Income Generation and Poverty Reduction: Experiences of Selected Asian Countries (Development...

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DEVELOPMENT PAPERS NO. 26

Income Generation and Poverty Reduction:

txpenences or Selected Asian Countries

United Nations ESCAP

New York, 2005 ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

DEVELOPMENT PAPERS NO. 26

Income Generation and Poverty Reduction: Experiences of Selected Asian Countries

United Nations publication Sales No. E.05.11.F.21 Copyright O United Nations 2005 All rights reserved Manufactured in Thailand ISBN: 92-1 -1 20432-1 ISSN: 0255-9250 STlESCAPl2371

Development Papers is a series of studies issued by the Poverty and Deve- lopment Division of the Economic and Social Commission for Asia and the Pacific (ESCAP). The Division is also responsible for the annual Economic and Social Survey of Asia and the Pacific, the annual Key Economic Developments and Prospects in the Asia-Pacific Region, and the biannual Asia-Pacific Deve- lopment Journal.

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PREFACE

The present volume of Development Papers addresses the subjects of poverty alleviation and income and employment generation in selected Asian countries. It is based on country assessment studies carried out under the project on "Strengthening income and employment generation for vulnerable population groups in Central Asian countries during economic transition" generously funded by the Government of Japan. The publication includes four papers: (a) an overview paper on policy issues and challenges faced by the Central Asian countries in trying to strengthen their income and employment generation for poverty reduction; (b) a country study on the relevant experience of Azerbaijan in implementing income and employment generation programmes; (c) country studies on the poverty reduction experiences of China and Viet Nam; and (d) a country study on the Malaysian experience in the accumulation of social capital and poverty eradication.

The economic transformation to a market-based system that has been going on in Central Asian countries for more than a decade has been much more difficult than originally expected and has resulted in rising poverty and very high levels of income inequality. Poverty alleviation and unemployment have appeared as the main challenges faced by those countries. During the period 1991 to 1995, a sizeable part of the population descended absolute poverty. Indicators of poverty had steadily worsened, and the social safety net had deteriorated greatly, owing mainly to the limited financial resources available for poverty reduction and to the absence of income and employment generation programmes. However, since 1996, the financial and physical indicators of living standards in some of the Central Asian countries have improved owing to resumed economic growth, important gains made in macroeconomic stability, fiscal consolidation, privatization and liberalization of economic activity, and the development of the basic institutions required for the efficient functioning of market economies.

The overview paper on Central Asia brought out the salient features of the transition efforts undertaken in those countries, as well as issues and problems related to poverty reduction and income generation in the subregional economies. One of the main conclusions emerging from the paper as well as the country study on Azerbaijan is that the Central Asian countries need to embark on a broad agenda of macroeconomic reforms and to strengthen income and employment generation programmes, especially for more vulnerable population groups, in order

iii

to make better progress in reducing poverty and unemployment. The other two papers provide illustrative practical applications of poverty reduction programmes implemented in China, Viet Nam and Malaysia from which other developing countries and the countries with economies in transition can benefit.

Ravi Ratnayake Chief Poverty and Development Division

CONTENTS

Preface ...........................................................................................

I . STRENGTHENING INCOME AND EMPLOYMENT GENERATION IN CENTRAL ASIA: POLICY ISSUES AND CHALLENGES ..............................................................

.............................................................................. lntroduction

................... A . The socio-economic profile of Central Asia

............ B . Poverty. unemployment and income distribution

C . Policy issues and challenges .........................................

D . Conclusions .....................................................................

II . INCOME AND EMPLOYMENT GENERATION IN AZERBAIJAN .....................................................................

Impact of economic transformation ................................

Programmes on income and employment protection and generation ................................................

Implementation of the State Programme on Poverty Reduction and Economic Development ............

Measures to strengthen income and employment generation programmes ...................................................

Lessons learned ..............................................................

Ill . POVERTY REDUCTION IN CHINA AND VlET NAM ............

.............................................................................. Introduction

A . Economic reform and economic performance ................

B . Poverty reduction ............................................................

C . Programmes on poverty reduction ..................................

.......................... D . Concluding remarks: challenges ahead

Page

iii

1

1

3

9

14

22

27

27

31

35

38

44

47

47

48

63

73

1 07

CONTENTS (continued)

Page

IV . SOCIAL CAPITAL AND POVERTY ERADICATION: SOME ISSUES FROM THE MALAYSIAN

......................................................................... EXPERIENCE 113

.............................................................................. Introduction 113

A . Explaining social capital ................................................. 115

B . State and social capital .................................................. 118

.............................................. C . Social capital and poverty 123

................................ D . Social capital and entrepreneurship 135

..................................................................... E . Conclusions 140

TABLES

Page

Territory and population of the Central Asian countries. 1 990-2004 ............................................................. GDP growth rates. sectoral shares and inflation .................. Central Asian economies: merchandise exports and their rates of growth. 2001 -2004 .................................... Central Asian economies: merchandise imports and their rates of growth. 2001 -2004 .................................... Percentage of the population below the national poverty line in selected countries. 1988-2003 ...................... Unemployment rates. 1 992-2004 ........................................... Gini coefficient in selected countries. 1 988-2001 ................. Percentage of the population below the one dollar poverty line in selected countries. 1988-2001 ...................... Selected social indicators ..................................................... Per capita growth and rate of change in the rural poverty rate in China. by region ........................................... Major economic indicators. 1993-2002 .................................. Viet Nam's structure of GDP by economic sector ............... Viet Nam's employment structure by economic sector ........ Viet Nam's merchandise exports and imports ...................... Incidence of poverty in Viet Nam. 1993. 1998 and 2002 ....................................................................... Real annual per capita expenditure and annual growth. 1 993-2002 ................................................................. Poverty by main sectoral occupation for people aged 15 years old or higher who were employed in the preceding 12 months .................................................. Responsibilities of central ministries and other agencies under HEPR ...........................................................

111.1 0 . Access to targeted benefits in 2002 ..................................... I I I . l l . The impact of HEPR benefits ............................................... IV.1. Poverty line income (PLI) ..................................................... IV.2. Incidence of poverty and number of poor

.......................................................... households, 1 970-1 999

FIGURES

Page

111.1. GDP growth rates and inflation rates. 1977-2003 ................. 59

.................................................... 111.2. Poverty reduction in China 63

viii

ADB

AFTA

APEC

ASEAN

CIS

EBRD

ECE

ECO

EIU

FDI

GDP

HDI

I L 0

IMF

MFI

NGO

PRSP

SME

SOE

UNDP

UNICEF

W O

Asian Development Bank

ASEAN Free Trade Area

Asia Pacific Economic Cooperation

Association of Southeast Asian Nations

Commonwealth of Independent States

European Bank for Reconstruction and Development

Economic Commission for Europe

Economic Cooperation Organization

Economist Intelligence Unit

foreign direct investment

gross domestic product

Human development index

International Labour Organization

International Monetary Fund

microfinance institution

non-governmental organization

poverty reduction strategy paper

small and medium-sized enterprise

State-owned enterprise

United Nations Development Programme

United Nations Children's Fund

World Trade Organization

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INTRODUCTION

After the break-up of the Soviet Union in 1991, the Central Asian republics had to confront many new challenges. The newly independent States, having been governed by a central planning system, had to grapple with the complexities of market-based systems and new currencies and exchange rate systems on a trial-and-error basis. A lack of financial resources, particularly after the loss of Soviet subsidies, coupled with a lack of governance skills in market economics and compounded by the confinement of being landlocked made managing these economies in the initial stage of independence a daunting task. Most of these States had to run their economies by borrowing externally, depleting assets and reducing private consumption. The deterioration of human capital, in part due to the migration of skilled workforce, had a deleterious effect on both the quality of life and the economy and further complicated the process of adjusting to new challenges. On top of these challenges, some Central Asian countries were engaged in armed conflicts with neighbouring countries or internal conflicts, which resulted in large numbers of internally displaced persons in those countries.

As a result of these negative developments, all countries in Central Asia experienced economic distortion and contraction, deterioration in social services and infrastructure and an increase in poverty. Annual real GDP dropped by as much as 50 per cent in some countries

* Prepared by Amarakoon Bandara, Muhammad Hussain Malik and Eugene Gherman, Economic Affairs Officers, Poverty and Development Division. The paper is an expanded and updated version of an earlier paper entitled "Poverty in countries of Central Asia", published in the ESCAP Bulletin on Asia- Pacific Perspectives 20041'05.

I. STRENGTHENING INCOME AND EM PLOY M ENT GENERATION IN CENTRAL ASIA: POLICY ISSUES AND CHALLENGES*

L 1

making it more difficult for them to recover even though many countries have registered positive growth since 1996. Average growth during 1991-1996 was negative for all Central Asian countries, dragging a large number of people into poverty. Several of the economies are yet to recover to the levels that prevailed prior to independence. Although many Central Asian countries have since made attempts to reform their economies, the results are not yet encouraging.

Despite a reversal of asset depletion in most Central Asian economies since 1996 as a result of reforms, with some countries even making significant strides in the transition to a market economy and recording double-digit economic growth rates, job opportunities have not grown sufficiently and economic gains are yet to be translated into higher living standards. Output growth in recent years has not been accompanied by sufficient employment generation as the business environment has not been supportive enough for new private enterprises to grow and little restructuring of existing ones has taken place. New investment has been limited by interference in business activities by the government bureaucracy, a shortage of skilled human resources and political instability. Meanwhile, since independence, ineffective governance and corruption have become serious impediments to growth and poverty reduction.

How can the Central Asian countries respond to these challenges? What kind of a development framework would bring in maximum benefits for Central Asian economies that would reduce poverty, create adequate employment opportunities and improve social welfare? How can the opportunities arising from a robust Asia-Pacific economy be seized? The objective of the present paper is to analyse socio- economic conditions in Central Asian economies, identify policy challenges and propose a development policy framework for strengthening income, reduce poverty and generate employment. The paper is organized as follows: section A gives a brief summary of the current socio-economic conditions in Central Asia and will review the transition process of Central Asian economies with a view to identifying policy issues and challenges; section B provides an overview of the poverty situation, unemployment and income distribution; policy issues and challenges related to income and employment generation and reducing poverty in Central Asian economies are presented in section C; and section D summarizes the findings and policy conclusions.

A. THE SOClO-ECONOMIC OF CENTRAL ASIA

: PROFILE

The Central Asian countries have many common historical and geographical characteristics. All of the countries belonged to the Soviet Union and were integrated into that country's division of labour. Geographical proximity and a rich history with a cultural mix of East and West created the basis for intensive trade and cultural links between the people of Central Asia. Covering more than 4 million square kilometres and home to about 73 million people, the Central Asian countries have a good foundation for subregional cooperation (table 1.1). The subregion is richly endowed with agricultural, mineral, and fuel resources. Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan have substantive hydrocarbon deposits, the exploitation of which constitutes their principal export prospect. Additional advantages of the subregion are human resources with a high level of education and scientific and technical potential.

Table 1.1. Territory and population of the Central Asian countries, 199O-2OM

Source: Website of the Interstate Statistical Committee of the Common- wealth of Independent States (www.cisstat.com), 4 February 2005.

The Central Asian countries accounted for more than 18 per cent of the total territory and about 23 per cent of the total population of the former Soviet Union in 1990. The population of the subregion was 66 million then but had increased to 73 million by 2004. The economies differ widely in area and population. Kazakhstan is the largest country

87 70

2 717 199 143 4a% 447

4 181

3 m 7 131 5456 16 (191 4 367 5 248 3622 21) 322 $6 130

3763 7 535 5 w 16 533 4 547 5885 4565

22 978 71 192

3 216 8 347 4 315 15 o$% 5 121 6 771 4845 25 116 72 798

in area and the second most populous. The most populous country is Uzbekistan, with more than 25 million people. The least populous and the smallest country in area is Armenia.

