Emerging Pattern of Employment Relation After Globalization

							United Nations Development Programme



                                       KEYNOTE ADDRESS BY
                                        Dr. Hafiz A. Pasha
                                  UN Assistant Secretary-General
                             UNDP Assistant Administrator and Director
                              Regional Bureau for Asia and the Pacific
                                                    for
                  The National Economic Outlook Conference 2007-2008
                            (5-6 December 2006, Kuala Lumpur, Malaysia)




Ladies and Gentlemen:


        I would first like to start by thanking Dr. Ariff for inviting me to address this conference
today. You have already heard several presentations during the earlier sessions of the National
Economic Outlook Conference on the critical topic of Planning for Growth and Development –
these concerns are extremely topical in light of the recently unveiled 9th Malaysia Plan and the 3rd
Industrial Master Plan. The Malaysian Institute for Economic Research has focused on the
challenges confronting the country in terms of its growth strategies for the future.


        What I would like to speak to you today is about the new challenges that confront Malaysia,
as well as other countries in the East Asia and the Pacific region, in a rapidly changing era of
globalization. I would like to use this opportunity to primarily highlight to you the findings of two
recently launched Human Development Reports of the United Nations Development Programme.
The first report is the 2006 Asia-Pacific Regional Human Development Report which is titled
“Trade on Human Terms,” launched a few months ago in Kuala Lumpur, by the Honorable Deputy
Prime Minister of Malaysia. The second report is the 2006 Malaysia National Human Development
Report on “International Trade, Growth, Poverty Reduction and Human Development,” which was
also launched recently, prepared by a team ably led by Dr. Richard Leete, United Nations Resident
Coordinator in Malaysia.


        Both these Reports highlight the fact that East Asia in general and Malaysia in particular can
be seen as truly vintage examples of successful globalization. The process of trade liberalization in

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this region started over three decades ago. This has resulted in phenomenal export-led growth, and
East Asia has been the fastest growing region in the world with a growth rate between 7.5 to 8%. It
is fair to say that East Asia is emerging now as the “factory of the world” providing a diverse range
of products in global markets at competitive prices. As a result of this phenomenal performance in
international trade, today, East Asia has built up a huge stock of foreign exchange reserves currently
estimated at over US$ 2 trillion, half of which is with China. In fact, what we are now beginning to
see is the Chinese government deploying these resources for helping developing countries in Africa
and Asia.


        The performance of the Malaysian economy has also been spectacular. Today, Malaysia is
one of the most open economies in the world, with its trade to GDP ratio exceeding 200%. Over
the last 25 years or so, the economic growth rate of Malaysia has averaged 6-6.5%, with some
fluctuations depending upon the stage of the business cycle. This growth has been achieved on the
back of growth in exports of over 10% per annum. What is truly remarkable is that within one
generation, Malaysia’s economy has been transformed structurally from essentially a raw material
exporting economy to initially a labour-intensive manufacturing and now capital- and skill-intensive
manufacturing economy, like electronics. I congratulate the leadership and the people of Malaysia
on these wonderful achievements.


        These achievements are a testimony to very skillful economic planning. Analyzing current
trends, focusing on policy changes, anticipating future trends and taking corrective actions now—
these are the elements of successful planning. In particular, the policy of strategic protection by
Malaysia for the export industries of the future is a model for other developing countries.


         The East Asian Tigers have made a successful transition within one generation from low to
high levels of human development and income. We are pleased to note that, according to UNDP’s
global Human Development Report 2006 which came out only a few weeks ago, Malaysia has
graduated to the status of a High Human Development Country, with its Human Development
Index exceeding 0.8 (maximum level of 1). The rising prosperity has brought major improvements
in quality of life for the people of Malaysia.




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          As a result of this remarkable growth, primarily led by further integration into international
markets, we have seen a phenomenal decline in poverty in East Asia as a whole and in Malaysia, in
particular. In other parts of the world including South Asia, the relationship between trade
liberalization, poverty reduction and human development remains ambiguous and more complex in
nature.


          If you look at East Asia as a whole, the incidence of poverty (in relation to the international
poverty line US$ 1 PPP per day) in this region has fallen from over 50% in the early 1980s to about
15% currently. In fact, over 400 million people of East Asia have been taken out of poverty in the
period of roughly thirty years. This pace and magnitude of poverty reduction has probably never
been witnessed before in the history of humankind. This is truly extraordinary. The process of
poverty reduction in Malaysia has gone even further. Starting from a poverty incidence of over 30%
in 1980, Malaysia today has only about 5% of population below the international poverty line.


