Asia's Contribution To Global Economic Development and Stability: Proceedings of ADBI's Annual Conference 2008

Annual Conference
2008
Asia’s Contribution to
Global Economic
Development and Stability
Asian Development Bank Institute, Tokyo, Japan
Asia’s Contribution to
Global Economic
Development and Stability
Annual Conference 2008
Edited by Masahiro Kawai and Susan F. Stone

Kasumigaseki Building 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008, Japan
www.adbi.org
©2009 Asian Development Bank Institute
ADBI Publishing
adbipubs@adbi.org
ISBN: 978-4-89974-030-8
Freely available electronically at:

http://www.adbi.org/book/2009/asia.contribution.global.economic.dev/
The views expressed in this work are the views of the authors and do not necessarily reflect the views or
policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its board of
directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included
in this work and accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.
Contents
Foreword: Asia’s Contribution to Global Economic

Development and Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Preface .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
Contributors .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Abbreviations and Acronyms .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
I Overview .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Masahiro Kawai and Susan F. Stone
1
II Keynote Address: The International Agenda: Immediate

Priorities and Longer-Term Challenges .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Jean Pisani-Ferry
III Regional Cooperation for Greater Global Stability:

A Medium-Term Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Shinji Takagi
Comments .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Gang Fan
IV Asia’s Role in Stabilizing Food and Agricultural Prices .. . . . . . . . . . . . . . 51

Kym Anderson
Comments .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Bambang P. S. Brodjonegoro
V How Can Asian Regionalism be a Stepping Stone to

Preserving the Multilateral Trading System? .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Inkyo Cheong, Jungran Cho, and Seungyeon Jeong
Comments .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Pham Quy Long
VI How Can Asia Develop in a Socially Sustainable Manner? . . . . . . . . 123

Medhi Krongkaew
Comments .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Arsenio M. Balisacan
VII Promoting Sustainability Under a Changing Climate in Asia . . . . 179

Matthias Ruth
Comments .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Kazuhiro Ueta
VIII Panel Discussion .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

iv Asia’s Contribution to Global Economic Development and Stability
Foreword
Asia’s Contribution to Global Economic Development

and Stability
While the ongoing global financial and economic crisis originated far from
Asia’s shore, its impetus has created an environment of great uncertainty
(in the case of credit, especially trade finance credit) and has adversely
impacted global economic growth in both 2008 and 2009. It has affected
Asia’s economy mainly through the trade channel. Strengthened after the
1997–1998 financial crisis through a series of supervisory and regulatory
reforms, Asia’s financial institutions have thus far weathered the storm, even
though equity and bond markets have turned down. As the world economy
starts down an unprecedented path to reform, there has been no better time
to examine the role Asia should play in the new global economy. The chapters
in this book do just that: examine Asia’s contribution to global growth and
sustainability.
Looking at the issues addressed in this book, it becomes clear that Asia can
be a leading force in contributing to the global recovery, while still attending
to its own needs. In other words, Asia can help the world by helping itself. By
strengthening domestic markets and providing a transparent, well-supervised,
and integrated financial market, Asia can efficiently mobilize its surplus savings
to provide needed capital to its own investors, as well as potentially provide
a mechanism through which the rest of the world can get capital flowing
again. By investing in technology and providing training and educational
opportunities to its population, Asia can develop “home grown” solutions
to the demand-side challenges of unstable food prices, as well as reduce its
reliance on unreliable energy sources.
The progression of the current economic difficulties has highlighted
the vulnerability of Asia’s development strategy, which relies heavily on
external demand. The widespread and fundamental nature of the causes of
the downturn means that Asia will not be able to export its way out of the
current crisis; it must, instead, turn to Asian markets. Rebalancing growth
by increasing reliance on domestic and regional demand will provide ready
markets not just for Asian manufacturers, but for global producers as well.
As Asia continues on a path toward regional integration, its vast and efficient
Foreword v
system of production networks can be used as a basis for maintaining the
competitiveness that has brought such success to Asian producers. Asia knows
how to produce; by learning how to consume, the region can contribute to
global economic growth and prosperity.
By developing robust markets in goods and financial services, while
improving its energy efficiency and use of alternative energy sources, Asia can
contribute to global public goods. From a social perspective, a more educated,
more engaged population will provide abundant opportunities for growth
and poverty reduction, which also help alleviate the social pressures that can
accompany inequitable growth. Widespread infrastructure projects can give
the poor access to social services, such as education and health care, and to
market opportunities they would otherwise lack, while also providing jobs.
The chapters contained in this volume provide ample evidence of the
potential for the region not only to lead the way out of the current crisis,
but also to provide an example of how to develop sustainable markets and
open and transparent economic systems. From well functioning financial
markets to energy efficient products and services that could provide new
markets for Asian producers, the region stands poised to enter a new era
of greater global engagement while providing robust regional markets for
regional producers.
Haruhiko Kuroda
President, Asian Development Bank
vi Asia’s Contribution to Global Economic Development and Stability
Preface
Given the current economic uncertainty surrounding the recovery of global

markets, this volume addresses some fundamental issues for Asia’s growth
and development. From the current crisis, there needs to rise a new economic
order. In this new global economy, traditional economic relationships will
no longer hold and the West’s near monopoly on financial markets may be
broken. If this is to happen, Asia must take its rightful place by providing
leadership in the global recovery, contributing to the key areas of economic
and financial stability, trade stability, and sustainable development.
This volume deals with three crucial issues:
• How can Asia’s financial integration and sound macroeconomic policies
enhance global economic and financial stability and lead to a more
sustainable recovery?
• How can Asia contribute to a trading system that ensures free and open
markets, while promoting growth and prosperity at home?
• How can Asia promote both climate change mitigation and an equitable
distribution of income (along with its associated externalities, such as crime
reduction—including terrorism—and political stability) to ensure these
regional public goods enhance global welfare?
I would like to express our deep appreciation to the distinguished participants
who shared their views, as well as to the conference attendees whose engaged,
insightful comments helped stimulate a fruitful discussion.
Masahiro Kawai
Dean, Asian Development Bank Institute
Contributors vii
Contributors
Kym Anderson is George Gollin Professor of Economics at the University of

Adelaide in Australia. He served as lead economist (trade policy) at the World Bank’s
Development Research Group (2004–2007). He has been a consultant to many national
and international bureaucracies, business organizations, and corporations, and has
published more than 25 books and 200 journal articles and book chapters. Between
1990 and 1992, he was deputy to the director of the research division of the General
Agreement on Tariffs and Trade (GATT) (now World Trade Organization) Secretariat
in Geneva, and became the first economist to serve on a series of dispute settlement
panels at the World Trade Organization (1996–2008). He received his MS from the
University of Chicago and PhD from Stanford University.
Arsenio M. Balisacan is director of the Southeast Asian Regional Center for

Graduate Study and Research in Agriculture and a professor at the University of
the Philippines Diliman. Previously, he was the agriculture undersecretary of the
Philippine government. One of the leading development economists in Asia, he has
been a consultant to various Philippine government institutions and international
organizations. He has authored and co-authored seven books and over 100 journal
articles and book chapters. He earned his MS in agricultural economics from the
University of the Philippines Los Baños and his PhD in economics from the University
of Hawaii.
Bambang P. S. Brodjonegoro is dean of the University of Indonesia’s Faculty of

Economics. He has also lectured at Hitotsubashi University and the University of
Illinois at Urbana-Champaign. He has published books and numerous articles in
academic journals, and has presented a number of papers at various international
academic conferences. He has received awards such as the Eisenhower Fellowship
in 2002; visiting research fellowships at the Institute of Southeast Asian Studies in
Singapore in 1999, and at the Research School of Pacific and Asian Studies, Australian
National University in 2004; and was honored by the University of Indonesia in
1989. He holds a BA in economics from the University of Indonesia and MA and
PhD degrees from the University of Illinois.
Inkyo Cheong is a professor of economics at Inha University, where he is director

of the Center on Free Trade Agreements Studies. He is also vice president of the
Korean Association of Trade and Industry Studies and serves as the Republic of Korea’s
delegate at official negotiations for bilateral free trade agreements. For eight years,
he has served at the Korean Institute for International Economic Policy as director
viii Asia’s Contribution to Global Economic Development and Stability
for Association of Southeast Asian Nations (ASEAN) economies and director for
free trade agreement studies. He has also served as secretary general for the East
Asian Vision Group. A journal referee and author of articles and books on free trade
agreements and East Asian economic cooperation, he holds MA and PhD degrees
in economics from Michigan State University.
Gang Fan is director of the National Economics Research Institute, China Reform
Foundation, and is a professor at the Chinese Academy of Social Sciences. He also serves
as adviser to the Chinese government and to the Center of International Development
at Harvard University. He is a consultant to the World Bank, International Monetary
Fund (IMF), United Nations Development Programme, United Nations Economic
and Social Commission for Asia and the Pacific, and the Organisation for Economic
Co-operation and Development . He was ranked 33rd in the “World’s top 100 public
intellectuals” and was awarded “Global Leader for Tomorrow” by the World Economic
Forum. He has written eight books, over 100 academic papers, and more than 200
articles in newspapers and magazines published around the world. He earned his
PhD degree in economics from the Chinese Academy of Social Sciences.
Masahiro Kawai is the dean of ADBI. For three decades, he has served the academic
community, first as an assistant and then as an associate professor at the Johns Hopkins
University, and as a professor of economics at the University of Tokyo’s Institute of
Social Science. He has also served as chief economist for the World Bank’s East Asia
and the Pacific Region, deputy vice minister of finance for international affairs at
Japan’s Ministry of Finance, the first head of ADB’s Office of Regional Economic
Integration, and as special advisor to the ADB president. He has written books and
numerous academic articles on international economics, economic globalization and
regionalization, and regional financial integration and cooperation in East Asia. He
holds an MS in statistics and a PhD in economics from Stanford University.
Medhi Krongkaew is director of the Center for Poverty Studies at the National
Institute of Development Administration in Thailand. He was an economist in the
Ministry of National Development and dean of the Faculty of Economics at Thammasat
University, a post he held while serving with the Prime Minister’s Office. He has
been a member of the advisory boards of various committees, in the government
and at Thammasat University, and has been a consultant to various international
organizations. He has a BA in economics and political science from Victoria University
of Wellington, an MA in economics from the University of Canterbury, and a PhD
in economics from Michigan State University.
Haruhiko Kuroda has been ADB’s president since 2005. Previously, he was special
advisor to the cabinet of the Japanese prime minister and a professor at the Graduate
School of Economics at Hitotsubashi University. In a career spanning nearly four
Contributors ix
decades, he has represented Japan’s Ministry of Finance at a number of international
monetary conferences as vice minister of finance for international affairs. Under his
leadership, Japan supported Asian economies hit by the 1997–1998 financial crisis
and helped Asian nations establish a network of currency swap agreements to avert
another crisis. He holds a BA in law from the University of Tokyo and an MPhil in
economics from the University of Oxford.
Pham Quy Long is head of the Department for Economics and Integration at the
Vietnam Institute for Northeast Asian Studies. He is also a member of Viet Nam’s
Study Team for ASEAN Plus 6, a track-two study group on comprehensive economic
partnership in East Asia. Previously, he worked at the Vietnam Institute for Asia-
Pacific Studies as a senior researcher. He has published many books and articles on
economics and international relations. He earned his BS from Viet Nam National
University, Hanoi; an MA in economics from Jawaharlal Nehru University; and
a PhD in economics from Ho Chi Minh National Academy of Politics and Public
Administration.
Jean Pisani-Ferry was appointed director of Brussels European and Global

Economic Laboratory in 2005. A French professor of economics at Université Paris-
Dauphine, he was previously economic adviser of the European Commission; director
of Centre d’Etudes Prospectives et d’Informations Internationales, the top French
research institute in international economics; and executive president of the French
prime minister’s Council of Economic Analysis. He is currently a member of the
European Commission’s Group of Economic Policy Analysis and the French prime
minister’s Council of Economic Analysis. He holds an engineering degree from
Ecole Supérieure d’Electricité, an MS in mathematics from the University of Paris,
and a graduate degree in economics from the Centre d’Etudes des Programmes
Economiques, Paris.
Matthias Ruth holds the Roy F. Weston Chair in Natural Economics at the School
of Public Policy, University of Maryland, where he is director of the Center for
Integrative Environmental Research, director of the Environmental Policy Program,
co-director of the Engineering and Public Policy Program, and a professor of
environmental economics and policy. His research focuses on dynamic modeling
of non-renewable and renewable resource use, industrial and infrastructure systems
analysis, and environmental economics and policy. He teaches courses and seminars
on microeconomics and policy analysis, ecological economics, industrial ecology, and
dynamic modeling at the undergraduate, graduate, and PhD levels. On occasion, he
also conducts short courses for decision makers in industry and policy in the United
States (US) and in other countries.
x Asia’s Contribution to Global Economic Development and Stability
Susan F. Stone joined ADBI in 2007 after serving as research manager for the
Productivity Commission in Melbourne, Australia. Between 2003 and 2005, she
worked as a research economist at the National Center for Environmental Economics,
US Environmental Protection Agency, where she worked on the intergovernmental
panel on environmental review of trade agreements. She has held appointments and
lectured at various universities in the US and Australia. She has published research on
a wide range of trade topics, including expanding water markets in the Murray Darling
Basin, technology and trade, the environmental impacts of trade agreements, and
the economic effects of invasive species. Her most recent projects involve transport
and trade facilitation. Ms. Stone holds a PhD in economics, with a concentration in
finance, from Drexel University in the US.
Shinji Takagi is a professor at Osaka University’s Graduate School of Economics

and was a visiting fellow at ADBI from 2007–2009. His professional appointments
have included: economist at the IMF (1983–1990), senior economist at the Japanese
Ministry of Finance (1992–1994), visiting professor of economics at Yale University
(2000–2001), and advisor to the IMF’s Independent Evaluation Office. He is a specialist
in international monetary economics and author of over 70 professional publications,
including four books. His recent work has dealt with issues on exchange rate policy,
emerging market crises, capital market development, and regional policy cooperation.
His undergraduate textbook on international monetary economics, currently in its
third edition and 15th year, has sold more than 25,000 copies. He holds a PhD in
economics from the University of Rochester.
Kazuhiro Ueta is a professor at Kyoto University’s Faculty of Economics and Graduate

School of Global Environmental Studies. Previously, he was an assistant professor
at the Institute of Economics Research, Kyoto University; a visiting professor at the
London School of Economics and Political Science; an honorary research fellow at
University College London; and a visiting research fellow at Resources for the Future.
He also served as a visiting professor at University College Dublin and as a visiting
scholar at the Center for Economic Studies Information and Forschung (research)
in Germany. He holds an MS in engineering and a PhD in economics from Kyoto
University, and a PhD in engineering from Osaka University.
Abbreviations and Acronyms xi
Abbreviations and Acronyms
ADB Asian Development Bank

ADBI Asian Development Bank Institute
AFTA Association of Southeast Asian Nations Free Trade Agreement
APEC Asia-Pacific Economic Cooperation
APTA Asia-Pacific Trade Agreement
ASEAN Association of Southeast Asian Nations
BBC British Broadcasting Corporation
CEPT Common Effective Preferential Tariff
CNN Cable News Network
CO2 carbon dioxide
CTE consumer tax equivalent
DDA Doha Development Agenda
DFID Department for International Development
EAFTA East Asian Free Trade Agreement
EKC Environmental Kuznets Curve
EU European Union
FAO Food and Agriculture Organization of the United Nations
FSF Financial Stability Forum
FTA free trade agreement
G7 Group of Seven
G8 Group of Eight
G20 Group of Twenty
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GDP gross domestic product
GITI Growth-Inequality Trade-Off Index
GNP gross national product
GPI genuine progress indicator
HPAE high performing Asian economies
HPI Human Poverty Index
IEA International Energy Agency
IFPRI International Food Policy Research Institute
IMF International Monetary Fund
IPCC Intergovernmental Panel on Climate Change
xii Asia’s Contribution to Global Economic Development and Stability
ITC International Trade Centre

JETRO Japan External Trade Organization
Lao PDR Lao People’s Democratic Republic
m3 cubic meter
MFN most favored nation
MTV Music Television
NAFTA North American Free Trade Agreement
NESDB National Economic and Social Development Board
NRA nominal rate of assistance
ODA official development assistance
OECD Organisation for Economic Co-operation and Development
OPEC Organization of Petroleum Exporting Countries
PPP purchasing power parity
PRC People’s Republic of China
R&D research and development
RRA relative rate of assistance
RTA regional trade agreement
SAFTA South Asia Free Trade Agreement
SME small or medium enterprise
SO2 sulfur dioxide
SPS sanitary and phytosanitary
SSD socially sustainable development
TBI trade bias index
TRI Trade Reduction Index
UN United Nations
UNCAC United Nations Convention Against Corruption
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNESCAP United Nations Economic and Social Commission for Asia
and the Pacific
US United States
WRI Welfare Reduction Index
WTO World Trade Organization
Overview 1
I
Overview
Masahiro Kawai and Susan F. Stone
In times of economic turbulence, leadership plays a critical role, not only in

maintaining what prosperity there is to be had, but, more importantly, in
showing the way out of the crisis. But how does leadership play itself out in the
age of globalization? Globalization has made the world more interdependent
than ever. The rapid spread of the financial collapse in the United States (US),
first to financial sectors throughout the world, and then to real sectors, is
testament to this fact. This has affected economies across the world but has
been felt most severely in the US, Europe, and Japan. As a result, it is unlikely
that the pattern of past recoveries—consumption in the West met by production
in the East—will be effective. A new dynamic needs to emerge.
This dynamic will undoubtedly involve a greater role for Asia in the world
economy. No longer just the world’s factory, Asia needs to step up and take the
lead across the economic spectrum: from developing robust credit markets
to enacting safeguards for environmental stewardship. These demands are
as vital as they are difficult, yet Asia must rise to the challenge.
ADBI’s 11th Annual Conference, Asia’s Contribution to Global Economic
Development and Stability, took up many of these issues. Yet several months
on, even the title seems out-of-date. Perhaps a better reflection of today’s
economic landscape could be captured by Asia’s Leadership in Promoting Global
Economic Development, as the region is perhaps best positioned to lead the
world out of the current global downturn.
Contrary to what was believed even a few months ago, Asia is experiencing
a rapid deceleration in growth and output. Chinese exports alone were over
25% lower in the month of February than for the same period last year (CEIC
2 Asia’s Contribution to Global Economic Development and Stability
Data Company Ltd.).1 The International Monetary Fund (2009) predicts that
the global economy will shrink by 1.3% in 2009, the first time that trade
and economic activity have declined simultaneously since the Second World
War. In Asia, estimates from the International Monetary Fund are for Japan
to contract by 6.2%, for growth in the People’s Republic of China (PRC) to
slow to 6.5%, and for the Association of Southeast Asian Nations (ASEAN)-5
economies2 to experience no growth at all.
A recent ADB study estimated that the crisis slashed the value of financial
assets worldwide by US$50 trillion last year, with developing Asia suffering
more than other emerging markets (ADB 2009b). In addition, the World
Bank is estimating that developing countries will face a financing shortfall
of US$270–700 billion this year, as private sector creditors shun emerging
markets. Less than one quarter of the most vulnerable countries have the
resources to prevent a significant rise in poverty (World Bank 2009).
In times such as these, policy makers face a myriad of pressures. Their
response must be cognizant of short term needs, but must also take into
account medium- and long-term impacts and opportunities. Cash transfers,
for example, can alleviate some of the immediate need, but do not meet the
longer-term development requirements of the poor. Asia is in a unique position,
having come into the crisis in a much stronger position than much of the rest
of the world. Its immediate exposure to the subprime crisis was limited and
lessons learned from the 1997 crisis were well in place. Thus, it is arguable
that Asia is in the best position to be the driving force of global economic
growth in future. By focusing on regional cooperation—responding to the
crisis by helping developing country neighbors—and regional demand, Asia
can not only contribute to growth and development, it can lead the way in
attaining both.
1. The International Agenda: Immediate Priorities and

Longer-Term Challenges
The conference began with a keynote address delivered by Jean Pisani-Ferry,
which touched upon three major issues relating to the current global crisis.
The first was countries’ short-term response. He commended the fact that
1
Available: http://www.ceicdata.com/
2
Indonesia, Malaysia, Philippines, Thailand, and Viet Nam (ADB 2009a).
Overview 3
in contrast to the experience of the Great Depression, throughout the world
there has been a remarkable ability to innovate and learn from mistakes.
He emphasized the need to support global demand and avoid free-riding
behavior, and cautioned against succumbing to the temptation to support
producers through trade defense, subsidies, or non-cooperative exchange-
rate policies. The current crisis will test every country’s commitment to
international cooperation.
The second issue was the longer-term agenda. Pisani-Ferry highlighted
the need to accept that the process of international reform will take years
rather than months, especially as there is no generally accepted blueprint
to start with. He stressed the importance of the macro-financial dimension,
and that responses should take it into account, both nationally and
internationally. Key challenges for policymakers will be, at the national level,
how to strike the balance between automatic stabilization and discretionary
intervention, and, at the international level, effective multilateral surveillance
of the risks to global financial stability and their links to macroeconomic
developments.
The final issue was the role and effectiveness of international institutions
in the changed landscape (both new ones like the Group of Twenty [G20] and
the Financial Stability Forum, and established ones like the International
Monetary Fund [IMF]). For the IMF, governance reforms are needed, such
as reducing and consolidating Europe’s representation, but these will not be
sufficient on their own. Another possibility is to make country surveillance
more independent by releasing IMF analysis under the responsibility of
management. In the absence of quasi-judicial powers like those of the World
Trade Organization (WTO) panels, the role of the IMF should be to provide
expertise to the G20, that is, to help to base discussion on sound analysis but
not to decide.
The conference was broken into three distinct themes. The first session dealt
with the instability of two of the great global markets: credit and agriculture.
The year 2008 will be remembered for the number of record-setting events.
First, there was the spike in food prices (rice, in particular, reaching record
levels) in conjunction with soaring oil prices. These were followed by an almost
as spectacular decline in oil prices. Immediately on the heels of this commodity
price roller coaster, there came the similarly dramatic decline in the fortunes
of some of the world’s largest financial institutions.
2. Asia’s Contribution to Global Economic Stability

The first paper from this session examines the degree to which Asia is integrated
with the rest of the world. Shinji Takagi argues that while there is evidence of
some real integration, the fact that financial integration has not kept pace has
been detrimental to Asia’s development. Even though the lack of integration
with respect to the rest of the world has meant that the initial impacts of the
financial crisis were rather limited in Asia, subsequent events have shown
that Asia remains vulnerable.
The region has been, and will continue to be, affected by the crisis. While it
has been argued that growing regional trade links have become more important
than global demand as a driver of Asia’s economic growth, Takagi presents
evidence that ties with the global economy have actually strengthened. The
region is export dependent and there is emerging evidence that intra-regional
trade is the predominant factor behind the increasing output synchronization
in Asia. This large share of intra-regional trade provides the mechanisms
through which a shock in one economy affects the output in another.
So the question becomes, if such a linkage with the real economy has
exposed Asia to the ravages of the global downturn, should Asia similarly
open its financial markets as well? Takagi argues that the answer to this is yes.
He bases his argument on two major points: First, there is a need for a long-
term, local-currency funded bond market to provide the finances necessary to
grow businesses in the region. This would be an effective mechanism to bring
the large pool of Asian savings “home.” Second, an intra-regional financial
integration strategy would place the region in a better position to meet its
own financing needs, in addition to creating new opportunities by lowering
the transaction costs of cross-border activities. The paper concludes that a
more closely linked Asia will expand the demand for goods both inside and
outside the region.
In his comments on the paper, Gang Fan warns that though such
liberalization would be beneficial, it should avoid “over shooting.” There
needs to be a balance between financial liberalization and the level of
economic development and institutional capacity in the region. He points
out that it took Europe 50 years to arrive at its current level of economic
integration. While Asia is well ahead of this time frame, it still has a long
way to go.
Specifically, Fan argues that reserve balances should continue to reflect
a country’s level of participation in world trade. A cross-holding approach
Overview 5
provides greater flexibility in dealing with regional account imbalances. Holding
currencies of regional trade partners allows governments the opportunity to
avoid risks in other currencies as well as deepening integration by making
countries mutual investors.
But 2008 saw more than just a collapse of the banking sector, a widespread
lending freeze, and toxic asset seepage into the real economy. As mentioned
above, it was also the year that saw some of the largest variation in the
prices of food and fuel in over 20 years. Oil prices, on which food costs
largely depend, hit a record high of US$147 per barrel in July 2008 before
falling sharply to less than US$40 a barrel in December 2008/January 2009
(Figure 1.1).
The price of food likewise reached record levels. In 2008, the price of food
outpaced general price increases across the region (Figure 1.2). Viet Nam and
the PRC experienced the largest increases, followed by Thailand and Hong
Kong, China. The cause of the rapid increase in these prices has been hotly
debated. In addition to rising oil prices, many have blamed speculators and
various hedge fund investors. However, a recent World Bank report found
that the most important factor in explaining these price spikes was the large
Figure 1.1: Weekly Crude Oil Prices

US$ per barrel
US$ = United States dollar.

Source: Energy Information Association. Available: http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm
(accessed 28 July 2009).
Figure 1.2: Ratio of Increase in Food Consumer Price Index to

Increase in Overall Consumer Price Index, 2008
Sources: ADBI staff estimates using (i) CEIC Data Company Ltd. data for Indonesia, Malaysia, Republic of Korea,
New Zealand, and Viet Nam; (ii) data from statistics offices of Australia; Bangladesh; People’s Republic of China;
Hong Kong, China; Japan; Philippines; and Singapore; and (iii) data from the Ministry of Commerce of Thailand.
increase in biofuel production from grains and oilseeds in the US and the
European Union (Mitchell 2008). The large increase in rice prices was mainly
a response to the increase in wheat prices rather than to any specific changes
in rice production or stocks and, thus, was indirectly related to the increase
in biofuel production. The implication is that speculative activity probably
would not have occurred without the large price increases due to biofuel
production. Thus, these traders were responding to rising prices rather than
causing such changes. Higher energy and fertilizer prices were estimated to
increase crop production costs by between 15–20 percentage points in the
US and by lesser amounts in countries with less intense production practices
(Mitchell 2008).
While food prices have fallen from last year’s spike, they remain high. Rising
unemployment and falling incomes are putting additional pressure on poor
and vulnerable groups. More worrying still is that, once the global economy
recovers, the pressures that drove up food prices last year will return.
The specter of volatile food prices is of grave concern to developing nations.
Recent modeling by the World Bank measured the impacts of the price increases
on urban poor (Dessus, Herrena, and de Hoyos 2008). Not surprisingly, initial
conditions were a key determinant of total impacts. However, many countries
Overview 7
in Asia were shown to be affected more than the average, especially in South
Asia.3 As large and as sudden as the recent price spikes were, they were not
unprecedented, nor are they the last expected to be seen in the near future.
In times of price volatility, governments often intervene to stabilize
domestic food markets. For example, in the early part of 2008, 14 countries,
including India, PRC, Thailand, and Viet Nam, banned or limited exports of
rice (Berthelsen 2008). However, it is often the intervention itself that leads
to further price volatility, Kym Anderson argues in the second paper of this
session. Intervention seeks to reduce fluctuations in domestic food prices
and quantities available for consumption by erecting barriers to trade. By
doing this, countries undermine the stabilizing role international trade can
bring to the world’s food markets. The more countries insulate their domestic
markets, the more other countries perceive a need to do likewise, exacerbating
the effect on world prices.
Anderson presents evidence that while trade in general has expanded much
faster than global production, the propensity to trade agricultural goods has
seen relatively little growth. Even accounting for the growth in regional trade
intensities, the share of farm production exported has remained at around 4%
or 5% for Asia. The most likely explanation is the persistence of government
intervention in these markets.
The paper presents recent evidence of this anti-trade bias through a new
set of agricultural distortion estimates. The results show a dramatic rise in
the relative (to other sectors in the economy) rates of assistance to agriculture
in both India and the PRC in the past several decades. Both countries have
remained close to self sufficient in agriculture products over the past four
decades and Anderson argues that the steady rise in this assistance has
contributed to that outcome.
The paper shows further that only 8% of agriculture’s output is traded,
versus 31% for primary products and 25% for all other goods. This has led
to thin markets, a major contributor to volatility in international prices for
weather-dependent products.
Anderson concludes by saying that Asia can lead the way toward thicker
markets and less volatile prices by applying domestic policies appropriately.
While this may increase import dependence in agriculture in some countries
over time, the region as a whole would benefit. If Asia were to lead the way in
Out of a sample of 73 countries covering 88% of the world’s poor, Cambodia, Bangladesh, India, and
3
Pakistan all ranked in the top 20 most affected countries.

this, other developing countries might well reconsider their current position
in the WTO’s Doha Round. By agreeing to lower substantially their bound
tariffs and subsidies on agricultural products, developing countries would
be in a stronger position to extract greater concessions from high-income
countries without having to reduce their actual applied rates. Reducing tariff
binding overhangs and the scope to vary taxes on farm trade should boost
that trade, thickening markets and reducing food price instability.
The discussant, Bambang Brodjonegoro, highlights the impact of domestic
policies on international prices, not only through relative rates of assistance,
but also through the promotion of biofuels, citing the US and European Union
as examples. Brodjonegoro argues that most governments see the insulation
of their domestic markets for important basic needs such as energy as an
imperative. However, he also points out that the protection of food is often for
the farmers’ benefit and not that of the general population of the developing
country. Thus, it is often easier for countries with relatively high domestic
purchasing power to determine the price acceptable to the majority of domestic
consumers than to find a price satisfactory to farmers.
The answer to these conflicting goals, Brodjonegoro states, is through
openness, by not imposing barriers for agricultural exports. It is also then
important for government polices to provide real income support for farmers.
He argues that as a result of their presumption that liberalization and free
trade primarily benefit developed countries, economies in the Asian region
do not like the idea of internationalization determining their fate. Rather
than creating thickness in international markets, they prefer to keep any
agricultural surplus as domestic reserves. He questions if free trade will still
be the answer if renewable energy and bioenergy are included in the picture.
If Asia wants to take a bigger role, it should ensure that the agricultural price
for food takes into account the agricultural price for energy, and that food
and energy supplies are both secure.
These sentiments are likely to become stronger as the global economy
continues to weaken and Asian countries continue to face a sharp downturn
in commodity prices (Figure 1.3). Such a decrease, while a welcome relief to
consumers, implies lower earnings for producers, especially farmers in the
developing world. This, combined with the tightening credit markets, will
make it tempting for countries to again try to isolate domestic markets and
even impose protectionist measures.
Overview 9
Figure 1.3: Change in Commodity Prices
M1 = January, M4 = April, M7 = July, M10 = October.

Source: Loser (2009). Based on International Monetary Fund Commodity Prices.
Figure 1.4: Number of New Anti-Dumping Measures
Source: World Bank (2009).

3. Asia’s Contribution to the Global Trading System

The second session looked specifically at these and other issues facing the
global trading system. Fears of protectionism are rife. The number of anti-
dumping measures registered with the WTO increased in the second half of
2008, compared with the first (Figure 1.4). This caused so much concern that
the recent Group of Eight (G8) ministerial meeting felt obliged to make a formal
statement eschewing such practices in order to placate domestic constituencies.
Likewise, the leaders from the 10-member ASEAN issued a joint statement that
called for “…bold and urgent reform of the international financial system” to
tackle the worsening crisis, while agreeing to “stand firm against protectionism”
(Reuters 2009). However, such pressures are difficult to resist in such times. Some
regional leaders are citing the example of US President Obama’s advice to “Buy
American.” For example, the Indonesian Trade Ministry, which is encouraging
civil servants to buy Indonesian products (Johnston 2009).
Despite the rise in anti-dumping claims, there is little evidence that
protectionism has been the chief cause of the rapid decline in international
trade (Johnston 2009). Rather, it has been argued, it is the decline in the
availability of trade finance that has hurt trade. Still others say that while
a general reassessment of risk among financial institutions and companies
may have hurt smaller and poorer countries—now cut out of global supply
chains—bank lending in trade finance has held up well compared with their
activities in other areas of lending. Whatever the reason, the dramatic decline
in world trade in 2009, the first since 1982 (World Bank 2009), is cause for
serious concern.
These issues have led to an increasing call for regional cooperation.
Coordination will be key as stimulus packages implemented by one or two
countries will be rendered ineffective by international diffusion. The returns
from such coordinated actions will spread throughout the globe through
international trade linkages (Lin 2009). Thus, the first paper of the session
focused on using the strong regional dynamics that have arisen in the Asian
community to strengthen and promote the global trading system.
In these turbulent times, the extent to which regionalism—particularly
regional trade agreements—acts as a kind of regional protectionism, isolating
select countries from the storm of the current crisis, is more pertinent than
ever. It is important to be confident that such arrangements function as an
open road over which countries may better emerge from this current slowdown,
rather than as a road block for global growth.
Overview 11
In the first paper, Inkyo Cheong, Jungran Cho, and Seungyeon Jeong argue
that Asian regionalism has indeed complemented the multilateral system, and,
in some respects, has surpassed it. Cheong and his co-authors point to the rules
of origin in the Asia Pacific Trade Agreement as an example of going beyond
current standards. A further characteristic of Asian regionalism is that regional
agreements were generally concluded in a relatively short time frame and thus
applied the rules already established under the multilateral system.
On the other hand, the authors argue that regionalism can also lead to a
lack of differentiation in trade rules between free trade agreements (FTAs)
and the multilaterally set most favored nations. Measures tend to be so minor
as to be a disincentive to businesses to act under the FTA. Indeed, the paper
points to the fact that the ASEAN FTA’s preferences are not being widely used,
ranging from 11.2% to 5% in Thailand and Malaysia, two highly outward
oriented countries (Kawai and Wignaraja 2008).
A negative aspect of the multilateral system is the increasing complexity
such a large number of participants can add to the negotiating process. Regional
trading blocs reduce this number and simplify the process. They also allow
the content of many FTAs, including that of the ASEAN FTA, to include a
much broader agenda covering, for example, investment and government
procurement.
For Asia to lead the world with a fully integrated regional trading system,
in support of true multilateralism, a driving force or regional leader is needed.
Instead, the authors argue, intense internal rivalries within East Asia have
led to a network of bilateral FTAs through which competing alliances are
formed to gain influence over the region. The authors warn that if this trend
continues, it will make regional community building quite difficult and lead
to “competitive bilateralism.”
The discussant, Pham Quy Long, agreed with the assessment that Asian
FTAs have played a significant role in contributing to the development of a
multilateral system. Long states that from a political economy viewpoint, FTAs
in East Asia have been influenced by regional rivalries and, thus, that Asia
should be on guard not to let the conflict of non-economic factors influence
the track of regional development. Regional FTAs must be motivated by
market-led forces.
Long goes on to argue that while Asian regionalism has made adjustments
to follow WTO rules, it is rightful that the multilateral trading system change
to reflect the activity and proficiency of today’s markets. Although governments
in the region need to balance their economic and political agendas with respect
to regionalism, the process of economic integration and globalization is seen

as creating a vulnerability to other countries. In this area, however, Asia can
lead the world by showing how compromise and patience can be used as a
tool for moving forward.
4. Asia’s Contribution to Global Public Goods
The third session dealt with public goods in support of sustainable growth.
In turbulent economic times, it is tempting to shelve some concerns as being
“luxury” items. The immediate can supplant the important. With government
programs in support of tax cuts and rebates becoming more likely, attention
must not be diverted from programs for people and issues in need of continued
government support, such as the poor and the environment.
However, these programs are coming under increasing pressure. For
example, there has been fierce debate in Australia over its proposed emissions
legislation with talk of postponement or even abandonment. The country’s
leading industry group representing manufacturing, engineering, and
construction firms believes that this carbon trading scheme, originally set
to be introduced in July 2010, should be postponed to at least 2012. It recently
announced that “the 2010 timetable has…become unrealistic because of the
impacts of the global financial crisis…” (Grubel 2009: 1). Other industry and
labor groups across the globe are increasingly calling for a deceleration of the
social agenda outside issues directly related to the global slowdown.
This is creating an atmosphere of uncertainty when clarity on policy and
prices is what is needed now. Indeed, uneven implementation of fiscal stimulus,
combined with the continued uncertainty created by the economic crisis and
the sustainability of recovery, has compounded risk, damping investment.
However, it is measures such as the innovation required for a low-carbon
economy that can be an effective stimulant to real growth (Stiglitz and Stern
2009). A way out of the current slowdown that supports sustainable growth
requires making the investments necessary to move society to a low-carbon
economy. These investments could drive growth over the next two to three
decades. The Peterson Institute reports that spending US$10 billion to insulate
US homes and federal buildings could create and sustain up to 100,000 jobs
between 2009 and 2011, while saving the economy from US$1.4 billion to
US$3.1 billion a year between 2012 and 2020 (Houser 2009). With idle resources
in so many economies, the opportunity cost of action is quite low. This is an
Overview 13
opportune time to meet the challenges the world faces in meeting the needs
for basic investment critical to long-run sustainable development.
The concept of sustainable development was coined explicitly to suggest
that it was possible to achieve economic growth and industrialization without
environmental damage. In the ensuing decades, mainstream sustainable
development thinking has been progressively developed through the World
Conservation Strategy (Commissioned by the United Nations [UN] in 1980), the
Brundtland Report (released in 1987), and the UN Conference on Environment
and Development in Rio (also known as the “Earth Summit,” held in 1992), as
well as in national government planning and wider engagement from business
leaders and non-governmental organizations of all kinds.
Over the past several decades, the definition of sustainable development
has evolved. The Brundtland Report defined sustainable as “development that
meets the needs of the present without compromising the ability of future
generations to meet their own needs” (UN 1987: Ch 2). This definition was
vague, but it captures two fundamental issues: the problem of environmental
degradation that so commonly accompanies economic growth, and the need
for growth to alleviate poverty.
The core of mainstream sustainability thinking encompasses three
dimensions: environmental, social, and economic sustainability. This approach
demonstrates that the three objectives need to be better integrated, with action
to redress the balance between dimensions of sustainability.
In the first paper of this session, Medhi Krongkaew argues that in these
times, the essentials laid out more than 20 years ago in the Brundtland Report
are still not only relevant, but an imperative. However, to the seven development
agenda items outlined as:
1. Reviving growth;
2. Changing the quality of growth;
3. Meeting essential needs for jobs, food, energy, water, and sanitation;
4. Ensuring a sustainable level of population;
5. Conserving and enhancing the resource base;
6. Reorienting technology and managing risk; and
7. Merging environment and economics in decision making,
Krongkaew adds political development, good governance, and the desirability
of cultural and spiritual lifestyles. Political development can be, and has been,
defined in a number of ways, but all deal with transparent and well functioning
access to a political institutional structure. Economic development, unmatched
by commensurate political development, Krongkaew argues, will not lead to
development in a socially sustainable manner. Poverty is a particularly difficult

hurdle in achieving this objective given the apathy and indifference to the political
process often experienced by the poor, but reducing poverty without a change
toward a more positive political outlook will not be enough. Socially sustainable
development must include satisfactory political mechanisms and arrangements
so that an appropriate type and degree of democracy can be instituted.
Good governance in the public sector is often overlooked in most discussions
of socially sustainable development, yet corruption could be one of the most
critical factors influencing long-term growth and development. From the
existing data and information, a strong relationship has been shown to
exist between a country’s level of development and corruption. Therefore,
anticorruption efforts should be among the most urgent priorities for Asian
countries in their efforts to achieve sustainable development.
Krongkaew states that freedom from poverty lies between the basic rights
of the individual’s own person and the rights of the society to live together.
Freedom from poverty strengthens and makes a society economically and
culturally sustainable. The highest form of human rights is the right to create,
develop, and enjoy one’s own cultural and spiritual lifestyle. Sustainable long-
run development, therefore, must strive to achieve this level of human rights.
Countries in Asia are still striving to attain a socially sustainable path
of development and this will only become more difficult in the immediate
future. Krongkaew argues that what is most needed right now is more than
the correct choice of economic policies (market-based philosophies will take
care of that), but a correct political system where people enjoy basic political
and human rights, fully understanding the true nature of democracy. Both
the political and corporate sectors need to engage in fair play and act in a
socially responsible manner.
In his remarks on the paper, Arsenio Balisacan agreed with the need to
expand the concept of sustainable development to include political processes,
culture, and ethics, but questioned its ability to inform critical policy choices,
especially among resource-poor countries. He points out that taking a broader
view of income measures, evidence across countries at the sub-national level
shows that there is usually no direct correspondence between income and
expenditure measures, on the one hand, and human development and social
outcomes, on the other. Indeed, the heterogeneity of the response is the most
consistent relationship between poverty reduction and growth, even between
countries of similar income levels. This, Balisacan argues, is a key feature of
the development experience.
Overview 15
Poverty and inequality are multidimensional concepts. The key challenges
for society are to determine which policy levers are required to bring about both
sustained growth and poverty reduction. It is important to pay attention to the
details. Balisacan points out that for a particular country, it is the inequality
within groups that typically accounts for much of the inequality, and this is
the case for Asian countries as well. He argues that to improve the spatial
disparities that often accompany the development process, priority should
be given to improving market links to allow greater factor mobility. He also
states that by improving the social services in a region—particularly education
and health—lagging regions can catch up.
In the final paper of this session, Matthias Ruth discusses the major
challenges in Asia’s determination to develop along an environmentally
sustainable path. These challenges are: (i) population growth, especially in
urban areas; (ii) the growing contribution of Asian economies to global climate
change; and (iii) the vicious circle of using growth to solve the very problems
growth is causing. Between 2005 and 2030, Asia’s urban population is expected
to grow by over 70%, with countries like Viet Nam, Pakistan, and Cambodia
experiencing growth in excess of 100%.
This has wider implications than for social policies and mass transit alone.
As both main contributors to and victims of climate change, cities need to
develop effective policies to mitigate and adapt to changing conditions. This
applies particularly to vulnerable areas that include agricultural production,
infrastructure in coastal zones, water supply and treatment systems, adequate
and reliable energy supplies, and public health. While other regions in the
world face one or more of these challenges, Asia faces all of them. Given that
Asia is one of the most affected regions in this dual problem, it is in a unique
position to take the lead in designing effective solutions.
The paper goes on to argue that there is a difference between economic
growth and economic development, yet the two are often blurred in public
discourse and policy debate. Growth typically refers to size and, with respect
to economic activity, is often measured as changes in gross domestic product.
Development, on the other hand, implies qualitative improvements and
has less well-defined measures associated with it. The author suggests two
alternative measures for development: the Genuine Progress Indicator and
the ecological footprint.
Just as the last paper argued that attempting to measure sustainable
development outside the context of political sustainability will fall short of
the mark, Ruth argues that attempting to address climate change without
addressing existing social and economic conditions will likewise lead to

unviable solutions.
Instead of looking at the issues of climate change and economic growth
as either/or initiatives, Ruth argues that the interaction of the two provides
many more opportunities than obstacles. The rapid socioeconomic changes
taking place in Asia provide a chance to shape resource use and promote a
better quality of life for people as well as the ecosystem. The view must change
from seeing resources as being “diverted” from economic growth activities,
to understanding that they are being invested in technological development
opportunities. In addition, a lack of such investment in climate change
mitigation efforts will result in the costly use of precious resources down
the line—often in orders of magnitude much larger than initial investments
might entail. Not engaging in adaptation efforts means neglecting existing
vulnerabilities to climate vagaries.
The paper concludes by offering three recommendations. The first is to
increase social capital in cities to help develop coping mechanisms for the
challenges of climate impact. Second, reduce greenhouse gas emissions by
improving energy efficiency, as well as stemming the irreversible loss of valuable
assets. Finally, upgrade existing infrastructure and institutional procedures
to deal with the climate change resulting from past activities.
In his comments on Ruth’s paper, Kazuhiro Ueta argues that while these
recommendations are highly tenable, effective implementation can be less
forthcoming. A major field of investigation in environmental economics is
the need to integrate environmental conservation with economic growth.
Dealing with this supposed trade-off has occupied environmental economists
and policy makers alike for the past quarter century.
One way to approach the topic is through the so called decoupling policy.
Concepts surrounding decoupling can be classified into two groups. The
first, which includes the dematerialization theory, claims that decoupling
environmental impacts and growth can be accomplished through technological
innovation. The dematerialization theory deals with ways to reduce the amount
of materials used in the production of goods and services through various
technological advances.
The second group is centered on structural reform, as exemplified by
ecological tax reform. Higher tax rates on energy increase revenue that can
then be used to reduce the social burden of such a tax. These types of tax
reforms generate a so called “double dividend,” namely one dividend from
energy savings and the possible impetus to develop alternative energy, and
Overview 17
another dividend from the expansion of social programs. Ueta concludes by
urging theoretical and empirical researchers to join forces in developing a
multi-level environmental governance agenda.
5. How can Developed and Developing Countries Work

