Globalization ExportLed Growth and Inequality The East Asian

Globalization, Export-Led Growth and Inequality: The East Asian Story Mah Hui Lim Penang Institute limmahhui@gmail. com Sanya University 22 -24 February 2016 1

OUTLINE o Stylized facts on rising inequality o Forces of Globalization & National Policies o Trend & reasons for worsening inequality in each country o Limits & Challenges of Export Led Growth o Alternative Policies & Strategies 2

Section I - Inequality o Issue of inequality return with vengence – failure of trickle down growth – 13 of 36 Asian ctries Gini>40 o Inequality not just distribution of personal incomes, opportunities & outcomes, technology o Focus on functional income distribution – distribution of national income to capital vs labor 3

Functional Income Distribution (FID) worsening o Since 1990 s, ¾ of 69 countries for which FID data are available experienced declining wage share* (WS) of income. o On avg in Asia WS declined by 20 percent since 1994 o * Wage share and labor share used interchangeably 4

Wage share in Devpg Econs 1970 -2007 (ILO 2012/3) 5

Worsening FID driven by two sets of forces o Exogenous - Globalization forces o Endogenous - Policy driven forces o Export-Led Growth reflects both these forces 6

Globalization – Trade & Financial, Technology o Mainstream view– world trade improves equality – exports pull up wages in LDCs with labor endowment o Technology > freer flow of capital & info > decrease inequality o Above not supported by evidence 7

Heterodox view – political economy o Trade openness accompanied by financial openness-worsens inequality o Main factor – K more mobile than labor - flow to wherever wages are lower > downward pressure, worsened by national policies o Change in bargaining power btw lab & capital. Emph redistribution of rents 8

Heteredox -Globalization Forces o Financial liberalization/deregulation > frequent currency and econ crises o FX deprcn and econ recession – more negative & lasting effects on labor thru erosion of wages via prices & bargaining power, e. g. Korea during Asian financial crisis 9

Section II – East Asian Story o China, Korea, Taiwan (Po. C), Malaysia and Thailand o High growth rates avg 6%-11% p. a. but o Gross export growth higher @ 7%-20% o Definition of Export Led Growth (ELG) o ELG = periods when gross export growth > GDP growth; can have current account deficit o Most periods are ELG 10

Export-Led Growth Periods (in red) = GDP growth – Export Growth 1960 s China N. A. Korea Thailand Taiwan (Po. C) 1980 s 13. 7 Malaysia 1970 s 1. 5 -0. 6 -6. 5 2. 3 -0. 7 0. 5 19971999 19901996 6. 4 0. 8 3. 3 2000 -2007 9. 3 5. 9 13. 5 -1. 0 1. 6 4. 3 20082011 -0. 1 1. 3 -2. 3 2. 5 2. 9 6. 3 2. 8 10. 6 2. 8 2. 2 12. 1 9. 9 3. 9 0. 6 2. 6 5. 0 2. 1 11

Growth with Declining Wage Share (WS) in all 5 economies o Because wage growth is lagging behind productivity growth resulting in declining wage share o Most productivity captured by capital rather than labor 12

Wage Share for 5 East Asian Economies, 1990 -2008 13

Falling Wage Share o Steepest for China of over 12% o Malaysia & Thailand lowest level of WS (ard 30%), secular decline for Msia & stagnating for Thailand o Taiwan significant decline ard 10% o Korea – decline after 1996, recovered slightly after 2000 but down again after 2007 14

Reasons for Inequality & Falling Wage Share o Trend mirrored in real wage growth falling behind prodtvy growth o Not marginal prodtvy but pol, econ, soc forces, at global & national level, can better explain rising inequality 15

Summary of E Asian ELG policy o China, Malaysia, Thailand follow labor intensive ELG based on repressing labor & unit labor cost to attract FDI o Korea ELG based more on technology r/t wage comptn; nevertheless WS declined after fin libzn & crisis o Taiwan – in btw 2 camps. Started off like Korea but > 1990 changed to “cost-down” strategy with opening of China & massive invst moved to Ch 16

China- extreme case of ELG based on pushing down unit labor cost -wage competiveness strategy o Indzn & export based on cheap lab fr rural sector o Explicit policies to discriminate against migrant labor; prohibit trade union except state sponsored o 1996 -2007 – productivity rose 2 x real wages 19% vs 11% o Worsened after China joined WTO 17

China: Labor Productivity vs Real Wages in Industry, 1995 -2010 1000. 0 900. 0 800. 0 700. 0 600. 0 Labour productivity index Real average wage index 500. 0 400. 0 300. 0 200. 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 18

Chinese ELG policy based on exploitation of agr & rural sectors o Massive capital transfer from agriculture to industry plus from rural to urban sectors amounted to a total of Rmb 4. 3 trillion btw 1978 & 2000 19

China-Yearly Capital Transfer fr Agr to Industry and Rural to Urban (in Rmb Bn) 450 400 350 300 250 Agr-Ind 200 Rur-Urb 150 100 50 19 7 19 8 7 19 9 8 19 0 8 19 1 8 19 2 8 19 3 8 19 4 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 00 0 -50 Source: Huang, Rozelle, Wang, 2006, Table 6 20

