National Graduate Institute for Policy Studies Global Center of Excellence Economics Working Paper No. 6 April 2009 RURAL POVERTY AND INCOME DYNAMICS IN SOUTHEAST ASIA Jonna P. Estudillo a Keijiro Otsuka b Abstract Many rural households in Asia have been able to move out of poverty in the presence of increasing scarcity of farmland initially by increasing rice income through the adoption of modern rice technology and gradually diversifying their income sources away from farm to nonfarm activities. Increased participation in nonfarm employment has been more pronounced among the more educated children, whose education is facilitated by an increase in farm income brought about by the spread of modern rice technology. An important lesson for poverty reduction is to increase agricultural productivity through the development and adoption of modern technology, which subsequently stimulates the development of the nonfarm sector, thereby providing employment opportunities for the rural labor force. This chapter explores the key processes of long-term poverty reduction in Southeast Asia using the Philippines and Thailand as case studies. Key words Green Revolution, poverty, nonfarm employment, child schooling JEL classification: O12, O15, O53, Q12, Q15 aFoundation for Advanced Studies on International Development, 7-22-1 Roppongi, Minato-ku, Tokyo 106-8677, Japan, phone +81-3-5413-6038, fax +81-3-5413-0016, email: [email protected] . bFoundation for Advanced Studies on International Development, 7-22-1 Roppongi, Minato-ku, Tokyo 106-8677, Japan, phone+81-3-5413-6035, fax +81-3-5413-0016, email: [email protected] Acknowledgment: The authors thank Prabhu Pingali for his comments on an earlier draft of this paper. The usual caveat applies. RURAL POVERTY AND INCOME DYNAMICS IN SOUTHEAST ASIA 1 1. Introduction There was a belief from the 1950s to the 1970s that high population pressure on closed land frontier would result in high incidence of rural poverty, food shortages, and even widespread famine in Southeast Asia and South Asia. High population pressure leads to a decline in the size of farmland and an increase in the incidence of landlessness, even though farmland is a major source of income of rural households in the early stage of development (Estudillo and Otsuka, 1999; Hayami and Kikuchi, 2000; Hazell and Haggblade, 1991; Lanjouw, 2007). Indeed, the incidence of poverty is observed to be higher among the land-poor and landless households than among the farmer households (World Bank, 2008a; Estudillo et al ., 2008; Hossain et al ., 2009). The direct impacts of the Green Revolution, as exemplified by the adoption of modern rice technology, on employment opportunities for the poor agricultural landless and near-landless population seem to be modest (Lipton and Longhurst, 1989). Demand for agricultural labor is seasonal and there has been an increasing trend in the adoption of labor-saving technologies (Jayasuriya and Shand, 1986). The major direct impact of the Green Revolution comes mainly through an increase in rice production, attributable to yield increase and the shorter growing period that significantly reduced rice prices, thereby increasing the welfare of the poor as consumers (Barker and Herdt, 1985; David and Otsuka, 1994). 1 This chapter is a synthesis of Sawada et al . (2009), Estudillo et al . (2009a), Takahashi and Otsuka (2009), Cherdchuchai et al. (2009), and Otsuka et al . (2009b), which are Chapters 1-4 and 9 of the book Rural Poverty and Income Dynamics in Asia and Africa (Otsuka et al ., 2009a). 2 Yet, we observe a clear and remarkable movement of rural households out of poverty in Southeast and South Asia in the midst of the unfavorable scenario of increasing scarcity of farmland and declining labor employment opportunities in the farm sector. According to the Asian Development Bank (2008), the proportion of population living on less than the Asian poverty line of US$1.35 per day declined by 5.9 percentage points in the Philippines, by 7.8 percentage points in Thailand, by 21.4 percentage points in Indonesia, and by 47.7 percentage points in Viet Nam from the early 1990s to the mid- 2000s. Interestingly, income growth and, consequently, poverty reduction, have become evident in land-scarce regions of sub-Saharan Africa, where land is once considered a relatively abundant resource (Otsuka et al ., 2009a). This may indicate that African rural households have been experiencing the same pattern of structural change and tracking similar pathways out of poverty that rural households in tropical Asia have experienced in the past 20–25 years. An important issue is to identify the strategic processes by which rural poverty has been declining in Asia, which serves as a lesson, not only to sub- Saharan Africa, but to other developing countries as well. We found that the rise in nonfarm income is the major driver behind poverty reduction, which was facilitated by earlier decision of households to invest in children’s schooling made possible by the increase in