Together to Tackle the Big Economic Development
Issues?
The conference ended with a panel discussion on how developing and developed
countries can work together to solve the major economic issues of the day,
notably the Doha Development Round under the WTO, global warming, and
the current economic and financial crisis. Essentially, sustainability is the key
to future growth, effective global governance, and long-term globalization.
It was generally acknowledged that the Asian FTAs could easily be built as
a complementary process to the WTO and perhaps serve as a mechanism
to jump start these negotiations. But, this should be taken in conjunction
with the need for developing countries to develop high-end value-added
production. While food security, energy security, and environmental security
were all seen as communal issues across the world, it was acknowledged that
while the global crisis was still in full swing, countries’ attentions would be
focused on emerging from this crisis with their economic security intact. It
is perhaps in this realm that the largest advance in developing-developed
country cooperation could be made, and Asia is in the best position to take
a leading role in that change.
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2009).
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but Prices Could Spike Again. Development Asia 2. Available: http://development
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Keynote 19
Keynote Address
II
The International Agenda: Immediate Priorities and
Longer-Term Challenges
Jean Pisani-Ferry
I commend the choice of topic for this year’s conference: Asia’s contribution
to global economic development and stability. Stability is a global public good
and nowadays it is in very short supply, to say the least. To paraphrase John
F. Kennedy, it is the time to ask not what economic stability can do for you,
but what you can do for it.
I cannot remember a time when the sense of commonality was as high as it is
now amongst countries participating in the world economy. It is truly remarkable
that policymakers coming from different backgrounds and subject to different
political constraints have been able to agree at the recent Group of Twenty (G20)
meeting in Washington on a set of principles to respond to the crisis.
However, several issues relating to the current crisis need attention. I will
focus on:
• The short-term response,
• The longer-term issues, and
• The institutional dimension.
1. The Short-Term Response
The speed at which policy thinking has evolved in recent months is striking.
Many of the measures taken over the last year were unthinkable before 10
August 2007 and many of those introduced in recent weeks were unthinkable
before 15 September 2008. There have been mistakes—some of them minor,
like the European Central Bank decision to raise interest rates in July, some
of them major, like the United States (US) Treasury decision to let Lehman
fail—but throughout the world there has been a remarkable ability to innovate
and learn from mistakes. This is a major difference from the experience of
the Great Depression.
Why is this so? One reason is that there have been marked improvements
in the ability of policymakers to learn from research insights, due to the closer
relationship between research and policy. Throughout the crisis academics
have participated actively in policy discussions and they have helped break the
instinctive reluctance toward bold decisions that characterizes government
bureaucracies. Ideas have moved at unprecedented speed from seminars to
blogs and from there to legislative bills. Also, policymakers have studied past
experiences and have drawn lessons from them. This is especially true of the
Japanese banking crisis of the 1990s, where the errors made in dealing with
it, and the eventual success, have served as a lesson. Nevertheless, it remains
to be seen whether the current response will be sufficient and appropriate.
By “sufficient,” I mean proportionate to the problem. The shock we are
suffering from is of unprecedented magnitude and it is important not only
to cushion its effects, but also to address the risk of a vicious circle between
financial market developments and economic developments. This risk is still
very much present and this is why governments need to act forcefully. North
America, Europe, and East Asia each represent about one quarter of world
gross domestic product (GDP) at purchasing power parity exchange rates.
Each needs to contribute to supporting global demand.
Everywhere, monetary policy has moved or is moving aggressively toward
easing—where there is still room—and unconventional measures are being
contemplated. But there are limits to the effectiveness of monetary policy
when money markets are clogged and when banks, uncertain about their
own solvency, are reluctant to take the risk of lending.
On the budgetary front, we learn from the US that a major fiscal support
initiative is being contemplated. In Europe a coordinated response is desirable
(Pisani-Ferry, Sapir, and von Weizsäcker 2008) but it is likely to be somewhat
weaker. The European Council has endorsed the principle of a fiscal boost
amounting to 1.5% of GDP but some countries are reluctant. It remains to
be seen whether, on the aggregate, Europe will come up with something
significant.1 In East Asia, the People’s Republic of China has announced a
Saha and von Weizsäcker (2008) provide an evaluation of the size of the European stimulus
1
programs.
Keynote 21
major budgetary program and Japan and the Republic of Korea have also
moved toward providing support.
What we are likely to see is, on the whole, a rather uneven reliance on
fiscal support. This can be regarded as a natural development as long as the
magnitude of the stimulus is roughly commensurate with the magnitude of
the shock. After all, not all countries are affected to the same degree. The
US has been hit much harder than the other major countries, and whereas
Europe suffered directly from the financial crisis, for Asia the trade channel
is more important.
However, there would be reason for worry if responses were to differ too much
or in a way that does not correspond with economic realities. Supporting global
demand is a common goal and it is important to avoid free-riding behavior. If
such behavior were perceived to be the case, governments would most probably
shift to supply-side measures, giving preference to subsidizing their producers
rather than to supporting global demand. This temptation is already visible.
This brings me to the appropriateness issue. The lessons from history are
very clear: in a major downturn it is of utmost importance to avoid having
recourse to trade-distorting or trade-reducing measures. This is why we can
commend the commitment to this end included in the G20 communiqué and
the more recent Group of Seven (G7) pronouncement—and regret that some
countries have started departing from it.
The devil is in the details and the temptation is to support producers through
trade defense, subsidies, or non-cooperative exchange-rate policies. Already
we are seeing signs of such temptation on all three continents, and temptation
can only grow as the recession unfolds. To be honest, there is more involved
than just temptation. Governments that embark on major budgetary support
to banks or nonfinancial companies are accountable to domestic taxpayers
about the use of public money, and we need to recognize that there is for
this reason a true tension between the logic of democratic accountability
and the logic of economic integration. So a good start has been made, but
it is not enough. The current crisis will test every country’s commitment to
international cooperation.
2. The Longer-Term Agenda: Policy Issues
Dean Acheson, who represented the US State Department at the Bretton

Woods conference, noted in his memoirs that the gestation period of these
agreements had been “about twice as long as that of an elephant.” Indeed it

was in 1941 that Keynes and Harry Dexter White had embarked upon the
design of the monetary and financial architecture that 44 countries signed
up to in July 1944.
This tells us something about the level of ambition of the discussions
initiated at the G20 summit in November. If the goal really is to rebuild the
foundations of international financial stability, one has to start from a clear
idea of what the problems are and what the likely solutions will be. One also
needs to accept that the process of international reform will take years rather
than months, especially as there is no generally accepted blueprint to start
from.
At the risk of overstatement, I would argue that the agenda for
regulatory reform is, intellectually at least, rather straightforward. Many
of the developments that have led to the current crisis can be attributed to
pervasive regulatory failure. Economic theory—event economics 101—tells
you that, in a world of imperfect information, the way contracts are designed
is essential for determining attitudes toward risk. The standard contracts for
credit origination, rating, and executive pay, to take only three examples,
were bound to create perverse incentives toward inadequate risk evaluation
and/or excessive risk-taking.
The solutions are certainly not self-evident. There are discussions, for
example, between those who blame accounting standards and those who
blame prudential ratios. There are trade-offs involved in the choice of response,
especially between controlling risk and fostering innovation. There are
institutional issues. There is the international dimension. But at least the
diagnosis is well established and the type of response required is clear.
However, it would not be enough to address the regulatory failures one
by one. Regulators do not think in systemic terms and they tend to miss
correlations across risks. The most novel and challenging part of the agenda
for reform is what is usually termed the macro-financial dimension. That is,
the assessment of and response to threats to financial stability that arise from
overall financial developments under certain macroeconomic conditions.
On this issue there is much less clarity. It is telling that the G20 communiqué
is, purposely or not, remarkably vague on the macroeconomic dimension.
The key paragraph reads “major underlying factors [...] were, among others,
inconsistent and insufficiently coordinated macroeconomic policies, inadequate
structural reforms, which led to unsustainable global macroeconomic
outcomes” (G20 2008: paragraph 4). This is obscure in the extreme.
Keynote 23
The analytical question for economists is twofold:
• Whether monetary policy in the US should have been more restrictive and
whether this would have helped to avoid an excessive rise in asset prices,
and
• Whether what we used to call global imbalances contributed to creating
the problem and whether a less complacent attitude toward them would
have helped.
These are closely related but not identical questions. The second one is
broader because it involves other potential policy remedies, including fiscal
and regulatory policies.
On monetary policy I have sympathy for the view expressed by the US
Federal Reserve that somewhat tighter monetary policy would have helped
contain the housing and credit bubble but would not have changed the overall
picture fundamentally. A central bank whose mandate is to maintain price
stability (and even more, one whose mandate is dual, like the Fed) can factor
in the risk that asset price inflation will ultimately translate into price inflation
and therefore err on the side of caution, but it cannot go much beyond. The
low interest-rate environment clearly contributed to the asset-price bubble (or,
to put it differently, there is certainly an interest rate level that would have
been sufficient to avoid its development), but for the Fed to prick the bubble,
it would have had to raise interest rates much more aggressively than allowed
by its mandate.
There is more in the view that global imbalances contributed to the problem.
Remember Ben Bernanke’s global savings glut or the academic version of
the same story, the model of Caballero, Fahri, and Gourinchas (2007). The
rationalization given to global imbalances was in both cases that the US had
a comparative advantage in the supply of financial assets and that the rest of
the world had high demand for those assets. So the simple story is that there
was excess demand for US AAA assets and the US financial system responded
by manufacturing more assets of lower quality.
This simple story is not entirely satisfactory. It does not tell us why the
balance between demand and supply involved quality rather than price
adjustment, nor why European rather than Asian institutions accumulated
toxic assets on their balance sheets. After all, Europe was not exporting much
of its savings, so a more elaborate story must explain why Asia bought plain
vanilla government bonds while Europe bought the toxic waste.
But the story is sufficient to warn against the neglect of the macro-financial
dimension and to suggest responses that take it into account, both nationally
and internationally. To start with the national dimension, if macroeconomic

developments played a role in creating favorable conditions for excessive risk
taking, then as in previous financial crises, and if there are limits to what
monetary policy can do to counter them, this has implications for regulatory
design. Put simply, the less macroeconomic factors are taken into account,
the tighter sector-specific and product-specific regulations have to be because
they have to be suited to situations that are auspicious for risk-taking.
It is like deciding on safety standards for a car and its components. Road
quality standards, speed limits, and signposts on the road are also there to
ensure safety, and the less effective they are, the more your car needs to be
equipped for rough conditions.
This is why the macro-financial issue is high on the agenda. At the national
level, proposals have been made to equip policy institutions—either the central
banks or an institution in charge of market stability—with new instruments
to tame threats to financial stability (see, for example, Shafer 2008). But there
are other options to address the problem. There is no water-tight distinction
between micro and macro responses: automatic financial stabilizers stand
somewhere between the macro-blind regulatory response and the discretionary
macro response. For example, Kashyap, Rajan, and Stein (2008) have proposed
giving incentives to banks to subscribe to state-contingent capital insurance
to make sure that they would automatically have access to additional capital
in case of macro-financial stress.
This brings us into the familiar “rules vs. discretion” debate. How to strike
the balance between automatic stabilization and discretionary intervention
is bound to be an important issue on the policy agenda.
Turning to the international dimension, two issues deserve attention. The
first has to do with the international spillover effects of regulatory policies.
These are important, as uneven regulatory requirements are bound to trigger
capital flows and/or the relocation of financial actors, and this has implications
for the choice between rules-based and discretionary approaches: rules
lend themselves more easily to coordination among independent national
regulators.
The second issue is that recognizing the importance of macro factors
highlights the importance of effective multilateral surveillance of the risks
to global financial stability and their links to macroeconomic developments.
This surveillance does exist—in fact, the Global Financial Stability Reports of
the International Monetary Fund (IMF) and the Annual Reports of the Bank
for International Settlements for 2006 and 2007 included strong warnings. But
Keynote 25
its effectiveness has been limited. This brings me to my last point: international
institutions, their role, and their effectiveness.
3. The Longer-Term Agenda: Institutions

It is appropriate to start with two major changes in the landscape:
(i) Emergence of the G20 as a substitute to the G7
(ii) Emergence of the Financial Stability Forum (FSF) as an effective
regulatory body
Each has its problems. The G20 is a welcome addition as recognition of
the reality of the current economic environment, but it has not yet passed
the test of time. It is large and diverse and unlikely to play the role of the G7,
which has been more successful in addressing the problems of others than
in addressing problems among its members. While the coordination record
of the G7 is weak, it has been successful in defining common positions on
Russia and Argentina. The transition to the G20 is therefore likely to be a
slow learning process. G7 countries have to learn that they are not running
the show anymore and emerging countries have to learn how to cope with
interdependence and the responsibilities this implies.
The FSF has been surprisingly successful so far (Angeloni 2008). It has no
status, no structure, no decision-making power, and no staff, but it has been
able to steer a coordinated regulatory response. The question is why it has been
successful: most probably because of a combination of a clear political mandate
from the G7, intellectual proximity among participants, and, paradoxically,
absence of formal powers. It is easier to engage in coordination when you
know that it does not entail any formal transfer of power. The question is
how the FSF will perform in the future. An enlarged FSF operating in a non-
crisis environment may face more difficulty reaching consensus and fostering
implementation of commonly agreed guidelines. Whatever the strengths and
shortcomings of these new institutions, however, the fact is that the landscape
has changed. This raises questions: what consequences for the institutional
architecture? Especially, what role for the IMF?
The IMF is not the central institution it once was, and it is not likely to
regain its past centrality. It is one among several. The current environment is
different from Bretton Woods’ time and even from ideas discussed at the time
of the Asian crisis. However, the IMF is in a better situation than a year ago
when there were questions about its relevance in a world of capital mobility.
It is now back in business and questions today are rather about the adequacy
of resources in response to increasing demand for assistance.
The regional challenges faced by the IMF are mostly, but not exclusively,
in East Asia. The response provided in Europe with programs in Central and
Eastern Europe suggests that its assistance can and probably will be combined
with regional support. In a situation of high risk aversion, the IMF label has
considerable, even indispensable, value.
However, conditional financial assistance is the monopoly business
of the IMF. What about its other businesses, especially surveillance? The
surveillance record is not strong. It has provided good analysis—and it has
strengthened intellectual credibility with Global Financial Stability Reports
and World Economic Outlooks. These have been more accurate than most
other assessments or forecasts—but there have been few results.
The weak surveillance of US macro and financial developments has
weakened the IMF’s credibility. Nobody can remember what the IMF told
the US authorities about their domestic policies. The Chinese insist that
surveillance must start with “the reserve currency-issuing countries” and
they have a point.
Exchange-rate surveillance as currently envisaged is a dead end. At US
insistence the IMF was recently given the ability to slate countries contributing
to “external instability,” but it has been unable or unwilling to say anything
clear to the People’s Republic of China. So the IMF has been too shy to resist
US pressure and then too shy to criticize the People’s Republic of China.
Multilateral consultations, on the other hand, were an innovative and well
thought-out initiative but, probably because of a lack of ownership among
participant countries, did not result in anything significant.
Which way forward for the IMF? There continue to be problems of
governance; it is very hard for an institution to openly criticize its major
shareholders. Further reform is needed, including through reducing and
consolidating Europe’s representation (see Ahearne et al. 2006), but it will
not be enough on its own.
One response could be to make country surveillance more independent.
Already the World Economic Outlook and Global Financial Stability Report
are issued under the responsibility of staff. Why not extend this to country
reports? To vote on an analysis is not best practice. Fund analysis should be
released under the responsibility of management.
On exchange rates there is an inconsistency in the procedures. A statement
by the IMF that a country’s policy contributes to external instability—let
Keynote 27
alone that it is manipulated—would almost certainly trigger a procedure at
the World Trade Organization. So we are speaking of quasi-judicial powers
and for them to be exercised the IMF would need quasi-judicial procedures.
The model should be that the World Trade Organization panels decide on
trade conflicts.
Absent such powers, the role of the IMF should be to provide expertise to
the G20, that is, to help to base discussion on sound analysis but not to decide.
This is what Mervyn King (2006) called the role of a cricket umpire instead
of a referee. We are thus talking of a complex and evolving landscape. Robert
Zoellick (2008) was right to speak of a “Facebook of multilateral economic
diplomacy.” And we know that on Facebook the important thing is to make
friends.
4. Conclusion
The challenge to policymakers is not to waste time before addressing the

urgent tasks ahead of them and not to lose the momentum for reform created
by the crisis. The sense of urgency and commonality that characterized this
autumn should not be lost.
At the same time, there are difficult issues that deserve to be analyzed
and discussed. While some aspects are clear, research is still far from fully
understanding the root causes and the mechanisms of the crisis—let alone
being close to drawing policy lessons from it.
Furthermore, the G20 has yet to develop the kind of common analytical
framework the G7 has been able to achieve, a framework that does not imply
consensus but does facilitate making the best of differences of view. So there is
a need to move fast while acknowledging that an unambiguous lesson born of
experience is that there is nothing the best possible science can do to shorten
the gestation period of a baby elephant.
References
Ahearne, A., J. Pisani-Ferry, A. Sapir, and N. Véron. 2006. Global Governance: The Agenda
for Europe. Bruegel Policy Brief No. 2006/07. December.
Angeloni, I. 2008. Testing Times for Global Financial Governance. Bruegel Essay and Lecture
Series No. 3. October. Available: http://www.bruegel.org/Public/PublicationPage
.php?ID=1170.
Caballero, R., E. Fahri, and P.-O. Gourinchas. 2007. An Equilibrium Model of Global Imbalances
and Low Interest Rates. American Economic Review 98(1): 358–393.
Group of Twenty (G20). 2008. Declaration of the Summit on Financial Markets and the World
Economy. Washington, DC. 15 November. Available: http://www.g20.org/Documents/
g20_summit_declaration.pdf.
Kashyap, A., R. Rajan, and J. Stein. 2008. Rethinking Capital Regulation. Mimeo.
King, M. 2006. Reform of the International Monetary Fund. Speech at the Indian Council
for Research on International Economic Relations, New Delhi, February.
Pisani-Ferry, J., A. Sapir, and J. von Weizsäcker. 2008. A European Recovery Programme.
Bruegel Policy Brief No. 2008-09. November.
Saha, D., and J. von Weizsäcker. 2008. An Evaluation of the Size of the European Stimulus
Packages. Mimeo. Basel, Switzerland: Bruegel. December.
Shafer, J. 2008. Restoring International Financial and Monetary Stability. Remarks at the
Reinventing Bretton Woods conference, New York, November.
Zoellick, R. B. 2008. Modernizing Multilateralism and Markets. Speech given at the Peterson
Institute for International Economics, Washington, DC, 6 October.
Regional Cooperation for Greater Global Stability: A Medium-Term Agenda 29
III
Regional Cooperation for Greater Global Stability:
A Medium-Term Agenda
Shinji Takagi
1. Introduction
The world economy is experiencing what some call the worst economic crisis
since the Great Depression. The impact of the global recession is being felt
in Asia with a slowdown in exports of final goods to the markets in North
America and Western Europe. Despite much ado about the decoupling of
Asia from the United States (US) and Europe, the economies of emerging and
industrial Asia have not been as immune to the global economic meltdown
as had been anticipated.
In relative terms, though, the impact on Asia appears limited. While the
outlook for Asia is clearly down from previous years, the latest update from
the International Monetary Fund (IMF) (January 2009) places the 2009
forecasts for developing Asia at 5.5% (compared to 7.8% in 2008 and 10.6%
in 2007). This contrasts with the forecast of 1.1% for the Western Hemisphere
and -0.4% for Central and Eastern Europe. At least collectively, Asia has not
experienced the kind of crisis that swept the emerging market economies of
Europe in recent months.
At least two reasons explain the comparatively limited negative impact of
the current global crisis on Asia. First, the region is not very well integrated
with the global financial system, the financial systems of many economies
in the region are relatively underdeveloped, and many countries still restrict
the cross-border flow of capital. Second, the region has been a net exporter
of capital since the East Asian crisis. This has allowed many economies to
avoid becoming susceptible to ebbs and flows of international capital and
thereby developing balance-sheet vulnerabilities that come from reliance

on external borrowing. Part of the net capital exports, moreover, has
been retained as official foreign exchange reserves: The region’s balance
of official reserves quadrupled over the decade following the East Asian
crisis of 1997–1998.
The recent experience has demonstrated that trade and financial
globalization is a double-edged sword. Globalization benefits the world by
giving countries opportunities to exploit their comparative advantage to the
fullest; it provides opportunities to lend and borrow, to allocate resources
in an efficient manner. As a result, when there is an economic boom in the
center countries, most countries in the system participate in the global
prosperity. By the same token, a large negative shock in the center countries
could also have ripple effects throughout the entire system. It spreads quickly
and profoundly affects the whole world. A globally integrated economy
can be a dangerous place unless there is a safety mechanism to prevent the
concentration of risks in the center and to diffuse the spread of negative
shocks when they do occur.
This chapter considers the lessons of the recent global crisis for Asia from a
medium-term perspective. The chapter does not consider what Asian economies
could do now to mitigate the immediate impact of the global crisis; in Asia (at
least outside the Association of Southeast Asian Nations [ASEAN]), a credible
institutional mechanism does not exist to make a collective response possible
at this time. The most that the region’s economies can hope to do is to start
the process of building an institutional mechanism to make sure that Asia
will contribute to a more stable world.
The rest of the chapter is organized as follows. Section 2 discusses the
nature of Asia’s output linkages both within the region and with the rest of
the world. Section 3 discusses Asia’s financial openness (which is a necessary
ingredient of financial integration) and how it compares with the level achieved
in other parts of the world. Section 4 explores the implications of a region that
is well integrated through trade but not so well integrated financially. Finally,
Section 5 offers a few conclusions.
2. Asia’s Intra- and Inter-Regional Output Linkages

2.1 Strengthening Regional Output Linkages
Economic integration has been progressing in Asia, mainly led by intra-
regional trade in parts and components. Within ASEAN+3, for example,
the share of intra-regional trade rose from around 30% during 1980–1990
to over 38% in 2006; with Hong Kong, China and Taipei,China included,
the share was almost 55% (Rana 2007). These figures were comparable to
67% in EU-25 and 44% among the North American Free Trade Agreement
(NAFTA) countries. Intra-regional trade provides a channel through which
a shock in one economy affects the output of another economy within the
region, both as final demand and as direct inputs into the production process.
Closely related is intra-regional foreign direct investment, which has recently
accounted for as much as half of the region’s total foreign direct investment
(Hattari and Rajan 2008). Direct investment in plants and equipment, in
particular, has created production networks in some industries that cut
across national borders.
Theoretically, the impact of economic integration on the nature of output
linkage is uncertain. If economic integration leads to greater specialization,
it could result in weaker output synchronization. If the direct trade
channel dominates (such that a positive output shock in one country, for
example, is transmitted as a positive demand shock across borders), there
is a presumption that output synchronization increases with economic
integration (Frankel and Rose 1998). Greater economic integration can
also mean that countries are increasingly faced with common shocks, in
which case output synchronization is also expected to strengthen. This is
an empirical issue.
Within Asia, there are at least two reasons to believe that interdependence is
creating a co-movement of output. First, because most trade within Asia consists
of intra-industry trade in parts and components,1 it propagates common,
industry-specific shocks across the region.2 Second, because the US and Europe
remain the principal export markets for Asia’s final goods—accounting for
over 40% of total exports—external demand shocks to Asian economies tend
to be similar, as has been demonstrated in the current global crisis.
More than 70% of intra-Asian trade consists of intermediate goods used in production (ADB 2007).
1
Rana (2007) showed intra-industry trade to be an important factor explaining the positive output
2
correlations in Asia.
Indeed, many recent studies have noted that the synchronization of Asian
business cycles has greatly increased (McKinnon and Schnabl 2003; Kawai
and Motonishi 2005; Sato and Zhang 2006; ADB 2007). Taking three-year
moving averages of quarterly gross domestic product (GDP), one would find
that the average output correlation of Asia’s 10 economies rose from a mere
0.07 during 1988–1996 to 0.54 during 1999–2007 (Figure 3.1).3 The correlation
for the post-crisis period typically becomes larger as the sample for the moving
average is lengthened (in part reflecting the impact of the East Asian crisis),
but a similar (though somewhat dampened) rise in the correlation is still
observed in contemporaneous data.
A number of analytical studies are almost unanimous in showing that
output links within Asia strengthened after the East Asian crisis (Table 3.1,
third column). The role of the People’s Republic of China (PRC) and (to a lesser
extent) Japan, however, is less certain. Moneta and Ruffer (2006) showed that
the PRC was not synchronized in terms of either GDP or industrial production,
while Japan was highly synchronized with Asia only in terms of industrial
production (but not in terms of GDP). On the other hand, Haltmaier et al.
(2007) used rolling regressions to estimate the contemporaneous output
correlations of an Asian economy with the PRC and the US and found that,
during 1970–2006, Chinese growth became more important for emerging
Asian countries. Moneta and Ruffer (2006), in particular, argued that the strong
synchronization of business cycles during 1993–2005 primarily reflected the
co-movement of exports.
Empirical work has confirmed the view that intra-regional trade has been
the predominant factor behind the increasing output synchronization in Asia.
For example, Choe (2001) found that, during 1981–1990 and 1986–1995, greater
bilateral trade dependence was on average associated with greater business cycle
synchronization among 10 East Asian countries (or 45 pairs)—the coefficient of
trade intensity on correlation was larger (and usually more statistically significant)
during the latter period. Likewise, Shin and Wang (2003) showed that increasing
trade had caused a greater co-movement of business cycles among 12 Asian
countries during 1976–1997, with intra-industry trade being the main channel
through which output shocks were transmitted.4 Cortinhas (2007) directly tested
3
The economies include PRC; Hong Kong, China; Indonesia; Japan; Republic of Korea (hereafter Korea);
Malaysia; Philippines; Singapore; Taipei,China; and Thailand.
4
Other recent studies that confirm the positive contribution of trade intensity to output synchronization
in Asia include Shin and Sohn (2006) and Rana (2007).
Figure 3.1: Asia’s Output Correlations with Itself, 1986–2007
Source: Adapted from Asian Development Bank (2008), Figure 5.1.
Table 3.1: The Decoupling of Emerging Asia: Selected Empirical Studies,

2006–2008a
Study Sample Period Impact of Output Impact of Output

Shocks Within Shocks in Industrial
the Region Countries
Moneta and Ruffer 1993–2005; 1990–2005 Increased over time Weak, particularly with
(2006) (1993–2005) b respect to North America
(1990–2005)
Asian Development Bank 1999–2006 (compared to Stronger Stronger
(2007) 1983–1996)
International Monetary 1986–2005 (compared to Stronger Weaker (but stronger for
Fund (2007) 1960–1985) spillovers from the United
States)
Rana (2007) 1989–2003/1989–2004 Stronger Weaker/strongerc
Kose, Otrok, and Prasad 1985–2005 (compared to Stronger Weaker

(2008) 1960–1984)
Akin and Kose (2008) 1986–2005 (compared to Strongerd Weaker
1960–1985)
Kim and Lee (2008) 2000–2007 (compared to Stronger Stronger
1990–1996)
Asian Development Bank 1999–2006 (compared to Stronger Stronger
(2008); also Takagi and 1988–1996)
Kozuru (2008)
Notes:
a
The definition of emerging Asia differs slightly from study to study. The results are therefore not strictly
comparable but are reported here for illustrative purposes.
b
Here the region includes only Singapore; Hong Kong, China; Korea; and Taipei,China.
c
The United States is the only industrial country considered.
d
Here, the region refers to all emerging market economies (as a group) irrespective of geography.
and confirmed the importance of intra-industry trade in generating business

cycle synchronization in ASEAN countries during 1962–1996.
2.2 Decoupling of Asia?

Within Asia, there has been a heated debate on whether the region’s output
linkage with the rest of the world has weakened as a result of increasing regional
economic integration (see ADB 2007). The “decoupling hypothesis” says that,
with recent growth and integration, regional demand has become more
important than global demand as a driver of Asia’s economic growth. There
is, however, a contrary view that states that, with commitment to openness
and the importance of the US and European markets as a destination for the
export of final goods, Asia’s economic linkage with the rest of the world has
actually intensified in recent years.
Again, taking three-year moving averages of quarterly GDP, one would
find that the average output correlation of Asia with the rest of the world
(consisting of the US and Europe) increased from 0.16 during 1988–1996 to
0.51 during 1999–2007 (Figure 3.2). This appears to be a fairly robust result
found in many studies. For example, ADB (2007) used contemporaneous
data to come to a similar conclusion about output correlations between Asia
and the rest of the world.
Several recent analytical studies have confirmed the broad conclusions from
using correlation analysis (though the empirical literature is far from conclusive).
Figure 3.2: Asia’s Output Correlation with the Rest of the World,
1986–2007
Source: Adapted from Asian Development Bank (2008), Figure 5.1.

For example, Takagi and Kozuru (2008) used vector autoregression methodology5
to show that the output linkage of emerging Asia as a group strengthened
both with Japan and the rest of the world (consisting of the US and Europe). In
particular, although almost 90% of the variance of Asia’s GDP (outside Japan) was
explained by a regional shock before the East Asian crisis, the percentage fell to
60% following the crisis (while that attributable to global and Japan shocks rose
to 30% and 10%, respectively, from 10% and 0%); while regional GDP responded
significantly only to a regional shock before the crisis, regional output became
significantly responsive to all shocks following the crisis.
The results appear to be sensitive to the choice of sample and methodology,
however (see Table 3.1, fourth column). Moneta and Ruffer (2006), for example,
showed that Asian growth was relatively little affected by developments in
industrial countries outside the region; IMF (2007) likewise found that
common global factors became less important drivers of national business
cycle fluctuations, while regional factors became more important among highly
integrated regions, such as emerging Asia (see also Akin and Kose 2008; Kose,
Otrok, and Prasad 2008).6 The same study also found that spillovers from
US growth onto global and national growth were significantly higher during
1986–2005 than during 1960–1985 (see also Kim and Lee 2008). The response
of Asia to the recent global crisis is an additional reminder that Asia remains
connected to the world in a serious way, whether the linkage has strengthened
or weakened over the past 10 years.
3. Asia’s Financial Openness

3.1 Measuring Asia’s Financial Openness
There is a presumption that the strengthening of output links in Asia has
largely been driven by trade integration, with financial integration playing
They considered a three-region model, consisting of global, Japanese, and regional outputs. Asia
5
included, in addition to Japan, PRC; Hong Kong, China; India; Indonesia; Korea; Malaysia; Philippines;
Singapore; Taipei,China; and Thailand. The rest of the world included Belgium, France, Germany,
Italy, Netherlands, Spain, US, and United Kingdom. Global and regional GDPs were the weighted
averages of the individual country GDPs in the respective regions, with 2,000-dollar GDPs used as
the weights. Their results were robust to the choice of ordering.
Regional factors accounted for 41% of the output fluctuations in emerging Asia. With Japan added,
6
the contribution of regional factors to output fluctuations increased from 9.5% during 1960–1985 to
34.7% during 1986–2005, while the contribution of global factors declined from 10.6% to 6.5% over
the same period.
a smaller role. Imbs (2004, 2006) showed that stronger financial links could
increase not only consumption correlations (as theory suggests) but also
output correlations. But in the context of East Asia,7 Shin and Sohn (2006)
found little evidence of financial integration (proxied by monthly interest rate
correlation) contributing to a co-movement of output during 1971–2003. The
weaker financial-output link for Asia may well mean that financial integration
in the region has not fully kept pace with real integration. In fact, there is
good evidence to support such a view.
Financial integration can be measured in several ways, but no matter how
it is defined, it has a strong policy component. Deeper financial integration
will not take place unless policymakers try to promote the development of
domestic financial markets and to dismantle legal and regulatory restrictions
on cross-border financial transactions. Asian economic integration has been
largely a market-driven process. It is thus understandable that regional financial
integration has lagged behind.
To obtain a sense of how Asia’s financial integration stands, relative to
its past as well as to other regions, I used saving-investment correlation as
a measure of average financial openness for the region. Saving-investment
correlation has several conceptual problems, but it has the benefit of being
obtainable for a large number of economies on a consistent basis. Moreover,
recent research indicates that it contains useful information about the broad
direction of change in average financial openness in a region (see Takagi and
Taki 2008 for further discussion). For example, with the financial globalization
of the 1990s and 2000s, there has been observed a substantial secular decline
in saving-investment correlations in many parts of the world,8 while work
based on intra-national data has consistently shown that correlation within
a sovereign nation is small or often nearly zero.9
7
East Asia includes PRC; Hong Kong, China; Indonesia; Japan; Korea; Malaysia; Philippines; Singapore;
and Thailand.
8
Taki (2008), for example, reports that the coefficient (β) (the FH coefficient) for Organisation for
Economic Co-operation and Development (OECD) countries declined from 0.66 during 1975–1979
to 0.10 during 2000–2003.
9
Taki (2008) reported that the coefficient for Japanese prefectures was consistently small over 1975–2004;
the coefficient could even be negative, indicating the impact of fiscal transfers within a sovereign nation.
Other studies based on intra-national data have indicated a similar result, with a coefficient estimate
ranging between -0.11 for the US and 0.15 for the PRC (Sinn 1992; Boyreau-Debray and Wei 2002).
Table 3.2 reports the estimates of β when the investment-to-GDP ratio is
regressed over the saving-to-GDP ratio, as follows:
(I/Y)i = α + β (S/Y)i + εi, (1)
where I is domestic investment; S is domestic saving; Y is domestic income;

α and β are coefficients to be estimated; ε is a random error term; and i is
a country subscript. It was the seminal work of Feldstein and Horioka (1980)
that first postulated that the coefficient (β)—henceforth referred to as the FH
coefficient—would be unity in the complete absence of capital flows and zero
under perfect capital mobility.
Three observations are immediate from Table 3.2. First, there is a strong
indication that Asia’s average financial openness increased over the period: The
Table 3.2: Estimates of β for Regions and Country Groups, 1990–2006a
Regions or country groups 1990–1999 2000–2006

Asia-Pacific: b
ASEAN+3 (10) 0.534 (0.067) 0.349 (0.169)
ASEAN+3 (7) 0.470 (0.103) 0.223 (0.162)
Europe:
EU (27) 0.109 (0.141) 0.080 (0.078)
Euro Zone (15) -0.131 (0.178) 0.049 (0.075)
Other Parts of the World:
MERCOSUR (10) 0.229 (0.201) 0.284 (0.134)
Africa (38) -0.063 (0.144) 0.092 (0.064)
CFA Franc Zone (12) 0.524 (0.375) 0.255 (0.080)
Other Groupings:
OECD (24) 0.152 (0.146) 0.020 (0.070)
G7 (7) 0.808 (0.141) 0.329 (0.168)
ASEAN = Association of Southeast Asian Nations, EU = European Union, MERCOSUR = Southern Common
Market, OECD = Organisation for Economic Co-operation and Development.
Notes:
a
Figures in parentheses indicate the number of countries in each region or group (first column) and standard
errors (second and third columns); depending on data availability, the list of countries in each region or group
may not be exhaustive.
b
ASEAN+3 (7) includes Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand; ASEAN+3
(10) includes ASEAN+3 (7) plus Cambodia, People’s Republic of China, and Viet Nam.
Source: Takagi and Taki (2008), Table 2.
estimated FH coefficient declined for both groups. The decline is particularly

substantial for the seven advanced members of ASEAN+3, for which the
estimate fell from 0.470 during 1990–1999 to 0.223 during 2000–2006. This
latter estimate (0.223) is not statistically significant.
Second, looking at other parts of the world, we cannot say that financial
openness increased consistently over the same period. This is true especially
of Europe, which most likely means that the degree of openness was already
high during 1990–1999. Financial openness changed little among the Western
Hemisphere countries, despite the fact that the region was not as open as Europe
to begin with. The extremely low estimates for Africa must be interpreted
with care, because this could mean that the share of official development
assistance in financing domestic investment is large (relative to GDP) in many
countries (the coefficient for the Communauté Financière Africaine countries,
however, is much larger).
Third, comparing the coefficient estimates across regions and country
groups, we note that the degree of financial openness in Asia, even for the later
2000–2006 period, is not very high relative to Europe or the Organisation for
Economic Co-operation and Development (OECD) members. Asia’s openness
(of 0.22–0.35) appears comparable to the degree observed in the Western
Hemisphere (0.28).10 Although comparison with Africa is difficult, Asia as a
region remains among the world’s least financially open—hence integrated—
despite the great advances made in real integration over the years.
3.2 Explaining Asia’s Limited Financial Integration
The limited volume of cross-border capital flows observed in Asia is consistent

with the region’s low average financial openness (and integration). Kim, Lee,
and Shin (2006), estimating a gravity model of bilateral financial asset holdings
for 1999–2003, found that the East Asia dummy had no additional explanatory
power (indicating a lack of financial integration beyond what could be explained
by trade) and concluded that financial links during 1999–2003 were almost
entirely explained by trade. Indeed, the volume of autonomous capital flows in
Asia is rather limited relative to other regions. For example, trend gross capital
10
The estimate of β for the Group of Seven (G7) countries declined substantially over the period but
remained high for the second period (0.329). This likely reflects the fact that the group includes large
industrial countries, such as US, Japan, and Germany, for which the global budget constraint becomes
more binding.
flows in ASEAN+3 over 2000–2004 were only 15–18% of GDP, compared to
39–46% in the OECD, over 40% in the European Union (EU), and 55–56%
in the Euro Zone (Figure 3.3).11
Moreover, for the capital transactions that do take place, Asian economies
are financially more connected with the global financial centers outside the
region than with each other (see Eichengreen and Park 2004 for cross-border
bank credit flows; Kim, Lee, and Shin 2006 for cross-border securities and
bank assets). Cowen et al. (2006), based on the IMF’s portfolio survey, showed
that Asia’s portfolio liabilities to other Asian countries amounted to only
2.25% of regional GDP in 2004, less than one-third the liabilities to either
Figure 3.3: Trend Gross Capital Flows, 2000–2004 (in % of GDP)
ASEAN = Association of Southeast Asian Nations, EU = European Union, GDP = gross domestic product,
OECD = Organisation for Economic Co-operation and Development.
Notes:
a. Figures in parentheses indicate the number of countries in each region or group; depending on data
availability, the list of countries in each region or group may not be exhaustive.
b. ASEAN+3 (7) includes Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand; ASEAN+3
Source: International Monetary Fund (various years[b]).
11
The Hodrick-Prescott filter was used to remove cyclicality from the volatile time-series of capital
flows. Each region or country group in Figure 3.3 includes fewer countries than Table 3.2 because of
data limitations.
North America or the EU. ADB (2008) noted that Asia held less than 10% of
its total portfolio assets within the region in 2006, while the share held in the
US was nearly 30%; for portfolio liabilities, the corresponding shares were
11% (within the region) and nearly 40% (in the US). A substantial portion of
Asia’s savings appears to be recycled back to the region through the global
financial centers in the US and Europe.
Capital account restrictions and financial underdevelopment are among the
factors responsible for the lack of financial integration in Asia. First, Asia as a
region maintains a wide range of restrictions on capital transactions (though
some economies in the region have a highly open capital account regime). In
terms of the IMF’s de jure measures of exchange and capital controls, Asia not
only remains more restrictive than groups of industrial countries, but also has
changed little since the currency crisis (Figure 3.4).12 In fact, Asia’s exchange and
capital control regimes are among the most restrictive in the world, comparable
to Sub-Saharan Africa (where the index has also been in the 0.6 range).13
Second, Asia’s financial markets are underdeveloped relative to the advanced
markets of North America and Europe. The development of capital markets
is hampered by poor corporate governance rules, inadequate accounting
standards, and weak regulatory and legal frameworks (ADB 2008). According
to the World Bank’s financial sector development indicators, Asia’s stock
markets (including those in Japan and Singapore) rank low in the efficiency
rating.14 Except in some economies, the lack of deep corporate bond markets in
particular is limiting the availability of long-term financing to viable investment
opportunities. The banking system has improved considerably since the East
Asian crisis, but room remains for further reforms in enhancing competition,
promoting consolidation, and strengthening risk management skills.
4. Should Asia Promote Financial Integration?
Asia has reaped the benefits of trade integration without a commensurate

increase in financial integration. Asia’s relative financial isolation has allowed
12
The de jure index is based on 14 types of restrictions on foreign exchange and capital transactions.
13
This figure excludes the Communauté Financière Africaine zone, where the index has been around
0.9—the most restrictive in the world.
14
To give just a few examples, among the 58 countries rated in 2006, the PRC ranked 56th, Indonesia
54th, Philippines 53rd, Singapore 49th, and Thailand 45th.
it to limit its exposure to the fallout of the current global financial crisis. Also,
Asia does not seem to have suffered terribly by relying on world financial
centers to intermediate its rather limited flow of financial resources (at least
as a share of GDP). Does this mean that Asia should continue to pursue the
policy of limited financial integration? Not necessarily. A convincing case can
be made for promoting financial integration.
First, maintaining the status quo is not a sustainable policy option for Asia.
The region needs an efficient financial system for its own sake. The lack of liquid
and well-functioning bond markets is limiting the availability of long-term
local currency funding for viable and profitable investment projects. Financial
underdevelopment is also acting as a constraint on the region’s growing trade
and investment links. But with better financial systems, financial integration
will be a natural consequence.
Figure 3.4: De Jure Exchange and Capital Controls, 2000–2006

(Share of controlled transactions)
ASEAN = Association of Southeast Asian Nations, EU = European Union, OECD = Organisation for Economic
Co-operation and Development.
Notes:
a. Figures in parentheses indicate the number of countries in each region or group; depending on data
availability, the list of countries in each region or group may not be exhaustive.
b. ASEAN+3 (7) includes Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand; ASEAN+3
Source: International Monetary Fund (various years[b]).
Although the outcome of financial system development does not

discriminate between regional and global integration, given the nature of
information asymmetry in financial transactions, it should be biased toward
intra-regional financial integration. The fact that Asia’s savings are mostly
intermediated abroad is a reflection of the greater efficiency of the financial
centers outside the region; as the financial systems in Asia improve in efficiency,
geographic proximity, closer time zones, and more direct personal contacts
within the region should begin to create a “home” bias that has so far been
totally absent in Asia (ADB 2008).
Second, financial integration should not be assumed as an outcome of financial
system development: It should be actively promoted. Financial integration
facilitates further real integration. Imbs (2006), based on a sample of 41 countries
over 1960–2000, found that more financially integrated economies (in terms of
cross asset holdings) tended to have more synchronized output movements, even
after the effects of finance on trade and specialization were accounted for. Intra-
regional financial integration is expected to strengthen trade and investment
links both by creating new opportunities and by lowering the transaction costs
of cross-border activities. A more closely linked Asia will be a greater source of
demand for final goods from both within and outside the region.
In sum, the emergence of a “home” bias and the strengthening of real
links are expected to work together to mitigate the danger that the region’s
vulnerability to global shocks will increase as a result of financial integration.
Figure 3.5: The Hub-and-Spoke Structure of World Trade and Finance

Larger “point-to-point” trade and capital flows within the region will be a
form of insurance against the adverse impact of global shocks that originate
outside the region. This will represent a transformation of the current hub-
and-spoke structure of world trade and finance, which has been the source of
instability, to a more pluralistic structure (see Figures 3.5 and 3.6 for schematic
representations). It will be a more stable world for all parties.
Regional cooperation is essential in the process. First, cooperation facilitates
financial integration at the regional level by promoting the harmonization
of standards and regulations; through the sharing of best practices, it helps
establish a more resilient financial system. Second, regional cooperation
promotes sound macroeconomic policies that are consistent with financial
stability, through peer pressure and surveillance (designed to allow policymakers
to take account of the cross-border spillovers of each other’s policies). Third, as
a last resort measure, a regional crisis management facility—complementing
the global facilities provided by the IMF—would give the region’s policymakers
additional confidence.
5. Conclusion
The chapter has provided evidence—corroborated by a growing empirical

literature—that Asia’s financial integration has not kept pace with its real
Figure 3.6: The Pluralistic Structure of World Trade and Finance

integration. Driven mostly by increasing intra-regional trade in parts and

components, output synchronization has risen within the region in recent
years; at the same time, the output link with the rest of the world does not
seem to have weakened in the process. Financially, however, Asia remains
among the least open regions of the world; it may even be more integrated
with world financial centers outside the region than within itself. Although
this has allowed the region to remain relatively unscathed by the fallout of
the recent global financial crisis, the chapter has argued that maintaining the
policy of relative financial isolation is not a sustainable option for Asia.
First and foremost, Asia needs an efficient financial system for its own sake,
but with more efficient financial systems inevitably comes greater financial
integration. Second, paradoxically, actively promoting greater financial
integration will benefit both the region and the world. Given the nature
of information asymmetry in financial transactions, promoting financial
integration is expected to be biased toward intra-regional integration, which
in turn will strengthen trade and investment links within Asia. A more closely
linked Asia will create demand for final goods from within and outside the
region. It will help prevent the concentration of risks in the center and diffuse
the spread of any negative shock that may originate in the center.
To make the needed shift, Asian policymakers must begin by making
concerted efforts to develop a deep, efficient, and well-supervised financial
system, and liberalizing a substantial portion of restrictions on cross-border
capital transactions. Regional cooperation is essential, not only to push the
process forward but to give additional confidence to the authorities.
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Comments
Gang Fan
Three recommendations for Asian economies emerge from Professor Shinji

