Financial crisis, structural adjustment, and transition-related food insecurity
Globalization, inequality and poverty
Population pressure and demographic transition
Rapid urbanization and the "urbanizing" face of food insecurity
Resource base degradation and water scarcity
Modern science and R&D priorities for rural development
Governance, policy reform and sustainability of reform
While there is now a general consensus that sustained economic growth holds the key to long-term poverty alleviation in Asian developing countries, development problems and policy challenges for these countries are enormous. Recurring issues on population and problems with demographic transition, natural resource degradation, and governance appear to be more pressing now than ever before. New challenges are likewise emerging, resulting partly from the same factors that have fuelled recent growth and partly from political events and global developments in trade and finance.
Because these have important implications for agriculture and household food security in the region, it is crucial that they get the attention they deserve. The issues raised are not meant to be exhaustive but only to indicate the broad spectrum of development concerns vis-à-vis food security and poverty alleviation at the threshold of the twenty-first century.
The late 1990s is seeing a wave of financial crisis and macroeconomic instability in major countries of East Asia, with rising servicing cost on foreign debt and mounting fiscal and external imbalances entailing an unsustainable excess of aggregate demand over supply. To be sure, the East Asian problem has roots in private-sector financial decisions: misallocation of investments, maturity/currency mismatch of assets and liabilities, and, especially in the case of Korea (Rep.) and Indonesia, very high debt-equity ratios (Stiglitz 1998). Restoring prudent macroeconomic management and abandoning failed policies and institutional arrangements are essential not only to restore growth but also to prevent erosion of the gains in poverty reduction in these countries during the preceding decades. An "adjustment program" is a package of policies to achieve these goals. The programme usually combines, in varying degrees, aggregate fiscal contraction-by either cutting government spending or increasing taxes, or both-with supply-side measures aimed at reducing inefficiencies (e.g., dismantling private monopolies, privatizing wasteful state-owned enterprises, or removing trade controls). It typically also involves devaluation of the local currency to switch domestic consumption away from tradeable goods, enhance the competitiveness of exports, and hence improve trade balance.
Structural reform is also ongoing in the transition economies, as well as in South Asia, although the problem there is not so much with macroeconomic instability but with the rather slow implementation of efficiency-enhancing measures aimed at getting these economies to higher but sustainable growth paths. In South Asia, for example, trade and regulatory reforms, as well as financial and institutional reforms aimed at enhancing domestic resource mobilization, have been at best piecemeal. In Indochina, the development of institutional infrastructure supportive of a reasonably efficient market economy is unnecessarily slow, partly because of the tenacity of vested interests against changes in the status quo, i.e., a command economy. The quality of physical infrastructure, human capital, and governance in some countries in the sub-region are also far poorer than in any of their neighbors.
Unless supply response is rapid, adjustment causes consumption to fall for at least some groups in society, especially when prices of basic consumer goods and services rise sharply and rapidly with currency devaluation. The attraction of not adjusting is therefore tempting, but only at the cost of a potentially hard landing in the future. The case for adjustment programme therefore rests on demonstrating that the stream of consumption-appropriately discounted-is higher with adjustment than without adjustment.
The common claim in policy discussions is that the poor are not only hurt during adjustment but also disproportionately bear the pain of adjustment. Related to this is the view that while the adjustment will benefit the poor in the long term (i.e., their income stream will be higher with adjustment than without adjustment), it inevitably reduces their command over basic goods and services, including food, in the short term. These claims are, however, exaggerated. Both theory and evidence on adjustment in the 1980s suggest that the there is no systematic tendency for adjustment to be biased against the poor, nor to hurt the poor even in the short term (Lipton and Ravallion 1995, SIDA 1994). In countries which avoided or abandoned macroeconomic stabilization and adjustment, the living standards of the poor worsened sharply. Where adjustment hurt the poor, the reason was often not on adjustment per se but on the composition of policy instruments chosen to achieve the adjustment. How public expenditures, for example, are cut influences the poverty outcomes of adjustment. In many Latin American and African countries during the 1980s, aggregate budget contraction was achieved primarily by cutting spending on social services, including targeted transfers that were principally benefiting the poor. The adjustment thus disproportionately hurt the poor. In Indonesia, the careful mix of public spending cuts, together with rapid devaluation, helped mitigate the short-term consequences for the poor of lower growth (Thorbecke 1991).
