Structural change in Asia – good for growth but bad for equity?

ADB
Donghyun Park

Tea quality appraisal in a PRC factory.

Due to rapid globalization and the diffusion of new technologies, most Asian countries have experienced drastic changes in their economic structures in the past few decades. Output growth has consistently exceeded employment growth, and productivity outgrew wages. While structural change facilitated catch-up with advanced economies and contributed to an unprecedented improvement in living standards and poverty reduction, it also raised the demand for more skilledworkers relative to less skilled ones, thus contributing to wage inequality. The same factors that drove Asia’s catch-up and rapid growth, i.e. technological change, globalization and market-oriented reforms, may thus have also exacerbated inequality.

Asia’s structural transformation is characterized by several distinctive features. For one, the East Asian growth model was characterized by labor-saving technological progress and high levels of investment in human and physical capital. Furthermore, many Asian economies still specialize in labor-intensive manufacturing, in contrast to the ongoing premature de-industrialization occurring in many other developing countries outside Asia.

Since the mid-1990s, productivity growth has been uneven across countries and industries. Looking at five major Asian economies—the People’s Republic of China (PRC), India, Indonesia, the Republic of Korea, and Taipei,China—provides some valuable insights. From 1995 to 2009, the PRC and India enjoyed the highest growth of productivity. In Korea and Taipei,China, productivity remained relatively stable, which is plausible in light of their already high productivity levels (Figure 1). Indonesia, on the other hand, lost ground. After a rebound in the early 2000s, productivity declined visibly in manufacturing and fell modestly in the service sector, with the exception of some industries such as transport and communications.

Figure 1: Changes in productivity level between 1995 (x-axis) and 2009 (y-axis)


Source: Martorano, Park and Sanfilippo (2016). Note: Productivity is measured at the country and industry level as the ratio of deflated value added on employees.

Wage inequality trends over time also show differences within economies. Hourly wage data for workers of different skill levels indicate that inequality in the PRC was initially low but then widened markedly (Figure 2). Rising disparities between urban and rural areas, along with growing wage gaps between skilled and unskilled workers within urban areas, contributed to the growing wage gap. However, the increase in wage inequality went hand-in-hand with a strong increase in overall productivity, suggesting that the PRC’s economic growth was largely driven by the absorption of surplus labor.

India and Indonesia have the highest levels of wage inequality. Interestingly, Indonesian wage inequality has remained fairly stable. A possible explanation is that the 1997-1998 Asian crisis affected urban wages more than rural wages. On the other hand, East Asian countries, which enjoyed the positive spillover effects of rapid growth on income distribution during the pre 1997 years of the so-called East Asian Miracle, have somewhat lower levels of inequality.

Figure 2: Average levels of wage gap in Asian economies, 1995-2009


Source: Martorano, Park and Sanfilippo (2016).

Recent empirical analysis of the nexus between productivity growth and wage inequality in a group of Asian economies provides new, policy-relevant evidence. More precisely, analysis of finely disaggregated industry-level data indicates that structural transformation widened wage gaps in all economies in the region by increasing the relative share of high-skilled workers in total wages. The evidence indicates that this is due to both (i) a shift toward more productive – and more intensive in the use of skilled workers – activities within and between industries; and (ii) capital deepening.

While such outcomes are difficult to reverse since they are intrinsically linked to the industrialization process, selective policy interventions can partly offset the negative effect of structural change on wage inequality. More specifically, boosting the supply of high-skilled workers by investing in education and human capital can limit the adverse effect of structural transformation on inequality. In this context, the experience of Korea and Taipei,China, is illuminating. Their education policies enabled the skills of their workforce, especially technical skills, to evolve along with their economic structures over time.

Marco Sanfilippo is Assistant Professor at the University of Antwerp.