Takagi’s chapter, to which I fully agree. These economies should:
1. Continue to develop their financial markets;
2. Further open their financial markets and capital accounts and remove
more restrictions against capital flows; and
3. Promote regional financial integration that will reduce the dependence
on “center countries,” reduce transaction costs, and facilitate the further
development of real integration.
The questions are how and how much opening up and integrating should
be done.
1. Proportionate (Appropriate) Financial Development
One of the lessons from the recent financial crisis was not to allow a country’s
financial development to outpace or “bubble out” the real economy. The lesson
from the previous financial crisis in the region, i.e., the Southeast Asian financial
crisis (1997–1998) was that a developing country should avoid “overshooting”
in liberalization of its capital account and financial market and be careful
about the compatibility between its financial liberalization and its level of
economic development and institution building.
Comparisons are often made between Asian economies and the financially
open economies of the US, EU, or OECD, to determine why Asia is not able to
fully benefit from more efficient financial markets and freer capital flows. While
such comparisons can be instructive, we need to look at other differences between
Asian economies, particularly between developing Asia and more developed
countries. If we compare the current situation of a developing Asian economy
with other countries at the same economic level (having per capita income of
US$2,000, for instance), it is hard to say that the Asian one is behind schedule.
The level of development is important not only because it determines the amount
of financial assets a country has and what financial services it needs, but also
because it relates to conditions such as the level of education, the development
of legal and regulatory frameworks, the existence of a political system for checks
and balances, the sophistication of market transactions, and the knowledge of
the world market and management skills. These are all important conditions
for financial development and all relate to the economy’s ability to handle
financial risks and market fluctuations domestically and globally.
All countries should make efforts to develop their financial system and
eventually all countries should “converge;” these efforts must include risk-
control regulatory frameworks. However, the efforts needed will differ for
real economies that are at different levels.
2. Difficulties for Asian Financial Integration
A special difficulty for Asian financial integration is caused by wide diversity

among Asian economies in terms of development level; economic, legal, and
political system; and financial maturity. Europe took 50 years to reach full
financial and monetary integration. But even the Europe of 50 years ago was
more homogenous than present-day Asia. We have to account for this diversity
when thinking about financial integration in the region.
The Bretton Woods System and the post-Bretton Woods US dollar standard
international monetary system made it more difficult for monetary integration
to take place in a regional framework if that system could not provide common
reserve money. That is one of the reasons why businesses link themselves
directly to the “center country” or “center countries,” which provide the
convenience of common reserve currency (currencies), even if they have to
pay higher transaction costs.
3. Can Asian Countries Provide Partial Currency Reserves

to One Another?
Instability and imbalances were caused by the US dollar standard monetary
system in the past decades. This experience has taught us that we need to reform
the global governance of financial markets and the global monetary order.
Some foreign currencies are still needed to facilitate global trade and capital
transactions. That is why we may still need the US dollar or US dollar + euro to
serve as reserve currencies, particularly for the developing countries that need
to provide some reserves as collateral for trading because their own currencies
are not yet accepted as reserve currencies. This is independent of whether or
not the countries should adopt free-floating foreign exchange regimes.
If more alternative and competing reserve currencies mean a more stable
global financial system (a yet untested hypothesis), we may increase regional
and therefore global financial stability by creating a mechanism to reduce our
dependence on the US dollar and provide alternative reserve currencies.
As an intellectual exercise, imagine a mechanism of “cross-holding”
of the currencies of other economies in the region as part of a country’s
official foreign exchange reserves, proportional to each country’s trade
structures with other economies. For instance, if the imports of the PRC
from Thailand count for (say) 3% of the PRC’s total imports, the PRC may
hold 3% of its total foreign reserves in Thai baht (instead of US dollars),
and vice versa for Thailand.15 If the trade balance itself cannot meet the
holding requirement under the agreement, the country should swap for
the “targeting currency” with some other acceptable currency(ies) in the
reserve. For instance, if the PRC is running trade deficits against Thailand
and cannot increase its holdings of Thai baht through trade, it should “buy”
Thai baht using other currencies that Thailand accepts. This approach may
avoid negotiation costs.
The commitment of governments is necessary for any trial of this regional
integration initiative. At the beginning, corporations do not need to denominate
and intermediate their trades in local currencies. As long as governments
start to hold reserves of the currencies of their regional trade partners, the
choice will be available and corporations may start to use this mechanism if
they see opportunities to avoid risks with other currencies. Later on, private
foreign direct investment may also become part of the mechanism before
cross-border financial liberalization. It will definitely make trade and foreign
direct investment easier and will give stakeholders the sense of mutual trust
and integration.
At the trial stage, we may think of a “partial scheme.” For example, a country that has 40% of its total
15
trade in intra-regional trade may only need to hold 10% or 20% of total intra-regional reserve cross-
holding if everyone does the same. But the holdings of each country’s assets in this 10–20% may still
be proportional to the shares of trade.
Unlike the current “currency swap” system, this cross-holding approach

does not require a major international balance of payment crisis to be tested
and start to function. It is also different from the regional “reserve fund,”
which is supposed to use a pool of foreign reserve currencies (including the
US dollar and the euro) and is also not functioning on an ongoing basis. All
economies that subscribe to the cross-holding agreement can get reserves right
away and get interest payments (or lose money) immediately on each other’s
financial assets. This is the way to make all participants mutual stakeholders
of one another. In addition, the diversification of reserve money holdings is a
good approach to reduce the systematic financial risks in the current global
financial market.
Through this initiative, we may reduce our reliance on the US dollar and
further increase intra-regional trade. This will contribute to the reform of
the global monetary system and the stability of the global financial market
in addition to the development of regional economies.
Asia’s Role in Stabilizing Food and Agricultural Prices 51
IV
Asia’s Role in Stabilizing
Food and Agricultural Prices
Kym Anderson
1. Introduction
The theme of ADBI’s annual conference, on Asia’s contributions to global

economic development and stability, was timely for several reasons, including
the rapid rise of food, petroleum, and other primary product prices in 2007–
2008 in response to high growth in Asia’s large emerging economies; the
sudden deceleration of the world economy in the second half of 2008; and
the widespread recession that followed. The focus of this chapter is on the
region’s contributions via policies affecting the agricultural sector, and, in
particular, on the role of Asian governments in stabilizing the prices of food
and other agricultural products.
Food price gyrations worry the poor even in high-income countries, but are
especially important in low-income countries where poorer households spend
most of their income on food. Upward spikes clearly hurt buyers of food, but
downward spikes in the prices of farm products can also negatively affect a
large proportion of households in developing countries, for which agriculture
is a major source of employment and gross domestic product (GDP). National
This is a product of an ongoing World Bank research project on distortions to agricultural incentives,
under the author’s leadership (www.worldbank.org/agdistortions). The author is grateful for the efforts
of the nearly one hundred authors who provided country case studies for the agricultural distortions
project; for computational assistance from a team of assistants led by Ernesto Valenzuela that brought
together the global agricultural distortions database; for help with some of the graphs from Jayanthi
Thennakoon; and for funding from various World Bank trust funds, particularly those provided by the
governments of the Netherlands and the United Kingdom, as well as by ADBI. Views expressed are the
author’s alone and not necessarily those of the World Bank or its executive directors.
policies that reduce the amplitude of domestic agricultural price fluctuations

over time therefore help domestic consumers at the expense of the country’s
farm households, or vice versa.
The policy instruments used for this purpose are typically the same as
those used to alter the trend level of domestic agricultural prices, namely
trade policy measures.1 When many national governments intervene with
variable trade taxes or quantitative restrictions, the share of global production
that is traded shrinks, making the international market “thinner” than it
otherwise would be. This erodes the international public good that open
national economies generate through trade, not only because the normal
economic gains from trade are diminished, but also because an international
market that is thinner for this reason is more volatile. This greater volatility
entices even more governments to intervene to stabilize their domestic food
markets, further increasing international price volatility. This is especially
bad for the development of open agricultural-exporting economies, as history
has shown that volatility in a country’s long-run trend terms of trade slows its
economic growth (Williamson 2008). Such a beggar-thy-neighbor unilateral
policy action generates an international public “bad,” suggesting there is scope
for collaborative action.
Section 2 of this chapter looks at how large the fluctuations in real
international food prices are, both absolutely and relative to those for other
primary products, and how the price spike of 2008 compares with earlier
spikes. Section 3 examines how much agriculture has lagged behind other
sectors in expanding the extent to which its products are traded internationally
in the latest wave of globalization, and how Asia compares with other regions
in this respect. In Section 4, new evidence is presented on the impacts
government policies have had on farmer incentives in Asia as compared
with elsewhere, in terms of both long-term trends and fluctuations from
year to year. The final section examines what can be done by governments
in Asia and elsewhere, both unilaterally and collaboratively, to achieve more
1
These are occasionally supplemented with government storage initiatives, which are largely ineffective
or too expensive, and so tend to be short-lived. Managing public food stockholdings is difficult because
of uncertainty regarding the quantity of stocks needed and how much to release at any time. Stock
mismanagement can even be destabilizing, as appears to have been the case in 2008, with some attempts
to create or expand stocks when food prices were at their peak. Stocks are a large drain on the treasury,
particularly when displacement of private stocks is taken into account. Their interaction with trade
policies also needs to be carefully considered. If, for instance, farm output falls for a product protected
only by an import tariff, sales from stocks will reduce imports but do nothing for the farmers whose
output has fallen.
efficient and equitable outcomes in the future, while improving stability
and growth and alleviating poverty.
2. The 2008 Commodity Price Hike in Historical

Perspective
The international price of rice nearly trebled in the first few months of
2008, sending politicians, bureaucrats, and consumers into a panic. Some
governments responded with restrictions on their exports of rice, which
exacerbated the situation for rice-importing countries. Prices of other grains
and oilseeds also rose rapidly, though none as much as for rice. As a result, the
World Bank’s food price index in the second quarter of 2008 was 55% above
its 2007 level in nominal United States (US) dollar terms. Figure 4.1 shows
quarterly grain prices for the decade to mid-2008. In the second half of 2008,
however, they—and most other primary commodity prices—roughly halved,
again in nominal US dollars.
2.1 Drivers of the Recent Food Price Rise

Causes of this latest food price spike have been much debated (International
Food Policy Research Institute [IFPRI] 2007; Mitchell 2008; Organisation for
Economic Co-operation and Development [OECD] and Food and Agriculture
Organization of the United Nations [FAO] 2008; Stoeckel 2008; Meyers
and Meyer 2008). On the supply side, grain reserves had been run down
over the first half of this decade in response to low prices so that, when
crop failures occurred in some grain-exporting countries in 2006–2007,
supplies could not be replenished until the following harvest.2 Meanwhile,
the steady rise in petroleum prices—due in large part to the rapid growth of
Asia’s emerging economies—and hence, also in urea fertilizer prices (Figure
4.2), added substantially to farmers’ costs, which dampened their incentive
to expand output.
On the demand side, two sets of changes coincided. One was the impact of
rapid income growth in Asia on the demand for high-protein foods, including
meat and milk. This demand drove up the prices of these products, but also
In 2006, global grain reserves comprised less than one-quarter of annual consumption, compared
2
with more than one-third during 1997–2001 (Stoeckel 2008). By 2007–2008, they accounted for only
one-sixth (Meyers and Meyer 2008).
Figure 4.1: Nominal International Market Prices for Wheat, Rice, and
Maize, 1988 to mid-2008 (current US$ per ton)
US$ = United States dollar.

Source: World Bank Commodity Price Data.
Figure 4.2: Nominal International Market Prices for Crude Oil and Urea
Fertilizer, October 2003–October 2008 (current US$)
Crude Oil, Average (US$/bbl)
Urea (US$/t)
bbl = barrel , t = ton, US$ = United States dollar.

Source: World Bank (2008b).
those of feed grains and oilseeds.3 The other was an unanticipated government
response to rising petroleum prices and concerns about carbon emissions
from both the US and the European Union (EU), namely, the imposition of
policies to subsidize domestic biofuel production through tax credits and
the introduction of mandates on biofuel use. Those actions led to sudden
increases in the demand for maize in the US and for rapeseed in the EU.
Farmers in affected countries responded by growing those crops at the expense
of others, thereby adding to the shortage of grains and oilseeds for food and
animal feed demand (OECD 2008c). The weakening of the US dollar against
the euro and other currencies also contributed to the rise in the nominal
US-dollar price of commodities. Also, there was an increase in speculative
holdings of commodities because the excess demand for assets from emerging
economies (whose own financial sectors are underdeveloped) could not be met
by financial assets in the US in the 12 months to mid-2008 (Caballero, Farhi,
and Gourinchas 2008). That excess demand had driven down US interest
rates, making it less unprofitable to hold commodities (Frankel 2008). Panic
buying and hoarding by Asian rice consumers increased the magnitude of
the rice price spike in the second quarter of 2008.
A consensus on the relative contributions to the food price hike of these
various factors—and of the food export restrictions instituted by many food-
surplus developing countries during 2008—has yet to emerge. According to
Mitchell (2008), higher energy prices and related increases in farm production
costs, combined with the weakening of the US dollar, may have contributed
about one-quarter of the rise in food prices between 2002 and early 2008. In
addition, biofuel subsidies (themselves partly a response to high petroleum
prices and growing concerns about energy security) may be responsible for
much of the rest. In the case of rice, export restrictions are reported to have
caused its price rise by as much as one-quarter (Meyers and Meyer 2008).
Mitchell’s analysis implies that the dramatic fall—by more than two-thirds—
of the US-dollar price of oil in the four months to early December 2008 was a
contributor to the halving of the prices of numerous agricultural products over
that period, as was the easing/removal of temporary food export restrictions.
Whether those food prices will return to and remain at the relatively low
levels of earlier this decade, however, depends heavily on whether biofuel
tax credits and mandates persist in the US and EU. Projections published
3
The volume of oilseed use in the People’s Republic of China (PRC) doubled in the decade to 2007–2008
(Meyers and Meyer 2008).
before mid-2008 by IFPRI (2007) suggest that by 2050, real international food
prices will be 30–80% higher than in 1999–2001 unless farm productivity
growth accelerates substantially. The OECD and FAO (2008) projections are
not quite as dramatic, but they suggest nominal food prices will rise and
real prices will fall much less than in previous decades. The agencies stress,
however, that their price projections would be much less positive if biofuel
subsidies (via tax credits) and mandates were to be reduced or abandoned
(OECD 2008c; FAO 2008).
2.2 Relative Magnitude of the Recent Food Price Rise

Large and sudden as the latest food price shock has been, it was not
unprecedented. Using the price of manufactured exports to developing
countries from the five largest high-income countries as a deflator, the World
Bank has compiled an index of real international prices since 1900 for food
products important for developing countries (Grilli and Yang 1988, updated
by Pfaffenzeller, Newbolt, and Rayner 2007). During the 20th century, the
real food price index fell at 0.75% per year. Most of the decline, however,
was in the second half of the century, and for the 60 years since 1948 the
annual rate of decline was twice as rapid, at 1.5%. During that post-World War
II period the index spiked above trend six times, or an average of once per
decade. It is clear from Figure 4.3 that the 1973–1974 spike was much larger
than the estimate depicted for 2008, but nonetheless, the price rise in 2008
was the next largest in proportional terms. The 1973–1974 event was partly
associated with the four-fold rise in the price of oil that resulted when the
Figure 4.3: Real International Food Price Index, 1948–2008

(1977–1979 = 100)
Real Food Price Index
Sources: Author’s compilation using data from Pfaffenzeller, Newbolt, and Rayner (2007), updated from 2004 with
data from World Bank (2008b).
Organization of Petroleum Exporting Countries (OPEC) unilaterally imposed
production quotas. However, it was mostly due to the Soviet Union departing
from its policy of self-reliance and entering the international grain market in
a significant and unanticipated way to offset a domestic shortfall (Johnson
1975; Morgan 1979).
The other point to note from Figure 4.3 is that in each of the six previous
cases, the price rise was followed very shortly by an equally sharp fall. The fall
in food prices in the second half of 2008 was thus also not unprecedented,
although its suddenness and severity may have been exacerbated by the cessation
of economic growth brought on by the global financial crisis of 2008.
In Figure 4.4, the annual movements in food prices since 1960 are shown
alongside those for energy, minerals and metals, and other primary products,
all of them deflated by the same price index for manufactures. Energy price rises
since the early 1970s have been driven largely by the OPEC cartel’s production
quotas, which have not expanded as fast as global demand. Fluctuations in
the prices of minerals and metals have primarily been demand-driven, as has
the price of timber, which is weighted at 44% in the index for other primary
products (the rest being non-food agricultural and so also subject to farm
policy interventions).
It is conceivable that weather-related supply shocks could contribute to price
fluctuations for food and other agricultural products, but vast differences in
unseasonable weather around the world mean its influence on international
prices would be minor if each national market was fully integrated with the
rest of the world. Indeed, Johnson (1975) estimated that had free trade in
grain been in place in the mid-1970s, prices would have been so much less
variable—because trade would mitigate local supply variability—that only
negligible quantities of carryover and/or storage would have been profitable.
A subsequent study of global food trade provided complementary results.
Using a stochastic model of world markets for grains, livestock products, and
sugar, Tyers and Anderson (1992) found that the instability of international
food prices in the early 1980s was three times greater than it would have been
had there been free trade in those products. This suggests that the relatively
high volatility in international food markets is caused by the thinness of those
markets, which, in turn, is due to the use of variable trade policy instruments
to insulate domestic food markets from fluctuations abroad.
Market thinness is also linked to another common characteristic of
agricultural trade policies: their use to alter the trend level of domestic prices
of farm products. Should these policies have an anti-trade bias, they would
Figure 4.4: Real International Price Index, Food, Energy, Minerals and
Metals, and Other Primary Products, 1920–2007 (1977–1979 = 100)
Food
Energy
Minerals and Metals
Other Primary Products
Source: Author’s compilation using data from World Bank (2008b).

also contribute to making the international market thinner, and hence, more
volatile. As discussed below, the stronger a country’s agricultural comparative
advantage (disadvantage), the more its government tends to keep domestic
prices below (above) the trend level in the international market, and, within
the farm sector, to bias assistance toward import-competing farm industries
at the expense of export industries.
Before addressing recent evidence for intra- and inter-country anti-trade bias
in government intervention in agricultural markets, this chapter will review
trends in the international tradability of agricultural versus other products.
3. Trends in Tradability of Agricultural Products
Globalization forces have greatly lowered the cost of doing business across
national borders. During the past quarter century, these forces have included the
information and communications technology revolutions, as well as technical
changes in transport, such as bulk carriers and the containerization of ocean
shipping. Policy changes, such as the deregulation of airline and other services,
and the phasing down of manufacturing tariffs, have also significantly lowered
trade costs, for example, by allowing ever-greater fragmentation of production
of goods and services, and outsourcing abroad. As a result, international trade
has expanded much faster than global production. Between 1974 and 2007,
real GDP grew at 2.9%, while the real value of international trade grew at
5.0% (World Trade Organization [WTO] 2008).
In agriculture, by contrast, there has been relatively little growth in the
propensity to trade. For developing countries, the share of farm production
traded has remained approximately 8% since the early 1960s, and for high-
income countries it has grown, mainly within the EU and within North
American Free Trade Agreement (NAFTA) countries. Even including that
intra-bloc trade, the share of farm production exported globally has risen
only modestly over the past five decades, from 11% to 16%, and has remained
at 4% or 5% in Asia (Table 4.1).
It is certainly more difficult to break up the production process into
component parts in agriculture than it is in manufacturing, but that is likely
only a small part of the explanation for relatively low farm trade growth.
A more likely explanation is the persistence of government intervention in
agricultural markets, especially when such intervention includes an insulating
component or an anti-trade bias. To explore that possibility, the next section
Table 4.1: Export Orientation, Import Dependence, and Self-Sufficiency

in Primary Agricultural Production, Major Regions of the
World,a 1961–2004 (percent at undistorted prices)
a. Exports as Share of Production

1961–1964 1970–1974 1980–1984 1990–1994 2000–2004
Africa 19 17 12 7 8
Asia 5 4 4 6 5
Latin America 24 27 16 16 27
Western Europe 13 16 27 37 43
United States and Canada 14 14 20 20 21
Australia and New Zealand 41 35 44 43 48
Japan 1 2 1 0 1
All countries 11 11 13 16 16
Developing countries 8 8 7 8 8
High-income countries 14 15 22 26 29
b. Imports as Share of Apparent Consumption

1961–1964 1970–1974 1980–1984 1990–1994 2000–2004
Africa 2 2 5 4 4
Asia 4 4 8 16 14
Latin America 2 4 7 10 17
Japan 23 24 24 26 27
All countries 11 10 12 19 18
c. Self-Sufficiency Ratio
1961–1964 1970–1974 1980–1984 1990–1994 2000–2004
Africa 120 117 107 104 105
Asia 102 100 96 89 91
PRC 99 100 98 101 98
India 98 99 99 100 100
Latin America 129 132 110 107 114
Japan 78 78 77 74 74
All countries 100 101 101 96 98
EU = European Union, FAO = Food and Agriculture Organization of the United Nations, NAFTA = North American
Free Trade Agreement, PRC = People’s Republic of China.
Note: a Includes intra-EU (and intra-NAFTA) trade.
Source: Anderson (forthcoming) using estimates of total agricultural production valued at undistorted prices and
the FAO’s total agricultural trade value data.
summarizes the findings of a new set of estimates of distortions to agricultural
incentives over the past half-century.
4. Estimates of Distortions to Agricultural Incentives

A study completed two decades ago showed that developing economies had
been heavily taxing their agricultural sectors, both directly and indirectly, by
protecting manufacturing from import competition and overvalued exchange
rates (Krueger, Schiff, and Valdés 1988, 1991). The main exceptions seemed to be
the Republic of Korea and Taipei,China, which, like Japan some decades earlier,
had switched from taxing to providing financial assistance to their farmers,
and were steadily raising that assistance as per capita income and agricultural
comparative disadvantage rose in the course of their rapid economic growth
(Anderson and Hayami 1986). Since the mid-1980s, however, great progress
has been made by many developing countries in reducing their earlier anti-
farm policy bias. Indeed, these changes have been transformational in the
People’s Republic of China (PRC) and, to a lesser extent, in India.
To better understand the nature and extent of this reform process, a new
World Bank research project has revisited this issue, extending the earlier
estimates of distortions to the present decade, and expanding the sample to
examine similar trends in other parts of Asia, as well as in Africa, the Americas,
and Europe. In all, estimates are now available for 75 countries—comprising
90% of global agriculture (and 95% of Asia’s economy)—and for as many years
as possible over the past five decades (Anderson and Valenzuela 2008).
A key driver of the rapid growth and industrialization of Asia has been
the decision by many countries in the region to become more open and to
transition from import-substituting development strategies to those that are
export oriented. With export-led growth has come a dramatic restructuring
of Asia’s economies away from agriculture and toward manufacturing and
service activities. For developing Asia as a whole, agriculture now accounts
for less than one-eighth of GDP (down from more than one-third in the late
1960s), industry has risen from 27% to 38%, and services from 35% to 49%.
The apparent decline in agricultural comparative advantage in developing
Asia is evident in the self-sufficiency data for primary farm products. Until
30 years ago the region was nearly 100% self-sufficient in farm products, but
since then that indicator has declined to less than 85%. The share of farm
production exported has not changed significantly, averaging in the 4–6% range
(although there have been substantial changes in some individual countries,

with declines in Malaysia; Philippines; Sri Lanka; and Taipei,China offset by
increases in countries such as Viet Nam, Thailand, and PRC). By contrast,
since the late 1970s, the share of imports in domestic consumption of farm
products has quadrupled, to roughly 20% (Table 4.1).
The increasing dependence on imports of farm products in Asia has
occurred despite lower taxes on agricultural exports and greater incentives
provided to farmers via government policy reforms. Before presenting those
results, it is necessary to briefly summarize the methodology used to generate
these new indicators of distortions (details of which are available in Anderson
et al. 2008).
4.1 Methodology for Measuring Price Distortions

The nominal rate of assistance (NRA) is the key indicator used. It is defined
as the percentage by which government policies have raised gross returns to
farmers above what they would be without the government’s intervention (or
lowered them, if NRA<0).4 If a trade measure is the sole source of government
intervention, then the measured NRA will also be the consumer tax equivalent
(CTE) rate at that same point in the value chain. When domestic producer or
consumer taxes or subsidies also exist, however, the NRA and CTE will not be
equal, and at least one of them will differ from the price distortion at the border
due to trade measures. Both are expressed as a percentage of the undistorted
price (unlike the producer and consumer support estimates computed by the
OECD [2008a], which are expressed as a percentage of the distorted price).
Each industry is classified as import-competing, as a producer of exportables,
or as producing a nontradable (with its status sometimes changing over the
years), so as to generate for each year the weighted average NRAs for the two
different groups of tradables. Those NRAs are used to generate a trade bias
index (TBI), defined as:
(1) TBI = (1+NRAagx/100)/(1+NRAagm/100) -1,
4
In most countries, distortions to farm inputs are very small compared with distortions to farm output
prices. Where there are significant product-specific distortions to input costs, however, they are captured
by estimating their equivalence in terms of a higher output price. This figure is then included in the
NRA for individual agricultural industries wherever data allow. Any non-product-specific distortions,
including distortions to farm input prices, are also added into the estimate for the overall sectoral
NRA for agriculture as a whole.
where NRAagm and NRAagx are the average percentage NRAs for the import-
competing and exportable parts of the agricultural sector. The TBI indicates
in a single number the extent to which the typically anti-trade bias (negative
TBI) in agricultural policies changes over time.
The coverage of products for NRA estimates averages between two-thirds
and three-quarters of the gross value of Asian farm production at undistorted
prices. Authors of the country case studies also provide “guesstimates” of the
NRAs for non-covered farm products. Weighted averages for all agricultural
products are then generated, using the gross values of production at unassisted
prices as weights. For countries that also provide non-product-specific
agricultural subsidies or taxes (assumed to be shared on a pro-rata basis
between tradables and nontradables), such net assistance is then added to
product-specific assistance to calculate an NRA for total agriculture (and also
for tradable agricultural products).
Farmers are not only affected by the prices of their own outputs, but also by
the incentives non-agricultural producers face. That is, it is relative prices, and
hence, relative rates of government assistance that affect producer incentives.
More than seventy years ago Lerner (1936) published his symmetry theorem
that proved that in a two-sector economy, an import tax has the same effect
as an export tax. This also applies to a model that includes a third sector
producing only nontradables, or to a model with imperfect competition,
and applies regardless of the economy’s size (Vousden 1990). If one assumes
there are no distortions in the market for nontradables and that the value
shares of agricultural and non-agricultural, non-tradable products remain
constant, then the economy-wide effect of distortions to agricultural incentives
can be captured by the extent to which the tradable parts of agricultural
production are assisted or taxed relative to producers of non-farm tradables.
By generating estimates of the average NRA for non-agricultural tradables,
it is then possible to calculate a relative rate of assistance (RRA), defined in
percentage terms as:
(2) RRA = 100[(1+NRAagt/100)/(1+NRAnonagt/100) -1],
where NRAagt and NRAnonagt are the weighted average percentage NRAs for
the tradable parts of the agricultural and non-agricultural sectors, respectively.
Since the NRA cannot be less than -100% if producers are to earn anything,
neither can the RRA (assuming NRAnonagt is positive). If both of those sectors
are equally assisted, the RRA is zero. This measure is useful in that if it is below
(above) zero, it provides an internationally comparable indication of the extent

to which a country’s policy regime has an anti- (pro-) agricultural bias.
In calculating the NRA for producers of agricultural and non-agricultural
tradables, our approach sought to include distortions generated by dual or
multiple exchange rates. Such direct interventions in the market for foreign
currency were common in some Asian countries in the 1970s and 1980s,
including the PRC. However, as the authors of some of the focus country studies
had difficulty finding an appropriate estimate of the extent of that distortion,
its impact on NRAs has not been included in all cases. Its exclusion from
the figures for some countries (e.g., India) means their estimated (typically)
positive NRAs for importables and (typically) negative NRAs for exportables
are smaller than they should be. This may also have led to an underestimation
of the (anti-)TBI. Moreover, in cases where the NRA for importables dominated
that for exportables, this omission may have led to an underestimation of the
average (positive) NRA for such tradables.
NRAs and CTEs are useful as distortion measures in national or global
economy-wide computable general equilibrium models to estimate the trade,
economic welfare, and other effects of government interventions. They are
not ideal as trade or welfare indicators on their own, however, because of
possible offsets. For example, if a country has positive NRAs for its import-
competing farm industries but negative NRAs for its export industries, the
weighted-average NRA for the sector might be close to zero, whereas the trade
and welfare effects of those two subsectors’ distortions are additive. That is,
their total effect on trade or welfare is greater than the two individual sets of
effects, not less than, as implied when their NRAs are averaged. The same is
true when averaging NRAs across countries if the sample includes countries
with both positive and negative average NRAs. To overcome this averaging
problem, Lloyd, Croser, and Anderson (2009) devised more-satisfactory
indexes for capturing distortions to agricultural incentives, drawing on the
trade restrictiveness index literature developed by Anderson and Neary
(summarized in their 2005 book) and the theoretical simplifications made
by Feenstra (1995) and Lloyd (2007, 2008).
To capture specifically the distortions imposed by each country’s border and
domestic policies on its economic welfare and trade volume, Lloyd, Croser, and
Anderson defined measures they called the Welfare Reduction Index (WRI)
and the Trade Reduction Index (TRI). The WRI (or TRI) has the advantage
of providing a theoretically sound indicator of the welfare (or trade) effect
of a single sectoral measure that is comparable across time and place. That
measure provides an estimate of the common trade tax across all agricultural
products that would generate the same welfare cost (or same reduction in trade)
as that generated by the actual structure of NRAs and CTEs in a country. In
this way, the WRI and TRI are better able to approximate what a computable
general equilibrium model can provide in the way of estimates of the trade
and welfare (and other) effects of the price distortions captured by the NRA
and CTE estimates for a given product—and have the advantage of being able
to indicate trends over time.
4.2 Estimates of NRAs, RRAs, CTEs, WRIs, and TRIs

First, estimates of NRAs to agriculture will be compared with nominal rates
for non-agricultural tradables in Asia and with similar rates for other regions.
Then, estimates from the WRI and TRI will be provided, again reporting
those for other regions for comparison.
Nominal Rates of Assistance to Agriculture

From the mid-1950s to the early 1980s, agricultural price and trade policies
reduced the earnings of farmers in developing Asia—on average by more than
20%. Implicit taxation declined from the early 1980s, however, and from the
mid-1990s, the NRA switched sign and became increasingly positive. That
average NRA hides considerable diversity within the region, however. Nominal
assistance to farmers in the Republic of Korea and Taipei,China was positive
from the early 1960s (although very small initially, compared with the 40+%
in Japan at that time). Indonesia’s NRA was only slightly above zero in some
years in the 1970s and 1980s (as was Pakistan’s prior to Bangladesh becoming
an independent country in 1971). Average NRAs in India and the Philippines
were positive from the 1980s (Table 4.2).5
This trend also holds for the vast majority of commodity NRAs in the region,
with meat and milk the only products to have seen their assistance rates cut
over that period. As is true for other regions of the world, assistance is among
the highest for “rice pudding” products: sugar, milk, and rice. Even for those
5
Note that in the tables and figures to follow, it has been assumed that NRAs for the PRC pre-1981 and
for India pre-1965 are the same as the average NRA estimates for those economies for 1981–1984 and
1965–1969, respectively, and that the gross value of production in those missing years is that which gives
the same average share of value of production in total world production in 1981–1984 and 1965–1969,
respectively. This NRA assumption is conservative, in the sense that for both countries the average
NRA was probably even lower (more negative) in earlier years.
Table 4.2: Nominal Rates of Assistance to Agriculture,a

Asian-Focus Economies, 1955–2004b (percent)
1955– 1960– 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000–
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
 
Japan 38.8 45.8 50.4 46.9 65.9 68.3 116.6 115.8 118.6 119.8
Northeast Asia -42.8 -42.6 -41.7 -41.2 -39.5 -38.2 -25.7 -1.7 14.4 11.9
Republic of
Korea -3.2 4.0 13.4 35.7 56.3 89.4 126.1 152.8 129.8 137.3
Taipei,China -12.0 3.6 3.0 9.3 7.1 14.9 27.1 38.1 46.4 61.3
PRC b
-45.2 -45.2 -45.2 -45.2 -45.2 -45.2 -35.5 -14.3 6.6 5.9
Southeast Asia na -6.8 5.9 -8.8 0.0 4.6 -0.4 -4.2 0.0 11.1
Indonesia na na na -2.6 9.3 9.2 -1.7 -6.6 -8.6 12.0
Malaysia na -7.2 -7.5 -9.0 -13.0 -4.6 1.3 2.3 -0.2 1.2
Philippines na -5.3 14.4 -5.1 -7.1 -1.0 18.7 18.5 32.9 22.0
Thailand na na na -20.3 -14.0 -2.0 -6.2 -5.7 1.7 -0.2
Viet Nam na na na na na na -13.9 -25.4 0.6 21.2
South Asia 0.0 -0.5 0.6 0.4 -5.5 0.6 20.9 0.7 0.2 13.6
Bangladesh na na na -16.0 1.4 -3.3 11.7 -1.5 -5.2 2.7
India b
0.1 0.1 0.1 0.2 -5.6 1.9 24.9 1.8 0.7 15.8
Pakistan na -0.7 15.3 6.8 -8.5 -6.4 -4.0 -6.9 -1.6 1.2
Sri Lanka -2.3 -22.8 -24.5 -16.3 -25.5 -13.5 -9.9 -1.2 12.2 9.5
Asian dev
economiesa -27.3 -26.7 -25.1 -25.3 -23.8 -20.6 -9.0 -2.0 7.5 12.0
Av. dispersion c
39 37 56 42 48 51 67 56 56 64
na = data unavailable, NRA = nominal rate of assistance, PRC = People’s Republic of China.
Notes:
a
Weighted average includes product-specific input distortions and non-product-specific assistance as well
as authors’ guesstimates for non-covered farm products, with weights based on gross value of agricultural
production at undistorted prices.
b
Estimates for the PRC pre-1981 and India pre-1965 assume the NRAs to agriculture in those years were the
same as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and
that the gross value of production in those missing years is that which gives the same average share of value
of production in total world production in 1981–1984 and 1965–1969, respectively. This set of assumptions is
conservative in the sense that for both countries the average NRA was probably even lower (more negative) in
earlier years.
c
Simple average across countries of the standard deviation of product NRAs around the weighted mean for each
country each year.
Sources: Calculated from Anderson and Valenzuela (2008), which draws on national estimates reported in
Anderson and Martin (2009).
three products, however, there is great diversity in NRAs across countries, with
five-year averages ranging from almost zero to as much as 400% for rice and
140% for milk in the Republic of Korea, and to 230% for sugar in Bangladesh.
There is also a great deal of NRA diversity across commodities within each
Asian economy’s farm sector, and the range (as measured by the standard
deviation) has grown rather than diminished over the past five decades, from a
regional average of less than 40% in the early years of the period being studied,
to more than 55% in recent years. This suggests that there is still much that
could be gained from improved resource reallocation, both between Asian
economies and within the agricultural sector of individual Asian economies,
if differences in rates of assistance were reduced.
A striking feature of the distortion pattern within the farm sector is its strong
anti-trade bias. This is evident from Figure 4.5, which depicts the average NRAs
for agriculture’s import-competing and export subsectors for the region. The
former’s average is always positive and its trend is upward-sloping, whereas
the average NRA for exportables is negative and did not diminish until the
1980s, after which it gradually approached zero. Since the 1980s, the gap
between the NRAs for those two subsectors has diminished somewhat for
the region as a whole, with several countries (Malaysia, Thailand, Pakistan,
and Sri Lanka) contributing to that trend.
Assistance to Non-farm Sectors and Relative Rates of Assistance

The anti-agricultural policy biases of the past were not solely due to agricultural
policies. Also important to changes in incentives affecting intersectorally
mobile resources has been the significant reduction in border protection for
the manufacturing sector (which has been the dominant intervention for
non-agricultural tradables). Reduced assistance to producers of non-farm
tradables has had a greater positive impact on farmer incentives than has
reduced direct taxation of agricultural industries.
It has not been possible to quantify the distortions to non-farm tradable
sectors as carefully as for agriculture. Authors of the country case studies typically
relied on applied trade taxes (for exports as well as imports) rather than being
able to undertake price comparisons, and hence most of the studies do not
capture the quantitative restrictions on trade that were important in earlier
decades, but have become decreasingly so in recent times. The case studies
were also unable to capture distortions in the services sectors, some of which
now produce tradables (or would in the absence of interventions preventing
their emergence). As a result, the estimated NRAs for non-farm importables are
smaller and decline less rapidly than in fact was the case—this also holds true for
non-farm exportables, with the exception that in some cases their NRAs would
have been negative, bearing in mind the anti-trade bias in the dual exchange
rate systems that operated in the PRC and elsewhere. Of these two elements of
underestimation, the former bias dominates, so the authors’ estimates of the
overall NRA for non-agricultural tradables should be considered to be on the
conservative end. The underestimation becomes greater further back in time,
such that the NRA’s decline appears to be less rapid than it is in actuality.
Despite the likely underestimation, NRA estimates for non-farm tradables
prior to the 1990s are very sizeable. For Asia as a whole, the average NRA value
has declined steadily throughout the past four or five decades as policy reforms
have spread. This has contributed to a decline in the estimated negative RRA
Figure 4.5: Nominal Rates of Assistance to Exportable, Import-Competing,

and Alla Agricultural Products, Asian Developing Economies,b
1955–2004 (percent, weighted averages across 12 developing economies)
NRA = nominal rate of assistance, PRC = People’s Republic of China.

Notes:
a
The total NRA can be above or below the exportable and importable averages because assistance to
nontradables and non-product specific assistance is also included.
b
The exportables, import-competing, and total estimates are based on PRC pre-1981 and India pre-1965 values
estimated on the assumption that the nominal rate of assistance to agriculture in those years was the same
as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that
the gross value of production in those missing years is that which gives the same average share of value of
production in total world production in 1981–1984 and 1965–1969, respectively.
for farmers. The weighted average RRA was less than -50% up to the early
1970s but improved to an average of -32% in the 1980s, -9% in the 1990s, and
is now positive, averaging 7% in 2000–2004. Five-decade trends in RRAs and
their two component NRAs for each economy are reported in Table 4.3. It is
even clearer from Figure 4.6 that falling positive NRAs for non-farm producers
have contributed even more to the rise of the RRA in Asia than has the gradual
reduction in negative NRAs for farmers due to agricultural policy reforms.
Has the location of production of farm products within and between Asian
countries become more or less efficient as a result of policy changes over the
past five decades? A global computable general equilibrium model with a time
series of databases is needed to fully answer this question. In the absence of
such a model, one crude method of addressing the question involves examining
Figure 4.6: Nominal Rates of Assistance to Agricultural and Non-

agricultural Tradable Products and Relative Rate of
Assistance,a Asia Developing Economies,b 1955–2004
(percent, weighted averages across 12 economies)
NRA = nominal rate of assistance, RRA = relative rate of assistance.

Notes:
a
The RRA is defined as 100*[(100+NRAagt)/(100+NRAnonagt)-1], where NRAagt and NRAnonagt are the
percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively.
b
The exportables, import-competing, and total estimates are based on PRC pre-1981 and India pre-1965 values
estimated on the assumption that the nominal rate of assistance to agriculture in those years was the same
as the average NRA estimates for those economies for 1981–1984 and 1965–1969, respectively, and that
the gross value of production in those missing years is that which gives the same average share of value of
production in total world production in 1981–1984 and 1965–1969, respectively.
Table 4.3: Relative Rates of Assistance (RRA) to Agriculture,a

Asian-Focus Economies, 1955–2004 (percent)
1955– 1960– 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000–
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
Japan
NRA Ag. 37.2 44.5 50.4 47.3 70.8 67.0 127.7 129.7 133.4 133.6
NRA Non-Ag. 2.5 3.9 3.8 2.8 1.6 1.1 1.3 1.1 0.8 0.7
RRA 33.9 39.1 44.9 43.3 68.1 65.2 124.8 127.1 131.4 132.1
Northeast Asia
NRA Ag. -43.1 -42.5 -42.2 -41.3 -40.0 -18.4 -26.2 -1.7 14.7 12.0
NRA Non-Ag. 40.9 40.8 40.0 39.7 39.4 71.1 18.8 15.0 6.8 3.3
RRA -58.2 -57.7 -56.6 -55.7 -53.7 -51.9 -38.0 -14.2 7.4 8.5
Republic of Korea
NRA Ag. -3.3 4.9 16.3 46.1 71.8 118.6 159.8 197.6 164.8 171.9
NRA Non-Ag. 45.6 37.1 22.3 11.4 11.7 6.8 5.7 3.3 2.3 1.7
RRA -32.6 -21.4 -4.8 30.5 53.9 104.8 145.9 188.2 158.8 167.3
Taipei,China b
NRA Ag. -15.8 4.7 3.9 12.0 8.9 18.7 33.8 46.3 54.9 70.9
NRA Non-Ag. 8.8 9.3 8.8 7.5 7.0 5.2 4.5 2.6 1.8 1.0
RRA -22.5 -4.2 -4.5 4.2 1.7 12.9 28.0 42.5 52.2 69.0
PRC b
NRA Ag. -45.2 -45.2 -45.2 -45.2 -45.2 -45.2 -35.5 -14.3 6.6 5.9
NRA Non-Ag. 41.6 41.6 41.6 41.6 41.6 41.6 28.3 24.9 9.9 5.0
RRA -60.5 -60.5 -60.5 -60.5 -60.5 -60.5 -49.9 -31.1 -3.0 0.9
Southeast Asia
NRA Ag. na -5.8 5.6 -10.2 0.1 4.9 -0.9 -4.7 0.0 12.1
NRA Non-Ag. na 11.5 15.4 20.2 22.0 21.1 18.0 11.5 8.2 8.1
RRA na -15.5 -8.5 -25.3 -18.0 -13.4 -16.1 -14.5 -7.7 3.7
Indonesia
NRA Ag. na na na -3.8 10.4 10.5 -1.9 -7.5 -9.7 13.9
NRA Non-Ag. na na na 27.7 27.7 27.7 26.5 17.6 10.6 8.1
RRA na na na -24.7 -13.6 -13.5 -22.5 -21.3 -18.3 5.4
Malaysia
NRA Ag. na -7.6 -7.9 -9.4 -13.7 -4.9 1.4 2.6 -0.2 1.5
NRA Non-Ag. na 7.4 7.0 7.1 6.5 5.2 3.9 2.8 2.0 0.9
RRA na -14.0 -13.9 -15.5 -18.9 -9.6 -2.4 -0.3 -2.2 0.6
Philippines
NRA Ag. na -1.7 14.3 -6.0 -7.2 -4.0 15.8 16.7 35.7 23.5
NRA Non-Ag. na 19.0 20.3 16.3 16.3 12.9 11.0 9.9 8.6 6.4
RRA na -17.4 -5.0 -19.8 -20.3 -14.9 4.3 6.1 24.9 15.9
Thailand
NRA Ag. na na na -23.1 -15.9 -2.3 -6.9 -6.4 1.8 -0.2
NRA Non-Ag. na na na 16.1 16.0 14.2 11.1 10.0 8.9 7.8
RRA na na na -33.7 -27.5 -14.4 -16.3 -14.9 -6.5 -7.4
1955– 1960– 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000–
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
Viet Nam b
NRA Ag. na na na na na na -15.9 -26.4 0.0 20.7
NRA Non-Ag. na na na na na na 4.3 -11.2 1.5 20.8
RRA na na na na na na -19.2 -17.4 -1.3 0.0
South Asia
NRA Ag. 4.7 3.9 4.4 9.7 -7.7 1.8 47.1 0.2 -2.4 12.7
NRA Non-Ag. 112.7 115.5 143.1 81.7 57.8 54.6 39.9 18.6 15.0 10.1
RRA -56.2 -56.8 -57.0 -39.8 -41.6 -33.3 5.1 -15.5 -14.9 3.4
Bangladesh
NRA Ag. na na na na 3.1 -3.9 17.5 -2.4 -8.0 4.0
NRA Non-Ag. na na na na 28.4 22.4 28.5 33.3 29.0 23.4
RRA na na na na -19.7 -21.5 -8.6 -26.7 -28.6 -15.8
India b
NRA Ag. 5.2 5.2 5.2 12.6 -7.4 4.1 67.5 2.0 -2.3 15.4
NRA Non-Ag. 113.0 113.0 113.0 83.1 64.8 59.3 48.6 15.9 12.6 5.2
RRA -56.3 -56.3 -56.3 -38.3 -43.8 -33.5 11.7 -12.1 -12.9 12.5
Pakistan b
NRA Ag. na -1.0 21.7 9.3 -11.8 -9.3 -5.9 -10.2 -2.6 1.5
NRA Non-Ag. na 169.7 224.5 146.7 44.0 48.3 45.1 39.3 27.0 14.6
RRA na -63.8 -62.4 -55.9 -38.6 -38.6 -35.1 -35.2 -23.0 -11.5
Sri Lanka
NRA Ag. -2.7 -25.7 -27.6 -18.5 -29.0 -15.4 -11.2 -1.3 14.0 10.8
NRA Non-Ag. 104.9 124.6 138.4 70.7 52.9 57.1 59.0 47.1 36.4 22.9
RRA -52.5 -66.6 -68.0 -51.6 -53.5 -46.2 -44.3 -32.9 -16.3 -9.8
Asian Developing Economiesc
NRA Ag. -29.0 -27.7 -26.9 -24.3 -31.3 -18.8 -11.2 -2.6 7.5 11.7
NRA Non-Ag. 66.8 67.1 70.9 50.3 50.3 38.3 15.4 14.9 9.6 4.3
RRA -57.5 -56.4 -55.3 -47.9 -44.7 -40.8 -22.8 -15.2 -1.9 7.1
Dispersion of
21.9 30.7 36.2 37.6 41.5 51.9 56.0 65.1 50.5 50.8
national RRAsd
na = data unavailable, NRA = nominal rate of assistance, PRC = People’s Republic of China.
Notes:
a
The RRA is defined as 100*[(100+NRAagt)/(100+NRAnonagt)-1], where NRAagt and NRAnonagt are the
percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively.
b
Estimates for the PRC pre-1981 and India pre-1965 are based on the assumption that the nominal rates of
assistance to agriculture in those years was the same as the average NRA estimates for those economies for
1981–1984 and 1965–1969, respectively, and that the gross value of production in those missing years is that
which gives the same average share of value of production in total world production in 1981–1984 and 1965–
1969, respectively. This NRA assumption is conservative in the sense that for both countries the average NRA
was probably even lower in earlier years, according to the authors of those country case studies.
c
Weighted averages of the above national averages, using weights based on gross value of national agricultural
production at undistorted prices.
d
Simple average of the standard deviation around a weighted mean of the national RRAs for the region each year.
the standard deviation in RRAs across the economies of the region over time.
This suggests that distortions have become more dispersed across countries
over time. The dispersion averaged 35% in 1960–1974, 50% in 1975–1989,
and 55% in 1990–2004 (Table 4.3, bottom row).
Of the striking changes in the RRAs in individual economies over the past
two decades, it is the move from negative to positive RRAs in the PRC and
India that matter most for the region and, indeed, for the world. The extent
of the decline in non-agricultural NRAs since the early 1980s is very similar
in these two key countries. However, their agricultural NRAs have differed.
In the PRC, the five-year averages have risen steadily from -45% to 6%. In
India, they have remained close to zero, with the exception of an upward
spike when international food prices collapsed in the mid-1980s and a rise
in the present decade (Figure 4.7).
This dramatic rise in the RRAs for the world’s two most populous countries
is significant for those studying the causes of the recent international food
price increases. One of the contributors to these increases is said to be the
growing appetite for food imports in these two countries as they industrialize
and their per capita incomes rise. Yet, as Table 4.1 shows, both countries have
remained close to self-sufficient in agricultural products over the past four
decades. The steady rise in their RRAs has undoubtedly contributed to this
capacity to remain self-sufficient. The rise in RRAs may also have helped
ensure that in the PRC, the trend in the ratio of urban to rural mean incomes
(adjusted for cost of living differences) has remained flat since 1980 (Ravallion
and Chen 2007). At the same time, rising RRAs in India have meant that the
Gini coefficient has changed very little between 1984 and 2004 (World Bank
2008a). A major issue, which will be addressed at the end of the chapter, is:
Will their RRAs remain at the current neutral level of close to zero, or will
they continue to rise in the same way as observed in the Republic of Korea
and Taipei, China and, before them, in Japan?
Comparisons with Assistance Rates in Other Regions

The regional upward shift in agricultural RRAs and NRAs toward zero, and
even the recent move to positive numbers, is not unique to Asia. Figure 4.8
shows that similar trends, albeit less steep, have resulted from policy reforms
in other developing-country regions over the past four decades. This suggests
that similar political economy trends might be at work as economies develop.
In the past, it has been found that agricultural RRAs and NRAs are positively
correlated with per capita incomes and agricultural comparative disadvantage
(Anderson 1994, 1995). A glance at Tables 4.2 and 4.3 suggests that Asian
economies have been—and continue to be—contributors to that trend. This
is confirmed statistically in the multiple regressions with country and time
fixed effects shown in Table 4.4.
Figure 4.7: Nominal and Relative Rates of Assistance, PRC, and India,
1965–2005 (percent)
India
PRC
NRA = nominal rate of assistance, PRC = People’s Republic of China, RRA = relative rate of assistance.
Figure 4.8: Nominal and Relative Rates of Assistance,a Asian, African, and
Latin American Regions, 1965–2004b (percent)
NRA
RRA
LAC = Latin American countries, NRA = nominal rate of assistance, PRC = People’s Republic of China,
RRA = relative rate of assistance.
Notes:
a
Five-year weighted averages with value of production at undistorted prices as weights.
b
Estimates for the PRC pre-1981 and India pre-1965 are based on the assumption that the NRAs to agriculture
and national share or regional agricultural production in those years were the same as the average NRA
estimates for those economies for 1981–1984 and 1965–1969, respectively.
Anderson and Masters (2009), Anderson and Martin (2009), and Anderson and Valdés (2008).
Table 4.4: Relationships between Nominal Rates of Assistance to Farm
Products and some of their Determinants, Asian Developing
Economies, 1960–2004
Explanatory
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
variables: c
Ln GDP Per ‑0.28* ‑0.21* ‑0.23* ‑0.22* ‑0.11 ‑0.06 ‑0.14 ‑0.16* ‑0.38* ‑0.28* ‑0.44* ‑0.38*
Capita (-0.03) (-0.03) (-0.03) (-0.03) (-0.05) (-0.05) (-0.06) (-0.06) (-0.10) (-0.9) (‑0.10) (‑0.11)
Ln GDP 0.23* 0.20* 0.21* 0.21* 0.19* 0.15* 0.21* 0.18* 0.23* 0.19* 0.22* 0.21*
Per Capita (-0.02) (-0.01) (-0.01) (-0.01) (-0.02) (-0.02) (-0.03) (-0.02) (-0.03) (-0.02) (‑0.03) (‑0.03)
Squared
Importable   0.33* 0.34* 0.32*   0.40* 0.41* 0.40*   0.39* 0.39* 0.39*
(‑0.04) (‑0.04) (‑0.04) (‑0.04) (‑0.04) (‑0.04) (‑0.04) (‑0.04) (‑0.04)
Exportable   ‑0.13 ‑0.12 ‑0.14   ‑0.03 ‑0.03 ‑0.03   ‑0.04 ‑0.04 ‑0.04
(-0.04) (-0.04) (-0.04) (-0.04) (-0.04) (-0.04) (-0.04) (‑0.04) (‑0.04)
Revealed       0.03*       -0.07*       -0.04

Comparative (-0.01) (-0.02) (-0.03)
Advantagea
Trade     0.11*       -0.13       -0.03  
Specialization (-0.03) (-0.09) (-0.10)
Indexb
Constant 0.14* 0.03 0.00 -0.02 0.07* -0.11 -0.05 0.07 -0.49* 0.23* -0.19 -0.08
(-0.01) (-0.03) (-0.03) (-0.04) (-0.02) (-0.04) (-0.05) (-0.07) (-0.12) (-0.11) (-0.09) (-0.10)
R2 0.10 0.27 0.27 0.27 0.07 0.23 0.22 0.22 0.14 0.28 0.29 0.29
No. of obs. 2766 2766 2594 2594 2766 2766 2594 2594 2766 2766 2594 2594
Country Fixed No No No No Yes Yes Yes Yes Yes Yes Yes Yes
Effects
Time Fixed No No No No No No No No Yes Yes Yes Yes
Effects
Ln GDP Per Capita = log of gross domestic product per capita in US$10,000s, NRA = nominal rate of
assistance, OLS = ordinary least squares, R 2 = coefficient of determination.
Notes:
a
Revealed comparative advantage index is the share of agriculture and processed foods in national exports as a
ratio of that sector’s share of global exports (world=1).
b
Net exports as a ratio of the sum of exports and imports of agricultural and processed food products
(world=1).
c
Dependent variable for regressions is NRA by commodity and year. Results are OLS estimates, with standard
errors in parentheses.
* Statistically significant at the 1% level.
Source: Anderson and Martin (2009).
Consumer Tax Equivalents of Agricultural Policies

The CTE at the farm level is equivalent to the NRA for each covered product
only when no farm input or domestic output price distortions exist, and
when no domestic consumption taxes or subsidies are in place. In such
cases, the NRA is exclusively the result of border measures such as import or
export taxes or restrictions. However, such domestic distortions are present
in several Asian economies. In the Republic of Korea, for example, producer
prices have been well above consumer prices for several important crop
products for decades, while in the PRC, the opposite was true at least until
the early 1990s. In the PRC, producers of food staples were taxed more
than consumers were subsidized, even taking into account the “iron rice
bowl” in-kind partial wage payment received by many urban workers. Also,
because of international trade, the weights one uses to aggregate product
distortion rates on the consumption side of the market differ from those
used on the production side. Hence, aggregate CTEs differ somewhat from
aggregate NRAs in each economy.
Welfare and Trade Reduction Indexes

Table 4.5 reports the WRIs for agricultural import-competing products,
exportables, all covered tradable products, and all covered products from
1960 to 2007 for Asia and four other regions, and for the world as a whole.6
The WRI results for covered products show a similar pattern over the five
regions. A constant or increasing tendency for policies from the 1960s to the
mid-1980s to reduce welfare existed, but thereafter the opposite occurred in
almost all regions, as can be seen from Figure 4.9. This pattern was generated
by different policy regimes in different regions. In high-income countries,
agriculture was assisted throughout the period, although it peaked in the 1980s
(at approximately 60%) and fell thereafter. By contrast, in developing countries,
agriculture was “disprotected” until the mid-1980s, and only thereafter did
taxation of developing country farmers decline to the point that they received
positive assistance by the turn of the century. The WRI is thus able to correctly
identify the adverse welfare consequences that result from both positive and
negative assistance regimes for the sector.
6
National WRIs are aggregated across countries using an average of the value of consumption and
production at undistorted prices. National TRIs are aggregated across countries using the absolute
difference between the value of production and the value of consumption at undistorted prices. National
and regional indexes for the five-year periods are unweighted averages of the annual indexes.
Table 4.5: Welfare Reduction Indexes, Asian, African, Latin American,
European Transition Economies, and High-Income Regions,a
All Covered Tradable Farm Products, 1960–2007 (percent)
1960– 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000– 2005–
1964 1969 1974 1979 1984 1989 1994 1999 2004 2007
Import-Competing Products
Africa 59 52 53 47 51 98 43 32 30 na
Asia 36 45 46 50 48 62 48 44 48 na
Latin America 54 34 27 37 47 40 46 26 32 na
All Developing
49 46 43 44 44 54 36 28 30 na
Countries
European Transition
na na na na na na 60 44 45 43
Economies
High-Income
79 87 71 100 106 123 102 91 87 50
Countries
World 74 76 65 85 81 100 78 65 65 45
Exportable Products
Africa 37 44 48 49 48 55 58 41 40 na
Asia 24 43 34 34 48 45 24 10 7 na
Latin America 28 22 36 32 36 33 29 12 15 na
All Developing
31 38 38 36 46 44 26 11 10 na
Countries
European Transition
Economies
High-Income
12 20 16 12 12 25 22 11 11 10
Countries
World 16 27 26 24 34 39 26 13 12 15
All Covered Farm Tradables
Africa 52 52 52 49 51 82 52 37 36 na
Asia 27 43 39 42 47 45 28 19 16 na
Latin America 43 25 38 36 44 39 42 20 22 na
All Developing
44 44 42 42 47 47 31 19 18 na
Countries
European Transition
Economies
High-Income
49 48 46 64 69 70 51 38 37 22
Countries
World 48 47 45 55 57 57 41 28 27 23
CTE = consumer tax equivalent, na = data unavailable, NRA = nominal rate of assistance.
Note: a Regional aggregates are weighted using the average of the value of production and the value of
consumption at undistorted prices.
Sources: Lloyd, Croser, and Anderson (2009), based on product NRAs and CTEs in Anderson and Valenzuela
(2008).
Figure 4.9: Welfare Reduction Indexes for Covered Tradable Farm

Products, by Region, 1960–2007 (percent)
Africa, Asia, and Latin America
Developing Countries, High-Income Countries, and European Transition

Economies
CTE = consumer tax equivalent, NRA = nominal rate of assistance.

