Thursday, Jan. 29, 2009

Potholes On the Path to Prosperity

Hoang Van Ti was one of the winners when Vietnam ended its long period of isolation and joined the global economy. Foreign investors flocked to the communist country, new factories making computers, clothing and other goods for export rose from the country's rice paddies, and suddenly jobs were no longer in short supply. In 2007, Ti landed work near Hanoi at a South Korean – owned kitchenware manufacturer, where he attached handles to pots on an assembly line. The pay, at $105 a month, was much more than the 22-year-old could ever earn back in his farming village of Hau Loc in central Vietnam. But two months ago, the world's severe economic slowdown hit home. Orders at Ti's factory dried up; his manager furloughed him indefinitely. Ti can no longer help his family in Hau Loc by sending them extra cash. As he chain-smokes at a makeshift tea stall near Hanoi, he longs to get back on the road to prosperity. "I'm trying to stay here to find another [factory] job," he says, "because life is even more difficult back home."

As the economic slump deepens, stories like Ti's are playing out with dismal regularity all over the world. From Mexico to Malaysia and Bahrain to Botswana, poor nations that bought into the promises of globalization benefited mightily as increased investment and trade generated new jobs, lifting hundreds of millions of people out of poverty. But the crash of consumer spending in the West is idling the manufacturing engines that drove much of the developing world's economic growth. In Asia and Africa, leaders fret that large swaths of the population could be plunged into destitution. In China — that modern-day paragon of economic bootstrapping that has provided a blueprint for so many other countries — exports are plunging, tens of thousands of factories are closing and tens of millions of newly unemployed workers are migrating from coastal cities back to their impoverished home villages. Globalization, the greatest poverty-alleviation machine the world has ever seen, looks to be losing its ability to transform lives for the better. The export-led growth model "in a medium and long-term sense is coming under stress," says Ajay Chhibber, director of the Asia bureau at the United Nations Development Program (UNDP) in New York City. As a result, "it will be much harder to maintain progress on poverty reduction." (See pictures of China on the wild side.)

The Asian Way
Nowhere is this stress more evident than in East and Southeast Asia, where countries including South Korea, Taiwan and Thailand proved for half a century that economic miracles were possible. While most of the developing world in the 1950s and 1960s tried socialist experiments or nationalistic, state-dominated strategies to end poverty, Asia was busy employing some old-fashioned capitalist tools by encouraging entrepreneurs, exports and foreign investment. Industrial enterprises, both foreign and local, multiplied, tapping low-wage labor to become internationally competitive exporters that shipped toys, textiles and TV sets to the U.S. and Europe. Farmers found new jobs on assembly lines, and their incomes soared. In 1981, nearly 80% of East Asians lived on less than $1.25 a day, according to a recent World Bank study; by 2005, only 18% did. Compare that record to sub-Saharan Africa, where countries didn't connect to the world economy as successfully as Asia. There, the poverty rate remained stuck at around 50% from 1981 to 2005.

Globalization worked. China adopted the strategy after Deng Xiaoping's reforms began in 1978. The results were spectacular, and by the 1990s, most developing countries were to varying degrees turning to export-led manufacturing to boost their economies. India joined the party after Prime Minister Manmohan Singh, then Finance Minister, introduced reforms beginning in 1991 that dismantled the stifling network of state controls and licenses known as the "license Raj." The Gulf emirate of Dubai has enjoyed a boom by reinventing itself as a major finance and trading hub for international companies. Countries as diverse as Togo, Kazakhstan and Jordan have advertised on CNN in search of foreign investors.

