10 Years After: The middle class rises

By Tientip Subhanij

[Dr Tientip Subhanij holds a PhD in economics from the University of Cambridge, and currently has a career in banking as well as academia. She can be reached at tien201@yahoo.com]

Next month marks the 10th anniversary of the Asian financial crisis. East Asian countries are now wealthier, but things are not as good as they seem.

The event left a large imprint on many countries involved.

When the Thai baht was devalued on July 2, 1997, triggering a big crisis that spilled over to other countries, a long list of explanations was on offer. They include crony capitalism, corruption, inflexible exchange rates, bad governance, moral hazard, and lack of transparency.

These explanations, however, rang hollow considering that these flaws existed long before the crisis, and particularly during the time of East Asia's extraordinary growth.

Ten years on, East Asian countries are now wealthier, with fewer poor people and a larger role than ever on this planet. Having struggled with economic difficulties over 10 years, East Asia is fast becoming a middle-income region.

Led by strong growth in China, the region's aggregate output now exceeds US$5 trillion, double what it was before the crisis. When Vietnam graduates to the middle-income class in 2010, people in nine out of 10 countries in the region will live in middle-income economies.

Looking below the surface, however, things are not as good as they seem. In terms of economic policy, there is little change in the broad macroeconomic approach. The general tenets of the Washington Consensus (later referred to as the "augmented" Washington Consensus), with its market-based policies, remain in place. Export-led growth is still believed to be a powerful policy and hence the importance of competitive exchange rates. Trade and capital-flow restrictions are kept to a minimum. Fiscal discipline is in good shape and price stability has been reinforced by widespread introduction of inflation targets.

While China's per-capita GDP growth has been going strong since 2002, the country is facing tremendous environmental pressures. Today China is home to 20 of the world's 30 most-polluted cities, largely as a result of using coal for energy. And no wonder the government is struggling to get the economy back on a more "balanced" growth path.

For the rest of East Asia, the situation is different, but not necessarily better. Economic growth and investment spending have slowed down significantly from the pre-crisis level. Investment growth during period 2002-06 has averaged only 3%, compared to the double-digit growth experienced during 1990-96. Their share of world trade has also worsened, as the countries fail to adjust to a rapid rise of China.

Another cause for concern is income inequality. Greater overall wealth in the region is not shared equitably among their citizens. In fact, while poverty continues to fall, income inequality has risen. Increased income inequality is largely due to increased inequality between urban and rural areas, as well as among wage earners. Wage premiums are paid to the better educated as a result of increasing demand for skilled labour.

The disparities between urban and rural areas are exacerbated by the fact that coastal areas and cities with good transport links attract the most part of foreign direct investment. Firms in these areas could reap the benefits from synergy with each other, enhancing their productivity further and attracting more investment.

Problems of uneven development have never been resolved. Inequality deters productive investments and growth: poor people with no credit access are unable to exploit investment opportunities that may be very beneficial to society. Excessive disparities also cause political instability and social unrest.

Today, we have seen increasing awareness among top business leaders of the inequity issue. In his Harvard commencement speech last week, Bill Gates - finally receiving his Harvard degree - declared: "Humanity's greatest advances are not in its discoveries, but in how those discoveries are applied to reduce inequity. Whether through democracy, strong public education, quality health care, or broad economic opportunity - reducing inequity is the highest human achievement."

Dealing with inequality while maintaining sustainable economic development will certainly be one of the major challenges facing East Asia over the next 10 years. For this reason, I believe that development of "social entrepreneurship" could be a key answer to our future.

What are "social entrepreneurs"? And how they could help transform many seemingly impossible challenges in East Asia into possible ones deserve explanations in my next column. Through their innovative and entrepreneurial ways, these entrepreneurs build hope and implement dream from bottom up by focusing on what is achievable locally, rather than relying on global "best practices" - the solution that has proved unworkable for several decades.