Central Asia is naturally ideal for agriculture. The countries of the subregion accounted for 21 per cent of total agricultural production of the former Soviet Union in 1989, close to their share of the population. The cotton production of the former Soviet Union was totally concentrated in Central Asia. Armenia and Georgia focused on fruits and vegetables, but climate and soil gave an undisputed advantage to the latter; Georgia was the only significant domestic citrus producer in the former Soviet Union. Azerbaijan produced cotton, grapes, other fruits and berries, and vegetables. Kazakhstan raised primarily grain and livestock, while Kyrgyzstan was a major wool producer in the former Soviet Union. The remaining Central Asian republics specialized in cotton-growing, although they raised fruits and vegetables as well. Therefore, the subregion has a competitive advantage in producing grain, cotton, meat, dairy products, fruits and vegetables and can be self-sufficient in food.

The share of every Central Asian country in the industrial output of the former Soviet Union was lower than its population share. The Central Asian economies produced more than 7 per cent of the crude oil and 18 per cent of the gas in the former Soviet Union in 1989. The Central Asian subregion was among the main producers of electric power, machine-building, heavy industry and building materials in the 1980s. As a matter of fact, the Central Asian countries produced intermediate goods for the European countries of the former Soviet Union. The share of industry in GDP has remained high in Armenia, Azerbaijan and Kazakhstan, reflecting significant oil and gas deposits as well as large deposits of other natural resources, including coal, many rare and precious metals, including gold (table 1.2). However, in recent years, the services sector has played a key role in generating GDP in Central Asian countries. This sector accounted for more than half of GDP in Georgia, Kazakhstan and Tajikistan in 2003.

All the Central Asian countries continue to be economies in transition with the reform agenda in different stages of completion. Macro- economic reforms initiated in the subregion have many common features. The most important aspects of these relate to macroeconomic stabilization, financial sector reform, tax reform and exchange rate management. The Central Asian economies experienced hyperinflation, recession of industrial and agricultural production, and worsening living standards. The impact of their economic transformation on development was similar to

Table 1.2. GDP growth rates, sectoral shares and inflation

Sources: IMF, International Financial Statistics (Washington, D.C., IMF), various issues and World Economic Outlook Database April 2005, at website www. imf.org/external/pubs/ft~weo/2005/02~data/index. htm, 1 6 June 2005; El U, Country Reports and Country Forecasts (London, EIU, 2004 and 2005), various issues; website of the Interstate Statistical Committee of the Commonwealth of Indepen- dent States (www.cisstat.com), 26 October 2004 and 3 February 2005; and World Bank, World Development Indicators 2005 (online).

that experienced by Azerbaijan, which is described in detail in chapter II. The economic policy stance of countries in Central Asia focused on ensuring durable and stable growth through, among other avenues, the maintenance of a more balanced budget, low inflation rates and relatively steady currencies. A matter of some concern, however, was the output of most of the economies of the subregion, which remained 25 to 30 per cent below the 1989 GDP level. Only Uzbekistan, Turkmenistan and Kazakhstan managed to exceed their 1989 GDP level during the period 2001 -2003.

As indicated earlier, average growth during the period 1 991 -1 996 was negative for all the Central Asian countries (table 1.2). The recovery process, which had started in 1997, strengthened further during the period 2001-2004 thanks to the robust global economy, solid economic growth in the main trade partner of the Central Asian economies, the Russian Federation, and stable demand for and favourable prices of major subregional export products. Azerbaijan, Kazakhstan and Turkmenistan are net exporters of oil and gas. These economies benefited greatly from the significant rise in energy prices. In addition, economic growth in those countries was underpinned by strong domestic demand and reinforced by strong subregional linkages that boosted exports from energy importers. In 2004, GDP growth in Azerbaijan and

Average annual GOP Average annuaj growth rat@ innation rate

1991- 1997- 2o04 1991- 1997- 2oo$ 1996 2003 1996 2003

Armenia -10.1 8.0 10.1 1 687.6 4.5 7.0 Azerbaijan -12.8 9.4 10.2 707.3 0.4 6.7 Georgia -15.4 5.3 8.4 3 316.6 7.0 5.7 Katakhstan -7.6 6.4 9.4 894.1 9.6 6.9 Kyrgyrstan -8.9 4.6 7.1 329.5 13.8 4.1 Tafiistan -14.2 7.0 10.6 807.0 35.0 6.8 Turkmenistan -8.5 13.6 7.0 1 460.2 23.7 9.0 Urbekistan -2.9 3.7 4.9 .0 29.5 2.4

sectoral shares in GLV 2003

Agri- Indus- Ser- culture try vices

24 39 37 14 55 31 20 25 54 8 38 54

23 20 56

35 22 43

39 23 38

Kazakhstan remained rapid owing to high global oil prices and associated foreign direct investment. Higher metals prices benefited Tajikistan (aluminium) and Kyrgyzstan (gold). Uzbekistan maintained its modest rates of GDP growth, exceeding 4 per cent during the period 2001-2004.

From 2001 to 2004, the Central Asian countries emerged as one of the fastest-growing regions in the world economy, all the economies posting solid, albeit varying, rates of GDP growth. This outcome followed more than a decade of uneven economic performance and setbacks that accompanied the difficult economic transformation in the subregion. Economic growth continued to be high owing to a combination of soaring international prices of natural resources, strong exports and solid domestic demand. The main macroeconomic indicators also show consistent expansion in industrial and agricultural output. Domestic demand grew at double-digit rates in almost all the countries, while strong consumer spending was sustained by rising real incomes.

In recent years, Central Asian countries have made impressive progress on containing inflation with sound monetary and fiscal policies in the context of a commodity price boom. A tight monetary policy contributed to the sharp drop in the average annual rate of inflation in Uzbekistan from more than 530 per cent in 1991 -1 996 to 29.5 per cent in 1997-2003. In 2004, inflation in Uzbekistan fell to 2.4 per cent. The annual inflation rate in Armenia, Georgia and Turkmenistan exceeded 1,000 per cent in 1991-1996. However, from 1997 to 2004, the downward trend continued and inflation fell to a manageable level in all of the Central Asian countries. Average annual inflation in Azerbaijan in 1997-2003 was 0.4 per cent but increased sharply to 6.7 per cent in 2004. The acceleration in consumer price inflation was attributed mainly to strong domestic demand resulting from high oil-related investment and increased oil export revenues. For the same reasons, consumer price inflation reached 6.9 per cent in Kazakhstan, exceeding the government target range of 5 to 6 per cent. In Kyrgyzstan, consumer prices rose by 4.1 per cent in 2004 compared with an average annual rate of 13.8 per cent recorded in 1997-2003.

The Central Asian countries made considerable progress towards trade liberalization through the elimination of State monopolies on foreign trade, the realization of licensing requirements, and the implementation of significant tariff reforms. However, the progress towards trade liberalization has been more pronounced in Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan and Tajikistan, while it was more gradual in Turkmenistan and Uzbekistan. The Central Asian countries established relatively open and liberal regimes and made considerable

progress to abolish State monopoly privileges, unify exchange rates and simplify the regulatory and fiscal frameworks governing foreign trade. The measures to liberalize trade also included the elimination of non-tariff trade restrictions and export duties, the surrender of export earnings, and registration requirements for export contracts.

As a result, in 2001-2004, exports grew significantly and the countries of the subregion were able to diversify their markets. In 2004, Central Asia as a whole continued to record considerable trade expansion. Export earnings rose by more than 50 per cent in Kazakhstan, by about 40 per cent in Azerbaijan and Georgia, and by more than 20 per cent in Kyrgyzstan (table 1.3). Despite a narrow export base, export earnings in Kazakhstan rose from US$ 12.9 billion in 2003 to more than US$ 20 billion in 2004. The economy ran a trade surplus of US$ 7.3 billion in 2004 compared with a surplus of US$ 4.5 billion recorded in 2003. However, primary commodities dominate the exports of the Central Asian countries, making their export revenues highly sensitive to changes in commodity prices. Azerbaijan, Kazakhstan and Turkmenistan depend significantly on foreign sales of crude oil, natural gas and oil products. Exports of base and ferrous metals are important to Kazakhstan, Kyrgyzstan and Tajikistan while cotton and light industry products are important to Uzbekistan.

Table 1.3. Central Asian economies: merchandise exports and their rates of growth, 2001-2004

Sources: Website of the Interstate Statistical Committee of the Common- wealth of Independent States (www.cisstat.com), June 2005; and EIU, Country Reports (London, EIU), various issues.

a Figure for 2003-2004 are EIU estimates.

valsre, (mNm of us &rs)

m a 1 2002 2aa rn Ammia 71 5 13.4 48.7 35.8 4.2 Ambaijan 3 614 33.0 -6.4 19.6 39.4 Georgia 649 3 . 0 1.7 38.5 39.6 ICarakhstan 20 096 -5.3 11.8 33.7 55.5 Kyrgyzstm 71 9 6 . 5 2.0 19.8 23.5 T@&St&W M 5 -1 6.7 13.3 8.3 14.8 T u M i t m a 3 870 6.0 13.1 27.2 16.7 Uzl>ekistma 4380 4 . 1 -8.9 24.6 15.7

The imports of the Central Asian countries continued to be dominated by technological goods, machinery and equipment and the value of import spending increased in 2004 by about 40 per cent compared with 2003. The construction of new oil and gas pipelines in the hydrocarbon-exporting countries of the region increased import expenditures in Kazakhstan by more than 50 per cent and by more than 30 per cent in Azerbaijan in 2004 in comparison with 2003 (table 1.4). Import expenditures in Georgia grew by more than 60 per cent in 2004 owing to an increase in capital goods and services related to pipeline construction and other infrastructure development and energy imports for the growing industrial sector. The Central Asian countries have redirected their trade away from the traditional partners of the former Soviet Union to non-CIS countries. Although the Russian Federation remains one of their main trade partners, Germany, Italy, China and the United States of America have now become major trade partners of the Central Asian countries.

Table 1.4. Central Asian economies: merchandise imports and their rates of growth, 2001 -2004

Sources: Website of the Interstate Statistical Committee of the Common- wealth of Independent States (www.cisstat.com), June 2005; and EIU, Country Reports (London, EIU), various issues.

a Figure for 2003-2004 in f.o.b. values are EIU estimates.

Looking forward, while GDP growth is expected to moderate to more sustainable levels in 2005 and 2006, the outlook remains generally favourable. External and commodity price developments are expected to be generally supportive of activity, although capacity

Atmenin 1 351 kerbaijm 3504 Georgia 1 847 KluakhWm 12 781 Kytw-n !341 T a j i 1 375 Turkmgnithn a 3 320 U*Mrn* 3 010

4.5 22.4 4.2

25.9 -15.8

1.8 26.6 4.6

13.0 29.6 16.4 57.7 6.0 s.!j 2.1 27.7

26.0 22.1 5.0 22.4

-3.7 18.5 -14.4 8.3

5.6 33.4 61 9 52.0 31.2 56.1 17.1 23.0

Atmenin 1 351 kerbaijm 3504 Georgia 1 847 KluakhWm 12 781 Kytw-n !341 T a j i 1 375 Turkmgnithn a 3 320 U*Mrn* 3 010

4.5 22.4 4.2

25.9 -15.8

1.8 26.6 4.6

13.0 29.6 16.4 57.7 6.0 s.!j 2.1 27.7

26.0 22.1 5.0 22.4

-3.7 18.5 -14.4 8.3

5.6 33.4 61 9 52.0 31.2 56.1 17.1 23.0

constraints and inadequate investment are beginning to limit the benefits that some economies can reap. The highest GDP growth is expected in Azerbaijan (21.6 per cent in 2005 and more than 38 per cent in 2006), the lowest in Uzbekistan (2.5 to 3.5 per cent), and other economies are expected to grow by 5 to 8 per cent annually. Regarding inflation, the inflationary pressures will re-emerge owing to higher energy prices and expansionary fiscal policies, presenting policymakers with a challenging external environment. Monetary policy and banking supervision need to deal with the challenges of rapid money and credit growth in this environment. Most economies in the subregion will remain vulnerable to changes in the external environment. Greater harmonization of trade rules, encompassing multilateral standards, the liberalization of transit regimes with neighbouring countries, and the removal of non-tariff barriers, will pave the way for growth in order to realize the gains from closer economic integration with larger economies and the diversification of the export base.

