Circumspect Asia-watcher

Ifzal Ali of the Asian Development Bank talks to ANTHONY ROWLEY about
the daunting economic challenges facing the region

THE Asian Development Bank’s (ADB) chief economist, Ifzal Ali, might
appear to be a prophet of doom, given the rather bleak picture that
he paints of growing income inequalities in Asia – an Asia which he
perceives to be ‘shivering’ as much as it is said to be shining.

Such an impression is reinforced when Mr Ali talks about the
‘complete breakdown of public administration’ in parts of Asia, and
about levels of official corruption that are ‘worse than highway robbery’.

Mr Ali, who has a doctorate from Johns Hopkins University and a
master’s degree from the Delhi School of Economics, takes a gloomy
view of the short term as well, suggesting that the environment
facing developing Asia is going to be ‘very, very harsh’ in 2008 and
that this region could ‘catch pneumonia’ if the world’s major
economies sneeze.

And yet, for all his lugubrious air, the logic of what Mr Ali says is
as unassailable as it is disturbing, as became apparent when we sat
down for a conversation during his recent visit to Tokyo. Prophet of
doom or not, one gets the impression that governments, economists and
the development community in general will ignore what he says at
their peril.

What exactly does he mean by the ‘shivering face of Asia?’, I ask him.

‘One face of Asia is truly shimmering,’ he explains. ‘There is one
group of people that is benefiting from the forces of globalisation,
technological change, economies of scale and competition. What we
find is that there are enclaves in those Asian economies that are booming.

‘But, at the same time, there is a vast swathe of society which is
not too different from Africa. And that’s what I call a shivering
Asia. These are the people living in a time warp who have been
completely bypassed and marginalised by exuberant growth rates that
many economies in total are enjoying. But a disproportionate part of
the benefits of this is going to maybe a fraction of the population.’

Is this a problem outside of India or Pakistan and other South Asian
countries?

‘I’m sure that it exists in China too,’ he says. ‘It exists in many
parts of South-east Asia – it certainly exists in the Philippines and
in Indonesia. In today’s world where with the revolution in
information technology everyone knows what his or her neighbour is
enjoying this is socially and politically very divisive.’

It is not so much a case of the rich getting richer and the poor
getting poorer, Mr Ali suggests, as that ‘the rich are getting richer
faster than the poor’. Income gaps are opening up and widening.

Winners and losers

Is the current development model to blame?

‘There are two aspects to this,’ Mr Ali points out. ‘One is inherent
in the process of growth and structural transformation. There will be
winners and there will be losers. In that sense, shining Asia is an
intrinsic part of growth and structural transformation.

But ‘shivering Asia’ has been caused by prolonged neglect of vast
swathes of society in terms of lack of even the most elementary forms
of schooling, the most elementary forms of public health, the issues
of lack of sanitation.

What is happening is that a large part of society is completely
unable to access even the most rudimentary forms of public goods and
services.’

I ask him how he justifies his charge of a ‘complete breakdown of the
delivery of public services’ in Asia.

‘With rising inequalities you have elite capture of institutions,’
says Mr Ali. ‘Legal institutions, governments, decision-making and
policy, public investment and public expenditure. It is not that
governments are not spending on these things; it is just that it has
been hijacked to the benefit of a few and there are huge leakages
along the way.’

Does he mean official corruption?

‘Yes, outright corruption. It is worse than highway robbery.
Essentially, we are looking at a political problem rather than an
economic one – and it is a vicious circle.’

And such issues are by no means irrelevant to business people, Mr Ali
points out.

‘While things like inequality, poverty and social tensions may not
seem to be relevant superficially, if you look at it from a real
sense in which firms have to operate, it affects them in very
fundamental ways. Ultimately, economies will operate and function
properly only if there is law and order, justice and efficient
delivery of public goods and services.’

Dealing with these problems is going to be difficult, he feels. ‘It
is not as if governments at the central level are unaware of them or
unwilling to do anything. But they are unable to, because what has
happened in the last 30 or 40 years is that public administration in
many countries has basically collapsed. Without a sound and ethical
public administration system you simply do not have the capability to
deliver public goods and services.’