Today, amid the financial meltdown, it is those very nations that have gained most from the global economy that are suffering the most. Jing Ulrich, chairman of China equities at JP Morgan in Hong Kong, estimates that 60,000 enterprises shut in China's Guangdong province alone in 2008, as export orders and credit dried up. The Chinese government says that 10 million migrant workers have lost their jobs. In January the Federation of Indian Export Organizations warned that 10 million Indian workers might lose theirs in coming months, amid what A. Sakthivel, the group's president, called "the worst year in history" for exporters. Some 300 million people in Asia alone are so close to the poverty line that the economic downturn could push them back below it. Even those parts of the emerging world not as exposed to the shrinkage of global trade are at risk. Tito Mboweni, governor of the South Africa Reserve Bank, warned in October that the economic crisis could "undermine the policy gains we have made over the last decade." Says the UNDP's Chhibber: "At a minimum, the progress on poverty could be stalled — but it could even be reversed."

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Diminishing Returns
Even before the economy cracked, there was mounting evidence that, of late, the poor hadn't been enjoying much of the promised gains of globalization. For those on the edges of poverty, life was becoming more difficult. In early 2008, prices for staple food like rice and corn skyrocketed with rising global demand. Higher prices strained already meager incomes and malnourishment increased. Even those whose lives have been improving are not gaining ground as quickly as they might have in the past. Around the world, wage increases have been lagging overall economic growth rates. In a November study, the International Labor Organization (ILO) figured that in Asia, for every percentage-point increase in per capita GDP growth between 2001 and 2007, average wages increased by less than two-thirds of a point. "Workers do not benefit fairly from the enormous growth in the region," says Gyorgy Sziraczki, an ILO economist in Bangkok. "The low-skilled benefit even less."

In other words, the rich have been getting richer faster than the poor. In India, for example, the degree of income inequality in urban centers rose 15% in the decade prior to 2005, according to a study by the New Delhi – based National Council of Applied Economic Research. "Growth is captured by high-income groups," says Shiladitya Chatterjee, the head of the poverty unit at the Asian Development Bank in Manila. "It is not trickling down."

Without a trickle down, the world is getting used to a global army of salaried workers who struggle to support their families — people like 31-year-old Riyanto in Indonesia. Three years ago, Riyanto (like many Indonesians, he goes by one name) landed a job at a South Korean – owned garment factory on the outskirts of Jakarta. Employment in a foreign factory was once a ticket out of poverty. But the $110 a month he earns can barely feed and house his wife and 4-year-old son. The family lives in a rented, 10-ft. by 16-ft. (3 m by 5 m) room divided by a plywood board. If they spend more than $1 a day on food, they run out of money between Riyanto's paychecks. "We only eat chicken once a month, just so that we don't forget how it tastes," he says. "I'm amazed myself that I still survive."

Why the poor now seem to be missing out on the spoils of globalization is a matter of debate among economists. Part of the reason could be the greater use of technology in manufacturing. With factories even in low-wage countries like China and India shifting to higher-tech production methods and products, demand is rising for well-trained engineers and managers — positions out of the reach of unskilled laborers. Moreover, as more nations try to advance, ever more hungry mouths are chasing foreign investment and export sales. There's not enough to go around. Wages grow more slowly. Countries that were late to the globalization party now may never get a foot in the door. Richard Freeman, an economist at Harvard University, says that once the giant, poor population of China entered the fray, it crowded out many other developing countries, especially those with slightly higher costs, such as some Latin American nations. "It's hard to compete if you're higher-wage than [the Chinese] are," Freeman says.

Repair Work
So the Asian way to end poverty needs reform. Governments have become overly dependent on export-led growth, in the process ignoring the needs of those not engaged in industries connected to world trade and investment. That has been especially true in the emerging world's agricultural sectors. One of the forgotten factors underpinning some of the most noteworthy poverty-reduction success stories in countries like Taiwan and Vietnam has been an intensive program of rural development, including land reform and investment in roads and other crucial infrastructure for farmers. But many developing nations have chosen to import food and industrialize rather than invest in agriculture — with devastating consequences. Policymakers' focus on creating urban, industrial jobs "clearly can't be the answer when you have great masses of people existing in the rural areas," says the UNDP's Chhibber.

