New research: A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa

Spoke last week as a ‘discussant’ (my favourite speaking role, no prep required) at the launch of an extraordinary new ODI paper, with the deeply forgettable title ‘rural wages in Asia’ (we’ll come back to the title later).

In one of those papers that restores your faith in economists, Steve Wiggins and Sharada Keats crunch the available data on 13 large Asian countries andChina rural wages find some intriguing patterns:

  • Rural wages are rising across much of Asia, and in some cases have accelerated since the mid 2000s.

And they are doing so fast (and getting faster) – see rather busy powerpoint slide, right, for real wages in five Chinese provinces. Doubling in China in the last decade, tripling or quadrupling in Vietnam. A bit slower in Bangladesh, but still up by half. This really matters because landless rural people are bottom of the heap (72% of Asia’s extreme poor are rural – some 687m people in 2008), so what they can pick up from their casual labour is a key determinant of poverty, or the lack of it. Steve argues that if the trend continues (and it looks like it will) this spells ‘the end of mass (extreme) poverty in Asia’.

  • The two main drivers are a slowdown in the growth of the rural labour force, probably mainly from lower fertility rates, and the growth of manufacturing that attracts workers from rural areas.

The authors ran a cross country regression and were surprised to find population as the biggest causal factor – rural populations are falling across much of Asia, labour shortages are even appearing in Bangladesh, and wages are responding (Steve: ‘music to your ears. As an agricultural economist, it’s what you dream of hearing’). Policy wonks take note: this shows that the underlying structural causes or rising wages are primarily structural, not down to our cherished policies like India’s Employment Guarantee Act.

  • Higher rural wages are driving up the cost of food production, thereby creating opportunities for other countries to export to Asia.

Steve argues that this will undermine Asian countries’ preference for self sufficiency in food (they’ve already come to rely on imports for vegetable oil and animal feed), opening up big new markets for food exporters.

They also contribute to higher wages in manufacturing. As costs rise in China, for example, it is likely that some plants will relocate to low income Asia and to Africa.

Collapsing fertility rates
Collapsing fertility rates

Former World Bank chief economist Justin Lin has talked about 80 million manufacturing jobs leaving China as wages rise. Many of those could go to Africa, as the last global repository of truly cheap labour. Steve talked about ‘a beautiful marriage of convenience between Africa’s youth bulge and Asia’s rising wages’)

There are some exceptions – the Philippines have not seen rural wages rise, and there has been no fall in rural population or growth in manufacturing (which sort of supports the paper’s thesis).

If this is true, (and I have no reason to believe it isn’t), the implications are momentous. We always wondered if China’s ‘reserve army of labour’ was so large that it could endlessly industrialize and wages would never rise, because more millions of peasants would simply move from the countryside. The remaining poor countries would be best advised to give up on the manufacturing dream and stick to extractives and agriculture.

But now other large Asian countries are reaching the end of that phase and some jumbo jet-sized ‘flying geese’ are about to take off, leaving the way for Asia’s remaining low income countries, and Africa to follow in their wake. Their governments need to dust off those industrial policy plans and get to work.

The focus on shrinking rural populations is also intriguing – is this the biggest success story yet for women’s education, empowerment and sexual/reproductive rights (at least outside China, whose fertility fall is based more on coercion)?

The research begs lots of questions – Steve and Sharada have ‘no idea’ why an acceleration seems to have begun in the mid 2000s, or why wages between rich and poor regions within countries (and between men and women) are converging. For once, ‘NMR’ (needs more research) is fully justified.

I raised a couple of other questions: what does this mean for inequality, both horizontal (eg rural-urban) and vertical (income)? If China suddenly opens its doors to food imports, will it trigger a price shock on a par with the 2008 food price spike?

Finally, if the findings are so earth-shattering, how come only a handful of people showed up to discuss them? The ODI has done its customary comms bells and whistles (see infographic, below), but I think it got one thing badly wrong – the title. When I skimmed my RSS feed, I passed swiftly over ‘rural wages in Asia’ – who’s going to click on that? I suggest that ‘Mass poverty in Asia is ending, with no need for any post-2015 malarkey’ would have got a bigger turnout. Steve, an ag economist to the core, was baffled – ‘wages are really exciting – we’re like dedicated motor mechanics – how could anyone not be fascinated by carburettors?!’ Sweet.

rural wage in asia infographic

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8 Responses to “New research: A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa”
  1. David E

    This is obviously fantastic news. Increasing wages in rural areas is a hugely important route to take people out of extreme poverty. And the knock-on implications in manufacturing wages is similarly very important.

    But whether there is a “a beautiful marriage of convenience between Africa’s youth bulge and Asia’s rising wages” depends a lot on what you think about (a) the current state of productivity in African manufacturing (generally pretty low); (b) the cost of other inputs (e.g., energy, logistics) in Africa which are typically much higher and (c) how you expect the relative importance of labour versus other inputs to change in the future.