How far can the ADB or the World Bank help?

‘For these multilateral development banks, their partners are
governments and public sector institutions. If public sector
institutions are in decline, it is difficult for MDBs to do anything
meaningful.’

And sometimes, the problems persist, no matter what the political
system, he adds.

‘The case of countries with democratic systems is interesting. You
have a government that stays in office for four or five years and is
then trounced in elections and a new group comes in. You have musical
chairs and nothing really improves.

In other places, totalitarian regimes carry out cosmetic changes to
keep certain groups of people quiet, while another group is
benefiting disproportionately. This is seen in many parts of Asia.
You have seen this happen in China. It has always been so in the
Philippines, which is a highly feudalistic society. If you look at
the last 20 or 25 years, it is very difficult to find any tangible
areas where improvements have actually taken place which have
benefited people. One indicator of the seriousness of the problem is
that middle class educated groups are leaving countries in droves.
People are basically voting with their feet.’

Mr Ali hasn’t found it easy to convince people about the seriousness
of such problems.

‘Initially when I started speaking on this subject, people would say:
‘This is just the Kuznets Curve at work and over time these things
will take care of themselves’. (The Kuznets Curve says that in the
process of growth, inequality first rises, reaches a peak and then
starts to fall).

‘But in the Asian newly industrialising countries, like Korea and say
Taiwan, it never happened. In fact, in their period of most rapid
growth we saw inequality actually come down. This is very interesting
because in the case of Korea and Taiwan their initial growth spurt
came from a massive increase in the manufacture of labour-intensive
goods. So, the high-growth period was accompanied by the creation of
large numbers of highly productive employment opportunities. Wages
increased more slowly than productivity. This is what led to growth
with benign levels of inequality.’

To some extent, the foreign investment – or the lack thereof – has
been a factor. In contrast to more recently emerging economies,
development in Korea and Taiwan had been ‘mostly home grown’, Mr Ali
points out.

‘But there are other factors involved. First, real interest rates in
the world have been at very low levels for quite a long time and that
straight away points toward more capital-intensive production
techniques. If you look at production technology and at technological
change, they are all moving toward higher capital intensity. In
China, what we have found is that in the 1980s, to generate a one
percentage point increase in employment required a three percentage
point increase in growth. Now it requires an eight percentage point
increase in growth. So the intensity of employment with respect to
growth has fallen precipitously. And this again has contributed to
growing inequalities because with this kind of phenomenon we are also
seeing a move away from employment in the formal sector to the
informal sector – the casualisation of labour.’

Drift of labour

Mr Ali explains that in the past, as happened in Korea and Taiwan,
those migrating from the agricultural sector of Asia’s developing
countries would go into the manufacturing sector. ‘Now what is
happening is that the manufacturing sector is far more
capital-intensive and the skill levels required in manufacturing are
much higher. So both these factors have led to the drift of labour
into the informal part of the services sector.

‘The people who move to this casual, informal sector are in many ways
leading lives of much greater hardship than they were in agriculture.
You may ask, if that is true, why do people move. People move because
hope breeds eternal. People think that by moving to the service
sector and to urban areas, their lives, or their children’s lives,
will become better.’

And the poor face another serious problem, he notes.

‘In many countries, the prices of food are rising and posing risks of
inflation to both rural and urban communities. This year alone has
seen cases where both China and India have been forced to act quickly
to stave off social discontent over food prices.’

This, says Mr Ali, is a ‘clear and present danger to these
countries’. Moreover, such problems could become more predominant in
future. ‘What is happening is that with global warming, with weather
patterns changing, the Asian countries’ ability to feed themselves is
becoming less and less because the growing seasons are becoming
shorter. This is not just because there is a local drought. It is
something that might come to stay and haunt us for a long time.’

I ask Mr Ali how far local politicians in affected Asian countries
are aware of such problems?