Malaysia and Thailand – also ELG based on wage comptve o Msia & Thailand – ELG since 70 s but diffnt fr Korea & Taiwan o High foreign direct investment o High import content; few linkages o Dependent on foreign market o Poor or no industrial policy 21

Foreign Direct Invst as Percent of Gross Capital Formation FDI as Percent of GFCF 20. 0 18. 0 16. 0 14. 0 12. 0 AVG 1970 s 10. 0 AVG 1980 s AVG 1990 s 8. 0 AVG 2000 s 6. 0 AVG 2010 -2012 4. 0 2. 0 0. 0 -2. 0 China, Taiwan Province of Korea, Republic of Malaysia Thailand Japan 22

Msia & Thailand o Incentives for FDI –tax holiday, low impt duties, prov infrastrcuture, o Repressive lab laws – unions banned in export inds; no minimum wage until 2012/13; right to strike prohibited o Lacking technology, participate in low end of global supply chain 23

Policy of high prodtvy & low wages > falling WS of GDP Thailand: Productivity vs Real Wage Growth, 2001 -2009 130. 0 120. 0 Real wage index 110. 0 Labour Productivity Index per employed persons 100. 0 90. 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 24

Policy of high prodtvy & low wages > falling WS of GDP Malaysia: Productivity vs Real Wage Growth, 1990 -2010 350. 0 300. 0 250. 0 Value Added Per Worker Real Wages Per Worker 200. 0 150. 0 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 100. 0 25

Taiwan-From Technology to Labor Competitiveness ELG o Up to 1990 s, labor reaped large part of prodtvy gains o Wage Share rose fr 50% to 54% (1980 to 1994) o Gini dropped fr 0. 4 to 0. 3 in 1990 s o Things changed > 1990 with opening up of China to FDI o Taiwan invsted heavily in China & adopted “cost-down” strategy 26

Taiwan o One million skilled workers & professionals moved to China o Taiwan imported cheap foreign labor o Technology development trailed behind Korea o All these put pressure on wage > declining WS 27

Taiwan: Productivity vs Real Wage Growth in Industry 28

Korea- WS declined after financial liberalization & crisis o Korea ELG based on domestic cap, technology purchase o <1990 s, real wages rose with prodtvy o WS rose from 33% (1970) and peaked at 49% (1996), then declined o Turning point financial liberalization & Asian Fin Crisis – opportunity state & cap to extract concessions from labor > rise in temp emplyt & unemplyt 29

Korea – Wage diverged from productivity growth > 1996 Korea: Labor Productivity vs Wage Growth, 1990 -2010 280. 0 230. 0 180. 0 130. 0 80. 0 199019911992199319941995199619971998199920002001200220032004200520062007200820092010 Labour Productivity Index (1990=100) Real average wages index (1990=100) 30

Section III- Limits & Challenges of Export Led Growth o 2007 global fin crisis (GFC) exposed weakness & limits of ELG – higher ext vulnerability; dom rising inequality o Wage- not only a cost item; also source of aggr demand o Drop in WS impacts negatively dom consumption & aggregate demand o ELG is one way to escape stagnating dom demand arising fr declining WS 31

China – falling WS, falling private consptm, rising exports 32

Inequality contributes to global imbalance o Current acct surplus of one ctry shows up in cur acct deficit of others o CAS of China & CAD of U. S. -2 sides of same coin o In U. S. falling WS counteracted with rising household debt > fin crisis o In China – falling WS made up for with rising exports o Both unstable & unsustainable 33

Korea & Malaysia – also taking the debt route o Parallel to fall in WS, Korea’s household savings rate plunged from 26% (1988) to 0. 4% (2002). Now hovers around 2%-3% o Household debt rose at 13% p. a. twice GDP growth rate > 89% of GDP in 2011 o Household debt / HH disposable income at 164% in 2012 34

Malaysia –same story but worse – slowing prodtvy growth o WS dropped from 47% (1970 s) to 30% in 2008 o Private consptm supported by debt, not rising income o Msia prodtvy growth is slowing down - early deindustrialization 35

Malaysia – Growth of GDP, HH Consptm & HH Loans 36

Section IV – Alternative Policies & Strategies o Ctries esp China trying to orientate to dom demand to stimulate growth o But need to restructure their productive, distributive, redistributive systems 37

Restructure Distributive System o Align wage rise to prodtvy growth + inflation o Instead of race to bottom in wage comptn, coordinate wage policies btw countries 38

Restructure Redistributive System o More progressive tax structure o Reduce tax bias now favoring capital o Increase capital gains tax – esp graduated cap gains tax – higher tax for short term cap gains o China sh reduce over invst in phy infrast & incr invst in social infra – health, educn, social safety net 39

Restructure Productive System o Productive structure – move away fr just vertical specialization in global supply chain to horizontal specialization o More intra-regional trade in final goods 40

o THANK YOU 41