farm income brought about by the Green Revolution. This is the first study to our knowledge that examines the structural transformation of rural economies from farm to nonfarm activities by exploring the causal mechanisms that link agricultural productivity growth with human capital investments, the development of nonfarm sector, and poverty reduction.2 We selected 2 At the aggregate level, Rosegrant and Hazell (2000) found that Asian countries that grew the earliest and fastest are those that experienced rapid agricultural growth in the early stages of growth. This growth was 3 four countries in Southeast Asiathe Philippines, Thailand, Indonesia, and Vietnamwhere poverty reduction has been remarkable and then we focus on dynamic changes in income structure and composition of rural labor force in selected villages in the Philippines and Thailand, where the Green Revolution took place. This chapter has five remaining sections. Section 2 presents an overview of the structural transformation of the economy away from farming in four countries in Southeast Asia. Section 3 discusses the conceptual framework and postulates basic hypotheses. Section 4 describes the data set in the Philippines and Thailand. Section 5 identifies the determinants of household income, investments in children’s schooling, occupational choice of children, and nonfarm income. Finally, Section 6 presents the summary and conclusions. 2. Economic transformation in Southeast Asia If rural labor force increases under the scenario of closed land frontier and stagnant technology, we can expect a decrease in the marginal productivity of labor, which leads to a decrease in income and rise in the incidence of poverty. This is seemingly the case in Southeast Asia, where the land frontier had been closed in the 1960s and 1970s and population grew at an annual growth rate of well more than 2% in the same period. Unexpectedly, however, poverty incidence has declined in these countries, along with the structural shift of the economy away from agriculture to industry and services, as shown broad-based, benefiting both small and medium-sized farms and this growth was made possible by an equitable distribution of land. Strong agricultural growth in these countries is based on rapid growth on input use and productivity growth. The main sources of productivity growth have been public agricultural research and extension, expansion of irrigated area and rural infrastructure, and improvement in human capital. 4 by the decline in the proportion of gross domestic product (GDP) coming from agriculture. In Southeast Asian countries, we found that the service sector has been the dominant sector in the Philippines, whereas industry has become important in Thailand, Indonesia and Vietnam (Table 1). Vietnam has shown the most dramatic shift of its economic activities toward industry and away from agriculture and service sectors. Simultaneous with the swift transformation is the marked decline in the incidence of poverty, by as much as 48 percentage points from 1993 to 2004. As a result, the incidence of poverty in 2004.has become lower in Vietnam compared with that in the Philippines and Indonesia, which started at a much lower incidence of poverty in the early 1990s. It is by now well known that direct participation in the labor market in the nonfarm sector in industry and services is the most important route to upward income mobility and an escape from poverty for a large majority of the rural poor (Hayami and Kikuchi, 2000; Lanjouw, 2007; Estudillo et al. , 2008). Employment structure in Thailand, Indonesia, and Vietnam shows that agriculture remains the largest employer of both male and female labor. In contrast, females in the Philippines are largely employed in the service sector (i.e., 55% of the female labor force in the early 1990s) and increasingly so in more recent years (i.e., 64% in the mid-2000s) while males remain largely in agriculture (Asian Development Bank, 2008). Similarly, in Thailand and Indonesia, females in the labor force have been increasingly flocking the service sector while males have been moving out of agriculture to industry. According to Momsen (2004) females in the world at large have been moving out of agriculture faster than men to the industry sector, initially from the 1960s to the 1980s, and, finally, to the 5 service sector from the 1990s. Increased involvement of Southeast Asian females in the industry coincides with the movement of production base of labor-intensive, low- technology products away from Taiwan, Korea, and Hongkong to Southeast Asia, when these East Asian countries shift in a major way to more sophisticated products corresponding to their sharp wage increases in the late 1970s to the early 1980s. Meanwhile, agricultural productivity in these countries began rising before the structural transformation of the entire economy, as exemplified in rice yield increase, attributed to the development and adoption of modern rice varieties (MV) in the 1970s and 1980s (Figure 1).