‘Politicians are extraordinarily myopic,’ he says. ‘They are only
concerned with local issues that affect them. It is only at the time
of a large state election or a national election that these pressures
on the surface really start bubbling. I would think that it is
politicians at the national level rather than the local level who are
far more sensitive to this because they have much more at stake. If
you lose your parliamentary seat, to get it back is going to be very
difficult. Local politicians are important but in many parts of Asia
they seem to think that they can buy their way out of anything.’

Despite this, Mr Ali is confident that the message is getting through
– slowly.

‘A lot of our work has now become mainstream in the planning process
at the highest level in India. In the new five-year plan they have
dropped poverty reduction to talk about inclusive growth. In China
they talk about a harmonious society where the benefits of growth are
more equitably shared.

‘I think that in this sense our message has been heard – not that it
is new or great; it is just that the message is much more relevant at
this stage of Asia’s development than it has been in the past.’

After 24 years working in multiple functions at the ADB, Mr Ali has
only 10 months to go now before his scheduled retirement in October
next year at the age of 60. But he intends to ensure that the message
is not forgotten once he is gone.

‘I will definitely try and consolidate some of these things that we
do. These issues are really long-term, systemic development
challenges that will have to be addressed whether we want to or not.
People in countries will demand that something be done about it. In
that sense, there will be an enduring story but, at the same time, we
are living in very uncertain times. The global economic environment
has never been so uncertain as it is now.’

Harsh environment in 2008

This seemed like a good point to ask him about how he sees Asia’s
economic prospects in 2008.

‘I think that the external environment facing developing Asia is
going to be very, very harsh in 2008,’ Mr Ali ventures. ‘We are going
to see a further depreciation of the US dollar and 2008 will probably
be the defining year in terms of finally addressing the global
imbalances that have been building up for so long. With wrenching
exchange rate changes, Asia is going to be hit in two ways. Number
one, aggregate demand in the United States is probably going to come
down and, at the same time, the (Asian) currencies will have to
appreciate vis-a-vis the US dollar, the euro and the pound. This is
going to cause some movement away from a focus on external demand
toward internal demand. Any kind of change of that sort is always
painful but inevitable and healthy over the long term.’

Does this mean a period of slowing growth while the transition is made?

‘That would depend very much on what kind of adjustments are made
within Asian countries. In many countries, except in South Asia,
their fiscal situations are healthy and there is room for manoeuvre
in fiscal expansion. Another set of issues related to the decline of
the US dollar is the very rapid rise in the real price of oil and
energy. One thing that countries have to be very careful of is that
while they have begun the process of acknowledging that high oil
prices are here to stay, they have to be passed on to consumers and
producers. The speed with which this is done could affect
macro-economic stability. If energy subsidies increase very rapidly,
as they have done in the last two weeks in Indonesia, that could
become very problematic. Countries will have to deal with this as
prudently as possible but the sooner they bite the bullet, the
short-term pain will lead to the long-term gain because the
efficiency improvements would kick in immediately if the pass-through
is quick.’

Does he think that a trade shock from a slowdown in the US could be
serious for Asia?

‘Well, you know, there is much talk about the idea that Asia has
decoupled from Western economies. That is absolute nonsense. What a
recent study of ours showed is that looking at East Asian countries,
after netting out for all the exports that go to each other and if
you just focus on final demand, 79 per cent of Asian exports end up
in the G-3 countries (namely, the US, the eurozone and Japan). So
clearly if the G-3 countries sneeze, Asia is going to catch a cold.
And if the G-3 countries sneeze together, Asia is likely to catch
pneumonia.’

Finally, I ask him, how he feels having spent nearly a quarter of a
century in one of the world’s leading development institutions?

‘What I have found so exciting about working in the ADB is that it
gives you a bird’s eye perspective of what is going on in the
development process, from the north to the south and from the east to
the west. You see different countries at different stages of
development evolving. To my mind that has been the most rewarding
part of working in the ADB. Every day is a joy and every day you
learn something new,’ Mr Ali replies.
2,594 words
29 December 2007
Business Times Singapore
English
(c) 2007 Singapore Press Holdings Limited

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Filed under Asia, Inequality, Poverty

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