Keynote paper

Averting hunger and food insecurity in Asia

Arsenio M. Balisacan
Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA) and University of the Philippines Diliman, Philippines

Recent years have seen a resurgence of economic growth in Asia. The region’s growth of roughly5 percent achieved in 2003 came close to the level achieved prior to the East Asian financial crisis in the late 1990s. Remarkably, despite this crisis that led most countries in East Asia to either a sharp economic slowdown or a contraction, the past decade witnessed significant poverty reduction. Between 1990 and 2000, the number of people living on less than a dollar a day fell by about 243 million. Poverty incidence in East Asia declined from 29.46 to 15.6 percent while that in South Asia fell from 41.3 to 31.1 percent. At these rates, the Millennium Development Goal (MDG) of halving the proportion of people whose income falls below one dollar a day (in purchasing power parity [PPP]) by 2015 looks attainable for Asia. Indeed, China, Viet Nam, Thailand and Indonesia have already reached that goal while the rest, except Sri Lanka, are on target (Table 1). The prevalence of undernourishment between the late 1980s and late 1990s also declined from 29 to 13 percent in East and Southeast Asia and from 38 to 23 percent in South Asia (Table 2).

Even so, the region still accounts for about 60 percent of the world’s 1.1 billion poor. The proportion of underweight children in the region fell by only four percentage points (from 35 to 31 percent) between the early and late 1990s (ESCAP 2003). In Cambodia, Bangladesh, India and Nepal, almost half of the children under five years are still moderately and severely malnourished. The proportion of undernourished people in the region remains high at 16 percent, with very little progress in the 1990s for Bangladesh, India, Nepal and the Philippines. Without a renewed push and fresh initiatives, the region will likely miss the MDG of halving the incidence of hunger by 2015.

Table 1. Proportion of population with income below $1 (PPP*) per day

Sources: ESCAP (2003), Figure I.2; Chen and Ravallion (2004).
* Purchasing power parity

Table 2. Proportion of people who suffer from hunger

Source: ESCAP (2003), Figure I.3.

The global community’s efforts in attacking poverty must focus on agricultural and rural development. Of the world’s poor, 75 percent work and live in rural areas and 60 percent will continue to do so in 2025. In Asia, nearly two-thirds of the poor live in rural area, the large majority of them dependent on agriculture and agriculture-related industries for employment and income. In Viet Nam, for instance, about 80 percent of the poor live in households where the head works in agriculture (Glewwe et al. 2000). In rural Bangladesh, poverty incidence among marginal farmers is about 43 percent while that among landless and nearly landless households - whose members make up 45 percent of the population and are mostly agricultural wage labourers - is about 60 percent (IFAD 2002). Moreover, reductions in rural poverty in the Philippines, Malaysia, Indonesia, Thailand and India account for 40 to 70 percent of the observed reduction in national poverty incidence (Warr 2001)^[1].

It is one thing, however, to say that agricultural growth and rural development are keys to the reduction of poverty and food insecurity. It is another matter to identify the key drivers that bring about growth and development in the rural economy given fiscal constraints, political-economy considerations and global trends in trade, finance and technology. This paper distills lessons from recent Asian experiences and identifies critical development issues and options for securing rural growth and household welfare. In the next section, the paper revisits recent findings on the growth-inequality-poverty nexus. It then briefly reviews agricultural performance vis-à-vis overall growth and poverty reduction. From there, it examines the implications of overarching development issues pertaining to public investment in agriculture, institutions (governance) and globalization and trade reforms on food security and poverty reduction. It ends with some remarks.

Growth is good - but not enough

Asia’s GDP growth has consistently outpaced those of other regions of the world in the past 30 years. This growth though has not been uniform across subregions and countries. In East Asia, GDP per capita expanded by 6 percent annually, driven by sustained growth in China, Republic of Korea, Thailand and Malaysia. In South Asia, where growth rates of output were relatively low and those of population high, the rate was about 3 percent per year. For India, growth gained momentum in the 1990s and early 2000s, enabling the country to join the ranks of fast growing nations in Asia.

Poverty reduction accompanied this growth in income. Based on the World Bank’s poverty line of one dollar (PPP) a day, poverty in East Asia dropped from 29 percent in 1990 to 14 percent in 2000. Performance was less stellar in South Asia; over the same period, the reduction was about 10 percentage points.

Data based on national poverty lines tell the same story - i.e. where the income growth rate was relatively low, so was the rate of poverty reduction. For instance, per capita real GDP grew at an average of 1 percent per year for the Philippines in the past 30 years compared with 4.7 percent for Thailand and 4.3 percent for Malaysia (Table 3); average annual rates of poverty reduction were 0.9, 1.9 and 1.6 percent, respectively, in these countries. Where high output growth has not been sustained for a considerably long period, economic booms have nonetheless been associated with significant abatement of poverty as in the case of the Philippines in 1985-87 and 1994-97 (Balisacan 2003). Recessions, on the other hand, have been accompanied by deceleration or reversals in poverty reduction (Deininger and Squire 1996). The harder hit economies of Thailand and Indonesia, for example, saw higher poverty rates in the aftermath of the 1997 financial crisis (Suryahadi et al. 2000; Balisacan et al. 2003; ESCAP 2003).

Table 3. Annual growth of per capita GDP (%)

Source: World Bank, World Development Indicators 2003.