It should not be assumed, however, that adjustment has uniform effects on the poor, even if fiscal contraction would spare basic social services benefiting them. The poor (as well as the non-poor) are a heterogeneous lot. The welfare outcome for the various groups of the poor depends on the price effects of adjustment on their consumption bundle, their trading position in food markets, and the speed of wage response to adjustment. For the poor, food staples usually represent the largest component in total household expenditure; these are generally tradeable goods (hence their prices are expected to rise with devaluation). If wages respond sluggishly to adjustment, the short-term welfare impact of the adjustment on the poor who are net buyers of food is likely negative. Even in rural areas where most of the poor are dependent on agriculture for incomes, the poorest tend to be net buyers of food staples. Access to safety nets programmes during adjustment is critical to the welfare of this group of poor people. These programmes have, however, too often been accessible only in metropolitan and peri-urban areas. At the same time, not much is known about appropriate safety-net programmes for rural areas, especially ones that meet not only efficiency criteria but also political-feasibility considerations.
Concerns have been raised that Asia’s financial crisis may have exerted a breakdown of the traditional firm-worker safety nets that in the past served well the vulnerable groups. Worse, the countries most affected by the crisis, except Korea (Rep.), do not have social safety-net programmes similar to those found in Western countries[10]. It is thus possible that the crisis has further deepened social inequities that were becoming increasingly apparent even before the crisis. Governments in these countries are thus under pressure to put in place institutional arrangements that will prevent erosion in the economic welfare of displaced workers and other vulnerable groups. While the aim to protect displaced workers is laudable, and having a safety net is important, it is equally important that as they design strategies to deal with high unemployment, these governments should not lose sight of lessons learned from mistakes vis-à-vis safety net programmes. One of these is that regulations designed to protect existing jobs often obstruct the creation of new ones. The other is that generous unemployment benefits create unintended behavioural effects, e.g. discouraging idle workers from searching for jobs.
The role of public policy goes well beyond providing safety nets to the poor during adjustment. As has been suggested above, complementarities often exist between the benefits that the poor get from structural adjustment and the composition of public spending. In rural areas, the output response to the increase in prices of tradeable goods (including food staples) is higher the better is the quality of rural infrastructure (both physical infrastructure, such as roads, and information) and human capital. It is well known that infrastructure and human capital investments, especially for rural areas, are likely to be less than optimal if the provision is left to the private sector alone. Protecting public spending in rural infrastructure and basic social services from cuts during adjustment is thus essential to advancing both growth and equity goals.
Another impediment to successful poverty intervention is the dearth of information about market and household responses to adjustment. There is, for example, hardly any evidence on the speed of rural wage response, including migration response, to adjustment in developing countries. The quality and collection frequency of household data available in many of these countries also severely constrain the effectiveness poverty intervention efforts (e.g., targeted programmes). The institutional capacity of these countries to develop and maintain a responsive poverty indicator and monitoring system-a crucial element of an effective poverty alleviation program-is also weak. Clearly, the importance of collaboration between multilateral institutions and developing-country governments toward improved understanding of the dynamics of poverty alleviation during macroeconomic adjustment and financial crisis, cannot be overemphasized.
One danger that the financial crisis poses to future poverty alleviation is that it has, in some circles, cast doubt on the efficacy of economic growth to lead poverty reduction and human development. A recent view, for example, points out that slow-growth à la South Asia’s is, after all, preferable to East Asia’s rapid growth. This view is rather too simplistic: East Asia’s past achievements in reducing poverty, developing human capital, accumulating savings, and promoting investments have no parallel in recent history. Moreover, these achievements cannot be simply erased, even if growth in the most troubled economies (Thailand, Indonesia, and Republic of Korea) will turn negative for the next two or so years (Manuelyan and Walton 1998). Thus, in their efforts to plot strategies for coping with the crisis, and to put in place a sound financial system, Asian governments would be wise not to de-track from a growth-led poverty-alleviation strategy that has proven effective in the past.
