself-employment; (iv) an increase in the productivity of employment; and (v) an improvementinthetermsofexchangefortheproduceofthepoorbothinwageemploymentandinselfemployment.9Inquantifyingtheextentoftheemploymentlinkageallthesepossibleeffectsneedtobecaptured.

Theparameterthatisoftenusedtoquantifytheemploymentlinkageistheoutputelasticityofemployment(OEE)attheoverall,sectoralandindustrylevelandtheratiooftheproportionateincreaseinemploymenttotheproportionateincreaseinoutput.Thisonlycapturesthefirstandthethirdoftheaboveeffects.Thus,itisimportanttomonitorthechangeinthevariablesrepresentingtheother threeeffects. This issoespeciallybecausethemovements in theseothereffectsmaynotbesynchronizedwithmovementsinOEE.Toillustrate,amovementinrealwageandOEEarelikelytobesynchronizedifthechangeinOEEiscausedbyachangeinlabourdemand:ariseinlabourdemandwouldincreasebothOEEandrealwage.Butachangecausedbyashiftinthesupplyoflabourwouldusuallyresultindivergentchangesforthem:afallinlaboursupplycouldresultinafallinOEEandariseinrealwage.Similarly,achangeintheextentofself-employmentmaybeassociatedwitheitherapositiveoranegativechangeinproductivity.Finally,itisveryimportanttomonitorthetermsofexchangeoftheproductsofthepoor.Risingphysicalproductivityoflabourmaynottranslateintopositivechangeinearningifthereisanadversechangeinsuchtermsofexchange.


As shown in section IV, most of the new case studies provide some information on realwagesandlabourproductivity.Itis,however,rareforthemtoprovideinformationonthelastoftheindicators.Partofthereasonforthisisthatitishardtoobtaintherelevantinformation.Theseindicesarenotsystematicallyestimatedbytheexistingsystemsofstatisticalinformation.However,onewouldhopethatsomeoftheobviousindicators,suchasthetermsoftradeforagriculture,thesectorthatoftenemploysmostofthepoor,wouldbedocumented.

Whileitistruethatmonitoringchangesinthefivecomponentsofchangeinlabourincometogethershouldprovideagoodaccountofchangeinwelfareofthepoor,occasionallytheiraggregateeffectmaybefavourablyoradverselyaffectedbyotherfactors.Thus,afavourablelabouroutcomemaybeinconsistentwiththepovertyoutcomeifthereisalargechangeinincomefromnon-laboursources.Publicincomesubsidyhasbecomeadecreasingsourceofincrementalincomeforthepoorinrecentyearsanditisquitepossiblefortheon-goingreformprocessinthedevelopingcountriestofurtherreduceitsnetbenefittothepoor.Therefore,the avoidance of bemusement when a positive overall employment linkage fails to reducepovertywouldrequireanaccountingoftheseeffects.Intheabsenceofsuchinformation,itwouldbehelpfultomonitorsuchindicatorsasthechangeinthedistributionofincome.

MeasuringandInterpretingtheOutputElasticityofEmployment

Gross or Partial Elasticities

Conceptually,elasticitiesaredefinedwithrespecttothedeterminantsofavariableandtheyare meaningful when a complete specification of all the determinants, or at any rate themajorones,are taken intoaccount. Insuchasystemthepartialelasticitywith respect toaparticulardeterminantshowsthepercentchangeinthevariablethatiscausedbyaonepercentchangeinthegivendeterminantwhenall theotherdeterminantsremainunchanged.For employment, the estimation of such partial elasticities would show the causal sourcesofemploymentgrowthwhichwouldbeveryuseful formanypurposes.But, theOEEasanindicatoroftheactualemploymentintensity-employmentfriendliness-ofgrowthwouldnotbewellrepresentedbythepartialelasticityofemploymentwithrespecttooutput. Ahighpartialoutputelasticityofemploymentdoesnotmeanthatapercentgrowthofoutputwouldprovideanincreaseinemploymentindicatedbyit:theactualgrowthinemploymentwoulddepend on the change in all the other determinants and the employment elasticities withrespecttothosedeterminants.EmploymentintensityandemploymentfriendlinessofgrowtharebetterrepresentedbywhatthispapercallsthegrossOEE,theratioofproportionatechangeinemploymenttoproportionatechangeinoutput.Ifreliableestimatesofpartialelasticitiesareavailable,onecouldgetanideaofthesourcesofemploymentintensitybycomparingthemwiththegrossOEE.ItisthegrossOEE,however,thatservesastheindicatorofemploymentintensityofgrowth. Insomeofthecasestudies,partialelasticitieshavebeenestimatedfor


�0 FortheIndiancasestudyonthenon-agriculturalsectors,partialelasticitieshavebeenestimatedformanufacturingindustries.

�� Indonesianestimatesforagriculturearebasedoncross-sectionaldata.Predictablytheyyieldextremelyhighelasticities.Chineseestimatesofcross-sectionalelasticityforthenon-agriculturalsectorssimilarlyareextremelyhighandimpossibletoacceptasindicatorsofemploymentpossibilityofgrowthintherecentpastornear-termfuture.SomeThailandestimatesarebasedonpooledcross-sectionandtimeseriesdata.

anumberofthesectors.Littleusecouldbemadeofthemmainlyforthereasonjustgiven,but partly also because of the uncertainty of whether the stipulated function represents areasonablycompletespecificationofthedeterminants.�0

Time-series or Cross-Section

Gross OEE could be estimated in a variety of ways.The simplest estimate, often called arcelasticity, shows the ratio of observed proportionate change in employment to observedproportionate change in output (typically value added) over a period of time.The obviousproblem with these measurements is that they often show sharp fluctuations if theirmeasurements are available for consecutive short periods (say annual estimates based onannualdata),andtheybecomebiasedwhenestimatedoveraperiodoftimeiftheendvaluesofthevariablesdivergefromtrendvalues.Itisthusdesirabletoobtainsimpleeconometricestimates based on regressions of logarithms of employment and output when enoughobservationsareavailable.

Some of the studies have used cross-sectional data, or combined cross-sectional andtime-seriesdata,toestimategrossOEE.Thereasonisthatthetimeseriesdatadonotprovideenoughobservationstofitregressions.Butthesecross-sectionalestimatesdonotseemtobetherightindicatorsofemploymentpossibilityofgrowth.Thecross-sectionaldataareusuallyobtainedfordifferentprovincesorstatesofthecountry.Consideranindustryfacedwiththesameincentivesystemindifferentprovinces.Chancesarethatcapital/labourratioswouldbesimilar with provincial differences in the size of the industry providing the variation in thelevelsofoutputandemployment.AfittedregressiononthebasisofsuchdatawouldgiveanOEEofapproximatelyone.Thiswouldbeapoorindicatorofemploymentgrowththatwouldbe generated by the growth of the industry over time.Time series estimates are far betterindicatorsofemploymentintensityofgrowth.��

How to interpret the magnitude of OEEs

ItishardtodecidethedesirablemagnitudeorrangeofOEEs.Thereare,however,somesimplecriteriathatonemightconsider.Inadynamically-growingeconomy,OEEswouldnotbethesameforallsectorsatanytime;norwouldtheychangeinthesamedirectionoveranygivenperiodoftime.OnewouldexpecttheOEEforagriculturetodeclineandultimately,oncetheLewis transition is under way, to become negative.This does not mean that a precipitousdeclineand/oranegativevalueoftheOEEforagriculturebyitselfrepresentadynamic/Lewistransition.Forthattobethecase,labourabsorptioninindustriesandservicesmustberapidenoughfortheoverallemploymentgrowthtoexceedthegrowthofthelabourforce:forthesesectors to productively absorb labour shed by agriculture, their employment growth must


�2 Malaysia,atanadvancedstageofLewistransition,isanobviousexception.

exceedthegrowthoftotallaboursupply.Thiskindoftransitionshouldbedistinguishedfromareductioninagriculturalemploymentthatismorelikelyareflectionofthesector’sinabilitytoproductivelyemploylabourwhichispushedouttoresidualemploymentsectorsofevenlowerproductivity.

HowhighshouldtheOEEbeformanufacturingindustriesandmodernservices?Historically,theEastAsiancountriesappeartohavehadanOEEof0.7formanufacturingintherelativelyearlyyearsofrapidgrowthasinthecaseoftheRepublicofKoreaduringthe1970s.Itfellto0.5inthenextdecadeandkeptdecliningasagriculturewentthrougharapidLewistransition.Thus,formostofthecountriesinthepresentgrouparangebetween0.5and0.7wouldseemreasonable.�2Itis,however,worryingifithitsthelowerrangeofthelimitwithawideningofproductivityandearningsbetweenmodernsectorsandtraditionalactivities,likeagriculture.

AnOEEaboveonesignifiesafallinlabourproductivityandisgenerallyundesirable.ThemeaningisthesameforanegativeOEEaccompaniedbyafallinoutput.Asshort-termcyclicalphenomena,theiroccurrenceisquiteconsistentwithhealthylong-termOEE.Intheestimatesmadeforseveralcountriesforshortperiods,manyofthesectoralOEEsfluctuateratherwildly.Intheabsenceofcorrespondingestimatesforlongertimeperiods,littlesensecanbemadeoftheseelasticities.

A final, though obvious, point is that a high OEE does not necessarily suggest goodemployment performance. It is possible for an activity, with an initial capital intensity thatis inappropriately high for the country’s resource endowment, to continue to grow withunchanged capital intensity, thereby yielding a high OEE. It will, however, not be a goodoutcomeforpovertyalleviatinggrowth.OEEsonlymeasuretheemploymentfriendlinessofgrowth,notoftheinitialstructureoftheeconomy.Similarly,“non-competitive”activities(e.g.,powergeneration)withhighcapitalintensitycangrowwithhighOEEwithoutprovidingmuchemploymentgrowth.

III.BroadFeaturesofthePoverty-ReductionPerformance oftheCountries

Of the eight countries covered by the new set of studies, six (Cambodia, China, Indonesia,Malaysia,PhilippinesandThailand)areinEastandSouth-EastAsia(“EastAsiaandthePacific”accordingtoWorldBank’sregionalclassification)andtwo(IndiaandSriLanka)areinSouthAsia.Theyincludethethreelargestdevelopingcountriesoftheworld,aswellassmallcountrieslikeCambodia(14million)andSriLanka(19million).Together,theyaccountfor84percentofthepopulationofdevelopingAsiaandthePacificand52percentofthepopulationoftheentiredevelopingworld. Theyincludethreeoftheeight“highperformingAsiancountries”(HPAEs)intheWorldBank’sAsianMiraclestudy(Malaysia,ThailandandIndonesia)aswellastwoofthecountriesatthetopofthecontemporarygrowthleague(ChinaandIndia).Taking


�3 Thepositivecoefficientisduetothefactthatthecountrywiththehighestincidenceofpovertyisassignedthehighestrank,asisthecountrywiththehighestincome.

�4 ForIndiathemoderatepovertyratesinWDI,2006seemtobemisprints.WehaveusedthefiguresfromtheWDI,2005.

intoaccountCambodia’srapidgrowthsincetheearly1990s,sixoftheeightcountriescanbesaidtohaveagoodtoexcellentrecordofgrowthinoverallGDP.ThePhilippinesandSriLankahaveachievedslower,butstillpositivegrowth.

Table 1 summarizes some facts about these countries’ level of development, incidenceof poverty, and trends in growth, inequality and poverty. As a perusal of these basic factsreveal,simplerelationsbetweenlevelsofincomeandpovertylevelscanbepuzzlingandevenmysterious.Noteherethatpovertythresholdsandincomesareininternationallycomparableunits.Thelevelofpercapitaincomeandtheincidenceofpoverty,orrathertheinverseofit,arewellrelated,withsomeclearoutliers.But,thisrelationshipismuchstrongerformoderatepoverty (proportion of population below the higher threshold of PPP$2 per person perday)thanforextremepoverty(thosebelowPPP$1).Spearman’srankcorrelationcoefficientbetweenpercapitaincomeandthepovertyincidenceis0.70forextremepovertyand0.85formoderatepoverty.�3ThemaindifferenceisduetoChinawhichhasamuchpoorerperformanceintermsofextremepovertythanintermsofmoderatepovertyrelative to the other countries in the group.Forexample,ithasmorethantwicetheincidenceofextremepovertyasIndonesia,acountrywithlessthan60percentofitspercapitaincome,butalowerincidenceofmoderatepoverty.

Anotherpuzzleis India,whichhasthehighest incidenceofbothextremeandmoderatepoverty.�4India’spercapitaincomeismorethanathirdhigherandinequality,asmeasuredbytheGiniratio,isafifthlowerthanCambodia’s.Andyetithashigherpovertyaccordingtobothindices.Thiscould,ofcourse,beduetooneormorereasons,e.g.,lackofcomparabilityofPPP$incomesandpovertythresholdsandthefailureofthedifferenceintheGiniratiostocapturethedifferenceintheincomesharesofthepoor.

Apart from a question mark about the Philippines, all the countries achieved povertyreduction in the periods under review. Even the three HPAEs appear to have reversed theriseinpovertythattheyexperiencedduringbriefperiodsaftertheonsetoftheAsiancrisis.WhileinMalaysiaandThailandtheresumptionofrapiddeclineinpovertyquicklypushedtheincidenceofpovertybelowthepre-crisislevels,inIndonesiatheprocesshasbeenslower.

Itis,however,importanttopointoutthat,byandlarge,actualpovertyreductionhasbeenslowerthanthe“potential”povertyreduction,arateofpovertyreductionthatmighthavebeenexpectedfromthegivengrowthinincomeifotherunfavourablechanges(e.g.,deteriorationinthedistributionofincome)couldbeavoided.TheonlypossibleexceptionmaybeMalaysia.Thereasonisthatinequalityincreasedinmostofthecountries.Malaysiaistheonlycountry


�5 Thisstandardhasbeenchanging.Malaysia’sGiniratioisreportedtobecloseto0.5.IntheEastAsianpioneersitwasverysubstantiallylowerduringtheirrapideconomicgrowth.

Note: Per-capita income is in PPP$ for 2004. Poverty estimates refer to the proportion of population belowrespectivelyPPP$1andPPP$2perpersonperdayintheearly2000s.ThesedataarefromtheWorld Development Indicators (WDI), 2006.Trend in growth, inequality and poverty are from a variety of sources including the casestudies.

IV.AnOverviewoftheFindingsoftheSpecificCaseStudies

Inthissection, thecasestudiesarenotsummarized,butratherthehighlightsof the issuesinthem,relevantfortheanalysisofgrowth-employment-povertylinkage,arepresented.Thecasestudies,manyofthemextraordinarilylong,oftendiscussissuesthat,howevervaluableforotherpurposes,arenotdirectly relevant to thisone.The followingoverviewshavealsodrawnuponevidencefromsourcesotherthanthenewcasestudies.

whichexperiencedaslightdropininequality,buteventheretheabsolutedegreeofinequalityishighbythetraditionalAsianstandard.�5Indonesiaistheonlycountrywithlowinequalitywhichhasavoidedatrendincreaseininequality.Whathasbeentheroleoftheemploymentperformanceofthecountriesinthisgrowth-povertylinkage?Beforewecanattemptananswer,itisnecessarytoanalysethebasicfactsforthecountriesfromthecasestudies.

Table1:PerformanceoftheCountries

Country Per-capita Income 2004

Income Growth

Poverty Level Inequality Poverty Reduction

PPP$� PPP$2

Cambodia 2310` Rapidbutnotrobust

34.1 77.7 High&rising

Slow

China 5890 Veryrapid 16.6 46.9 High&rising

Rapidbutlessthanthepotentialrate

Indonesia 3480 Rapidbefore1997,slowsince2000

7.5 52.4 Low Rapiduntil1997,slowinrecentyears

Malaysia 9720 Rapid,someslowdownafter1997

<2 9.3 Highbutsomefall

Rapid,exceptbetween1997and1999

Philippines 4950 Slow 15.5 47.5 High&rising

Slowifatall

Thailand 7930 Rapiduntil1997,slowrecently

<2 25.2 High,roseuntilrecently

Fairlyrapid,lessthanpotential

India 3120 Moderateinthe1980s,rapidsinceearly1990s

34.7 79.9 Moderatebutrising

Slow

Sri Lanka 4210 Modest 5.6 41.6 Moderatebutrising

Slow


EastAsia

Cambodia

In thedecadebetween1994and 2004,Cambodia’sGDP increasedat anannual rate of6.8per cent and per capita GDP increased at 4.3 per cent per year. Much of the growth wasconcentratedinafewnarrowsectors:garmentmanufacturing;construction;transport;andhotelsandrestaurants.Agriculture,thesector“employing”morethan70percentofthelabourforce,grewatamuchslowerrateof3.4percent.OverallGDPgrowthrateacceleratedsincethelate1990swhentherateofgrowthofagriculturefell.