Estimates of the responsiveness of poverty to growth corroborate the above story. In developing economies, the elasticity of the poverty headcount index with respect to mean income ranges from -2.1 to -3.1 (Ravallion and Chen 1997; Bruno et al. 1998; Adams 2002). This varies widely across and within countries due to differences in conditions prior to growth. Where access to land, credit, social services and infrastructure is highly unequal, the response is weak especially in the rural areas. Such is the experience of provinces/districts/regions/states in the Philippines (Balisacan and Pernia 2003), Indonesia (Balisacan, Pernia and Asra 2003), Viet Nam (Balisacan, Pernia and Estrada 2003) and India (Datt and Ravallion 2002). In some cases, weak local institutions (including social capital), poor investment climate and inward-looking policies favouring capital over labour-intensive sectors such as agriculture exacerbate the feeble response. In East Asian countries like China and Republic of Korea, the effect of growth on poverty is stronger than in other economies in the region owing to their generally more favourable initial conditions - a salient one for China being the equitable distribution of land use rights (Fan et al. 2002). Income distribution also affects growth elasticities. Economies with lower levels of initial income inequality have greater potential to lift people out of poverty (Ravallion 1997; World Bank 2000). Countries with Gini coefficients below 40 have estimated elasticities of -5.7 to -6.1; for those with Gini values above 40, the range is -2.4 to -3.3 (Adams 2002).

Country studies that use disaggregated data provide ample evidence that income inequality blunts the impact of growth on poverty. If inequality had not changed or worsened, every 1 percent growth would have reduced poverty incidence in Lao PDR by 3.2 percent between 1992 and 1998; the same holds for Thailand between 1988 and 1992. The actual decline for both countries was about 1 percent (Kakwani and Pernia 2000). If growth had been distributionally neutral in the Philippines in 1994-97, poverty incidence would have fallen from 32 to 22 percent instead of to 25 percent (Balisacan 2003). Conversely, a 1 percent reduction in per capita income would have raised the percentage of the poor by 4.7 percent in Thailand, but the actual increase in the recent financial crisis was 6.5 percent (Kakwani and Pernia 2000).

During growth periods in Viet Nam, households in communities with paved roads record larger increases in expenditures than households with poorer roads while those with higher levels of education experience larger declines in poverty. Households that remain poor have about twice as much debt relative to assets compared with those that have escaped poverty (Glewwe et al. 2000). In the Philippines, irrigation and favourable terms of trade for agriculture positively influence living standards of the poor (apart from their indirect impact via overall income growth) as does schooling, if complemented with roads. The welfare of the poor tends to be lower in provinces governed by political dynasties than in those characterized by competitive politics (Balisacan and Pernia 2003). In Indonesia, improvement in access to technology such as electricity and information channels raises incomes of the poor (Balisacan et al. 2003). In India, states with lower literacy rates, higher landlessness and higher infant mortality rates benefit less from non-farm growth (Ravallion and Datt 2002). Strong correlations among poverty, technology adoption, irrigation, agricultural productivity, education, road density, electricity and non-farm employment growth were also observed (Fan et al. 1999). Overall, these observations suggest that policies, quality of institutions and access of the rural population to infrastructure, credit, land and human capital are robust predictors of income and poverty.

Evidently, the nature of growth and not just its speed matters to poverty reduction. In this regard, the quality of growth has to be made more broadly based than it has been for a number of Asian countries. Agricultural and rural development is key to achieving broadly based growth.

Why agricultural growth matters

As pointed out earlier, the majority of Asia’s poor live in rural areas and depend on agriculture. Thus, growth in agriculture reduces poverty and food insecurity directly by augmenting farm incomes. If broadly based, this growth stimulates rural non-farm activities through demand and supply linkages, thereby increasing employment opportunities and providing enduring sources of poverty reduction.

The response of the rural non-farm sector to the stimulus of agricultural growth hinges on certain "conditioning factors", which for present purposes can be broadly grouped into: (1) infrastructure, broadly defined; (2) policies and the global environment for trade and finance; and (3) institutions. This is illustrated in Figure 1. In what follows, the paper examines the linkages shown in the figure as gleaned from the Asian experience and from results of recent empirical work.

The pace of agricultural growth in the developing countries of Asia is quite varied (Table 4). During the past two decades, agricultural growth was remarkably rapid in China, where overall growth and poverty reduction were also very impressive by international standards. This was not quite so in the Philippines and South Asian countries (except India), especially if one takes into account their much higher population growth. The Mekong countries (save for Cambodia) experienced equally robust agricultural growth, which accounted for nearly half of GDP growth.

Figure 1. Agricultural growth and rural welfare outcomes

Sources of productivity growth

Productivity growth brought about primarily by investment in research and development (R&D) and good governance is key to sustained production growth. Total factor productivity (TFP) growth accounted for two-thirds of China’s agricultural output growth in 1972-95. This was driven by investments in infrastructure, irrigation and research, especially during the latter half of the period when the effects of institutional reforms were already exhausted (Rosegrant and Hazell 2000). TFP growth was likewise determined by changes in these spending items in India. Its contribution to agricultural growth declined though from 42 percent in 1975-80 to 30 percent in 1986-90 (Desai 1994; Desai and Namboodiri 1997) as resources were allocated more to input subsidies. By itself, public spending on research and extension accounted for 70 percent of India’s TFP growth (Evenson et al. 1999).