Sources: Lloyd, Croser, and Anderson (2009), based on NRAs and CTEs in Anderson and Valenzuela (2008).
Figure 4.10: Trade Reduction Indexes for Covered Tradable Farm

Products, by Region, 1960–2007 (percent)
Africa, Asia, and Latin America
Developing Countries, High-Income Countries, and European Transition

Economies
CTE = consumer tax equivalent, NRA = nominal rate of assistance.

Sources: Lloyd, Croser, and Anderson (2009), based on NRAs and CTEs in Anderson and Valenzuela (2008).
Table 4.6: Trade Reduction Indexes, Asian, African, Latin American,

European Transition Economies, and High-Income Regions,a
All Covered Tradable Farm Products, 1960–2007 (percent)
1960– 1965– 1970– 1975– 1980– 1985– 1990– 1995– 2000– 2005–
1964 1969 1974 1979 1984 1989 1994 1999 2004 2007
Import-Competing Products
Africa -28 -23 -19 3 0 112 7 10 4 na
Asia 11 25 19 26 38 70 68 63 76 na
Latin America 28 27 11 2 6 1 32 11 20 na
All Developing
Countries -1 20 10 11 7 48 26 10 16 na
European Transition
Economies na na na na na na 13 23 26 29
High-Income
Countries 79 80 52 72 88 89 83 84 81 63
World 64 55 42 56 58 80 59 60 62 56
Exportable Products
Africa 29 39 43 47 41 36 38 24 30 na
Asia 14 27 26 23 35 20 17 8 0 na
Latin America 20 15 28 22 23 21 5 2 3 na
All Developing
Countries 22 29 32 30 34 25 17 9 6 na
European Transition
Economies na na na na na na 0 2 -2 -9
High-Income
Countries -8 -12 -9 -5 -8 -21 -13 -4 -2 -2
World 3 7 11 12 17 8 4 4 3 -8
All Covered Farm Tradables
Africa 32 33 33 34 18 54 17 16 23 na
Asia 15 28 23 28 34 28 18 8 6 na
Latin America 22 8 19 17 19 13 23 7 8 na
All Developing
Countries 26 28 26 28 28 29 22 9 10 na
European Transition
Economies na na na na na na -4 13 14 2
High-Income
Countries 19 9 16 21 27 30 28 18 18 7
World 21 17 20 24 28 30 21 14 14 2
CTE = consumer tax equivalent, na = data unavailable, NRA = nominal rate of assistance.
Note: a Regional aggregates are weighted using the absolute value of net imports (computed as the difference
between the value of consumption and the value of production) at undistorted prices.
Sources: Lloyd, Croser, and Anderson (2009), based on product NRAs and CTEs in Anderson and Valenzuela
(2008).
Regarding the trade restrictiveness of agricultural policy, the TRI for
developing countries as a group was roughly constant or rose slightly until
the early 1990s, after which it declined, especially for Asia and Latin America.
This is evident from TRI estimates shown in Figure 4.10 and Table 4.6. For
high-income countries, the TRI time path was similar, but the decline began
a few years later. The aggregate results for developing countries are driven by
the exportables subsector, which is being taxed, and the import-competing
subsector, which is being protected. Like the WRI, the TRI correctly aggregates
the restrictiveness of subsector policies that are masked in aggregate NRA
and CTE measures where they offset one another.
The TRI generally shows greater variance than the WRI. This is because
the TRI measure is sensitive to switches from negative to positive rates of
assistance. For example, a move from a -30% to +30% rate of assistance would
have little or no effect on the welfare consequences of the policy, but it could
have a significant effect on trade restrictiveness. For example, net imports
of farm products would be greater when the NRA is negative than when it is
Figure 4.11: Nominal Rate of Assistance and Welfare and Trade

Reduction Indexes for Covered Tradable Farm Products,
World, 1960–2007 (percent)
CTE = consumer tax equivalent, NRA = nominal rate of assistance, TRI = trade reduction index, WRI = welfare
reduction index.
Sources: Lloyd, Croser, and Anderson (2009), calculations based on NRAs and CTEs in Anderson and Valenzuela
(2008).
positive, other factors being equal. The greater variability of the TRI is most
clearly demonstrated for Asia in the period from 1965–1969 to 1985–1989.
The WRI measure changed very little throughout that period, whereas the TRI
dipped and then spiked upwards in the 1980s (See Figures 4.9 and 4.10).
The fact that NRAs for high-income and developing countries diverged
from zero (in opposite directions) in the first half of the period under study
and then converged toward zero in the most recent quarter-century means
that their weighted average NRAs traced out a fairly flat trend. By contrast,
Figure 4.11 shows that the WRI and TRI for the world as a whole traced out
a hill-shaped path, thus providing less misleading indicators of the evolving
disarray in world agricultural markets. Figure 4.11 also suggests that the
global welfare cost of distortions was much higher than the NRA indicates,
but was more so in earlier decades than in the current one.
Welfare and Trade Effects According to a Global-Economy-Wide Model

It is clear from the above that there has been a great deal of change over the
past quarter of a century in policy distortions to agricultural incentives in Asia
and throughout the world. This is as a result of reduced anti-agricultural and
anti-trade biases in many developing countries’ policies. In addition, export
subsidies in high-income countries have been cut, and some re-instrumentation
toward less inefficient and less trade-distorting forms of support has begun,
particularly in western Europe. However, protection from agricultural import
competition has continued its upward trend in both rich and poor countries,
notwithstanding the Uruguay Round Agreement on Agriculture that aimed
to bind and reduce farm tariffs (Martin and Winters 1996). What, then, have
been the net economic effects of agricultural price and trade policy changes
around the world since the early 1980s? And how do these effects on global
markets, farm incomes, and economic welfare compare with the effects of
policy distortions still in place as of 2004?
Valenzuela, van der Mensbrugghe, and Anderson (2009) have employed a
global-economy-wide model to provide a combined retrospective and prospective
assessment of progress toward addressing the policy distortions in world
agriculture. Their model quantifies the impacts of both past reforms and current
policies by comparing the effects of the NRA distortion estimates in Valenzuela
and Anderson (2008) for the period 1980–1984 with those of 2004.
Several key findings from their study are worth emphasizing. First, the
policy reforms from the early-1980s to the mid-2000s improved global economic
welfare by US$233 billion per year, and removing the distortions that remain
as of 2004 would add another US$168 billion per year. This suggests that in
terms of global welfare, the world moved three-fifths of the way toward global
free trade of goods over that quarter century.
Second, developing economies have benefited proportionately more than
high-income economies (1.0% compared with 0.7% of national income) from
past policy reforms, and would gain nearly twice as much as high-income
countries by completing the reform process (an average increase of 0.9%
compared with 0.5% for high-income countries). Of the prospective welfare
gains from global liberalization, 60% would come from agriculture and food
policy reform—a striking result, given that the shares of agriculture and food
in global GDP and global trade in goods and services in 2006 were only 3% and
6%, respectively. Even in developing countries, agriculture now contributes,
on average, less than 10% of GDP and exports (World Bank 2008a). The
contribution of farm and food policy reform to the prospective welfare gain for
developing countries would be even greater than the 60% globally, at 83%.
Third, the share of global farm production exported in 2004 (excluding
intra-EU trade) was reduced slightly as a result of reforms made since 1980–
1984, because of lower farm export subsidies. Agriculture’s 8% share in 2004
contrasts with the 31% share for other primary products and the 25% for all
other goods—a thinness that is an important contributor to the volatility
of international prices for weather-dependent farm products. If the policies
distorting goods trade in 2004 were removed, the share of global production
of farm products that is exported would rise from 8% to 13%, thereby reducing
instability of prices and quantities of those products traded.
Fourth, the developing countries’ share of the world’s primary agricultural
exports rose from 43% to 55% between 1980–1984 and 2004, and its farm
output share rose from 58% to 62% in the same period because of reforms,
which resulted in rises in nearly all agricultural industries with the exception
of rice and sugar. Removing remaining goods market distortions would boost
their export and output shares to 64% and 65%, respectively.
Fifth, the average real price in international markets for agricultural and
food products would have been 13% lower had policies not changed over the
past quarter century. Evidently, the effect of falling RRAs in high-income
countries (including cuts to farm export subsidies) in raising international
food prices more than offset the opposite effect of rising RRAs (including
cuts to agricultural export taxes) in developing countries over that period.
By contrast, the removal of distortions remaining as of 2004 is projected
to raise the international price of agricultural and food products by, on
average, less than 1%. This is contrary to modeling results from previous
analyses based on the Global Trade Analysis Project protections database.7
The lower impact predicted in these new results is due, based on the above
NRA estimates, to export taxes in developing countries being included in
the new database (most notably for Argentina). Their reform would offset
the international price-raising effect of eliminating import protection and
farm subsidies elsewhere.
Sixth, for developing countries as a group, net farm income (value added
in agriculture) is estimated to be 4.9% higher than it would have been without
the reforms of the past quarter century, which is more than ten times the
proportional gain for nonagriculture. If policies remaining in 2004 were to
be removed, net farm incomes in developing countries would rise a further
5.6%, compared with just 1.9% for non-agricultural value-added. In addition,
returns to unskilled workers in developing countries—the majority of whom
work on farms—would rise more than returns to other productive factors
from that liberalization. Together, these findings suggest that both inequality
and poverty could be alleviated by such reform, given that three-quarters of
the world’s poor are farmers in developing countries (Chen and Ravallion
2007).
Finally, the removal of agricultural price-supporting policies in high-income
countries without the institution of corresponding compensation schemes for
local farmers would undoubtedly lead to painful reductions in their income and
wealth. It should be kept in mind, however, that the majority of farm household
income in high-income countries comes from off-farm sources (OECD 2008b),
and, in any case, compensation schemes could easily be afforded by taxing
some of the gains from those who benefit from freeing trade.
4.3 Are Policies Stabilizing Domestic Prices? The Case of Rice

A common objective of food policies—in Asia and elsewhere—is the stabilization
of food prices and quantities. For no other product is this more obvious than
for rice. Governments in Asia frequently use year-to-year fluctuations in trade
barriers as a buffer against domestic or international shocks, rather than
using trade as a source of lower-priced imports or an opportunity for high
7
For example, Anderson, Martin, and van der Mensbrugghe (2006), who estimated that the international
price of agricultural and food products would rise by 3.1%, or by 5.5% for primary agriculture
alone.
export earnings. As Asia produces and consumes four-fifths of the world’s rice
(compared with about one-third of the world’s wheat and maize), this market-
insulating behavior of Asian policy makers means that, even as of 2000–2004,
only 6.9% of global rice production was being traded internationally8 (compared
with 14% and 24% for maize and wheat, respectively). International prices
are, as a result, much more volatile for rice than for these other grains. Its
coefficient of variation over the 1970–2004 period was 0.63, compared with
0.46 and 0.44 for wheat and maize, respectively (Anderson forthcoming). This
means that nominal rates of protection for rice are above trend in years of
low international prices and below trend in years of high international prices
for rice. Figure 4.12 reveals that this has been the case. Even if figures for all
countries in Southeast or South Asia are averaged, the negative correlation
between rice NRAs and the international price for rice is high, at -0.59 for
Southeast Asia and -0.75 for South Asia.
4.4 Summary of Pertinent Findings

The key findings of relevance to the question of Asia’s contributions to global
economic development and stability via reform to policies affecting agricultural
incentives include the following:
• Overall trade liberalization, including reduced import protection of
manufacturing, has reduced the RRA to nearly zero and improved the
competitiveness of the agricultural sector in many economies, especially
in the PRC and India.
• The gradual policy shift away from taxing agricultural exportables,
although accompanied by a rise in agricultural import protection, has
reduced the anti-trade bias in agricultural distortions. This is evident
from the movement of the TBI and TRI toward zero over the past quarter
century.
• The dispersion in the NRAs and RRAs to farmers across Asian economies
has increased rather than diminished, despite reforms in the region. This
has also been the case for farm product NRAs within each studied Asian
economy. This means there is still scope for reducing the distortions in the
region’s use of resources in agriculture through greater international and
This was up from the pre-1990s half-decade global shares which are all less than 4.5% (e.g., 4.1% in
8
1985–1989), and is greater than the Asian share of just 5.7% in 2000–2004, according to Anderson
and Valenzuela (2008).
Figure 4.12: Rice NRA and International Rice Price, South and Southeast
Asia, 1970–2005 (left axis is int’l price in USD, right axis is NRA in%)
South Asiaa
Southeast Asiab
NRA = nominal rate of assistance, Pw = world price, USD = United States dollar.
Notes:
a Correlation coefficient is -0.75.
b
Correlation coefficient is -0.59.
Sources: Anderson and Martin (2009), based on data in Anderson and Valenzuela (2008).
intranational relocation of production. Since openness tends to promote
economic growth, total factor productivity growth in agriculture is slower
than it would be if remaining price-distorting interventions were removed.
As in other regions, such as Latin America (Lopez and Gallinato 2006),
there has been comparatively little assistance provided to Asian farmers
via public investment in rural infrastructure and agricultural research
and development (R&D),9 even though social rates of return from such
investments remain high (Fan and Hazell 2001; Fan 2008).
• Food policies in Asia continue to seek to reduce fluctuations in domestic
food prices and in the quantities available for consumption via fluctuations
in barriers to trade, especially for rice. This beggar-thy-neighbor dimension
of each government’s food policies reduces the role that trade between
nations can play in bringing stability to the world’s food markets. The
more countries insulate their domestic markets, the more other countries
perceive a need to do likewise, exacerbating the effect on world prices such
that even greater changes in NRAs are desired—a classic collective action
problem.10
5. How Can Asia Contribute More to Global Development

and Stability of Agricultural Markets?
After the current recession in high-income countries passes, it is expected
that Asia’s developing economies will keep growing rapidly, and that this
growth will continue to be more rapid in manufacturing and service activities
than in agriculture. In the more densely populated economies of the region,
growth will be accompanied by increases in the incomes of low-skilled workers
where labor-intensive exports boom. Agricultural comparative advantage is
thus likely to decline in these economies. Whether these economies become
more dependent on imports of farm products depends, however, on their
9
Data in Pardey et al. (2006) suggest that public R&D expenditure in Asia since the late 1970s has averaged
less than 0.5% of the gross value of production at undistorted prices, which is trivial compared with
the NRA via price-distorting measures for Asia of 25 to 40 times that (12% in 2000–2004 and below
-20% prior to the mid-1980s).
10
That policies seeking to insulate domestic food markets from changes in world market prices can
be self-defeating because of international spillovers was illustrated in 2007–2008. The imposition of
export restrictions in key exporting countries in late 2007 and early 2008 certainly contributed to the
sharp increases in world prices in the first half of 2008: such measures simply increase the volatility
of world markets as they seek to reduce volatility domestically.
RRAs. The first wave of Asian industrializers (Japan, then the Republic of
Korea and Taipei,China) chose to slow the growth of food import dependence
by raising their NRAs for agriculture even as they reduced their NRAs for
non-farm tradables such that their RRAs rose above the neutral zero level.
A key question is: Will later industrializers follow suit, given the past close
associations among RRAs, rising per capita income, and declining agricultural
comparative advantage?
If the RRAs for Japan, Republic of Korea, and Taipei,China are mapped
against real per capita income, it is possible to superimpose on that same figure
the RRAs for lower-income economies to see to what extent these economies
are tracking the first industrializers. Figure 4.13 does that for the PRC and
India, and shows that their RRA trends over the past three decades are on
the same upward trajectory as the richer economies of Northeast Asia. This
provides a reason to expect the governments of later industrializing economies
to follow suit, other factors being equal.
One reason one might expect different government behavior now is
because earlier industrializers were not bound under the General Agreement
on Tariffs and Trade (GATT) to keep agricultural protection down. Had
Figure 4.13: RRAs and Log of Real Per Capita GDP,

India and Northeast Asian-Focus Economies, 1955–2005
RRA %
Real GDP Per Capita

GDP = gross domestic product, PRC = People’s Republic of China, RRA = relative rate of assistance.
there been strict discipline on farm trade measures at the time Japan and
the Republic of Korea joined GATT in 1955 and 1967, respectively, their
NRAs might have been kept to less than 20% (Figure 4.14). At the time of
the PRC’s accession to the WTO in December 2001, its NRA was less than
5%, or 7.3% for import-competing agriculture alone. The PRC’s average
bound import tariff commitment was about twice that figure (16% in 2005),
but more important was its out-of-quota bindings on the items for which
imports were restricted by tariff rate quotas. As of 2005, the latter tariff
bindings were 65% for grain, 50% for sugar, and 40% for cotton (WTO,
International Trade Centre [ITC], and United Nations Conference on Trade
and Development [UNCTAD] 2007). The PRC also had bindings on farm-
product-specific domestic supports of 8.5%, and was able to provide another
8.5% as non-product-specific assistance if it so wished—a total NRA of 17%
from domestic support measures alone, which is in addition to assistance
available through out-of-quota tariff protection.
Clearly, the legal commitments the PRC’s government made on acceding
to the WTO are far from the current levels of domestic and border support it
provides its farmers. As a result, the commitments are unlikely to constrain
Figure 4.14: NRAs for Japan, Republic of Korea, and PRC, and Date of
Accession to GATT or WTO, 1955–2005 (percent)
NRA %
GATT = General Agreement on Tariffs and Trade, NRA = nominal rate of assistance, PRC = People’s Republic of
China, WTO = World Trade Organization.
the government much in the next decade or so;11 and the legal constraints on
Asia’s developing countries that joined the WTO earlier (with the exception
of the Republic of Korea) are even less constraining. In India, Pakistan, and
Bangladesh, for example, the estimated NRAs for agricultural importables
in 2000–2004 are 34%, 4%, and 6%, respectively, whereas the average bound
tariffs on their agricultural imports were 114%, 96%, and 189%, respectively
(WTO, ITC, and UNCTAD 2007). Also, as in other developing countries, the
governments of these countries have significant bindings on product-specific
domestic supports of 10%, and another 10% for non-product-specific assistance,
a total of 20 additional percentage points of NRA that could legally be applied
through domestic support measures. This compares with the less than 15%
currently in effect in South Asia (Table 4.3).
One can only hope that the PRC and South and Southeast Asia will not
make use of the legal wiggle room they have allowed themselves in their WTO
bindings and thereby follow Japan, the Republic of Korea, and Taipei,China
into substantial agricultural protection and insulation. Indications from the
ongoing Doha Round of multilateral trade negotiations at the WTO are not
encouraging. The group of 33 developing countries, led by Indonesia but
strongly supported by India and the Philippines, among others, is arguing
for additional “special and differential treatment” for developing countries
in the form of exemptions from agricultural tariff cuts for so-called “special
products,” (that would be subject to only small tariff cuts) and for a special
safeguard mechanism that would allow such countries to impose higher than
bound tariffs in years of likely import surges. A much more efficient and
equitable strategy would involve treating agriculture in the same way as they
have been treating non-farm tradables. This would involve opening the sector
to international competition, and relying on more-efficient domestic taxes
(e.g., income, consumption, or value-added taxes) rather than on trade taxes
to raise government revenue, and on general social safety nets rather than on
variable trade taxes to cope with food price fluctuations.
It might be argued that such a laissez faire strategy might increase rural-
urban inequality and poverty and thereby generate social unrest. Nonetheless,
import policies that lead to high food prices—for staples in particular—involve
potentially serious risks for the urban and rural poor, who are net buyers
of food in developing countries. Available evidence suggests that problems
relating to rural-urban poverty gaps have been alleviated in parts of Asia
11
For more on this point, see Anderson, Martin, and Valenzuela (forthcoming).
when more-mobile members of farm households are able to find full- or part-
time work off the farm and repatriate a portion of their higher earnings to
family members (Otsuka and Yamano 2006; World Bank 2007). Concerted
government intervention through social policy measures is hugely important,
both in reducing the gaps between rural and urban incomes, identified as a
concern by Hayami (2007), and in raising national incomes overall (Winters,
McCulloch, and McKay 2004). Efficient ways of assisting overlooked groups
of poor (non-farm or farm) households include public investment measures
that have high social payoffs, such as in basic education and health care, rural
infrastructure, and agricultural research and development.12
Improvements in farm productivity that increase output while lowering
consumer prices are likely to be much more important for long-run food
security than import restrictions. Both increase farmer incomes, but
productivity growth lowers food costs to consumers. Moreover, recognized
social benefits from expanding investments in agricultural R&D have become
even greater in recent years, due to the threat of climate change. In many
regions agriculture will have to contend with hotter, drier, and more volatile
weather, and hence, with scarcer water supplies (Pacific Economic Cooperation
Council 2008). New technologies to help farmers adapt to these changing
conditions will be needed sooner than they can be produced, even if R&D
investments increase immediately, given the very long lags from research start
to farmer adoption. Greater volatility in seasonal conditions, expected as a
result of climate change, is yet another reason governments should agree to
reduce their use of trade measures to insulate their domestic markets from
fluctuations in the international food market.
In light of the above, what should developing country policymakers do
when faced with a sharp upward movement in international food prices? In
2008, as in the past, many governments simply increased export restrictions or
lowered import restrictions on food staples for the duration of the spike (Figure
4.12). What if the recent rise in international prices is more prolonged than
the short-lived spikes of the past? Outlook projections issued by international
agencies in 2008 suggest prices may remain elevated for the foreseeable future,
12
If only one-twentieth of the current NRA provided to Asian farmers via farm price-support policies
was replaced by agricultural R&D expenditure, current public spending on such R&D would more
than double, and the latter would increase regional economic welfare (whereas price-distortionary
policies reduce it). Such a boost to Asian R&D could generate a second green revolution of the order of
magnitude of the one that began in the 1960s, especially if it took full advantage of new developments
in biotechnology (as shown for rice, for example, in Anderson, Jackson, and Nielsen [2005]).
and that growth in net food imports by rapidly industrializing economies in

Asia is a significant contributor to this phenomenon.13 Yet, as shown in Figure
4.7 and Table 4.1 above, over the past two or more decades, the PRC and India
have steadily raised their RRAs, despite their having been sufficient to keep
both countries very close to self-sufficiency in primary agricultural products
over the previous four decades. In terms of total agricultural and processed
food trade, however, in 2000–2004 the PRC became a net importer for the
first time, while, in South Asia, India’s net exports of farm products were less
than those of Pakistan or Bangladesh for the first time since the late 1960s
(Sandri, Valenzuela, and Anderson 2007).14 Should these governments choose
to maintain RRAs at current levels (close to zero), the import dependence of
these countries in agriculture could increase. If this occurs, other developing
countries might reconsider their current position in the WTO’s Doha Round
of trade negotiations. By agreeing to substantially lower their bound tariffs
and subsidies on agricultural products, they could extract greater concessions
from high-income countries without having to reduce their actual applied
rates for the foreseeable future. If a successful Doha agreement was then
concluded, the result would be a reduction in tariff binding overhangs, and
hence of the scope to vary taxes on farm trade. This would boost agricultural
trade, “thickening” international markets for farm products, and reducing
food price instability. If Asia wishes to take a lead in this direction, there is
no better product to focus on than rice.
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Comments
Bambang P.S. Brodjonegoro
Kym Anderson’s chapter discusses the role of Asian governments in stabilizing

the price of food and other agricultural products. In the last food price hike, the
role of governments in developed countries outside Asia was quite influential.
Panic relating to oil price hikes prompted the governments of some developed
countries to promote the production of biofuel made from traditional food
crops (e.g., corn in the US). Once the US government began to promote corn
as the base material for ethanol biofuel, many farmers shifted from soybeans
to corn due to higher biofuel prices. This widespread shift to corn resulted in
reduced production of soybeans and a sudden increase in the price of both
corn and soybeans, creating problems for importing countries, including
many developing countries.
This US case proved that national policies can influence domestic agricultural
price fluctuation over time and can either help the country’s farm households
at the expense of domestic consumers, or vice versa. Since the US is a leading
food exporter, the influence of its policies extends to international parties,
especially consumers. The free trade of agricultural products, particularly of
food, should be the solution to overcoming the dependence on major producer
countries’ policies. The existence of food trade restrictions, including export
restrictions, contributes to high international real food prices. Without an
increase in productivity growth, prices in 2050 could be 30–80% higher than
in 2000 (see Anderson’s paper for details).
The food market could be considered a unique case, as most countries tend
to insulate their domestic food markets from fluctuations, and, consequently,
create “thinness” in the international market. As food is the most important
basic need, together with energy, governments will do whatever they can to
secure the domestic food supply at an affordable price level. At the same time,
most governments pay special attention to farmers producing food for the
domestic market who have significant political power. Many governments
indirectly apply trade protection to food for the benefit of farmers rather than
of the food itself; this is the case in both developed and developing countries.
It is not really clear who benefits more from food protection: consumers or
farmers. Governments try to establish food prices that will create a balance
between domestic customer purchasing power and profit margins for farmers.
It is easier for developed countries with relatively high domestic purchasing
power to determine what price will be accepted by the majority of domestic
customers; developing countries will have a harder time finding a price that will
satisfy farmers but not be a burden for relatively low-income customers.
A balance between the conflicting goals of people’s welfare and economic
efficiency through openness should be achieved by removing barriers to
agricultural exports and imports, combined with government policies that can
improve the real income of farmers. Improving farmers’ welfare, for example,
should not focus exclusively on protection of products or on maintaining high
artificial prices, but should aim more at improving quality of life and lowering
input costs. The domestic market price should better reflect the international
price, which would result in farmers’ revenues being affected by food price
fluctuation. High price fluctuation often invites government intervention in
the form of direct market operations or the creation of buffer stock to stabilize
prices. Although considered inefficient, the idea of buffer stock is still attractive
to developing countries. This may be because farmers in developing countries
are more risk averse than those in developed countries.
The simulation results generated using the general equilibrium approach
discussed in Anderson’s chapter revealed that policy reforms have improved
global welfare quite significantly, and that developing economies have benefited
more proportionately than high-income economies. Furthermore, 60% of
welfare gains from liberalization have come from agriculture and food policy
reform, and developing countries’ share of agricultural exports has risen
substantially. If reforms are fully implemented, international food prices will
decrease, and at the same time, net farm income will rise. Reforms are not yet
complete, as indicated by ongoing protection of agricultural imports, both
in developed and developing countries. In fact, the political economy of food
security makes it more difficult to achieve complete reform. A major challenge is
that liberalization and free trade are not well accepted by developing countries,
especially poor ones. The presumption is that liberalization and free trade
benefit developed countries while exploiting the natural and human resources
of developing countries. Even if that presumption did not exist, governments
and citizens want control over their own food and energy security and will
not let the international market or imported products determine their fate.
Rather than contribute to “thickness” in the international market, developing
countries generally prefer to keep any surplus food as domestic reserves; the idea
of exporting food surpluses is considered to endanger national interests.
Asia has an opportunity to stabilize food and agricultural prices, given
the current global trend of increasing economic openness and the region’s
relatively high level of food and agricultural production. However, Asia is
still struggling to implement free trade in food as a major solution to the
challenge of securing food supply while benefiting both consumers and farmers.
Distrust among Asian economies should be solved first, and more developed
economies should lead the way. Another matter to be resolved is the possible
dualism of food and renewable energy, especially bioenergy. It might not be
an immediate problem, but fossil energy scarcity will eventually force an
acceleration of bioenergy production that might compete with food. If Asia
wants to take on a bigger role, the agricultural price of food should take into
account the agricultural price of energy, which, in turn, should result in the
security of food and energy supplies. Will free trade still be the answer if
renewable energy or bioenergy becomes part of the picture? The US’ oil price
hike experience proves that free trade is not a simple solution, but is rather
an opportunity to make a country’s economy more efficient.
How Can Asian Regionalism be a Stepping Stone to Preserving the Multilateral Trading System? 99
V
How Can Asian Regionalism be a Stepping Stone
to Preserving the Multilateral Trading System?
Inkyo Cheong, Jungran Cho, and Seungyeon Jeong
1. Introduction
The World Trade Organization (WTO) was established in 1995 amid controversy
over the relationship between regionalism and multilateralism. One strong
contention held that the spread of regionalism would hamper the development
of a multilateral system. The World Bank (2004: 15) noted that regional trade
agreements (RTAs) “can create trade and bring other benefits for members… but
results are not automatic and depend critically on design. Actual contribution
to the multilateralism remains unclear. One of the key factors behind this
performance is slow and incomplete implementation of the agreements.”
However, optimists concluded that regionalism contributes to the development
of a multilateral trade system.1 Supporters of this view have cited the rapid
spread of regionalism and the fact that more than half of the world’s trade
volume is being traded under preferential trade agreements. Accordingly, it
is desirable that regionalism and multilateralism be developed side by side,
and that regionalism be developed in such a manner that it supplements
multilateralism.
The home page of the WTO states that it is the only international organization
that deals with the global rules of trade between nations. Its main function is
to ensure that trade flows as smoothly, predictably, and freely as possible. It
provides a forum for governments to negotiate trade agreements and settle
1
Peter Petri of Brandeis University is very optimistic regarding East Asian regionalism. See Petri
(2008).
trade disputes. Where countries have faced trade barriers and wanted them
lowered, these negotiations have helped to liberalize trade.
RTAs also liberalize trade. Many times, they include trade standards that
the WTO has not yet been able to deal with. For example, the protection of
intellectual property rights, which was adopted in the North American Free
Trade Agreement (NAFTA) for the first time in 1993, was adopted as a regular
policy by WTO when it was established. Also, the Republic of Korea (hereafter
Korea)-United States (US) Free Trade Agreement (FTA) includes standards
related to the environment and labor, which have not yet been included in
the multilateral system.
However, with regard to market access, RTAs do not apply the most-favored-
nation (MFN) treatment, which is the basic principle of a multilateral trade
system, in accordance with Article XXIV of the General Agreement on Tariffs
and Trade (GATT). Moreover, RTAs incur trade-diversion losses due to the
mutual offering of preferential treatment among their member countries.
They also have the disadvantage of incurring spaghetti bowl losses caused
by strict rules of origin and overlapping FTAs.
This study examines the current conditions and characteristics of Asian
regionalism and explores the ways in which Asian regionalism can contribute
to the development of multilateralism. Given that the purpose of a multilateral
trade system is to promote the well-being of the populations of the member
countries by easing trade barriers and expanding trade, the formation of
regionalism that can contribute to trade expansion can also contribute to
the development of a multilateral trade system. Thus, FTA member countries
should conclude agreements in which the scope of liberalization is wide and
comprehensive and should minimize spaghetti bowl losses. FTAs that comply
with the GATT-WTO requirements should be concluded. When WTO+
agreements are pursued, regionalism will contribute to the formation of a
multilateral trade system. Also, a pan-regional FTA could explore ways of
supporting the expansion of trade infrastructure in developing countries and
of supporting the development of a WTO system on a regional basis.
2. Current Conditions of Asian Regionalism
The full-scale participation of Asian countries in regionalism began only

recently, although the history of Asian RTAs dates back to 1975, when five
countries—Korea, India, Sri Lanka, Bangladesh, and Lao People’s Democratic
Republic (Lao PDR)—established the Bangkok Agreement to expand trade
among developing countries within the jurisdiction of the United Nations
Economic and Social Commission for Asia and the Pacific (UNESCAP) by
removing tariffs and nontariff barriers. It was a typical preferential trade
agreement for providing preferential tariffs on some items primarily exported
by developing countries.
In 2002, the People’s Republic of China (PRC) joined the Bangkok Agreement,
and in 2005, an expansion of the applicable items was agreed upon. In 2006,
the Bangkok Agreement was renamed as the Asia-Pacific Trade Agreement
(APTA), the number of permitted items was expanded, and the rules of origin
were eased. In Korea, the number of generally permitted items, which was
applicable to all the member countries and which included chemical products,
steel, metals, and textiles and clothes, was expanded from 285 (HS10 unit)
to 1,367. In the PRC, the number of items was increased from 920 (HS8 unit)
to 1,858 and, in India, from 221 (HS6 unit) to 618. The rules of origin of the
Bangkok Agreement required that regional value-added ratios (on a free on
board price basis) of the applicable countries exceed 50% or be changed into
HS6 units. However, the rules of origin of APTA reduced the intraregional
value-added rate to 45% and decreased the value-added ratio by more than
35% in the cases of only Bangladesh and the Lao PDR, which were the least
developed of the member countries.
One characteristic of Asian regionalism is that many FTAs with different
contents were concluded in the region in a short span of time and many FTAs are
still being negotiated and/or discussed. Kawai and Wignaraja (2008) reported
that as of July 2007, there were as many as 102 bilateral FTAs in East Asia,
of which 36 were concluded (implemented), 41 were under negotiation, and
25 were under discussion. As in Europe (i.e., the European Commission and
European Union), with its many bilateral FTAs with the Mediterranean region
and African countries in the 1990s, the fragmentation of FTAs is currently
occurring in Asia. In Europe, concerns were raised over the cost of the spaghetti
bowl because of overlapping FTAs and differing rules of origin.
The first FTA in the Asian region was the Association of Southeast Asian
Nations (ASEAN) Free Trade Agreement (AFTA). It was established in 1994
following the grouping of the world’s biggest economies into economic blocs,
as with NAFTA and the European Union in the 1990s. Since 2003, the existing
ASEAN+6 countries, including Singapore, have been implementing the
Common Effective Preferential Tariff (CEPT). The main purpose of CEPT is
the reduction of tariffs in intraregional trade to 0–5% rather than the complete
abolition of tariffs, considering each country’s sensitivity to tariffs. The contents

of AFTA in its early stage focused mainly on lowering tariffs, but later, its range
was expanded to include investments and government procurement.
Although ASEAN countries have concluded FTAs with countries outside
the region, such as the US, Chile, and Mexico, most of their FTAs are with
other Asian countries. Most are bilateral agreements that the PRC, Japan,
and Korea have concluded with individual ASEAN countries.
PRC-ASEAN FTAs are composed of 10 bilateral agreements that the PRC
has concluded with 10 individual ASEAN member countries. In FTA tariff
negotiations, each ASEAN country makes CEPT the base and then tends to
decrease tariffs on some items. Thus, there are only slight differences between
the tariff rates under FTAs and those under MFN statutes. This has resulted
in a lack of incentives for business enterprises to utilize the preferential tariffs
under FTAs. According to Cho and Cheong (2008), preferential tariff margins
in the Korea-ASEAN FTA are around 1% on average.
Serious discussion on this issue was conducted in a workshop at ADBI in
July 2008. According to empirical research on FTA utilization rates,2 AFTA
preferences (CEPT) were not being used well and ranged from 11.2% to 4%
for Thailand and Malaysia. The Japan External Trade Organization (JETRO)
survey showed that among more than 700 Japanese companies, 11.9% of
respondent companies were utilizing FTAs, 22.8% planned to do so, and 37.4%
had no such plans.3 The margins under the preferential tariffs relative to the
MFN tariff rates are not large enough to compensate for the administrative
cost and delay of applying for preferential tariff treatment. Even small- and
medium-sized enterprises (SMEs) tend to bear higher costs per export than
large companies, since those enterprises do not have trade experts or the
know-how to use FTAs. Therefore, SMEs have lower rates of utilization and
planning for utilization, while large companies tend to have higher rates of
utilization and planning for utilization.
Accompanying the global trend toward competitive regional integration,
intraregional economic integration has become a survival strategy of the
East Asian region. The promotion of FTAs within the entire region has been
discussed for the past several years. The proposal for an East Asian FTA
The workshop was jointly organized by ADB, ADBI, and Economic Research Institute for ASEAN
2
and East Asia at ADBI, Tokyo, 17–18 July 2008. Refer to Kawai and Wignaraja (2008) regarding major
findings about the utilization of FTAs in East Asian countries.
Refer to Hiratsuka et al. (2008) for details.
3
(EAFTA) in the East Asia Vision Group report in 2001 was revitalized with
the PRC’s proposed study of the economic effects of EAFTA with ASEAN+3
countries. The first-stage studies of experts on the feasibility of EAFTA led
by the PRC were finished in August 2006 and the second-stage studies are
underway. At the ASEAN+3 Summit Meeting in January 2007, Korea proposed
that these second-stage private studies on EAFTA commence in May 2007
and end in May 2009. In the course of conducting research on EAFTA, Japan
proposed an ASEAN+6 FTA with the participation of India, Australia, and
New Zealand, called the Comprehensive Economic Partnership Agreement
in East Asia. In early discussions on EAFTA, ASEAN countries supported the
PRC’s proposal, but later, worried over the expansion of the PRC’s influence,
they appeared to sympathize with Japan’s proposal.
East Asia has triggered bilateralism prior to regional integration,
notwithstanding the growing economic interdependencies. This development
has been unfortunate in the sense that the deepening bilateralism has intensified
international rivalries within East Asia—especially between the PRC and Japan.
Generally speaking, bilateral FTAs offer a means by which Sino-Japanese rivalry
can play out as each country seeks to develop its own competing network of
diplomatic alliances to gain advantage and influence within the region. Such
behavior was well demonstrated when the PRC forwarded its FTA proposal to
ASEAN. Likely due to the pro-PRC tendency observed among ASEAN member
countries, the proposal itself was seen as a first move by the PRC to help build
its position as a future regional hegemon in East Asia. For this reason, Japan
entered into counter-balancing FTA negotiations with ASEAN to compete
for hegemony in the region (i.e., Japan-centered rather than PRC-centered
integration) (Kagami 2003).
If this practice of inviting states to enter bilateral FTAs as countermeasures in
reaction to other states’ moves continues, a defensive and adversarial economic
diplomacy environment could hamper regional community building. What
is worse is that such “competitive bilateralism” could also lead to a “hub-and-
spoke” pattern of international trade within a region that centers on dominant
“hub” powers (Park 2008). In East Asia today, there are two major and four
minor competitors for this “FTA hub” position: ASEAN vs. Northeast Asia
as blocs and/or ASEAN vs. PRC vs. Japan vs. Korea as individual entities.
Should this competition intensify any further, even a dialogue on this issue
at a regional level might become difficult.
Furthermore, this competition can result in something even worse than
delays in the process over miscommunication: the absence of leadership and
of a driving force. Thus far, the process of East Asian regional integration
has been led by ASEAN to launch ASEAN+3 as an extended form of ASEAN
for addressing issues that require the attention of the three Northeast Asian
countries. This format failed to realize the regionalization of East Asia. Despite
an early start by ASEAN, the hard truth of their being a group of minorities,
both in terms of politics and economic influence in the world, simply made
the ASEAN countries incapable of “leading” the three giants from Northeast
Asia. In this light, until the PRC, Japan, and Korea identify appropriate roles
and responsibilities for taking up the leadership, this process of regional
integration cannot properly progress.
This begs the question why the three countries from Northeast Asia—
especially the PRC and Japan, who desire regional leadership—have not
promptly taken the lead. Although the World Bank (2000) has pointed out
that diverse political factors can be (and were) the main motives behind
the expansion of trade blocs in the 1990s, it is also undeniable that East
Asian regionalism has suffered—and continues to suffer—from various non-
economic conflicts. Occasional political conflicts that involve territorial
disputes and disputes over historical perspectives, differences in political
systems, and lingering national sentiment toward unresolved issues from the
Second World War prevent all three countries from taking a leadership role
in the region. Thus, a happy reconciliation among the three Northeast Asian
countries of the wounds from the past is necessary for the establishment
of the EAFTA.
3. Channel of Regionalism Developing into Multilateralism
It is already internationally acknowledged that regionalism contributes to

the development of multilateralism. As the conclusion of FTAs entails the
liberalization of trade at least among FTA member countries, a liberalized
market economy is formed and economic profits are produced, which overcome
anti-liberalization sentiments and improve the protectionist atmosphere.
Moreover, the conclusion of comprehensive agreements can be utilized not
only to abolish trade barriers but also to advance national economies and to
abolish unreasonable regulations. As the number of concluded FTAs increases,
a market-friendly and liberalization-friendly atmosphere will be formed.
As a result, WTO-led voluntary trade liberalization and multilateral trade
negotiations can be made from a more active stance.
Although spaghetti bowl costs can be incurred in the presence of a very
large number of agreements, the spread of regionalism will likely contribute
not only to the liberalization of intraregional trade but also to multilateral
trade liberalization. In a way, trade liberalization under FTAs may be politically
easier than multilateral trade liberalization. The latter is trade liberalization for
the whole world, whereas trade liberalization under FTAs is limited to imports
from the participating countries in which external tariffs should be abolished.
Estevadeordal and Suominen (forthcoming) proved this by analyzing the
lowering of tariffs by 11 countries in Central and South America under FTAs
and a multilateral system. As Figure 5.1 shows, the pattern of the lowering
of preferential tariff rates was similar to that of the lowering of multilateral
tariff rates, and the lowering of preferential tariff rates is shown to have led
to the lowering of MFN tax rates.
According to Estevadeordal, Shearer, and Suominen (2008), growing
numbers of FTAs in East Asia have merits in spite of slow progress toward
forming a region-wide FTA. They allow countries in the region to achieve
deeper trade liberalization than would otherwise be possible. They can
also contribute to global trade liberalization through multilateralizing
regionalism.
Figure 5.1: RTA Liberalization Drove MFN Liberalization in Latin America
MFN = most favored nation.