Inequality,asmeasuredbytheGiniratio,increasedfrom0.347in1993to0.403in2004.ThisbeingtheGiniratioofconsumption,theGiniratioofincomedistributionwasalmostcertainlymuchhigher.Thisindicatesthatinequalityisbothhighandhasincreasedsubstantiallyoverthedecade.

Cambodia had four household surveys between 1994 and 2004. Estimates of povertyshown by these surveys indicate little change. The case study, however, argues that thesurveysarenotcomparableovertime,especiallybecauseofthelowcoverageofthefirstofthem.BasedontheWorldBank’sadjustment,itarguesthatpovertyheadcountratefellinthepartofCambodiacoveredbythefirstsurveyfrom47percentto35percentoverthedecade.Unadjustedestimatesshowasmalldeclineof3percentagepointsbetween1994and1997andvirtuallynonethereafter.

Agriculture absorbed more than 75 per cent of employment in 1994. This ratio fell toabout72percentin2000andchangedverylittlethereafter.Overthedecadethelabourforceincreasedatanannualrateof3.5percentduetonaturalincrease,thereturnofrefugeesandthe reintegration of the members of the former Khmer Rouge households. Employment isestimatedtohavegrownataslightlyslowerannualrateof3.3percent.But,sincemuchoftheso-calledgrowthinemploymentwasintheslow-growingagriculturalsector,notmuchcanbemadeofthesefigures.

EvenifoneacceptstheadjustedBankestimateofthedeclineinthepovertyheadcountratebetween1994and2004,therateofpovertyreductionmustbejudgedtobeslow,giventhatpercapitaGDPduringtheperiodincreasedbymorethanhalf.Itisparticularlyworryingthatpovertyreductioninlateryearsappearstohavebeenmuchslower,ifatallsignificant,whenthe rateof increase inpercapitaGDPaccelerated.Thecasestudyargues thatmuchof theexplanationforthisistobefoundinthelowoverallemploymentintensityofgrowth.

Theeconomy-wideOEEwas0.48fortheentireperiod.Itwasmuchhigherforagriculture(0.76) thanfor industries (0.56)andservices (0.53).Sinceoutputgrowthforagriculturewaslow,thehighlabourabsorptioninthesectorwasnotparticularlyhelpfulforpovertyreduction.Garments, themost rapidlygrowingactivity,hadanOEEof0.47,notnearlyashighasonewouldexpect.

AsianExperienceonGrowth,EmploymentandPoverty �0

�6 Informationinthisparagraphisfromsourcesotherthanthecasestudy.

ThestudyshowstheOEEsfortwosub-periods:1994-97and1998-2004.Therateofgrowthwashigherinthesecondperiod.TheOEEfortheeconomyasawholeandforeachindividualsectorwashigherinthesecondperiod.Forindustriesitincreasedto0.63andforgarmentsto0.62,bothquitedecentrates.Thesameoccurredforconstructionandtherapidly-growingservicesliketransport.Foragriculturetheelasticityexceededone,anindicationofslowgrowthofoutputanddecliningproductivity.

The economically active proportion is about as high for females as for males.There arestriking differences between the poor and the rich in terms of labour endowment: theproportionofeconomicallyinactiveadultsismuchlowerforthepoorestconsumptionquintile(22percent)thanfortherichestquintile(30percent)whiletheproportionofmembersunderworkingageismuchhigherforthepoorestquintile(30percent)thanfortherichestquintile(9percent).Theformermustindicatealoweraffordabilityofinactivityforthepoorwhilethelattershowsthathigherdependencyratioisacorrelateofpoverty.Overall,dependencyratioishighforthecountryduetothemassivelossoflifeduringtheKhmerRougeperiodandthehighpopulationgrowththathasstartedmoderatingonlyinrecentyears.�6

Thecasestudyblamesthelowemploymentfriendlinessofgrowthasamajorreasonforthelowpovertyreductioneffectofgrowth.Andyet,ontheevidenceofmorerecentyears,itishardtoarguethattherapidly-growingsectors,suchasgarmentsandconstruction,havenotbeenadequatelyemploymentintensive.Thatemploymentgrowthhasnotbeenrobust,isratherduetothefactthatgrowthwaslimitedtosomenarrowsectorsoftheeconomyand,in particular, was very low for agriculture, where most of the population and the poor arelocated.Theslowgrowthofagricultureanditsundiminishedshareofthelabourforcehaveledtoafallinoutputperworkerinagricultureandperhapsalsooutputperpersondependentonagriculture.Combinedwiththefactthathouseholdsinlowerdecilesderiveahigherproportionofincomefromagriculture,onegetsapictureofthecontinuedincidenceofextensivepovertyintheruralareas.

The paper analyses the role of four major instruments of public policy - fiscal policy,investmentpolicy,tradepolicyandprivatizationofcommonpropertyresources-ongrowth,employment and poverty. Relaxed investment policy, supported by import tax exemptionon raw materials, easy immigration of expatriate experts and other targeted incentives,havehelpedgrowth.Fiscalpolicyhasnothelpedpoverty reductionbecausethe limitationof resources has obviated large public investment to promote infrastructure developmentnecessary for agricultural growth and broad industrialization. It has also been an obstacleto public expenditure needed to promote investment in human capital development andother targeted support to the poor. Trade liberalization and World Trade Organization(WTO) membership have generally supported growth by enabling access to the marketsoftheadvancedindustrialcountries.Accordingtothestudy,Cambodia’sacceptanceoftheregulationofminimumwagesandworkingconditions ingarmentshasensuredfavourableaccess of these exports to the US and European markets.The paper is, however, indirectlycriticaloftradereformsinsofarasthereductionoftariffhasreducedpublicrevenueandtheabilityofthegovernmenttofinanceahigherlevelofinvestmentininfrastructureandpoverty-

�� An overview with special reference to the findings of some recent case studies

alleviationprogrammes.Aninterestingpointthatthestudyleavesunexploredistheextenttowhichtheacceptanceofhigherregulatedwagesingarmentshasresultedintherationingofemploymentinthatsectorandtheextenttowhichthesector’sOEEmightpossiblyhavebeenhigherintheabsenceofsuchregulations.Accordingtothestudy,theongoingprivatizationof traditionalcommonproperty rights -notablyaccess to forestryandfishingwater -havehamperedthewelfareofthepoorwhoselivelihoodssignificantlydependedonsuchaccess.

China

ThecasestudyonChina,titled“Growth,EmploymentandPovertyReduction:TheCaseofChina”,beginswithanoverviewoftrendsingrowthinGDPanditsmajorsectoralcomponents,aswellasintotalandsectoralemployment.ObservedOEEfortheeconomyasawholehassteadilydeclinedsincethe1980s.Itsdeclinehasbeenparticularlysharpforindustries.FortheservicessectoralsotheOEEhasdeclinedovertimethoughremaininghigherthaninindustries.

ThecasestudyarguesthatChina’stradeliberalizationandexternalorientationduringthereformperiodhavebeenconducive tohighergrowthandemployment.While themethodandactualmagnitudeofitsestimatesofemploymentgrowthduetotradeliberalizationareopentoquestion,thebroadqualitativeconclusionthatithashelpedgrowthandemploymentgenerationdoesnotseemindispute.Italsoarguesthattheexportprocessingzones(EPZs)havehelpedattractforeigndirectinvestment(FDI)andby2004FDI-fundedenterprisesdirectlyemployed3.9percentofallurbanworkers.By2003suchenterprisesalsodirectlyemployed5.4percentofallemploymentintownshipandvillageenterprises(TVEs)inruralChina.

Given the residual nature of the sector’s employment which is dominated by self-employment,theobservedOEEinagricultureismoreareflectionofemploymentgrowthintherestoftheeconomythanofproductiveabsorptionoflabourinthesectoritself.ThefactthattheOEEturnedfrompositive,intheperioduntil1991,tonegativeduringthenextfiveyearssimplyindicatesthebeginningoftheabsolutefallinemploymentinagriculturewhichwasfacilitatedbyareasonablyrapidgrowthofemploymentinsecondaryandtertiarysectorsjustas the fact that thesector’sOEE turnedpositiveagain in1997andcontinuedtobesountil2002,reflectsthereversalofthetrendofabsolutedeclineinagriculturalemployment,achangebroughtaboutbytheabsolutedeclineinemploymentinindustries.By2003growthinindustrialemploymentagainturnedagriculture’sOEEnegative.

Employment in TVEs, accounting for much of the rural non-farm employment, had anexplosive rate of growth during 1984-88. During the following three years, growth inTVEssloweddownduetocreditrestrictionsthatwereimposedasapartofstabilizationpolicies.ThroughoutmuchofthisperiodthedeclineinoutputgrowthwasaccompaniedbyanegativeobservedOEEforthesector,resultinginanabsolutefallinemployment.ThiswasfollowedbyfrequentsharpfluctuationsintheobservedOEEforthesector,negativeelasticitiesbeingrecordedfor1994andalsoforthefirsttwoyearsoftheAsiancrisis.Bytheearlytwenty-firstcenturytheOEEfortheTVEsrecoveredtoanaverageof0.23,aratherlowvalueforacountryof


�7 Thepaperalsoreportsa“regression-based”elasticitywhichrangedbetween0.7and0.8from1996and2003.ThesearebasedonprovincialpaneldataonemploymentandvalueaddedinTVEs,presumablyeachprovinceconstituting one observation. It is hard to interpret the operational meaning of this estimate. More on thisfollowsinconnectionwithestimatesforothersectors.

�8ThedataareshowninNationalBureauofStatisticsofChina,2005.

China’srelativeresourceendowment.�7Cross-sectionaldataprovidesupportforthehypothesisthatTVEemployment,asaproportionoftotalemployment,isstronglynegativelycorrelatedwiththeincidenceofruralpoverty,afindingthatsuggeststhatthedeclineintheOEEfortheTVEswasanobstacletoruralpovertyalleviationinrecentyears.

Growthofmanufacturingemploymentfellfromanannualrateof2.6percentinthefirsthalfofthe1990sto-3.9percentduringthesecondhalf.Intheearly2000stherewassomerecovery.Mostofthemanufacturingemploymentgrowthduringtheperiodsince1990tookplaceinthecoastalprovinces,thenetgrowthovertheentireperiodbeingnegativeforalltheotherprovinces.ThegrossOEEforthemanufacturingsectorwasapproximately0.5inthemid1980s.Itsteadilydeclinedthereafterreachinganegativevaluein1996.Itwasnotuntil2002thatitturnedpositiveagain,eventhoughreachingavalueofjust0.25.

Thecasestudypresentsseveralsetsofestimatesofemploymentelasticityforconstructionandservicessectors.LikesomeoftheelasticitiesforTVEs,thesearehardtointerpret.Foragivenyear,theelasticityisbasedonregressionofemploymentonvalueaddedbasedoncross-sectionalpaneldatainwhichaveragevaluesforaprovinceconstituteoneobservation.Whatsuchestimatescaptureisthevariationinemploymentintensitybetweenprovincesofdifferentsizeofaggregatevalueaddedofthesesectors.Onecanmakelittleoperationalsenseofsuchanestimateasanindicatoroflikelyemploymentgrowthasnetoutputsofthesesectorsgrowovertime.Thedifficultyiscompoundedbythefactthattheordinaryleastsquareestimatesbasedonthesemethodsgiveelasticityforconstructionof1.11andforservicesof0.74fortheperiod1996-2002.Elasticitiesbasedonrandomeffectandfixedeffectmodelsusingthesamedata–forwhichthemethodsareinadequatelyexplained-arerespectively0.30and0.26forconstructionand0.33and0.31forservices.ThepresentreviewermadeestimatesofobservedOEEsfortheentiretertiarysectorasratiosofannualemploymentgrowthtoannualgrowthinvalueaddedoverthreetimeperiods:1990-95;1995-2000and2000-2004andtheyturnedouttoberespectively0.71,0.40and0.46.�8

On the whole, the estimates suggest that China’s non-agricultural sectors, includingindustries,hadan increasinglyemployment-hostilegrowth,especially since themid1990s.Duringthesecondhalfof the1990stheobservedOEEs in industriesbecamenegativeandin construction and services much lower than before. In the early years of the twenty-firstcenturytheseelasticitiesimprovedsomewhat,butstillremainedfarlowerthantheEastAsianpioneersatcomparablelevelsofdevelopment.

The case study reports that real wages in all sectors have increased steadily withoutinterruption during the entire reform period. This appears to have been the case formanufacturingduringthesecondhalfofthe1990saswellwhenabsoluteemploymentfellandurbanunemploymentrose.Itwouldbeinterestingtoknowwhatdrovewagesupduringthis

�3 An overview with special reference to the findings of some recent case studies

periodofsharplyrisingurbanunemployment.Thisclearlyrepresentsadesirableoutcomeinsofarasthisreducedconcealedunemploymentinmanufacturing,increasedtheproductivityofthosewhoremainedinemploymentandpassedthebenefitsofproductivitygrowthontotheemployedworkers.However,itisunclearhowthemarketwas“induced”ormanipulatedtomakethispossible.

Poverty in China has traditionally been considered a rural phenomenon. According toofficialestimatesreportedinthecasestudy,theincidenceofruralpovertywashalvedintheshortspanoffiveyearsafterthelaunchingofreformsin1978,aperiodofrapidagriculturalgrowthandgrowthinruralincome.Eversince,therateofdeclineinthenumberoftheruralpoorhassloweddownineachsuccessiveperiodandinveryrecentperiodsithasshownverylittlereductionaccordingtoofficialestimates.Thecasestudyarguesthatwhileruralpovertynowafflictsasmallproportionoftheruralpopulation,theabilityofthepoortobenefitfromlabourmarketopportunitieshasbecomeverylimited.Migrationisamajorsourceofpovertyalleviation: it increasestheincomesofthemigrantsand,throughtheremittancesthattheymake,ofmembersoftheirfamilieswhoare leftbehind.Studieshave,however,shownthathouseholds below the poverty line have a much lower probability of migrating.Targetingpoor counties and creating labour market opportunities there, the principal strategy ofpovertyreductioninruralChina,havenotsucceededinbenefitingthesehouseholds.ThecasestudyarguesthatthefocusofChina’sruralpovertyreductionmustshifttothetargetingofthesepoorhouseholds,ratherthanpoorcounties,anduseincometransfersandotherdirectinstruments.

Chinahasexperiencedafairlyhighrateofmigrationfromruraltourbanareas inrecentyearsalthoughmostmigrantscontinuetobewithoutofficialresidentialstatusandexcludedfrommostofthebenefitsavailabletotheurbanresidents.Theflowofmigrationhasnotbeenhigh enough, or free enough, to bring about a reduction of the large urban/rural incomedifferentialthatadverselyaffectsthewelfareofChina’spoorwhoaremostlyresidentinruralareas.

UrbanpovertyhasbecomeanissueinrecentyearsinthewakeofrisingunemploymentinurbanChina,aphenomenonthathasemergedastheresultofthereformofStateandcollectiveenterprisesinthe1990s.Urbanunemploymentrateincreasedfrom4percentin1995to6.1percentin2002and,thereafter,fellto5.8percentin2004accordingtoofficialsurveydata.However,theseestimatesareseriousunderstatementsoftheextentofunemploymentasisindicatedbythefallofthelabourforceparticipationfrom83.1percentin1995to74percentin2002and71.6percentin2004accordingtothesameofficialsurveys.Thecasestudyarguesthattheincreaseinunemploymentislargelyhiddenbythephenomenonofdiscouragementwhichhas ledto the11.5percentagepoint reduction in the labour forceparticipationratebetween1995and2004.


�9 SeeKhan,2005,foradiscussionoftheseissuesandreferencestotheirsources.

TotheabovefindingsofthecasestudymightbeaddedthefollowingadditionalpointsaboutChina’sgrowth-employment-povertynexusfromsomeotherrecentsources.�9Mostofthesepointsareconsistentwiththefindingsreportedinthecasestudy.

TheinstrumentsofexternaleconomicpolicyhaveindeedfacilitatedChina’squestforrapideconomicgrowth,whichhasexpandedtheopportunityforpovertyreduction,buthavenotuniformlybenefitedthepoor.China’stradeliberalization,followingWTOaccession,hasmadeitmoredifficulttoprotectandaugmenttheincomesoftheagriculturalproducers.Thishasmadethetaskofruralpovertyreductionmoredifficultthanitwouldotherwisehavebeen.Thebenefitsofincomeandemploymentgrowthduetoexportexpansionhavebeenconcentratedinthecoastalareas,whichwerealreadymuchricherthantheinlandprovinces.FDIinflowhas,onbalance,helpedcreatealotofemploymentandincome,butagainconcentratedintherichcoastalprovinces.Theresulthasbeenalop-sidedregionalperformanceinpovertyreduction.

Employment policies have suffered from serious deficiencies. In rural areas, egalitarianaccesstolandhashelpedthecreationofself-employmentwhichhasservedasanultimatesafety net for the vast rural population.There has also been a steady increase in non-farmemployment, though not equally in all regions. Finally, the tolerance of migration to cities–thoughhalf-hearted,withthepersistenceofwidespreaddiscriminationagainstthemigrants– has helped improve the balance between supply and demand of labour in rural China.Between1995and2001ruralemploymentremainedstablewhileruralpopulationdeclinedatanannualrateof1.3percent.ThishashelpedpovertyreductioninruralChina,giventheeffectofotherpoliciesandcircumstances.