    The last of these is an area I think is hard to predict but also very important. If you look at projected future trends in manufacturing, there is an increased focus on manufacturing being done closer to sources of demand and also on increasing automation (crudely, think 3D printing). These make me more sceptical that African manufacturing will be an inevitable beneficiary of rising wages in Asia.

    Frey and Osborne have written about this in the US context: I had a (much less rigorous) go at thinking about what that might mean in the African context:

  2. Matt

    Very interesting! I wonder if the NMR agenda should also try and understand these findings as part of the ‘big picture’ – looking more closely at both the causes and consequences of rising wages. So in particular the interplay between rising rural wages and migration, urbanisation and effects on smallholders.

    The experience of countries like Nepal, for example, shows that while higher wages may be good for those labourers ‘left behind’ in rural areas, a) the higher wages are partly a result of under-supply, caused by massive rural out-migration (usually abroad) – meaning landowners (the majority of those in poverty are still smallholders) who struggle to then find affordable land prep labour etc. which causes productivity declines – so not really helping those who are perhaps not poorest of the poor, but still well below the poverty line. b) rural wage increases are still less than the gains from going abroad to work, meaning agriculture remains a less attractive option for youth (again, diminishing supply and driving up wages), and c) Nepal is one of the least urbanised, but fastest urbanising countries in Asia – so is one unintended consequence (or cause) of rural wage rises that we are just shifting the problem to cities, which is making the rural wage data look better than it is? Duncan touches on this with his point about inequality.

    On Nepal, an interesting case study on this is:

  3. Andrew Wells-Dang

    How to square ODI’s findings about rural wages with Oxfam and IDS’s that higher food prices make farmers worse, not better off? (See ‘Squeezed’, May 2013, and here in Vietnam, ‘Who Has Benefited from High Rice Prices’, October 2013.) The main arguments of these studies are that farmers face higher costs for fuel, land rent, and agricultural inputs which more than offset the gains from higher output prices, and these gains are mostly captured by middlemen and exporters anyway.

    So perhaps a couple of caveats are in order to the ODI study. Yes, wages are rising – but what about returns to the majority of agricultural labourers who are not wage workers? And does a ‘real’ increase in wages (nominal increase adjusted for inflation via national CPI) really capture the costs for rural workers who depend more on certain inputs than on prices of a basket of consumer goods? These micro dynamics might help us understand why so many rural Asians are taking any opportunity to get out of agriculture, even for alternatives like low-wage manufacturing work.

  4. Jacob

    Could you please not put photographs in the background of your charts, and could you pick line colors/styles that are a bit more distinct for your line charts? (You have Bangladesh, China, India, Myanmar, and Pakistan all as slightly different shades of blue, and it’s almost impossible to figure out precisely which is which.)

    I recommend the books of Edward Tufte (particularly his first, The Visual Design of Quantitative Information) to anyone who makes data displays; following his advice, e.g. avoiding “chartjunk”, makes for dramatically more legible and useful charts.

  5. Jacob

    By the way, the little infographic at the bottom would be more useful if presented as a simple table of numbers, or perhaps a paragraph. In its current form it’s very visually distracting but illegible; there’s no reason to make a giant image full of irrelevant arrows and symbols to present 12 data points.

  6. Gareth Price-Jones

    Hmm, wonderful news if true, but rather optimistic I think, I’d want to learn more about the detail – are wages translating into better living standards and being invested in resilience, or being absorbed by higher input costs and regular disaster recovery? The extrapolations likewise seem heroic – in terms of anticipating significant shifts in production to Africa it glosses over the huge challenges in terms of governance, security, logistics and utilities in the poorest parts of Africa, and also contradicts the rather depressing special report in last weeks Economist which suggests that mechanisation is becoming so cheap that it’s cheaper than even the lowest wages, and that therefore industrialisation as a route out of poverty is becoming a dead end.

  7. Elise

    In addition to Gareth and Andrew’s comments, I would also raise the question of whether we really want to be living in an increasingly industrialised world. Call me an idealist, but I would like to also like to see these types of studies consider issues such as quality of life and ecological impact (among others), particularly in the long term, before encouraging anyone to’dust off their industrial policy plans.’

    • Duncan Green

      Hmm, thanks Elise, but I’ve always been pretty sceptical about the ‘we have to save them from industrializing themselves’ view. The penny dropped while visiting an idyllic organic farming community in Thailand, and noticing that all the farmers were old. ‘all the young people have gone to the factories, and we just can’t get them to come home’ said their parents. That’s either an awful lot of false consciousness, or else staying on the farm is a lousy alternative, even when it’s a nice one.