A key issue in macroeconomic policy facing most, if not all, countries in Central Asia in the short to medium term is achieving macroeconomic stability to improve the fiscal position, the business environment and the investment climate. Diversification beyond the energy sector is important to help achieve stable medium-term growth. Key systemic institutional and structural reforms are still necessary to establish well-functioning product, labour and financial markets. Improv- ing the living standards of the population and achieving the Millennium Development Goals remain major medium-term priorities for all of the countries of Central Asia.

B. POVERTY, UNEMPLOYMENT AND INCOME DISTRIBUTION

Extreme poverty in Central Asian countries was considered to be almost non-existent during the time of the Soviet Union. Guaranteed employment and subsidies from the State provided almost the entire population with food and other basic necessities. Despite this, the standard of living in the Central Asian republics in general was low as compared with the other republics of the Soviet Union. After the Central Asian countries gained independence in 1991 and their transition to a market economy brought severe economic hardships for most of the population, the discussion on rising absolute poverty levels in these countries gained momentum.

Some efforts led by the World Bank and IMF were made to have some notion of the levels of absolute poverty in Central Asian countries prior to their gaining independence (IMF and World Bank, 2002). For this, poverty estimates prepared for 1988 were based on national poverty lines, which were set at around US$ 2 (in purchasing power parity terms). The setting of the poverty line at a somewhat higher level was necessitated by the cooler climate of the Central Asian countries, requiring additional expenditure on heating, winter clothing and food. The available results indicate that poverty levels were quite pronounced even in l988 (table 1.5). In Tajikistan, the incidence of poverty stood at 59 per cent, followed by Kyrgyzstan (37 per cent), Azerbaijan (33 per cent) and Armenia (18 per cent). Because of the limitations of the data, it would be advisable not to draw too many conclusions from these numbers. However, these results show not only that absolute poverty existed in 1988 but also that in some Central Asian republics it was quite substantial.

Table 1.5. Percentage of the population below the national poverty line in selected countries, 1988-2003

Sources: ESCAP, based on IMF and World Bank (2002), and country studies on Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan and Tajikistan prepared for national seminars on strengthening income and employment generation programmes for poverty eradication in Central Asian and Caucasus countries held in the respective countries during April and May 2004.

The incidence of poverty increased rapidly after the Central Asian countries gained independence and the process of transition to a market economy began. During the second half of the 1990s, more work to estimate poverty levels in these countries was carried out. Some estimates of poverty levels based on national poverty lines are reported in table 1.5. The incidence of poverty reached 55 per cent in Armenia in 1998, 62 per cent in Azerbaijan in 1995, 43.4 per cent in Kazakhstan in 1998, 64.1 per cent in Kyrgyzstan in 1999 and 83 per cent in Tajikistan in 1999.

1988 1995 IQ96 1@@7 IS8 19m W O O 2001 mix 2003

Armenia 18.0 .. 54.7 .. 55.0 .. .. 56.9 .. Azerbdlijan 33.0 62.0 .. .. 49.0 46.7 4x0 Kazakktan .. .. 34.6 43.0 43.4 34.5 31.8 28.4 24.2 .. Kyrgyrstan 37.0 .. .. 81.0 .. 64.1 82.0 47.6 44.4 .. TajiWstan 59.Q ._ .. 83.0 .. .. 68.0

As the economies of the countries in the region started to recover in late 1990s, poverty levels started to come down. The results in the table show that all of the countries have registered some reduction in poverty in recent years. It appears that the worst is over as far as poverty levels are concerned.

Several factors contributed to the sharp increase in poverty in Central Asian countries over most of the decade of the 1990s. These included a contraction in GDP, galloping inflation, widespread unemployment and falling real wages and incomes. Some details on these factors have already been provided. Official statistics on unemployment rates are given in table 1.6. All of the countries experienced an increase in unemployment during the 1990s. However, open unemployment rates are reportedly to be low. The unemployment rates in Azerbaijan, Tajikistan, Turkmenistan and Uzbekistan were less than 3 per cent. All of these figures reflect only the registered unemployed; actual unemployment rates are much higher.' In Armenia and Kazakhstan, unemployment

Table 1.6. Unemployment rates, 1992-2004

Sources: ADB, Asian Development Outlook 2005 and Key Indicators 2004 (available online at www.adb.org/Statistics), 20 June 2005; and ILO, LABORSTA Labour Statistics Database available at http://laborsta.ilo.org/, 20 June 2005.

a Data refers to 1994 for Kazakhstan, 1993 for Kyrgyzstan and 1991 for Turkmenistan.

Data refers to 1996 for Georgia and 1997 for Turkmenistan. C Data refers to persons aged 16 to 63 years.

Data as of December of each year. For 2002 methodology revised; data not strictly comparable.

' This impression comes from country studies on Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan and Tajikistan prepared for the national seminars on strengthening income and employment generation programmes for poverty eradication in Central Asian and Caucasus countries, held in the respective countries during April and May 2004.

1.8 6.7 11.7 10.4 9.4 10.1 0.2 0.8 1.2 1.3 1.4 1.4 1.5

2.4 3.5 5.5 1.2

1.7 5.7 7.6 7.% 8.6 9.0 0.4 2.0 2.7 2.3 2.5 2.5 2.Q 2.4 1.9 2.4 2.6 2.5 2.6 0.1 0.3 0.3 0.3 0.3 0.2 0.2

7.5 11.0 12.8 10.4 9.4 8.8 8.4

rates for some years were over 10 per cent. The problem of disguised unemployment is much more serious in most Central Asian countries as a large number of people are partially employed. Data on disguised unemployment rate is rarely available; in Kyrgyzstan it was around 22 per cent in 1998.

The transition to a market economy was expected to increase income inequality within the countries. However, the deterioration in income distribution occurred very rapidly and in some countries the Gini coefficient nearly doubled in value from the pre-transition leveL2 In Kyrgyzstan, the value of the Gini coefficient increased from 26.0 in 1988 to 53.7 in 1993 and remained around that level until 1996 (table 1.7). The income inequality situation of the country started to improve after that. In Uzbekistan, the Gini coefficient rose from 25.0 in 1988 to 45.4 in 1998 but came down to 27.0 in 2000. The increase in income inequality in Kazakhstan was relatively moderate. However, Turkmenistan's Gini coefficient rose from 26.4 in 1988 to 40.8 in 1998. Despite problems with the quality of distributional data, it can be concluded that income distribution broadly worsened in most countries of the region after 1990 and some improvements have been recorded in more recent years. Worsening income inequality coupled with a sharp decline in aggregate output aggravated the poverty situation in the countries of the region. It is a major challenge for these countries to continue their progress towards a full market economy and at the same time prevent the worsening of income inequality. This is important for tackling the problem of poverty.

Table 1.7. Gini coefficient in selected countries, 1988-2001

Source: World Bank, PovcalNet website (http://iresearch.worldbank.org/ PovcalNet), 6 May 2005.

* This point has also been raised by the Economic Commission for Europe in a recent publication. For details, see ECE, 2004, pp. 165-167.

1!%38 1993 1995 1996 1997 19B 1999 2000 2001

Armenia Amrbaijan Georgia Karakhstan Kyrgyzstan Tajikistan Turkmeniotan Uzbekirtan

26.7 26.0

26.4 25.0

32.7 53.7

35.4 33.3

.. 44.4

.. 37.1

.. 35.3

36.0 36.1

40.5

37.9

37.4

36.0 31.5 40.8 45.4

38.1

34.6

38.9

30.3

27.0

36.5 36.9 31.3 29.0

As far as the achievement of the Millennium Development Goals (MDGs) is concerned, there is need for rethinking of time frame in the case of these countries. The base year for the MDGs is 1990 and these countries had a very good record in terms of many MDG indicators at that time. The situation started to deteriorate thereafter. For example, the poverty situation worsened significantly after 1990 when these countries became independent and began their transition to a market economy. One of the goals under the MDGs is to reduce extreme poverty by half by 2015 as compared with 1990. Not only are data on extreme poverty hard to come by for the base year of 1990, but it is not wise to expect a reduction in extreme poverty by half from very low levels in 1990. One proposal is for the base year for these countries to be changed to a later year, when poverty levels had peaked. There is a need for serious debate on how MDG targets should be interpreted and their progress measured in the case of these countries.

Available data on the dollar a day per capita poverty line are reported in table 1.8. On the basis of this definition of poverty line, in 1988 poverty was non-existent in all the countries for which data are available. However, in general there was a sharp increase in poverty after these countries gained independence and became transitional economies. Data for more recent years show lower levels of poverty.

Table 1.8. Percentage of the population below the one dollar poverty line in selected countries, 1988-2001

Source: World Bank, PovcalNet website (http://iresearch.worldbank.org/ PovcalNet), 6 May 2005.

Poverty is a multidimensional phenomenon, and social indicators capture some dimensions of poverty other than income. The values of some social indicators continue to remain impressive. Adult literacy

f988 1993 1995 7996 1997 1998 7999 2000 2001

Armenia .. 6.7 .. 12.8 Aaerbaijan .. .. 11.0 .. 3.7 Georgia .. 1.7 1.2 1.6 2.6 2.8 2.7 Kazakhstan 0.0 0.4 .. 1.9 .. 0.1 Kyrgyzstan 0.0 8.0 .. 1.6 .. 0.7 2.0 0.B Tajikistan .. 13.9 Turkmenistan 0.0 20.7 .. 12.1 Uzbekistan 0.0 3.3 .. 19.2 .. 17.3

rates are close to 100 per cent in most countries (table 1.9). However, life expectancy decreased somewhat in Kazakhstan and Turkmen istan. Infant mortality rates increased in Kazakhstan and Uzbekistan. The human development index shows some deterioration in a few countries.

Table 1.9. Selected social indicators

Sources: UN DP, Human Development Report 2004 (Statistics available at (http:Nhdr.undp.orglstatistics/data), 21 June 2005; United Nations, World Population Prospects, data available at (http://esa.un.org/unpp), 21 June 2005; and UNICEF website (http://www.childinfo.org/cmr/revis/dbl .htm), 20 June 2005.

C. POLICY ISSUES AND CHALLENGES

Lack of institutions, human capital and regulatory mechanisms to support market economies and a high concentration of export commodities and markets are the hallmarks of the Central Asian economies, and these are the things that hamper sustainable growth. This section looks at how the Central Asian countries can benefit from policy reforms, outward orientation and accelerated integration with the world economy in order to raise the living standards of their people.