Globalisation-i.e., the opening up of goods, labour, capital, and services markets to world trade-is the dominant fixture in the development paradigm of the 1990s. There is no doubt that it has aided the remarkable transformation of the East Asian economies in recent years. At the same time, it has aroused fear and suspicion that it is exacerbating inequality, helping perpetuate poverty in some segments of the society, and contributing immensely to the inability of developing countries to defend themselves from external shocks. Indeed, calls for reversal-or its milder version, slowdown-of efforts to embrace it have intensified in developed and developing countries alike, especially as the same East Asian economies that have openly welcomed globalisation begin to tumble in the wake of the region’s current financial crisis. But such calls amount to nothing less than a return to the old policy regime of import substitution that was quite popular in the 1950s and early 1960s. This regime, of course, failed miserably in delivering growth and poverty alleviation.
Standard trade theory suggests that opening up of goods markets and pursuing comparative advantage in line with factor endowments is advantageous for growth and equality in developing countries where labour-largely low-skill (uneducated)-is abundant and capital scarce. Trade along comparative advantage lines raises the return to the abundant factor relative to the return of the scarce factor. Since the large majority of the poor are low-skill labourers, trade should reduce poverty, improve the size distribution of income, and promote growth. The same theory suggests that, for developed countries, the distributional impact of trade is just the opposite. Since the abundant factor is capital, its return relative to that of labour rises, and since capital owners are usually wealthier than labourers, inequality increases with trade. If labour is heterogeneous, then high-skill/educated labour (abundant in developed countries) gains proportionately more from trade than unskilled labour (scarce in these countries), thereby also widening the income disparity between the low-skill and the high-skill labour.
The evidence, though largely from cross-country studies, is unambiguous: openness tends to improve the distribution of income in developing countries (Edwards 1997), but to worsen that in the US and, to some extent, OECD countries (Wood 1995, Williamson 1997). The evidence for developing countries further points out that inequality is higher the more distorted (i.e., the less open) the economy is. In these countries (the poor South) where uneducated labour is abundant and growth in labour with basic skills is rising, the wage disparity between the high-skill and the low-skill labour has diminished. In the rich North where educated labour is abundant but growth in labour with basic skills is slow, the disparity in the wages between the highly skilled and the not-so skilled has widened.
The political reaction to the rising inequality in developed countries poses a threat to the deepening of world trade and, more importantly, to the sustainability of poverty reduction in poor countries. To be sure, those hurt by globalization, such as the relatively unskilled in developed countries, need the government’s protection. But erecting tariff walls, nontariff barriers, or severe impediments to mobility of labour and capital, will do more harm than good to growth and employment in the long term. The lesson of history is worth keeping in mind. The late 19th century (1860-1913) was also a period of rapid globalization and growth precipitated by the transportation revolution (Williamson 1997). With trade, the resource-rich New World (USA, Canada, Australia, and Latin America’s Southern Cone) realized its enormous potential, while it was pulling the Old World along. But the growing inequality induced by globalization put pressure on governments to retreat from globalization. Globalization ceased between 1913 and 1950 when the international community retreated behind high trade barriers, global capital markets collapsed, and immigration choked off by quotas.
Current trends suggest that another 1.5 billion people will be added to the population of developing Asian countries by 2025. If one assumes that incomes will also grow at rates closely resembling recent trends, then both the direct and indirect effects of this expansion will mean an annual increase of basic staple food demands by roughly 0.5 percent over the next 30 years. Can Asia feed itself? Is Asia’s access to food threatened? The case for optimism has not been lost: past decades saw even more daunting food demand-supply situation than that looming at the turn of the next century. This does not, of course, suggest that food insecurity will not be a threat to some or even many of the countries in the region. Inefficient policy and institutional responses to changing conditions, including the changing environment for agriculture, have enormous influence on food security outcomes. China has, for example, demonstrated its remarkable capability to respond to challenges of rising food demands despite severe resource constraints. In recent years, the response of Bangladesh and India to these challenges has likewise been remarkable. What is often missed by many pessimists, including Can-China-feed-itself alarmists, is that, given favourable policies and governance structure, societies do respond, often in predictable ways, to changes in factor endowments and opportunities.