          Altogether, this is a story of long-term success in development of this region. However, the
2006 Regional and National Human Development Reports highlight some worrisome emerging
trends during the last decade or so. The primary feature of this disturbing trend is that as trade
liberalization has proceeded to a more advanced phase in East Asia, inequalities have begun to rise
sharply in most East Asian economies during the 1990s and in recent years, after falling in the
decade of the 80s. Probably one exception to this trend is Thailand. In China, for example, the
Gini coefficient has risen from 0.33 in the early 90s, which represents a moderate level of inequality,
to 0.42, according to the most recent data, thus exceeding the critical level of 0.4.


          A similar U-shaped curve of level of inequality is observed for Malaysia. The Gini
coefficient fell steadily during the 70s and 80s, but has shown some tendency to rise during the 90s,
although not as sharply as we have seen in China and elsewhere.


          This trend in inequality has a significant consequence—that is, the poverty-to-growth
elasticity has been nearly halved during the 1990s from the magnitude in the 80s. Rising inequality
has implied that the “trickle down” effects of growth on poverty have become increasingly limited.
This is the principal area of concern, as highlighted particularly in the Regional Human


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Development Report. This is why I am talking about trade on human terms. Globalization ought
to benefit all the people, and not just one segment of society.


        Then the question is, why has inequality started rising since the 1990s in this region, with
only one or two possible exceptions? There are at least two major factors behind this phenomenon
of rising inequalities. The analysis of these factors will help us diagnose what should be our primary
focus in future planning. The first factor is the emerging pattern of international trade in East Asia.
Predominantly, the bulk of the incremental growth in export and production domestically has been
in manufacturing sector.


        What is not so well known is that East Asian agriculture has not performed well during the
last 15 years. This is one of the worrying features of the development path of East Asia. The gap
between the growth rate in the primary, the secondary and the tertiary sectors has been widening.
The annual growth rate of the agricultural sector in East Asia is estimated to have fallen to about 3%
from over 5% during the 1980s. As the result, in the face of limited growth in supply and rapidly
rising demand, a number of East Asian countries, like China and the Philippines, have been
converted from being net agricultural exporters to, in fact now, importers. Chinese food imports
have grown rapidly at the rate of 20% per annum in recent years and are beginning to exert upward
pressure on world food prices.


        From the viewpoint of food security, rural livelihoods and poverty, buoyancy of agriculture
is essential. Therefore, it appears that the sectoral pattern of growth has had a limited direct impact
on poverty, as much of the poverty remains rural in character, even in East Asia.


        Part of the relative agricultural stagnation in East Asia is due to the opening up to cheap
imports in the process of trade liberalization, and the realization on the part of governments that
due to the lack of market access to developed country markets, because of the regime of massive
agricultural subsidies provided by the European Union and the United States, probably it would not
pay to invest in agriculture so much because there are limits to exports . During in the 90s, in most
East Asian countries, the share of public sector development expenditure going to agriculture has
fallen by as much as half to even two thirds, for instance in Indonesia.


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        Of course, there are notable exceptions, and Malaysia is one of them. Malaysia’s a gricultural
exports have been buoyant in recent years, growing at the rate of about 15%. Consequently, the net
food exports of Malaysia have more than doubled in the last five years reaching a level in excess of
US$ 12 billion. This must have contributed to rising real wages and incomes in the rural sector and
probably explains at least partially the halving of rural poverty in Malaysia in the last 15 years.


        The second major factor contributing to rising inequality and a slowing down in the rate of
poverty reduction in East Asia, which is again underemphasized in literature, is the breakdown in the
trade-production-employment linkage and the emerging phenomenon of what has been referred to
as “jobless growth.”


        For trade to be translated into human development gains and poverty reduction,
employment creation is vital, especially at the lower end of skills. In contrast to the earlier success in
expanding employment through export of labour-intensive manufactures, the last 15 years have
witnessed a major decline in the rate of employment growth. During the 80s, employment in East
Asia increased at the rate of 3%, which is high enough to absorb the increase in labour force and
bring down the unemployment rate. However, in recent years, the rate of employment growth in
East Asia has fallen to 1% only. In fact, while employment in agriculture has either remained
constant or fallen, it has actually declined in manufacturing in many countries, including Malaysia,
despite rapid growth of the sector. Currently the employment-to-growth elasticity in East Asia is
down to only 0.1 from roughly 0.4 in the 80s. Whatever employment growth we have seen is mostly
in the services sector, whether formal or informal. The striking consequence is that, despite the
rapid economic growth of 7.5-8% of East Asia as a whole, the overall unemployment rate has
actually increased.


        The lack of labour absorption in industry is due, first, to the shedding of labour in relatively
labour-intensive activities due to growing competitive pressures arising from globalization and,
second, to the fact that, as East Asian economies have moved up in the international division of
labour as a result of rising wages, there has been a movement towards capital intensive products, like
electronics and other sophisticated high-tech products of Malaysia.