1. Macroeconomic policies and institutional set up

The challenges faced by the Central Asian countries in their transition to a market economy and economic development with equitable distribution of the benefits of growth are manifold. In this context, a stable macroeconomic environment with a set of consistent policies

Adult literacy rate (% Life expectancy Infant mortalify Human devehp-

af birth rate rnent index value ages 15 and above)

1990 2002 1992 2002 2o02 1995 2005

Armenia 99.4 Azerbaijan 97.0 Georgia 100.D Kazakhstan 99.4 Kyrgyzstan 97.0 Tajikistan 99.5 Turkmenistan 98.8 Uzbekistan 99.3

68.7 71.4 49 65.6 66.9 74 70.5 70.5 24 65.2 63.2 54 65.8 66.8 69 63.1 63.5 57 63.3 62.4 80 66.2 66.5 47

30 74 24 61 52 53 76 52

0.801 0.730 0.747 0.774

0.629 0.697 0.664

0.689

0.754 0.746 0.739 0.766 0.701 0.671 0.752 0.709

geared to accelerating economic growth would be of paramount importance. This should be supported by an efficient institutional set-up, which includes a properly functioning regulatory mechanism.

A stable macroeconomic environment that is supportive of sustainable and equitable growth would require coherent and consistent policies, particularly in the areas of monetary policy, fiscal policy, exchange rate policy, external trade and public debt management. Although in such countries as Armenia, Azerbaijan, Georgia and Kazakhstan steps have been taken to bring down the rate of inflation to one-digit levels through monetary and fiscal policies, further fiscal consolidation would be needed to sustain the gains. In such countries as Tajikistan, Uzbekistan and Turkmenistan, high rates of inflation remain a concern. In these economies, the tax base is narrow and tax administration weak, adding to the pressure on the budget. Fiscal consolidation through better tax administration, broadening the tax base and expenditure control would be necessary to improve the fiscal situation.

Despite recent efforts to reduce external debt, it remains high and has been growing rapidly since independence in most Central Asian countries, requiring effective debt management practices. The use of the windfall gains from high oil prices to repay part of external debt would be one option to reduce the debt burden in oil-exporting Central Asian economies. Development of financial and other markets are also required not only to make monetary and fiscal policies efficient but also to provide a strong foundation for sustainable growth. The elimination of restrictive financial practices, particularly in countries such as Tajikistan and Uzbekistan, would be highly desirable to stimulate growth. The completion of the systemic reforms undertaken since independence is also essential to rehabilitate the critical infrastructure in the countries of Central Asia.

2 Economic diversification and trade liberalization

The diversification of the production and trade base of Central Asian countries is another challenging but essential policy option to promote growth and generate employment. Currently, most countries are heavily dependent on a limited range of products, which in turn exposes them to vulnerability in terms of external price fluctuations. Conse- quently, diversification into labour-intensive sectors would be necessary for broad-based growth in employment and income and to reduce the high levels of vulnerability to unexpected swings in the price of oil and other primary commodities and to relatively inelastic external demand for these commodities. However, individual countries need to prioritize their

sectoral development needs, taking into account domestic and external trade-offs.

As the rural sector may not be able to provide employment opportunities for the increasing labour in the rural areas, it may be necessary to strengthen the ability of non-farm agricultural activities to absorb the labour. This is particularly important when increases in agricultural labour productivity reduce the demand for labour. The informal sector could be another source of employment as many new employment opportunities are created in the informal sector.

As described earlier, the economies of the subregion have an advantage in power generation, agricultural production and mineral resource extraction. However, productivity improvements in those sectors should be considered on a priority basis not only to remain competitive in world markets but also to maximize gains. The means that could be used to increase production and efficiency are privatization and the formation of public-private partnerships and community-based programmes. Appropriate management and exploitation of natural resources, in particular oil reserves, will be crucial to secure sustained investment and growth. Additionally, a revival of the agricultural sector would be another key to generating employment in Central Asia, where fertile land is abundant. Productivity improvement and the re-establishment of an extensive distribution network within the subregion would be necessary to exploit the advantageous conditions and economies of scale in agriculture.

3. Improving the business environment

The private sector could play an important role in economic development in open economies. However, the public sector still plays a major role in most Central Asian economies. Many inefficient public sector firms are kept alive through government budgetary support. While this may be necessary to protect the employment and livelihood of those working in these firms, such practices make it difficult for new firms trying to gain entry and delays the evolution of competitive firms. The private sector is yet to emerge as a force to be reckoned within the formal sector in many Central Asian countries as the existing conditions are not conducive for the private sector to operate on a financially viable basis. A favourable business climate is missing in several Central Asian countries. For example, in Uzbekistan, the centralized decision-making and State directives to all key sectors have discouraged private investment and employment generation. Attracting private invest-

ment would require a combination of regulatory and appropriate public policies. Among the issues to be addressed are:

Implementing policies to reduce investment risk and the cost of doing business, including minimizing red tape,

Increasing efficiency in key institutions, such as the tax and customs administration,

Improving the transparency, accountability and efficiency of public institutions,

Strengthening the legislative and judicial branches of government.

At present, the growth of the private sector is most visible only in the informal sector as the lack of employment opportunities has forced people of working age to become self-employed by starting small businesses for survival. There is a need for the rapid development of formal sector activities so as to generate much-needed employment opportunities and economic diversification in a more efficient way.

Countries in the subregion still face the challenge of how to foster, unleash and sustain entrepreneurship and private sector activities. In this connection, there is a clear need for more effective institutions, policies and basic infrastructure to promote and facilitate the building of the private sector. In this regard, it would be critical to effect a change in the mindset to resist the tendency towards a centrally planned economic setting and embrace a more dynamic, private sector entrepreneurial setting and to understand that there is a trade-off between heavy public intervention and growth.

4. Regional cooperation

One of the prime factors in the economic slowdown during the transition period after independence was the breakdown of the production and distribution networks that had operated under the Soviet system of central planning. The production and distribution networks that existed prior to independence could be reinvigorated and made more efficient through regional cooperation. It could also be used as a mechanism to face challenges arising from disadvantages and other bottlenecks to development.

In the above context, strategies for income and employment generation would greatly benefit from the formation and strengthening of regional cooperation and cross-border ties. The landlocked nature of

Central Asian economies and their abundant natural resources make regional cooperation, particularly in water, energy, transport and trade, an effective vehicle for economic development in the subregion. The revival of the Great Silk Road could make an important contribution to the goods trade among Central Asian countries. This would enable them to overcome the geographical disadvantage of being landlocked, limited internal markets, limited access to international markets and other bottlenecks to development, and high transport costs.

Despite the fact that most countries in Central Asia are members of either subregional organizations such as the Economic Cooperation Organization (ECO) or cross subregional organizations, such as the Shanghai Cooperation Organization (SCO), they are yet to benefit from them as the ratification process is slow in respect of ECO and is in the early stage of development (ESCAP, 2004b). Early ratification of trade agreements and the full use of the regional cooperation initiatives could enhance intra-ECO trade and help to overcome the barriers arising from the landlocked nature of most Central Asian economies. However, improvements in cross-border and transit facilities would be key to reaping the benefits of trade.

5. Investing in human capital

During the time of the Soviet Union, countries in Central Asia had a good record of human resources development. In particular, educational indicators in terms of literacy rates and school enrolment rates have been comparable to those in developed countries. Physical and human capital have eroded steadily since independence and many Central Asian countries now face an acute shortage of skilled person- nel. The quality of education declined, and health indicators show deterioration during the transition period. A major challenge for these countries, therefore, is to restore and maintain their achievements in human resources development. Higher levels of investment are needed in most countries, particularly in the health, education and social welfare sectors, to ensure the creation of an energetic and skillful labour force that could match demand in a newly transformed economic setup. More financial resources will be needed in the education and health sectors, particularly for rural areas and poor people who have suffered most from the reduction in public expenditure during the early phase of the economic transition.

Investment in human capital is essential not only to transform the private sector into an engine of growth and diversification. It is also

necessary as a measure to counter the negative impact on development arising from the migration of educated and skilled people, particularly those of Russian origin, out of Central Asia. Educational reforms with particular emphasis on the needs of the society at large, including those of private enterprises, would play a critical role in this respect. Such initiatives should be accompanied by efforts to foster employment generation, particularly in labour-intensive sectors.

6. Infrastructure development

An enabling environment for both the public and private sectors to function efficiently is a key to development, which is a fundamental requirement for growth in income and employment opportunities. This would require adequate physical infrastructure, including transport, communication and water supply as well as functioning competitive markets for both inputs and products. Well-developed financial markets that channel resources to entrepreneurs and a favourable legal and regulatory environment would also be necessary to support a broad-based development agenda that 'provides income and employment generation opportunities in both the public and private sectors. Governance, enterprise restructuring and competition policy in Tajikistan and Uzbekistan, banking reforms in Uzbekistan, securities markets reforms in Azerbaijan and Taji kistan and infrastructure reforms in Kyrgyzstan, Taji kistan and Uzbekistan are some key areas where significant progress can be made to facilitate private sector participation and sustained growth (ADB, 2005).

Since independence, infrastructure in many Central Asian countries has been neglected mainly owing to resource constraints. A major issue in this regard is the deteriorating quality of services, imposing heavy costs on development. This in itself emphasizes the importance of the private sector, public-private partnerships and community involvement in service delivery.

7. Employment generation through SME promotion

As indicated above, worsening income inequality coupled with a sharp decline in aggregate output aggravated the income and employment situation considerably in countries of Central Asia. The slow growth of new private enterprises in particular was one of the prime factors behind the poor employment opportunities in these economies. Therefore, it is a major challenge for these countries to continue to ensure broad-based progress towards a full market economy and at the same time prevent deterioration in the distribution of income among various social and

economic groups. Development of private sector enterprises that have significant employment potential would particularly be necessary to increase employment opportunities.

Despite the positive gains in income and employment generation, the development of small and medium-sized enterprises (SMEs) in the formal sector appears to have been hampered by a host of factors. For example, in Kyrgyzstan, multiple requirements for opening enterprises, a high degree of corruption, complicated tax requirements, and limited access to credit funds prevent the creation of a favourable climate for SMEs. Addressing these issues will be vital for SMEs to emerge.

Policies and programmes for broad-based growth should be strengthened on an ongoing basis so that the poor are not left out of the progressive economic restructuring and recovery to come, as experienced by many transition economies, including China and Viet Nam. Employ- ment generation and the provision of social and basic services, particularly for the poor, including agricultural extension services and the development of SMEs, among other things, should be integral components of such programmes.

In this regard, the following are some of the areas and issues for consideration:

Diversified development of the non-oil sector in oil-producing countries and promoting long-term growth (as in Azerbaijan)

Building infrastructure to support SMEs and stimulating agriculture (as in Azerbaijan)

Undertaking community-driven development projects (as in Armenia)

Providing the poor with better access to financial, land, water and other resources (as in Kyrgyzstan)

Undertaking public works programmes and providing training for the unemployed

Improving market access, particularly for the poor

Removing structural constraints, such as limited access to inputs, inadequate marketing and credit systems and obsolete agricultural machinery

8. Improving transparency and good governance

Good governance with clear and transparent signals would be required in order to foster investor confidence, among other stimuli to economic production and trade. Monetary, fiscal and exchange rate policies would play a critical role in growth and development and as such should be exercised appropriately, taking into account the lessons learned from the Asian financial crisis.

Many traditional networks of power and patronage persist in Central Asian countries, impeding the establishment of an impartial rule of law and governance (ADB, 2005). In the absence of an impartial rule of law and good governance, the administrative mechanism could be hampered by corruption, an issue common to almost all Central Asian countries. For example, all Central Asian countries ranked below 1 14 in the corruption perception index in 2004, Azerbaijan ranking 140. A high level of corruption would be detrimental not only to the efficient functioning of the public service but also for the private sector to evolve as a cohesive force in development. Therefore, steps must be taken to maintain the rule of law and adhere to international governance standards.