Therehasbeenanasymmetricalrelationbetweentheoverallgrowthrateandtherateofpoverty reduction in different time periods in rural and urban China.Thus, the fall in ruralpovertyinthetwodecadesofreformwaslargelyaccountedforbytworelativelybriefperiods:thefirstfiveyearsofreformandthemiddlethreeyearsofthe1990s.Duringtheseperiods,macroeconomic policies concerning public revenue and expenditure, determining thepricingandprocurementofagriculturalproducts,facilitatedrapidgrowthinruralincomebyimprovingagriculture’stermsoftrade. Inotherperiods,contrarypoliciesadverselyaffectedagriculture’stermsoftradeandledtoslowgrowthofruralincomeandmuchreducedratesofpovertyreduction.

InurbanChina,thevitalemploymentlinkinthegrowth-povertynexuswasbrokenespeciallyinthe1990s.Between1990and2001urbanemploymentincreasedatanannualrateof3.1percentwhileurbanlabourforceincreasedmuchfaster(urbanpopulationincreasedat4.3percentperyear).ThiswasduetoasharpfallinemploymentinStateandcollectiveenterprises–byalmost50millionovertheperiod–duetothesheddingof“concealed”surpluslabouraspartofpublicenterprisereform.

Cities in China have had a much lower incidence of poverty than in the countryside.Nevertheless,urbanpovertyactuallyincreasedinthelate1990sevenwhennoaccountistakenofthefloatingmigrantstourbanareas.Thiswaslargelyduetotheriseinurbanunemployment


20 These include the indices showing the depth and distribution of poverty among the poor as well as theproportionofpopulationbelowthe internationalpoverty lineofpurchasingpowerparity$2perpersonperday.

2� Thecasestudyhighlightsthefactthatthesetwoperiodswerecharacterizedbyfavourablecircumstances,anoilboomandtradeliberalization,whichapparentlyhadnopositiveeffectonrealwages.

causedbyaninappropriatesequencingofthereforms:reformsofStateenterprises,creatinglarge-scaleredundancy,wereimplementedlongbeforethecreationofasafetynettoprotectthe unemployed.This again was intimately related to macroeconomic policies concerningpublicexpenditure.

Indonesia

IntheyearsprecedingtheAsianfinancialcrisisIndonesia’spercapitaincomewasincreasingatanannualrateofmorethanfivepercent,indicatingasixtosevenpercentannualgrowthinGDP.GDPfellsharplyinthetwoyearsafterthecrisishitIndonesiaand,althoughrecoverystartedin2000,by2003percapitaincomeremainedsixpercentbelowwhatithadbeenin1997,theyearcrisishit.Percapitarealconsumptionexpenditure,however,grewfasterand,by 2003, it had slightly exceeded the pre-crisis level. The inequality in the distribution ofincome,whichhadfallenintheimmediateaftermathofthecrisis,rosethereafter,closetothepre-crisislevel.Although,theheadcountrateofpoverty,definedintermsofaconsumptionpovertythreshold,fellbacktonearlythepre-crisislevelbytheyear2002afterasharpriseintheimmediatepost-crisisyears.Someoftheotherindicesofpoverty,however,indicatealessfavourableperformance.20

TheunemploymentrateinIndonesiahadbeenrisingintheyearsbeforethecrisis.Itsrateofincreaseacceleratedinthepost-crisisperiod.Theriseintheunemploymentrateshowednosignsofslowingdownintheperiodofrecovery.In2003itwasmorethantwicethe1997level.Thisunfavourable turn inemploymentperformancehasbeencombinedwithanumberofotherundesirablechangesintheemploymentscene.Agriculture’sshareoftotalemploymenthadbeenfallingsteadilyuntil1997.Sincethenithasincreasedsubstantiallyandstoodnearlysixpercentagepointshigherin2003thanin1997.Theshareofmanufacturingindustriesintotalemploymentwaslower in2003thanin1997.Therewasanincreaseintheproportionofemployment in informalactivitiesandacorrespondingfallofemployment intheformalsectors.

Inthetwodecadesbeforethecrisis,realwagesandproductivitygrewataboutfivepercentperyearandpovertyheadcountratefell29percentagepoints.Exceptfortwoshortspells,ariseinrealwagesandfallinpovertymovedcloselytogether.2�Intheaftermathofthecrisisrealwagesfellsharply.Since2000theyhavebeenrisingagain.

Labour market performance in the post-crisis period has been the subject of a debateaboutpolicies.Onegroupofeconomistshasarguedthattherecoveryinrealwageshasbeenduetostronggovernmentinterventionintheformofminimumwageenforcementandotherregulationsandthatthishashamperedemploymentgrowthintheformalsector.Anopposingschoolofthoughttowhichtheauthorsbelong,hasrejectedthisviewbyarguingthatthereisnoevidenceofwageincreasesleadingtoariseinwagesasaproportionofoutputvalue.


22 TheauthorsofthepapercallsuchannualestimatesofOEE“employmentelasticitybasedondescriptivemethod”.Theseestimatesfluctuatesharplybetween-8and+3duringthe1990s.

Theauthorsintroduceadifferentindexofrealwagethattheycallreal product wage,derivedbydeflatingnominalwagebythepriceof theproductthatwage-earnersareemployedtoproduce,andshowthatitstrendwarrantsnoconcernaboutrisingwageseatingintoprofits.Theyarguethattheslowemploymentgrowthisessentiallyduetoslowgrowthinaggregatedemandresultingfromdeflationaryfiscalandmonetarypolicies.

Forthetwodecadesleadingto1990,agricultureattainedanannualoutputgrowthof3.6percentandanemploymentgrowthof1.7percent,leavingahealthygapof1.9percentforgrowthinproductivityperworker.Duringthislongperiod,agricultureproductivelyabsorbedlabourasisindicatedbytheobservedarcOEEof0.47.Bytheearly1990sagriculturalgrowthratefelltoasignificantlylowerrateandchangeinemploymentinagriculturebecamerathererratic,oscillatingbetweenlargepositiveandlargenegativerates.Employmentinagricultureappearedtobechanging,notinresponsetochangeinlabourdemandwarrantedbychangein output and technology, but by its role as the residual employment sector receiving andreleasinglabourshedorreclaimedbytheothersectorsoftheeconomy.EstimatesofOEEbasedonobservedchanges inoutputandemployment for thisperioddonot reflectmeaningfulemployment intensities for purposes of projection.22 The case study also reports OLSestimatesofso-called“pointelasticity”basedoncross-sectionalprovincialdataonoutputandemployment.Theseelasticitiesareusuallyaboveoneforeachyearbetween1977and1996.Intheopinionofthepresentreviewer,thesecross-sectionalelasticitiesarehardtointerpretanduseforanalyticalpurposes.Theauthorsarguethatthedeclineinagriculturalgrowthhasbeenlargelyduetolackofresourcesforinfrastructure.Thishasbeenbadforbothoveralleconomicgrowthandpovertyreductionbecauseagriculturalgrowthhasalargemultipliereffectonthegrowthofothersectorsandontheincomeofthepoor.

Manufacturingindustriesgrewveryrapidly,especiallybetween1985and1992,followingthe adoption of trade liberalization and export-led development strategy. But, its growthratehadstartedmoderatingintheyearspriortothecrisis.Accordingtotheauthorsthiswasduetothedeclineintheinternationalcompetitivenessoftextile,woodandpaperindustries.They argue that in the last decade there has been a disjoint between output compositionandexportcompositionofindustries:outputsharehasincreasedforlow-technologyproductswhile export share has increased for high-technology products.The case-study shows OLSestimatesofOEEbasedontime-seriesdata for individual industriesandformanufacturingasawholefordifferenttimeperiods. TheOEEwasquitehealthy, fallingfrom0.8to0.6formanufacturingasawhole,betweenthefirsthalfofthe1980sandthefirsthalfofthe1990s.Sincethesecondhalfof the1990stheelasticityhasbeendrastically lower: less than0.1 inthesecondhalfofthe1990sand-0.2during2000-03.Whilethefirstofthesetwosub-periodsbeganwellbeforethecrisis,theelasticityfortheperioditself,endingin1999,musthavebeentheoutcomeoftheconsequencesofthecrisis.Indeed,theestimatedelasticityfor1975-96ishigherthan0.7,indicatingveryhealthyemploymentintensity,whilethatfor1997-2003islessthan0.2.Unfortunately,thecasestudydoesnotshedmuchlightonthecausesforthischange.Itmaintainsthatthe lowemploymentgrowthisduetoconstrainedaggregatedemand,anargumentthatthereviewerfindspersuasive.Nevertheless,thatbyitselfdoesnotexplainwhy


23 Thisisduetoanelasticityof-69.1for1999.Excluding1999theaverageelasticityfortheremainingyearsis0.36(butseebelow).Thepapershowsoutputandemploymentgrowthonlyoncrowdeddiagrams,withoutactualnumbersshownintables.Fromthediagramsitappearsthatthemassivenegativeelasticityfor1999isduetoaminusculenegativeoutputgrowthandasmall,butmuchlarger,positiveemploymentgrowth.Ifso,thisshouldhavebeenignored.Averagingofsuchannualelasticitiesmakeslittlesense.ItisalsonotcleartothereviewerwhyOLSestimatesofpointelasticitiescouldnotbemadefromthesedata.

industriesshouldhavebecomelessemploymentintensive,unlessonearguesthatstringentmonetary policy caused disproportionately more severe credit starvation for small, labour-intensiveindustries;andinvokesothersimilarasymmetricaleffectsofmacroeconomicpoliciesonactivitiesdifferinginfactorintensity.

The case study shows “descriptive” arc elasticities, the only ones that the authors sayavailabledataallowtoestimate,forconstructionandtrade,transportandfinanceserviceforeachoftheyearsfrom1994to2003.Forconstruction,theaverageelasticityisjustoveronewhileannualvaluesrangefromalowof-0.6toahighof+2.3.Fortrade,theaveragevalueisastaggering-6.5.23Fortransport,theaverageelasticityis0.46,althoughannualvaluesfluctuatebetween-1.7and+1.8.Evenmoreoddly,forfinance,theaverageelasticityis1.8whileannualestimatesrangefrom-0.8and+8.6.Littlesensecanbemadeoftheseestimates.

Theauthorsmakeextensiverecommendationsforpoliciestoovercometheunfavourableemploymentscenarioandtohelpacceleratepovertyreduction.Theprincipalemphasisisontherestorationofeconomicgrowthtopre-crisisrates:endingoftheperversecreditsqueezeand fiscal retrenchment adopted at the onset of the crisis, motivated by an unwarrantedconcernforstabilization,andinsteadsettingmonetaryandfiscaltargetsthatareconsistentwithhigherinvestmentandfastergrowth;improvedfocusonthegrowthofagriculture,thesectoremployingmostworkersandhousingmostofthepoor;andimprovedresourceflowintosmallandmediumindustries,thesectorswithmostemploymentpotential.Theyrejecttheargumentinfavourofgreaterlabourmarketflexibilityasthemainpolicyforemploymentpromotion.Indeed,theyrecommendanexpansionofbothreactive(e.g.,greaterprotectionfor the workers) and proactive (e.g., improved access to human capital) labour marketinterventions.


24 This,longestofthecasestudies,providesagreatdealofinformation,thoughmuchofitisreproductionoftablesfromofficialsourcesandnotallofitisnecessaryforananalysisoftheissuesunderconsideration.Anunfortunateproblemisthatmostofitsowncalculationsseemtobefaulty.Forexample,allthegrowthratescalculatedbytheauthorsarepercentagechangesbetweenthevaluesintheterminalyearandthebaseyear,dividedbythenumberofyears.AcomparisonofTable2.1andTable2.3andaperusalofTableslike3.16makesthisclear.TheresultisthatthegrowthrateofGDPbetween1970and2004isestimatedtohavebeenanabsurd24.4percentperyear.Amongotherproblems,growthrateofavariableanditspercapitagrowthrateareinconsistentwiththe population growth rate that is shown.The reviewer has chosen to ignore all numerical estimates madeby theauthorsunless theycanbeconfirmedbydatasources. Normally thiswouldbeaseriousobstacle toanalysis,but,fortunately,Malaysia’sgrowth-employment-povertylinkageisrelativelyclearandunambiguous.Thegrowthratesreportedareusuallyestimatesmadebythereviewerfromtheofficialdatashowninthecasestudy.

25 Thesegrowthrates,andtheonesthatfollow,areestimatedbytherevieweronthebasisoftheofficiallabourforceandemploymentfiguresshowninTables2.6,2.8andothers.Asnotedearlier,thegrowthratesestimatedandshownbytheauthorsofthereportareallincorrect.

26 Thisisbasedonthenetimmigrationof620,000duringthe1990sshowninWDI,2006.Toarguethat42percentoftheincreasedlabourforceduringthedecadewasaccountedforbyimmigrationonewouldneedtoassumethatallimmigrantsbecamemembersofthelabourforce.

Malaysia24

Malaysiaachievedaveryhighrateofgrowthinrecentdecades.Between1970and2004ithadanannualcompoundrateofgrowthinGDPof6.77percent,anannualpopulationgrowthof2.56percentandanannualgrowthof4.1percentinpercapitaincome.Duringthisperiod,stretchingovernearlythreeandahalfdecades,MalaysiaexperiencednegativeGDPgrowthonlytwice:in1985inthewakeofasharpdeclineinexportpricesandin1998,intheaftermathoftheAsianfinancialcrisis.Malaysiastartedoutwithahighinequalityinthedistributionofincome:theearliestestimateoftheGiniratioreportedinthecasestudyis0.51for1970forPeninsularMalaysiaonly.ForMalaysiaasawhole,theGiniratioisreportedfrom1980onwards.On this evidence, Malaysia’s remarkable growth performance was not accompanied by anincreaseininequality.Indeed,inequalitydecreased:theGiniratiodecliningfrom0.51in1980to0.46in2002.Theresultofthishighandinequality-aversegrowthwasarapiddeclineintheincidenceofpoverty:theproportionofpopulationbelowtheofficialpovertyline,representingaminimumconsumptionbasket, fell from52percent in1970toaminuscule4percent in2004.Therewasashort-livedincreaseintheincidenceofpovertyfrom6.1percentin1997to7.5percentin1999,butby2000itfellbelowthe1997levelandcontinuedtodecline.

Employmentgrowthappearstohaveplayedanimportantroleintheprocessofmakinggrowthinequality-averseandpoverty-alleviating.Inthe34yearsbetween1970and2004,theannualgrowthoflabourforceaveraged3.16percent:itwas3.87percentduringthe1970s,2.67percentduringthe1980s,3.23percentduringthe1990sand2.44percentduring2000-04.25Theaccelerationintherateofgrowthinthelabourforceduringthe1990swasduetoa rise in the rate of immigration; during this decade net immigration accounted for 42 percentoftheincreaseinthelabourforce.26Thefallintherateofgrowthinthelabourforceintheyearsafter2000wasduetoasharpfall intherateofimmigration.Employmentgrowthexceededthegrowthofthelabourforceoverthewholeperiodandineachsub-periodexcept


the 1970s when the former was just a shade lower than the latter.The officially-estimatedunemploymentratefellfrom9.3percentin1970tolessthantwopercentin1995whereithadbeenhoveringaroundjustoverthreepercent.

Malaysia has experienced the classic type of Lewis transition. Agricultural employmentpeakedin1975afterwhichitstartedtodecline.Theannualrateofdeclinewas0.4percentduringthe1980sand1.5percentduring1990-2004.Agriculture’sshareofemploymentfellfrommorethan52percentin1970tolessthan14percentin2004.

Thefallinagriculturalemploymentwasoffsetbytherisingdemandforlabourgeneratedbythemanufacturingandservicessectors.Employmentinmanufacturinggrewatanannualaveragerateof6.7percentovertheentireperiodsince1970:at8.9percentduringthe1970s,5.94percentduringthe1980s,6.74percentduringthe1990sand2.91percentsince2000.Estimatesofemploymentinservicesareshownonlysince1980.Inthe24yearssincethenitaveragedanannualgrowthrateof4.1percent:4.9percentduringthe1980s,3.6percentduringthe1990sand3.3percentsince2000.