Source: Estevadeordal and Suominen (forthcoming).
The conclusion of FTAs can strengthen the implementation of the WTO

commitments made by member countries. Most FTAs that were recently
concluded encompass many aspects, such as market access, services and
investment, trade rules, the protection of intellectual property rights, and
government procurement, which are parts of the WTO system. More recent
FTAs tend to have a similar structure and to become more closely related
with the WTO rules. For example, in terms of the substantive aspects of
FTAs, Korea has maintained a high degree of consistency. First of all, in line
with Article XXIV of GATT 1994 and Article V of the General Agreement on
Trade in Services (GATS), Korea has pursued comprehensive FTAs that cover
all sectors and substantially all trade. Most of its FTAs, including those still
under negotiation, cover trade in goods, trade in services, investment, and
other topics.
Trade in goods spans market liberalization, rules of origin, and trade remedy
rules, such as safeguards and anti-dumping and countervailing duties, customs
procedures, sanitary and phytosanitary (SPS) measures, technical barriers to
trade, and mutual recognition. Trade in services defines market liberalization,
related rules on national treatment, market access, local presence and domestic
regulations, and specific sectoral coverage (finance, telecommunications, etc.)
and sector-specific rules. Chapters on investment, e-commerce, government
procurement, intellectual property rights, competition, transparency, dispute
settlement, and other topics are included in many FTAs.
Also, Asian countries have improved the content of FTAs over time. An
analysis of the FTAs that the PRC has concluded distinctly shows this pattern.
The FTA that the PRC concluded with ASEAN in 2005 involved the trading
of goods, but the FTA that it concluded with Chile in 2006 also involved
customs procedures and the trading of services. The PRC-New Zealand FTA
in 2008 included content that had not been dealt with in the FTAs that the
PRC had concluded with ASEAN, Chile, and Pakistan, as seen in Table 5.1.
Of the FTAs that the PRC had concluded, the PRC-New Zealand FTA was
the first comprehensive agreement by the PRC and included simultaneous
agreements on services, investment, and negotiations on goods. With regard
to the trading of goods, the PRC, for the first time, included a WTO tariff-
evaluation agreement in its FTA with New Zealand, with which it initiated
the likely inclusion of tariff evaluation in future FTAs. Meanwhile, the PRC’s
economy has not yet been recognized as a full-fledged market economy, and
it has incurred much trade friction due to its arbitrary tariff evaluation.
Also, in the PRC-New Zealand FTA, a memorandum of understanding on
the environment and labor was signed, with which the PRC can begin to
improve its environmental criteria and labor conditions.
The typical field in which an FTA can contribute to the development of
a multilateral trade system is that of nontariff barriers. Most Asian FTAs
Table 5.1: Coverage of the PRC’s FTAs
ASEAN Chile Pakistan New Zealand

(2005) (2006) (2006) (2008)
Goods ○ ○ ○ ○
National Treatment ○ ○ ○ ○
Tariffs ○ ○ ○ ○
ROO ○ ○ ○ ○
Customs Valuation × × × ○
Customs Clearance × ○ × ○
Mutual Recognition × × × ○
SPS Measures ○ ○ ○ ○
Safeguard Measures ○ ○ ○ ○
AD and CVD ○ ○ ○ ○
Services × ○ × ○
Rules on Services × ○ × ○
Human Mobility × × × ○
Investment × × ○ ○
Intellectual Property Rights × × × ○
Government Procurement × × × ×
Others
Competition × × × ×
Environment × ○ × ○
Labor × ○ × ○
E-commerce × × × ×
Transparency × ○ ○ ○
Administration
FTA Committee ○ ○ ○ ○
DSU ○ ○ ○ ○
AD = anti-dumping, ASEAN = Association of Southeast Asian Nations, CVD = countervailing duties,

DSU = dispute settlement unit, FTA = free trade agreement, PRC = People’s Republic of China, ROO = rules of
origin, SPS = sanitary and phytosanitary.
include chapters on SPS measures and technical barriers to trade. Hygienic

quarantine is an area that even international organizations such as the WTO
typically cannot handle well. SPS, which is an agreement on the application
to foods as well as animals and plants, stipulates that the trading of food
cannot be refused if internationally determined criteria are met in four areas:
food additives; pollutants (residual agrichemicals, heavy metals, and other
pollutants); pathogenic bacteria; and toxins. In accordance with SPS agreements
that became effective 1 January 1995, international standards for food have
been forcibly applied but have not been well implemented due to domestic
resistance. Individual countries can prevent imports of internationally traded
agricultural food products by setting up domestic standards that are higher
than international standards. The candlelight street demonstrations in Korea
in May–August 2008, which protested against American beef imports, can
be understood in the same context.
While FTAs can adopt different types of SPS measures that reflect the
positions of member countries on the issue, most FTAs choose to adopt
international standards regarding SPS measures, which refers to an agreement
on the Application of Sanitary and Phytosanitary Measures. This means
that member countries of FTAs make another commitment in complying
with the WTO rule, which results in more active observation of the rule.
For example, Chapter 8 of the Korea-Chile FTA defines “Sanitary and
Phytosanitary Measures,” noting that the definitions and terms established
under the following shall be applied: (a) Agreement on the Application of
Sanitary and Phytosanitary Measures, which is part of the WTO Agreement
(SPS Agreement); (b) Office International des Epizooties (World Organisation
for Animal Health); (c) International Plant Protection Convention; and (d)
Codex Alimentarius Commission.
Article 8.5 of the FTA describes “International Standards and
Harmonization” by saying that “without reducing the level of protection of
human, animal, or plant life or health, each Party shall base its sanitary and
phytosanitary measures on relevant international standards, guidelines or
recommendations, where they exist, with a view to seeking harmonization.”4
4
Section 2 of Article 8.5 of the Korea-Chile FTA notes that the Parties may adopt a sanitary or phytosanitary
measure offering a level of protection other than the level that would be achieved through a measure
based on an international standard, guideline, or recommendation, including a more stringent measure
than the foregoing, if there is a scientific justification, or as a consequence of the level of sanitary or
phytosanitary protection the Party determines to be appropriate in accordance with the relevant
provisions of Article 5 of the SPS Agreement.
In this article, “relevant international standards” imply the SPS Agreement,
Office International des Epizooties, International Plant Protection Convention,
and Codex Alimentarius Commission, which are a part of the WTO system.
This article is quite similar to the WTO SPS Agreement, which implies heavy
reliance on the WTO system.
Pan-regional FTAs have aspects that contribute positively to multilateral
trade negotiations, but they also have negative aspects. The European Union’s
27 member countries have taken a joint position on a regional basis in the
Doha Development Agenda (DDA) negotiations. Given that 153 WTO member
countries are participating in multilateral negotiations, the subjects of such
negotiations are becoming complex, such that big regional blocs are reducing
the number of participants in their negotiations to simplify such negotiations.
Also, peer pressure, which causes passively participating countries to be active,
can be expected. On the other hand, the conclusion of agreements can be
delayed if selfishness sets in.
Asia is composed of diverse countries and accounts for a big share of
the world’s trade volume, economy, and population. Thus, Asian regional
coordination not only in the ongoing DDA negotiations but also in new
multilateral negotiations can contribute to the speedy conclusion of these
negotiations. In particular, with the higher positions of the Chinese and
Indian economies in the world economy, the importance of Asia in multilateral
negotiations is increasing. Thus, if an economic cooperation body for the
entire Asian region is established and the joint positions of Asian countries in
multilateral negotiations are explored, the multilateral negotiation structure
will be simplified, which will facilitate the conclusion of negotiations.
4. Schemes of Asian Regionalism that Contribute to the

Multilateral System
The ways by which Asian regionalism can contribute to the development of a
WTO multilateral system can be classified as either Asia-specific or not related to
the region. The most important objective is to pursue a high-quality, pan-Asian
FTA, but a pan-regional FTA is not easy to promote. Through the currently
implemented or promoted FTAs, however, a scheme that will contribute to
the development of a multilateral system can be explored.
4.1 Side-By-Side Development of Multilateralism and Regionalism
With the delays in the conclusion of the DDA negotiations, regional trade
agreements such as FTAs have been spreading worldwide. Moreover, the current
recession in the world economy is raising fears of the return of protectionism
and discriminatory regionalism not only in advanced countries, but also in
developing countries. It is not desirable, however, that FTAs that are based
on discrimination replace a multilateral trade system that is based on MFN
statuses. Although the development of a multilateral system has been delayed
and regionalism is being pursued to meet interests that cannot be secured with
a multilateral system, top priority should be accorded to multilateralism. It is
certainly the best trade policy for maximizing the benefits from the expansion
of global trade, the liberalization of trade, the reinforcement of trade standards,
and the resolution of trade disputes among member countries.
Accordingly, the world trade order should be based on a multilateral system,
and the FTAs that individual countries promote under given circumstances
should pursue greater trade liberalization than that which the DDA is
considering. Thus, multilateralism and regionalism should be developed
side by side. As previously discussed, FTAs can contribute to global trade
liberalization, but because they have negative effects, such as spaghetti bowl
costs, high-level FTAs that engender broader trade liberalization and that are
more comprehensive should be promoted.
4.2 Compliance with Multilateral Standards for Regionalism

In general, the latitude in Asian FTAs for opening markets is not wide. An
FTA that can hardly meet even the market-opening conditions stipulated in
Article XXIV of GATT has been concluded.5 Although the regulation itself
has unclear clauses, tariffs on at least 90% of trade transactions among the
member countries (on a number of items and on a traded-amount basis) should
be abolished within 10 years, and particular industries should not be exempted
from liberalization. Some FTAs stipulate tariffs of less than 5% rather than
Section 8(a) of GATT Article XXIV notes that “a free-trade area shall be understood to mean a
5
group of two or more customs territories in which the duties and other restrictive regulations of
commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and
XX) are eliminated on substantially all the trade between the constituent territories in products
originating in such territories.”
a total abolition of tariffs. For example, AFTA targets 0–5% tariff rates, and
the South Asia Free Trade Agreement (SAFTA), which came into effect in
2006, has similar clauses.
SAFTA allows India and Pakistan to reduce tariffs to 0–5% within seven
years (10 years for other members). The FTA between India and Thailand
specifies that tariffs for only 10% of all products be eliminated. The Japan-
Singapore FTA ensures that Japanese agriculture will not be affected in any
real sense. Only a 14% increase was made in the number of Japan’s zero-tariff
commitments with regard to agricultural products, relative to its commitments
in the WTO. Therefore, most of the non-ad valorem tariffs, which are to be
eliminated, are to be maintained in spite of the distorting effects on domestic
production patterns.6
4.3 Promotion of a Pan-Regional FTA

Despite the many FTAs that have been concluded in Asia in a short period
of time, their economic effects are less than expected. For greater economic
effects, high-level FTAs should be concluded, and pan-regional, multilateral
FTAs must be promoted. In Asia, multilateral FTAs are being discussed, but
the participation of the related countries is sluggish. In the long term, the
economic integration of the Asian region must be revitalized. Throughout the
Asia and Pacific region, discussions are underway on multilateral economic
integration, as with the PRC-Japan-Korea FTA,7 the ASEAN+3 (Korea, PRC,
and Japan) or +6 (Korea, PRC, Japan, India, Australia, and New Zealand)
FTAs, and the Free Trade Area for the Asia-Pacific that is being discussed
in the Asia-Pacific Economic Cooperation (APEC), and the governments of
the countries involved should favorably consider this matter with a liberal
attitude.
Apart from the existing discussion channels among the concerned
governments, a permanent organization must be established among the
PRC, Japan, and Korea, wherein the discussions on economic integration
in the region can continue without interruption even if there are diplomatic
6
Refer to Cheong (2002) regarding the wide range of exceptions for agricultural products in the Japan-
Singapore FTA.
7
In accordance with the agreements in the summits of Korea, PRC, and Japan, joint private studies
on the feasibility of a regional FTA are underway. In 2008, studies on the direction, problems, and
expected effects of the promotion of an FTA among these three countries were conducted.
confrontations among the countries concerned. Such an organization,

tentatively named the Organization for East Asia Economic Integration
Promotion, has been proposed by Jeong (2008). To ensure the reliability of
this new organization, government officials of each member country, and—as
far as possible—members of the private sector, such as businesspeople, scholars,
and nongovernmental organizations, must participate in the organization.
Although this new organization should be promoted with the PRC, Japan, and
Korea as the central players, representatives of the US and the European Union
could also participate in it. This promoting body should have the competence
and authority to deal with economic integration in the industrial and financial
sectors and to reinforce functional economic cooperation in each area.
4.4 Harmonization of the Rules of Origin

In RTAs, the adoption of strict and diverse rules of origin incurs economic
costs. Two ways of unifying or standardizing the rules of origin of RTAs
in the Asian region can be considered. One scheme is to lay down model
rules of origin and have each RTA accommodate them. The other scheme
is to form an organization that covers a broad range of issues on East Asian
economic integration and to adopt a rational form of the rules of origin. Such
rules of origin can be set up as a kind of model. Intra-regional RTAs can be
recommended to use these rules even before the East Asian integrated body
is formed. Meanwhile, the Harmonization Work Program for laying down
non-preferential and uniform rules of origin has been underway in the WTO
since 1995.8 Thus, when uniform WTO rules of origin are adopted and Asian
countries adopt them as their FTAs’ rules of origin, spaghetti bowl costs will
be considerably reduced.
In the preparation of model rules of origin that can be applied to Asian
RTAs, objective and transparent rules should be established with regard to
consistently controversial matters, such as the setting up of neutral rules of
origin, the method of calculating the regional value content to determine
the position of the intra-regional place of origin, the de minimis regulations
and standards, the expanded application of accumulation, and the Integrated
Sourcing Initiative.
Despite the extension of the time limit on several occasions, negotiations on uniform rules of origin
8
have not yet been concluded. The WTO’s General Board of Directors designated as critical issues 12
areas out of 94 core policies that have not yet been resolved, on which negotiations are underway.
4.5 Removal of Nontariff Barriers
Tariff levels have been considerably lowered. In particular, tariffs on industrial

goods have been distinctly lowered. In the DDA negotiations, the reduction of
tariffs in the agricultural sector has become one of the core points of contention.
However, the nontariff barrier is more serious than the tariff barrier. Unlike
tariff barriers, nontariff barriers are difficult to quantify, and an international
comparison of nontariff barriers is likewise not easy, which implies that it
is not easy to handle nontariff barriers in multilateral trade negotiations.
Such barriers can be more effectively handled through FTAs than through a
multilateral system, and this is one way by which regionalism can contribute
to the development of multilateralism. Under FTAs, if the trade system is
improved, the improved system can be applied not only to the countries
that participate in the FTA but also to virtually all WTO member countries,
such that considerable benefits from the resolution of nontariff barriers can
be expected. In particular, the Agreement on Technical Barriers to Trade,
the Agreement on the Application of Sanitary and Phytosanitary Measures,
customs procedures, and commodity price tariff evaluation in Article VII of
GATT are included in FTAs. Further, since business enterprises in the FTA
member countries closely monitor the implementation of these agreements,
their implementation effects can be substantially improved.
The simplification of customs procedures can contribute to the expansion
of international trade.9 With the expansion of one-stop service shops, in which
standardized information on export-import customs clearance is input at
a single place, single-window projects with simplified and standardized
procedures should be developed and expanded.10
The WTO is preparing a customs data model to provide standardized
electronic data, and the US, Japan, and Australia are actively participating in
this process. The contents of this model must be reflected in the Asian FTA. To
remove nontariff barriers, electronic trade must be expanded. FTAs that have
been recently concluded include the promotion of electronic trade, for which
the system of cooperation is stipulated. Internet and digital communication
can be made available all over the world with the development of information
9
A single window is defined as “a facility that allows the parties that are involved in trade and transport to
lodge standardized information and documents at a single point of entry to fulfill all import, export, and
transit-related regulatory requirements” (United Nations Economic Commission for Europe 2005).
10
See United Nations Economic Commission for Europe (2006) for one such framework.
and communications technologies; and accordingly, enterprises have rapidly

expanded their e-trade because in the present age, prompt access to information
on international business situations is essential for enterprises to survive.
Accordingly, national governments are doing their best to construct a base for
e-trade through a global network and also feel the urgency for international
cooperation. FTAs can lead to the development and expansion of the global
network by enhancing the e-trade platform and by forming an Asian e-trade
network and connecting it to the e-trade networks of other regions.
4.6 Support for the WTO Implementation System

Many Asian countries have joined the WTO over the last several years, but the
Lao PDR has yet to do so. In Asia, economic cooperation is being promoted
through the ASEAN+3 Summit Meeting, and diverse cooperation projects,
such as support for intraregional development, support for the construction
of trade infrastructure, and development of manpower, are underway. Also,
diverse FTAs have been concluded among intraregional member countries,
and the promotion of an ASEAN+3 or an ASEAN+6 FTA is being discussed.
The level and comprehensiveness of the planned pan-regional FTA will most
likely be set up in consideration of those countries whose trade conditions
and trade infrastructures are the weakest.
The most basic trade infrastructure can be compliance with and
implementation of WTO regulations. Reinforcement of the protocol for
implementing the WTO system is one of the prerequisites for the conclusion
of a high-level FTA. Marked differences and diverse stages of development
across Asian economies have become obstacles for establishing an economic
cooperation system. Official development assistance (ODA) to developing
countries in Asia must be expanded, the ODA support system for the construction
of trade infrastructures must be reinforced, and the WTO system must be
implemented. The ODA scales of Japan, Korea, and PRC must also be increased.
When trade infrastructures are reinforced, developing countries can also expand
their participation in international trade. When their economies grow as their
international trade expands, the approval ratings for their open economies
are expected to rise. As a result, the political competence of the sphere of
powers that support the open economies will expand, and the environment for
the promotion of liberalization policies will improve. As a result, developing
countries can actively participate in FTA negotiations and WTO negotiations
and can ultimately contribute to the development of a multilateral system.
4.7 Reinforcement of the Public’s Support of Market Economics
An open market policy influences income distribution and entails the

restructuring of weak industries, due to which it can hardly be a popular
policy. Regardless of the international economic theories mobilized to explain
an open policy, the contentions of anti-liberalization advocates have been
more convincing for the general public in many countries. The US has been
no exception. In the recent US presidential elections, President Barack Obama
adopted a protectionist trade policy platform to protect jobs and made it clear
that he opposed a Korea-US FTA on the grounds that the results of negotiations
in the automobile sector were unsatisfactory. In part because Americans had
been experiencing serious economic difficulties, Obama’s position won him
many votes in the 2008 presidential election.
Despite today’s difficult political and economic environment, the best way
of promoting an open trade policy is to induce participation in the global
trend toward regionalism and to harvest the economic profits of opening
up markets. Trade authorities should reinforce their efforts for improving
the public’s recognition of the advantages of market economies and liberal
policies. In particular, for promoting multilateral negotiations in the DDA,
FTAs with big economic blocs, and pan-regional FTAs, the opposition from anti-
liberalization political powers should be overcome through broader support
from the public. To win the public’s support, the help of media organizations
should be sought and lectures should be given to the public on the market
economy. In the Korean government’s conclusion of an FTA with the US in
April 2007, the Korean negotiators’ aggressive stance in the negotiations was
made possible with the support of the Korean public.11
Popular recognition of the merits of a market economy will grow if business
enterprises and consumers experience the benefits of market liberalization.
In particular, no matter how low tariffs may be, if the domestic distribution
structures are undeveloped, it is the middlemen who will enjoy the benefits
of lowered tariffs, and welfare effects on consumers can hardly be expected.
Accordingly, deregulation, such as the innovation of the domestic distribution
structure, should be emphasized. Efforts should also be made to enhance the
degree to which enterprises utilize existing FTAs.
11
During the FTA negotiations, the Korean public’s approval rating for a Korea-US FTA was about 30%
but, thanks to the Korean government’s active promotion, the approval rating rose to 60% toward
the conclusion of the negotiations.
Likewise, efforts should be made to maximize the positive effects of FTAs,

not only through the qualitative and quantitative assessment of the effects of
FTAs, but also through smooth implementation of existing FTAs. To do this,
governments must provide business enterprises with the information they
need to actively utilize existing FTAs. Member countries should hold meetings
of implementation committees regularly, as stipulated in the agreements, to
evaluate the current conditions of FTA implementation and discuss schemes
for future development.
5. Conclusion
The global economy has entered a recessionary phase due to credit distress
and deterioration of the industrial sector, which was caused by the US financial
crisis. The Asian economy has been affected, although it has continued to
enjoy high growth. International cooperation to prevent a deeper financial
crisis and to boost the global economy is proving effective to a certain extent,
but it is expected that the world economy will not soon escape the trend of
low growth. As a result, the prospects for the Asian economy, which depends
heavily on exports, are gloomy. If the DDA is concluded, it will help to invigorate
the world economy. However, the negotiation for the DDA is not likely to be
concluded in the near future.
In terms of Asia’s stage of economic development, economic growth
potential, and population size, the growth prospects of the region’s economy are
better than those of the US and Europe. The task is to actualize these growth
potentials and expand domestic demand. For this purpose, intraregional
cooperation for the expansion of demand within the Asian region must be
initiated. A pan-regional FTA can be formed to support this effort. In the
long term, a system for financial cooperation within Asia, such as the Asian
Monetary Fund, must be discussed. The level of trust among Asian countries
is low, so no one country can lead pan-regional economic integration. The
current urgency for forming a regional FTA can help overcome such problems.
In particular, the EAFTA will help to enhance the growth potential of the
East Asian economy.
The ASEAN+3 Summit Meeting has made much headway as an economic
cooperation organization. However, practical discussions on regional
integration are needed. It is more important to develop a consensus on the
establishment of a pan-regional FTA than to fan controversies on an ASEAN+3
or an ASEAN+6 FTA. This is a difficult issue to resolve because of barriers
such as wide gaps between member countries, differences in perceptions of
market liberalization, and a struggle for leadership in intraregional integration.
Because many countries have accumulated experience and expertise on FTAs,
a pan-regional FTA can be promoted only when political agreements have
been reached. When consensus on a liberalization policy is established in
Asia, the region can play the role of promoting DDA negotiations and drive
the conclusion of negotiations with other regions.
Most countries have not formed equally antagonistic structures between
pro-FTA groups and anti-FTA groups. The voices that oppose FTAs and
liberalization are loud, while the voices of FTA and liberalization supporters,
such as business enterprises and others that can expect profits from liberalization
policies, are too soft. This imbalance affects the political map in domestic
politics, making the promotion of FTAs more difficult.
Why are the FTA supporters who can benefit from liberalization silent? In
the case of Korea, the most important reason for this is the lack of involvement
of Korean enterprises beginning from Korea’s choice of the country with which
it would conclude an FTA. Because the government is doing well in aggressively
promoting FTAs, business enterprises think they need not participate. In
addition, they may not want to bear the emotional burden of facing the groups
of people who may be harmed, including laborers and farmers.
Only when supporters of market-opening policies make their voices heard
can the government actively participate in FTA and DDA negotiations. The
ways by which “silent approval” can be converted into “proactive approval”
should be explored. The participation of interested parties, such as business
enterprises, in the course of decisions on trade policies should be expanded,
and positive coverage by the media must be sought. The government should
reinforce trust with the media by consistently conveying accurate information
to the media.
References
Cheong, I. 2002. The Assessment of the Japan-Singapore FTA. Internal Discussion Paper.
Seoul: Korea Institute for International Economic Policy. Korean.
Cho, J., and I. Cheong. 2008. Survey on Korean Companies on the Utilization of FTAs.
Presented at a seminar by Korea Association of International Trade and Industries.
November. Korean.
Estevadeordal, A., M. Shearer, and K. Suominen. 2008. Regional Integration in the Americas:
State of Play, Lessons, and Ways Forward. Paper presented at the Multilateralizing
Asian Regionalism Conference organized by ADBI and the Center for Trade and
Economic Integration of the Graduate Institute of International and Development
Studies, ADBI, Tokyo, 18–19 September.
Estevadeordal, A., and K. Suominen. Forthcoming. Bridging Regional Trade Agreements in
the Americas. Washington, DC: Inter-American Development Bank.
Hiratsuka, D., I. Isono, and H. Sato. 2008. Findings from Japan Enterprise Survey of the Impact
of FTAs: Escaping from FTA Trap and Spaghetti Bowl Problem. Paper presented at
the Asian Noodle Bowl Conference and Technical Workshop on Impacts of FTAs on
Business Activity in East Asia, ADBI, Tokyo, 17–18 July.
Jeong, S. 2008. Economic Integration in East Asia and the Roles of Korea. Paper presented
at the conference on East Asian Economic Integration organized by the Institute for
the Research of Advanced Korea, Seoul, 12 October. Korean.
Kagami, M. 2003. ASEAN-Japan Comprehensive Economic Partnership and Japan’s FTAs
with Other Countries Including Korea and Mexico. Paper presented at the JEF/SIIA
International Symposium, Singapore, 7–8 March.
Kawai, M., and G. Wignaraja. 2008. Asian Noodle Bowls: Are They Serious? Paper presented
at the Multilateralizing Asian Regionalism Conference organized by ADBI and the
Center for Trade and Economic Integration of the Graduate Institute of International
and Development Studies, ADBI, Tokyo, 18–19 September.
Park, I. W. 2008. Regional Trade Agreements in East Asia: Will They Be Sustainable? Mimeo.
Seoul: Korea University.
World Bank. 2000. Trade Blocs: A World Bank Policy Research Report. Oxford: Oxford
University Press.
————. 2004. Global Economic Prospects, 2005: Trade, Regionalism and Development.
United Nations Economic Commission for Europe (UNECE). 2005. Recommendation on
Establishing a Single Window, Recommendation 33, ECE/TRADE/352. Geneva:
UNECE.
————. 2006. WCO Framework of Standards to Secure and Facilitate Global Trade. Geneva:
UNECE.
Comments
Pham Quy Long
1. Background and Purpose of Analyses
The debate is ongoing regarding the roles of regionalism and multilateralism

in the world economy in terms of reinforcing the global multilateral trading
system (under the WTO). We have discussed the “noodle bowl” phenomenon
of FTAs in Asia. Fears persist that the FTAs existing in Asia will hamper
the development of a multilateral trading system under the umbrella of
the WTO. The growing economic integration of nations around the world
through regional or global trade and investment has been accompanied by
increasing overlap between bilateral FTAs and the multilateral trading system
under GATT/WTO rules. Given the side-by-side development of regionalism
and multilateralism, in what directions will regionalism be developed? Will
it supplement multilateralism or make it more complicated? Not enough
evidence exists to answer these questions. However, optimists say that if we
account for the trade in the Asia and Pacific region over the last decade, Asian
regionalism under FTAs has contributed significantly to the development of a
multilateral trade system (Petri 2008). From that point of view, I quite agree
with the statement of the authors that “it is desirable that regionalism and
multilateralism be developed side by side, and that regionalism be developed
in such a manner that it supplements multilateralism” (see p.99).
2. Status of Asian Regionalism
How complex is Asian regionalism today? In Section 2 of the chapter, the

authors have described the real picture and analyzed Asian regionalism.
From the foundation of the ASEAN FTA, the model of FTAs (ASEAN-plus
agreements) was built. The chapter shows that one of the characteristics of
Asian regionalism is that many FTAs with different contents were concluded
in the region in a short time, and many FTAs are still under negotiation. The
reasonable concern over having more FTAs is the potential spaghetti bowl costs
due to overlapping FTAs and different or complicated rules of origin. I think
that from the political economy perspective, FTAs in East Asia, understood
as RTAs, were also influenced by the rivalry between Japan and the PRC for
future regional leadership. The authors also mentioned the concept of an
“FTA hub” position in which ASEAN vs. Northeast Asia compete as blocs and
ASEAN vs. PRC vs. Japan vs. Korea compete as individual countries. However,
which country should take the leadership role is still a controversial issue. Most
of the focus is on the rivalry between the PRC and Japan as well as ASEAN
for that position. Korea does not normally get considered as a possible future
leader. For the first time, this chapter put Korea forward for consideration as
a new candidate. Thus, it can be said that the regionalism in Asia in terms of
RTAs or bilateral FTAs is still complicated and involves conflicts over non-
economic factors rather than market-led motivations.
3. How to Reach Our Purpose?
The question is sometimes asked whether regionalism contributes to the goals

of the WTO. RTAs are concluded basically to liberalize trade, a focus they share
with the WTO. From that perspective, I agree with the authors’ argument
that a market-friendly and liberalization-friendly atmosphere, formed as the
number of FTAs increases, will facilitate intraregional and multilateral trade
liberalization.
In Sections 3 and 4, the authors explained how regionalism in Asia can
be a stepping stone to harmonize RTAs under WTO rules. I think that the
following seven issues pointed out by the authors are crucial for dealing with
the complicated status of Asian regionalism:
• Side-by-side development of multilateralism and regionalism
• Compliance with multilateral standards for regionalism
• Promotion of a pan-regional FTA
• Harmonization of the rules of origin
• Removal of nontariff barriers
• Support for the WTO implementation system
• Reinforcement of public support of market economics
However, in order to reach the goal of Asian regionalism (i.e., RTAs) by
continuing to follow GATT/WTO rules and contributing to the development
of the multilateral trading system, more than the issues mentioned above
will need to be addressed.
From a political economy perspective, I offer the following additional
suggestions.
First, we have been talking solely about the responsibility of Asian
regionalism, seen as existing RTAs. It is correct that they should make
adjustments to follow GATT/WTO rules. However, this is not fair. The
multilateral trading system under GATT/WTO rules should be made more
efficient and clear.
Second, regarding the objectives of Asian countries in participating in
RTAs, their strongly economic motivation is doubtless. However, if we look
more carefully at the economic and political atmosphere in East Asia as well
as the world, we might have to give up our dream of building a global free
trade and investment system in the near future. The failure of the DDA a
few years ago was seen as strong evidence against the success of our efforts.
Asian regionalism should move in a direction in which it can contribute to
strengthening multilateralism under WTO rules. The governments in the
region must find a balance between the economic and political benefits from
joining regionalism. The process of international economic integration and
globalization may make us vulnerable to developments in other nations.
However, because there is no way to opt out of this trend, we must compromise
to progress together.
References
Petri, P. A. 2008. Multitrack Integration in East Asian Trade: Noodle Bowl or Matrix? Asia-
Pacific Issues 86. Honolulu, HI: The East-West Center.
How Can Asia Develop in a Socially Sustainable Manner? 123
VI
How Can Asia Develop in a
Socially Sustainable Manner?
Medhi Krongkaew
1. Introduction: Why the Question?
Many readers may find the title of this chapter a little odd because any economic
scholar would know that there can be no definitive answer to a question such
as this. First, there has never been an agreement or consensus on the definition
of a socially sustainable development. Second, even when socially sustainable
development (SSD) is further qualified to mean an equitable and inclusive kind
of SSD, it is still not clear as to what exactly “equitable and inclusive” mean
here. Third, the question focuses on Asia, which is one of the most diverse and
disparate continents in the world. It is difficult to definitively say something
that is applicable to all countries in the region. However, this chapter presents
a challenge worth taking on because it provides a good opportunity to explore
the issues involved in the question, “How can Asia develop in a sustainable
manner?,” and touch upon certain ideas and opinions that may lead to a wider
discussion on proper development approaches and a deeper understanding
of current development problems.
It is possible that the fundamental question of how a country or an
economy develops is still the main concern of many development economists
and practitioners, and that these people want to expand the knowledge of
development beyond the causes or determinants of development. But some
would still be unsatisfied with the basic explanations of economic growth
and development of countries in Asia or elsewhere in the world. Recall the
World Bank’s (1993) well-publicized work, The East Asian Miracle. While
most scholars have accepted this work on several of these high-performing
Asian economies (HPAEs)1 as very well researched and informative, many have
questioned its applicability in other economies or in other regions. Even within
the East Asian region itself, the explanation of growth and development in a
contiguous or adjacent country can be different. Of course, the World Bank has
realized the potential for discrepancies; indeed, it found that the diversity of
experience, institutions, and policies among the HPAEs do not allow a model
to be developed. Yet, the World Bank believed that some lessons for other
developing countries could be learned from the East Asian experience, the first
lesson of which is that it is essential to get the fundamentals right—i.e., a high
level of domestic saving, broad-based human capital, good macroeconomic
management, and limited price distortions providing the basis for growth.
The second lesson is that careful policy interventions to accelerate growth
should produce very rapid growth. This chapter attempts to further clarify
or explain the sources and causes of dynamic growth in East Asia.
There are two more issues that need to be addressed in dealing with East
Asian economic growth. The first is that, while it is clear why some economies
are able to grow very fast, it is not clear how long it will take these economies
to catch up with other developed economies. On this point, Ali and Zhuang
(2007) showed that despite rapid growth, developing Asia’s income gap with
the developed world remains astonishingly wide. In 2005, the average per
capita gross domestic product (GDP) in 2000 constant United States (US)
dollars for developing Asia as a whole was less than 3% of those of Japan and
the US. Even for the People’s Republic of China (PRC), which experienced a 9%
growth rate for more than 20 years, per capita GDP in 2005 was only 3.7% of
Japan’s and 3.9% of the US’. These numbers suggest that developing Asia has
a long way to go to reach the per capita income levels seen in the developed
world. It must be noted that these developed economies are growing too and
that they can find ways to further increase their own growth.
The second issue is that despite the fast growth, there is no guarantee
that this is a quality growth. On this point, Krongkaew and Ragayah (2008)
referred to the economic crisis in East Asia that started in Thailand in July
1997 as a wake-up call for many of these rapidly growing economies in East
Asia to realize that rapid economic development not followed by a more
mature institutional infrastructure and economic management system can
lead to economic disaster. The 1997 economic crisis gave rise to at least two
The East Asian economies included in this study are Japan; Hong Kong, China; Republic of Korea;
1
Singapore; Taipei,China; and newly industrializing Indonesia, Malaysia, and Thailand.

new thoughts on the ways in which a country develops its economy. One is
that, despite the rapid economic growth experienced during the boom years,
poverty can return quickly if the crisis results in the collapse of the real sector
and ensuing extensive unemployment. The other is that problems of income
inequality can no longer be ignored and relegated to the background in policy
determination during the period of economic prosperity. There have been
several crisis-hit countries where, in the past few years, poverty incidence
fell because the average income of the people increased through increased
employment brought about mainly by economic growth. However, often,
that economic growth came as the result of inappropriate and unsustainable
economic activities associated with a bubble economy (such as speculative
movements in the stock market and speculative investment in the real estate
sector). When the bubble burst, those economic activities died with it, causing a
real reduction in income and welfare, and a real increase in poverty incidence.
Furthermore, the economic prosperity of the bubble period overshadowed
concerns for economic inequality. No one cared if his or her income was lower
than those of others around them as long as their own income continued to
rise. But the growing income inequality could be the pretext under which
the top income group was able to engage in inappropriate and unsustainable
economic activities, which further brought about economic disaster and, later,
crisis.
In future economic management in developing economies, policymakers
must not be blinded by the extent and speed of economic growth that
characterized many East Asian economies in the past. Sustainable economic
development should be characterized by a reasonable rate of growth of the
economy, with price stability, satisfactory employment situation, adequate
consumption growth of goods and services that promote health and long-
term well-being, a stable government with sufficient public revenues and
an appropriate and efficient public expenditure system, a concern for and
preservation of the environment, and good prospects for future growth and
development. The implications of the two issues mentioned above are that
anti-poverty strategies would be made more conducive to long-term rather
than short-term change and transitory poverty reduction, while, at the same
time, at the very least, a basic social safety net be put in place to protect the
needy. Perhaps even more importantly, the concern for equitable income
distribution must be increased so that growing income inequality will no
longer be tolerated but dealt with firmly; without equitable income distribution,
sustainable development cannot be attained.
A more demanding development scholar could further argue that sustainable

development requires more than the removal of absolute poverty and acceptable
income inequality. The term “socially sustainable” should transcend economic
boundaries and consider other aspects of social development. A few of these
social conditions can be immediately mentioned. The guarantee of political
freedom; equal political entitlement; freedom of speech, expression, peaceful
assembly, and association as contained in the first few articles (i.e., Articles
1, 2, 3, 18, 19, and 20) of the United Nations (UN) Universal Declaration of
Human Rights must come before any other conditions can be considered. Then,
there must be a requirement that environmental protection and management
of natural resources for present and future generations be included in the
definition of SSD. Finally, SSD should include a society in which exists good
governance both in the public and private sectors, where state officials do
not use their offices to transfer public gains to their own private benefits (a
general meaning of corruption), where corporations do not have to be told
about corporate social responsibility because their good corporate practices
and fairness already remove the need for such admonitions, and where the
government is able to maintain an appropriate balance between private
initiatives and state interventions.
These above problems and difficulties tempt one to wonder how Asia might
develop in a socially sustainable manner. Unfortunately, however, the realistic
situation in developing Asia is such that SSD may be difficult to attain in the
near future. It is the main intention of this chapter to show why this may be
the case. Several statements about the feasibility of SSD for Asia (and indeed
for other developing regions of the world as well) are:
(i) As poverty remains in many Asian developing economies, the low-
income position of the poor often gives rise to situations in which
the government exploits the poor by initiating or instituting populist
policies that add or generate income to these poor households or
population without much regard to the efficiency of such policies, in
exchange for the poor’s political support in a Western-style democracy
through election and/or acquiescence of politicians’ corrupt behavior.
When this happens, the chance of an economy developing into a
socially sustainable system is less likely because the income growth
in the short-term will not last and the politicians will make the most
of the gains themselves.
(ii) Even when the government is genuine in its policies to help the country
achieve long-term development, it may be restricted by the need to
appear successful in the short-term. As economic growth and expansion
is often used and regarded as a first and easy sign of a government’s
success, the GDP growth figure is often the main aspect a government
is concerned about. Growth takes priority over other economic policies
for a government’s own short-term image and SSD suffers as a result.
(iii) Poverty issues will become continuously less important in a growing
economy because people’s increased income will automatically show
a decrease in poverty problems as time passes. However, as long as
the economy keeps growing, worsening income distribution will
likely continue to go unnoticed by the general public because their
immediate welfare will not be affected. Only when growth stalls and
the lowest income groups start to feel the hardship might public
unrest and upheaval result. This is one of the most serious hidden
dangers of growth accompanied by increasing inequality.
(iv) Policies to engender inclusive and equitable growth are probably
some of the most difficult policies for any economy, developed or
underdeveloped. Although politicians and policymakers in most
countries in the world normally come from high-income backgrounds,
their reactions toward inclusive and equitable economic policies may
differ, depending on whether they are in a developed or developing
country. More equitable and inclusive developed countries may
be more attuned to maintaining the existing equitable economic
and social conditions in their countries, whereas the politicians
and policymakers in developing countries with serious equity and
inclusiveness problems to begin with may be less inclined to do
anything to harm their favorable social and economic positions.2
(v) Policies and conditions associated with SSD such as environmental and
resources preservation and improvement can be said to be very income
elastic; that is, more will be demanded when income is higher. When
a country is poor, these policies or conditions will not be demanded
or will be demanded in insufficient quantity. Only when economic
growth and future development has increased people’s income will
these environmental and resource situations become important.
2
A good case in point is the situation in Thailand, one of the most unequal countries in the world among
countries with the same level of economic development (in terms of the Gini coefficient, a well known
index of income distribution); effective land reform has never been allowed to function, inheritance
and estate tax legislation has never been allowed to pass the parliament, and income from capital
gains through the stock market has been tax-free for the last 30 years.
(vi) In order to catch up with developed economies, developing Asian

economies need to find policies and measures that contribute to long-
term growth. Science and technology may be beyond the grasp of
these developing economies in the short-run. However, failure to
generate overall capability in the economy could result in a country
depending on purchasing or using foreign technology without the
prospect of creating or generating its own technology that could push
the country forward. How can developing Asian economies find or
develop their own technology?
(vii) Corruption often slows down the process of growth and development.
Until very recently, fighting corruption in developing Asian economies
(especially East Asian economies) was not a major policy undertaking.
Anti-corruption policies may turn out to be one of the most important
tools in bringing about SSD. Again, society may be indifferent, even
averse, to the fight against corruption in the public and private sectors
for the simple reason that the general public is the beneficiary of the
populist policies of states and governments.
(viii) The economic crises in many East Asian countries in the late 1990s
can be viewed as the outcome of several economic excesses in several
respects. The easy money that accompanied a large influx of foreign
capital, either through foreign short-term investment or short-term
overseas borrowing by domestic borrowers, gave rise to careless
spending and “living beyond one’s means.” The pain of economic
crisis has taught many lessons to the people of these countries, but is it
certain that this profligate behavior will not return? Does there need
to be new thinking that could lead us to a safer and more sustainable
development in the future?
This chapter aims to elaborate on the above feasibility and plausibility
of SSD for developing Asian countries. Section 2 considers the meaning
and scope of SSD, and the reason why it is still important as a development
goal for any developing country. Section 3 looks at empirical evidence of
economic growth and development of some East Asian economies, especially
to substantiate or establish relationships between growth and other goals
of economic development such as income distribution, and the reasons for
difficulties in achieving SSD in Asian countries today. Once the sources of
problems have been analyzed, Section 4 proposes or discusses the ways in
which SSD could be installed in the Asian setting. Section 5 provides summary
and conclusions.
2. The Meaning and Scope of Socially Sustainable

Development
The term SSD may be relatively new, but it is being based on quite an old concept
of sustainable development. In 1987, the term “sustainable development”
appeared as the theme concept of the report of a special commission set
up by the UN General Assembly in 1983 called the World Commission on
Environment and Development. This influential report, which set the tone for
the concern for environment problems like global warming today, describes the
accelerating deterioration of the human environment and natural resources, and
the consequences of that deterioration for economic and social development.
Figure 6.1 depicts the concept of sustainable development as consisting of three
interconnecting circles of social, economic, and environmental development,
where the innermost part that shares the element of each type of development is
termed sustainable development. This resulted in the widely accepted meaning
of sustainable development—that is, “…development that meets the needs of
the present without compromising the ability of future generations to meet
their own needs.” But even before that, the concern about the environment and
the depletion of the world’s resources was already hotly debated as a result of
a publication by the Club of Rome3 called “The Limits to Growth” (Meadows
Figure 6.1: Scheme of Sustainable Development at the Confluence of

Three Constituent Parts
Source: Adapted from International Union for Conservation of Nature and Natural Resources (2006).
3
The Club of Rome is a think tank founded in Rome in 1968 by a group of successful scientists, businessmen,
international civil servants, and other prominent individuals to study future development prospects.
et al. 1971). In the field of development, sustainable development has spawned

several other related terms and concepts, such as human development, SSD,
social inclusion and inclusive growth, social accountability, pro-poor growth,
and social opportunity.
With regards to SSD, a topic that is so important that the World Bank
Institute has created a special website on the subject, there is technical
reference to it dated as early as 2002. In August 2002, for example,
the Department for International Development (DFID) of the British
Government published a background briefing on SSD making a reference
to the three-ring, or three-pillar, concept of sustainable development that
this is an improvement over development that is based on economic aspect
alone (Figure 6.1). But the DFID argued that the three-ring concept still
ignores the political, legal, human health, demographic, educational,
and technical dimensions, and obscures the links between them. The
implication that “economy” and “society” are separated is misleading.
Therefore, the DFID recommended replacing the three rings or three pillars
with four dimensions as a better concept of SSD. These four dimensions
include (DFID 2002):
1. Biophysical aspects of natural and manufactured goods and processes,
and human biology;
2. Institutional aspects of formal and informal social, political, educational,
and financial interrelationships;
3. Technical aspects of knowledge, tools, skills, and practices; and
4. Ethical aspects of philosophical and attitudinal influences on policy
and behavior.
ADB is another organization that has paid close attention to inclusive growth
which could be called its version of SSD. A few of ADB’s recent publications
(Ali 2007; Ali and Zhuang 2007; Ali and Son 2007; Walton 2007) have focused
on the main concept of this inclusive growth and attempt to devise ways to
measure inclusive growth. Ali (2007) and Ali and Zhuang (2007), for example,
mentioned that inclusive growth means growth with equal opportunities, or
growth that focuses on creating opportunities and ensuring equal access to
them. In other words, “growth is inclusive when it allows all members of a
society to participate in and contribute to the growth process on an equal basis
regardless of their individual circumstances such as religious background,
parental education, or geographical location” (Ali and Zhuang 2007: 10).
Another three-pillar concept of inclusive growth was given by Ali (2007)
(Figure 6.2). In the figure, the three pillars upon which inclusive growth has
Figure 6.2: Three Pillars of Inclusive Growth
Source: Reproduced from Ali and Zhuang (2007).