9. Poverty reduction strategies

The countries of Central Asia, while implementing structural reforms to support the transformation to a market economy since independence, have adopted various measures aimed at poverty reduction. A number of countries in Central Asia3 have introduced Poverty Reduction Strategy Papers (PRSPs) as a vehicle for reducing poverty; others have initiated their own policies outside the PRSP process to tackle poverty problems. Strategies for poverty reduction will take centre stage in Central Asia for two reasons. First, poverty in Central Asian countries is the result of structural changes that have taken place in their transition to a market economy system. Secondly, wide disparities could arise in newly established, market-driven economies. This could disrupt the growth process, thus dragging more people into poverty and making it more difficult to tackle poverty on a sustainable basis.

Of the three main areas of focus under PRSPS,~ infrastructure development serves to develop and maintain rural road networks and basic utilities in Kyrgyzstan and Tajikistan. However, improving irriga-

These include Armenia, Azerbaijan, Georgia, Kyrgyzstan and Tajikistan.

For a detailed analysis, see ESCAP (2004). PRSPs for Central Asian countries are available at www.imf.org.

tion systems has received priority attention in Armenia, Azerbaijan and Tajikistan. Meanwhile, Georgia focuses more on establishing rural markets and improving their linkages to urban markets. Agriculture being the dominant sector in all of the economies of Central Asia, the establishment of distribution networks and storage facilities, land reforms to overcome the small size of land holdings and related productivity losses, and initiatives to increase agricultural productivity to compensate for falling prices will be necessary if such strategies in rural infrastructure development are to make a meaningful contribution to poverty reduction.

Among the capacity-building measures are the training of farmers in management practices and agricultural inputs and the provision of technical support in Azerbaijan and Tajikistan. Government support is aimed at encouraging school attendance in Armenia, Azerbaijan, Kyrgyzstan and Taji kistan, while microcredit facilities are made available for the poor in Armenia and Kyrgyzstan. Meanwhile, social safety nets have become a major support system, especially for the most vulnerable, including the internally displaced people in Azerbaijan and Georgia. Improving efficiency through, among other things, better targeting, would be needed to make such initiatives sustainable. The rehabilitation of institutions for invalids, the elderly and mentally retarded children has also become a major component of social safety nets in Kyrgyzstan and Tajikistan. Meanwhile, food for work programmes in Georgia provides support for idle men and women during off seasons by utilizing their labour for productive purposes.

However, experience suggests that most PRSPs are not linked to national development agendas, making PRSP in its current form an ineffective development tool. Central Asian countries could defy this by strengthening the link between income and employment generation and the PRSPs and making it an integral component of national development plans.

D. CONCLUSIONS

Extreme absolute poverty in Central Asian countries was not considered to be a serious problem during the time of the Soviet Union. Guaranteed employment, social safety nets and subsidies from the State provided almost all of the population with food and other basic necessities. In their transition to market economies following independence, Central Asian countries experienced sharp increases in poverty levels due to output contraction, high inflation and widespread unemployment as

well as a deterioration in social services and infrastructure. Despite a reversal of asset depletion in most Central Asian economies since 1996 as a result of reforms, job opportunities have not grown sufficiently and economic gains are yet to be translated into higher living standards.

The problems encountered by Central Asian economies are manifold. Making the adjustment to a market economy from a centrally planned system itself is a daunting task. Many fundamental requirements for operating a market economy efficiently are not properly in place in many Central Asian economies. These countries need a proper macroeconomic environment with a set of consistent policies geared to accelerate economic growth. This should be supported by an efficient institutional setup, which includes a well-functioning regulatory mechanism. Good governance with clear and transparent signaling mechanisms would be required to induce investor confidence.

The public sector still plays a major role in these economies. The growth of the private sector is most visible in the informal sector. There is a need for rapid development of the formal sector so that the private sector can generate much-needed employment and economic growth in a more efficient way. These countries still face the challenge of how to promote the growth of an efficient private sector. There is a need for more effective institutions, policies and basic infrastructure to promote and facilitate the emerging private sector.

Agriculture being the dominant sector in all of the economies of Central Asia, the development of rural infrastructure, focusing on developing and maintaining rural road networks, basic utilities and irrigation systems, establishing rural markets, and improving their linkages to urban markets is important for rural development and poverty reduction.

Governments need to diversify their economies in order to sustain high growth and generate employment. This is particularly important in Central Asian countries as they depend highly on limited products, which in turn makes them vulnerable to price fluctuations. Diversification into labour-intensive sectors would therefore be necessary for growth in employment and income as well as to reduce the economy's vulnerability to swings in the price of oil and other primary commodities.

These countries enjoyed a very good record of human resources development prior to their independence. A major challenge for these countries is to maintain their achievements in terms of human resources development. More financial resources need to be devoted to the education and health sectors not only to take advantage of the private

sector in economic development but also as a measure to counter the negative impact on development arising from the migration of educated and skilled people, particularly Russians, from Central Asia. Educational reforms with particular emphasis on the needs of the society at large, including the needs of the private sector would play a critical role in this respect.

All of the Central Asian countries have highly specialized, trade- dependent economies based largely on natural resources and agricultural production, which account for the bulk of their total exports. The landlocked nature and the abundance of natural resources make regional cooperation an effective vehicle for economic development in Central Asian economies. It would enable them to overcome the locational disadvantage of being landlocked, limited internal markets and other bottlenecks to development while reducing transportation costs.

Policies and programmes for broad-based growth, such as employment generation and provision of social and basic services for the people, particularly the poor, should be strengthened so that poor benefit more from the ongoing economic recovery. Development efforts should also go hand in hand with social support for vulnerable groups.

Most of these countries are receiving technical assistance from various sources regarding the preparation of more reliable data on socio- economic variables in general and the definition and measurement of poverty in particular. Reliable data and the ability of policymakers to understand them can help in devising appropriate policies for socio- economic development. For this, all stakeholders, including international organizations, have to enhance their technical assistance so that data collection and measurement issues are fully understood and more reliable data are available for better policymaking.

REFERENCES

Asian Development Bank, 2005. "Supporting the achievement of the Millennium Development Goals in Central Asian Republic Economic Cooperation (CAREC) Countries".

ECE, 2005. Economic Survey of Europe 2004 No. 1 (United Nations publication, Sales No. E.05.11.E.7).

ESCAP, 2004a. Bulletin on Asia-Pacific Perspectives 2004/05 (United Nations publication, Sales No. E.04.11.F.47).

ESCAP, 2004b. Meeting the Challenges in an Era of Globalization by Strength- ening Regional Development Cooperation (United Nations publication, Sales No. E.04.11 .F.24).

ESCAP, 2005. Economic and Social Survey of Asia and the Pacific 2005 (United Nations publication, Sales No. E.05.Il.F. 1 0).

IMF and World Bank, 2002. "Poverty reduction, growth and debt sustainability in low-income CIS countries" (Washington, D.C.).

UNDP, 2004. Human Development Report 2004 (New York, Oxford University Press) .

The transformation processes in Azerbaijan, which started at the beginning of the 1990s, resulted in the contraction of production, high unemployment and inflation and sharpened socio-economic problems, which led to a reduction in incomes and lower living standards. By 1994, GDP had fallen by 52.5 per cent, industrial production by 61.7 per cent, agricultural production by 43.7 per cent, consumption by 86.5 per cent, and capital investment by 45.6 per cent compared with 1991. The inflation rate reached 1,765.0 per cent in 1994. The average monthly wage in the country fell by 83.7 per cent, and living standards deteriorated considerably in the first half of 1990s.

In addition, the Karabakh conflict resulted in a large number of refugees, many of them in temporary accommodation, without regular employment and dependent on humanitarian aid from general channels. At the same time, the mutual exchange and production cooperation that had existed between the countries of the former Soviet Union were devastated, leading to a decrease in production intensity, the closing of many State companies, massive unemployment and a reduction in the wage level. The Government of Azerbaijan attempted to increase family benefits and wages and to adopt numerous subsidies in order to reduce possible social tension. However, these measures actually led to hyperinflation. As a result, vulnerable population groups emerged and their living standards worsened considerably.

Economic transformation in Azerbaijan started with the liberalization of prices and foreign trade, as was the case in most countries of Central Asia and the Caucasus. Until 1995, the process of economic

* Prepared by Mr. Vagif Rustamov, Deputy Director for Scientific Issues, Mr. Rashad Dayiyev and'Mr. Rashad Bakhshaliyev, Research Fellows, the Center for Economic Reforms, Ministry for Economic Development, Azerbaijan.

II. INCOME AND EMPLOYMENT GENERATION IN AZERBAIJAN*



liberalization was characterized by hyperinflation. For example, consumer prices rose by 2.07 times in 1991 and by 17.7 times in 1994. Owing to the macroeconomic stabilization policy introduced by the Government, prices increased by only 5.12 times in 1995 and, since 1996, the rate of inflation in Azerbaijan has been contained. A tightening of the monetary policy reduced the inflation rate from 19.9 per cent in 1996 to 7 per cent in 2004.

The transformation process has also resulted in lower wages, which were the main source of income for the population. During the period 1991-1995, the real income of the population fell by 83.0 per cent. Measures taken by the Government to ease social tension included the periodic doubling and tripling of wages, the establishment of a higher minimum wage and the introduction of numerous privileges. However, these measures spurred additional inflation pressure. Since 1995, real income has been increasing. In 1996, it constituted 21 per cent of its 1991 level and by 2003 it was up to 83 per cent in 2003. However, there was a considerable gap in income distribution between rural and urban areas, the private and public sectors, and different regions of the country.

Another consequence of the transformation processes during the initial stage of the transition period was a decline in job opportunities and an increase in unemployment. Among the main reasons were an economic crisis and the Nagorny Karabakh conflict, which engulfed the society as a whole. The collapse of the Soviet Union resulted in the loss of traditional markets and the disruption of the mutual exchange and production relations that had been formed over decades among the countries of the former Soviet Union. Other reasons included the liberalization of foreign trade and the opening of local markets in the absence of structural adjustments, a lack of knowledge of marketing and modern management and related technology, and the incompatibility of the State regulatory system vis-a-vis the needs of a market economy. As a result, most enterprises could not adapt to the new conditions and were obliged to restrict or cease their activities. Most employees were dismissed and there was significant decrease in wages, the main source of income. While the official figures on unemployment were low (the unemployed accounted for 1.4 per cent of the economically active population in 2003), the population census and a number of surveys undertaken by international organizations showed that the share of the population classified as unemployed ranged from 10 to 17 per cent in the early 2000s.

The poverty problem has deep historical roots in Azerbaijan. During the Soviet period, Azerbaijan was one of the two Soviet republics that did not receive subsidies from the Central Government (the other was the Russian Federation), but it ranked tenth in terms of living standards among the 15 Soviet republics. In 1990, average monthly wages were approximately 30 per cent below the average for the Soviet Union and were 50 per cent lower than those of the Baltic republics (Lithuania, Latvia and Estonia). Official statistics from 1990 show that 35 per cent of the population had per capita incomes below the national minimum subsistence level.

Macroeconomic stabilization and economic growth were achieved in 1994, giving Azerbaijan ground to develop and realize a single-minded economic policy on the basis of systematic economic reforms. Since 1995, a number of programmes have been introduced by the Government with the financial support of such international organizations as the World Bank and IMF, and with the technical and financial support of UNDP. The programmes were aimed at maintaining macroeconomic stability and carrying out economic restructuring for economic growth and to increase the population's living standards. As a result, GDP grew by 1.3 per cent in 1996 and by 5.8 per cent in 1997. During the period 1998 to 2004, annual rates of GDP growth exceeded 10 per cent, the inflation rate was reduced to the low level of 2 to 3 per cent per year, and the budget deficit dropped to 1 to 2 per cent of GDP. However, despite these achievements, the poverty level remained high. More than 61 per cent of the population in Azerbaijan was classified as poor in 1995, although by 2003 that number had fallen to 43 per cent.

