POLICY BRIEF. research for a fairer world. Supporting Poverty Reduction in Asia : Opportunities and Challenges in CIDA s Countries of Focus

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1 Summer 2012 The North-South Institute POLICY BRIEF Supporting Poverty Reduction in Asia : Opportunities and Challenges in CIDA s Countries of Focus A sia s inexorable emergence into prosperity is often viewed as a fait accompli. Compared with other developing regions, Asia has certainly stood out in terms of performance. Between 2005 and 2010, developing countries in Asia reduced the number of people living in poverty (spending $1.25/day or less) by 430 million, accounting for 93 per cent of global poverty reduction during this period (AsDB 2011). With only seven countries with average per capita incomes below C$1,000, the region appears to be moving firmly toward middle-income status (Kharas 2011). However despite these and many other indicators, there is still great diversity in the region. Issues such as food security, employment, and education, as well as conflict and governance remain some of the most fundamental obstacles to Asia s continuing ascendance. This policy brief, which is based on North-South Institute research recently commissioned by the Swiss Agency for Development and Cooperation, reviews the main trends forecast for Asia to 2020 (Table 1). Particular emphasis is placed on the outlook for sustainable development in the countries of focus of the Canadian International Development Agency (CIDA) in the region: Afghanistan, Bangladesh, Indonesia, Pakistan, Vietnam, and other countries of Southeast Asia. Taking into account the priorities and main areas of work outlined by CIDA in each of these countries and the Southeast Asian subregion, we offer some key recommendations for future Canadian cooperation in the attainment of inclusive growth and poverty reduction there. This brief summarizes work done by NSI researchers to forecast key development issues arising in Asia for , making special reference to the areas already designed by CIDA as core initiatives. This project was made possible by the generous funding of the Swiss Agency for Development and Cooperation (SDC). A view of heavy flooding caused by monsoon rains in Punjab Province, Pakistan. UN photo. research for a fairer world

2 Supporting Poverty Reduction in Asia : Opportunities and Challenges in CIDA s Countries of Focus International cooperation agencies need to assist with immediate investments in physical infrastructure to reduce bottlenecks and better connect producers with markets to achieve large and sustained payoffs over the next few years amid high food prices. Food Security and Poverty Reduction In 2007, Asia accounted for 554 million, or roughly two thirds, of the world s undernourished inhabitants (FAO 2010). Most were in India (238 million), Bangladesh (42 million), Pakistan (43 million), and China (130 million). Although substantial progress had been made in China during the 1990s, when the undernourished population fell from 210 to 130 million, blistering economic growth there as in India and other parts of South Asia had not translated into further reductions in the number of people affected by food insecurity in the early 2000s. In contrast, low- and middle-income countries in Southeast Asia made substantial progress from the 1990s to 2007, with Myanmar and Vietnam reducing their food-insecure populations by two thirds, and Laos by a quarter. In Asia, most people suffering from food insecurity tend to be rural poor, often farmers or farmhands living in marginal areas. The global food price peaks of 2008 and produced consternation and confusion among development experts, some of whom expected the higher prices to create incentives for more production in remote areas, while others worried that imports would become unaffordable. Table 2. Population projections for developing Asian countries Country Population (thousands) Proportion Urban (%) Table 1. Growth projections for developing countries in Asia Country GDP (US$ millions) Average annual growth (%) Per capita GDP (2005 US$) Afghanistan Bangladesh Cambodia Indonesia ,483 2,210 Pakistan ,175 Philippines ,265 1,669 Vietnam ,412 World 51,303 69, ,159 9,055 Note: GDP = gross domestic product. Source: World Bank, World Development Indicators, International Financial Statistics of the International Monetary Fund, IHS Global Insight, and Oxford Economic Forecasting. In fact, since 2009, Bangladesh, Cambodia, and Vietnam have experienced higher growth in agricultural GDP than in services or industry. However, this new dynamism in agriculture can only become an opportunity to reduce poverty in if there is a proportional increase in the availability of credit to expand production and in access to affordable inputs, such as fertilizer, to increase yields in new, marginal areas (Islam 2010). Furthermore, Average annual growth (%) Urban Rural Urban Rural Afghanistan 6,410 15,364 20,735 31, Bangladesh 42,191 76, , , Cambodia 3,022 6,473 11,421 13, Indonesia 94, , , , Pakistan 58, , , , Philippines 41,126 64,951 44,370 52, Vietnam 23,888 40,505 63,487 65, World 3,293,944 4,584,233 3,377,283 3,426, Source: Source: United Nations, Department of Economic and Social Affairs, Population Division international cooperation agencies need to assist with immediate investments in physical infrastructure to reduce bottlenecks and better connect producers with markets to achieve large and sustained payoffs over the next few years amid high food prices. Demographic trends in Afghanistan, Bangladesh, and Pakistan, in particular, call for strategic interventions in production, infrastructure, and distribution systems to ensure sustained improvements in food security and poverty reduction (Table 2).

