New research: A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa

October 8, 2014

     By Duncan Green     

Spoke last week as a ‘discussant’ (my favourite speaking role, no prep required) at the launch of an extraordinary new ODI paper, with the deeply forgettable title ‘rural wages in Asia’ (we’ll come back to the title later).

In one of those papers that restores your faith in economists, Steve Wiggins and Sharada Keats crunch the available data on 13 large Asian countries andChina rural wages find some intriguing patterns:

  • Rural wages are rising across much of Asia, and in some cases have accelerated since the mid 2000s.

And they are doing so fast (and getting faster) – see rather busy powerpoint slide, right, for real wages in five Chinese provinces. Doubling in China in the last decade, tripling or quadrupling in Vietnam. A bit slower in Bangladesh, but still up by half. This really matters because landless rural people are bottom of the heap (72% of Asia’s extreme poor are rural – some 687m people in 2008), so what they can pick up from their casual labour is a key determinant of poverty, or the lack of it. Steve argues that if the trend continues (and it looks like it will) this spells ‘the end of mass (extreme) poverty in Asia’.

  • The two main drivers are a slowdown in the growth of the rural labour force, probably mainly from lower fertility rates, and the growth of manufacturing that attracts workers from rural areas.

The authors ran a cross country regression and were surprised to find population as the biggest causal factor – rural populations are falling across much of Asia, labour shortages are even appearing in Bangladesh, and wages are responding (Steve: ‘music to your ears. As an agricultural economist, it’s what you dream of hearing’). Policy wonks take note: this shows that the underlying structural causes or rising wages are primarily structural, not down to our cherished policies like India’s Employment Guarantee Act.

  • Higher rural wages are driving up the cost of food production, thereby creating opportunities for other countries to export to Asia.

Steve argues that this will undermine Asian countries’ preference for self sufficiency in food (they’ve already come to rely on imports for vegetable oil and animal feed), opening up big new markets for food exporters.

They also contribute to higher wages in manufacturing. As costs rise in China, for example, it is likely that some plants will relocate to low income Asia and to Africa.

Collapsing fertility rates

Collapsing fertility rates

Former World Bank chief economist Justin Lin has talked about 80 million manufacturing jobs leaving China as wages rise. Many of those could go to Africa, as the last global repository of truly cheap labour. Steve talked about ‘a beautiful marriage of convenience between Africa’s youth bulge and Asia’s rising wages’)

There are some exceptions – the Philippines have not seen rural wages rise, and there has been no fall in rural population or growth in manufacturing (which sort of supports the paper’s thesis).

If this is true, (and I have no reason to believe it isn’t), the implications are momentous. We always wondered if China’s ‘reserve army of labour’ was so large that it could endlessly industrialize and wages would never rise, because more millions of peasants would simply move from the countryside. The remaining poor countries would be best advised to give up on the manufacturing dream and stick to extractives and agriculture.

But now other large Asian countries are reaching the end of that phase and some jumbo jet-sized ‘flying geese’ are about to take off, leaving the way for Asia’s remaining low income countries, and Africa to follow in their wake. Their governments need to dust off those industrial policy plans and get to work.

The focus on shrinking rural populations is also intriguing – is this the biggest success story yet for women’s education, empowerment and sexual/reproductive rights (at least outside China, whose fertility fall is based more on coercion)?

The research begs lots of questions – Steve and Sharada have ‘no idea’ why an acceleration seems to have begun in the mid 2000s, or why wages between rich and poor regions within countries (and between men and women) are converging. For once, ‘NMR’ (needs more research) is fully justified.

I raised a couple of other questions: what does this mean for inequality, both horizontal (eg rural-urban) and vertical (income)? If China suddenly opens its doors to food imports, will it trigger a price shock on a par with the 2008 food price spike?

Finally, if the findings are so earth-shattering, how come only a handful of people showed up to discuss them? The ODI has done its customary comms bells and whistles (see infographic, below), but I think it got one thing badly wrong – the title. When I skimmed my RSS feed, I passed swiftly over ‘rural wages in Asia’ – who’s going to click on that? I suggest that ‘Mass poverty in Asia is ending, with no need for any post-2015 malarkey’ would have got a bigger turnout. Steve, an ag economist to the core, was baffled – ‘wages are really exciting – we’re like dedicated motor mechanics – how could anyone not be fascinated by carburettors?!’ Sweet.

rural wage in asia infographic