In 2002, the poverty rate was slightly higher in urban areas (47.8 per cent) than in rural areas (45.4 per cent). In large cities, the poverty level was noticeably lower (44.5 per cent) than in smaller towns (53.5 per cent). Despite the fact that the poverty level in the capital, Baku was lower than the country average (40 per cent), the capital was home to the largest share of the poor population (21 per cent).

The poverty level in households with a female head was 4.8 per cent lower than that for households headed by a male. This can be explained partly by the fact that female headed households usually receive assistance from relatives. The higher the education level of a head of household, the lower the probability of the household being poor. The poverty risk for households where the head of household had a secondary level education or higher was lower than the country's average poverty level. The poverty incidence for households where the

head of household had refugee or "internally displaced person" (IDP) status was lower than for the other population groups. The poverty risk for households with refugee status was slightly lower (22.2 per cent) than that for those with IDP status (27.6 per cent). Refugees and lDPs received benefits from the government and international humanitarian organizations. In addition, their expenditures for such services as water, gas and electricity supply were covered by the Government.

The greater the size of a household, the higher the poverty risk. The poverty risk among households with less than four members was relatively low, but the poverty risk increased radically once the number of family members exceeded four. The poverty level was below the average only among households without children and with only one child. There was much higher poverty level among households with three, four or more children. The poverty risk for households without children was much lower than the average, but the presence of only one child in a family increased this poverty level by 16.5 per cent. The incidence of poverty increased to 34.8 per cent for households with three children and to 45.5 per cent for households with four or more children.

The system of social protection in Azerbaijan comprises a number of social insurance and social assistance benefits. Social insurance benefits are paid from social security contributions made by the working population, and social assistance benefits are paid from the State budget to the most vulnerable strata of the population. Thus, until 2002, there were tax-free privileges for communal, communication, education, health and transport services, as well as the supply of medicine for hospitals. These privileges were abolished in 2002 and replaced with compensations. The largest social protection item in terms of expenditure was utility subsidies, which was in fact a very inefficient way of protecting the poor. The Government took some important steps towards the removal of these subsidies with the adoption of the State programme on strengthening financial discipline in the energy and water sectors. However, the current social protection system still faces the following challenges:

A lack of legal acts regulating the determination of social assistance in accordance with the absolute poverty level and ensuring targeting and transparency;

The need to adapt the social insurance system to the requirements of the market economy and to reform the pension system;

The need for a more efficient solution to the unemployment problem and for extension actions to raise the level of skills and to retrain people with a view to creating new job opportunities.

B. PROGRAMMES ON INCOME AND EMPLOYMENT PROTECTION AND GENERATION

Macroeconomic stability along with the implementation of public works, microfinance programmes and income support measures as well as the provision of SME credit spurred employment generation and helped to drive up real incomes. During the period 1998 to 2003, real incomes more than doubled.

1. Public works programmes

A strategic solution to the unemployment problem in Azerbaijan was the implementation of public works programmes. Employment offices were established to implement the relevant programmes. The legislative base for the development and implementation of public works programmes was improved through the adoption of the Law on employment in 2001. In addition, State programmes to allocate resources for job creation and to finance measures to effect social protection for the unemployed and those seeking employment were approved and their implementation began in 2002.

During the period 2002-2003, employment offices found appropriate jobs for 31,384 job seekers. In addition 3,979 job seekers were trained, 4,838 job seekers were employed on paid public works projects, and 14,243 job seekers received unemployment benefits. Typical labour fairs were organized throughout the country to involve the population in the programmes. Another step in this direction was the establishment of labour exchanges in Baku and other large cities.

2 Provision of SME credit

The Government of Azerbaijan developed a State financial support system for entrepreneurship. The National Fund for Entrepreneurship Development, established in 1992, was expected to implement government policy on supporting SME and financing innovation activities for entrepreneurs, import-substituting products and other relevant measures. However, owing to a lack of finances, poor management skills and a non-supportive environment, the Fund was not able to carry out its main

duties. After a State programme for small and medium entrepreneurship development was approved in 2002, the National Fund for Entrepreneur- ship Development was identified as one of the main levers of State suppori for entrepreneurship. A corresponding regulation was approved that same year. In accordance with the regulation, 14 commercial banks were selected as commissioner banks in order to assist the Fund in the distribution of finances to entrepreneurs in different regions of the country.

The Government took the relevant measures to expand opportunities for entrepreneurs to use alternative sources of financial support. For this purpose, the legislative base of leasing mechanisms was improved and credit unions were created. The World Bank initiated a project on agricultural development and credit in Azerbaijan with the intention of contributing about US$ 33.0 million for agricultural development. In order to match the opportunities offered by commercial banks to the investment needs of SMEs, the Government encouraged long-term credit, improved collateral and mortgage mechanisms and undertook other infrastructural measures. For example, interest rate charged by the National Bank of Azerbaijan for centralized credit resources was reduced from 10 to 7 per cent, a new mortgage law aimed at improving mortgage and collateral mechanisms for SMEs was drafted, compulsory reserve norms for long-term deposits (more than a year) were set at zero in 2003, and banks were granted tax allowances for long-term credit.

A number of measures for funding SME development in the country were undertaken in collaboration with regional and international organizations, such as:

Establishment of the Microfinance Bank to improve financial support for entrepreneurship, with authorized capital of US$ 5 million, 35 per cent of which was contributed by the Inter- national Finance Corporation, 35 per cent by the Black Sea Trade and Development Bank, 25 per cent by EBRD and 5 per cent by Germany;

EBRD allocated US$ 7.25 million for SME development;

The Ministry of Finance and the German banking group KfW Bank signed a credit transaction whereby the Bank would allocate 5.1 1 million euros to fund a project on private sector support. Within this project an Azerbaijan-Germany Fund was established;

The International Financial Corporation allocated US$ 3.6 million to develop SMEs in Azerbaijan.

3. Microcredit programmes

Credit unions and microfinance institutions (MFls) were considered important tools for improving the delivery of financial services to rural areas and to low-income individuals and households in the country.

Credit unions have had a difficult history in Azerbaijan. In 1994 and 1995, the European Union Programme for Technical Assistance to the Commonwealth of Independent States and Georgia (TACIS) financed the creation of over 100 credit unions in the country. However, within a few years most of them went bankrupt mainly owing to large credit exposure in non-viable projects. In 2003, there were 39 credit unions licensed by the National Bank; half of them were very small, with assets of less than US$ 20,000 and most of them had limited management and professional capabilities. The members of their different committees were not properly trained to assume their responsibilities. Total credit union membership was estimated at 1,200 persons and legal entities with total assets of US$ 1.6 million. So far, only nine credit unions have joined the Azerbaijan Credit Union Association, which was established by five credit unions at the beginning of 2003. The association's activities focused on training, advocacy and information campaigns about the credit union movement.

For its part, the World Bank initiated an agricultural development and credit project. The largest component of the project dealt with rural finance and aimed at establishing a network of rural intermediaries, including 200 liability groups (groups of borrowers) and 80 credit unions in five targeted regions of the country. By 2003, 134 groups had been set up with 2,513 borrowers 15 credit unions and loans outstanding worth US$ 750,000. The implementing agency for the project has been licensed as a non-bank credit organization by the National Bank under the same rules as those applicable to MFls.

The legal and regulatory framework for credit unions operating in Azerbaijan includes a law on credit unions, the regulation on licensing and the regulation on prudential norms. However, a number of constraints are imposed on the activities of credit unions.

There are currently 10 MFls operating in Azerbaijan and one microfinance bank. Their total assets amounted to US$ 8.6 million with 25,242 active clients in 2003. All the MFls are supported by international NGOs, and all of them are members of the Association of Microfinance Institutions of Azerbaijan (AMFA). There is also a whole- sale lender, Mercy Corps, supporting a number of MFls.

After experiencing some delinquency problems in recent years, MFls have managed to keep their situation under control and their port- folio at risk (PAR) is on average around 3 per cent of loans outstanding, which is better than the performance of commercial banks. Inter- nal controls have been greatly improved in response to the requirements of their parent organizations and international donors. Some of MFls are close to reaching operational self-sustainability, but financial self- sustainability is still a few years away.

There is no law on microfinance in Azerbaijan. MFI activities fall under the Law on Banks and Banking Activity. They have to register with the State authorities as limited liability companies and should be licensed by the National Bank. The licensing regulation specifically prohibits MFls from collecting deposits (the same problems exists for credit unions), even in the form of compulsory savings. MFls were confronted with the same licensing fee as credit unions, and a number of them had been withholding their license application until the situation was resolved. In August 2003, only 4 of the 10 MFls had been licensed by the National Bank. MFls operate in a sort of regulatory limbo: there are no prudential norms applicable to MFls, no minimum capital requirement and no effective supervision by the National Bank. Licensed MFls should submit quarterly reports similar to those of credit unions, but the reports are used mostly for statistical purposes and to verify that they do not mobilize savings.

Credit unions and microfinance institutions are uniquely positioned to assist the Government of Azerbaijan in its efforts to reduce poverty. Unfortunately, the current environment is not supportive of their development, in part because of the constraints imposed by the legal and regulatory framework.

4 Income support measures

In the first years of independence, the Government of Azerbaijan was unable to undertake any income support measures owing to the lack of financial resources. However, after macroeconomic stability was achieved, several activities were carried out to increase incomes and improve living standards. The most significant among them were the strengthening of social protection for pensioners, the increase in the minimum wage and the monthly salaries of employees in budget-funded sectors, and the preparation of a new law on the minimum subsistance level. The minimum monthly wage was increased from 45,000 Azerbaijan manat (US$ 9) in 2003 to 60,000 manat (US$ 12) in 2004.

Pensions in all categories (1,087,000 persons) were increased from 88,000 manat (US$ 17.6) to 125,000 manat (US$ 25) in 2003. In the same year, 71 1.2 billion manat (US$ 142 million) was allocated from the State Social Protection Fund for the payment of social benefits. In addition, 586 billion manat (US$ 117 million) was allocated from the State budget for the same purpose and 107 billion manat (US$ 21 million) to compensate for the benefits lost. As a result, per capita incomes grew by 13.2 per cent in 2003 compared with 2002.

C. IMPLEMENTATION OF THE STATE PROGRAMME ON POVERTY REDUCTION AND ECONOMIC DEVELOPMENT

The achievement of political and macroeconomic stability in the country created the conditions for making poverty reduction a priority area in the Government's economic and social policy. The State Programme on Poverty Reduction and Economic Development for 2003- 2005 (SPPRED) was prepared and approved in close consultation with the World Bank and IMF in 2003. As the Programme is of national significance, comments and recommendations from all strata of civil society were taken into consideration. Government institutions, NGOs and civil society participated in the preparatory work for the Programme as well.

SPPRED is based on six key objectives:

Creating an enabling environment for expanding income- generating opportunities

Maintaining economic stability

lmproving the quality of and equal access to basis health and education services

lmproving infrastructure

Reforming the existing system of social protection

lmproving the living conditions and opportunities of refugees and lDPs

The main objectives of SPPRED are consistent with the internationally agreed development goals contained in the Millennium Declaration.

The secretariat of SPPRED is located within the Ministry of Economic Development, which is responsible for coordinating, monitoring and evaluating the implementation of the Programme and for provid-

ing policy advice to enhance the effectiveness of measures. Among the main donor organizations are UNDP, USAID, the Asian Development Bank, the World Bank and the European Union as well as international NGOs. The coordination of all related donor contributions and the efficient use thereof is the responsibility of the SPPRED secretariat.