Population pressure thus has adverse influence on food security, particularly if policies and institutional arrangements prevent efficient and equitable adjustment to the pressure. But the direction of causality also works the other way: food security influences demographic transition in developing countries, i.e., the transition to lower fertility rates. Because of its interrelationship with health and fertility decisions, it is an important element of strategies aimed at reducing population growth and promoting socio-economic development.
A comprehensive policy response to population pressure and to the challenge of demographic transition needs therefore to include acceleration of food and agricultural production, as well as sustained expansion of employment opportunities, especially in rural nonfarm areas. Technological change, coupled with appropriate governance structure, will have to be an essential component of the policy response. Without technological change, agriculture will stagnate, productive employment and income expansion will cease, and health and nutritional status will deteriorate, thereby either impeding or delaying demographic transition. Unfortunately, this view has not quite percolated yet into the mainstream practice vis-à-vis population programmes, at least in the region’s densely-populated developing countries.
The last two decades have witnessed unprecedentedly rapid rates of urbanization in developing Asian countries. The urban population now represents about 35% of the region’s total population and continues to grow at about twice the growth rate of overall population (1.5% a year). While poverty in these countries is still largely located in rural areas, it is expected that in the not-so distant future, more poor and undernourished people will live in the cities than in the countryside. No developing country can afford to ignore this phenomenon. The challenge is particularly daunting for Indochina (including China) and South Asian countries where overall population growth rates remain high, fiscal resources needed to finance urban (and rural) infrastructure and public support programmes (such as food subsidy systems) are acutely limited, institutional capacity to respond to the demands of urbanization is weak, and, with varying degrees, the natural resource base is degraded.
Although available studies indicate that the incidence and depth of malnutrition is higher in rural areas than in urban areas, the data often gloss over the large differences that exist within urban areas. Malnutrition in some pockets of urban areas is as severe as, if not more severe than, those found in rural areas. Moreover, within urban areas, the conditions and causes of poverty and food insecurity vary from one subgroup to another, suggesting that there is no universal solution to the urban food insecurity problem.
Neither is the nature of policy and programme intervention required to alleviate poverty in urban areas likely to be the same as that required in rural areas. For one thing, the urban poor move frequently (especially if tenure of residence is not secured, as in slums), thereby making targeting of interventions especially difficult. For another, the social support networks, such as with relatives or friends, that oftentimes serve as important coping mechanisms in times of distress, may not be as developed in urban areas as in rural areas.
Nonetheless, lessons of recent experience suggest that a coordinated approach capitalising on the synergistic effects of policy and programme components is more effective than one narrowly focusing on cost-effective mechanisms for short-term income transfers. Put differently, for sustained food security and poverty alleviation, not only must the programmes intended for the poor be designed cost-effectively and are accessible to them, the costs of such programmes must also not undermine long-term development potentials.
Population pressure, as well as inappropriate policies and institutional framework, is exacting a heavy toll on the natural resource base. In many parts of the region, slow growth of productive employment opportunities in the nonfarm sector intensifies the pressure exerted by the poor in agriculture on natural resources through unsustainable farming practices. Indeed, there exists discernible links between the natural environment, agricultural productivity, health and nutritional status of the population, and poverty. The warm semi-arid tropics, the warm sub-humid tropics, and the cool tropics of Asia have the smallest increases in agricultural productivity and the highest prevalence rates of malnutrition, especially among children 0 to 60 months of age. In South Asia's warm humid subtropics, childhood malnutrition is about 65 percent compared to the overall figure of 60 percent for the Asian region (IFPRI 1997). But even in many warm humid tropic zones of Asia, where agricultural land and labour productivity is high in relation to all other environments, malnutrition is high owing presumably to high population densities (hence the thin spread of the rich natural resource base across the population) and relatively high prevalence of diseases. What policies and institutional arrangements are most effective in addressing the population-environment-productivity-poverty-health links? What technologies simultaneously meet growth, poverty alleviation, and sustainability goals? How do traditional/community-based institutions affect growth, poverty alleviation, and sustainability outcomes of policy reforms in environmentally fragile, less-favored agro-ecological zones?