3 Although Asian countries have been highly successful in tackling urban poverty, better policies surrounding food security are still needed to make gains in agricultural productivity and, above all, to diversify production to accommodate the fast-changing dietary habits of the growing urban middle classes. Failure to take action will increase rural inequalities, increase food security further, and increase dependence on expensive and volatile food imports. Employment and Education A pragmatic way to ensure that brisk economic growth results in poverty reduction is to focus on improving access to sustained employment via appropriate educational programs. Such programs are most effective when they provide marginalized people and groups with the skills and training they need to pursue gainful opportunities in the labour market. However, other factors must also be appropriately aligned for educational investments to have a significant effect in poverty reduction: population growth must slow and economic growth strategies must be oriented toward employment creation. In that regard, two trends are clear in Asia today and for the future. First, attention to industrial productivity, fullemployment targets, domestic ownership goals, and strategies for adding value and economic diversification have helped ensure that higher productivity employment opportunities expand with fast economic growth in China, Malaysia, Thailand, and, to a lesser extent, other countries of East and Southeast Asia in (McMillan and Rodrik 2011). Simultaneously, strong health and education campaigns have been established to accelerate the reduction in population growth that was already taking place alongside rising incomes. The other trend is the double-digit growth in the labour force since the 1990s in Afghanistan, Pakistan, Cambodia, and Bangladesh which is expected to continue during In these countries, the chosen economic growth strategies are unlikely to create sufficient formal sector employment opportunities to satisfy the wave of new labour market entrants in the coming years. The result will likely be an increase in the already large informal sectors, which would greatly limit the benefits that could flow to labour from rapid economic growth. Country In 2007, the International Labour Organization (ILO) estimated that, by 2015, the informal economy will still account for 60 per cent of the region s total employment, with the largest number of informal workers as a proportion of total employment occurring in South Asia (over 70 per cent), followed by Southeast Asia and the Pacific (55 per cent), and East Asia (50 per cent). For example, Pakistan s informal sector is 70 per cent of all employment, and the proportion is 68 per cent in Vietnam. Under these circumstances, informality exerts downward pressure on wages and employment quality, becoming a key constraint on inclusive growth and poverty reduction. Especially in settings with relatively low secondaryschool enrolment, vocational education and training (VET) can play a critical role in upgrading labour force skills and accumulating human capital. In Vietnam, VET rates rose from 2.3 per cent to 4.3 per cent (from 2.5 per cent to 4.9 per cent for women). Of the countries surveyed, Vietnam is the only case where women s VET rates exceeded those for the labour force as a whole in Most countries such as Bangladesh, Cambodia, and Pakistan reveal very low VET rates for the same period, but trends vary. Pakistan saw modest rises: from 1.6 per cent to 1.9 per cent for the total labour force and from 0.6 per cent to 1.8 per cent for women. Table 3: Employment indicators in developing Asian countries, Active population (millions) Active population growth (%) Informal jobs 2010 (% of total employment) Unemployment (%; latest year) Afghanistan (2005) Bangladesh (2009) Cambodia (2008) Indonesia (2009) Pakistan (2008) Philippines (2009) Vietnam (2008) Sources: ILO 2010, 2011a, 2011b. Higher levels of secondary school attainment do not always translate into better jobs. Thus, to increase human capital development and national productivity over the longer term, more emphasis must be placed on vocational education and training.