OverallOEEfortheeconomyasawholehasshownnodownwardtrendovermorethanthreedecades:itwas0.46inthe1970s,0.55inthe1980s,0.48inthe1990sand0.53during2000-04.27 ThereviewerhasalsoestimatedgrossOEEsformanufacturingandservicessectorsbycombininginformationforgrowthinvalue,addedfromtheWDIsandgrowthinemploymentfromthedatashowninTable2.8.ThegrossOEEformanufacturingindustrieswas0.67duringthe1980sand0.71duringthe1990s.ForservicesthegrossOEEforthe1980s,thuscalculated,turnedouttobejustoverone.Thismaybebecauseofthenon-comparabilityofgrowthinvalueaddedandgrowthinemploymentinthissector.If,however,thisestimateistakenseriouslythenitmustbeconcludedthattheinitiallaboursheddingbyagriculturewasaccompaniedby the movement of these workers to rudimentary service activities, until their absorptionintomoreproductiveactivitiesafteraperiodofadjustment.Ontheevidenceofmovementinrealwages,discussedbelow,itappearsthattheformerexplanationismoreplausible;thattheestimateofOEEforthe1980sisbiasedupwardsduetoerrorinthemeasurementofgrowthratesofthevariables.Forthe1990stheservicesOEEthuscalculatedturnsouttobe0.77.

Itcanbeseenthatagriculturalvalueaddedgrewat3.8percentperyearduringthe1980swhen employment in the sector fell at 0.4 per cent, together the two factors representinganannualgrowth in labourproductivityofmorethan4percent.While therateofgrowthof agriculture fell to 0.3 per cent during the 1990s, the rate of decline in employment was1.5 per cent, meaning a growth of productivity per worker of close to 2 per cent. Much of

27 ThesearetheestimatesmadebythereviewerbyestimatingthegrowthratesofrealGDPfromtheofficialdatashowninTable2.3andgrowthratesofemployment fromtheofficialdatashowninTable2.8.Thesegrowthratesaretheannually-compoundedratesofchangebetweenendpointsandhencearesubjecttoshort-termfluctuationsinoutputandemployment.Notethattheauthorsprovidetheirownestimatesof“outputelasticityof employment in manufacturing”, but this is the partial elasticity, showing a value greater than one, and isderivedfromaneconometricfunctionofuncertainqualitywhichhas,inadditiontooutput,employmentcostandcapital/labourratioas independentvariables.Asthisreviewhasargued,thesepartialelasticitiesarenotparticularlyusefulasindicatorsoftheemploymentfriendlinessofgrowth.


this was passed on to the workers in the form of increased real wages.28 The high OEE formanufacturingleftenoughscopeforproductivityincreasewhichagainappearstohavebeenpassedontotheworkers intheformof increasedrealwages.Between1972and2000realwagesinmanufacturingincreasedatanannualrateof2.8percent.Realwagesinservicesalsoincreasedatanannualrateof2.6percentoverthesameperiod.29

Not much can be gathered from the paper about the policies that led to the highemployment intensity of Malaysia’s growth. It appears that the shift away from import-substitutingindustrializationandtowardsexport-ledindustrializationinthemid-1980shelpedmaketheincentivesystemfriendliertowardslabourabsorption.Overallpublicpolicyduringthe successive development strategies emphasized poverty reduction.The New EconomicPolicyinitiatedin1971focusedonthereductionofpoverty,thenencompassingmorethanhalf the population, as one of the two prime objectives of development. It also promotedegalitarianismbyemphasizingahighershareinemploymentandassetsfortheBhumiputra,the relatively disadvantaged ethnic group. The National Development Policy, instituted in1991, focused public action on the reduction of hardcore poverty; those who were belowhalfthepovertyincomelevel.TheNewVisionPolicy,institutedintheaftermathoftheAsianFinancialCrisis,emphasizedsustainablegrowthandtheremovalofpovertyinhard-to-reachpocketstowhereithadretreated.

ThePhilippines

The study shows estimates of OEE (which it calls EOE,“employment-output elasticity”) attheaggregate level foragriculture,manufacturing,constructionandservices for the1980s,1990sandthe first fiveyearsof the twenty-firstcentury.Theseareobtainedas the ratioofannualgrowthinemploymenttoannualgrowthinGDP/valueadded.Attheaggregatelevelthis OEE fluctuated wildly, from negative value in 2002 to an absurd 1,200 in 1983.30 Wildfluctuations in this observed aggregate OEE probably reflect sharp changes in the degreeof under-employment in the residual employment categories like agriculture and informalactivities,ifnottoinappropriatemeasurementofchangesinemployment.Whatissurprisingisthattheelasticitiesforindividualsectorstoo,makelittlesense.Thustheaverageelasticityformanufacturingchangedfrom-5.8duringthe1980sto-2.07duringthe1990sand0.45duringthe first five years of the twenty-first century.Year-to-year fluctuations within a decade arewild:duringthe1980stheyrangedfrom-47.9in1981/82to2.75during1986/87.Thereport’sexplanationofthephenomenonisasfollows:

TheobservationsmadeabovecallattentiontothelimitedusefulnessofEOE-ascomputedabove–tomeasureemploymentresponsivenesstooutputgrowth…Thoughsimpleenough

28 Thisisillustratedbythegrowthofrealwagesinrubber,amajoragriculturalactivity,attherateof3.4percentperyearbetween1981and1995.

29 AlltheseestimatesarebasedonrealwagesdatashowninTable3.16.30 ItisnotclearthatthesectoralelasticitiesinTable5.aarecomparablewiththeoverallelasticityshowninTable1.

Theformerareforfiscalyearswhilethelatterareforcalendaryears.

2� An overview with special reference to the findings of some recent case studies

and economical with data, a practical problem is that the available data may reflect someunusual event that had nothing to do with the usual relationship between output andemployment.Changesinoutputaswellasemploymentestimatesonaccountofchangesinsurveymethodologyandsamplingframeseasilycometomind.Factorintensitiesinthebaseandterminalyearsmayalsobedifferentasaresultoftechnologicalchange,thusleadingtofaultyelasticityestimates.

Thekindofchangereferredtointhefinalsentenceispreciselywhatastudysuchasthisshouldtrytomeasure,anditisinappropriatetocallthisacauseoffaultyelasticityestimates.If,however,theproblemiswiththefactorsnotedintheprecedingsentencestheneithertheeconomyofthePhilippinesisorganizedinawaythatoutputandemploymentarecausallyunrelatedorthedataaresobadthatnomeaningfulestimatesofanactualrelationshipcanbemade.Intriguingly,thecasestudyrefersto“alternativeestimatesofEOEbasedonregression[that] indicate low overall elasticity (0.14) for the Philippines in 1980-2004, with those foragriculture(0.10)andservices(0.08),abouthalfofindustry’s…”Unfortunatelynoexplanationordetailsofthesealternativeestimatesaregiven.3�

Povertyestimatesmadebytheofficialstatisticalagencyshowasteadydeclinebetween1991and2004from46to30percentofthepopulation.Duringthisperiodaverageannualgrowth in GDP was 3.8 per cent and the annual growth in population, according toWorldBank’sWDI 2006,was2.1percent.PercapitaGDPgrewatabout1.7percentperyear.Iftheusual relationbetweengrowth inGDPandgrowth inpersonal incomeholds inthecaseofthe Philippines, then the annual growth in per capita personal income was lower, perhapslessthan1.5percentperyear.Thepaperstatesthatinequalityinthedistributionofincomeishigh,butgivesnoinformationaboutitschangeovertime.WorldBank’sWDIsfor1997and2006respectively, showthat theGini ratioofdistributionofpersonalexpenditurewentupfrom0.407in1988to0.461in2000.ThissuggeststhattheGiniratioofincomedistributionwasalmostcertainlyhigher,whichwouldmakeitoneofthehighestintheregion,andprobablyincreasedatasimilarrate.Withalowgrowthofpersonalincomeoflessthan1.5percentandasignificantincreaseininequality,itispuzzlingthatpovertyfellassteadilyasclaimed.Thecasestudy expresses strong skepticism about the claim and argues that poverty estimates overtimearenotcomparableduetoachangeovertimeinthestandardoflivingindicatedbythepovertythreshold.

Fromthelabourforceandemploymentdatareportedbythepaper,therateofunemploymentisfoundtobeaboutthesamein2004asin1986,approximately11percent.But,thereisaconsiderabledifferenceinthepatternofchangeovertime.Unemploymentinitiallymorethandoubledbetween1980and1985to11percent;thenfellsteadilyto7.4percentby1995and,thereafter,rosesteadilytocloseto11percentby2003.Annualrateofemploymentgrowthwas3.04percentbetween1986and1995anditfellto2.37percentbetween1995and2004.

3� It isnotclear, forexample, if theseare fromregressionsbasedonthesamedata inwhichcasethefitof theregressionswouldbeverypoor.ThecasestudycitesapaperbyFelipeandLanzona,2005,asthepossiblesourceofthesealternativeestimates.Thereferencesattheendofthecasestudydonotincludeafullcitationofthepaper.


Theeconomy-wideobservedOEEthusfellfrom0.83intheperiod1986-95to0.6intheperiod1995-2004.32Andyet,theannualrateofdeclineintheheadcountrateofpoverty,asclaimedbyofficialestimates,wasconsiderablyfasterinthesecondperiodthaninthefirstperiod!Ifthereisanyvalidity in theseclaims, itsexplanationmustbe found inotherpoliciesandchangesaffectingpovertythatthecasestudydoesnotdealwith.

The case study makes a big point about low total factor productivity growth in thePhilippinesastheexplanationofthecountry’sslowgrowthandhighpoverty.Italsohighlightsthepoorperformanceoflabourproductivity,whichisjustsayingthattheOEEisundesirablyhigh.Whileallthesemightbevalid,thereislittleinthecasestudythatallowsameaningfulanalysis of the growth-employment-poverty nexus. One thing, however, clearly stands out:therateofgrowthoftheeconomyhasbeentoolowtoprovideareliablebasisforpovertyreductiongivensomanystructuralfeaturesthatcontributetoahighlyunequaldistributionofincrementalincome.33

Thailand

Duringthe1980stherateofgrowthfortheeconomyaveraged7.5percent.Overalloutputelasticityofemployment,estimatedfrompooledtimeseriesandcrosssectiondata,was0.56whiletheobservedoverallOEEwas0.47.34Therateofemploymentgrowthwassubstantiallyhigher than the rate of growth in labour force. During this period, the inequality in thedistribution of income increased, but income poverty declined rapidly. Elasticities for fourmajor sectors – agriculture, manufacturing, construction and services – ranged from 0.53(agriculture) to0.68 (services). Given the very high rate ofgrowth, the OEE was sufficientlyhigh to generate rapidly enough employment growth for a quick reduction in poverty. Ablemishinthisotherwiseadmirableperformancewastheincreaseininequality.TheGiniratioofincomedistributionincreasedsteadilyuntilitreachedaplateauin1992at0.536.35Butforthis, therateofdecline inpovertywouldhavebeenmuchfaster.ThecasestudyquotesaneconometricstudywhichestablishedthataonepercentincreaseintheGiniratioledtoa3.4percentincreaseinpoverty.36

Thenext timeperiodconsideredbythepaper is1990-96, thepartof thedecadeof the1990sbeforeThailandwashitbytheAsianfinancialcrisis.DuringthisperiodtheannualrateofGDPgrowthacceleratedto8.6percent,buttheoverallOEEfellsharply:theelasticitybasedonpooleddatareportedbythecasestudywasonly0.07whiletheobservedelasticitywasjustunder0.1.However,apparentlythisdidnotcreateaproblemofunemploymentbecausethe rate of growth in the labour force fell sharply. The paper does not discuss the latter

32 TheseobservedOEEsarejusttheratiosofgrowthratesinemploymenttogrowthratesinGDPovertheentiretimeperiods,notaveragesofannualratios.ThesehavenorelationtoEOEsreportedinthecasestudy.

33 Thecasestudydoesnotdiscussthesefeatures.ForanearlierstudyanalysingthesefeaturesseeKhan,1997.34 Theelasticitiesreportedbythepaperarebasedonpooledtimeseriesandcrosssectiondata.Themethodof

estimationoftheseelasticitiesisnotfullydiscussed.But,theoverallrateofgrowthofemploymentisshowntohavebeen3.5percent,implyingthattheobservedoveralloutputelasticityofemploymentwas0.47.

35 TheGiniratioisnotshownforindividualyearsofthe1980sbutitisreportedtohavebeenaslowas0.485in1988.

36 Thereviewerinterpretsthistobeanincreaseintheheadcountindexofpoverty,somethingthatthecasestudydoesnotmakeabsolutelyclear.


phenomenon.Withoutafullunderstandingofthisphenomenonitishardtoexplainthestoryduringthisperiod.ThedatareportedintheWDI (2006)showthatthelabourforceparticipationratefellsharplyafter1990andtheannualgrowthrateoflabourforcebetween1990and2004wasjustoveronepercentperyear.Evenso,theaverageannualrateofemploymentgrowthwaslower,justabout0.8percent.Thedistributionofincomeremainedunchanged:theGiniratiosfor1990and1996werevirtuallythesame.Theincidenceofpovertyfellveryrapidly,theheadcountindexforthecountryasawholefallingbymorethanhalf.

DisaggregatedOEEsforindividualsectorsshedmorelightonthepuzzlingscenario.OEEsformanufacturingandservicesremainedaboutthesameasinthe1980s,whiletheOEEforconstruction,themostlabour-absorbingsector,shotupto1.41.37 Thus,overallOEEforthenon-agriculturalsectorstakentogetherincreased,perhapssignificantlyso.Thesharpfallintheeconomy-wideOEEisexplainedbyahighlynegative(-0.86)OEEforagriculture.ThiswasclearlytheperiodwhenThailandstarteditsso-called“Lewistransition”,anabsolutedeclineinemploymentinagriculture,apparentlypromotedbyaveryrapidincreaseinemploymentinthenon-agriculturalsectors,whichinturnwasinducedbyveryhighratesofgrowthinthosesectors.Foraneconomyexperiencinghypergrowthforseveraldecades,thiskindoftransitionisexpectedanddesirable.ThehighlynegativeOEEforagriculture,resultingintheverylowoverallOEE,mustbeattributedtomeasurementanomalies.Thiswasclearlyaperiodofrapidgrowthinemployment,helpedbyadeclineinthegrowthoflabourforce,whichcontributedtobothanimproveddistributionofincomeandanacceleratedreductioninpoverty.

IntheaftermathoftheAsiancrisis,theGDPgrowthratewasnegativeforseveralyearsaswastherateofemploymentgrowth.Employment,however,fellataslowerratethanoutput.38Duringthisperiodinequalityalsorosealittleandtheincidenceofpovertyincreased.

The paper captures the characteristics of the period after the resumption of growth byanalyzing the performance during the period 2001-04. Annual growth rate in GDP was 5.2percentduringthisperiodwithanemploymentgrowthof2.0percent.ThiswouldmaketheobservedoverallOEE0.38,muchhigherthanitwasintheimmediatepre-crisisperiod,thougharguablynotashighasitshouldhavebeenforacountryatThailand’slevelofdevelopment.Andyet,itneedstobenotedthatthisoverallOEEwouldhaveresultedinaveryfastannualrateofemploymentgrowthof3.3percentiftherateofgrowthhadbeenashighasinthepre-crisisperiod. Therestorationofgrowthappearstohavebeenaccompaniedbyafall ininequality.Theincidenceofpovertystarteditsrapiddeclineonceagain.

37 Thisinitselfisapuzzle.AnOEEgreaterthanoneindicatesfallingoutputperworker.Thiscanhappenduringaperiodoflowemploymentgrowthleadingtorisingconcealedunderemploymentwhichmustberuledoutforthisperiodofdynamicgrowth.Theonlyotherexplanationisachangeinthecompositionofoutputofthesectorleadingtoasharpriseintheshareofmorelabour-intensivetypesofconstruction(forexample,moreofruralhousingandlessofmechanizedconstruction).

38 It is puzzling that in Table 2.1 the overall OEE is reported to be -0.62 while GDP growth and employmentgrowthratesarereportedtoberespectively-2.5percentand-0.1percent.Onthebasisofthesegrowthratestheobserved (not theonebasedonpooleddatausedby thecasestudy)overallOEEwas0.04,positive,butfortunatelyverylow.


During the period of resumed growth, sectoral OEEs for services and constructionincreasedovertheirrespectivepre-crisis levels.Formanufacturingitfellsomewhat,to0.39.ThemostintriguingoutcomeisanegativeOEEforagricultureduringthisperiodwhenoutputgrowthofthesectorcontinuedtobeslightlynegative.This impliesthatagriculturestartedanetabsorptionof labourdespiteafall inthesector’srealvalueadded,thereby(hopefullytemporarily)reversingtheLewistransitionthatThailandhadbeenexperiencingpriortothecrisis.39OverallthestorysuggeststhatintheperiodofrecoveryThailand’sagriculturehadanetabsorptionoflabourtooffsettheslowdowninlabourabsorptioninthenon-agriculturalsectors,largelyduetotheirdeclininggrowth,butalsoduetoafallinthelabourintensityofmanufacturinggrowth.Bethatasitmay,theoverallrateofemploymentgrowthwasfasterthaninthepre-crisisperiod.