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Indeed, while India reduced its poverty rate during its recent boom years, the absolute number of desperately poor Indians increased from 436 million in 1990 to 456 million in 2005, or 42% of the population. Some development experts in India say that's because leaders haven't directed enough resources to the countryside, home to 70% of Indians. "India's growth is not sustainable without improving food production," says Arup Mitra, an economist at the Institute of Economic Growth in the University of Delhi. "But so far, little action has taken place." Critics of India's economic policy say exports and foreign investment have brought benefits mainly to a small number of city dwellers, while India's new wealth hasn't been employed to build roads, irrigation systems and schools for the hinterlands. "Growth has failed to lift the quality of life in villages and small towns," says Ajay Mehta, executive director of the nonprofit National Foundation for India. Much of India remains almost completely untouched by the years of near double-digit growth. In the village of Dhala in the hills of Rajasthan, Suresh Bhagora grows maize and black-eyed peas and resides in a two-room hut much like his forebears did, ignorant of the dramatic economic progress taking place elsewhere in the country. "If [policymakers] are doing anything," he says, "I haven't heard about it."

That attitude is sadly common. An export-at-all-costs mentality has led officials to ignore potential sources of growth in their own backyards. With feeble social safety nets to protect them, many families in emerging nations tend to save for a rainy day rather than splurge with their new wealth. And when consumers in the U.S. and Europe scale back in times of recession — as they are doing now — export-dependent developing countries can't count on domestic demand to soften the blow. The Chinese leadership, for its part, has awakened to this danger and is furiously striving to stimulate domestic demand, hoping to bring more balance to its economy. Beijing is also strengthening property rights for farmers to boost welfare in the still poor countryside and improving the health-care system. "There is certainly a need to realize that you cannot rely entirely on an export-led growth model," says Jim Walker, an economist at independent research firm Asianomics in Hong Kong. "There has to be some encouragement of the domestic economy."

Think Global, Act Local
Much more needs to be done. as competition for export markets and foreign investment intensifies, governments need to develop better education programs that can churn out qualified workers, build efficient ports and airports to smooth trade, and introduce business-friendly tax and regulatory policies. Indonesia's antipoverty efforts have stalled recently due to restrictive labor laws and other measures that have scared away job-creating investment. India lacks the infrastructure and basic education system to attract the kind of mass-scale, labor-intensive manufacturing that could lure farmers from the countryside and create a China-like boom in low-skilled jobs.

All that said, most economists believe poor countries would make a dire error if they were to reject globalization altogether. "The export model may come under scrutiny, but it is still the right model to get people out of poverty," says Danny Leipziger, vice president for poverty reduction at the World Bank in Washington. And despite the trials of the current crisis, policymakers in developing countries have so far shown little inclination to withdraw from the world. In Vietnam, where the export sector has been battered by the downturn, leaders "are beyond such wild ideas," says Adam McCarty, chief economist with Mekong Economics, a research firm in Hanoi. McCarty says the alternative is to look inward and become a version of North Korea. The Hermit Kingdom, he says, "is certainly not suffering the negative effects of recent events." But the country has "missed out on decades of globalization-driven growth."

Narayan Dangi, 42, doesn't want to miss out. He was a laborer for a state-owned zinc smelter in the central Indian district of Udaipur — a poor region, albeit famous for the glistening white palaces of the local maharaja — when India's market reforms rescued him. In 2002, a private company, now a subsidiary of U.K.-based Vedanta Resources, began acquiring stakes in the zinc company, and it today owns 65%. The new owner invested to increase capacity and began exporting for the first time. Dangi's salary nearly tripled, to about $6 a day. He purchased a motorcycle and rebuilt his home. His standard of living has improved more since the new investor's arrival, he says, than in the previous 16 years. "Money has been rolling in," he says. "One man getting a job here benefits 25." We may be living through a painful downturn. But joining the global economy remains the best hope for the world's poor.

— with reporting by Zamira Loebis/Jakarta, Martha Ann Overland/Hanoi and Madhur Singh/Udaipur

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