SPPRED contains a matrix of over 400 policy measures, which were expected to be implemented over a three-year period through the activities of 15 sector working groups (SWGs), covering all State agencies, in partnership with donor organizations and other stakeholders. It defines the policy measures for tackling poverty within a changing macroeconomic framework. A medium-term expenditure framework was developed to provide finance for the implementation of the Programme. A public investment programme (PIP) was also developed with the objective of investing in poverty reduction measures.

A Poverty Monitoring Unit (PMU) was established within the SPPRED secretariat to monitor the impact of the Programme on poverty and living standards. The PMU is responsible for the measurement and analysis of poverty, inequality and vulnerability. The scope of its responsibilities covers education, health, social policy, IDPs, demography, the labour market, the environment, macroeconomics and infrastructure. The annual reports of the SPPRED secretariat are expected to include the results of analyses of key aspects of poverty such as income poverty and such non-income aspects as health, education and employment. The reports describe the situation in key sectors and highlight the factors which need to be addressed to improve the situation. The Programme is based on internationally recognized methodologies for setting targets for poverty reduction and monitoring standards.

In addition to PM U, the secretariat has working teams dealing with human capital development, rural development and participation. The activities of these teams focus on the analysis of the input measures prepared by the 15 SWGs in collaboration with donor organizations. Their reports on the progress made by the SWGs and the donor organizations in implementing the policy measures are also included in the annual report of the SPPRED secretariat, produced by international and national experts. The report describes the progress made in the implementation of the policy measures by the SWGs and identifies trends in poverty reduction and economic development.

The SPPRED secretariat evaluates the implementation of the Programme, which makes evident obstacles in undertaking poverty reduction measures and their effectiveness, and proposes actions to ensure the effectiveness of the Programme. Both qualitative and quantitative evaluation and monitoring measures are used to provide policy advice to the Government on the priorities and effectiveness of policy measures to achieve the objectives of SPPRED.

In 2003, the focuses of SPPRED were as follows:

Further policy actions will be undertaken within SPPRED aimed at:

Speeding up the social and economic development of Azerbaijan through the implementation of relevant programmes to improve the wage system and increase in the level of labour remuneration for labourers and the wages of employees in budget-funded sectors on the basis of the results of the year 2004;

Encouraging the creation of new jobs in the country based on .the relevant comprehensive government plans for the development of the country's regions;

Analysing the current and potential comparative advantage of Azerbaijan to strengthen its competitiveness in global and regional markets;

I Structure of the SPPRED matrix

* + Development

and Employment Growth (development

of non-oil sector)

Fiscal Policy Monetary Policy and Banking Sector Development Investment

Energy Policy Labour Market

Policy

and Employment

and Human Development

Education Policy (including Culture) Health (including sport) Social protection system and pension reforms Refugees and IDPs

ional policy1 and Infrastructure

Development

Public investment in utilities and infrastructure

Development Agriculture, irrigation, land protection and water resources Environmental safety Tounsm

Rural

* titutiona Reforms and

Capacity Building

Juridical reforms Poverty monitoring

Preparing an employment strategy for the country with technical assistance from UNDP and ILO. The strategy is expected to identify employment opportunities in Azerbaijan and the main trends in labour market development, including employment issues in the public and private sectors, education and the social protection system;

Implementing a special programme for vocational training of job-seekers and the unemployed and preparing an action plan to develop a social dialogue between employees, employers and trade unions;

Strengthening the National Fund for Support to Entrepreneur- ship (NFSE) to create new job opportunities in SMEs and through State employment services and labour exchanges.

D. MEASURES TO STRENGTHEN INCOME AND EMPLOYMENT GENERATION PROGRAMMES

1. Macroeconomic policy reform

A widespread stabilization programme initiated by Azerbaijan in 1995 included measures on tightening fiscal and credit policies and implementing structural reforms. The result was substantial macroeconomic stabilization, as demonstrated by main macroeconomic indicators during the period 1996 to 2004. The development of the oil sector provided the engine for long-term sustainable growth and rising per capita incomes across all strata of the population. Extensive oil resources have formed the basis for the economy and are expected to remain an important factor in future economic development. Oil mining and export are projected to increase by as much as threefold from the current level by the second part of this decade.

However, the dependence of the whole economy on the oil sector presents the Government with a major challenge: staving off the famous "Dutch disease". Therefore, the main objective of the country's economic strategy is to achieve balanced and sustainable growth in all sectors of national economy through diversification. Traditionally, industry (oil, oil machinery, agro-processing) and agriculture (cotton, grape, fruits and vegetables) have been the leading economic sectors.

To achieve balanced and sustainable growth, Azerbaijan has been implementing macroeconomic reforms supported by IMF, the World Bank and other international creditors. The Government's broad programme of macroeconomic reforms includes the following policy measures:

Liberalization of prices;

Widespread cuts in government subsidies;

Tight budgetary and fiscal controls to limit inflation;

Restructuring the banking sector to improve transparency;

Modernizing the tax structure;

Instituting a land reform programme;

Privatizing State-owned assets.

In order to accelerate macroeconomic reforms, Azerbaijan undertook several important structural and institutional changes. They included the strengthening of banking supervision and regulations for commercial banks; full trade liberalization; the enactment of legislation to improve tax collection; and the improvement of accountability in government purchases. As indicated above, Azerbaijan achieved macroeconomic stability and sustained economic growth in the mid-1990s owing to comprehensive macroeconomic reforms. Along with this achievement, thousands of new jobs were created and incomes rose regularly.

Owing to trade liberalization and improvements in the customs system, merchandise exports grew from US$ 2.1 billion in 1991 to US$ 3.5 billion in 2004. Real GDP growth along with the increase in incomes led to an increase in imports. In 2004, the value of merchandise imports was US$ 3.4 billion, compared with US$ 667 million in 1995. There was a considerable improvement in the country's investment climate. Investment for economic development increased from 2.2 trillion manat (US$ 440 million) in 1995 to 17.8 trillion manat (US$ 3.5 billion) in 2003. There were also qualified changes in the structure of investments. In 2003, the share of long-term credits in the total amount of investment accounted for 27.4 per cent, compared with 12 per cent in 1995.

However, despite these positive changes in the economy, real incomes, wages, pensions, social benefits and the rate of employment remain low. In order to improve the socio-economic situation and to ensure the sustainability of macroeconomic policy, the Government has endeavoured to do the following:

Strengthen macroeconomic stability and the potential for sustainable development;

Improve the competitiveness of the national economy;

Diversify the economy through the further development of the non-oil sectors;

Ensuring efficient integration with the world economic system;

Increasing public and private sector investment in infrastructure;

Promoting income-generating opportunities.

2 Reform of the agricultural sector

One of the challenges for the national economy is the dynamic development of the agricultural sector, which still plays an important role. Agricultural production declined annually by 12 per cent from 1992 to 1995. As a result of systematic reforms in the agricultural sector started in 1996, output dynamically increased in the second part of the 1990s; in 2002 and 2003, agricultural production grew by 6.4 and 5.6 per cent respectively. The Government of Azerbaijan successfully conducted land reform and improved the internal credit mechanism for agricultural farms. The land reform was carried out through the free distribution of over 1.3 million hectares of agricultural land among rural residents. More than 40,000 individual farms and 5,000 other farming units were established that resulted in an increase in agricultural production from 3,567.0 billion manat in 1995 to 6,832.6 billion manat in 2003.

Currently, agricultural policy is aimed at solving serious problems, such as the creation of internal consumer markets, the effective use of manpower resources in the sector, and the strengthening of income and employment generation for vulnerable strata of the population living in rural areas. There is also a need for more integration between the processing of agricultural products and the agriculture sector, solving market access problems, improvement of agro service and infrastructure. Structural reform policy in agriculture is expected to take the comparative advantages of this sector and the natural-climate potential of the country into consideration in order to provide food security for the population. For example, production and processing of the country's strategic and traditional agricultural products, such as cotton, grape, green tea, tobacco, fresh vegetables and fruit, have a comparative advantage in the world economy and special measures are needed to stimulate their production.

3. Restructuring of industry

During the Soviet period, Azerbaijan had a diversified economy. However, the destruction of the Soviet Union created a number of serious problems for the industry, such as the loss of traditional markets

in the former Soviet Union and the closure of many industrial enterprises. In the 1980s, 80-95 per cent of the country's industrial output was exported to other Soviet republics. The loss of traditional trade partners, delays in the delivery of inputs from other countries, and outdated technology made industrial restructuring necessary. In 1990-1 995, there was a sharp decline in industrial production as in the other sectors of economy. By 1995, the total industrial production of Azerbaijan was one third of its 1990 level. During this period, the number of enterprises decreased by 22.0 per cent and the number of employees in the industrial sector decreased from 409,100 in 1991 to 304,300 in 1995.

A prudent economic policy and a rational oil strategy created favourable conditions for the industrial development of the country. The privatization of small industrial enterprises brought the State budget about 50 billion manat in 1996-2002. At the same time, 300 large and medium-sized enterprises were transformed into stock companies with authorized capital of 1,748 billion manat. There was also a significant increase in the production of crude oil, petroleum, electricity, steel, cement, nitrogen, oil industry equipment, and light industry products as well as different food products, which constitute the bulk of the country's industrial output.

The reform of the industrial sector was aimed at attracting more foreign direct investment to the economy, applying modern techniques and technologies, and creating favourable conditions for business. As a result, industrial production in 2003 exceeded its output in 1997 by 29.7 per cent. During the period, development of non-oil sectors and the oil refining industry was stimulated. From 1998 to 2002, production in the oil-refining industry increased by 13.6 per cent, the wood and paper industry and the construction materials industry by 3.5 times, chemical production by 2.1 times, metallurgy by 2.5 times and food industry by 22.0 per cent. Locally manufactured products started substituting imported items. Thus, the domestic production of alcoholic and non- alcoholic drinks, packed tea, milk products, cigarettes, etc. significantly enriched the local market. The success gained in this field was mostly a result of the development of the private sector. The share of the private sector in GDP increased from 5.5 per cent in 1995 to 55 per cent in 2002.

However, a number of problems remain in industrial sector. Today, the oil sector generates 28.6 per cent of GDP but only 1.1 per cent of all jobs. New businesses in non-oil sectors and diversification of the economy are urgently needed. The creation of new jobs and the upgrad-

ing of existing skills are among the key tasks of the Government of Azerbaijan. It is of great importance to define the sectors (products) and subsectors of the economy which are competitive in world markets and which have a potential comparative advantage for the creation of new job opportunities in Azerbaijan. The issue of comparative advantage is of vital importance for Azerbaijan as the world economy becomes more and more competitive. Therefore, the restructuring of industry should be aimed at developing and restructuring sectors which have current or potential comparative advantage in the international division of labour. For example, the development of oil equipment and related machine- building sectors could constitute one of the most promising manufacturing sectors in Azerbaijan. For this purpose, efficient economic policy measures are needed, including investment policy, regional development programmes, privatization, development of the financial and banking sector and encouragement of SMEs.

4. SME development

The SME sector assists the Government of Azerbaijan in its efforts to generate jobs and reduce poverty. The first years of economic transformation were not really supportive for its development due to many serious economic issues and poor governance. The development stages of the SME sector in Azerbaijan are illustrated in the table (p. 43).

The legal and regulatory framework to develop the SME sector in the economy was established through the adoption of more than 30 legislative acts and several State programmes. Among the main programmes related to SME development are the State programme for the development of entrepreneurship, 1993-1 995, the programme of State support for small and medium-sized enterprises, 1997-2000, and the State programme on small and medium-sized enterprise development, 2002-2005.