Theexperienceofthelastfewpost-crisisyearsshowsthatgrowthinThailandhasbecomemorepovertyalleviatingthaninthepre-crisisperiod.Theprincipaldifferencebetweengrowthpatternsinthetwoperiodsisthatgrowthnowismoreinequalityaversethanbefore.Reasonablyhighlabourintensityofgrowth,ontheaggregatefarmoresothanintheimmediatepre-crisisperiod,probablyexplainssomeofthedifference.Thestudystronglysuggeststhat it isalsoduetotheredistributivepublicexpenditurebytheThaksingovernment.

Thecasestudymakesuseofthesocialaccountingmatrix(SAM)toexplainhowgrowthistransmittedtoaugment incomeofthepoorhouseholdsthroughinter-sectoral linkageandby identifyingboththe initialactivitiesthatresult inthegreatest final incomecontributiontothepoorandtheformoffactorpaymentsthatthesecontributionstake.Forlow-incomeagriculturalhouseholds,theactivitiesthatprovidethemaximumlinkage,rankedinorderofimportance, are wheat products, meat products, other agricultural activities and non-farmactivities. For non-agricultural poor households such activities are diffused. A surprisingfinding is that thesehouseholdsbenefitmorebypayments for factorsofproductionotherthanlabour,capitaltobemorespecific.Expansionofbankingandinsurancedoesnotbenefitthepoorthroughenhancedwageincomebecausetheydonothavethenecessaryskillstobegainfullyemployedintheseactivities.Butanexpansionoftheseactivitiesbenefitsthenon-agriculturalpoorbyincreasingthereturnontheirdeposits.IntheabsenceofmoredetailedinformationontheresourceendowmentofthesepoorandofgreatertransparencyoftheSAMmultiplieranalysis,thepresentreviewerreservesjudgementonthevalidityofthisparticularfinding.

Thecasestudymakesanumberofbroadpolicyrecommendations:supporttoagriculture-related activities to arrest the decline in agriculture’s labour absorption and to promotethe activities that the SAM multiplier analysis shows to have the maximum linkage to theincomeofthepoor;thepromotionofserviceindustries;skilldevelopmentoftheworkers;thepromotionofsmallenterprises,whichthestudyfindstohaveagreaterlabourintensitythanlargerenterprises;andmoreeffectiveenforcementofminimumwagelawsandotherformsofprotectionfortheworkers.Whilealltheserecommendationsappearinnocuous,onemusttakeamorecarefulapproachtoagriculture’sso-calledinabilitytoabsorblabour.Thailand’spresent

39 AqualificationiswarrantedbythefactthatthesectoralOEEsreportedbythecasestudyareprobablytheonesbasedon“pooleddata”andhencemaydivergefromtheobservedelasticities.


stageofdevelopmentwarrantsareallocationof labourfromagriculturetonon-agriculturalactivities.Intheearly2000sagriculture’sshareofemploymentcontinuestobearound45percentwhileitsshareofGDPhasfallenbelow10percent.Thismeansanenormousdifferenceinproductivityoflabourbetweenagricultureandnon-agriculturalactivities.Giventhatmostof the poor are in agriculture, a reallocation of labour is a precondition of rapid povertyreduction.

SouthAsia

India40

Two distinct time periods, dictated by the timing of the National Sample Surveys (NSS),are considered: 1983 to 1993/94 and 1993/94 to 1999/2000.The former is interchangeablyreferredtoas“the1980s”and“thepre-reformperiod”whilethelatterisnamed“the1990s”and“thepost-reformperiod”.TotalemploymentgrowthinIndiadeceleratedfromjustover2percentperyearintheformerperiodtojustunderonepercentinthelatterperiod.Growthratein population declined slightly between the two periods. However, during the post-reformperiodtherateofgrowthinemploymentwassignificantlylowerthantherateofpopulationgrowth. Employment growth rate during the 1980s had slightly exceeded the populationgrowthrate.

Theannualgrowthofemploymentinagriculture,employing60percentofthoseworkingin2000,fellfrom1.4percentduringthe1980stoaboutzerointhepost-reformperiod.4�Thegrowthofemploymentinmanufacturingfelltoo,butcomparativelyslightly.Thesamewasthecaseforcommunity,socialandpersonalservices,andelectricityandgas.Intheremainingsectors–construction,trade,transportandfinancialservices–therateofemploymentgrowthincreasedinthepost-reformperiod.But,forthenon-agriculturalsectorstakentogether,therateofemploymentgrowthfell.

TherateofGDPgrowthwassignificantlyfasterinthepost-reformperiodthanduringthepre-reformperiod,6.42percentascomparedto5.05percent.TheoverallOEEfellfromthe-already-low0.40inthepre-reformperiodtoadismal0.15duringthepost-reformperiod.Inagricultureitfellfrom0.5tozeroorlessandinmanufacturingfrom0.37to0.29.Inconstructionitwasexceptionallyhigh inbothperiods,1.1 in thepre-reformperiodand1.2 in thepost-reformperiod.Intrade,transportandfinancialservicesitremainedreasonablyhigh,rangingrespectivelyfrom0.6and0.8andrisingbetweentheperiodsforthelasttwo.

40 TherearetwocasestudiesonIndiainthepresentseries:Chadha,2006,dealswiththecaseofruralIndiawhileMitraandBhanumurthy,2006, isconcernedwithmanufacturing,constructionand tertiarysectors.This sub-sectiondrawsonthefindingsofboththecasestudies.Inaddition,itoccasionallydrawsuponSundaramandTendulkar,2006.

4� Itvariesbetween0.05percentand-0.15percentdependingonwhatpopulationfiguresareusedinconjunctionwith the NSS ratios to estimate employment.The lower figure indicates the estimate made by the PlanningCommissionusingadifferentpopulationfigurethandoothers.


Betweenthetwoperiodsemploymentgrowthfellinboththeorganizedsectorandintheunorganized sector.The fall in the former was largely due to the downsizing of the publicsector.Whiletheproportionatedeclineintheemploymentgrowthratewasthesameforthetwo,employmentgrowthwasalmosttwiceasfastintheunorganizedsectorasintheorganizedsector. Casual workers, earning less than the average of the other workers, increased as aproportionofallworkers,bothinruralandurbanareas.

Although the rate of employment growth significantly lagged behind the rate ofpopulationgrowthduringthepost-reformperiod,theevidenceoftheNSSsuggeststhattheopen unemployment rate and the unemployment rate adjusted for hours of employment,showed very little change. For rural areas they are very low and show only the slightestincrease.Forurbanareastheyshowaslightdeclinewhenadjustedforhoursofwork.Thattheunemploymentrateremainedroughlystablewhilethegrowthinemploymentlaggedbehindthegrowthinpopulationmeansthattheratioofworkerstopopulationfell,acrucialissuetowhichthisreviewwillreturn.

According to official estimates, the incidence of poverty fell in India during both theperiods,therateoffallbeinghigherinthepost-reformperiod.ThiswasthecasebothforruralandurbanIndia,therateofdeclineinpovertyduringthepost-reformperiodbeingfasterinrural India. Thus, Indiaseemstohaveachievedafasterrateofreductioninpovertyduringthepost-reformperiodwhentherateofgrowthinGDPwasfasterdespitethefactthattheemployment intensity of growth was dismal by any absolute standard and slower than inthepre-reformperiod.Wastheemployment linkageunnecessary in India’sgrowth-inducedpoverty reduction? If so, what was the mechanism of converting growth into an improvedwell-beingofthepoor?

OnepossibleresponsetothequestionisthatpovertyreductioninIndiawasveryslowforthekindofgrowththatthecountryexperiencedandthepoorperformanceonemploymentis toblameforthisbreakdownof linkagebetweengrowthandpovertyreduction.Thetwocasestudiesappeartotakethisposition,especiallywhentheyhighlightthecontinuedhighincidenceofpoverty.But,thefactremainsthatofficialestimates,unchallengedbythecasestudies,showthattheannualrateofreductioninthenumberofpersonsinpovertyincreasedfromamere0.3percentduringthepre-reformperiodto3.8percentinthepost-reformperiodinruralIndiaandfroma-0.7percent(i.e.,fromanannualriseinthenumberofpoorof0.7percent)to2.2percentinurbanIndia.Therefore,growthinthepost-reformperiod,thougharguably still not adequately poverty-alleviating, was far more pro-poor (or at least far lesshostiletothepoor)thangrowthinthepre-reformperiod.Howdidthishappendespiteafarworse performance on employment growth? Unfortunately, the case studies do not quiteaddressthisissue,nordotheyprovidetheinformationnecessarytofullyanalysethegrowth-povertylinkage.


AnotherpossibleresponsetothepuzzlemaybethatpovertyreductioninIndiaduringthepost-reformperiodwasslower,perhapsmuchslower,thanofficialestimatesclaim.Thereisalivelydebateonthisissuethatremainsunresolved.Inthisdebatetheofficialestimateshavebeenchallengedbothforshowingtoomuchandtoolittlereductioninpoverty.Averycarefulexaminationof theentirecontroversyandthemethodologicalbackgroundsofcontendingviews have led Angus Deaton andValerie Kozel (2005) to reach the following conclusion:42Althoughthere isnoconsensusonwhathappenedto Indianpoverty inthe1990s,there isgoodevidenceboththatpovertyisfallingandthattheofficialestimatesofpovertyreductionaretoooptimistic,particularlyforruralIndia.

Theroleofemploymentinpovertyreductioncan,however,beguessed.Employmentinagriculturedidnotgrowatall.Theruralcasestudyrightlydoesnotconsiderthistobe,byitself,anundesirablephenomenoninsofarasitarguesthatthemostdesirablechangeinagricultureisforoutputtogrowrapidlywhilemoreandmoreworkersaretakenoutofagriculture.Indeed,thisdesirableoutcomewasborneoutbyactualevents:agriculturalgrowthinthepost-reformperiodwashigheralbeitveryslightlyandagriculturalemploymentarguablyfell(accordingtothePlanningCommissionestimates).Theproblemisaboutwhathappenedtoemploymentanditsproductivityelsewhereintheruraleconomy.Non-agriculturalemploymentincreasedmuchmorerapidlythanagriculturalemployment,butaggregateruralemploymentgrowthwasslowerthaninthepre-reformperiodandslowerthanruralpopulationgrowth.Furthermore,therewasanincreaseintheproportionofcasuallabourerswhohavelowerincomethanotherworkers. Of non-agricultural employment, the largest category, namely enterprises basedonself-employment,hadthefastestexpansion,buttheyalsohadanOEEgreaterthanone,signifyingdecliningproductivity.43

AgainstallthesenegativeemploymentoutcomesinruralIndiathereoccurredapositiveoutcome in the form of strong growth in real wages for casual agricultural labourers andworkersinruralinformalemployment.Thisclearlyindicatedatighteningofthelabourmarketwhichcanonlybeexplainedbythedeclineintheworker/populationratiobeingcausedbyadeclineinlaboursupplyratherthanafallindemand,adeclineinducedbysuchbeneficialchanges as improved schooling rates.44 It is possible that positive changes in some of thefactorslistedabovefurtherreinforcedthisfavourable“employment”outcometomakegrowthinthepost-reformperiodmorepovertyalleviatingthaninthepre-reformperiod.

For urban India the increased poverty-alleviating effect of growth in the post-reformperiod,ascomparedtothepre-reformperiodwasprobablyduetosimilarfactors:asupply-induced tightening of the labour market leading to a rise in real wages along with otherpossible positive effects of government policies and programmes. Once again, the paucityofinformationontheseaspectsandanabsenceofananalysisofincomedistributionobviate

42 DeatonandKozel,2005.43 Thisisbasedontheevidenceforown-accountruralmanufacturingenterprisesinMitraandBhanumurthy,2006.

Itislefttothereadertodecideifthisphenomenonisquiteconsistentwiththehypothesisofthetighteningofthelabourmarketdiscussedbelow.

44 ThisexplanationisspelledoutinSundaramandTendulkar,2006,whichalsoarguesthattheslightriseinsomeoftheindicatorsofopenunemploymentratesaremoreapparentthanreal.


45 Thiswasduetoanannualfallof0.7percentinoutputand7.4percentinemployment.Itwouldappearthatduringthisperiodafairlylargenumberofthoseinunorganizedmanufacturingwithverylowproductivityweremovingouttootheractivitieswithverylittleeffectontheoutputofthesector.

afullerunderstandingofthephenomenon.Anotherlimitationofthecasestudies,especiallyoftheoneonmanufacturing,constructionandtertiarysectors(referredtobelowastheMCTstudy),isthelackofananalysisofchangesaftertheyear2000whengrowthacceleratedfurtheranditscompositionchangedsubstantially.WhilelackofasdetaileddataasfortheNSSyearsmakesafullanalysisofthisperiodimpossible,somebroadfeaturesofchangesinthisperiodmighthavebeenanalysedonthebasisofinformationfromnon-NSSsources.

The MCT case study makes detailed analysis of employment intensity of manufacturingindustries,bothorganizedandunorganized,analysestheroleofconstructionandservicesingrowthandpovertyreduction,anddiscussestheeffectsofsomemajorreformsinthe1990sonemployment.Fortheorganizedmanufacturingsectorthestudymakesestimatesofpartialelasticities of employment with respect to both output and wages for three distinct timeperiods: regulated regime (1973/74 to 1984/85), deregulated regime (1984/85 to 1990/91)and reform period (1990/91 to 1997/98) for as many as 178 industries.These econometricestimatescapturetheaccelerationordecelerationinpartialoutputelasticitiesofemploymentinsubsequentperiodsbytheuseofdummyvariables.Asnotedbefore,aproblemwiththisapproachisthatwhilethepartialelasticitiesarebetterabletocapturetheeffectsofcausaldeterminantsofemploymentgrowth,thegross(observed)outputelasticitiesofemploymentbetterrepresentthedegreeofemploymentfriendlinessofgrowth.It isalsonotpossibletocompare these partial elasticities with either the elasticities estimated in the other studiesor with the estimates for the other sectors made in the same study. Another problem ofcomparabilityisthedifferenttimeperiodsusedfortheseestimatesfromthoseusedfortheones discussed above and for the estimates of the other sectors made by this study. DatareportedbythestudyshowsthatthegrossOEEfororganizedmanufacturingasawholewas0.44intheregulatedregime,0.14inthederegulatedregimeand0.33inthereformperiod.Unfortunately,thenon-comparabilityoftimeperiodsmakesitimpossibletojuxtaposetheseestimates against the ones shown for the pre-reform and post-reform periods above. Thebroadconclusionsarethat:thepartialelasticitywithrespecttooutputattheaggregateleveldeclined slightly in the reform period as compared to the pre-reform periods; and, at thedisaggregatedlevel,thepartialelasticitieswithrespecttooutputincreasedforone-fifthoftheindustrieswhilefortheresttheyremainedverylowand/orstagnant.Thestudyconcludesthatreformseemstohavemadenoimpactontheelasticity.

ForunorganizedmanufacturingthecasestudyestimatesgrossOEEsfortimeperiodswhich,dictatedbytheavailabilityofrelevantsurveys,areagaindifferent:thepre-reformperiodnowconsistsof1989/90to1994/95whilethepost-reformperiodstretchesbetween1994/95and2000/01. For the entire unorganized manufacturing, rural and urban, the rate of growth ofoutputrose,fromnegativeinthepre-reformperiodtoahighannualgrowthof7.6percentinthepost-reformperiod.GrossOEEfellfromastaggering10.4inthepre-reformperiod45to1.1inthepost-reformperiod.


Unorganizedmanufacturing isclassified intothreecategories:morethan80percentofruralandabouthalfofurbanemploymentinunorganizedmanufacturingisinown-accountmanufacturingenterprises(OAMEs)whichareentirelybasedonfamilylabour.Forthisgroup,outputgrowthturnedfromnegativeinthepre-reformperiodtoahighlypositiveeightpercentperyearinthepost-reformperiod.GrossOEEforthesectorfellfrom3.3to1.4.ThehighOEEfortheformerperiodrepresentsalargeexodusofworkersfromotheroccupationsresultinginarelativelysmalldeclineinoutput.Inthepost-reformperiodthegreater-than-unityOEEistheoutcomeofalargeincreaseinoutputresultingfromastilllargerinflowofworkersfromotheractivities,mostlikelyfromagriculture,butpossiblyalsoconsistingofthoselaidoffbytheorganizedsector.Ifthisinterpretationiscorrectthenthiswouldnotquitebeconsistentwiththehypothesisofthetighteningofthelabourmarketinthepost-reformperiodthathasbeenhighlightedasthecriticalelementexplainingtheriseinrealwagesintheperiod.

About a quarter of employment in unorganized manufacturing is in non-directorymanufacturingenterprises (NDMEs)whichemployupto fiveworkersofwhichat leastonemustbehired.Inthepre-reformperiodtheseenterprisesexperiencedasmalldeclineinoutputaccompaniedbyastillsmallerdeclineinemployment,resultinginthegrossOEEof0.65.Inthepost-reformperiodtheyachievedahighrateofoutputgrowthwithahighemploymentgrowthresultinginalmostanunchangedOEE.Theremainderofunorganizedmanufacturing,theso-calleddirectorymanufacturingenterprises(DMEs)eachemployingsixtonineworkersifusingpowerandsixormoreworkersifnotusingpower,increasedtheiroutputgrowthfromamodestrateinthepre-reformperiodtoamuchhigherrateinthepost-reformperiod.Whiletheiroutputgrowthinthepre-reformperiodwassoemploymenthostileastoyieldanegativeOEE,inthepost-reformperiodtheseenterpriseshadareasonablydecentOEEofmorethan0.5.