Related to degradation of the natural resource base is water scarcity, which has the potential to become a potentially explosive issue for the global community. The problem is twofold. The first is that freshwater is distributed extremely unevenly across countries, across regions within countries, across seasons, and across income or ethnic groups in society. Given the mounting pressure exerted by rapidly rising populations to degrade the resource base, this pattern is likely to have profound implications not only for long-term food security but also for social stability and international relations in the next millenium. The second aspect of the problem is economic and environmental: low water use efficiency, high cost of developing new water supplies, and water pollution. Most of the countries in the world, developed or developing, do not treat water as a scarce resource. Massive subsidies and distorted incentives have prevented prices that users pay for water from reflecting the economic value of water. At the same time, new sources of water to meet rising demands are increasingly expensive to exploit; new demands for water in urban areas and in industry conflict with demands for water in agriculture. In recent years, resource degradation through waterlogging, salinization, groundwater mining, and water pollution have impaired the quality of water for human use, at least in densely populated centres of Asia. Health problems arising from water pollution through industrial effluents, poorly treated sewage, and runoff of agricultural chemicals are growing problems in these countries.
Finding solutions to the water problem will not be easy, since the solutions will likely vary from country to country, depending on their underlying conditions such as level of economic development, state of resource base, cropping patterns, institutional capacity, and political commitment to water policy reform. Additional research is needed to determine country-specific policy and institutional designs that will promote efficient and sustainable use of water without compromising the food security of the vulnerable groups in society. How will removal of water pricing distortions in irrigation systems, for example, affect household food security, especially the poor in rural areas? What policy instruments are appropriate for alternative institutional settings? How does one establish an efficient and sustainable system of allocating water among competing uses (for home use in urban areas, for industries, for agricultural production) in developing countries where institutional capacity is weak?
The above issues are complex and comprehensive solutions are nowhere in close sight. However, given the empirical evidence so far, the main elements of a comprehensive policy design for water will have to include reform of price incentives (to get prices reflect economic cost of water and hence improve efficiency), provision of secure water rights to individual water users or groups of water users (to encourage investment, decrease incentives to degrade water resource, and enhance flexibility in water use), and devolution of irrigation system management to water users (to promote sustainability of water use).
Modern science is a powerful stimulus to agricultural transformation and economic growth. Through enhanced knowledge and better technologies for food and agriculture, it also holds the key to sustained food security and poverty alleviation in resource-poor developing countries. Through improved technologies, it has been possible to increase food availability per person by almost 20 percent since the early 1960s. Whatever its shortcomings, real or alleged, the Green Revolution-undoubtedly one of modern science’s most spectacular application-has helped in averting widespread starvation and enabling many millions of people to escape chronic food insecurity. Its impact on poverty and rural development has been greater the more favourable were the "initial" conditions of rural areas, namely, state of human capital and physical infrastructure, asset distribution, and quality of governance.
Nevertheless, hunger remains persistent in developing countries, even as modern science continues to advance at the threshold of the twenty-first century. At the same time, the yield potential of the Green Revolution has apparently been exhausted, at least in favourable areas with provision for irrigation. Given the urgency of averting hunger, efforts to shift the agricultural technology frontier-i.e., to find new applications of modern science to food and agriculture through R&D-have to be sustained. After decades of sustained growth, the rate of increase in real agricultural research spending-both public and private-has been slowing dramatically and even shrinking for some countries. The slowdown, particularly in the public sector, has apparently nothing to do with changing profitability of agricultural research.