In the Philippines, Thailand and Indonesia, factor accumulation played a major role in output growth, with fertilizers accounting for 14 to 20 percent; irrigated land, 10 to 16 percent; and labour, 9 to 15 percent (Mundlak et al. 2002). Physical infrastructure (represented by roads) and human capital (represented by schooling and infant mortality) were equally important, each accounting for 10 to 15 percent of growth in agricultural output. Notably, the slowdown in agricultural growth in the Philippines (from 3.8 percent in 1961-80 to 1.4 percent in 1980-98) was largely driven by a drastic fall in TFP growth from 0.98 to 0.13 percent (Mundlak et al. 2002).

Table 4. Contribution of agriculture to GDP growth, 1990-2001

Source: World Bank, World Development Indicators 2003.

Food security performance

Its falling shares in national income and employment notwithstanding, agriculture continues to be important to developing Asian economies, not only as it fuels industrialization, but more importantly, as it ultimately improves food security and household welfare.

Alongside growth in agricultural output, food supply per capita in Asia rose from 2 200 calories/person/day in 1970 to 2 260 in 1980 and to 2 700 in 2001. This figure increased from 2 030 to almost 3 000 in China in those 30 years. For the rest of East and South Asia, increments were lower but nonetheless significant at around 630 and 340 kcal/person/day, respectively.

If food adequacy is measured at 2 300 kcal per person per day (FAO 1999), then Cambodia and Bangladesh have yet to attain the norm. Republic of Korea and Malaysia had done so before 1970 and China and Indonesia in the early 1980s. Thailand, Viet Nam and Pakistan, although experiencing fluctuations about the standard in the 1980s, have stayed consistently above it since 1992. The Philippines and India breached this adequacy norm only in 1989 but have maintained above-base levels since 1994. Lao People’s Democratic Republic achieved 2 300 kcal/person/day only in 1999.

Agricultural growth in Asia was accompanied not only by higher food supplies but also by changes in diet composition, particularly shifts from vegetable to higher-quality animal products. In China, the share of calories from animal sources increased from 6 percent in 1970 to 20 percent in 2001; that of vegetable sources declined from 94 to 80 percent. The corresponding changes for the rest of East and Southeast Asia were from 6 to 9 percent and from 94 to 91 percent of total calorie intake. Within the vegetable group, there was also a shift towards non-cereal products and away from cereal products; the latter’s share in calorie intake in South Asia declined from 67 to 61 percent over the period. Notably, these improvements in the quality of diet did not occur or were marginal in the Philippines, Bangladesh and Sri Lanka.

South Asia now relies less on food aid. The quantity of cereals received by Bangladesh, India and Pakistan from donor countries dropped from 3.1 million metric tonnes in 1975 to only about 950 000 metric tonnes in 2001. It appears that at the macro level, availability of food in developing Asian economies has improved. The aggregates, however, gloss over the variations in food entitlements across areas or groups within countries. Stability of household food demand does not automatically follow from availability of total food supply. When economic expansion benefits only certain areas, the consequent demand-pull increase in overall prices may further restrict access to food (and other commodities) of poor households in isolated and backward communities.

The performance of Asian economies in terms of attaining food security also shows up in the nutrition indicators. In China and Indonesia, less than 10 percent of the population is undernourished. The same indicator fell by 10 percentage points in Viet Nam and Thailand during the past decade. By contrast, there has been virtually no progress in Bangladesh, India and Nepal, which suffer from very high proportions of underweight and stunted children (about 50 percent). Much work also has to be done in Cambodia, Lao People’s Democratic Republic and the Philippines where a sizeable portion of the population (28 percent on average) is undernourished. In these countries then, performance has been relatively weak not only in abolishing income poverty but also in controlling malnutrition.

Further improving food security and winning the war against poverty require nothing less than broad-based, rapid and sustained economic growth. For developing Asian economies, agricultural and rural development is the key. However, this does not take place in a vacuum. With respect to each agricultural input, the issues of availability, quality, accessibility and affordability, especially by small farmers, need to be addressed. The urgency of addressing them is critical in view of the degradation of the environment, the infeasibility of further land expansion and the deterioration of input "quality" (smaller farm sizes, aging farmers, extreme weather conditions and incidence of new types of pests and diseases). The solution may require prioritization of public expenditure programmes, policy changes and the establishment or strengthening of national and local institutions.

Public spending, growth and poverty

One rationale for public spending is to promote economic efficiency. Le. unaddressed, market failures result in suboptimal outcomes. Public goods (e.g. roads) may not be provided or may be insufficiently produced by the market. Individuals have no incentive to pay for such a good voluntarily since each would benefit from its provision regardless of his or her contribution. Additionally, some goods and services require large-scale, long-term, risky investments (e.g. agricultural R&D) that private entities may be unwilling to make.

Public spending is also carried out to stabilize the economy and stimulate output with its multiplier effects on employment and national income. Even in the absence of market failures, public spending may be warranted for equity reasons. Some commodities that possess the characteristics of private goods (i.e. consumption is rival and exclusion is relatively easy) are provided or subsidized by the government to ensure access of the poor to these welfare-improving assets. Education, for example, allows the acquisition of knowledge and skills that increase the productivity of labour - the most basic and often only asset of the poor - and enhances employment opportunities in both farm and non-farm sectors. In agriculture, it enables the adoption of more advanced technologies that bring about higher yields. Furthermore, investment in education has reinforcing effects on poverty through health, nutrition and fertility.

Governments spend on health not only to correct insurance market failures but also to provide affordable medical services. This comes from recognizing that better health (as well as nutrition and sanitation) contributes to productivity and incomes of the poor - for instance, by reducing work hours lost due to illness or by improving one’s capacity for learning.