The picture is still somewhat confusing. In the post-reform period all categories ofunorganized manufacturing grew rapidly and their growth was employment intensive. It,however,seemsthat inthevastself-employmentcategory, thehighemploymentelasticityrepresents an expansion of activities with very low productivity, indicating decliningemployment opportunity in the more productive activities. This creates some uneasinessaboutthehypothesisofthetighteningofthelabourmarketinthisperiod.

TheanalysisofthetertiarysectorintheMCTcasestudyshowsthatstateswithahighershareofthissectorinstateproducthavealowerincidenceofpovertyandthehighergrowthofthetertiarysectorisassociatedwithfasterpovertyreduction.Withinthetertiarysectorthiseffectisstrongerforthetransportsector,whichprobablyindicatesthestrongroleofinfrastructurallinkageinthepromotionofgrowth.Itis,however,notentirelyclearwhatparticulartypeofcausalitytheseobservedphenomenaimply.


TheMCTcasestudyalsohasananalysisof themajorpolicychanges inthepost-reformperiodandtheireffectsonemploymentgrowthandpovertyreduction.Itcitestheresultsofother recent studies which claimed that trade reform helped employment growth: greaterexportgrowthcontributedtohigherOEEinmanufacturingastheStolper-Samuelsontheoremwouldsuggest.Thestudyitselffoundthattheeffectofgreaterimportpenetrationhasbeenpositiveonemploymentgrowth,perhapsduetothehighercapacityutilizationfacilitatedbythegreateravailabilityofimportedintermediategoods.Thestudyalsomentionstheevidenceof the greater use of labour-displacing technology by some industries in the post-reformperiod.Onbalance,itfindsthattheresultoftradereformonemploymentgrowthwasmixed,unlikethemorepositivefindingofsomeotherrecentstudies.Italsoconcludesthatonbalanceforeigndirectinvestmenthelpedemploymentgrowth.

Onfiscalandmonetarypolicies,thestudysuggeststhatchangesinsubsidies,reductionofitoninputs,butariseofitonfood,hadanuncertaineffectonemploymentduetotheirmixedeffect on the growth of respective products. The tightening of monetary policy adverselyaffectedthegrowthofemploymentduetoitsadverseeffectongrowth.

Thecasestudyanalysesrecentpolicychangestomakethelabourmarketmoreflexibleandtoreducetheshareofthepublicsectorintotalemployment.Sincethesemeasuresareveryrecent,itisunlikelythattheyhadanyeffectontheemploymentoutcomeanalysedabovefortheperiodendingin2000.

SriLanka

SriLankaachievedamodestrateofGDPgrowthof4.2percentduringthe1980s.Itacceleratedto5.2percentduringthe1990s,but fellbackto4.0percentduringtheearlyyearsof thenewcentury.Populationincreasedatjustbelowonepercentperyear.ThuspercapitaGDPincreasedatanaverageofabout3.5percentovertheentireperiod.

The case study reports estimates of OEE for the 1980s, 1990s and the first four years of

the present century. On the evidence of these estimates, the overall employment intensityof growth fell in each subsequent period. One, however, needs to look at the sectoral andsub-sectoralestimatescarefullytogetaclearerpictureofreality.First,oneneedstotakeintoaccountthelackofcomparabilityfortheOEEestimatesbetweenthe1980sandthesubsequentperiods.Forthe1980stheyarethearcelasticitiesbetween1981/82and1986/87whileforthetwolaterperiodstheyarebasedonregressionsofemploymentonoutput.

For manufacturing industries the OEE fell between the 1980s and the 1990s, but nearlydoubledbetweenthe1990sandtheearly2000s.46Atthesub-sectorallevelseparateestimatesof OEE for most manufacturing industries for the period 1993-2001 are very low by anystandard.Construction, theothermajor industry,experiencedasteadydecline inOEEover

46 Remember,however,thelackofcomparabilitybetweentheestimatesforthe1980sandthe1990sandtheverysmallnumberofobservationsforthe2000s.


eachofthesubsequenttimeperiods,butcontinuedtohaveaveryhealthylevelofOEE(0.8intheearly2000s).47

FortheservicessectortheOEEincreasedbetweenthe1980sandthe1990s,butthenfelldrasticallyduringtheearly2000s.Oncloserexaminationonefindsthatitsdeclinewasentirelyduetothehighlynegative-nearlynegativeone-OEEoftheresidualsub-sector“otherservices”.ItseemsveryimplausiblethattheOEEforotherservices-likelytoconsistofinformalactivities-wouldhavesohighlynegativeanOEE.48Itismorelikelythatdatasourcesforemploymentandoutputforthiscategory,entirelydifferentfromoneanother,donotdefinethecontentstobeexactlythesame,afrequentoccurrenceforresidualcategories.Foralltheotherservicesub-sectorsforwhichestimatesareavailableformultipleperiods,theOEEhaseithergoneuporremainedhighinabsoluteterms.49Itshould,however,benotedthatthejumpoftheOEEforpublicadministrationanddefence, toan implausible5.5during theearly2000s,clearlyindicatesanattemptonthepartofthegovernmenttoartificiallyexpandemploymentduringthisperiodofslowemploymentgrowthelsewhere.50

TheOEEforagriculturefellsharplyduringthe1990sandincreasedtoanextraordinary2.6duringtheearly2000s.Asrepeatedlyemphasizedinthisreview,nogreatsignificanceneedstobeattachedtothesefluctuations.Theyreflectmorethechangeinlabourdemandinthenon-agriculturalsectorsthanchangeinlabourdemandwithintheagriculturalsectorwhichistheultimateresidualemploymentcategorydominatedbyself-employment.TheverylowOEEduringthe1990sprobablyindicatesafavourablegrowthinemploymentoutsideagriculture,whiletheextraordinarilyhighOEEduringtheearly2000sreflectstheslowemploymentgrowthelsewhere.

Realwagesgenerallygrewatamuchslowerrateduringtheearly2000sthanduringthe1990s.Indeedrealwagesinmanufacturing,numerousservicesandanagriculturalsub-sector(coconut)fellduringtheearly2000sconfirmingslowemploymentgrowthduringthisperiod.Allthesewouldpointtosomeincreaseininequality.ThisisconfirmedbytheincreaseintheGiniratioofpersonalincomedistributionfrom0.43to0.48between1990/91and2002.

Povertyheadcountratesareavailablefor1990-91,1995-96and2002.Intheinitialperiod,povertywashighestinruralareas(29percent)andlowestinurbanareas(16percent)with

47 ItisalittlehardtoimaginetheOEEofthesectorbeinghigherthan26duringthe1980sunlessoneallowsforavastchangeinthecompositionofthesector’soutputinfavouroflabour-intensiveproducts.Manufacturingandconstructiontogetheraccountformorethan95percentofindustrialoutput.OnecanthusignoretheerraticbehaviorofOEEsfortheremainingsub-sectors,e.g.,mining;andelectricityandwater.

48 Notealsothatthetwoprevioustimeperiodsdonotshowestimatesforthisresidualcategory(Table5.7)forwhichemploymentestimatesareavailableonlyfrom1992(Tables5.3and5.4).ThereisalsoanobviousinconsistencybetweenTables5.5and5.6withrespecttoemploymentgrowthforthissub-sector.

49 Forhotelsandrestaurantselasticityisestimatedforonlyoneperiodandthisisverylow.50 Theelasticityof5.5indicatessomethingaboutthenatureofemploymentgrowthinthissectorbecauseusually

value added in this sector is based on the income method, i.e., the change in payments to factors of whichlabourisoverwhelminglydominant.Thusthiselasticitymustmeanthatthegovernmentwashiringlotsoflow-paidworkers,perhapsaspartofaconsciousanti-povertypolicy.


theestateshavinganintermediateincidence(21percent).Bytheendoftheperiod,povertyhad become highest in the estates where it had increased to 30 per cent. It had declinedmoderatelyinruralareas(to25percent)andimpressivelyinurbanareas(toeightpercent).Forthecountryasawhole,povertyovertheentireperioddeclinedmodestlyfrom26to23percent.Itisinterestingtonotethatpovertyhadincreasedbetween1990-91and1995-96forSriLankaasawholeandforruralandestatesectors.Inotherwords,povertydeclinedmorerapidlybetween1995-96and2002inallthreeareasthanduringtheperiodasawhole;forthecountryasawhole,thefallbeingfrom29to23percent.

Poverty estimates are also available for 1995-96 and 2002 by sectors of employment.Forthoseemployedinagriculture,povertychangedlittle,from40to39percent.Forthoseemployedinindustriesitfellfrom28to23percent.Forthoseemployedinservicesitincreasedfrom16to18percent!5�

Since the time points for poverty estimates do not coincide with the points for whichestimatesforgrowthrates,employmentandinequalityareavailable,itisnotpossibletoanalysetherelationsamongchangesinthesevariables.Iftheproblemofasymmetricaltimepointsisignored,severalobservationscanbemade.First,therateofpovertyreductionappearstohavebeenratherslow,justoveronepercentannualreductionintheheadcountrate.Evenwiththemodestincreaseininequality,theannualgrowthinpercapitaGDPof3.5percentshouldhaveprovidedanopportunityforafasterreductioninpoverty.Theproblemisthatthestudydoesnotshowtheratesofincreaseinpersonalincome.Inincomepovertyestimates,itispercapitapersonalincome,notpercapitaGDP,whichisthebasisofmeasurement.TherateofgrowthofpersonalincomeistypicallylowerthantherateofgrowthofGDP:theincrementalsharesoftheclaimantsotherthanhouseholds–thegovernmentandbusiness–areusuallygreaterthantheiraverageshares.Furthermore, thedivergencebetweenthegrowthofpersonal incomeandthegrowthofGDPcanvaryovertimedependingonmacroeconomicpoliciesofwhichthestudyprovidesnoanalysis.Finally,in2004netfactorpaymentsmadebySriLankatoforeignfactorsofproductionamountedto2.8percentofGDP.AvariationinthisratioovertimecoulddriveyetanotherwedgebetweenthegrowthinpersonalincomeandthegrowthinGDP.

Bethatasitmay, itdoesnotappearthatlowemploymentintensityofgrowthhasbeentheprincipalobstacletothetransformationofeconomicgrowthintopovertyreduction.Theprincipalproblemseemstohavebeentheinadequacyofgrowthitself,alongwithapossiblediversionofahighproportionofincrementalincometoclaimantsotherthanthehouseholds,whichstoodinthewayofpovertyreduction.Lackoffastergrowthwasalsoareasonfortheslowgrowthinproductivityandrealwageswhichwouldhavehelpedpovertyreduction.Thisdoes not mean that everything was fine with the employment intensity of growth. HigherOEEsinsomeoftheservicesandsomeindustrialsub-sectorsduringthe2000swouldhavebeenhelpful.

5� Ifonewantstoreconcilethesewiththedeclineinoverallpovertyfrom29to23percent,onemustassumethatthesethreesectorsdonotadduptothetotal,thatthereareresidualcategorieswherepovertyfellmoresharply.Onewonderswhatthosecategoriesmightbe!


Thecasestudycreditslabourmarketreformscarriedoutsince2002,whichamendedmanyof the job protection measures that allegedly caused employment hostility on the part ofthe employers, with making the market flexible and thereby promoting high employmentintensity. It should, nevertheless, be noted that employment intensity of growth was quitereasonablyhighbeforethesereformstookplace.Thecasestudyfurthermentionsnumerousprovisionsfortrainingandincentiveswhichhavehelpedjobcreation.Italsomentionstheearlyreplacementoftheimport-substitutingindustrializationregimebythestrategyofexport-ledindustrializationasamajorfactorinpromotinganoverallsystemofincentivesthathelpedthedevelopmentofappropriatelylabour-intensivetechnology.

ThecasestudydocumentsoneveryimportantavenueforthealleviationoftheproblemofemploymentgenerationinSriLanka,namelytherapidexpansionofforeignemploymentwhichabsorbed28percentoftheincreaseinlabourforceduringtheperiodbetween2000and 2005.The rapid growth of private remittances made by these workers also appears tohavehelpedthereductionofpovertyduringaperiodofanaemicgrowth.

Onacceleratingthegrowthoftheeconomy,thecasestudyhasanumberofsector-specificpolicy recommendations. It does not seem to have much of a problem with the overalldevelopmentstrategyormacroeconomicpolicies.OneisleftwonderingiftheresolutionoftheongoingpoliticalconflictsisapreconditionforputtingSriLankaonasignificantlyhighergrowthpath.

V.WhatdoestheExperienceoftheAsianCountriessayabout Growth-Employment-PovertyLinkage?

HowEmployment-IntensivehasGrowthbeen?

ThefirstsetofquestionsthatweaddressrelatestowhethergrowthintheAsiancountrieshasbeensufficientlyemployment intensiveandwhathasbeenhappeningtotheemploymentintensity of growth over time. The latter part of the question is often framed as how theemploymentintensity-theOEEs-changedbetweenthe1980sandthe1990s,thetwomostrecentfulldecades.Astheperusalofthecasestudiesreveals,suchamechanicaldivisionoftimeperiodsisunjustified.Thus,forexample,theestimationofOEEforthe1990sforacountrythatexperiencedthesevereAsiancrisiswouldsufferfromthefactthattheterminalyearshavebeen subject to abnormal fluctuations in output and employment. Rather than doing this,the analysis below makes inter-temporal comparisons between more natural time periods,e.g.,thepre-crisisperiodandthepost-crisisperiod;andthepre-reformperiodandthepost-reformperiod.Oneunfortunateproblemisthatthedataavailabilityoftenlimitstheabilitytopreciselyadheretosuchtimeperiods. Table2presentscapsulesummariesofemploymentperformanceoftheeightcountries.

ThetwocountriesinwhichtherewasasharpdeclineinemploymentintensityovertimeareChinaandIndia.InChinatheOEEforthenon-agriculturalsectorhadbeenfallingsincethe1980s,atrendthatappearstohavequickenedsincethemid1990s.Thecasestudyshowsa


reversalofthistrendrightattheendoftheperiod(2004),but,inviewofthepresenceofsuchshort-termfluctuationsinthepast,itisimpossibletosayifthisisthebeginningofthereversalofthetrend.

The sharp decline in China’s OEE seems to be largely a problem of transition. Studiescarriedoutinthe1990saftertheonsetofthephenomenondidnotfindthattheindustrieswhich accounted for most of the increase in output were inappropriately capital intensive.ExpansioninemploymentintheseindustrieswasaccompaniedbyaparallelphenomenonofreformingtheStateandcollectiveenterprises.Duringtheearlieryearsofthereformperiod,China’sStateandcollectiveenterprisescontinuedthepolicyoftheMaoistperiodofaddingpeople to their payrolls in excess of legitimate demand for labour. This was a concealedsystem of unemployment insurance in a society which refused to admit the possibility ofunemployment.

Table2:ASummaryofEmploymentPerformance

Cambodia TheOEEsinrapidly-growingindustriesandmostservicesroseinthelate1990sascomparedtotheearly1990s.Thoseandtheeconomy-wideOEEinthelate1990swerequitedecentbyabsolutestandards.

China Agriculturestartedsheddinglabourfromtheearly1990s,butthiswasreversedforaperiodstartingin1997.IndustriesandservicesexperiencedsharplyfallingOEE.Overallemploymentperformancehasbeenpoor.Theproblemappearsessentiallytobeoneofpoormanagementoftransition.

Indonesia Employmentperformancewasgoodpriortothecrisis.OEEinmanufacturingfellsharplyintherecoveryperiod.Therewasareversalofthelong-termreductioninagriculture’sshareofemployment.Onbalanceemploymentperformancehasbeenpoorintherecoveryperiod.

Malaysia OEEshaveshownnotrendreduction.Growthhasbeenemploymentfriendlyoverall.

Philippines Estimatesofemploymentintensityinthecasestudyareinadequatetoarriveatafirmjudgementalthoughitappears,fromfindingsofotherstudies,thattherewereinstitutionalobstaclestolabourabsorptioninagricultureandmanufacturing.

Thailand OEEswerehigherforthenon-agriculturalsectorsinthe1990s(until1996)thaninthe1980sbuttheoverallOEEwaslowerduetothefactthatagriculture’sOEEturnedfromapositivevalueinthe1980stoahighlynegativevalueinthe1990s.IntherecoveryperiodtheOEEformanufacturingfellsomewhatbutthesameforconstructionandservicesrose.TheLewistransitioninagricultureofthe1990swasreversed.

India Inthepost-reformperiodtheOEEsfellandemploymentgrowthfellascomparedtopre-reformperiod.Butrealwagesrosepresumablyduetoasupply-inducedtighteningofthelabourmarket.