rested are full, productive, and decent employment; social protection; and
capability enhancement.4
Few other scholars have attempted to elaborate on their understanding
of the SSD and inclusive growth. Lin (2004) argued that in most developing
countries, if a government adopts an appropriate development strategy, it
will be able to achieve dynamic growth and equitable income distribution
during the development process. And this development strategy must follow
what Lin calls the “Comparative-Advantage-Following Strategy” to achieve
viability as opposed to the “Comparative-Advantage-Defying Strategy,”
which would bring failure in the long run.5 A proper policy prescription by
Lin is, therefore, a transition to a policy regime that facilitates industrial
development alongside the country’s comparative advantage development in
order to improve the country’s growth performance and to allow the poor to
benefit from the growth. Hausman, Rodrick, and Velasco (2005) attempted to
look at the reasons for “growth acceleration,” or determinants of fast growth,
that do not contain a long list of reforms. The authors looked at binding
constraints on growth rather than what is needed to achieve growth because
they believed that growth accelerations happen when such binding constraints
on growth are removed. This approach is known as growth diagnostics. And
although SSD is not specifically discussed or analyzed in the original article,
it is easy to see that once the policymakers set SSD as a development goal,
growth diagnostics could be used to find constraints that prevent SSD from
happening and remove them.6
While several development economists are preoccupied with the
nature and realization of inclusive growth—i.e., how to spread the
fruits of development to wider circles of people without compromising
and sacrificing too much with the consequences of development (e.g.,
environmental damage, urban congestion, concentration of wealth and
4
Ali and Zhuang further elaborate that inclusive growth not only addresses the inequality issue, but also
enhances the poverty reduction agenda. As they explained, “first, the impact of growth on poverty
reduction is higher when the initial level of inequality is lower and/or inequality declines over time.
Second, inclusive growth makes poverty reduction efforts more effective by focusing on creating
productive employment opportunities and making them equally accessible for all, while addressing
extreme poverty through social safety nets and, therefore, moving away from the targeting approach
to development” (Ali and Zhuang 2007: 11).
5
Lin (2004: 8) defines viability in this way: “If, without any external subsidies or protection, a normally
managed firm is expected to earn socially acceptable profits in a free, open, and competitive market,
then the firm is viable. Otherwise, the firm is not viable.”
6
See Felipe and Usui (2008) for further explanation of the growth diagnostics approach.
income, etc.), many would go deeper into accepting a more “holistic”
nature of development; that is, development that goes beyond income
and its distribution to include other aspects of human welfare. In positive
economics, development can be regarded as acceptable only in the Paretian
sense—i.e., when one can be made better off without making anyone else
worse off. However, in the real world, a trade-off between gainers and losers
often exists so that social choice where the preferences of all individuals
have been taken into account without anyone suffering from compromises
or sacrifices is impossible. If this is true, then there can never be agreement
on what constitutes true development.
To solve this impasse, many scholars have questioned the notion of the
impossibility of social choice. Sen (1999) has argued for the possibility of
social choice. This line of argument in which interpersonal comparison is
possible and acceptable through what Sen calls “informational broadening,”
or the knowledge that informs us of “…the real advantages and disadvantages
of different persons, related to their substantive well-being, freedoms, or
opportunities” (Sen 1998: 201). According to Clarke (2006: 152), human
well-being can be studied or measured through the “operationalisation” of
normative social choice theory where “…society’s choices, preferences and
value judgments on issues of economic equity and efficiency, intergenerational
equity, aggregation, justice, poverty measurement, and market perspectives
versus social perspectives” can be considered.
The challenge by Sen has given rise to many new ideas on the understanding
of economic growth and development. Clarke and Islam (2004a, 2004b) and
Clarke (2006) proposed that human well-being can be measured in at least two
ways: one is to measure human well-being as the fulfillment of hierarchical
needs à la Maslow (1943) through the present value of the estimate of such
hierarchical needs fulfillment, and the other is to measure human well-being
through the present value of national income adjusted by the costs and benefits
arising from achieving such economic growth.7
According to Clarke (2006), the present value of hierarchical needs fulfilment would be measured by:
7
Where HNF=hierarchical needs fulfilment, BN=basic needs, SN=safety needs, BLN=belonging needs,
EN=esteem needs, SA=self actualisation, α1,…,α5=the weights assigned to each set of needs, r=discount
rate, and t=time. The present value of the adjusted national income is measured by:
Where ANI=adjusted national income, NBt=net benefits, t=time, r=discount rate, Ect=economic factors,
Ent=environmental factors, Sot=social factors, Pt=political factors, and Spt=spiritual factors.
In 2006, the United Nations University in cooperation with the World

Institute for Development Economic Research organized a research project
on “Measuring Human Well-Being” with an aim to provide a comprehensive
and rigorous review of the concept and measurement of human well-being,
with the main focus on the well-being achievement at the level of nations
(McGillivray 2007). In 1996, Nanak Kakwani, a student of Sen, had already
applied the practical knowledge of the measurement of human well-being to
the national development of Thailand. The result of the study, which was later
adopted by Thailand’s National Economic and Social Development Board
(NESDB), has become one of the analytical tools to measure a country’s
development performance and is still in use today. The Indicators of Well-
Being so adopted consist of seven indicators: health, knowledge, working life,
income and income distribution, environment, family life, and governance
(NESDB 1997).8 Table 6.1 shows the characteristics of the Index of Well-
Being, its components, and actual indicators used in the measurement of
Thai development performance.
It is clear that SSD should include comprehensive elements of the original
UN-World Commission on Environment and Development sustainable
development and additional aspects of political development, good governance,
and other social conditions of people’s jobs and lifestyles. The analysis of this
will be taken up in Section 4.
3. Patterns of Growth and Income Inequality in East Asia
Like most developing countries in the world, Asian countries would like to
achieve a high rate of economic growth so that their population may escape
poverty and enjoy the benefits of higher incomes. The ways that Asian
economies, especially East Asian economies, have attained their economic
growth have been subject to much admiration and support, as mentioned
earlier, and in such publication as the World Bank’s East Asian Miracle (World
Bank 1993). HPAEs are diverse in natural resources, culture, and political
institutions; they also differ in the degree of government intervention in the
economy and the manner in which policies are shaped and implemented. Yet
they were successful in achieving rapid growth with equity. Today, growth
8
The work by Kakwani for the Thai government on the Index of Well-Being can be found on the NESDB
website at http://poverty.nesdb.go.th/poverty_new/doc/NESDB/uan_25490428104323.pdf.
Table 6.1: Index of Well-Being: Components and Indicators
Index Components Indicators
1. Health 1. Longevity 1. Life expectancy at birth

2. Good health 2. Percentage of healthy population on
3. Fairness in the public health annual basis
system 3. Percentage of population with health
insurance or security
2. Knowledge 4. Widespread and equitable 4. Average years of education of the

education population
5. Quality of education 5. Rates of enrollment of lower and upper
secondary education
6. Test scores in Thai language, English
language, mathematics and science
3. Working life 6. Full employment 7. Unemployment rate

7. Work security 8. Percentage of workforce with employment
welfare and covered by the social security
system
4. Income and distribution 8. Income 9. Percentage of income-poor population

9. Distribution of income 10. Index of income distribution
5. Environment 10 Shelter and public utilities 11. Percentage of households with ownership
11. Safety in life and property of houses or accommodations
12. Physical environment 12. Percentage of households with piped
water
13. Crime rate per capita
14. Rate of drug addiction per capita
15. Index of water quality
16. Size of waste per capita per annum
17. Ratio of forest area to total area
6. Family life 13. Relationship within members 18. Rate of divorce

of the family 19. Rate of marriage registration
14. Economic self-reliance 20. Index of family cohesiveness
21. Percentage of households having income
over expenditure of more than 10%
7. Good Governance 15. Ethical principles 22. Percentage of civil servants penalized
16. Participation with disciplinary actions
17. Cost effectiveness 23. Percentage of voter turnout
18. Transparency 24. Ratio of public expenditure to GDP
25. Transparency International’s Corruption
Perception Index
Source: Krongkaew (1996).

with more equity is being replaced with growth and growing inequality, a
situation that has become of great concern among development scholars and
practitioners in Asia.
In what follows we will refer to a number of studies by a group of East Asian
economists on the issue: how does the rapid economic growth of some East
Asian countries contribute to or impact the status of income distribution of
households and populations of these countries?9 The eight economies are:
PRC, Indonesia, Republic of Korea (hereafter Korea), Malaysia, Philippines,
Singapore, Thailand, and Viet Nam. These can be loosely classified into three
groups: (i) Singapore and Korea are more advanced, newly industrialized
countries; (ii) Indonesia, Malaysia, Philippines, and Thailand are developing,
middle-income countries; and (iii) the PRC and Viet Nam are former socialist
economies recently converted to market-oriented economic systems. The PRC
is a unique case in which the country is a developing country in terms of
economic development but with a potential to be a major economic power
in East Asia, if not the world, in the near future.
The state of development in these eight East Asian countries is quite
disparate (Table 6.2). As expected, Singapore and Korea rank first and second
in terms of purchasing power parity (PPP) per capita gross national product
(GNP). Malaysia, Thailand, and the Philippines enjoy the middle positions in
the overall rankings with the PRC ranking higher than Indonesia and Viet Nam,
which is in last place. The average growth rates of GDP for Singapore and Korea
were also higher than any other East Asian economy that had emerged from
the 1997 economic crisis. Economic recovery in Korea was unusually rapid, as
its GDP growth rate was a very high (7.8%). The Chinese economy continues
to grow very fast during this post-crisis period, with Viet Nam growing fairly
well, at 4.1% per annum. Using Japan’s rates as a benchmark, Singapore’s PPP
GNP per capita was 92% of the Japanese PPP GNP per capita, while Korea’s
position was almost 64% of the Japanese PPP GNP level. The rest of East Asia
is still far behind Japan in terms of PPP GNP per capita.
The last three columns of Table 6.2 show the average rates of growth of
GDP of these eight countries from 1980 to 2000. The average growth of the
Singaporean and Korean economies from 1980 to 2000 were almost the same
at 7.4% and 7.3% per annum, respectively. The Association of Southeast Asian
Nations-four (ASEAN-4) economies also grew quite well (around 5% to 6%),
9
The studies were undertaken by Alisjahbana et al. (2008), Balisacan and Piza (2008), Chia and Chen (2008),
Choi (2008), Israngkura (2008), Pham (2008), Ragayah (2008), and Tian, Wang, and Liu (2008).
with the Philippines as the exception. Indeed, the Philippines’ growth was
the lowest of our selected countries (only 2.2% per annum). The PRC had
the highest GDP growth rate, exceeding 10% per annum in the two decades
between 1980 and 2000. Viet Nam also grew very fast after it initiated a market-
oriented economic system.
While the growth of the selected economies mostly exhibits similar patterns
of high and sustained growth for most of the 1980s and 1990s, the same cannot
be said about the patterns of income distributions in these economies. The
distribution of income in these eight economies ranges from fairly equal, as
in the case of Korea, to very unequal, as in the case of Thailand in the year
2000. In terms of Gini coefficient, the Korean income distribution shows the
Table 6.2: Size and Growth of Some East Asian Economies, 2000
Country GNP per PPP GNP PPP per PPP GNP Per capita GDP growth GDP growth GDP growth
capita per capita capita as % per capita GDP Growth rates, rates, rates,
of Japan rank rate 1999- 1980-1990 1990-2000 1980-2000
2000
Korea, 8,910 17,300 63.9 2 7.8 8.9 5.7 7.3

Rep. of
Singapore 24,740 24,910 92.0 1 8.1 6.7 8.0 7.4
Indonesia 570 2,830 10.5 7 3.1 6.1 4.2 5.2
Malaysia 3,380 8,330 30.8 3 5.7 5.3 7.0 6.2
Philippines 1,040 4,220 15.6 5 2.1 1.0 3.3 2.2
Thailand 2,000 6,320 23.3 4 3.5 7.6 4.2 5.9
PRC 840 3,920 14.5 6 7.2 10.1 10.3 10.2
Viet Nam 390 2,000 7.4 8 4.1 4.6 8.1 6.4
Memo:
Japan 35,620 27,080 100.0
GDP = gross domestic product, GNP = gross national product, PPP = purchasing power parity, PRC = People’s
Republic of China.
Source: World Bank (2002a, 2002b).
value of 0.317 in contrast to the value of 0.525 in the case of Thailand. Other
countries in our study have their income distributions ranging between these
two limits.
The mechanisms by which the process of economic growth and development
affects income distribution in a country are varied. People arrive at different
income positions through the differences in their capabilities. Those who have a
higher level of education and skills are presumably able to do more difficult and
more complex jobs, and therefore, may be more highly remunerated. Income
can also be generated from different stocks of physical wealth. Therefore,
those who have larger and higher quality stocks of assets may receive greater
compensation from their assets. But even with equal physical and human capital
or assets, different individuals may receive different compensation depending
on different opportunities available to them. These unequal opportunities
in lifestyle and work may be a major explanation for income inequalities in
many economies and societies. As a major goal of economic development,
each country should strive for both an increase in the average income and a
more equal distribution of such income.
Table 6.3 gives a general picture of income distribution in the eight selected
East Asian countries in the last 10 years or so. These income distributions
represented by Gini coefficients are reported in all eight country papers.10
Not all the years are reported, usually because of lack of data for those years
or the difficulties in using that data.
The rapid growth in the Chinese economy has resulted in a rapid increase
in average incomes. As reported in Tian, Wang, and Liu (2008), the per
capita annual income of urban households rose from 343 yuan in 1978 to
6,860 yuan in 2001, an increase of about 20 times, whereas the per capita
annual income of rural households rose from 134 yuan in 1978 to 2,366
yuan in 2001, an increase of almost 18 times. This caused the number of
people living in poverty in rural PRC to fall from 260 million people in 1978
to 34 million in 2001. But the rapid increase in average income and rapid
fall in the number of those living in rural poverty were also accompanied
by a rapid increase in income inequality. During this period, the traditional
planned income distribution system was broken up. Following Deng’s policy
of “Let Some Get Rich First” (Tian, Wang, and Liu 2008: 63), the market-
driven distribution system has provided more incentives for productivity
10
The summary analysis of the eight countries is drawn from Krongkaew and Ragayah (2008).
and creativity, which has had significant impacts on changes in inequality
of income distribution in the PRC.
The Gini coefficient of the PRC increased from 0.288 in 1981 to 0.349 in
1989 and 0.458 in 2000. In 20 years, the rate of change of income inequality
measured by the increase in Gini coefficient was about 2.35% per annum. The
urban-rural income gap in the PRC has continued to widen greatly in recent years.
The average gap between urban and rural incomes was about 2.8 times in 2000,
but if the value of social welfare received by urban households is factored in, the
gap may increase to 4 times. According to Tian, Wang, and Liu (2008), the dual
structure of the economy (i.e., urban-rural differentiation) and its ramifications
is the root cause of the PRC’s income inequality. The unbalanced allocation of
foreign direct investment has exacerbated this regional income inequality. Policy
flaws such as lax taxation systems and monopolization of some industries have
also contributed to worsening income inequality in the PRC.
Whereas the PRC may exhibit a typical case of Kuznets-type growth where
inequality increases in the early period of growth, the situation is different in
Korea. Korea has been one of the fastest growing economies in East Asia in the
last two decades. Korea has gone from being one of the poorest countries in
the world at the end of the Korean War in the late 1950s to transforming into
one of the most advanced industrial economies in the world in the course of
about four decades. Between 1980 and 1990, Korea grew at an annual rate of
about 8.9% in real terms. Although the rate slowed during the 1990s, growth
was still very high at 5.7%, making the overall growth rate over the last 20
years 7.3%. This achievement is no less amazing than the PRC’s.
As a result of many factors, among which are equalizing land reforms and
economic assistance from the US, early Korean development was characterized
by increased income equality as the economy grew. However, it appears that
Korean income distribution has worsened after more than two decades of
rapid growth. Some economists blame this on excessive demand for a highly
trained labor force during the 1970s, which brought about a rapid widening
of wage and salary differentials in favor of the highly educated.11 Overall, Choi
11
There are some disagreements in the way income data are used in Korea to measure income inequality.
The official data, from the Urban Families Income and Expenditure Survey, only capture wages and
salaries of urban workers. This has a tendency to show low income inequality. However, the worsening
of income inequality in recent years, especially as a result of the recent financial crisis, is unmistakable.
Nevertheless, the improved social welfare systems of Korea have helped workers who are affected by
economic crisis to withstand the adverse impacts. Overall, the income inequality in Korea is much
better than in many other East and Southeast Asian countries (Krongkaew 1994).
Table 6.3: Gini Ratios for Household Income in Eight East Asian
Economies
Year Asian NIEs (New) ASEAN-4

Korea Singapore a
PRC Indonesia b
Malaysia Philippines Thailand Viet Nam
1961 0.49
(0.486)
1962 0.414
1964
1965 0.344 0.49
(0.491)
1966 0.498
1967 0.498
1968 0.429
1969
1970 0.332 0.513C
(0.502)
1971 0.480
(0.478)
1972
1973 (0.46)
1974 (0.45)
1975 0.448 0.451
(0.45) (0.426)
1976 0.391 (0.44) 0.34 (0.529)
(0.492)
1977 (0.46)
1978 (0.42)
1979 0.424 0.493
(0.42) (0.493)
1980 0.389 (0.41) 0.34
1981 0.443 0.288 0.33 0.443 0.473
(0.44) (0.453)
1982 0.357 0.465 0.465
(0.46)
1983 (0.48)
Year Asian NIEs (New) ASEAN-4

Korea Singaporea PRC Indonesiab Malaysia Philippines Thailand Viet Nam
1984 0.474 0.297 0.33 0.474
(0.47) (0.480)
1985 (0.46) 0.452
(0.446)
1986 (0.46) (0.500)
1987 (0.47) 0.32 (0.458)
1988 (0.400) (0.48) (0.445) (0.479)
1989 (0.49) 0.349
1990 0.436 (0.504)
1991
1992 0.284 0.536
1993 0.281 0.459 0.330
1994 0.285 0.46 0.521
1995 0.284 0.443 0.389 0.464 0.356
1996 0.291 0.375 0.366 0.516
1997 0.283 0.444 0.379 0.470 0.51
1998 0.316 0.446 0.386 0.509 0.348
1999 0.320 0.467 0.397 0.373 0.452 0.531
2000 0.317 0.490 0.458 0.51 0.525
2001 0.320 0.493 0.31 0.407
2002 0.312 0.505 0.33 0.461 0.505
2003 0.341 0.512
2004 0.344 0.517 0.462
2005 0.348 0.522
ASEAN = Association of Southeast Asian Nations, Korea = Republic of Korea, NIE = newly industrialized
economy, PRC = People’s Republic of China.
Notes:
a
Up to 1989, for employed population, not households. From 1990, the figures are based on ranking of all
resident households by per capita monthly household income from work.
b
Employed expenditure, not income data.
c
Revised figure given in Malaysian Perspective Plan, 1991-2000, as reported in Ragayah (2008).
Sources: Figures not in parentheses are from the original article by Rao (1988). Figures in parentheses are from
Krongkaew (1994). Figures after 1990 are from Ragayah (2005) and recent updates. This table is adapted from
Ragayah and Krongkaew (2008).
(2008) reports that income inequality did not change substantially during the
mid-1980s. From the late 1980s to the early 1990s, however, Korean income
inequality was reduced and stayed at a low level in the mid-1990s. However,
after the economic crisis in late 1997, income inequality suddenly increased
and stayed at this level until recently. Although the Gini coefficients of Korea
had increased as a result of the crisis, the overall level was only slightly worse
than the situation in the early 1980s, which was still lower than the situation
in the early 1960s when the Korean economy was just starting to develop.
Since the late 1960s, when Singapore established nationhood, income
inequality was already quite high (with Gini coefficient of 0.498). It has since
fluctuated between 0.41 and 0.49, with the average around 0.45; and in no year
has it gone below zero (Chia and Chen 2008). Compared with Korea, the income
inequality in Singapore is much more unequal, a fact probably explained by
the wage structures for skilled workers, especially at the management level in
both public and private sectors. Wages for skilled workers were already high
in Singapore’s infancy and these wage differentials—based on the technical
skills and professional character of the employment—has kept these income
disparities at a high level. However, Chia and Chen (2008) cautioned that this
relatively large inequality could be the result of the non-inclusion of benefits
derived from subsidies on housing, education, health, and other income
transfers to the lower income group.
Among the ASEAN-4 countries, it is obvious that Thailand and the
Philippines have more unequal income distributions than do Malaysia and
Indonesia. For Thailand, its relationship between economic growth and
income inequality is a typical Kuznets curve-type; that is, income inequality
was relatively low at the beginning of the 1960s, but it increased in step with
the growth of the economy. The Thai Gini coefficient reached its highest level
in 1992 and began to fall afterward. Unfortunately, the crisis in 1997 caused
Thai income distribution to worsen. The Gini coefficient reached 0.531 in
1999, almost the same level as the peak period of 1992. The improvement
in the average income position of the Thai people, especially in the lower
income groups, after economic recovery in the early 2000s helped reduce the
income disparity, and the Gini coefficient fell to 0.505 in 2002 (Krongkaew
1994; Krongkaew and Kakwani 2003).
In the Philippines, the Gini coefficient was already at a high level of 0.49 in
1961. This relatively high level of income inequality was somehow maintained
throughout its forty years of development. The crisis of the late 1990s caused this
income inequality as measured by Gini coefficient to go up to 0.51 (Balisacan
and Piza 2008). As Balisacan and Piza (2008) noted, the absence of high and
enduring economic growth that was the single most important constraint to
the pace of poverty reduction could also be a factor in the persistently high
income inequality found in the Philippines. Policies such as better schooling,
agrarian reforms, investment in land quality improvement, removal of price
distortions, and so on not only could bring about reduction in poverty but
could reduce persistent income inequality as well.
For Malaysia, the high growth rate of the whole economy associated
with the intensive growth of the manufacturing sector (with double-digit
growth between 1970 and 2000, with the exception of the 1981–1985 period)
contributed to a drastic fall in the poverty level.12 This poverty reduction was
also attributable to the New Economic Policy of 1970, which began to have
positive effects on the existing increasing trend of income inequality. The Gini
ratio rose from 0.513 in 1970 to a peak level of 0.529 in 1976; the ratio then
began to fall, reaching the lowest level of 0.446 at the end of 1990. But from
1990, the ratio started to rise again. The crisis in 1997 managed to bring the
Gini ratio down to 0.443 by 1999. (Ragayah 2005, 2008).
It seems that the renewed high-growth period of the early 1990s in Malaysia
created a new condition for greater income inequality, but the 1997 crisis
dampened this condition, which resulted in a lower Gini ratio. But the trend
of rising income inequality is apparent. One of the most delicate issues in
Malaysia is its ethnic income distribution. Because the Chinese in Malaysia
were generally economically better off than the indigenous Malays, the income
disparities between the Malays and the Chinese were large in the early period
of the New Economic Policy, but successive implementation of the state policy
brought about equality among ethnic groups. However, the rate of decreasing
income inequality is still considered slow. The continuation of state policy in the
form of the National Development Policy for 1991–2000 as well as the National
Vision Policy of 2001–2010 should see a greater reduction in income inequality
in Malaysia due to the increase in government social expenditure.
Finally, Indonesia was another success story in terms of achievement in
economic growth. From the start of its “New Order” government up to the
1997 economic crisis, Indonesian per capita income increased by almost four
times. From 1976, for example, the number of poor people declined from 54.2
12
The share of agriculture in GDP declined rapidly from 29% in 1970 to 8.5% in 2000 while the share
of industry in GDP increased from 31.4 to 40.3% in the same period.
million (about 40% of the total population) to 22.5 million in 1996 (about 11.3%
of the total population) (Alisjahbana et al. 2008). The increased income of the
average Indonesian resulted in a marked reduction in general poverty.
However, while the improvement in poverty reduction is clear, the
improvement in income inequality is less clear. During the 1960s and 1970s,
Indonesia’s income inequality as measured by the Gini ratio stayed at about
the same level (0.34), and there appeared little difference in the inequality
situation between the urban and rural areas. The oil boom and economic
boom of 1974–1976 resulted in an increase in income inequality, in both
urban and rural areas. The inequality trend was reversed in the late 1980s. The
decline in income inequality persisted until the mid-1990s but then started
to increase again from 1996. The available data for 1996, just prior to the
economic crisis, shows that the Gini ratio stood at 0.36 overall (Krongkaew
and Ragayah 2008).
The economic crisis resulted in lowering income inequality in Indonesia;
this is because the Gini ratio is calculated based on household per capita
consumption expenditure as a unit of measurement. The crisis reduced how
much households spent per capita. The reduction is probably less noticeable
among the poorer population than among the less poor population, bringing
the gap in the distribution of expenditure closer. Indonesia is the only country
in these study cases that used expenditure rather than income as a unit of
measurement.
Even allowing for possible adjustments in measurement techniques, it
could be argued that the problems of income inequality in Indonesia are
less serious than, say, in Thailand. Still, the government has gone ahead with
policies to address continuing concerns for poverty and income inequality
(e.g., the regional autonomy and fiscal decentralization policy). At the same
time, macroeconomic stability and growth have continued to be pursued.
Given time, the overall problem of income inequality should be lessened.
As a new member of ASEAN, Viet Nam may still have a long way to go to
catch up with Indonesia, Malaysia, Philippines, and Thailand, but this endeavor
may progress quickly thanks to the country’s rapid increase in economic
growth since its relatively recent conversion to capitalism. As a former socialist
economy, the income inequality of Viet Nam has been low traditionally. As
shown by Pham (2008), the Gini coefficient of Viet Nam was estimated at 0.33
in 1993, increasing to 0.348 in 1998. This increase may be small and it seems
that the country’s growth in the 1990s was sufficiently broad-based. Pham
believed that this increase in income inequality between 1993 and 1998 was
largely due to the widening of the rural-urban income gap. However, a more
recent study by the National Center for Social Sciences and Humanities of
Viet Nam (2001) has shown that the Gini coefficient for Viet Nam appears to
have risen significantly from 0.356 in 1995 to around 0.407 in 2001. If this is
so, then the growth of Viet Nam would follow the traditional Kuznets type.
In all, our sample case studies of selected East Asian countries have shown
that these fast growing Asian economies suffered from increased income
inequality during the decade or so of their development. In this section, we
only touched upon one aspect of the development problem, namely growth that
leads to greater inequality. In reality, there are other development problems that
we have not discussed, such as serious and lingering poverty, environmental
degradation, obstacles to technological progress, leakages and inefficiencies
due to corruption in the public sector, and political instability brought about
by the behavior of corrupt politicians as evidenced in the cases of Thailand
and the Philippines.
4. The Ways Forward for Socially Sustainable Development

for Asian Economies
This chapter proposes that the original concept of SSD as described in the
Brundtland Report (UN 1987) be maintained and strengthened. First, the overall
picture of the Brundtland Report will be re-examined. Then, the economic
components of sustainable development will be emphasized on their ability
to maintain stable growth, with continued reduction in poverty incidence,
and improvement in income equality. The social components of sustainable
development are stressed for their ability to increase the capability of the whole
population. The environmental components of sustainable development could
be re-evaluated through realistic and practical adjustments in people’s lifestyles.
After these core principles of sustainable development are addressed, three more
conditions will be added to make this fundamental sustainable development truly
SSD. The three conditions are: (i) need for political development, (ii) requirement
of good governance, and (iii) the hope and desirability of cultural and spiritual
lifestyles. Finally, this section ends with a recommendation for the adoption of
the Philosophy of Sufficiency Economy as a practical, real-life example of how
an Asian country could arrive with SSD.
Based on the above conceptualization, the above-discussed SSD could be
adapted to the format noted in Figure 6.3, in which the original three-rings
characteristics of sustainable development are encapsulated in additional boxes

of political development, good governance, and cultural and spiritual lifestyles.
Figure 6.4 gives a schematic explanation of the Philosophy of Sufficiency
Economy as practiced in Thailand at present. The following accounts explain
these diagrams.
4.1 Re-emphasis of the Traditional Concept

The Brundtland Report Briefly Revisited
It has been more than 20 years since the Brundtland Report (UN 1987) made
its influential impact on the world’s thinking on how countries should, and
could, attain sustainable development. In considering the ways forward for
SSD in Asia, it is useful to revisit the core principles of sustainable development
contained in the Brundtland Report.
In Section 2, the oft-quoted definition of sustainable development as
development that meets the needs of the present without compromising the
ability of future generations to meet their own needs was referred to. But equally
Figure 6.3: Scheme of Desirable Socially Sustainable Development
Source: Author’s own rendition based on International Union for Conservation of Nature and Natural Resources
(2006).
important is the report’s focus on the necessity of economic growth, saying
the problems of poverty and underdevelopment cannot be solved unless there
is growth in which all developing countries can take part and are able to reap
its large benefits. To be more complete, the report cites seven development
imperatives as follows (UN 1987):
1. Reviving growth;
2. Changing the quality of growth;
3. Meeting essential needs for jobs, food, energy, water, and sanitation;
4. Ensuring a sustainable level of population;
5. Conserving and enhancing the resource base;
6. Reorienting technology and managing risk; and
7. Merging environment and economics in decision making.
Figure 6.4: Sufficiency Economy and Globalization
Source: National Economic and Social Development Board (NESDB) (2003).

These development imperatives need no additional explanations, but in order

to help policymakers plan necessary policy prescriptions for development, the
report summarizes the requirements for sustainable development to include:
• A political system that secures effective citizen participation in decision
making;
• An economic system that is able to generate surpluses and technical
knowledge on a self-reliant and sustained basis;
• A social system that provides solutions for the tensions arising from
disharmonious development;
• A production system that respects the obligation to preserve the ecological
base for development;
• A technological system that can search continuously for new solutions;
• An international system that fosters sustainable patterns of trade and
finance; and
• An administrative system that is flexible and has the capacity for self-
correction.
Growth Through Market-Based Efficiency and Competition

There are larger details in the main Brundtland Report but the above summary of
how sustainable development could be reached is sufficient to use it as an anchor
for our further discussion. One central feature that was referred to previously is
the importance of economic growth. In managing an economy, the government
or policymakers face the principal choices of capitalistic, market-based free
competition, or socialistic, central-controlled types of policies. Although it is true
that socialism appears to have lost out to capitalism in the selection choices of
most countries in the world, this does not mean that socialism is dead. We have
seen that while a free-enterprise capitalistic system is more conducive to bringing
about greater efficiency and growth in resource allocation, income distribution
is usually worse off than in socialistic, state-controlled systems. The optimal
solution may be found in the judicious mix of the two policies that maintains
the balance between efficiency and equity. This creates greater likelihood that
SSD may be attained because the state or government could play a more active
role in preventing or solving market failures in the free-enterprise system.13
13
In some countries, such as Thailand, the choice of economic system is written in the country’s constitution
to make it difficult to change under the whim of politicians in power at the time. In Thailand, the
first clause of Section 84 of the 2007 Constitution reads, in part: “The State…must support a free and
fair economic system based on market mechanisms, and support the arrangement for sustainable
economic development.”
Smart Anti-Poverty Policies
Poverty problems are still prevalent in many Asian countries. Though a
growing economy would necessarily bring down the incidence of poverty,
the time it would take to see the positive effects of that growing economy
would be too slow, and the suffering of the poor may be too great. Smarter
anti-poverty policies are, therefore, urgently needed. This chapter suggests a
three-pronged approach for alleviating poverty: (i) general economic growth
and macroeconomic stability; (ii) specific, sectoral-based anti-poverty policies;
and (iii) safety-net programs for the poor (Box 6.1).
The concept of poverty as based entirely on income level alone is often criticized
for being insufficient to fully incorporate the meaning of poverty. As mentioned
by Sen (1999), there may be good reasons to look beyond income poverty because
there are variations in the poverty concept that make an income-based poverty
concept inadequate. These sources of different variations may include personal
heterogeneities (e.g., prone to illness), environmental diversities (e.g., living in a
flood-prone area), variations in social climate (e.g., living in a high-crime area), and
so on. To see poverty as capability deprivation can open up a new understanding
of poverty. And, as mentioned earlier, there have been many recent studies of
poverty as a multi-dimensional concept.14 However, Sen argues that it is unlikely
that the perspective of poverty as income deprivation can be dispensed with in
the empirical literature on poverty, even when the limitations of that perspective
are entirely clear. Indeed, as Sen puts it, “in many contexts, the rough and ready
way of using income information may provide the most immediate approach to
the study of severe deprivation” (Sen 1999: 195). In sum, income poverty is still
useful but one needs to be careful in its use for policy purposes.
Greater Efforts to Tackle Income Inequality

Efforts to reduce income inequality could be the most important way
in which Asian countries get closer to reaching SSD. Although income
14
Among the most well known studies using a multi-dimensional concept of poverty is the United Nations
Development Programme’s (UNDP) Human Poverty Index (HPI). Rather than measure poverty by
income, the HPI uses indicators of the most basic dimensions of deprivation: a short life expectancy,
lack of basic education, and lack of access to public and private resources. The HPI concentrates on the
deprivation in the three essential elements of human life already reflected in the Human Development
Index: longevity, knowledge, and a decent standard of living. The HPI is derived separately for developing
countries (HPI-1) and a group of select high-income Organisation for Economic Co-operation and
Development (OECD) countries (HPI-2) to better reflect socioeconomic differences and also the widely
different measures of deprivation in the two groups. A more recent literature on the multi-dimensional
ideas of poverty includes Kakwani and Silber (2008a, 2008b).
distribution may be listed as an important development goal for any

country, the goal of income inequality reduction is often neglected or
relegated to a secondary position of importance when economic growth
shows signs of slowing down, or the economy is facing macroeconomic
crisis. Moreover, the impact of income inequality on the welfare of the
people may be slow in its manifestation as compared to the impacts of
other economic adversities, but the final outcome can be catastrophic if
the pent-up suffering is long enough.
Economists have many ways of measuring and evaluating the size of the
impacts of policy changes. The terms “pro-poor” growth and “pro-poor” policy
Box 6.1: Policy Responses to Poverty Problems
There are two “types” of poverty: (i) poverty on the demand side, and (ii) poverty
on the supply side.
Demand-Side Poverty
In this first category, poverty is associated with, or caused by, the demographic or
socioeconomic characteristics of the poor themselves. For example, they have little
education, are in poor health, have large and dependent families, select or engage
in occupations that yield insufficient returns, and so on. In this case, the principle of
policy response in general would be to correct or improve these demographic and
socioeconomic conditions pertaining to the poor so that they are in a better position
to get more or better income or returns from their stock of human capital.
Supply-Side Poverty
Poverty can be caused, not by the lack of human capital of the poor alone, but
also by failures by the market and the government to provide necessary help. The
environment surrounding the poor can bring about supply-side poverty in the form
of inadequate or low-quality productive inputs or their lack of access, distortion, or
discrimination in the markets against the poor; shortage or inefficiencies of public
services to the poor; low returns for their production and services; and so on.
Under the framework of the two groups of poverty mentioned above, policy
responses can be designed to provide a two-pronged attack. There are three
general principles of poverty reduction that should be considered:
General Economic Growth and Macroeconomic Stability

General economic growth provides an excellent condition for the poor to increase
their income generally through increased employment and higher returns on
are of recent origin (Kakwani and Pernia 2000). The evaluation technique
proposed in this article has been widely used by many scholars, researchers,
and development practitioners. Box 6.2 gives a summary of how a trade-
off between growth and equity can be measured. A pro-poor policy is one
that reduces the incidence of poverty and improves income inequality at
the same time.
Capacity Building for the Nations

A country with a large proportion of its population illiterate cannot be
expected to provide a full and intellectually profitable life. The people in a
their productive services. But this growth must occur within a framework of
macroeconomic stability with low inflation and stable domestic and external
balances. Development in various economic sectors should also be balanced and
well coordinated so that there are no weak sectors that slow down other sectors,
or strong sectors that could go astray if not properly monitored or regulated.
Specific Anti-Poverty Policies

While general growth can bring about higher income and reduce poverty, economic
growth alone may not be sufficient. Specific anti-poverty policies targeted toward
the poor themselves may be needed. These specific anti-poverty policies include
policies that raise the value of the stock of human capital such as more education,
better skills, better health, and a general increase in individual or personal human
capacity, and also policies that general better working conditions or environments
favorable to the poor in their work or livelihood such as opportunities to increase
productivity, improve access to quality inputs, generate better marketing
opportunities and better prices, improve delivery systems of government services,
and so on.
Safety Net Programs for the Poor

When general economic growth and specific anti-poverty policies still fail to lift
the poor from poverty, society and the economy must have places in the safety
net of programs that provide temporary or short-term support to the poor. Food,
clothing, primary health, and shelter are some of the basic necessities that people
in any society or economy must be provided with by either the state, the private
sector, or civil society.
Source: Krongkaew (2003a).

Box 6.2: The Growth-Equity Trade-Off: How to Measure It

and How to Interpret the Results
The notion that growth is good for the poor is well accepted, and is said to be
influenced by a well known study by Dollar and Kraay in 2001. However, as Kakwani
(2000) and Kakwani and Pernia (2000) pointed out, the different types of growth may
have varying effects on poverty. For some countries, growth-maximizing policies
alone may be adequate to provide a satisfactory reduction to poverty, but for many
countries there may be a need to have pro-poor growth policies with a focus on
reducing inequality before, or concurrently with, a focus on increasing growth. This
last notion is based on the belief that the degree of poverty reduction depends on
both income and its distribution. The increase in average income reduces poverty
and the increase in inequality increases it. Therefore, the change in poverty can
be decomposed into two components: one is the growth component relating to
change in mean income, and the other is the inequality component relating to
change in income distribution.
Kakwani and Pernia (2000) have developed an index of pro-poor growth, which is
based on a decomposition of total change in poverty into (i) the impact of growth
when the distribution of income does not change, and (ii) the impact of income
redistribution when total income does not change. Suppose η is the poverty elasticity
with respect to growth, which is defined as the proportional change in poverty
when there is a positive growth rate of 1%, then η can be decomposed into two
components, ηg and ηI such that
η = ηg + ηI (1)
where ηg is the pure growth effect and ηI is the inequality effect. ηg is the
proportional change in poverty when the distribution of income does not change,
whereas ηI is the proportional change in poverty when inequality changes in the
absence of growth. ηg will always be negative, meaning that a positive growth
always leads to poverty reduction, with distribution remaining constant. ηI can be
either negative or positive depending on whether change in inequality accompanying
growth reduces or increases poverty. Growth will obviously be pro-poor if ηI is
negative. Thus the degree of pro-poor growth can be measured by an index
φ = η / ηg (2)
φ will be greater than 1 when ηI < 0. Growth will be pro-poor when φ > 1, meaning
that the poor benefit proportionally more than the non-poor—that is to say, growth
has resulted in a redistribution in favor of the poor. This would be the first-best
outcome. When 0 < φ < 1, growth is not strictly pro-poor (i.e., growth results in
a redistribution against the poor) even though it still reduces poverty incidence.
This situation may be generally characterized as “trickle-down” growth. If φ < 0,
economic growth actually leads to an increase in poverty. This is equivalent to what

Bhagwati (1958) would call “immiserizing” growth.15
Index φ measures how the benefits of growth are distributed across a population.
Suppose g is growth rate and θ is a poverty measure; the proportional change in
poverty may be written as
∆θ/θ = ƒ(g, φ) = ƒ(g*, 1) (3)
where
∂ƒ(g, φ) / ∂g < 0 and ∂ƒ(g, φ) / ∂φ < 0
which implies that there are two factors that determine a country’s performance
in poverty reduction. First, is growth rate g, which affects society’s mean income;
second, is the pro-poor index φ, which relates to the distribution of benefits of
economic growth. As there are two factors that affect poverty reduction, growth
alone is not sufficient to achieve a rapid reduction in poverty unless it can be
demonstrated that φ remains constant over time.
There are two more indices that should be noted. One is the Poverty Equivalent Growth
Rate g*, and the other is the Growth-Inequality Trade-Off index (GITI). According
to Kakwani and Son (2002), the Poverty Equivalent growth rate g* is defined as
the growth rate that will result in the same proportion of poverty reduction with no
change in income inequality—i.e., when everyone receives the same proportional
benefits of growth. This Poverty Equivalent Growth Rate is shown as
g* = gφ (4)
It can be demonstrated that the magnitude of poverty reduction is a monotonically
increasing function of g*, which implies that the larger g*, the greater the proportional
reduction in poverty. This suggests that the performance of a country should be
judged on the basis of its poverty equivalent growth rate, not by its growth rate
alone. For example, if a country’s growth rate g is 9% and the pro-poor index φ is
⅔, then its effective growth rate in terms of poverty reduction is only 6% (9*⅔=6).
If the same country achieves its growth rate of 9% but the proportional benefits
going to the poor are more than those to the non-poor—in which case, suppose
φ is 1.2, then the effective growth rate will be 10.8, not 9%.
Growth is pro-poor when the poverty equivalent growth rate g* is higher than the
actual growth rate g. If g* lies between 0 and g, then there is trickle-down growth,
when the poor receive proportionally lower benefits of growth than do the non-
Normally, growth is expected to lead to greater enjoyment in life. But if growth results in greater
15
suffering of the people, or more costs than benefits of growth to people, then this is an immiserizing
growth (Bhagwati 1958).
poor, but growth still reduces poverty. When g* is negative, then growth leads to
an increase in poverty.
For Thailand during the 1988 to 2000 period, the actual growth rates and poverty
equivalent growth rates are as follows (Table 6.4):
Table 6.4: Thailand’s Actual and Poverty Equivalent Growth Rates
Poverty Equivalent Growth Rate

Actual Growth Rate Percentage of Poor Poverty Gap Ratio Severity of Poverty
1988–1990 9.06 5.5 5.9 6.1
1990–1992 7.49 4.3 3.4 3.0
1992–1994 7.65 8.8 8.7 8.8
1994–1996 5.75 7.4 7.2 7.2
1996–1998 -1.00 -2.7 -2.5 -2.5
1998–2000 -4.03 -5.1 -6.3 -6.9
1988–2000 4.15 3.1 2.8 2.7
It can be seen that the actual growth rate of per capita welfare (which is the per
capita income adjusted for household needs) was 9.06% during 1988–1990, whereas
the poverty equivalent growth rate for the head-count ratio was 5.5%. This means
that 3.56 percentage points of growth were lost because the full benefits of growth
did not go to the poor; the trend continued for the rest of the decade. Thus, it may
be concluded that growth was not pro-poor during 1988–1990 and 1990–1992.
However, growth became pro-poor during 1992–1994 and 1994–1996, when the
poverty equivalent growth rates were higher than the actual growth rates.
Due to the 1997 financial crisis, growth in Thailand became negative for the first time
during the 1996–1998 and 1998–2000 time periods. Per capita welfare declined at
annual rates of 1% and 4.03% during 1996–1998 and 1998–2000, respectively. The
poor suffered even more during the crisis as is indicated by the poverty equivalent
growth rates, which were -2.7% and -5.1% during 1996–1998 and 1998–2000,
respectively.
The other index we would like to refer to is the GITI. Kakwani (2000) developed a
methodology to measure the trade-off between growth and inequality, which shows
how much growth is needed in order to offset the adverse impact of an increase in
inequality on poverty. This methodology is based on the idea of poverty elasticity with
respect to growth and inequality. If θ is any poverty measure, then growth elasticity,
denoted by ηθ , measures the impact of growth on poverty when inequality does

not change. Similarly, inequality elasticity, denoted by εθ , measures the impact
of change in inequality on poverty, when the mean income does not change. Then
the proportional change in poverty may be written as
dθ/θ = ηθ (dµ/µ) + εθ (dG/G) (5)
where µ is the mean income, and G is Gini ratio. The first term on the right-hand
side measures the impact of growth on poverty, and the second term measures the
impact of a change in the Gini index on poverty. The first term is always negative, as
mentioned earlier, implying that inequality neutral growth will always reduce poverty.
The second term is positive, implying that any increase in inequality resulting from
growth will always increase poverty. Thus, in equating the total proportionate change
in poverty to zero, the GITI presents itself as
GITI = (dG/G)/(dµ/µ) = -(εθ/ηθ) (6)
The interpretation of this equation is as follows. If, for example, GITI is equal to 3.0,
it means that a 1% increase in the Gini index requires a growth rate of 3% in order
to offset the adverse impact of the increase in inequality. The equation also means
that by following pro-poor strategy, if we can reduce the Gini index by 1%, then
this strategy is equivalent to having an additional 3% growth rate. This suggests
that the larger the GITI, the greater the benefits of following the pro-poor strategy
that would reduce inequality would be. Thus, the magnitude of GITI can give an
indication of what development strategy a country should follow. The value of GITI
for Thailand in 1998 is computed to be 4.04 (for the poverty gap ratio), which means
that an increase of 1% in the Gini index will require a growth rate of about 4% in
order that the incidence of poverty does not change. It also means that a reduction
of inequality by 1% is equivalent to having a growth rate of about 4%. This result
suggests that a strategy of inequality reduction will have greater pay-off for poverty
reduction than than the strategy of promoting economic growth.16
To sum up, in the case of Thailand, pure growth effects alone were insufficient to label
the growth of Thailand during the last four decades as “quality” or “pro-poor” growth
because the resultant inequality that accompanied such fast growth has had deleterious
effects on poverty reduction. This study should serve as a warning to present and
future policymakers everywhere that inequality problems are not something to push
aside and are more important than many people previously thought.
Source: Excerpted and adapted from Krongkaew and Kakwani (2003).
Kakwani (2000) has also shown that the relative importance of the inequality factor is much greater
16
in Thailand than in many other East Asian countries such as Korea, the Philippines, and Lao People’s
Democratic Republic (Lao PDR). Whereas the GITI for Thailand was 4.07 in 1998, the same index for
the Philippines, Korea, and Lao PDR were 2.32, 1.23, and 0.94, respectively. Inequality problems in
Thailand are much more critical than in many other East Asian countries.
country with SSD should be people with an adequate level of educational

attainment (say, at least four years of formal education, or at least until a
child is able to read and write, and know the basics of arithmetics), and
the average level of education should rise with increased national income
per capita. Contrary to the practices in some developing countries, not all
high school graduates should go to colleges and universities, first, because
not all of these school graduates are intellectually prepared for such a level
of education; and, second, because there is no need for this to happen as
secondary school graduates are still able to obtain gainful employment in
the labor market with adequate compensation. However, any student who
is intellectually capable of higher or specific education should be able to
access the educational facilities of their choice with the help of the state
through financing systems.
Realistic Environmental Preservation Policies

Concern for the environment may be remote from the immediate consideration
of those living in poverty. It may be necessary for the state to initiate
environmental policies that balance the minimum level of tolerance for
environmental exploitation and the use of the products of the environment.
For example, poor squatters may be allowed to stay in forest reserves and
utilize forest products for subsistence living, but a plan in which these squatters
could also help to maintain or preserve future growth and rehabilitation of
the present forest could be devised.
4.2 The Need for Political Development