By all indications, prospects of high payoffs (in terms of increased food production and incomes) to agricultural R&D remain bright; many studies report rates of return exceeding 20 percent a year, comparatively higher than those reported for many other investment areas. Advances in scientific practices combined with new developments in biotechnology and information technology offer high potential for achievements in agricultural R&D, possibly even surpassing the scale of the Green Revolution. The slowdown in agricultural R&D spending may thus be counterproductive.
Given that investments in agricultural R&D need to continue, what exactly should multilateral institutions and governments invest in? In principle, given the conflicting demands for development funds and the increasing participation of the private sector in the provision of agricultural research, the simple answer is that public research investments should be focused in areas that would not be privately funded and that offer convincing expectations of a positive social payoff.
For the multilateral research centres, this means refocusing efforts toward basic (upstream) research, as well as applied R&D whose benefits may spill across national boundaries, supporting rather than supplanting domestic research capacity in developing countries to address country-specific research needs, and facilitating mutually beneficial exchange of information among national research centres. Part of the challenge is to find institutional mechanisms of tapping the fast growing scientific community in Asian developing countries, especially East Asia, to undertake applied (downstream) research. The usual assumption that research capacity in these countries does not exist is less tenable now than, say, two or three decades ago.
For governments, apart from ensuring public agricultural research investment to focus only on areas with convincing positive social payoffs, they also need to play a role beyond agricultural research. One of their fundamental tasks, especially for governments in developing countries where private investments in research is still a negligible share of total agricultural R&D investments, is the establishment and enforcement of intellectual property rights. Such rights allow greater appropriation of the benefits of research, thereby encouraging private sector participation in research. The key consideration here is that public research should not crowd out private research. For instance, since private research tends to focus on aspects of commercial agriculture such as mechanical and chemical inputs, as well as food processing and post-harvest systems, it may well be that public research in these areas is counterproductive.
As noted above, past investments in agricultural research have focused on high-potential, usually irrigated areas, and on technologies with prospects for wide applications (such as high-yielding rice and wheat varieties). Technology development for these areas is likely to remain an important component of a strategy for raising agricultural surpluses for exports and urban food consumption.
However, given the gravity of poverty and environmental problems in marginal lands, research would also need to give importance to rainfed areas and fragile agro-ecosystems. While the long-term solutions to marginal areas might well be found in sustained expansion of high-paying employment opportunities in other regions/areas of the country and/or in nonfarm areas and, hence, in the migration of many inhabitants to these areas, it will take several decades for many of the agriculture-dependent developing economies of Asia to ease population pressure on marginal lands. The interim solution may require nothing less than raising agricultural productivity and enhancing local capacity to manage fragile, complex agro-ecosystems.
Funding the high costs of research on marginal areas and agro-ecosystems is likely to be a major problem for both governments and multilateral institutions. Given the extreme heterogeneity of rainfed areas across regions of the world as well as within regions of a country, the research and extension challenges are neither easy nor inexpensive. Policymakers will have to make difficult decisions concerning research priorities. They have to weigh the trade-offs between higher returns to agricultural research in high-potential areas relative to those in marginal areas and the goals of rural poverty alleviation, food security for the poor, and environmental sustainability.
The main reason for the slow-or rapid but unsustained-progress in poverty reduction for many of the developing Asian countries is usually the slow pace of policy and institutional reforms aimed at improving efficiency in the use of productive resources and building a long-term foundation for a broadly based growth. The key question is why it has been so difficult to put in place reform measures despite the usually clear evidence on the growth-retarding and anti-poor effects of existing policies. There is ample evidence, for example, that financial (credit) policies, agricultural and land policies, and industrial policies have tended to favour the rural and urban elites and hurt owner-operated family farms and landless workers (Schiff and Valdes 1992, Bautista and Valdes 1993, Johnson 1997). Safety nets programmes put in place in the name of the poor have also disproportionately benefited the nonpoor.