Sri Lanka Withtheexceptionofafewsub-sectorsofindustriesandservicesOEEswerereasonablyhighandgrowthwasemploymentintensive.

Source: Country Case Studies.


During the reform period these State enterprises were opened up to the challenge ofinternationalanddomesticcompetition,aswelltheopportunityofcollaborationwithforeignentrepreneurs, which required them to shed surplus labour. Necessary legal changes weremade and these enterprises entered a period of massive lay-offs. For manufacturing as awhole, total employment was pulled down by this transitional lay-off of large numbers ofworkers.TheobservedOEEforthesectorbecameverylowandnegativeforthe1990s.Thiswasanecessarytransitionwhoseeffectsarestillbeingfelt.Chinacould,andshould,havedonemoreandearlier,bywayofmitigatingtheadverseconsequencesofthisphenomenonontheurbanpoor,whoserankswereswelledbytheselaid-offworkers,throughtheinstitutionofatransparentsystemofunemploymentinsurance.TheoverallOEEmighthavebeenboostedbytheinstitutionofpublicworksprogrammesforcapitalconstructioninpoorregions.Someofthesemeasureswereadoptedaroundtheturnofthecenturywhichappearstohavemitigatedtheproblemofurbanpovertytosomeextent.52

WhataccountsforthesharpfallinIndia’sindustrialOEE?Thecasestudiesdonotprovidemuchofaclue.Itappears,however,thattoacertainextentIndiaalsofacedatransitionbroughtabout by adjustment in State enterprises. The ceiling on recruitment in State enterprisesindicates that there was some element of excess employment in them in India as well.Furthermore, India’s industrieshadmuch lowersectoralgrowthelasticity:duringthe1990stheygrewataboutthesamerateasGDP,whereasthemoreusualpatternisforindustriestogrowconsiderablyfaster. ItwastheservicessectorthatspearheadedIndia’sgrowth:duringthe 1990s the elasticity with respect to GDP was 1.33 for services and 1.05 for industries.The services that grew rapidly were intensive in skilled labour and it is probable that theirheadcountcontributiontoemploymentwasnotparticularlylarge.Afinalpointworthnotingisthatmostoftheseskilledworkerswhowereemployedinserviceswerenon-poor.

Indonesia and Thailand also experienced a decline in industrial OEEs in the post-crisisperiod.The case studies do not provide much of an explanation for this fall. In each case,however, the overall OEE was high enough for the economy to provide more employmentthantheincreaseinthelabourforceonlyifthegrowthratesoftheeconomieshadreturnedtopre-crisislevels.Inthissense,itispossibletoarguethattheemploymentproblemwaslargelyduetoslowgrowth.The Indonesiancasestudystronglyargues that thepooremploymentperformancewasduetotheslowgrowthinaggregatedemandcausedbyrestrictivemonetaryandfiscalpolicies.OnewondersiftheexplanationofthelowOEEinindustriesmightnot,atleastpartly,beduetotherelativedisadvantagethatsmallenterprises,withlabour-intensivetechniques, faced in getting access to credit and resources during a period of restrictivefiscal and monetary policies. In both countries, agriculture came to absorb more labour inthepost-crisisperiodthanbefore: in Indonesia, therewasan increase inagriculture’sshareof employment and inThailand there was a reversal of the absolute decline in agriculturalemployment that had started in the 1990s. Furthermore, inThailand, during this period ofrelatively poor employment performance, growth became more poverty-alleviating thanbefore.Thisreviewreturnstotheseissueslater.

52 ForasomewhatmoredetailedanalysisoftheissueseeKhan,2004.


Inthreeofthecases–Cambodia,MalaysiaandSriLanka–theOEEshavebyandlargebeenatdecentlevels.InCambodia,theywentupinthelate1990sandearly2000sascomparedtotheearly1990s.InMalaysiathereisnoevidenceofatrenddeclineinOEEsandthecountryseemstohavesuccessfullyadvanced,attainingtheLewistransition.DataonSriLanka,onthewholeshowfairlyhighOEEs.Ofthesethreecases,Malaysiaistheonlyonethathasattainedhighenoughemploymentgrowth.Intheothertwocases,overallemploymentgrowthhasnotbeenhighenoughduetoinadequateand/orunbalancedgrowth.InCambodia,theaggregateGDPgrowthratehasbeenhigh,butgrowthhasbypassedagriculture,thesectorinwhichmostof the country’s workers are located. In Sri Lanka the growth rate has not been sufficientlyhigh.

Fortheremainingcountry,thePhilippines,theavailableestimatesofOEEsarenotsufficientlyilluminating.Whileanumberofstudieshaveintherecentpastunderlinedtheemployment-hostileinstitutionsinagricultureandindustries,arecentAsianDevelopmentBank(ADB)studyestimates its overall OEE to have risen from 0.54 in the 1980s to a very decent 0.75 in the1990s.53

Thus, the outcome on employment intensity of growth has been mixed. In four of thecountries it has been low and declining while in the other four it has been high and non-diminishingor increasing.Of the fourcasesof lowanddecliningOEE, in twocountries theprimaryproblemaboutinadequateemploymentgrowthseemstohavebeensloweconomicgrowth and restrictive monetary and fiscal policies to rein in the growth of aggregatedemand.

It isworthcomparingtheseresultswiththerecentADBfindingswhichshowthatof11Asiancountriesforwhichtheyobtainedestimates,theoverallOEEfell insevenandrose infour,betweenthe1980sandthe1990s.Theirsampleincludessixofthepresentcasestudies(CambodiaandSriLankabeingexcludedfromtheADBlist)anditisonlyforMalaysiathattheADBresultsappeartodivergefromthepresentstudies.Indeed,thepresentstudyalsoshowsafallintheoverallOEEforMalaysiabetweenthe1980sandthe1990sandariseintheearly2000swhichleadstoadifferentconclusionfromthatmadefromtheADBdata.54

53 TheADBestimatesareshowninTable1.9oftheIndonesiacasestudy.54 TheotherdifferencebetweenthepresentcasestudiesandtheADBlististhatthelatterincludesBangladesh

(wheretheOEEfell),Pakistan (where it rose)andthethreeEastAsian“tigers”: theRepublicofKorea,“Taipei,China”andSingapore.ItroseinKoreaandTaipei,China,asonewouldexpecttohappenduringthetransitionofthesecountriestoahighlevelof industrializationanddevelopment.Thesurprisingresult isthat itroseinSingaporewhichhadaveryhighOEEof0.71duringthe1990srisingfrom0.38duringthe1980s!


WhatcanbesaidabouttheCausesoftheDeclineinEmploymentIntensity?

WhilethedeclineintheOEEshasnotbeenuniversal,theeffectoftheirchangeonemploymentand poverty has been very unfavourable in most countries, including the largest ones likeChinaandIndiawheretheeffectofsuchdeclineonhumanwelfarehasbeendevastating.Itisthusimportanttolookforananalysisofthefactorsbehindtheirchange.Astheperusalofthecasestudiesshow,thesechangeshaveoftenbeenconsideredbafflingbyanalysts.Ourknowledge about the factors behind them is incomplete. Certain facts, ranging from clearexplanationstoprobablehypotheseshave,however,emerged.

The principal explanation for the sharp decline in the industrial OEE in China is thetransitionfromaneconomicsystemthatmadeinefficientuseof labourinthepastunderaState-dominatedregimeofextremeimport-substitutingindustrialization(ISI).Transformationtoanefficientsystemofcompetition,bothdomesticandinternational,requiresthesheddingof a high proportion of workers, principally in State-owned enterprises, but also in otherforms of enterprises which tolerated excess labour absorption in a regime that made thispossiblebyshuttingoutcompetition.ThisisadesirablechangeandatransitionalfallintheoverallindustrialOEEduetothis,isinevitableforhealthydevelopment.Thegreatertheinitialinefficiencyanddistortion,thelargeristhemagnitudeofsuchtransition,bothintermsoftheextentoffalloftheOEEandthedurationoftimethatmustelapsebeforeareversaloccurs.

While the policy-makers cannot avoid such transition, except by opting for continuedinefficiencythat isultimatelybadfor thepoor, theycanmitigate itscost.Thiscanbedonebyresortingtopublicworksprogrammes, retrainingthe laid-offworkersandreplacingthesystemofconcealedunemploymentinsurancebyatransparentsystem.InrecentyearsChinahasbeenmovinginthesedirections. India,too,hasveryrecentlymovedtowardlegislatingforalargepublicworksprogrammethatshouldmitigatetheeffectsofthetransitionalfallinemploymentintensityofgrowth.

A second source of the fall in employment intensity of growth may be a shift in thecompositionofoutputinfavourofactivitiesthatarenotthetraditionallabour-intensiveones.Thisisnottheusualoutcomethateconomictheoryforeseesforalabour-abundantdevelopingcountrywheretransitiontoamoreglobalizedandmarket-orientedsystemshouldincreasetheshareoflabour-intensiveactivitiesintotaloutput.However,exceptionsarepossibleanditappearsthatthisexplainsagoodpartoftheparadoxofIndia’srapidgrowththatmayhaverelativelybypassedthetraditionallabour-intensiveindustries.55 Whilehavingacomparativeadvantageinahostoflabour-intensiveindustries,Indiaalsocametoattainstrongcomparativeadvantageinthehighlyskill-intensiveinformationtechnologyandrelatedindustries.Thishasbeendue to itspastpolicyofpromotinghigher technicaleducation.Thecountryhas longbeentheonewiththelargestexcesssupplyofhighly-skilledtechnicalhumanpower.Thisisarelativelyunusualsituationforadevelopingcountryandthepolicybehindthiswasoftensubjectedtocriticismbythedevelopmentcommunity inthepast.Bethatas itmay, inthe

55 The hypothetical formulation of the statement is deliberate. While there is a great deal of“circumstantial’evidenceinfavourofthishypothesis,thereviewerknowsofnoseriousstudyonthesubject.


ageofglobalizationwiththeemergenceofITasamajoractivityintheworldeconomy,Indiacame to have a strong comparative advantage in this activity. 56 India’s accelerated growthin the post-reform period came to feature a very large share of these highly skill-intensiveactivities which did not provide much employment of the traditional kind. 57 Once again,thereisnothingundesirableaboutrespondingtosuchopportunities.Itwould,however,bedesirabletosimultaneouslyimproveincentivesformanufacturingandagriculturewhichstillhavetoprovideemploymenttothebulkofthelabourforce.

The shift in comparative advantage may also come from other sources.The Indonesiancase study suggests that Indonesia has been losing competitiveness in labour-intensivegarmentsandotherexportstonewlyemergingcheaperexporterslikeVietnamandthatitsexportshavebeenshiftingtowardsmoretechnologically-sophisticatedproducts.Suchshiftsincompetitivenessforspecificexportsareanormalhazardofdevelopment inaglobalizedworld economy.The right policy response is to see if this can be offset by appropriate (i.e.,consistentwiththecountry’struecomparativeadvantage)supporttorestorecompetitivenessfortheadverselyaffectedindustriesortoshifttonewareasofcomparativeadvantage.Thereis no reason why such an orderly shift in policies should result in an overt change in thecompositionofoutputinfavourofemployment-hostileactivities.Inanycase,theIndonesiancasestudynotesthatthecompositionofoutputinIndonesiahasnotshiftedinresponsetothechangeinthecompositionofexports,sothisparticularexplanationforIndonesia’sdeclineinindustrialOEEdoesnotappearvalid.

Athirdpossiblesourceofadeclineintheemploymentintensityofgrowthisanadverseshift in the relative access of the labour-intensive activities to resources, most importantlycredit.Anexampleisareductionintheaccessofthesmall-scaleenterprises,whicharealmostinvariablymorelabourintensivethanthelarge-scaleenterprises,tocredit.Thisismostlikelytohappeninasituationofgeneralcreditcrunchwhen,evenwithoutostensiblediscrimination,thesmall-scaleenterprisesfacegreaterdisadvantage.Thisreviewhastentativelysuggestedthat in the environment of strict control of credit in the post-reform period, this may havehappened in IndonesiaandpossiblyThailand.Theobviouswaytopreventthis is todesignstabilizationmeasureswithcareandavoidanunnecessarilystiffdoseofstabilization.

A fourth possible source of a decline in employment intensity is an undesirable shift intherelativecostoffactorsofproduction.TheIndonesiancasestudypointsouttotheschoolof thought - one that the study rejects - that government regulations and enforcement ofminimumwageshavebeenamajorcauseoftheemploymenthostilityofIndonesia’srecovery.Generally,thenearly-universallong-termshiftindevelopmentpolicyhasmeantamoveawayfromsuchpolicies inthedevelopingworld. It isnotobviousthatthishashappenedinanyof the cases in the current group of countries. But policy-makers need to be alert to suchpossibilities.

56 Thepresentreviewerhaselsewherecomparedthiswiththeclassicalcaseof“ventforsurplus”. 57 Thismeansthatevenif IT industrygrowswithahighOEEandevenif it istruethatphysicalcapital intensity

oftheseindustriesisnotparticularlyhigh–anissuethatneedstobedocumented–thedirectimpactofsuchemploymentgrowthonpovertyreductionwouldbeminimal.


TheOverallEmploymentPerformance

It needs to be noted that poor overall employment performance was not limited to thecountrieswhichexperiencedadeclineintheemploymentintensityofgrowth.Employmentgrowth was inadequate in three of the remaining four countries which show no evidence,or at least no clear evidence, of declining employment intensity of growth (Cambodia, thePhilippines and Sri Lanka). In these countries the slow rate of growth or growth bypassingthemajor“poverty”sectorshasbeentheobstacletoadequateemploymentgrowth.TheonlycountryinwhichtheoverallemploymentgrowthhasnotbeenaseriousissueisMalaysiawhichhasbeenasignificantnetimporteroflabourfromabroad.Indeed,Malaysiahasalsofacedaproblemofemploymentgrowthinthepost-crisisperiodtowhichitsresponsehasbeentosharplyreducetheinflowofimmigrantlabour.Thus,theproblemofinadequateemploymentgrowthmustbeseenasamuchwiderproblemthanofmerelyimprovingtheemploymentintensityofgrowth.

ChangeinEmploymentIntensityInducedbySupplyShift

TheprocessofeconomicdevelopmentoverthelongperiodinducesagradualfallintheOEE,firstturningitnegativeinagricultureandthenreducingitthroughouttheeconomyaslabourbecomesscarce.IntheIndiancase,thesimultaneousoccurrenceofadeclineinOEEandariseinrealwageshasbeenexplainedwithreferencetoashiftinlaboursupplybroughtaboutbyadeclineintheworker/populationratio,whichinturnwasinducedbysuchfavourablechangesasariseintherateofschoolenrolment.58 Whilethismayexplaintheriseinrealwages,anditspositiveimpactonthepoor,despitethefallintheOEE,thisdoesnotsayifthefallintheOEEwasitselfcausedbythesupplyshiftbroughtaboutbythedeclineintheworker/populationratio.Indeed,India’sagricultureneedstoreleaseagreatdealmoreoflabour.HadtheOEEinindustriesand thenon-agricultural sectorsbeensufficientlyhigh, theremighthavebeenabeginningoftheLewistransitionaided bythefallintheoverallworker/populationratio.ThesupplyshiftthathasoccurredinIndiadoesnotwarrantorjustifytheextremeemploymenthostilityinindustriesalthoughitmayhavemitigatedtheadverseeffectofthelatteronrealwagesandpovertyincidence.

Thailandalsoexperiencedadeclineintheworker/populationratioduringthe1990swhentherateofgrowthoflaboursupplyfell.ThisperiodwitnessedtheaggressivebeginningofaLewistransitionwhichwasfacilitatedbyboththisfavourableshiftinlaboursupplyandariseinnon-agriculturalOEEs.59TheAsianfinancialcrisisended,andstarted,areversaloftheLewistransition.

58 Thisisbasedontheargumentsandevidence,notsomuchinoneofthepresentcasestudies,asinapreviousILOstudy:SundaramandTendulkar,2006.

59 Notethatinitsinterpretationofthecasestudy,thisreviewtakestheviewthatobserveddataprobablyoverstatetheextentoftheLewistransitionandunderstatetheoverallemploymentgrowthduringthisperiod.


Growth,Employment,InequalityandPoverty

This review has argued that, with the possible exception of Malaysia, the rate of povertyreduction inall thecountries in thegrouphasbeen less thanthepotential rateofpovertyreduction.Thispotentialrateofpovertyreductionistheonethatwouldobtain,iftherateofgrowthoftheincomeofthepoorwasthesameastherateofgrowthofpercapitaincomeor,inotherwords,ifthedistributionofincomeremainedunchanged.60Inreality,thedistributionofincomeworsenedinallcountriesexceptMalaysia,whereitimprovedveryslightly,andinIndonesia,whereitfellslightlyattheonsetofthecrisisandthenwentupbacktothepre-crisislevelduringtherecoveryperiod.