On looking back, it is interesting to note that development economists in
the post-war period did not talk much about political development at all
when they discussed economic development or how a developing country
attains the status of industrialized (developed) country. It is possible to
conclude that development economists did not see political development as
an important or critical factor for a country to transform from a basically
agrarian economy to a mainly industrial economy in which a change in
economic structure and how resources are allocated are more important.
On the contrary, many political scientists studying development in the post-
war period often noted the lack of political stability in many of these newly
industrializing countries, and despite the catching up of these developing
countries with developed countries in terms of per capita GNP there still exist
vast differences between the two categories with regards to other aspects of
development such as income inequality, social disruptions, and ecological
degradation.17 Huntington (1968), for example, noted that the violence and
instability characteristic of the post-World War II era was in large part the
product of rapid social change and the rapid mobilization of new groups
into politics coupled with the slow development of political institutions.
What is political development, then, and how does it impact on the SSD
of today? Huntington (1965, 1968) and Huntington and Weiner (1986) again
saw political development as the institutionalization of political organizations
and procedures, or the growth of institutions competent to deal with the
strains of social mobilization and political participation. Deutsch (1961)
defined political development as the process in which major clusters of old
social, economic, and psychological commitments are eroded or broken and
people become available for new patterns of socialization and behavior. Park
(1984) understood political development to be the capacity of the political
system to satisfy the changing needs of the members of the society. More
recently, Acemoglu and Robinson (2006) saw political development as
the path that political institutions take over time toward democracy. And
according to Acemoglu and Robinson, in analyzing political issues, there
are four main paths of the movements toward democracy: the first leads
from non-democracy gradually and inexorably to democracy and stays there
(Britain is the best example of such a path); the second path, once created,
quickly collapses (Argentina is an example); the third path is one in which
a country remains non-democratic but is not challenged because people
are sufficiently satisfied under the existing political institutions (Singapore
is often regarded as belonging to this type of political development); and,
finally, a country that is non-democratic as well as unequal and exploitative,
and the political rulers or elites find democracy so threatening that they use
violence and repression to avoid it (South Africa before the collapse of the
apartheid regime is a good example of this path).
Huntington (1965) observed a phenomenon that was a puzzle to many
scholars. According to the author, instead of a trend toward competitiveness
and democracy, there was an “erosion of democracy” and a tendency toward
17
There are several studies, new and old, by political scientists on political development and democracy
and democratization. See, for example, Deutsch (1961), Huntington (1965, 1968), Huntington and
Weiner (1986), Pye (1972), Higgot (1983), Park (1984), Przeworski et al. (2000), Hood (2004), and
Kingsbury (2007).
autocratic military regimes and one-party regimes. And instead of stability,

there were repeated coups and revolts; instead of unifying nationalism and
nation-building, there were repeated ethnic and civil wars. More than 40
years later, TIME magazine (2009) asked basically the same question: “Why
democracy is failing in Asia.” What TIME magazine has observed is that despite
the fact that most Asian nations now hold elections, true democracy still eludes
the region. Situations in Thailand; Malaysia; Korea: Taipei,China; Bangladesh;
Pakistan; and even India are often cited as indicative of underdeveloped
democracy or political development, so much so that the writer of the magazine
is forced to ask: “Given the events of the past year, are Asia and democracy
compatible?” (TIME 2009: 32).
In a similar vein, Leftwich (1993, 2002, 2008), has argued for almost
two decades that development in Third World countries is not a stable one
because these countries still lack the type of democracy that is practiced in
the West that would allow for development to progress and take hold. While
it may be believed that modernization and development may bring about
democracy or greater democracy, Leftwich (1993) believes that democracy
is a necessary prior or parallel condition of development, not an outcome
of it. The kind of liberal-democratic polity as seen in the West may be seen
to contain mature and stable “liberal democratic institutions, declining
social inequalities, a flourishing civil society, a widening policy consensus, a
secular and bureaucratic ideology, and the extension and institutionalization
of civil and human rights…” (Leftwich 1993: 612). Even with this kind of
democracy it is still insufficient to guarantee sustainable development
until “good governance” is acquired through some or all of the following
features: an efficient public service; an independent judicial system and
legal framework to enforce contracts; the accountable administration of
public funds; and independent public auditor, responsible to a representative
legislature; respect for the law and human rights at all levels of government;
a pluralistic institutional structure; and a free press.
The need for political development in Asia is too complex to be discussed
in this chapter. Suffice it to say that economic development unmatched by
commensurate political development in the form of people (i.e., the electorate,
politicians, and state officials) knowing or understanding their political rights
and duties, and having not fallen into the traps of election frauds—especially
vote buying and selling, influence peddling, and conflicts of interests—the
unscrupulous use of power of the majority and the disrespect of the rights of
the minority, nepotism, favoritism, cronyism of those in power, and so on, will
not lead to development of a socially sustainable sort. It is true that poverty
can lead to apathy or indifference in political development and poor people in
the country could be subject to exploitation by unscrupulous politicians (e.g.,
through policy corruption or other kinds of populist policies). But poverty
reduction without a change in positive political outlook of the poor people
would not be enough. A new SSD must include satisfactory political mechanisms
and arrangements so that the appropriate type and degree of democracy may
be undertaken in a country.18
4.3 The Importance of Good Governance

While necessary political development will equip a country and its people
for SSD, it is still not sufficient for reaching this goal if the country lacks
good governance. The United Nations Development Programme (UNDP),
which was one of the first international organizations to popularize the
concept of governance in development, defines governance as the exercise
of economic, political and administrative authority to manage a country’s
affairs at all levels. Sound governance or good governance, therefore, describes
governance that is, among other things, participatory, transparent, accountable,
effective, equitable, and promotes the rule of law. There are at least five major
organizations or entities involved in the issues of governance: the state, the
public sector, the private sector, civil society, and individuals. Individuals are
citizens of a country, and together with other individuals either alone or in
groups, form civil society. Civil society is defined to include formal and informal
enterprises in the marketplace such as commercial firms, banks, self-employed
merchants, and traders as well as employed labor. What is not included in
the private sector would fall under the public sector whose institutions are
known as the state. So, the state and the public sector are often classified as
belonging together in one group, whereas the private sector and civil society
are often classified together in another group.
The UNDP distinguishes the following core characteristics of sound
governance (UNDP 1996: 6–7):
• “Participation. All citizens have the opportunity to have a voice in
influencing decision-making, either directly or through legitimate
18
We could benefit from the idea of the “Justice as Fairness,” by John Rawls, which argues that basic
political freedom of the people must come first before economic or social policy to give maximum
assistance to the least advantaged group of a population. See Rawls (1971).
intermediate institutions that represent their interests; such broad

participation is built on freedoms of association and speech, as well as
capacities to participate constructively.
• Rule of law. Legal frameworks are established that are fair and enforced
impartially for all citizens. Particularly important are laws related to human
rights.
• Transparency. Processes, institutions and information bases are directly
accessible to those concerned with them, or sufficient information is
provided to enable those concerned to understand and monitor them;
transparency is built on the free flow of information.
• Responsiveness. Institutions and processes attempt to serve all their
stakeholders optimally, given limited resources.
• Consensus orientation. Sound governance mediates differing interests
to reach broad consensus on the nature of what is in the best interest
of the good of the group and, where possible, on particular policies and
procedures.
• Equity. All people have access to opportunities to improve or maintain
their well-being.
• Effectiveness. Processes and institutions produce results that meet needs
while making optimal use of resources.
• Accountability. Those who make decisions in government, the private
sector and civil society organizations are accountable to the public as well
as to institutional stakeholders; the precise nature of accountability differs
depending on the institutional level, whether it is internal or external to
an organization, and the societal sector, e.g. government bureaucracy,
political bodies, business, or civil society organizations.
• Long-term vision. Both leaders and the broad population have a long-
term perspective on sound governance and human development along
with a sense of the requisites of such development.”
While the UNDP’s concept of good governance is generally accepted as
an important component for SSD, one specific requirement is missing: the
absence of a warning against corruption in the public sector. This is a big
issue that has become a central concern around which many activities are
organized for many international organizations, including the UN, ADB,
World Bank, International Monetary Fund, and Organisation for Economic
Co-operation and Development (OECD). Probably one of the most important
events involving international efforts and cooperation to fight corruption is
the adoption of the United Nations Convention Against Corruption (UNCAC)
by the UN General Assembly in October 2003. This convention is a direct
response to the UN’s concern about the seriousness of problems and the threats
posed by corruption to the stability and security of societies, undermining
the institutions and values of democracy, ethical values, and justice, and
jeopardizing sustainable development and the rule of law.19 Five areas that
the UNCAC will cover are:
1. Corruption prevention where dedicated anti-corruption bodies may be
established to deal with various measures to prevent corruption;
2. Criminalization of corruption which goes beyond basic forms of
corruption such as bribery and embezzlement of public funds to include
trading in influence and laundering of the proceeds of corruption;
3. International cooperation where members agree to cooperate with
one another on the prevention, investigation, and prosecution of
offenders;
4. Assets recovery where stolen and ill-gotten assets may be seized and
repatriated to the original member state; and
5. Technical assistance where provisions on training, material and human
resources, and research and information sharing may be made available
to members.
This was not the first time that an anti-corruption agreement has been
reached by an international organization or group of countries. The World
Bank is one of the most distinguished and forceful pushers for worldwide
anti-corruption activities. At the annual meetings of the World Bank and the
International Monetary Fund in October 1996, for example, James Wolfensohn,
the then-new president of the World Bank, labeled corruption as a “cancer”
on the global economy, and said that it was time to “put teeth” into the World
Bank’s efforts to address it (World Bank 2002c: 86). In the aftermath of this
annual meeting, the World Bank prepared a report on an integrated anti-
corruption strategy that it formally endorsed in 1997.20
In Asia, ADB joined hands with the OECD to launch the ADB/OECD
Anti-Corruption Initiative for Asia-Pacific in 1999 (ADB/OECD 2001). The
Anti-Corruption Action Plan for Asia-Pacific developed in the framework
of this initiative set out the goals and standards for sustainable safeguards
As of early 2009, there were 140 signatories to the UNCAC. Of these signatories, 129 have already
19
ratified the convention and become state parties to the convention. More information on the convention
is available at: http://www.unodc.org/unodc/en/treaties/CAC/signatories.html.
20
This became known as the 1997 Anti-Corruption Strategy Paper (World Bank 1997).
against corruption in the economic, political, and social spheres of countries

in the region. The plan addresses corruption under three pillars: (i) developing
effective and transparent systems for public service, (ii) strengthening anti-
bribery actions and promoting integrity in business operations, and (iii)
supporting active public involvement. To date, 28 countries and economies
from the Asia and Pacific region have endorsed the plan and have agreed on
an implementation mechanism to achieve the standards it has set out.
In all, it could be concluded that good governance in the public sector is
often overlooked in most discussions about SSD; indeed, corruption in the
public sector could be one of the most critical factors influencing the long-term
growth and development of a country. From the existing data and information
provided by such organizations—for example, Transparency International’s
corruption perception index—it is possible to see a simple correlation between
the level of development and the absence of corruption in the country. In
other words, more-developed countries are more likely to have less corruption
than less-developed countries, and vice versa. In theory, people with adequate
means for living are less inclined to acquire more wealth and income through
corrupt means. Therefore, anti-corruption efforts should be among the most
urgent items to address in Asian countries.
4.4 The Hope for Satisfactory Cultural and Spiritual Lifestyles

Rather than being a necessary precondition for SSD, the achievement of
satisfactory cultural and spiritual lifestyles of the people in any country may
be a “by-product” condition once other previous conditions, such as political
development and good governance, have been met. In other words, having
social harmony where people are able to develop their cultures and traditions
and enjoy their respective lifestyles is the effect of a situation rather than the
cause of it. And once satisfactory cultural and spiritual lifestyles have occurred,
they are likely to reinforce further SSD.
Previously, it was suggested that in any country and in any type of
development, the people or population of that country must be given basic
human rights as stipulated in the Universal Declaration of Human Rights
adopted by the UN General Assembly on 10 December 1948. The declaration
contains three parts: (i) civil and political rights; (ii) economic, social, and
cultural rights; and (iii) solidarity rights. It is upon the achievement of the
second and third groups of rights that a person may have a satisfactory cultural
and spiritual lifestyle.
To elaborate: the First Level rights include such rights as the right to be
free from discrimination of any kind; the right to life and liberty, the right to
free opinion and expression of that opinion, the right to peaceful assembly
and association, and the right to participate in the government of the country
either directly or indirectly through election. The Second Level rights consist
of such rights as the right to have an education, the right to employment and
protection from unemployment, and the right to adequate living standards
for oneself and family. And the Third Level rights include such rights as the
right to freedom of choice in self development in political, economic, social,
and cultural areas; the right to live under good environment, and the right
to participate in activities that aim at the preservation of humanity. 21
4.5 The Practicability of a Sufficiency Economy

In this section, the chapter will recommend a practical approach that is believed
to bring about SSD in the real world. This practical approach to SSD is the
“Philosophy of Sufficiency Economy” suggested by King Bhumibol Adulyadej
of Thailand to be used in his country in the aftermath of the 1997 financial
crisis (that started in Thailand). The crisis faced by Thailand then was similar
to the crisis that began in the US recently—i.e., in that it involves careless
overexpansion of the economy, excessive consumption, and spending far
beyond one’s means, and the failure to take care of the risks involved. The
lessons learned over a decade ago have equipped the Thai economy to weather
the current global slowdown well enough to say that the prospective impact of
the global crisis on the country this time is likely to be less troublesome. No
doubt, the philosophy of sufficiency economy, which has been the principal
development guideline in Thailand since the 1997 crisis, must have contributed
something to this.22
The best literature on the philosophy of sufficiency economy is produced
by Thailand’s NESDB, which is charged with the duty to prepare an economic
and social development plan for Thailand every five years.23 According to the
21
It may be said that the classification of basic human rights into three levels reflects the true nature of
human evolution and development. That is to say, individuals in a society should be given basic rights
to life and liberty first, to be followed by the right to be free from economic deprivation, and finally
the right to enjoy spiritual freedom and individual lifestyles.
22
See Appendix for a theoretical discussion on how to understand the sufficiency economy in terms of
standard economic principles.
23
See http://www.sufficiencyeconomy.org/en/.
NESDB, the following statements can be used to explain the true nature of a
sufficiency economy (NESDB 2003):
Regarding the Form and Function of the Sufficiency Economy

• “Sufficiency economy” is a philosophy that serves as a guide for the way
of living and behaving for people of all levels toward the “middle path;”
• As an agenda, the sufficiency economy delivers the middle path as the
“economic life guiding principle,” i.e., a secularized normative prescription,
but not a religious statement of faith;
• For application domain, the sufficiency economy is scalable, with universal
domain applicability: individual, household, community, project, business,
management, institution, polity, society, nation state, region, humanity,
and biosphere;
• As the foundation for an economic framework, the sufficiency economy
is complete, governing everything from motivation (utilities, drives, etc.)
to criteria (goals, objectives, etc.) to behavior (production, consumption,
investment, etc.) to system (collectivity, connectivity, etc.), and can be said
to, at least implicitly, address all issues within a dynamic setting.
Regarding the Working Definition of the Sufficiency Economy:

• “Sufficiency” entails three components: moderation, reasonableness, and
requirement for a self-immunity system, i.e., ability to cope with shocks
from internal and external changes;
• Two underlying conditions are necessary to achieve sufficiency: knowledge
and morality;
• For knowledge conditions, the sufficiency economy requires breadth and
thoroughness in planning, and carefulness in applying knowledge and in
implementation of those plans;
• For moral/ethical criteria, the sufficiency economy enforces the conditions
that people are to possess honesty, while conducting their lives with
perseverance, harmlessness, and generosity.
Based on the above statements, the NESDB concludes that the sufficiency
economy is a holistic concept of moderation and contentment. It sets out to
shield the people and the country from adverse shocks and acknowledges
interdependency among people of all professions as an approach, against the
backdrop of interdependence and globalization. The philosophy emphasizes
the wise use of knowledge with due consideration. Its values include integrity,
diligence, goodwill, and sharing. Finally, it seeks to achieve balance and
sustainability. Figure 6.4 captures the basic essence of this philosophy, which, in
2007, has received recognition from the UNDP as an alternative development
policy that many developing countries could consider (UNDP 2007).
However, as a philosophy, the sufficiency economy does not provide a
ready-made handbook or manual from which a development practitioner
could follow step-by-step guidelines on how to reach a desired state of SSD.
This development practitioner may have to draw practical lessons from the
three concepts of moderation, reasonableness, and self-immunity.
Consider the following example of the use of the philosophy of sufficiency
economy in a typical situation of a farmer in Thailand. A typical rice farmer
in Thailand owns his own plot of land, but the area of land is generally quite
small, around six acres per family. A new agriculture theory that is part of
the philosophy of sufficiency economy would suggest that he divide the use
of this land into four parts with a proportion of 30/30/30/10: the first 30%
of the land to be used for rice cultivation; the second 30% designated for
field and garden crops; the third 30% to serve as water catchments; and the
remaining 10% for the family’s home and storage. In this way, this farmer is
protected against some external shocks as he allocates his resources and their
uses well. Through time, he could improve his productivity and grow more
than his family consumes, allowing him to sell the surplus. The farmer may
want to enter into some kind of production cooperative to save on the costs of
farm inputs and to increase the farm’s productivity with farming machinery.
He may expand his farm acreage by renting or purchasing new land, while
always relying on the reasonableness of each decision, immunizing himself
against future problems, and thinking about moderation in his family’s
consumption. The growth may be slow, but it will be stable, and along with
overall economic growth and responsible and effective government, his life
and the life of everyone in his family should improve; they will be happy under
the general guidance of the philosophy of sufficiency economy.
5. Summary and Conclusions
The main aim of this chapter is to seriously consider the source and meaning
of the question: How can Asia develop in a socially sustainable manner (i.e.,
equitably and inclusively), and subsequently to answer such a question by
reviewing the development experiences of some East Asian countries. The
chapter starts with a reference to a widely accepted notion that most Asian
economies, especially East Asian economies, have been relatively more

successful than developing economies in other regions of the world due
to the fact that these successful Asian economies have followed a path of
development based on a free-market system and affiliated economic and
social conditions such as openness, macroeconomic stability, human resource
capacity building, and appropriate interventions of the state. However, the
chapter has pointed out that, despite the fast growth, most Asian economies
still possess a relative small level of command over resources measured by such
commonly accepted indicators as GDP per capita compared to most developed
economies. This alone makes it difficult for these countries to achieve an
SSD defined as traditional sustainable development in social, economic, and
environmental fields, plus additional requirements in political development,
good governance, and support for a harmonious livelihood of the population. It
is difficult because SSD may require that the income and wealth of the people in
those countries are adequate to begin with. Moreover, the relatively low income
situations of the citizens are being made worse by income inequality, a factor
that greatly reduces the chances of achieving SSD. The political structures of
these countries that lack the maturity of democracy as practiced in developed
countries often give rise to abuses of power by politicians and political leaders,
and the misuse of public funds through various populist policies. The associated
corruption problems in political and public sectors have made it less likely
that people at large will be able to enjoy the benefits of growth; the ill-gotten
gains by politicians and state officials further exacerbate the already unfair
distribution of income.
The chapter chooses one specific issue in the relationship between growth and
equity in some East Asian countries and reports on the outcome of comparative
studies by a group of East Asian economists. The result confirms what was
referred to earlier, that is, the eight countries selected for this chapter (PRC,
Indonesia, Korea, Malaysia, Philippines, Singapore, Thailand, and Viet Nam)
have exhibited similar growth policies and patterns (e.g., market-based, free-
enterprise systems, with rapid income growth rates but a growing inequality in
income distribution). This result calls for the necessity of public policy that will
create growth with equity. The possibility of a “pro-poor” policy is discussed,
including many other policy prescriptions that can be used to bring about
SSD. The chapter comments on the continuation of market-based economic
policy, suggests a smart anti-poverty policy, emphasizes the importance of
transparency and integrity in public sector governance, encourages the building
up of human resources and capability of the people through continuous and
variegated educational activities, protects the environment in realistic and
cost-effective ways, promotes political development that raises awareness
among the people on the proper rights and duties of citizens, and finally
recommends the sufficiency economy as a practical philosophy that, once
applied, can lead to SSD.
In conclusion, SSD is what Asian countries must strive for. Realistically,
however, many countries in South and Southeast Asia still face great difficulties
in achieving full-fledged SSD in the near future. One can even go so far as to
say that such a goal is nearly impossible given the level of development these
countries are currently at. But this is not a valid reason or rationale to be
discouraged by the countries’ leaders and policymakers. It seems that what
is needed most in these countries is not a different economic policy (market-
based economic philosophy will take care of that), but rather uncorrupted
political systems, where people enjoy basic human rights and the true nature of
democracy is understood; where politicians, political leaders, and state officials
are honest and do their jobs according to established codes of conduct; and
where the corporate sector observes fair competition and fair play in their
business activities, which, when done properly, absolve these firms from the
requirements of corporate social responsibility. This leaves the government to
act as an arbitrator of any societal conflicts that may occur among all sectors
in the society, and the far-sighted leader for the social and environmental
future of each country. Finally, the chapter suggests the sufficiency economy
as probably the best solution to problems facing the feasibility or plausibility
of SSD.
Appendix: The Philosophy of Sufficiency Economy24

The economic crisis of 1997 affected everyone in Thailand, including the king.
Seeing many of his subjects suffering from the pains of the economic crisis, he
advised that the Thai people should change the economic philosophy of their
livelihoods so as to be able to cope with economic adversity and to withstand
future economic insecurity. The Thai king’s words have become known as the
philosophy of sufficiency economy, and have been used as the guiding principle
in Thailand’s current national economic and social development plan.
This philosophical statement can be summed in just one paragraph and
the following is the author’s own translation of that paragraph:25
Sufficiency economy is a philosophy that guides the livelihood and

behavior of people at all levels, from family to community to the country,
on matters concerning national development and administration so
that the ‘middle way’ is observed, especially economic development that
keeps up with the world of globalization. Sufficiency means moderation,
reasonableness, including the need to build reasonable immunity system
against any shocks from the outside as well as from the inside. In so
doing, one must rely on intelligence, attentiveness, and extreme care
to use all kinds of knowledge in making plan and in carrying out every
step of its implementation. And at the same time one must build up
the spiritual foundation of all people in the nation, especially state
officials, scholars, and business people of all levels, to be conscious of
moral integrity and honesty, and to strive for appropriate wisdom to
live the life with forbearance, diligence, self-awareness, intelligence,
and attentiveness, so as to maintain the balance and readiness to better
cope with rapid physical, social, environmental and cultural changes
from the outside world.
The above statement has lent itself to several interpretations by various

groups of people. First of all, the extreme interpretation that a self-sufficient
economy means a completely self-reliant economy or autarky can be dismissed
outright. An autarchic system is a system whereby a country intends to rely
24
See Krongkaew (2003b).
25
All quotes from the king’s speeches in the Appendix can be found in Piboolsravut (2003, vol. 3).
on itself or its people to produce all it can without depending on others. It
may do that voluntarily (e.g., cutting off contact with the outside world) or by
necessity (e.g., because it is incapable of generating contact with the outside
world). In the king’s words, “…This self-sufficiency does not mean that every
family must grow food for themselves or to make clothes for themselves. That is
too much. But in a village or sub-district there should be a reasonable amount
of sufficiency. If they grow or produce something more than they need they
can sell them. But they do not need to sell them very far; they can sell them
in nearby places without having to pay high transport costs.”
Some people have attempted to link this new sufficiency economy with
the so-called “Gandhian Economy” along the lines of a system proposed
by Mahatma Gandhi that is based on family- or village-level, small-scale
enterprises and traditional methods. This system may have been appropriate to
India at the time of its independence, when its people were poor and technology
was limited. But in modern times, this policy may be too restrictive as the
policy calls for families to do many things themselves using simple tools and
machinery (e.g., using traditional spinning wheels to make cloth). Perhaps the
basic idea of Gandhi’s simple life—a life unencumbered by modern needs and
modern technology—could make the lives of Indian people happier. But in the
much more open world of today where countries in the world are closely linked
with one another, the self-sufficiency proposed by Gandhi is too extreme.
Some people are trying to understand this new idea of sufficiency economy
using the knowledge and applicability of Buddhism. In Buddhism, life,
especially spiritual life, is enhanced by the cutting down of excessive wants
or greed. True happiness may be attained when a person is fully satisfied with
what he or she has, and is at peace with himself or herself. To strive to consume
more would lead to unhappiness if and when the consumption is not satisfied
or falls short of expectation. A sufficiency economy in this context would be an
economy fundamentally conditioned by basic needs, not greed, and restrained
by conscious efforts to cut down consumption. This is probably acceptable
insofar as it does not reject welfare gains from consumption altogether.
On looking back, it was discovered that the Thai king has talked about this
issue of the sufficiency economy since 1974. In his usual birthday speech in
December 1974, he wished that everyone in Thailand had “sufficient to live
and to eat.” This was indeed a precursor to today’s topic. The king followed
up this issue by saying again that “…The development of a country must be
by steps. It must start with the basic sufficiency in food and adequate living,
using techniques and instruments which are economical but technically sound.
When this foundation is secured, then higher economic status and progress
can be established.”26 This is very good and very clear because it has shown
that the king does not deny economic progress and globalization, which some
people have interpreted his sufficiency economy philosophy to lead away from.
Indeed, in Thai, the word “globalization” is used in the statement on sufficiency
economy that the king has endorsed. The notion that the sufficiency economy
is anti-globalization should be put to rest forever.
Still there are attempts from various segments of the Thai population
to separate or dissociate this new sufficiency economy from the realm of
mainstream economics that stresses economic rationality and efficiency in
resource allocation. It is very obvious that the king’s sufficiency economy
theory is not the type of economy that one can find in an ordinary mainstream
economics textbook, but it would be inaccurate to interpret this to mean that
this new sufficiency economy is the antithesis of mainstream economics in
every respect. The sufficiency economy may still be understood within the
framework of mainstream economics (of economic rationality and efficiency
in allocative choices). The difference is not in the type, but in the degree or
magnitude of economic behavior. The king used the phrases “middle path”
and “middle way” to describe the pattern of life that every Thai should lead;
a life dictated by moderation, reasonableness, and an ability to withstand
shock. Is there any policy in mainstream economics that best captures the
spirit of this philosophy?
How can we use our own understanding of optimization in economic
science to explain the sufficiency economy? It is possible to see the theory as
consisting of two states of affairs: one is the inevitability of facing a globalized
world in which economic efficiency and competition are the rules of the game;
the other is the need to have economic security and the ability to protect
oneself from external shock and instability. In the first instance, it must be
acknowledged that there are opportunity costs involved with all decisions.
Specialization and division of labor are still valuable because the opportunity
costs of doing everything individually rather than benefiting from comparative
advantages would be higher. The laws of comparative advantage and gains
from trade still work in today’s world, but it would be foolish to specialize
without basic needs security (e.g., food, shelter, and clothing). This is when
the second issue in the sufficiency economy theory must be addressed because
Information from Puntasen (1999).

26
it concerns the basic capability of the people in the country to take care of
themselves. The optimization principle applies when addressing the question:
How much of our time and energy should be devoted to the first and second
issues, respectively? In other words, how many resources should be allocated
to producing for trade based on the comparative advantage principle, and
how many for basic security? The best mix between the two allocations would
be the optimal state of affairs.
On the allocation of time for some economic purposes, the Thai king
suggested that we did not have to mobilize all our efforts to an attempt
to be a newly industrialized country. Referring to the point made earlier
about all-out specialization, one can see that there is no conflict between
the two concepts—that is, between being a sufficiency economy and a newly
industrializing country. The same conformity can be seen also in another of the
king’s statements that using only one quarter of those time and efforts would
be sufficient to reach a self-sufficient economic status. The king’s suggestion
has indeed provided a starting point in the economic optimization process.
The “one quarter time and efforts” idea needs to be studied to find out whether
it represents the optimal mix between the attainment of the first and second
states of affairs. Some countries may need more, some less, but the relevant
economic question is how to get an optimal mix of resource allocation that
both satisfies economic growth as well as basic needs and security.
Under the above economic framework, it is possible to see that there is a
correlation between what the king has proposed and the possible interpretation
of the sufficiency economy theory under mainstream economic principles.
One should note that the last clause in the philosophy of sufficiency economy,
which states that “…[all Thais] must posses integrity, honesty, and appropriate
knowledge so as to be able to lead the life with patience, perseverance, diligence,
wisdom and prudence, to maintain balance and be ready for the rapid material,
social, environmental, and cultural changes from the outside world.” Here,
the word “balance” may be understood to mean the optimal mix alluded to
above.
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Comments
Arsenio M. Balisacan
The key message of Medhi Krongkaew’s chapter is that while economic

growth in Asia’s developing countries, particularly those in East and Southeast
Asia, has been quite remarkable in comparison with the growth seen in
other regions of the world, progress in achieving SSD has been muted by
either rising income inequality or by persistently high levels of inequality
in incomes and opportunities in many countries. The chapter emphasizes
the need for wide-ranging reforms, especially political reforms, in order
to achieve SSD. The chapter suggests “ways forward” to achieving SSD in
these countries, offering Thailand’s “Sufficiency Development” paradigm
as one such way.
Krongkaew defines SSD by extending the concept of conventional sustainable
development (i.e., mainly the interface of the economy, environment, and
society) to include political processes, culture, and ethics, thereby presenting
an all-embracing approach to thinking about development. The approach has
its appeal, especially for popular discussions and for the media. However, the
concept falls short of fully covering the critical policy choices and key drivers
to achieving poverty reduction and equity, especially in fiscally constrained
and resource-poor countries.
Poverty and inequality are multi-dimensional concepts. Hence,
characterizing the “SSDness” of countries (i.e., measuring the various
dimensions of SSD) has to go beyond the conventional focus of the economic
development literature on income-based measures of poverty and inequity.
While recognizing this concern, Krongkaew almost exclusively focused
on country-level income measures. Given his definition of SSD, it would
have been useful to show inequality indicators of human functionings
(e.g., literacy, life expectancy), opportunities (e.g., education, health,
technology, basic infrastructure), and quality of governance (e.g., corruption
index, economic freedom index). The evidence at both cross-country and
subnational levels27 is quite compelling that there is usually no one-for-one
correspondence between income and expenditure measures, on the one
hand, and human development and social outcomes, on the other.
Heterogeneity in the responses of poverty reduction to growth, even for
countries at similar income levels, is a key feature of recent development
experience. Initial conditions—including institutions, geography, and asset
inequality—matter a lot. This suggests that critical constraints to poverty
reduction vary not only across countries but also across space and sub-
population groups within a country. Put differently, there is likely no one-
size-fits-all pathway to SSD in the developing world. The challenge for each
society is to identify the key policy levers required to bring about sustained
growth and poverty reduction. Such identification may be usefully informed
by, say, a growth and poverty reduction diagnostics exercise, such as that
suggested by Hausman, Rodrick, and Velasco (2005).
The Philippine development experience is a case in point. Poverty reduction
is remarkably slow in the country compared with its neighbors, even after
taking into account differences in economic growth rates. The speed of poverty
reduction also varies substantially across geographic areas (i.e., provinces,
regions, and between urban and rural areas). “Poverty reduction diagnostics”
indicate that the distribution of the benefits of basic social services, especially
education, health care, and infrastructure, has accrued mainly to the non-poor,
and that a variety of commercial policies and institutions has stifled growth
in the demand for assets owned by the poor, that is, mainly labor (Balisacan
2007). Many programs commonly identified with equity objectives (e.g.,
agrarian reform, credit, food price subsidy programs) have had, in practice,
little direct impact on poverty reduction. These programs have had many
leakages to the non-poor, were administratively costly to implement, and
encouraged unintended rent-seeking processes.
To the extent that great income inequality in a society is a binding constraint
to SSD, understanding the sources of that inequality is key to achieving SSD.
It has become a common practice to employ decomposition analysis to gain
such an understanding. A key empirical regularity in the literature is that,
globally, it is inter-country inequality (i.e., differences in mean per capita
income) that accounts for the bulk of global income inequality. However,
within a country, inter-group inequality accounts for only a relatively small
27
See, for example, Kanbur, Venables, and Wan (2006).
part of national inequality. Indeed, it is inequality within individual groups that

typically explains much of the inequality. This is the case for Asian countries.
This distinction could have helped clarify the comparative policy discussions
in the chapter.
To be sure, spatial disparities are not necessarily non-SSD. Given
agglomeration economies and factor mobility, the spatial concentration of
economic activities leading to differential patterns of growth across regions
or areas of the country may be inevitable and even desirable from an overall
economic growth perspective. However, to prevent unreasonable spatial
disparities in welfare during the development process, the priority should
be to improve market links between the leading and lagging regions through
greater factor mobility, particularly labor mobility. Improving access to social
services, particularly education and health care, in lagging regions should
also be part of any development agenda.
Finally, the suggestion that Thailand’s “Sufficiency Economy” approach
be seen as a pathway to SSD is a bit premature in the absence of empirical
grounding.
References
Balisacan, A. M. 2007. Local Growth and Poverty Reduction. In The Dynamics of Regional
Development: The Philippines in East Asia, edited by A. M. Balisacan and H. Hill.
Cheltenham, UK: Edward Elgar.
Hausman, R., D. Rodrik, and A. Velasco. 2005. Growth Diagnostics. Cambridge, MA: Harvard
University. Available: http://ksghome.harvard.edu/~drodrik/barcelonafinalmarch2005
.pdf.
Kanbur, R., T. Venables, and G. Wan, eds. 2006. Spatial Disparities in Human Development:
Perspectives from Asia. Tokyo: United Nations University Press.
Promoting Sustainability Under a Changing Climate in Asia 179
VII
Promoting Sustainability Under a
Changing Climate in Asia
Matthias Ruth
1. The Challenges to Sustainability in Asia
The population, economy, and environment in Asia are changing rapidly.

With these changes comes a growing demand for basic goods and services—
such as clean water, energy, education, and healthcare. Increased pressures
from outside—such as economic globalization and climatic change—make it a
daunting task for anyone interested in understanding how these changes can
be influenced in order to promote sustainability of the region. Yet, ignoring
the need to find and implement sustainable development strategies for Asia
runs the risk that people and countries in the region will be overrun by these
changes, with governments failing to deliver on the hopes and aspirations of
ever more people, present and future.
Given the need for sustainable development strategies for Asia, this
chapter concentrates on the following three interrelated issues that impact the
effectiveness of interventions to address current trends: (i) continued growth
of the population, especially in urban areas; (ii) growing contributions of Asian
countries to global climate change, as well as the ramifications of climate
change for local economies, societies, and the environment; and (iii) fixation on
economic growth as a solution to the very problems for which growth is one of
the root causes. Each of these issues is presented in the following three sections
of this chapter, with Section 2 focusing on population growth and urbanization
trends, Section 3 addressing climate change, and Section 4 distinguishing
the policy goals of economic growth from those of development. Based on a
discussion of these issues, this chapter presents in Section 5 a framework for
analysis and policy guidance that draws on principles and insights from the
natural sciences to inform the economics of sustainable development. The
chapter closes with a brief summary and suggestions for strategies to tackle
the interrelated social, economic, and environmental challenges faced in Asia
under rapidly changing climatic conditions.
2. Population Growth and Urbanization
World population has grown from 2.5 billion in 1950 to 6.7 billion in 2008.
An increasing share of that population is living in developing countries, with
India and the People’s Republic of China (PRC) combined now accounting
for about 37% of the world total (Population Reference Bureau 2008). Adding
Indonesia, Pakistan, Bangladesh, and Japan to the picture, six of the ten most
populous countries in the world are in Asia.
In line with global population trends, urbanization continues to increase.
The world has seen a fifteenfold increase in urban populations since the
beginning of the twentieth century. Both total and urban populations at all
levels of development are rising, though at a decreasing rate. Consistently,
wealthier and more-developed nations are characterized by greater levels of
urbanization, though the majority of urban growth is occurring in lesser-
developed countries (United Nations Development Programme [UNDP] 2003,
2006; World Bank 2005). Indeed, the rate of urbanization in the least-developed
places is as much as seven times that in the most-developed nations (UNDP
2003), with Asian countries accounting for some of the highest urbanization
trends (Table 7.1).
Approximately half of the world’s population now lives in urban areas, with
more than 50% living in cities of less than 500,000 people (McGranahan and
Marcotullio 2006). Though some of the world’s largest cities have experienced
a slowing of growth rates in recent decades, the average size of the world’s
one hundred largest cities has increased from 200,000 in 1800 to 5 million in
1990 (Cohen 2004). This trend in urban expansion is anticipated to continue
as transportation and communication networks, two of a city’s most extensive
infrastructure systems, expand outside of traditional inner-city boundaries
(Grimm et al. 2008).
In addition to purely demographic changes, a suite of environmental
conditions influence urbanization and are affected by it. Most cities are located,
and are primarily growing, in coastal zones, in part because of the importance
of access to natural resources and transportation networks in an increasingly
globalized world. Population densities in coastal areas are approximately 45%
higher than global average densities (McGranahan and Marcotullio 2006).
As the size and makeup of cities change, new urban economic and social
inequalities come to the fore and new pressures on the local environment are
created. For example, increased demand for land often leads to settlement in
ecologically vulnerable areas or to an increased imperviousness (i.e., paved and
built-up surfaces) in the urban landscape. As a result, the ability of wetlands
and forested areas to protect coastal zones, floodplains, and rivers is reduced,
and the likelihood of flooding is increased, with all its associated impacts
on housing structures, transportation networks, and supply and quality of
water. These trends are most pronounced in Asia, where approximately 60%
of the more than 4 billion people live within 400 km of the coast. In some
Table 7.1: Urbanization Trends in Asia
GDP per Urban Estimated Increase in

Population Proportion Urban
capita Population Urban Population
(PPP in US$) (million) (million) (%) (%) (%) (million) (%)
2005- 2005-
2003 2005 2005 1950 2005 2030
2030 2030
World 6,453.60 3,172.00 29 49 61 1,772.70 56
Asia 3,917.50 1,562.10 17 40 55 1,102.20 71
Malaysia 9,512 25.3 16.5 20 65 78 10.8 66
Thailand 7,595 64.1 20.8 17 33 47 14.6 70
PRC 5,003 1,322.30 536 13 41 61 341.6 64
Philippines 4,321 82.8 51.8 27 63 76 34.8 67
Sri Lanka 3,778 19.4 4.1 14 21 30 2.4 59
Indonesia 3,361 225.3 107.9 12 48 68 80 74
India 2,892 1,096.90 315.3 17 29 41 270.8 86
Viet Nam 2,490 83.6 22.3 12 27 43 24.5 110
Pakistan 2,097 161.2 56.1 18 35 50 79.3 141
Cambodia 2,078 14.8 2.9 10 20 37 5.8 197
Bangladesh 1,770 152.6 38.1 4 25 39 48.4 127
Lao PDR 1,759 5.9 1.3 7 22 38 2.3 177
GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, PPP = purchasing power parity,
PRC = People’s Republic of China, US$ = United States dollar.
Sources: United Nations (2003, 2004); United Nations Development Programme (2005).
countries, such as Indonesia and Viet Nam, almost all of the population is
coastal (Hinrichsen 1998, 1999).
Increasingly it is cities, rather than countries, that compete with each other
on the national and international stage for capital to support their growth and
development, and in the markets for the goods and services they produce.
The associated growth in economic activity is strongly correlated with higher
demands for energy and increased emissions of greenhouse gases. As a result,
cities are both the main contributors to climate change as well as victims
of changing climate conditions. The following section documents in more
detail the contributions of Asia and its cities to climate change and the extent
to which climate change contributes to and magnifies national and urban
vulnerabilities.
3. Climate Change Contributions and Ramifications in Asia
Two issues surrounding climate change concern policy and investment decision
makers, now that scientific consensus about its anthropogenic causes has
emerged. The first of these is reducing emissions of greenhouse gases, most
notably carbon dioxide (CO2), from burning fossil fuels. Addressing emissions
will be essential to stem the tide—figuratively and literally—that is heading
Asia’s way. However, even if greenhouse gas emissions could instantly be
reduced to zero, a second issue remains to be addressed, namely past emissions,
which will continue to impact the climate because the mean residence time
of most greenhouse gases exceeds one hundred years, and because the
atmosphere, oceans, and land respond only slowly. As a result, a prudent
strategy for the region as a whole would be to reduce emissions of greenhouse
gases while preparing for some form of climate change. Given the unique role
of cities in social and economic development, as well as their contributions
to environmental change at the local and global scale, opportunities for
leadership at the city level arise, with benefits that may extend well beyond
their geographic scope nationally, regionally, and globally.
3.1 Energy Use and Greenhouse Gas Emissions

Urbanization means concentration of people and economic activity. With
concentration can come opportunities for more efficient production and
consumption of materials and energy, in part because higher densities alleviate
the need for transportation and other transaction costs, and in part because
cities present accumulations of labor, knowledge, creativity, and financial
resources that can be brought to bear on the environmental, social, economic,
technological, and institutional challenges faced by the local population (Ruth
and Coelho 2007). Local policymakers can take advantage of the factors that
drive city competitiveness to prepare for climate change impacts. Concentration
in cities of infrastructure, labor, services, buyers, and sellers can facilitate
“knowledge spillovers” and innovation (World Bank 2005).
Such economies of scale and scope, however, are not automatically realized,
but are frequently the result of gradual fine-tuning of operations at all levels
of a city’s hierarchy—from households to businesses to local and regional
government, often within the opportunities and constraints provided by
national policies. In part, these cost savings from agglomeration in urban
areas are a direct result of the fact that savings are realized by private
entities—the firms that produce goods and services; the labor employed in
the production process; or the capital markets, which involve global players
with global, rather than local interests. In contrast, the costs of agglomeration
have historically been spread over the population as a whole and have become
the responsibility of government agencies, or attention to them is postponed
until some undetermined point in the future in the hope that by then economic
growth will have helped generate the resources needed to compensate for
compromised environmental quality and quality of life.
However, rapid geographic, economic, and population growth can readily
overwhelm efficiency gains, and empirical evidence is mounting of their
adverse effects on individual countries, regions, and cities. For example, while
urbanization rates in the PRC are relatively low compared to those in the
United States (US), the European Union (EU), and Australia and New Zealand,
the rate of change in urbanization and the ratio of per capita primary energy
demand to regional averages in the PRC are significantly larger (Table 7.2). As
a result, energy consumption in the PRC’s cities is disproportionately higher
than in its hinterlands. But even in the PRC, large differences can be observed
between cities’ energy use per unit of gross regional product (Figure 7.1).
The relatively high ratio of per capita energy demand in cities relative to
regional averages, combined with the strong reliance of developing countries on
energy sources rich in carbon content per heat value (such as wood, wastes, coal,
and oil), contributes to the fact that these countries are making considerable
and increasing contributions to global greenhouse gas emissions. For these
reasons, and obviously because of their size, three of the top five countries
emitting CO2 from fossil fuel burning are located in Asia (Table 7.3), with the
PRC’s emissions well on their way to topping the list globally.
Given the magnitude and rate of growth of energy use and greenhouse
gas emissions, there is intense competition among cities in the PRC and in
Table 7.2: Overview of City Energy Use and Urbanization Rate in Regions
and Countries, 2006
Share of city primary Ratio of city per-capita

Region energy demand in primary energy demand Urbanization rate
regional total to regional average
United States 80% 0.99 81%

European Union 69% 0.94 73%
Australia and New Zealand 78% 0.88 88%
China, People’s Rep. of 75% 1.82 41%
Source: International Energy Agency (IEA) (2008).
Figure 7.1: Per-capita Energy Demand and Gross Regional Product in

Selected PRC Cities, 2006
Tons of Oil
US$ at Market Exchange Rate

PRC = People’s Republic of China, US$ = United States dollar.
Source: Dhakal (forthcoming).
several other Asian countries to attract investments that can help slow or
even reverse observed trends. As a consequence, cities are acting to address
concerns about energy security and local air pollution. Interventions by city
authorities on energy matters tend to concentrate on four major fronts:
• Clean energy, especially encouraging greater penetration of natural gas
and limiting the use of coal, other high-carbon fuels, and wastes as energy
sources in the household and commercial sectors.
• Action in the energy sector to facilitate economic structural change from
primary to secondary industries and toward an enlarged tertiary sector.
• Promoting energy efficiency.
• Improving public and mass transportation systems.
3.2 Impacts and Adaptation Needs

Even if greenhouse gas emissions were brought to zero worldwide in the near
future, the ramifications of past emissions would continue to be felt for centuries
because of the long lifetime of greenhouse gases in the atmosphere and time-
delayed responses of terrestrial and aquatic ecosystems (Intergovernmental
Panel on Climate Change [IPCC] 2007). As a consequence, mitigation
Table 7.3: Carbon Dioxide Emissions from Fossil Fuels Burning in Top Ten
Countries, 2006
Emissions Share of Global Total
Country
Million Tons of Carbon %
Unites States 1,656 19.8
China, People’s Republic of 1,480 17.7
Russia 437 5.2
India 391 4.7
Japan 342 4.1
Germany 221 2.6
Canada 177 2.1
United Kingdom 171 2
Republic of Korea 130 1.6
Mexico 123 1.5
All Other Countries 3,249 38.8
Global Total 8,379 100
Sources: Compiled from Marland, Boden, and Andres (2007); BP Amoco (2007).
efforts need to be accompanied by adaptation strategies to help reduce the

vulnerabilities of societies and their economies. Particular vulnerabilities
surround agricultural production, infrastructures in coastal zones, water supply
and treatment systems, adequate and reliable energy supply, and public health,
all of which are discussed in more detail below. Also of concern, though not
specifically discussed here, are the impacts of climate change and population
pressures on the health of ecosystems.
Agriculture
Agricultural crops and practices have long been fine-tuned to local environmental
conditions. As these conditions change, agricultural yields may be affected.
Climate change—most notably changes in temperatures and precipitation—
directly affects growing conditions, and changes in the frequency and severity
of extreme weather events increase uncertainty for farmers about optimal
crop choice, timing of planting and harvest, and other management practices.
A study by Cline (2007) assessed impacts of climate change on agricultural
productivity under business-as-usual assumptions. One of his calculations
assumed no fertilization effect from higher CO2 concentrations. With such
an effect, adverse trends would be moderated or reversed. However, climate
does not stop changing once favorable growing conditions are reached. Rather,
rising temperatures, changes in freezing conditions, and more frequent and
severe droughts and downpours raise the vagaries under which agricultural
production decisions are made, and contribute to changes in disease and
pest prevalence, as well as to changes in regional and global markets as the
competitive landscape is altered. As a result, fundamental changes in the
agricultural sector are anticipated that may undermine its ability to supply
food to growing populations, particularly in urban areas (Parry et al. 1999).
Sea Level Rise

Sea level is an obvious concern for cities situated on coasts, where rising
water levels and storm surges can cause property damage, displacement of
residents, disruption of transportation, and wetland loss. Already a nuisance for
coastal communities globally, it is estimated that sea level rises and associated
impacts will affect five times as many residents by the 2080s as they did in
1990 (Nicholls, Hoozemans, and Marchand 1999). Projected sea level rise is
associated with significant loss of land in coastal regions. For example, a 1 m
sea level rise would mean a loss of nearly 21% of land in Bangladesh and slightly
over 17% in Viet Nam (Nicholls and Mimura 1998). The impact of this loss
extends beyond displacement of significant shares of the local population. For
example, a significant share of rice production occurs in areas susceptible to
a 1 m sea level rise (Hoozemans, Marchand, and Pennekamp 1993).
Saltwater intrusion into ground and surface waters is a critical problem
that impacts the availability of potable water and that can spread harmful
pollutants throughout urban water systems. Cases of saltwater intrusion are
nearly ubiquitous among coastal cities, documented in diverse environments
including the Thailand coast, as well as both PRC and Vietnamese deltas
(IPCC 2001). Costs of desalination are high at approximately US$1.00/cubic
meter (m3) to generate potable water from seawater and US$0.60/m3 to convert
brackish water, compared to US$0.02/m3 for freshwater chlorination (Zhou
and Tol 2005).
Flooding, Storm Water Drainage, and Sewage Systems