The evidence is also compelling that economic growth sustained over a considerably long period benefits the poor, at least absolutely. It is easy to pinpoint, as has been customary for critics of policy regimes in developing countries, the existing structure of governance as the main culprit. What is not easy, however, is to explain why a government chooses policy measures that retard growth and, hence, hurt the prospects of the poor in the long term. Put differently, what does it take-short of revolution-to get the right policies for growth and poverty alleviation? Once these reforms are in place, how can they be sustained? These questions acquire even greater significance in view of the economic crisis in Asia.
The development literature is only beginning to unfold the political economy of policy formation in developing countries. Nonetheless, from the historical data that helped inform this understanding, it is possible to identify some threads-empirical "regularities"-that have important implication for the prospect of reforms (or the sustainability of reform efforts) in developing Asian countries.
The most relevant here is the general finding of recent literature that reform attempts are most likely to be initiated and succeed when the state is facing a fiscal crisis, and that reform efforts are most likely to be sustained when those who gain from the policies can defend them against the pressures exerted by those who gain from alternative policies (Binswanger and Deininger 1997). Fiscal crisis makes it impossible for those in power to continue supporting efficiency-reducing activities and to buy off or suppress an emerging alternative coalition. External shocks, such as internal revolt or sharp deterioration in the country’s terms of trade, do not necessarily trigger efficiency-enhancing reforms, but if these shocks lead to a fiscal crisis of the state, then the resulting changes in relative bargaining influence of various groups provide opportunities for initiating policy and institutional reforms.
For these reforms to be durable and successful, a politically vocal coalition supportive of the reforms has to emerge. Such a coalition may be difficult to come by in the absence of external assistance. For example, in reforms involving agrarian policies and rural development programmes, the chief beneficiaries-the spatially dispersed rural poor-have low potential for collective action owing largely to the high cost of coalition formation. [This explains why many inefficient agrarian policy regimes persist and why peasants tend not to initiate revolts in the absence of a non-rural coalition partner.]
Thus, technical assistance that helps specific groups articulate their demands politically is crucial to the success of reforms. So are resources that help institutions supporting fiscal discipline, keeping inflation down, preventing special interest groups from undermining the reform effort, developing clearly defined rights to use or own property, and enforcing efficiency-enhancing rules. Multilateral and bilateral institutions can help ensure this success by extending technical assistance and resources primarily in the context of the fiscal crisis. The assistance may include the development of analytical capacity among technocrats and specific groups. The ability to exercise fiscal prudence and to influence policymaking depends critically on the availability of basic information on the economic situation and on the probable outcomes of policy options.
The rise in inequality in recent years for a number of the Asian countries has also an important implication for governance and the sustainability of poverty-reducing policies. Income inequality increases the likelihood that the state pursues efficiency-inhibiting policies. One reason for this is that inequality reduces the participation of the poor in the political process, thereby reducing the likelihood that they gain access to education, health, infrastructure, technology, and other services that would contribute to growth.
Another reason is that inequality enhances the capacity of the wealthy to hold out in political bargaining, either directly or through capital flight (Binswanger and Deininger 1997). This makes it more difficult for a society to respond quickly and efficiently to external shocks and to discard growth-retarding policies that just protect the vested interests of the wealthy. At the same time, the poor who stand to benefit from growth-promoting policies would have low potential for collective influence-peddling owing primarily to the relatively high coalition costs facing them. In rural areas, these costs are high since the poor are spatially dispersed, have little access to transport and communication infrastructure, and have low education. It is thus possible that a "political equilibrium" at low income level - i.e., a poverty trap - persists, unless some external shocks lead to changes in the balance of political influence.
The challenge for many of the developing countries is to seize opportunities for reforms when such shocks occur. Apart from choosing efficiency-enhancing policies, high in the agenda for growth and poverty reduction should be the improvement in the access of the poor to financial and insurance markets. Imperfections in these markets also help perpetuate poverty and dualistic development: the poor may be forced to liquidate their productive assets, such as draft animals and land, in times of distress. Varied experiences in the region vis-à-vis policy responses to these imperfections offer opportunities for comparative research and mutually beneficial policy dialogue aimed at finding avenues for escape from this type of poverty trap.