Hazell and Haddad (2001) point to the following benefits that can be derived by the poor from agricultural research: (1) increased own-farm production, providing more output for consumption and sale; (2) greater agricultural employment opportunities and higher wages within the adopting regions; (3) more opportunities for migration; (4) development of the non-farm economy in both rural and urban areas; (5) lower food prices; (6) greater physical and economic access to more nutritious crops crucial to the well-being of the poor, particularly women; and (7) empowerment of the poor by increasing their access to decision-making processes, enhancing their capacity for collective action and reducing their vulnerability to economic shocks via asset accumulation.

The living standards of the poor are also enhanced by infrastructure such as roads, electricity and information and communications technology. Farm-to-market roads, for example, enable the producers to bring their raw agricultural produce to markets in urban areas where their products can command higher prices. Moreover, low transport and communication costs strengthen the employment-creating linkages between agriculture and the rest of the economy. Hence, low transaction costs amplify the response of poverty to agricultural and urban demand growth.

In turn, the employment and income generated by public investments in these various assets enable the poor to invest more in technology, human capital and other resources (e.g. land). Empirical studies have estimated the rates of return on and the poverty effects of these assets although very few have used a comprehensive set of public investment data primarily to assess the impact of various types of government spending on poverty.

Returns to education are typically estimated at 12 percent or more and are highest for primary education in China, Nepal, Thailand, Viet Nam and the Philippines, where social rates of return are also greater than private returns (Psacharopoulos and Patrinos 2002). In Viet Nam, an additional year of formal schooling of the household head raises the relative probability of escaping poverty by about 11 percent (Glewwe et al. 2000) while an extra year of primary education increases crop income by about 8 percent of the mean (van de Walle 2000). Household attributes are likewise important in the Philippines where the head’s education accounts for 30 percent of the observed variation in household welfare (Balisacan 2003) and in Bangladesh where the spouse’s level of education is also important to poverty reduction (Wodon 1999). In Indonesia, each primary school constructed per 1 000 children increases the education of those aged 2 to 6 by 0.12 to 0.19 years and wages by 1.5 to 2.7 percent (Duflo 2001). In this country, improvement in human capital proxied by adult literacy reduces poverty principally via growth (Balisacan et al. 2003), with the effects of changes in public spending on primary education most strongly felt by the bottom two quintiles (Lanjouw et al. 2001). Among public investment variables in rural China, education has the second highest return to agricultural GDP (next to R&D) and the third highest with respect to total rural GDP. It has the largest impact in terms of poverty reduction, with nine persons brought out of poverty per 10 000 yuan of additional investment (Fan et al. 2002). A similar analysis for India yields 41 persons out of poverty for an incremental education spending of one million rupees (Fan et al. 2000). Non-farm growth in this country is more pro-poor in states with higher female literacy and lower infant mortality rates (Ravallion and Datt 2002).

Infrastructure affects growth positively (Jacoby 2000; Balisacan et al. 2003; Fan et al. 2002) and improves the welfare of the poor. Assessments of rural road projects show the poorest households deriving substantial benefits although equity impacts are less clear (Jacoby 1998; Jacoby 2000 as cited by Fan et al. 2002; Van de Walle and Cratty 2002). In rural China, an additional 10 000 yuan of public spending on roads lifts three persons out of poverty. A 100 billion rupee increase in road investment reduces rural poverty incidence in India by 0.65 percent, with 124 persons raised above the poverty line for every one million rupee of incremental spending (Fan et al. 2000). In Indonesia, poverty incidence is also more responsive to growth in provinces that have good roads (Kwon 2000). In Viet Nam, households located in communes with paved roads experience larger increases in expenditure during growth years and have a higher probability of escaping poverty than those in areas without paved roads (Glewwe et al. 2000).

Access to electricity has a similar impact on growth and welfare. In the Philippines, this accounts for 22 percent of the variance in household welfare (Balisacan 2003). Where public investment in electricity has already been substantial as in India and China, however, marginal returns are already low (Fan et al. 1999; Fan et al. 2002).

Spending on agricultural R&D not only accounts for a significant share of TFP growth in Asian agriculture (Evenson et al. 1999; Evenson and Gollin 2003; Rosegrant and Hazell 2000) but also yields high rates of return (ROR). For China, RORs range from 36 to 90 percent (Fan 2000). Out of 65 studies on the marginal internal rate of return to agricultural research for Asia, 41 showed that it exceeds 50 percent while 20 estimated it between 20 percent and 50 percent (Rosegrant and Hazell 2000). In China, a yuan of public spending on R&D increases agricultural and total rural GDP by about 10 yuan each; additional investment of 10 000 yuan lifts seven persons out of poverty (Fan et al. 2002). In India, a million rupees of additional public investment on R&D raises 85 persons above the poverty line through improved agricultural production (Fan et al. 2000).

Higher agricultural productivity from irrigation also tends to improve the living standards of the poor (Glewwe et al. 2000; Balisacan and Pernia 2003) and so too availability of technology. In Indonesia, a 10 percent improvement in access to technology raises incomes of the poor by around 2 percent (Balisacan et al. 2003).