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        Policies have also played a role here. While real wages have been rising in the modern and
formal industrial sector, especially for skilled workers, expansionary monetary policies pursued by
many East Asian countries have kept real interest rates low. This policy has been used as an
incentive for investment. For example, the real interest rate has averaged at only 2% pr annum
during the 90s in China and Vietnam. Relative factor prices have, therefore, favored the greater use
of capital in production processes.


        Here again, Malaysia has done better in terms of the rate of employment creation. The
annual rate of employment growth averaged 3.5%, which is a healthy rate, during the 1980s and, in
fact, also in the 90s. In recent years, it has fallen somewhat to 2.5% or so. As in the rest of East
Asia, employment is falling in agriculture due to mechanization and modernization, as well as in
manufacturing, but this has been more than compensated in Malaysia by the rapid increase in
employment of almost 5% per annum in services due to booming tourism and the high-income
elasticity of demand for various services of the local population. The employment elasticity in
Malaysia has exceeded 0.45, as compared to 0.1 for the whole of East Asia.


        Altogether, by and large, rising inequality in East Asia is due to the relative stagnation of
agriculture, which still employs a sizeable part of the labor force, and the failure in employment
creation particularly in the manufacturing sector, especially for unskilled workers. Malaysia has been
able to largely curb rising inequality by increasing agricultural exports and rapidly creating services-
related employment, while the government has pursued an active intervention policy for
redistribution.


        Rising inequality has been manifest in most countries of East Asia in growing disparities
between the following:
                  (i)     rural and urban incomes
                  (ii)    different regions of a country
                  (iii)   labor and capital income
                  (iv)    wages of unskilled and skilled workers
An interesting statistic is that the proportion of unskilled workers in unemployed workers has been
rising steadily in East Asia, indicating a serious problem of labour absorption of this category of
workers.

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        Future economic planning in East Asia will have to focus on arresting the trend of rising
inequality, while preserving the growth momentum. This will involve, first, restoring the focus on
rural development and raising both farm and off-farm employment and incomes; second, removing
distortions in relative factor prices, improving the operation of labor markets, investing in skills and
human capital development, as opposed to physical infrastructure; and, third, pursuing redistributive
policies, which are increasingly supported by the fruits of growth and not be part of the processes that
support growth. This will involve more progressive taxation on one hand, and enhanced public
expenditure on social protection and social safety nets on the other hand. Fourth, a major push of
public investment is required in relative backward areas, like the significant public investment that is
taking place in Western China.


        This brings me to the last part of my talk. Interestingly, we have contrasting trends in
inequality. While inequality has been increasing within individual countries of East Asia, we are
seeing a process of equalization among developing countries of East Asia. The process of
convergence has gained momentum during the last ten years or so, especially in the aftermath of the
East Asian financial crisis. Relatively low-income economies like China and Vietnam have shown
fast growth; China has grown at 10%, while Vietnam has achieved a growth rate in excess of 7.5%.
At the same time, the relatively high-income economies including the East Asian Tigers like the
Republic of Korea, Hong Kong (China), Malaysia, Singapore and Thailand have begun to see some
decline in growth rates down to between 4.5-5%. This process of convergence is manifest in the
increasing diversion of foreign direct investment to low-income locations, rapid export growth by
those countries, through diversification into export markets and products of more mature
economies.


        Therefore, the relatively high-income economies of East Asia will have to plan seriously to
preserve their competitive edge, if they are not to lose ground too rapidly. To sustain
competitiveness, Malaysia and other relatively high-income economies will have to plan for a
transition to truly knowledge-based economies offering improved and new technologies,
innovations and products in the international market place. Substantially larger outlays will have to
be made on research and development (R & D) with a focus on industrial applications and on
human capital development for creating state-of-the-art expertise.

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        In this regard, with all due respects, please allow me to indicate that Malaysia is currently
placed in a somewhat disadvantaged position. The Technology Achievement Index developed by
UNDP in its global Human Development report of 2001 places Malaysia significantly below Japan,
Republic of Korea, Singapore and Hong Kong (China). In addition, it is significant to note that in
the recent ranking of universities by the Times Magazine, there is no Malaysian university in the top
20 universities of East Asia.


        Let me conclude by saying that the future of East Asia, including Malaysia, remains truly
exciting and challenging. These countries have already gained worldwide recognition for the speed
with which they have developed economically in the last generation. Now they find themselves at a
different frontier—how to achieve even higher levels of development with more inclusive growth.
In many ways, this is a more complex and difficult task, and just as before these countries in East
Asia will no doubt work out their own solutions. One thing is certain—East Asia will remain at the
forefront of global development and will offer fresh lessons to the rest of the world.


        Thank you very much, Ladies and Gentlemen.




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