Themechanismthroughwhichincreasedemploymentleadstoareductioninpovertyispresumedtobeanaugmentationoftheearningsofthepoor.Ifthiseffectisstrongenough,the distribution of income should improve or avoid deterioration. The worsening of theincomedistributionmaythusbelargelyareflectionofthepooremploymentperformance.Exceptionstothe linkagebetweenemploymentanddistributioncanbe foundeven inthesmallnumberofcasesunderreview.InThailand,thedistributionofincomedeterioratedoverthelongperiodleadingtothecrisis,butitimprovedduringthepost-crisisperioddespiteapoorandworsenedemploymentperformance.Duringthisperiodgrowthalsobecamemorepovertyalleviatingthanbefore.InCambodia,employmentintensitywashigherduring1998-2004thanbefore.But,availableevidence,imperfectasitis,suggeststhatpovertyreductionwasfasterintheearlierperiodthaninthelaterperiod.

Each of these disjoints between employment growth on the one hand and inequalityandpovertyontheother,needstobeevaluatedbyexaminingchangesinfactorsotherthanemploymentthataffectinequalityandpoverty.InthecaseofThailandthecasestudyreferstotheredistributivepublicexpenditurebytheThaksingovernmentinthepost-crisisperiodwhichmayhavebroughtaboutan improvement in incomedistributionandwelfareof thepoordespitethepooremploymentperformance.Thisalsopointstotheimportanceofotherinstrumentsofpolicytocompensateforthefailureoftheemploymentlinkage.

Thecasestudiesaregenerallyweakwithregardtotheanalysisofthese“otherfactors”.LetusillustratewithreferencetothecasestudyforruralIndia.Theindicatedreductioninpovertymusthaveresultedfromasubstantialincreaseinpersonalincome/consumptionofthepoor.Actualincreaseinpersonalincome/consumption,availablefromtheNSS,hasnotbeenshown.

60 Strictlyspeaking,anunchangedincomedistributionisnotnecessary.Anunchangedshareforthepoorisquiteconsistentwithredistributionamongthenon-poorwhichcanbringaboutachangeintheindicesofinequality,suchastheGiniratio.Whenwetalkaboutanincreaseininequalitywemeanafallintheshareofthepoor.


The extent to which overall GDP growth is transmitted to the rural poor in the form of anincreaseintheirincomedependsonavarietyoffactorsofwhichthefollowingareimportant:

(a) TheshareoftheruraleconomyinthegrowthinGDP;(b) Changeintermsoftradeforagricultureandotherruraleconomicactivities;(c) Macroeconomic policies and their consequences in determining the effect of

growthinGDPonthegrowthinpersonalincome;(d) Otherfactorsaffectingthedistributionofpersonalincome.

Verylittleissaidinthiscasestudy,orinanyother,onanyoftheaboveaspectsofdevelopmentinthepost-reformperiod.Itisthusveryhardtoknowthemechanismandtheextentofchangeintheincomeofthepoor.

Thestrongpovertyalleviatingeffectthatinequality-aversegrowthexertsisillustratedbythe case of Malaysia. Unfortunately, few other case studies provide an opportunity for theillustrationofsuchexperience.IndonesiabeforebeinghitbytheAsiancrisisconstitutedsuchacase.ThedifferencebetweenChina’spoverty-reductionperformanceinthedecadeendinginthemid1990sandintheperiodaroundtheturnofthecenturyillustratesthenear-dramaticeffect thatachange inperformancewith respect to inequalitymakes. In theearlierperiodhighgrowthledtoslowreductioninruralpovertyandvirtuallynoreductioninurbanpovertybecauseofitsassociationwithsharplyrisinginequality.Inthelaterperiodequallyhighgrowthledtoasharpfallinpovertyduetoitsassociationwithafallinpovertyalbeitverysmallforurbanareas.6�ThefavourablelinkagebetweengrowthandpovertyreductionviatheavoidanceofrisinginequalityinthecaseofMalaysia,IndonesiapriortothecrisisandruralChinaaroundtheturnofthecentury,wasassociatedwithafavourableemploymentperformance.InthecaseofurbanChinaaroundtheturnofthecentury,thefavourabledistributioneffectwasassociatedwithaworseningoftheemploymentsituation,andwasduetoanumberofpoliciesimprovingthedistributionofincome,e.g.,socialprotectionfortheunemployed,greaterequalityinthedistributionofpublicsubsidiesandgreaterregionalbalanceingrowth.

AgriculturalEmployment

Historically, all successful cases of economic development have been characterized bythe following sequence with respect to employment in agriculture: in the beginning, theproportionofworkersemployedinagriculturestartsfallingalthoughtheabsoluteemploymentin agriculture continues to rise. During this period the OEE in the sector remains positivethough itbegins todeclineandremainsbelowtheOEE in thenon-agriculturalsectors. Asgrowthcontinues,atsomestage,theabsolutedeclineinemploymentinagricultureoccurs,aphenomenonthatisknownastheLewistransition.Beyondthispoint,theOEEinagricultureturnsnegative.TheLewistransitionhasbeenconsideredtobealandmarkintheprocessofdevelopment,indicatingthelaunchingofacountryonasustainedpathofindustrialization.A real Lewis transition occurs through the rapid expansion of demand for labour from the

6� SeeKhan,2004.


non-agriculturalsectors,apullfromoutsideratherthanapushfromagricultureitselfduetoitsinabilitytosustaintheexistinglabourforce.Undertheidealscenariothisleadstoariseinproductivity inagricultureandthe ruraleconomyanda reduction in incomegapbetweenagricultureandtheruraleconomy,ontheonehand,andthenon-agriculturalsectorsandtheurbaneconomy,ontheother.

There are many different patterns of change in employment in agriculture even in thelimitednumberofeightcases.Malaysiaappears tohaveachievedtheclassickindofLewistransition. China apparently started going through a Lewis transition after 1991 when itsagriculturestartedexperiencinganabsolutefallinemployment.China’sexperience,however,fallsseriouslyshortofthecriterionofasuccessfulLewistransitioninsofarasthegapbetweenruralandurbanincomeshascontinuedtoriseovertheperiodduringwhichagriculturehasexperienced a net decline in employment. Furthermore, the process of declining absoluteemployment in agriculture was reversed between 1997 and 2003 when it resumed again.Thailandalsostartedhavingadeclineinagriculturalemploymentduringthe1990swhentheOEEforthesectorturnedhighlynegative.IntheaftermathoftheAsiancrisisthiswasreversedandagriculturalemploymentinThailandbegantorise.Indonesiaalsoexperiencedasetbackinsofarasagriculture’sshareofemployment,fallingsteadilyuntiltheAsiancrisis,significantlyrosethereafter.InIndiatheabsolutesizeofagriculture’slabourforceseemstohavestabilizedinthesecondhalfof the1990s, indicatingthatthecountry ispoisedforaLewistransition.Althoughahypothesisaboutthetighteningofthelabourmarkethasemergedamongsomeeconomists,theevidenceoftheruralnon-farmeconomyisinconsistentwithit.Inthissector,absorbingagreatdealoftheincrementofthelabourforce,productivityhasnotonlybeenlow,butalsodeclining.BothinthePhilippinesandSriLankatheshareofagricultureintotalemploymenthasbeenfallingthoughthesecountriesdonotappear tobeclosetoaLewistransition.Inboththesecountriestherateofdeclineinagriculture’sshareofGDPwasmuchfasterthantherateofdeclineinthesector’sshareofemploymentduringthelastdecadeandlonger, therebysignifyingthat, relativetotherestof theeconomy,productivityperpersonemployedinagriculturehasbeenfalling.62AbsenceofdatadoesnotpermitanysuchanalysisforCambodia,butmorethan70percentofemploymentinthatcountryisinagriculturewhichcontributesjustathirdofGDP,signifyingahugegapbetweenagricultureandtherestoftheeconomyintermsofoutputperworker.

Indeed,therecordoftheAsiancountriesinbringingaboutatransformationinthesectoraldistributionofemploymentismuchbleakerthanwhattheabovedepicts.Adifferentsetofrecentstudiesongrowth-employment-povertylinkagelookedattheexperienceoftenAsiancountriesandfoundthatfiveofthem-Armenia,KyrgyzRepublic,Mongolia,Indonesia,andCambodia - experienced an increase in agriculture’s share of total employment. This wasbecauseindustriesandrelatedmodernactivitiesfailedtoabsorblabourand,inseveralcases,theabsolutenumberofworkersemployedbythesesectorsdeclined.63Thisisaperversetrendfromthestandpointofdevelopmenttheoryandisinconsistentwithallhistoricalexperienceofsuccessfuldevelopment.

62 ThesearebasedonthesectoralsharesofemploymentandGDPshowninWDI,2006.63 SeeKhan,2005.


Therefore,thepictureisdismalwithrespecttothetreatmentofagriculturewhichemploysandhousesmostofthepoorinthesecountries.Whatthesecountries’agricultureneedsisasmallershareofnationalemploymentandalargershareofnationalcapitalinordertoboostproductivityandreducethegapinlivingstandardsandpovertybetweenagricultureandtheruraleconomy,ontheonehand,andthenon-agriculturalandurbaneconomies,ontheother.Healthyresolutionofemploymentproblemscannotbeachievedwithoutsuchchange.Whenemploymentgrowthinthenon-agriculturalsectorisfastenoughtopermitaLewistransition,theprocessmustbehastenedbypromotingagriculturalgrowthsothattheremaininglabourforceinthesectorcanachievearapidincreasein livingstandards.Wheresuchtransitionisnothappening,agriculturemustbeprovidedwithadequateresourcestoabsorbitsshareofincrementallabourproductively.

VI.ConcludingObservations

InrecentdecadesseveralcountriesofdevelopingAsiahavereplicatedthegrowthperformanceoftheEastAsianpioneers,butalmostallofthemhavefailedtoreplicatetheirperformanceinincomedistributionandpovertyreduction.Oneoftheprincipalfailures,ifnottheoutstandingfailure,that ledtothisasymmetricaloutcomehasbeenthattheirgrowthwasnotnearlyashighlyemploymentintensiveaswasthecaseintheEastAsianpioneers.Indeed,thefastestgrowingAsiancountriesoftodayhaveinmostcasesexperienceddismallylowanddecliningoutputelasticitiesofemployment.Thishasbeendocumentedbyavarietyofempiricalcasestudies.Thepresentreviewdiscussesnewcasestudiesofgrowth-employment-povertylinkageineightmoreAsiancountries.Withoneexception–thatofMalaysia–alltheAsiancountriesin the present set of studies experienced the problem of inadequate employment growth.This isaproblemthatappears tohavebecomeaggravated in recentyearsandhasbeenamajorfactorinweakeningtheimpactofeconomicgrowthontheearningsofthepoorandinmakinggrowthlesspovertyalleviatingthanitmighthavebeen.

In four of the seven cases of inadequate employment growth – those of China, India,IndonesiaandThailand–theemploymentintensityofgrowthhasbeenlowandhasdeclinedovertime.Intwoofthosecases,thoseofChinaandIndia,thetwolargestdevelopingcountries,thesharpfallintheemploymentintensityofgrowthhasbeenthecauseoftheproblem.Intheothertwo,IndonesiaandThailand,thecausewasbothareductioninemploymentintensityand a reduction in the rate of growth. In the remaining three cases – those of Cambodia,the Philippines and Sri Lanka – the poor employment performance was, by and large, dueto inadequate growth or growth bypassing the large sectors where poor workers areconcentrated.

While more work is needed to understand fully the causes behind the decline in theemployment intensity of growth, several factors stand identified as responsible for thisphenomenon. A major explanation of the phenomenon is inherent in the nature of thetransitionfrominward-looking,regulation-based,ISI-typeofregimetoonebasedongreatercompetitionandintegrationwiththeglobaleconomy.Whiletheincentivesystemofthelatterismoreemploymentfriendlythantheincentivesystemoftheformer,thetransitionitselfentailsthelayingoffofvastnumbersofworkersinefficientlyabsorbedinthepayroll,principally,butnotexclusively,ofStateenterprises.Asecondsourceisasharpsuddenshiftinthecompositionofincrementaloutputinfavour


ofactivitieswith lowlabour intensity,either inresponsetosuchfactorsasopportunitythrownopenbytheglobaleconomyorduetolossofcompetitivenessinsomelabour-intensiveexports.Althoughthemoveawayfromtheregimeofdistortedincentivesthatfavoursinappropriatefactorintensitiesiswidespreadamongthecountriesunderreview,theymayhaveoccasionallylapsedintocircumstanceswithconsequencessimilartothoseofthepastsystem.Theselapsesconstitutetheotherfactorsbehindthe problem of diminished employment-intensity of growth. An example is the relative reduction inaccesstocreditforsmalllabour-intensiveenterprisesinaperiodofmacroeconomiccontraction.Anotherisinappropriatemarketinterventionsaffectingtherelativefactorcosts.Publicpolicycanmitigatetheeffectsofthoseofthefactorsthatareinevitableandremovetheonesthatarenot.64

Employmentperformanceispowerfullyinfluencedbymacroeconomicpolicies.Infiveofthesevencountries in difficulty, higher economic growth would help overcome the problem. Far too oftendisproportionatedegreesofmacroeconomicstabilizationhavereducedeconomicgrowthtoratesthatsimply are too low to permit adequately high rates of employment growth even when employmentintensities are high and intact. However, macroeconomic contraction can also damage theemploymentintensityitselfthroughitsasymmetricalimpactonenterprisesdifferinginfactorintensity.65

64 ThisreviewdoesnotfinditnecessarytodiscussthesepolicieswhichhavesoveryeloquentlybeenspelledoutinseveralILOpublications.See,forexample,Islam,2006.

65 Khan,2005,synthesizesanumberofUNDPcasestudieswhichanalysetheseissuesandoutlinepoliciestodealwiththeseproblems.


References

TheCaseStudies

(Theseareallmanuscriptsintypescript.TheyarearrangedinthesameorderinwhichtheyarediscussedinsectionIII.)

Samsen,NeakandDourngKakada,Studies on Economic Growth, Employment and Poverty Reduction, The Case of Cambodia,May2006.

CaiFang,Growth, Employment and Poverty Reduction: The Case of China,October2006.

Islam, Iyanatul and Anis Chowdhury, Growth, Employment and Poverty Reduction: The Case Study of Indonesia,March2006.

Nair,Sulochana,LooiKahYeeandGoySiewChing,Economic Growth, Employment and Poverty Reduction in Selected Southeast Asian Countries – The Case Study of Malaysia,July2006.

Canlas,DanteB.,FernandoAldabaandEmmanuelEsguerra,Growth, Employment Creation, and Poverty Reduction in the Philippines,September2006.

Krongkaew, Medhi, Suchittra Chamnivickorn and Isriya Bunyasiri, Employment-Intensity of Growth and Poverty Reduction: Case of Thailand,May2006.

Mitra,ArupandN.R.Bhanumurthy,Economic Growth, Employment and Poverty: A Study of Manufacturing, Construction and Tertiary Sectors in India,May2006.

G. K. Chadha, Economic Growth, Employment and Poverty Reduction: The Case of Rural India,September2006.

Tilakaratna, Ganga, Thusita Kumara, Priyanka Jayawardena and Roshini De Silva, Economic Growth, Employment and Poverty Reduction in Sri Lanka,October2006.

OtherReferences

Deaton,A.andV.Kozel,2005,Data and dogma: the great Indian poverty debate,PrincetonUniversity.

Islam,R.(editor),2006,Fighting Poverty: The Development-Employment Link,LynneRiennerPublishersInc.,Boulder,Colorado.

Khan,A.R.,1997,Philippines: Employment in a Globalizing and Liberalizing World,ILO,SEAPAT,Manila.

Khan,A.R.,2004,Growth, Inequality and Poverty in China: A Comparative Study of the Experience in the Periods Before and After the Asian Crisis,IssuesinEmploymentandPovertyDiscussionPaper15,ILO,Geneva.

Khan,A.R.,2005, Growth, Employment and Poverty: An Analysis of the Vital Nexus based on some Recent UNDP and ILO/SIDA Studies,IssuesinEmploymentandPovertyDiscussionPaper19,ILO,Geneva.

Khan, A. R. and M. Muqtada (editors), 1997, Employment Expansion and Macroeconomic Stability under Increasing Globalization,Macmillan,London.

NationalBureauofStatisticsofChina,2005,China Statistical Yearbook 2005,ChinaStatisticsPress,Beijing.

Osmani,S.R.,2006,“Employment IntensityofAsianManufacturing:AnExaminationofRecentTrends”,PaperpreparedfortheAsianRegionalBureauoftheUnitedNationsDevelopmentProgramme(UNDP),NewYork,March.

Sundaram,K.andS.D.Tendulkar,2006,“India:Employment-PovertyLinkagesandPolicyOptions”,inIslam(Editor),2006.

WorldBank,1997,2005and2006,World Development Indicators.

Documents

Asian experience on growth, employment and poverty: an ......Asian Experience on Growth, Employment and Poverty 2 3 See chapter 4 of Islam, 2006 for evidence on different developing