4 Challenges to improving governance vary considerably, as the countries most absorbed by security issues need rapid change to reduce the fallout from conflict, while others will move slower given their elites concerns with maintaining control of transitions to guarantee the best outcomes for themselves. Afghan primary school children attend classes in Kabul. UN photo. Higher levels of secondary-school attainment do not always translate into better jobs. Thus, to increase human capital development and national productivity over the longer term, more emphasis must be placed on VET. This can provide a pragmatic instrument to bridge the gaps between large informal sectors, limited education, and matching job creation with skills. Northern Pakistan in the near future to reduce the side-effects they are likely to endure from violence among the warring parties. A realistic understanding of the likely future should also inform CIDA s strategy for large-scale disaster (i.e. war) response in that region. Herein lies the greatest obstacle to maintaining economic growth, improving income distribution, and creating sustainable societies. Challenges to improving governance and the resulting payoffs vary considerably among countries, as those most absorbed in security issues need rapid change to reduce the fallout from violence and conflict, while others are expected to move slower given the concern of their elites to maintain control of political processes that guarantee favourable outcomes for themselves. For countries with less serious conflict issues and more democratic or representative government (e.g., Bangladesh, Indonesia, and the Philippines), the challenges to and payoffs from advancing the quality of governance are quite different. These countries have functioning democracies, but their institutions are under siege by polarized ideologies, violent oppositions, or both. A positive development could come from spillover of anti-corruption campaigns from India to Bangladesh and from Malaysia to Indonesia and the Philippines, signaling that these Asian governments must also improve the transparency of their institutions to maintain legitimacy as administrators under the rule of law (Gey et al. 2007). In the short- to mid-term (2020), Afghanistan and Pakistan are seen as the countries most directly implicated in potential violent conflict (Abbas 2010). After 10 years of international intervention and roughly $70 billion in foreign aid since 2002 to implement security and development assistance projects, there is still a strong possibility that Afghanistan will relapse into deeper conflict or civil war once foreign forces are withdrawn (USCFR 2011). This is despite large development achievements, such as a sevenfold increase in the number of children attending school and improvements to health care. Increased real decentralization and political empowerment of local communities could assist Afghans and people in In other countries, such as Cambodia and Vietnam, improvements in governance have a still different meaning. Cambodia has democratic institutions but is, de facto, ruled by a single party, while Vietnam clearly has an authoritarian government. In this context, changes carried out by ruling elites over the next decade and beyond will necessarily include balancing control with regime sustainability (Bersick and Pasch 2007). In addition, given the authoritarian nature of government in these countries, the true meaning of popular demand can only be extrapolated from limited poll samples in the countries or more detailed studies in neighbouring countries, such as Thailand and Malaysia. Governance and Conflict Resolution

5 Supporting Poverty Reduction in Asia : Opportunities and Challenges in CIDA s Countries of Focus Policy Recommendations for Support to CIDA s Asian Countries of Focus The following recommendations emphasize cooperation policies that leverage the likely changes, continuities, challenges, and opportunities for sustainable development that will take place in Asia toward 2020: Food security and poverty reduction: For , foster policy solutions that take immediate account in equal measures of external factors such as climate change and sustained high international food prices, but also internal ones such as migration to urban areas. Scarcity of water and growing income inequality in rural areas remain, but more as mid-term challenges. Where possible, show a preference for supporting subregional responses over national policies. Employment and education: Reinforce growth and job-creation policies underpinning the positive structural change already taking place in Asia, while supporting other Asian countries in this direction through more widespread and tailored adoption of vocational education and training. Give initial preference to countries where there is a significant gap between skills needed and those learned, while rapidly expanding high-school cohorts to maximize demonstration effects. This will increase the likelihood of adoption by other countries and cooperation agencies. Governance and conflict resolution: For and beyond, be mindful of the broader trend in reduced leverage for aid agencies versus recipient countries. The structural transformation of these Asian countries will force gradual improvements in their governance and accountability. To be most effective in assisting these domestically driven processes, CIDA must provide technical support while remaining ethical and pragmatic in its contribution. Finally, given the progressive strengthening of state capacity in most of the Asian countries discussed in this brief (except in Afghanistan and Pakistan), CIDA cooperation will be most effective and influential if it concentrates on macropolicies and targets policymaking circles, instead of spending significant resources in micro- or community-level projects. References Abbas, H. Pakistan 2020: a vision for building a better future. Washington, DC: Asia Society, AsDB (Asian Development Bank). Asia 2050: realizing the Asian century. Manila, Philippines: AsDB, Bersick, Sebastian, and Paul Pasch. Southeast Asia: the future of German foreign relations. Berlin: Friedrich Ebert Stiftung, Compass 2020 series. FAO (Food and Agriculture Organization). The state of food insecurity in the World: addressing food insecurity in protracted crises. Rome: FAO, Gey, P., Matthias Jobelius, and Renate Tenbusch. India: challenges on the road to becoming a world power. Berlin: Friedrich Ebert Stiftung, Compass 2020 series. ILO (International Labour Organization). Visions for Asia s decent work decade: sustainable growth and jobs to Geneva: ILO, ILO Key indicators of the labour market (7th ed.). Geneva: ILO, ILO estimates and projections of the economically active population: (6th ed.). Geneva: ILO, 2011a. ILO statistical update on employment in the informal economy. Geneva: ILO, 2011b, Islam, N. Reducing poverty and hunger in Asia. The role of agricultural and rural development. Washington and Manila: International Food Policy Research Institute and Asian Development Bank, Kharas, H. The emerging middle class in developing countries. Paris: Organisation for Economic Co-operation and Development, Working paper 285. McMillan, Margaret, and Dani Rodrik. Globalization, structural change, and productivity growth. In Bacchetta, M., and Marion Jansen. Making globalization socially sustainable. Geneva and Lausanne: International Labour Organization World Trade Organization, USCFR (United States Committee on Foreign Relations). Evaluating US foreign assistance to Afghanistan. Washington: 122th Congress 1st Session, June 8, 2011.

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