The frequency and severity of flooding has generally increased in the last
decade compared to 1950–1980 flood data, along with the frequency of floods
with discharges exceeding one-hundred-year levels (Kron and Berz 2007).
Although there is variation in regional predictions among different forecasting
models, it is generally accepted that both trends will continue, especially in
Asia (Milly et al. 2002; Fox 2003). More frequent and severe precipitation
events are predicted to cause greater incidence of flash flooding and urban
flooding.
Floods are one of the most costly and damaging disasters, and will pose
a critical problem to city planners as they increase in frequency and severity.
In addition to the obvious structural damage and loss of life they can cause,
floods can short-circuit transformers, disrupting energy transmission and
distribution; paralyze transportation; impair clean water supply and treatment
facilities; and can accelerate the spread of waterborne pathogens (IPCC 2001;
Ruth and Rong 2006). Socioeconomic models of future flood damage in cities
independently predict vast increases in damage spending due to climate change
in the absence of adaptive infrastructure changes (Kirshen, Ruth, and Anderson
2005; Hall, Sayers, and Dawson 2005; Choi and Fisher 2003).
Combating these problems requires consideration of structural flood
defenses (e.g., river diversion, reservoirs, and embankments) and of emergency
alert system and response service preparedness. Among the most effective
ways to prepare for, and deal with, some forms of flooding events, however,
are improvements in social networks and communication channels (Lange
et al. forthcoming). Given the extent to which virtually all aspects of urban
life depend on water, floods will moreover challenge the abilities of planners
and managers, who are charged with providing reliable services in the face
of a highly variable climate.
Hydrological changes can also stress the capacity of drainage infrastructures,
sewage systems, and water treatment facilities in cities. Heavy precipitation
events wash urban pollutants into rivers and lakes, and can reduce water quality
in reservoirs by increasing turbidity (Frederick and Gleick 1999; Miller and
Yates 2006). Low river flow during times of drought amplifies the concentration
of chemical and heavy metals, with potential implications on ecosystem health
and recreational opportunities (IPCC 2001). As intense precipitation occurs
more often, urban planners will have to confront multifaceted problems of
controlling and managing precipitation inflows and protecting existing water
supplies.
Urban runoff and failures of combined sewer overflows and municipal sewer
plants can all introduce pathogens into water systems that pose a variety of
health risks; documented cases globally range from wound infection to kidney
failure (Nuzzi and Waters 1993; Rose et al. 2001). Sea level rise combined with
increasing frequency of severe weather events can cause sanitation problems
when urban infrastructures are not prepared to accommodate sudden influxes
of water, leading to contamination of drinking or recreational water from
sewage backup and introduction of microbial/chemical agents and biotoxins
(Rose et al. 2001).
Increasing Water Demand

Higher air temperatures and more frequent droughts can cause increasing
water demand for household and industrial use in urban areas (IPCC 2007).
Although modeling evidence has not shown these increases to be dramatic
(Protopapas, Katchamart, and Platonova 2000), effects may be exacerbated as
population growth occurs in cities. This phenomenon has significant regional
variation, making it difficult to predict its impact on a given area based on
global or broad regional estimates of temperature change, for example.
Modeling estimates for the US have suggested large costs will be associated
with meeting increasing demand as temperatures rise through 2060, while
studies on Greece have predicted decreasing costs under certain climate change
scenarios (Morrison and Mendelsohn 1998; Cartalis et al. 2001). Regional
variation has proven significant at the state level in the US, emphasizing the
need to understand not only the anticipated regional effects of climate change,
but also the differences in manifestation of these impacts for various urban
sectors (e.g., waste management, manufacturing, and services) (Sailor 2001).
Little analysis is available for Asian countries, yet the challenges are likely
to be more pronounced in this region, given the more dramatic increases in
population, urbanization rates, and economic growth.
Equally important is the analysis of demand relative to supply in a given
environment. Estimates for gross demand increases that can be met by current
levels of supply may not necessarily be met by future supply, if it is restricted
by severe weather, pollution, or other climate change impacts. In fact, when
relative demand is considered in concert with additional stresses from the
agricultural sector, it becomes clear that many parts of the world will be forced
to confront infrastructure changes over the next several decades. For example,
model results, including population and climate change projections, estimate
large increases in relative demand in the northeastern US, the majority of
Latin America, sub-Saharan Africa, Eastern Europe, and the Middle East
(Vorosmarty et al. 2000).
Energy
The discussion of energy issues in the context of climate change has largely
focused on the contribution of fossil fuel burning to changes in atmospheric
greenhouse gas concentrations, and the mitigative strategies that may be
employed to reduce emissions. However, the energy sector is not only a
contributor to climate change, but is also directly affected by it. Increases in
mean temperatures, and particularly in the frequency and severity of heat
waves, will drive up demand for space cooling and refrigeration, which in
turn will mean investment in the capacity to meet peak load demand. Even
if wintertime temperatures increase as well, thus reducing the demand for
energy part of the year, the financial needs to support capacity increases will
not be eliminated (Amato et al. 2005). Additional challenges come from the
fact that electricity generation and distribution are less efficient during high-
temperature episodes, and because reduced water availability for cooling and
ambient air quality during such episodes may further impose technical and
regulatory constraints on the electricity sector, as well as on those parts of
industry that generate their own heat, steam, and electricity.
Heat-Related Mortality and Disease

Aside from deaths due to natural disasters, increasing temperatures can affect
mortality in a number of ways including heat-induced mortality, famine,
exacerbation of non-infectious health problems, and spread of infectious
disease. Heat waves are likely to increase in severity and duration in the future,
contributing to heat mortality in both developed and developing countries.
Shortages of electricity for cooling, due to inadequate peak load capacities
and reduced generation and distribution abilities, may further add to the
physical stress on local populations.
As population sizes and infrastructure investments in cities increase, and
as climate change requires increases in energy use for space conditioning and
refrigeration, the combination of energy use and the associated emissions
of air pollution and waste heat into the urban environment create urban
heat islands—areas with above-normal temperatures compared to urban
hinterlands. These urban heat islands, in turn, trigger further increases in
energy use and declining local air quality, and have been found to impact
regional precipitation patterns and wind speeds (Arnfield 2002). As a result,
urban heat island effects add to stress on ecosystem and human health, and
magnify the adverse impacts of climate change.
The spread of infectious disease stands as one of the most profound and
universal problems associated with increasing air and water temperatures.
The World Health Organisation attributes at least 150,000 annual deaths to
disease issues associated with climate change that has occurred since the 1970s,
and extends its analysis to estimate that death rates from climate-induced
disease may double by 2030 (Patz et al. 2005). Warming climates favor many
pathogenic agents and their vectors, often extending life cycles, increasing
reproductive rates, or allowing for range expansion. Diseases of particular
concern include malaria, dengue fever, plague, and West Nile virus.
Drought associated with long bouts of heat and reduced precipitation may
contribute to regional loss of crops, contributing to malnourishment, especially
in the developing world (Patz et al. 2005).
4. Distinguishing Economic Growth from Economic

Development
The difference between economic growth and economic development has
long been recognized in the scientific literature (Boulding 1966; Daly and
Umaña 1981) yet is frequently blurred in public discourse and policy debate.
Growth refers to increases in the size of an entity, and in the context of an
economy is typically measured by changes in the volume of marketed goods
and services produced in a given year. A typical indicator of economic activity
is gross domestic product (GDP). In contrast, development implies qualitative
improvements and, because quality is more difficult to judge, has less well-
defined measures associated with it.
One increasingly used measure of development is the genuine progress
indicator (GPI), which attempts to capture the contributions that non-marketed
goods and services make to society (such as household labor) and subtracts
expenditures needed to overcome adverse impacts of economic growth
(such as health expenditures for air pollution) or losses of ecosystem services
(such as flood control and water filtration functions of wetlands). Empirical
evidence suggests that for many countries, while GDP continues to increase,
improvements in the quality of life as measured by the GPI may slow and
even decline for high rates of economic growth (Talbarth, Cobb, and Slattery
2006).
A second type of indicator of qualitative changes associated with economic
activity is the ecological footprint (Jorgenson 2003), which attempts to capture
the extent of the ecological impact humans have, measured by the area
required to produce crops, animal products, wood, and paper; to harvest
fish and seafood; to provide land for housing and infrastructure; and to
sequester the carbon dioxide emitted from energy consumption. The larger
the footprint, the more extensive is the draw of a particular region on global
resources. Large parts of the world have increased their ecological footprints
since 1961, with parts of Asia, particularly its coastal regions, having some
of the highest impacts on ecosystems (Global Footprint Network 2006). One
factor contributing to worsening ecological footprints is the increased demand
for ecosystem services to support economic growth in general, and to support
an increased concentration of production and consumption levels in urban
areas in particular (Figure 7.2).
5. Sustainability Challenges for Research, Investment, and

Policymaking in a Changing Climate
The discussion above highlighted some of the challenges to sustainable
development that come from rapid population and economic growth. In many
ways climate change is a “threat multiplier,” magnifying already existing
vulnerabilities of societies, economies, and the environment. Attempting to
address the climate change challenge without addressing existing social and
economic conditions, or the ongoing degradation of ecosystems, will mean
falling short of any goal to promote sustainability. Conversely, when viewed

through the climate lens, threats from climate change strengthen the mandate
for local, regional, national, and international public and private sector entities
to tackle social, economic, and environmental challenges associated with
economic growth that undermine the potentials for true development. Insights
from economics, properly informed by the biophysical constraints under which
Figure 7.2: Urbanization and GDP Per Capita in Relation to

Size of Global Ecological Footprint
GDP Per Capita and Total Ecological Footprint
Ecological Footprint
2000 US$
Urban Population and Total Ecological Footprint

% of Total
Footprint
GDP = gross domestic product, US$ = United States dollar.

Sources: World Development Indicators Online (2007); Loh and Wackernagel (2004).
economic growth and development take place, can play an important role in
informing investment and policy choices.
5.1 Standard Perspectives on Economic Growth as a Vehicle

Towards Improved Environmental Quality
To date, strategies to promote economic development in Asia and elsewhere
have, in essence, been economic growth strategies. The underlying worldview
has been one in which increases in economic activity create the wealth that
enables society to tackle social and environmental challenges of ever-greater
scope (Figure 7.3). As societies increase their ecological footprint, interest in
maintaining an adequate supply of resources from, and relations to, more
distant places is increasing. Furthermore, as population densities increase and
urbanization continues, interest grows in maintaining some form of ecosystem
Figure 7.3: Progression of Environmental Concerns with

Changes in Economic Wealth
Source: Author’s own rendition.

integrity outside urban areas to balance the loss within cities. Missing from
this worldview is the explicit recognition that regional and global challenges
can only be addressed through local action, and that the viability of urban
and non-urban environments are fundamentally interrelated. Therefore, a
regional and global problem focus necessitates involvement of investment
and policy decision makers at the local level.
Recognizing that economic growth draws down the natural resource base
and environmental waste absorption capacities on which economic activity
depends, economists have long emphasized the role of technological progress
in cutting resource use and waste generation through improved end-use
efficiencies. Most notable in this context is the notion of an “environmental
Kuznets curve” (Kuznets 1955, 1998), which posits that the relationship between
income and inequality follows an inverted U-shape. The environmental
Kuznets curve suggests that pollution levels will increase with income but
some threshold of income will eventually be reached, beyond which pollution
levels will decrease (Grossman 1995). Much of the empirical support for the
environmental Kuznets curve comes from cross-sectional analyses of carbon
emissions from countries at different stages of development.
The underlying logic behind the environmental Kuznets curve presumes
environmental quality to be a normal good, demand for which increases as
income increases. Economies of scale, resource-saving technological changes in
the extractive and manufacturing sectors, trade liberalization leading to “out-
migration” of dirty processes, and development of regulatory mechanisms and
institutions all are seen to contribute to a country’s improved environmental
quality as economic development takes place (Panayotou 1993; Komen,
Gerking, and Folmer 1997; Suri and Chapman 1998; Andreoni and Levinson
2001). If the logic of the environmental Kuznets curve was to hold, many
of Asia’s environmental challenges, in particular its contributions to rising
atmospheric concentrations of greenhouse gases, would soon be addressed.
Methodological and empirical controversies surrounding the environmental
Kuznets curve aside, its insights are based on correlations among historical data
from diverse sets of countries that by no means establish causal relationships,
let alone inevitable development trajectories for regions or nations. Rapid
rates of urbanization, increases in affluence of local populations, and
investment in infrastructure that is bulky and long-lived may result in a
“rebound effect,” where emissions begin to rise again after some high level
of income is reached. Income inequality, in turn, may add to the complexity
of the environment-development relationship (Williamson 1998). More
homogeneous societies may experience less inclination to use consumption
as a means of internal differentiation, while in more economically-stratified
societies larger pressures may exist to “keep up with the Joneses.” However, the
reverse argument could be made as well—the more homogenous the society,
the more people may seek methods of internal differentiation through, for
example, resource-intensive conspicuous consumption. A high correlation
between resource-intensive consumption and energy use, in turn, translates
into high emissions of greenhouse gases. The need for equitable distribution
of income and opportunities, long recognized as a development goal, returns
as a new challenge in the context of environmental sustainability.
5.2 Alternative Views on the Functioning of the Economy

A wide range of alternative economic models have emerged in the twentieth
century, based either explicitly or by analogy on insights into the principles that
guide changes in the larger ecosystem within which economies are contained
(Daly 1973; Ruth 1997). Building on these principles can provide suggestions
for how to promote economic development, particularly in the light of climate
change. Four of these insights are discussed here.
Building on Concepts from Nature

Natural processes exhibit a tricky balancing act between competition,
cooperation, and coordination on the one hand, and elimination on the other
hand. Individual species carry out this balancing act when filling the niches
opened, or left open, by others. For a species to be able to adjust, individuals
must have opportunities to deviate from the norm. Deviations from the norm
are essential to exploring alternative, more efficient, and more effective means
of utilizing resources, and to maintaining or increasing population size. Failure
must not only be allowed, but the willingness of individuals to embark on
paths that may lead to failure must be encouraged for sustainable development
to occur. In the end, however, nature cares about the community, not the
individual—those who are not fit for a given environment will have reduced
reproductive success or be weeded out from the system.
If indeed nature stresses the long-term viability of populations and
communities over the short-term gain of individuals, and if humanity will
ultimately be required to follow principles similar to those that contribute
to sustainability in nature, then this has far-reaching implications for the
economic, legal, and ethical underpinnings of society. For example, profitability
for individuals—and the ability to seek out profitable strategies—must be

encouraged in ways that yield net benefits both for the individual and for
society. Legal systems must be effective in penalizing individuals who use
resources at the expense of others. Tax codes must encourage entrepreneurial
risk taking without providing any means to roll over to society the cost of failure,
should it occur. The cost savings to businesses generated by rapid urbanization,
for example, needs to enable concomitant investment in infrastructures and
services to facilitate sustainable development, rather than to socialize the
associated cost while profits are privatized.
The Roles of Efficiency and Effectiveness in Decision Making

Efficiency and effectiveness are important guides for decision making—efficiency
requires the highest productivity per unit of a resource; effectiveness requires
attaining the highest utility from what is used. Systems that are highly efficient
are not necessarily effective—they often reduce redundancies for purposes of
cost savings, and as a consequence become brittle and unstable, collapsing
when faced with unanticipated changes in their environments.
Historically, decision makers have tried to ensure continued performance
of highly efficient systems by controlling the environments in which they
operate. A prominent example is food production on the basis of monocultures,
which are prone to massive pest outbreaks. Avoiding failure has typically
meant strictly controlling physical, chemical, and biological conditions
through irrigation and use of fertilizers and pesticides. As the cost of, and
limits to, environmental control become increasingly apparent, and as climate
variability broadens the conditions under which agriculture operates, research
is returning to the crops themselves, making them, through breeding and
genetic engineering, more efficient in variable environments. As the larger,
systemic effects of genetic engineering become apparent, societal acceptance
has become a major stumbling block for modern agriculture. With increased
societal concerns about the potential environmental and health implications
of using new crops, attention must increasingly focus on the socioeconomic
environment within which food production and consumption take place.
The Need for Adaptive and Anticipatory Management

Since biophysical, technological, and socioeconomic environmental conditions
always change, and since, typically, not all the information necessary to identify
the best management decisions is known, some researchers and practitioners
have called for an iterative process of data collection, interpretation, and
adjustment of management decisions as we learn more about system behaviors.
This type of adaptive management has been promoted, for example, for
management of water resources, fisheries, and wildlife (for examples see
Gilmour et al. 1999; Gunderson 1999; Johnson 1999; Lee 1999; and Pinkerton
1999). The underlying management paradigm is a coevolutionary worldview,
which recognizes that natural systems and human systems adjust to each other’s
behavior. It is minimally forward-looking, recognizing that uncertainties
increase as time horizons and spatial scales increase, and emphasizes the
need for adjustments as hitherto unknown system features and behaviors
are revealed.
However, some systems are characterized by long temporal and spatial lags
between action and system response, as well as high degrees of complexity
and irreversibility. These are often the cases that pose major challenges to
sustainable development. In such cases, adaptive management may not be
the best approach. For example, in the case of industrial or infrastructure
systems, investments are lumpy and turnover rates are low. Waiting until
the ramifications of one decision are known before new decisions are made
is often impossible. Instead, management must be anticipatory. Actions must
be taken well in advance of knowing likely future environmental conditions
and must be robust under a wide range of possible futures. Since humans
have the capability to explore—theoretically and with scaled experiments—
various potential futures, their position is in sharp contrast with nature, where
“management” follows a trial-and-error, “adaptive” approach.
Examples of cases where current management is clearly not anticipatory
range from land use planning to infrastructure design. Expansion of cities
along steep slopes without natural buffers to surrounding ecosystems, into
wetlands, and along coasts often occurs irrespective of available knowledge
about the long-term potentials for soil erosion, spread of wildfires, and flooding,
all of which may be exacerbated by the presence of human settlements and
continued climate change. Insurance premiums are set on the basis of historical
risk and do not take into account the changes in risk that settlements and
climate change induce. As a result, they subsidize unsustainable land use
patterns. Similarly, infrastructures are designed to withstand one-hundred-
year floods—events that have the probability of occurring once in a hundred
years. Since climate change affects both the frequency and severity of extreme
weather events, what is currently considered a one-hundred-year flood may,
by the end of this century, occur as often as once every ten years. While many
infrastructures planned and built today will likely still be in use then, those
that have been designed with static definitions of a one-hundred-year flood

will be woefully inadequate to provide services under new climate conditions.
As a consequence, adapting to climate change will mean costly replacements
and retrofits that could have been avoided had some basic understanding of
possible climate futures been taken into account (Kirshen et al. 2005).
The Need for Holistic Impact Assessments

One way to think about system interventions is with respect to their reach
and complexity. Simple interventions with short (geographic or temporal)
reach affect only a small number of individuals, and the relationship between
intervention and effect is fairly immediate. The greater an intervention’s
complexity and the longer its reach, the more important it becomes to broaden
its scope as well, so as to not get blindsided by challenges that lie outside the
narrow focus of technical interests and expertise. For example, seeding of clouds
to influence precipitation or deliberate injection of aerosols into the atmosphere
to influence global climate may work very well from an engineering perspective
and may even be highly cost effective, but both are likely to raise objections
if there are sentiments, legal/liability issues, or institutional constraints that
are not taken into account at the outset. An engineering or economic solution
that is blind to ethical, moral, emotional, legal, or institutional constraints is
really not a solution at all. Such constraints, however, have frequently served
as excuses for engineers and economists to remain busy while blaming others
for failing to solve the problem.
Many of the current procedures for impact assessment; deliberative processes
for conflict resolution; and large-scale, dynamic modeling of system change
meet some of these requirements. Few, if any, integrated assessments, however,
are “holistic” enough to help foster sustainable development, particularly
under rapidly changing environmental conditions.
6. Summary and Conclusions
The discussion above has highlighted some of the well-known relationships

among economic growth, urbanization, resource use, and climate change that
currently play themselves out in Asia and around the globe. Given the rapid
socioeconomic changes in many Asian countries, however, opportunities exist
to shape resource use, and to make improvements in people’s quality of life
and the health of ecosystems in ways that support long-term and sustainable
development. It is a general perception, however, that investments to combat
global climate change undermine efforts to promote the development of Asian
countries. Two main reasons for this perception have been identified above:
First, addressing the root causes of climate change—emissions of greenhouse
gases—may mean diverting resources from the remainder of the economy
toward changing technologies or reducing output, thus undermining growth
in standards of living. Second, dealing with the impacts of climate change on
agriculture, infrastructures, water resources, energy systems, and public health
will require investment in adaptation strategies, again diverting resources
away from consumers.
Both of these reasons rest on the presumption that economic growth is
needed to support social and economic development, and that economic growth
can help overcome the very problems it creates. Both reasons also succumb
to the fallacy that there are no costs to inaction. However, not engaging in
mitigation efforts means continuing wasteful resource use practices; not
engaging in adaptation efforts means neglecting existing vulnerabilities to
climate vagaries.
Three sets of recommendations for policy and investment making emerge
from the observations above. One set of strategies should reduce existing
deficiencies in the social, economic, and environmental realm. Clearly,
strategies that strengthen the social capital in cities, regions, and nations in
Asia will help develop coping mechanisms needed for all kinds of challenges
to the livelihoods, safety, security, and well-being of people, not just for
climate impacts. Similarly, strategies that emphasize economic effectiveness
over efficiency—by maintaining or increasing the diversity of businesses and
redundancies of infrastructure systems—can help reduce vulnerabilities to
outside influences, including climate change. Recognizing and supporting
the contributions of ecosystems to society and the economy will be essential
to maintaining the diversity in assets needed in the long run—from provision
of goods and services that have no immediate substitutes (such as pollination
services) to those that work in conjunction with economic assets or that can even
substitute for them (such as wetlands providing flood control functions).
A second set of strategies needs to focus on the reduction of greenhouse
gas emissions. Since high emissions are synonymous with inefficient energy
conversion and irreversible loss of valuable assets (e.g., fossil fuel reserves,
or financial capital needed to gain access to those reserves), strategies to cut
greenhouse gas emissions can help lay the footprint for more sustainable
energy conversion and use.
A third set of strategies ought to help prepare society for the impacts of
climate change to which society is already committed because of past activities.
Typically, this means upgrading existing infrastructures, updating institutional
procedures, retreating from flood zones and other vulnerable areas, and
generally employing lower-risk strategies. Even without climate change, such
strategies make good economic sense for countries on a rapid development
trajectory because they will result in a more conservative approach to risks
and uncertainties. Conversely, the more countries place their assets—social,
economic, environmental—in jeopardy, the less sustainable their development
will be.
A wide range of policy instruments are available to stimulate investment
in social capital, more effective infrastructures, healthy ecosystems, and
sustainable energy supply in an adaptive society. Examples include regulatory
approaches, taxes of “bads” (such as energy use, emissions, and waste
generation) rather than “goods” (such as labor and capital), or cap and trade
schemes in which emission allowances are auctioned off, generating revenues
for governments to reinvest in the economy and society. The argument is
frequently made that, by their very nature, such policy interventions are
regressive, impacting less affluent parts of society more than others. What
is frequently missed, however, is that in the absence of market corrections,
economically and socially disenfranchised groups, the elderly, the young,
and the sick are likely to suffer disproportionately, particularly when faced
with impacts of climate change.
There is considerable overlap and synergy among all three strategies.
Identifying those overlaps and synergies can make these problems more tractable
and can improve the benefit-cost ratios of individual actions. Also, even though
the need to address the root causes of climate change and its ramifications will
add additional dimensions to the investment and policymaking process, this
will simply magnify already existing deficiencies. Alleviating those deficiencies
means reducing the threat-multiplier effect of climate change and enhancing
the sustainability of the development process.
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Comments
Kazuhiro Ueta
1. Introduction
Professor Matthias Ruth’s chapter first describes the relationships between

economic growth, urbanization, resource use, and climate change. It then suggests
an alternative to the conventional view that investments to combat global climate
change undermine efforts to promote development in Asia. The chapter concludes
by recommending three sets of strategies for policy and investment.
The first set of strategies aims at reducing existing deficiencies in the social,
economic, and environmental realms. The second set, which focuses on cutting
greenhouse gas emissions, is to help lay the groundwork for more sustainable
energy conservation and use. The goal of the third set is to help prepare society
for the impacts of climate change to which it is already committed because
of past activities. This chapter also emphasizes the considerable overlap and
synergy among all three strategies.
Most of the author’s observations and suggestions about sustainable
development issues in Asia are highly tenable. As a result, these comments
will look more closely at the conventional view on the relationship between
environmental conservation and economic development, and at the
Environmental Kuznets Curve.
2. Can We Overcome the Trade-Off between Environmental

Conservation and Economic Development?1
It has been widely believed that economic growth fuels the expansion of job
opportunities and social welfare. If this is still true, and if we also recognize
Section 2 is based on Ueta and Mori (2007).

1
the need for environmental conservation, we must investigate a way to

overcome the trade-off between environmental conservation and economic
development in order to improve our quality of life. One of the major issues
in the field of environmental economics is how to integrate the management
of environmental conservation and economic growth. Some environmental
economists and policymakers have proposed ideas to solve this issue in the
past quarter century.
One of these ideas is a “decoupling” policy, which promotes the decoupling
of the economic growth rate and environmental burdens arising from economic
growth, and is already being carried out in developed countries, including within
the European Union. The concept of environment and growth decoupling can
be broken down into two types. One type is realized through technological
innovation (e.g., dematerialization theory). The other type relies on social
structural reform (e.g., ecological tax reform).
Dematerialization theory is based on the concept in ecological economics
that the amount of material used to produce goods and services can be
reduced considerably through technological improvement. “Factor Four,”
a concept proposed by Weizsacker, Lovins, and Lovins (1995), aims at
accomplishing a fourfold increase in current levels of eco-efficiency by
doubling wealth and halving resource use. Eco-efficiency and resource
productivity are new indices of the relationship between economic growth/
wealth and environmental burden/resource use. New terminology, such
as cleaner production, zero emission, and inverse manufacturing, has also
been generated by these ideas. The question now is what kind of policy
and institutional reforms should be introduced to realize the innovation
mentioned above.
The Porter hypothesis, proposed by Porter and van der Linde (1995), is
another approach that emphasizes technological innovation as the key to
resolving the environment and competitiveness debate. The Porter hypothesis
puts great emphasis on the effectiveness of environmental policy in accelerating
technological innovation, resulting in greater competitiveness of products
and companies. According to this hypothesis, environmental policy should
not have a negative impact on the economy, but can stimulate innovation
and enhance the development of technological capability.
An idea more closely related to social structural reform is the ecological tax
reform proposed by Binswanger et al. (1983). The tax reform they proposed
would impose higher tax rates on energy and use the increased revenue
to reduce the social security burden of job growth. In the early 1980s, the
environment became an important political issue in Germany because of the
strong ecology movement, which included the establishment of the Green
Party. Binswanger et al. did not object to the incorporation of ecological
values into public policy; however they requested an end to unemployment,
another challenge faced by European society. They designed their ecological
tax reform to accomplish both goals at the same time by generating a “double
dividend:” one dividend for environmental conservation and energy savings
through taxation, and another dividend for job growth through tax revenue.
A type of double dividend tax similar to the idea proposed by Binswanger et
al. (1983) is actually being executed in Germany.
We should take note that these methods for overcoming the trade-off
between the environment and economic growth were designed primarily
with the economies of industrialized countries in mind, and that they take
only the national economy into consideration.
3. A Critique of the Environmental Kuznets Curve2
One important step toward sustainable development is the “de-linking” of

the relationship between economic growth and pollution. The Environmental
Kuznets Curve (EKC) hypothesis offers a rationale for the proposed de-linking:
it claims that there exists an inverted U-shaped relationship between a variety
of indicators of environmental pollution or resource depletion and the level
of per capita income. This relationship suggests that economic growth will
take care of the environment automatically, despite immediate and long-term
losses in environmental assets.
The EKC hypothesis explains the de-linking process by examining five
factors (de Bruyn and Heintz 1999): (i) increased marginal benefit to consumers
from a healthy environment, and from changes in their consumption activities
and preferences—which may affect firms’ production activities; (ii) institutional
and policy changes—often supported by voting, though susceptible to lobbying
activities by businesses; (iii) increased environmental efficiency through
technological and organizational changes—often backed by increased capital
stock; (iv) economic structural changes in the agricultural, industrial, and
service sectors; and (v) international relocation.
Section 3 is based on Mori and Ueta (forthcoming).

2
Empirical studies suggest that the turning point for de-linking comes
when per capita income reaches US$3,000–10,700 for sulfur dioxide (SO2), and
US$3,280–9,600 for suspended matters (Shafik 1994; Grossman and Krueger
1995). Country-specific studies have found that industrialized countries de-
link economic growth and pollution when they tackle industrial pollution.
For example, Japan succeeded in de-linking gross national product (GNP)
growth and increased pollutant emissions. It achieved an 82% decrease in
SO2 and a 22% reduction in nitrogen dioxide emissions from 1970 to 1992,
while enjoying GDP growth of 140%. Japan also de-linked GNP growth
and increased CO2 emissions in the late 1970s and 1980s. This de-linking
was realized primarily through end-of-pipe technology, cleaner production,
greater eco-efficiency of production patterns, and technological progress.
The country’s manufacturing sector, which includes pollution-intensive
industries such as iron and steel, heavy metals, chemicals, and ceramics,
improved the energy efficiency of its production processes between 1974 and
the late 1980s. The energy efficiency of its electric and electronic products
has also improved significantly. Japan suffered from industrial pollution
during the 1950s and 1960s. However, fueling its firms’ efforts to combat
pollution were immense pressure from local residents, corresponding policy
changes at the local and national levels of government, and the upsurge in
the price of crude oil caused by the oil crisis of the 1970s. These empirical
and country-specific studies provide counterevidence to the Club of Rome’s
report Limits to Growth (Club of Rome 1972), which predicted food and
resource shortages, and impending catastrophe as the result of economic
growth.
Developing countries can potentially benefit from an “advantage of
backwardness” during the early stages of economic development, thereby
avoiding serious pollution issues that industrialized countries have experienced.
They could potentially: (i) obtain more accurate scientific information on
the relationship between pollutants and environmental impacts; (ii) adopt
less-polluting and less-resource-intensive technologies and production
processes that industrialized countries have developed; and (iii) learn
from other countries’ experiences with environmental policy, institutions,
management, and land-use planning, in order to establish an investment
location policy that would promote investment in less-pollution-intensive
industries (O’Conner 1994). Munasinghe (1999) insists that environmental
policy that seeks to align subsidy levels and resource prices with long-run
marginal costs, impose taxes on pollution, and establish better-defined property
rights, will improve the environmental quality at a lower per capita income
level. Dasgupta et al. (2002) suggest that economic liberalization and public
disclosure of firms’ pollutant discharge are also beneficial to improving the
environment. These policy measures can help developing countries to build
a tunnel in the EKC (Munasinghe 1999) if special consideration is given to
timing and sequencing.
Critiques of the EKC can be classified into the following three categories:
(i) the econometric method of the EKC, (ii) the explanatory power of the
determining factors of the EKC shape, and (iii) the range of environmental
pollution and pollutants for which the EKC is applicable. The comments below
focus on the latter two.
Regarding the explanatory variables of the EKC hypothesis, recent studies
offer little support for the view that economic growth alone is the solution
to all environmental problems. There is no established agreement as to the
explanatory power of any individual driving force. Most contingent valuation
studies have found an income elasticity of demand for environmental services
smaller than unity. This is especially true in societies with low levels of literacy
and education, and for pollutants whose effects are not apparent until after
several years of accumulation. Changes to policy (including environmental
policy) have often been made only after civil society’s movement toward
democratization has become fierce. The Republic of Korea and Taipei,China,
as well as countries in Central and Eastern Europe are good examples of how
environmental movements have led to democratization movements, and of
how democratization has led to the creation of institutions for protecting the
environment. However, to date, there is no empirical evidence that satisfactorily
explains the relationship between democracy and environmental improvement.
Technological and organizational changes are critical to raising environmental
efficiency, but are typically realized only for pollutants for which cost-effective
technologies exist or are developed. In addition, increased eco-efficiency is
often offset by production and consumption growth, resulting in an N-shaped
curve. In Japan, for example, a “re-linkage” of real GNP and CO2 occurred after
1990, despite the successful reduction of CO2 emissions per unit of generated
electricity by Japanese electric power companies.
For which pollutants is the EKC hypothesis useful? Shafik (1994) suggested
that meaningful EKCs exist only for concentrations of biological oxygen
demand, total suspended particulate, and SO2, among the ten environmental
indicators listed in the World Development Report 1992. In addition, the
pollution-income relationship calculated from cross-country data could not
accurately forecast trends in air and water quality in a single country study of
Malaysia (Vincent 1997). This implies that EKCs are unable to reliably predict
if any given developing country will improve the environment, even if they
go beyond the turning point.
Moreover, the EKC hypothesis is unable to determine if improvements
to local air and water quality are the result of international or inter-regional
relocation of pollutants, or of a change from one type of pollutant to
another. This often happens when firms apply end-of-pipe solutions. Flue-
gas desulferization, for example, can virtually eliminate SO2 emissions, but
it produces fly ash, which must be disposed of as industrial waste. SO2 and
nitrogen dioxide emissions may be reduced when a coal-fired thermal plant is
replaced with a nuclear power plant, but the latter generates radioactive waste,
increasing the environmental risk to people nearby. Wastewater treatment
plants can clean up the water, but in so doing generate sludge that must be
disposed of very carefully because it contains heavy metals. This aggregate
waste, comprising solid waste and CO2 emissions, can mean per capita waste
has not declined. Global environmental sustainability cannot be ensured
if relocation and displacement can explain much of the environmental
improvement in industrialized countries.
This leads to the greatest criticism of the EKC hypothesis: even if economic
growth can be associated with improvements in some environmental indicators,
this does not imply that the earth’s resource base is capable of supporting
indefinite economic growth (Arrow et al. 1995). Degradation or loss of the
earth’s resource base, or ecosystem resilience, is irreversible. A loss of ecosystem
resilience will cause discontinuous change in ecosystem function, irreversible
change to the set of options open to present and future generations, and an
increase in the uncertainties associated with the environmental effects of
economic activities.
These changes tend to affect most adversely the poor in developing
countries, due to their heavy reliance on environmental resources (Dasgupta
2001). Without a high level of literacy or knowledge of sustainable uses of
environmental assets, the poor are incapable of maintaining their standard
of living once they lose environmental resources. To mitigate the adverse
impacts of environmental degradation and improve the well-being of this
group, the socio-economic mechanism of its causes and effects should be
clarified.
4. Concluding Remarks:
Toward Sustainable Development in Asia
More comprehensive public policy, including a “Green New Deal,” is necessary
for sustainable development to revitalize a global economy suffering from
a financial crisis. This implies that theoretical and empirical research on
multi-level environmental governance needs to be developed to explore how
sustainable development can be realized.
References
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Predicament of Mankind, edited by D. H. Meadows. New York, NY: Universe Books.
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Grossman, G., and A. Krueger. 1995. Economic Growth and Environment. Quarterly Journal
of Economics 110: 353–377.
Mori, A., and K. Ueta. Forthcoming. Beyond Green Growth: Sustainable Development in
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H.-H. Lee, and E. Quah. Seoul: Thompson Learning.
Munasinghe, M. 1999. Growth-Oriented Economic Policies and their Environmental Impacts.
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Panel Discussion 213
VIII Panel Discussion1

How can Developed and Developing Countries Work Together to
Tackle the Big Economic Development Issues?
The current crisis has ramifications over the long term, leading to substantial
and lasting changes for the world economy. Key to this transition is the ability
of developed and developing countries to work together to solve some of the
big issues presented not just by the current global economic crisis, but by
ongoing food and commodity price issues, multilateral and regional trade
concerns, and the mandate to achieve environmental sustainability.
The panel was chaired by Masahiro Kawai. Members of the panel were
Iwan Azis, Bambang Brodjonegoro, Inkyo Cheong, Ram Upendra Das, Cielito
Habito, and Jean Pisani-Ferry. Each was charged to identify pressing topics
for the region.
Inkyo Cheong:
“Trade as Asia’s Pillar of Economic Growth”
Intra-regional and global trade have facilitated East Asia’s rapid growth. Other
Asian countries have joined the bandwagon of regionalism and globalization,
using trade expansion to become middle-income countries. Cheong voiced
his strong support for a region-wide free trade agreement in Asia as a stepping
stone toward multilateralism. The conclusion of the Doha Development Agenda
negotiations would have the most significant and positive impact on global
trade. However, with the outbreak of the current global financial crisis, he
1
The chapter is based on the panel discussion held at the conclusion of the conference.
argued that Asian countries should try to create some internal demand within
the region in order to sustain trade growth.
Cielito Habito:
“Asia and the Western World”
Habito summed up his views in three statements: (i) Asia has much to learn from
the Western developed world, (ii) Asia has much to give to the Western developed
world, and (iii) Asia has much to teach the Western developed world.
From this global crisis, there is much that Asian countries, especially
developing countries, can learn from the mistakes or pitfalls of the Western
developed world. First, there are significant lessons to be learned from the
pitfalls of financial market management: the need to manage excessive risk
taking; the need to correct flaws in incentive systems, including reward systems
for managers; and the need to look at stronger transparency mechanisms.
Another pitfall is that of unwarranted protectionism. While it may be politically
popular among lobby groups, it can be counterproductive. Finally, there is the
pitfall of unsustainable development, meaning the tendency of countries to
embark on strategies that amount to grow now, clean up later, or grow now,
redistribute later. Asians can take advantage of their late-comer status and
avoid making these mistakes.
Second, there is much that Asia can give to the Western developed world,
especially in the context of the global economic crisis. There is a need for
net resources to flow from the developing to the developed economy. Asia is
being looked to by troubled economies in the West for the capital flows they
need to stabilize financial markets. The work of Fehr, Jokisch, and Kotlikoff
(2005), using results from their intertemporal and global computable general
equilibrium models, indicated that because of demographic forces and low
savings rates, fiscal systems in rich countries were bound to collapse in the
foreseeable future, and that Asian economies, especially the big ones, would
become the saviors of Western economies. Asia’s rapidly growing markets,
rising per capita income and population, and increased regional economic
integration have led to net increases in aggregate demand for the products of
the Western developed world. This indicates that Asia is being looked upon
as a valuable market by the Western developed world.
Finally, there is much that Asia can teach the Western developed world,
particularly in the area of sustainability. Sustainability is ingrained in Asian
culture as a very basic, natural lifestyle—whether based on Confucian ethics,
Buddhist principles, or Asian religions—and the values of sustainability have
been moving to the West by osmosis. Habito argued that as the inherently
sustainable cultures of Asia have been “corrupted” by Western values of
utilitarianism and hedonism, many discussions have pointed out the need
to bring back some indigenous value systems, legend practices, and lifestyles.
As media organizations like Cable News Network (CNN), British Broadcasting
Corporation (BBC), and Music Television (MTV) have been purveyors of the
West’s unsustainable lifestyles, Asians need one or two major Asian media
organizations that are as globally ubiquitous so that there are channels that
can teach the world what sustainability really means—Asian style.
Ram Upendra Das:

“Interface between the Developed and Developing Worlds”
Das cited three dimensions on which an interface could be built in the context
of cooperation between the two worlds. First, interdependencies in capital
and labor between developed and developing countries should be examined.
Another possible priority area is the exploration of new trade theories on
intra-industry trade that can be expanded from trading goods to trading intra-
sectoral services. Finally, trade conflicts between developed and developing
World Trade Organization member countries are a paramount topic of
discussion.
Iwan Azis:
“Dialogue of Equals”
Azis argued that with respect to developing and developed countries, the
key phrase is “dialogue of equals.” The Group of Twenty (G20) meeting on
15 November was the first meeting that put top leaders of many countries—
developing and developed—on equal footing. As already mentioned, there
is much that Asia can teach Western countries and the rest of the world.
Thus, this is the right time for developed and developing countries to discuss
strategic issues as equals. The G20 meeting is the beginning of good things
in the coming years and provides a golden opportunity to explore alternative
ways of tackling the issues in today’s economic landscape.
Bambang Brodjonegoro:
“Opportunities for Asia Amidst the Global Financial Crisis”
Brodjonegoro stated that the crisis would provide East Asia with a chance to
emerge as the third largest economy in the world, after the United States (US)
and Europe. In order to realize this goal, three critical issues will have to be
part of a cooperative process among the more developed Asian countries, as
well as with developing economies.
First, a healthy financial sector is necessary, but is not a sufficient condition
for economic development. Now is the time to discuss the idea of establishing
an Asian Monetary Fund. This would provide a conduit to bring “home”
foreign exchange reserves and stabilize currencies throughout the region.
Second, it is quite clear that fossil energy sources are limited and, thus,
that there is a need to create a grand design for bioenergy development in the
region. Cooperation between developed countries and developing countries
in this area is vital. The food versus energy dilemma should also be avoided.
A dichotomy between crops intended for food security and crops intended
for energy security should be properly designed; otherwise, we could face
simultaneous food and energy insecurity.
Finally, developed countries should not use developing countries exclusively
as suppliers of production inputs, but should also empower them to create
higher value-added products so that all parties derive equal satisfaction from
trade in the chain of production. In the current World Trade Organization
arrangement, there have been debates on this kind of arrangement. For
example, in the cacao trading system, the major chocolate producers in Europe
prefer not to import processed cacao from Indonesia, Ghana, or Ivory Coast.
They prefer to import raw cacao from those countries and try to prevent
developing countries from producing processed cacao. While this benefits
the major producers in Europe, it also creates less value-added for cacao-
producing countries. These are the critical issues that have to be addressed
by developed and developing countries.
Jean Pisani-Ferry:
“Consensus on Globalization and Climate Change”
Pisani-Ferry spoke about three urgent matters. The first is reviving growth.
The world has experienced, in a way, very successful globalization over the
previous decade. However, the consensus around globalization remains fragile,
in spite of the economic benefits to date, which include gains in purchasing
power. The world economy is suffering from a major blow and the longer it
lasts, the more the consensus will be undermined.
Second, is addressing how globalization works. In principle, there is much
to commend financial globalization in terms of growth and potential ways of
smoothing adjustments. However, some of the outcomes of globalization have
not been satisfactory to all. For example, it has rerouted capital flows from
poor to rich countries—which is certainly not desirable, and has brought a
great deal of instability to Asia, Latin America, and now the major economies.
Given this, the net benefit of financial globalization is being questioned, and
an agenda of regulatory reforms is crucial in order to sustain globalization.
Finally, climate change is a major challenge due to its evolutionary nature.
Climate change involves major issues of redistribution across generations and
countries against a backdrop of significant uncertainty. There are remaining
uncertainties with regard to the cost and impact of action versus inaction.
The intellectual framework that favors consensus is not in place, but all the
major challenges are present. Developed and developing countries have to
deal with this problem; it is as real as the other immediate problems.
Masahiro Kawai:
“ADBI’s Study on the Global Financial Crisis”
Kawai discussed the need to take an in-depth look at the causes and implications
of the global financial crisis, which largely originated in the US and quickly
spread worldwide. The global financial crisis exposed the shortcomings of the
current system and highlighted the need for financial sector supervision at
national, regional, and global levels. The contribution of Asia in resolving the
global economic crisis is not only the Keynesian type of response, but mostly
structural reshaping of the Asian economy. This needs to be emphasized. Asia’s
exports of final manufactured goods, as well as the expansion of intra-regional
trade of parts and components, have relied on external markets. As demand
from the US is expected to shrink as a result of a consumption adjustment,
how Asia should adjust is going to be a major issue. Kawai strongly supports the
creation of a more domestic and regional demand-oriented Asian economy.
References
Fehr, H., S. Jokisch, and L. J. Kotlikoff. 2005. Will China Eat Our Lunch or Take Us to Dinner?—
Simulating the Transition Paths of the US, EU, Japan, and China. Boston University
Department of Economics Macroeconomics Working Paper WP2005-009. Boston,
MA: Boston University.
About the Asian Development Bank Institute
The Asian Development Bank Institute (ADBI),

located in Tokyo, is a subsidiary of the Asian
Development Bank (ADB). It was established in
December 1997 to respond to two needs of
developing member countries: identification of
effective development strategies and improvement
of the capacity for sound development management
of agencies and organizations in developing
member countries. As a provider of knowledge
for development and a training center, ADBI
serves a region stretching from the Caucasus to the
Pacific islands.
ADBI carries out research and capacity building and

training to help the people and governments of
Asian and Pacific countries. ADBI aims to provide
services with significant relevance to problems of
development in these countries.
Asian Development Bank Institute

Kasumigaseki Bldg. 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008, Japan
www.adbi.org
ISBN 978-4-89974-030-8
Printed in Japan

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Asia's Contribution To Global Economic Development and Stability: Proceedings of ADBI's Annual Conference 2008

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Annual Conference

Annual Conference 2008

Edited by Masahiro Kawai and Susan F. Stone

©2009 Asian Development Bank Institute

Freely available electronically at:

Foreword: Asia’s Contribution to Global Economic

II Keynote Address: The International Agenda: Immediate

III Regional Cooperation for Greater Global Stability:

IV Asia’s Role in Stabilizing Food and Agricultural Prices .. . . . . . . . . . . . . . 51

V How Can Asian Regionalism be a Stepping Stone to

VI How Can Asia Develop in a Socially Sustainable Manner? . . . . . . . . 123

VII Promoting Sustainability Under a Changing Climate in Asia . . . . 179

VIII Panel Discussion .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Asia’s Contribution to Global Economic Development

Given the current economic uncertainty surrounding the recovery of global

Kym Anderson is George Gollin Professor of Economics at the University of

Arsenio M. Balisacan is director of the Southeast Asian Regional Center for

Bambang P. S. Brodjonegoro is dean of the University of Indonesia’s Faculty of

Inkyo Cheong is a professor of economics at Inha University, where he is director

Jean Pisani-Ferry was appointed director of Brussels European and Global

Shinji Takagi is a professor at Osaka University’s Graduate School of Economics

Kazuhiro Ueta is a professor at Kyoto University’s Faculty of Economics and Graduate

Abbreviations and Acronyms

ADB Asian Development Bank

ITC International Trade Centre

Masahiro Kawai and Susan F. Stone

In times of economic turbulence, leadership plays a critical role, not only in

1. The International Agenda: Immediate Priorities and

2. Asia’s Contribution to Global Economic Stability

Figure 1.1: Weekly Crude Oil Prices

US$ = United States dollar.

Figure 1.2: Ratio of Increase in Food Consumer Price Index to

Pakistan all ranked in the top 20 most affected countries.

Figure 1.3: Change in Commodity Prices

M1 = January, M4 = April, M7 = July, M10 = October.

Figure 1.4: Number of New Anti-Dumping Measures

Source: World Bank (2009).

3. Asia’s Contribution to the Global Trading System

to regionalism, the process of economic integration and globalization is seen

4. Asia’s Contribution to Global Public Goods

development in a socially sustainable manner. Poverty is a particularly difficult

addressing existing social and economic conditions will likewise lead to

5. How can Developed and Developing Countries Work

1. The Short-Term Response

2. The Longer-Term Agenda: Policy Issues

Dean Acheson, who represented the US State Department at the Bretton

agreements had been “about twice as long as that of an elephant.” Indeed it

and internationally. To start with the national dimension, if macroeconomic

3. The Longer-Term Agenda: Institutions

The challenge to policymakers is not to waste time before addressing the

thereby developing balance-sheet vulnerabilities that come from reliance

2. Asia’s Intra- and Inter-Regional Output Linkages

Source: Adapted from Asian Development Bank (2008), Figure 5.1.

Table 3.1: The Decoupling of Emerging Asia: Selected Empirical Studies,

Study Sample Period Impact of Output Impact of Output

Kose, Otrok, and Prasad 1985–2005 (compared to Stronger Weaker

and confirmed the importance of intra-industry trade in generating business

2.2 Decoupling of Asia?

Source: Adapted from Asian Development Bank (2008), Figure 5.1.

3. Asia’s Financial Openness

(I/Y)i = α + β (S/Y)i + εi, (1)

where I is domestic investment; S is domestic saving; Y is domestic income;

Table 3.2: Estimates of β for Regions and Country Groups, 1990–2006a

Revealed       0.03*       -0.07*       -0.04