Indicators of investment intensity in agriculture generally reveal decreases over the past 20 years (Table 5). For the entire region, public spending on agriculture as a percentage of agricultural GDP declined from 10 percent in 1980 to 8 percent in 1998. This is about the same figure posted by both China and India; interestingly, India used to invest twice as intensively as China in 1990. The share of public spending on agriculture to total government spending shows a clearer downward trend: Between 1980 and 1990, it fell for all countries except the Philippines, Republic of Korea and Thailand; between 1990 and 1998, it declined for all countries except China and Myanmar, hence the five percentage point reduction for the entire region.

Estimates of public expenditures on rural areas further highlight the important role of government spending on growth and poverty reduction. In rural China, public spending on irrigation expanded at an annual rate of 12 percent between 1953 and 1997 (Table 6). This together with agricultural R&D accounted for 25 percent of total government spending on rural areas. China also made huge education investments, which grew by 6 percent annually. Education’s share in total spending thus remained high at 41 percent. Infrastructure - roads, power and communication - accounted for 34 percent of total rural spending, up from only 7 percent in 1953. Electricity investments, in particular, have been substantial. As a result, nearly 100 percent of villages and households had been energized by 1996 (Fan et al. 2002). Telecommunications spending grew from 1 billion yuan in 1990 to 9 billion yuan in 1997 and together with private expenditures generated a 600 percent increase in the number of rural telephone sets. Econometric estimates by Fan et al. (2002) confirm that such government expenditures contributed to the improvement of irrigation, development of roads, advancement of rural education and communication and increased use of electricity. These in turn enhanced productivity, wages and employment in both the farm and non-farm sectors as well as reduced rural poverty incidence, which is now at less than 5 percent of the population based on official estimates.

Table 5. Intensity of public spending on agriculture

Sources: Fan and Rao (2003), Tables 1 and 3; World Bank, World Development Indicators 2002.

Table 6. Public spending in rural China, 1953-97
(millions of 1990 yuan)

Source: Fan, Zhang and Zhang (2002), Table 3.1.

Parallel results were obtained from state spending data for India where the bulk of the resources was allocated to development items - i.e. social and economic services (Fan et al. 1999). Social services, which include education, health and welfare, composed 47 percent of development spending (and 35 percent of total state spending). The rest went to economic services, comprising agriculture, irrigation, transportation, power and rural development. Welfare and rural development spending posted the highest annual growth rates in 1970-93 although other items also posted respectable growth rates. Agriculture and irrigation spending, in particular, expanded by 6.5 percent and 5 percent per year, respectively. Fan et al. (2000) noted that the downward trend in rural poverty from the late 1960s to the late 1980s coincided with the rapid adoption of high-yielding varieties (HYVs) and improved irrigation. These in turn were a direct result of public investment in R&D and extension, infrastructure, irrigation and education.

In the Philippines, public spending on agriculture has not only been inadequate but also misallocated. Government expenditure on R&D, for example, averages only 0.3 percent of GDP; the comparable figures for Malaysia and Thailand are 1.1 percent and 1.6 percent, respectively (David 2003). Long-term, productivity-enhancing types of investments account for less than half of total agriculture spending. Shares of R&D and infrastructure in 1998 were 8 percent and 5.5 percent, respectively; in comparison, a hefty 19 percent went to land acquisition and distribution. Production support, post-harvest facilities and price stabilization cornered 12 percent of agricultural spending. Irrigation, infrastructure and other developmental projects have also been plagued by corruption, poor quality and design and (the resultant) high maintenance costs. Such weaknesses may have muted the poverty impacts of public investments.

Evidently, countries whose governments spend more on agricultural and rural development obtain larger and more rapid reductions in poverty. It is not only the amount of resources that matters though, but also its allocation. Making effective and efficient investments is even more vital for developing countries where government resources are limited and where comprehensive income taxes are generally not a viable option for redistribution. Bigger gains from public spending in terms of poverty alleviation are derived from long-term, productivity-enhancing investments. Also, whether the benefits of public spending materialize and accrue to the poor ultimately hinges on the efficiency of implementation.

While the existing literature has adequately shown that certain types of assets - and thus public investment in them - are income-augmenting and poverty-reducing, it falls short in addressing the complementarities among these assets. That synergies exist is quite apparent. There may be enough health centres and schools in rural areas, for instance, but the poor may not benefit from these establishments unless there are good roads to make the services offered accessible. In the same manner, distributing land to poor farmers enables them to have command over a major resource, but lack of credit may hinder them from making productive use of it.

Empirical studies validate the importance of asset complementarities. The level of education of the mother, for example, has been found to positively affect the health and nutritional status of children (Skoufias 1999; World Bank 2000; Lanjouw et al. 2001). In the Philippines, a year of education increases annual income by about 13 000 pesos on average, but this is augmented by an additional 2 000 pesos if the household has electricity (Barnes 1997 as cited by World Bank 2000). In Indonesia, electricity positively influences the income of the poor through growth, with direct effects clearer for the upper quintiles, implying that some minimum level of income as well as complementary facilities are required to benefit from electricity (Balisacan et al. 2003). Rural electrification meanwhile raises the usage of irrigation in Bangladesh and India where poverty incidence has been significantly reduced (Songco 2002).

Balisacan and Pernia (2003), using provincial panel data, found that by itself, the roads variable has a negative coefficient with respect to the income of the poor, suggesting that roads do not typically reach the areas where most of the poor live and where they do, they may exert an adverse impact through factor market, political economy and other processes. But when schooling is interacted with roads - which serve as a proxy for access to markets and social services - the coefficient is positive and significant. In Figure 2, the impact of raising average province-level schooling on returns to roads (in terms of changes in quintile mean expenditures) is shown for the bottom two and top quintiles. The contrast suggests that higher schooling allows the poor to benefit directly from overall road development. Put differently, road access can improve the income of poorer groups provided they have sufficient human capital to take advantage of it.

In Viet Nam, benefits from investments in irrigation are larger for those with higher levels of schooling: An increase in the education level of all adults raises the net marginal effect of irrigation on crop income by 19 percent while an increase in the primary schooling of all adults raises it by 36 percent. Because of this interdependence, the presence of inequalities in education, correlated with levels of living, results in smaller returns to irrigation for the poor. Thus, irrigation investment without a corresponding investment in education may actually increase inequality (Van de Walle 2000).

Figure 2. Schooling and road impact

Ravallion and Datt (2002), testing an empirical model that allows for multiplicative interactions of the sectoral composition of growth with initial conditions, found that higher initial farm yield, higher initial female literacy rate, lower initial infant mortality rate and lower initial landlessness amplify the responsiveness of state-level poverty measures to non-farm growth in India. Of these variables, literacy (plotted in Figure 3 with each state’s headcount elasticity) exhibits the most significant interaction effect with non-agricultural output growth. An illustration was made for the state of Bihar, which had a female literacy rate of 6.9 percent in 1960. If it had Kerala’s literacy rate of 38.9 percent, Bihar would have had an absolute elasticity of headcount index to non-farm output per person of 0.79 instead of 0.25.

Thus, the benefits that the poor (as well as the non-poor) can derive from the provision of a certain asset are influenced by initial conditions in other assets. From the viewpoint of public finance, this suggests that in assessing the poverty impact of a specific type of investment or when ranking the returns to various types of investments, these interactions must be accounted for.

Even if the complementarities are addressed by the economic model used, one must additionally be cautious of prescribing the same set of public spending policies to countries or regions within countries. The response of poverty to public investment (and growth) varies significantly across areas and depends on initial conditions. In China, for instance, the marginal returns of public spending are much higher in the western region - where road density, telecommunications access and labour productivity are lowest and illiteracy and poverty rates highest - than in the central and coastal regions (Fan et al. 2002).

What is needed then to maximize the poor’s benefits from government spending is a prioritization of public expenditure programmes that build on the synergies among different assets and cater to the specific needs of each area or group.

Figure 3. Absolute elasticities of headcount index to non-farm output and initial female literacy rates, Indian states

Source: Ravallion and Datt (2002).

Institutions, policies and rural development

The prevailing wide disparities in income between rich and poor countries have engendered varied explanations as to the fundamental causes of growth and poverty.

One view maintains the overwhelming role of geography in income determination. Geographical and ecological variables such as climate zone, disease ecology and distance from the coast are held to be strongly correlated with per capita income and other economic and demographic variables (Sachs 2003a). For instance, zones with tropical climates, which are typically weighed down by many infectious diseases and which face special problems of agricultural management, are characterized by low agricultural productivity and levels of income (McArthur and Sachs 2001). Remote regions with few natural resource endowments, high disease prevalence and immobile factors of production are disadvantaged by high transactions costs of trade, tourism, migration and technological diffusion (Sachs 2003b). Indirectly, unfavourable geography apparently leads to even lower levels of welfare if it comes with a "predatory or exploitative government" (Gallup, Sachs and Mellinger 1998).

The second view upholds the preeminent role of institutions in explaining differences in income and welfare, arguing that prosperous countries tend to have good institutions characterized by:

"enforcement of property rights for a broad cross section of society, so that a variety of individuals have incentives to invest and take part in economic life; constraints on the actions of elites, politicians, and other powerful groups, so that these people cannot expropriate the incomes and investments of others or create a highly uneven playing field; and some degree of equal opportunity for broad segments of society, so that individuals can make investments, especially in human capital, and participate in productive economic activities" (Acemoglu 2003).

Proxied by measures of property rights and the rule of law, the quality of institutions is found to be the only positive and significant determinant of income levels (Rodrik et al. 2002)^[2]. After controlling for this, geography has at best weak direct effects on incomes though it has a strong indirect effect through the quality of institutions. Likewise, trade or openness (to which the integration view assigns the dominant role) is found to have no direct positive effect on income, but it has an indirect one through institutions. Additionally, institutional quality has a positive and significant effect on integration while the latter also has a positive impact on the former (Rodrik et al. 2002). Better governance enhances growth (Kaufmann et al. 1999; World Bank 2000), reduces its volatility (Edison 2003) and improves the availability and quality of public services and the extent to which the poor have access to them (Deolalikar et al. 2002).

While the importance attached to policies varies, the observed correlation between institutions and policies suggests that sound policies need to be supported by good institutions while weak institutions reduce the likelihood that policies adopted are good and will be effective (Edison 2003). The Asian financial crisis, for example, showed that policies unaccompanied by strong institutions were incapable of preventing the fall in incomes and welfare. In some countries, secure property rights over land cushioned the adverse effects of the crisis.

If there is one point of agreement among the different views, it is that geography, institutions and policies are all interlinked and jointly determine the levels of income and welfare. But what do the above findings suggest for agricultural and rural development?

Where geography is unfavourable, there is even greater need for productivity-enhancing investments in agriculture. Land, the essential factor of production, is immobile. This implies that complementary inputs have to be brought in. Farm output meanwhile has to be transported to the markets. Also, farmers need market information, which is costly to acquire and transmit given the spatial dispersion of agricultural production (Binswanger and Rosenzweig 1986). To improve the welfare of the poor, the necessary transactions costs of trade, migration and technology and information diffusion must be brought down through, for instance, the provision of good rural infrastructure.

Good institutions are even more crucial for agriculture, which is replete with market failures and risks. The seasonality and synchronic timing of operations in agriculture require adequate provision of credit and insurance to small farmers, who are most vulnerable to income shocks. But markets for credit and insurance are least developed in rural areas due to incentive problems, high information costs and the default, yield and price risks associated with agriculture. Moreover, small farmers need to be given secure property rights over land. Insecure tenure creates uncertainties and leads to suboptimal outcomes both for short-term agricultural output and sustainable development. While ownership of land can be the surest way to have access to land, it does not have to be the only way. In fact, with competing uses of land, ownership may not even be affordable. The more important thing though is that property rights are properly defined; that there are regulations pertaining to leasehold and even tenancy arrangements is vital. Institutions addressing these issues must be strengthened to ensure a more level playing field for the poor.

Contrary to persistent claims that agricultural supply is not responsive to price incentives, evidence and the Asian experience prove that it is. For instance, relentless pursuit of import-substituting strategies during the 1960s and 1970s and overvaluation of the foreign exchange in most Asian developing countries depressed the domestic price of tradables, including agriculture, relative to non-tradables. This encouraged movement of resources away from agriculture. The premature shift of resources away from agriculture has resulted in the dampening of growth of employment opportunities and output in rural areas. At the same time, real incomes of rural workers fell as demand for commodities they produce decreased. Hence, in terms of policies, efforts towards agricultural development should involve reforming incentives in the agriculture sector and the rest of the economy.

Globalization, trading regime and WTO agriculture negotiations

While geography, domestic policies and institutions play a significant role in promoting pro-poor rural growth, so do the global trading regime for agriculture and the external forces associated with globalization.

Many contend that the twin forces of globalization and agricultural trade liberalization are a bane to the poor in developing countries. The main argument is that developing countries have neither the broad infrastructure nor the institutions to effectively gain from globalization and trade liberalization; that they, in fact, have experienced increases in inequality and poverty.

Recent evidence, however, does not lend support to this contention. Developing country globalizers actually experienced accelerated growth rates, from 2.9 percent per year in the 1970s to 3.5 percent in the 1980s and 5 percent in the 1990s. In contrast, the corresponding per capita GDP growth rates for non-globalizers were 3.3 percent, 0.8 percent and 1.4 percent. The number of poor people in globalizing, developing countries dropped by 120 million between 1993 and 1998 while it increased by 20 million in the non-globalizing developing world. Poverty reduction in rapidly globalizing China and Viet Nam, in particular, is unprecedented in history. The reduction has also been substantial in India (since the late 1980s) and other globalizers in the region. While the Asian financial crisis reduced incomes in the two worst hit countries, namely Indonesia and Thailand, the gains in poverty reduction during the past quarter century of growth and trade liberalization have largely remained intact. Though factors other than integration affect growth, trade openness (expanding agricultural exports, in particular) has nonetheless been shown to contribute to the improvement of overall incomes, which benefits the poor (Dollar and Kraay 2002; World Bank 2001, 2003).

As regards trade and inequality, while there are winners and losers as well as risks associated with globalization, the evidence shows no systematic relationship between the two: Some countries that opened up did experience increases in inequality, others did not. Dollar and Kraay (2002), for instance, found no significant correlation between changes in trade to GDP ratio and changes in the Gini coefficient. A simulation made for globalizers reveals that if trade volumes are increased by 34 percentage points of GDP and inflation is decreased by 12 percentage points, the growth rate of income of the poor would be 2.6 percentage points higher. Of this, 2.2 percentage points are due to increased trade openness, with the bulk coming from growth effects; distribution effects are not significantly different from zero.

Even more fundamental is the additional argument that in practice "free trade" in agriculture is not "fair trade" since the developed countries continue to provide enormous subsidies to their farmers (thereby limiting the access of developing countries to their domestic markets) while the developing countries have taken great strides in fulfilling their part of the bargain (i.e. opening up their domestic markets).

Substantial reductions in tariffs, domestic support and export subsidies have been the main issues tackled in the World Trade Organization (WTO) agriculture negotiations. Adding to work undertaken since the start of negotiations in early 2000, the November 2001 Doha Ministerial Declaration reconfirmed the objectives of establishing a fair and market-oriented trading system through a programme of fundamental reforms encompassing strengthened rules and specific commitments on support and protection in line with Article 20 of the Agriculture Agreement. The declaration also made non-trade concerns and special and differential (S&D) treatment for developing countries integral to the WTO negotiations, emphasizing that all S&D provisions should enable developing countries to meet their needs, particularly food security and rural development.

While the global trade talks also dwell on non-farm trade, services, dispute settlement and the "Singapore issues" of investment, competition, trade facilitation and government procurement, agriculture is of primary importance to the development promise of the Doha Agenda, given that the majority of the poor work in the sector and that agricultural products are subject to the highest barriers to trade.

Recent World Bank estimates reveal the extent of protection of agriculture in developed countries. About 28 percent of domestic production in OECD countries is protected by tariff rate quotas. Support to producers in these countries in the form of higher domestic prices and direct production subsidies amounted to $248 billion in 1999-2001, two-thirds of which came from border barriers or market price support mechanisms. Imports from developing countries face tariff peaks as high as 500 percent.

Calls from poor countries for rich countries to eliminate these trade barriers and the latter’s firm stand of keeping them have resulted in a standoff in the agriculture negotiations and the overall failure of the September 2003 Cancun Ministerial Conference, which sought to "take stock of progress in the [Doha Development Agenda] negotiations, provide any necessary political guidance and take decisions as necessary". No agreement was made on the agriculture negotiations’ modalities - i.e. targets (including numerical ones) and issues related to rules that members are to use in achieving substantial improvements in market access; reduction (and eventual phase-out) of all forms of exports subsidies; and sizeable reductions in trade-distorting domestic support.

The conference, which also welcomed Cambodia and Nepal as the first of the least developed countries to accede to the WTO since its establishment, concluded instead with a ministerial statement, instructing officials to "continue working on outstanding issues with a renewed sense of urgency and purpose", taking into account all the views expressed in that meeting.

While the Cancun Conference has proven that, collectively, developing countries can make a lot of difference in the outcome of the negotiations (no deal in this case), it has also shown how unrealistic it is to expect developed countries to completely undo their policy of protecting local producers from international competition. Domestic support and export subsidies did not come out of a vacuum but evolved out of changes in the balance of political influence among competing groups in society (farmers, consumers and industrialists) in the course of economic development.

More importantly, both sides apparently have yet to recognize the losses engendered by the status quo. The World Bank (2003) illustrates a scenario where tariff peaks in agriculture are cut back to a maximum of 10 percent for rich countries and 15 percent for poor countries and those in manufacturing scaled down to a maximum of 5 percent for developed countries and 10 percent for developing countries. Combined with elimination of export subsidies, decoupling of all domestic subsidies and the elimination of the use of specific tariffs, tariff rate quotas and anti-dumping duties and sanctions, the global economy would derive $291 billion in gains - about three-fourths of the total potential gains from full merchandise trade reform. An estimated $193 billion of this would come from reforms in agriculture and food and the remaining $98 billion from reforms in manufacturing.

Of the $291 billion, about $159 billion would accrue to developing countries. Of this, $101 billion would come from lowering barriers in agriculture and food and $58 billion from manufacturing. Eighty percent of the poor countries’ gains from freer trade in agriculture would be derived from own reforms while 20 percent would come from reforms in rich countries. It thus appears that reforms even within developing countries have high dividends.

Not only would trade and incomes increase in the above scenario, but more importantly, the number of the poor would substantially decline. Globally, the number of persons living on less than $2 a day would fall by 144 million. In East Asia and the Pacific, the reduction would be no less than 40 million; in South Asia, it would be no less than 10 million.

Clearly, the benefits of open and non-discriminatory multilateral trading systems are so enormous that for developing countries to withdraw from future agriculture negotiations or put back protectionist trade measures would be a big mistake. Their economies depend heavily on their export markets, and the linkages between agriculture and the rest of the economy cannot be overemphasized. Moreover, freer trade regimes and better government focus on support services will allow more efficient resource allocation among and within sectors of these economies, thereby providing an enduring foundation for sustained rural growth, food security and poverty reduction.

Regional blocks and/or bilateral trade agreements meanwhile are poor substitutes for a multilateral trade arrangement. Realizing that it is important to continue working towards an ideal world trade framework, what is needed in future negotiations is a practical approach that recognizes the reality of political and economic constraints to domestic policy reform. Proposals, for example, for a complete elimination of agricultural subsidies in developed countries are not credible and feasible.

Concluding remarks

In many countries in Asia, domestic policies and institutions constrain efficiency and raise the "cost of doing business" in agriculture, thus blunting productivity growth and eroding competitiveness in the global marketplace. Liberalizing agricultural trade enhances the welfare of the poor, especially the landless workers and urban consumers, although the short-term cost to the sector in terms of reduced incomes and labour displacement may be quite substantial. However, if this is combined with public investment in productivity-enhancing support services (particularly R&D and irrigation), agricultural trade liberalization is likely to be a win-win proposition.

In addressing today’s pressing issues vis-à-vis poverty and food insecurity, it is important not to lose sight of the key lessons in agricultural growth and development in Asia in the past half-century. One such powerful lesson has to do with enabling the rural poor through policy, investment and institutional reforms that enhance the efficiency of domestic markets and provide improved access to technology, infrastructure and education. This enabling environment allows rural growth benefits to be broadly based, thereby enhancing overall nutrition, human capital development and productivity and economic growth in the medium to long term. Almost invariably, the successful cases of rural development and poverty reduction are characterized by tenacity in the pursuit of efficiency-enhancing reforms. The key driver to these reforms has been neither globalization nor agricultural policy in developed countries. Rather, it is largely the internal realization that reforms are for the benefit of the country and its citizens.

Globalization has its downsides but it also offers potentially enormous benefits. Many developing country globalizers have shown that the benefits more than outweigh the costs; for example, the speed of poverty reduction is unprecedented in China, Viet Nam and India. The challenge for most countries in the region is to find the appropriate mix of policies and institutions needed to exploit the benefits while being on guard of the costs. Fortuitously for agriculture and the rural sector, the key policy and governance reforms required for improved efficiency (i.e. increased productivity and income) - enhancing economic competition, investing in efficiency-enhancing infrastructure and support services and enabling institutions to efficiently respond to changes in economic landscape - are largely compatible with globalization as well.

Acknowledgement

The author is grateful to Rosemarie Edillon and Amy Cruz for very able technical assistance.

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