Necessary measures have been undertaken to form a mechanism for financial assistance to SMEs, to reduce taxes for entrepreneurs, to strengthen the promotional role of the tax structure, and to strengthen education, information and consulting services for SMEs. Special measures have also been taken to protect entrepreneurs' rights and interests. In order to prevent illegal interference in entrepreneurs' activities and to liquidate baseless examinations, a "control book" was introduced into the SME business. The SME sector extended its activities to develop regional infrastructures. Significant results were achieved in the establishment of trade unions for entrepreneurs. Cooperation with international and national organizations from other countries in the sphere of SME development has been promoted.

Development stages of SME

Stages

1991 - 1 993

1993-2002

Since 2002

1993-1 996

1996-2002

Peculiarities

No reforms Several desultory measures

. Supportive environment for reforms . Macroeconomic and political stabilty Initial measures for establishment of entrepreneurship . Establishment of State assistance system for development of entrepreneurship . Privatization . Restructuring of management system

Drastic changes in State assistance system for development of entrepreneurship: - financial assistance - State regulation - infrastructure - protection of rights

Results

9 Decline of main development

. Instability in financial and indicators

production sectors

. Prevention of GDP decline Minimum level of inflation

Demands of economic development

The necessity of starting reforms toward transition into market economy: - implementation of privatization - establishment of State

assistance system for development of entrepreneurship . Acceleration of reform realization

Sustainable growth of main macroeconomic indicators Sustainable increase in the number of entrepreneurs The flow of foreign investment

Carrying out restructuring of regional, sectorial and technological structure of entrepreneurship sector for better realization of country’s potential

Increase of industrial

Revival of business activities

. Strengthening position of

entrepreneurship

in the regions

entrepreneurs in the society

Promotion of employment Realization of potential of regions: - industry - agro sector - tourism realization of export potential establishment and development of innovation firms (techniques)

As a result of these measures, the number of people engaged in entrepreneurial activities significantly increased. However, there is scope for more new jobs in the SME sector as the potential of strategically significant enterprises is not fully used. The influence of the SME sector on the country's strengthening export base is still limited, and, with 70 per cent of SMEs located in the capital and its outskirts, the present level of entrepreneurship development across the country does not reflect the country's potential.

E. LESSONS LEARNED

The experience in implementing income and employment generation programmes for vulnerable population groups in Azerbaijan shows that further policy measures are needed in the following areas:

Macroeconomic policy

Sustainable development of non-oil sectors

Efficient use of oil revenues

lmprovement of budget-taxation mechanism, revenue management and efficient use of public expenditures

Maintaining stability in prices and the exchange rate of the national currency

Establishment of an efficient system to regulate external debt

lmprovement of monetary policy

lmprovement of the privatization process

lmprovement of customs regulation for foreign trade

Acceleration of institutional reform

Agricultural policy

lmprovement of infrastructure for agricultural development, including energy, gas, portable water, irrigation, melioration, land improvement, road repair, agro-service and development of the market infrastructure (for example: mortgages, financial insurance and consulting)

Establishment of a land market and simplification of the framework for collateral security, leasing and mortgaging of land

Implementation of measures on the guaranteed purchase of agricultural products

Support to farming development

Development of community-based organizations

Application of compulsory State insurance to risky agricultural sectors

Industrial policy

Acceleration of the privatization of large-scale industrial companies

Efficient management of State-owned enterprises, including partly owned enterprises

Attracting new investment to restructure industrial enterprises

Development of export-oriented industries

Diversification of the industrial sector

Application of scientific and technological achievements to industrial policy

Promoting cooperation with the foreign producers and establishing joint ventures

SME development policy

Expanding and addressing State assistance to the SME sector

lntroduction of more efficient credit mechanisms

Establishment of business promotion centres throughout the country

Stimulation of venture enterprises

Elimination of bureaucratic regulations

Stimulation of cooperation between domestic and foreign entrepreneurs

Microcredit policy

Authorization of deposit-taking from the members of credit unions

Strengthening prudential norms

lntroduction of amendments to the Law on credit unions

Reduction of taxes and some State duties established for credit unions and microfinance institutions

INTRODUCTION

China and Viet Narn have recorded considerable achievements in socio-economic development. It is now generally recognized that they are among the leading developing countries in terms of sustaining high economic growth and reducing poverty incidence.'

China and Viet Narn share key features in the transition towards a market economy. As with other economies in transition, they have had to deal with three key sets of reforms: liberalization and stabilization; institutional changes that support market exchange and shape ownership; and the establishment of social programmes to ease the pain of transition (World Bank, 1996). By the end of the 1970s, both were forced to undertake reforms because of the failure of the centrally planned model to deliver economic development. During the 1980s and 1990s, economic reform in China and Viet Narn was in general a process of "learning by doing" and characterized by gradualism. For both countries, the "open door policy" has played a key role in enhancing efficiency and promoting economic growth, though there is still debate about its social impact. Over the last few years, both countries have made new commitments to structural reforms, public administration reforms and international economic integration.

There have been certain differences, however, in the process of reform and development in China and Viet Nam. It is not possible to understand economic development in China and Viet Narn without

* Prepared by Mr. Vo Tri Thanh, Director, Ms. Pham Lan Huong and Mr. Trinh Quang Long, Research Fellows, Department for Trade Policy and International Integration Studies, Central Institute for Economic Management, Ministry of Planning and Invest- ment of Viet Nam.

But some argue that in international comparisons Viet Nam's performance is not so spectacular (see, for example, Dapice, 2003).

111. POVERTY REDUCTION IN CHINA AND VIET NAM*

examining carefully the "turning points" associated closely with the institutional changes. These "turning points", however, have been quite different. For example, Viet Nam's reform package, launched in 1989, was an exception in the context of gradualism, but its outcome was very impressive in comparison with the experiences of many transitional economies in Eastern Europe, although the liberalization and stabilization measures used were similar (Riedel and Comer, 1997). Apparently, the effect of growth on inequality in China and Viet Narn has not been the same either, though income distribution in both cases has worsened. Moreover, while Viet Narn is viewed as a small economy, China is among the top ten economies in the world in terms of gross domestic product (GDP) and trade. China is now the largest recipient of foreign direct investment (FDI) inflows. China has become the one to watch.

A comparative study of the experiences of China and Viet Narn is very important in order to enrich one's understanding of the underlying determinants of economic growth and poverty reduction, which can serve as a lesson for other transitional and developing countries. This will also be helpful for Viet Narn to implement its comprehensive poverty reduction and growth strategy (CPRGS) in a more effective way.

This paper is organized as follows: section A highlights the process of economic reform and its achievements in China and Viet Nam; section B discusses the trend in poverty reduction and characteristics of poverty in China and Viet Nam; section C reviews the poverty reduction programmes undertaken in China and Viet Nam, followed by an examination of their differences; and section D contains concluding remarks on the major problems facing China and Viet Narn in sustaining high economic growth with equity in the new millennium. The methodology applied for analyses is rather simple. It is based on a comparative summary of well-known facts highlighted in a number of relevant studies with the addition of our comments on the key features of economic reform in China and Viet Narn and the major lessons that can be drawn from their experiences.

A. ECONOMIC REFORM AND ECONOMIC PERFORMANCE

1. China

Like other former socialist and many developing countries, China had pursued an inward-looking heavy-industry-oriented development strategy and considered this strategy as the symbol of national power

and economic achievement since its independence. A range of policies to foster the development of heavy industry had been implemented. This strategy had enabled a rapid transformation of the structure of domestic production. However, rapid expansion of the industrial sector could not bring about equally rapid improvement in living standards; rather, it created an overall imbalance in the supply of and demand for credit, foreign exchange, raw materials and other necessities. In the meantime, although agricultural production was the main hard-currency generator, the Government was reluctant to divert scarce resources and funds from industry to agriculture.

The distorted macroeconomic policies, planned allocation system, and micromanagement institutions have caused the Chinese economy to be very inefficient. The annual growth of the total factor productivity was very low, at around 0.5 per cent from 1952 to 1981, equaling a quarter of the average growth rate of developing countries. This forced the Government of China to initiate a series of economic reforms in 1978 in the hope of restoring the balance in the economic structure, to improve resource allocation and to create a stable and undistorted macroeconomic environment for economic development. The economic reforms were so successful that the Chinese economy rocketed. China's economic reform included four major components: (a) reforming the resource allocation system and the price determination system; (b) devolving economic decision-making power; (c) creating new, non- State-owned models of organization for production; and (d) opening the Chinese economy to international trade and foreign investment, particularly after the mid-1980s (Lau, 2001).

The evolution of the Chinese economy from 1978 onwards can be divided into four periods. The initial period (1978-1984) was characterized by profound reforms in the rural sector while giving more autonomy for the State-owned enterprises (SOEs). The second period (1 985-1 992) focused on reforming ailing SOEs, creating a more favourable environment for development of town-village enterprises (TVEs), and laying foundations for the opening up of the economy. The third period, during the 1990s, witnessed huge inflows of foreign direct investment (FDI), leading to the emergence of coastal cities, which served as economic engines. From 1998 onwards, the Government of China has placed more emphasis on restructuring the economy, closing gaps in development between different regions of the country, and international economic integration.

The first period, 1978-1984. Changing the farming system from the collective as the main production unit to the household responsibility system has given a fresh wind to agricultural production. Productivity in this sector improved significantly, accounting for 42.2 per cent output growth in the cropping system (Stern, 2001 and Lin, 2000). In addition, a range of policies to raise agricultural procurement prices, and allow peasants to freely sell outputs in excess of government quotas at market prices had improved the rural-urban terms of trade by more than 40 per cent (World Bank, 2003). Moreover, policies fostering the development of TVEs were also introduced, thus leading labour to shift from agriculture to rural industries. Initial steps in SOE reform, such as enlarging enterprise autonomy, expanding the role of financial incentives within the traditional economic structure were also implemented during this period (Lin, 2000). The spur of the rural sector, however, greatly contributed to the growth of the Chinese economy during this period. This growth lifted (rural) real per capita income by 15 per cent per year, resulting in a high rate of savings, which in turn were used to finance TVEs. The development of TVEs in rural areas attracted a large number of labourers from agricultural production, causing a decline in the share of agricultural employment in total employment from 62 per cent in 1978 to 53 per cent in 1985 and an increase in the share of TVEs from 7 to 14 per cent (World Bank, 2003). During this period, inequality fell between urban and rural areas as the latter began to catch up with the former (Stern, 2001).

The second period, 1985-1992. The growth of the Chinese economy during the period 1985-1992 was mainly driven by improvement of resource allocation. SOE reform accelerated. During 1984-1 986, the emphasis of the SOE reform was on formulating financial obligations borne by the SOEs to the Government of China and to expose SOEs to market forces. The contract responsibility system was formalized to clarify the authority and responsibilities of SOE managers. This system, then, was widely adopted (Lin, 2000). These bold SOE reform measures exerted pressure on the resource allocation system. Material supplies were progressively detached from the plan, retail trade was gradually dereg ulated and the prices of manufactured goods were gradually li ber- alized (Lin, 2000 and World Bank, 2003). This relaxation in the resource allocation system had fostered the rapid growth of TVEs, leading rural labour to shift further towards the non-farm economy. Moreover, public spending and tax treatment favoured coastal areas during this period and thus facilitated growth in these areas (Stern, 2001). During this period,

the economy was opened to foreign trade and investment: the number of enterprises participating in foreign trade expanded, trade procurement targets were replaced by market-based trade policy instruments; trade barriers were gradually removed; and market mechanisms were increasingly used in foreign exchange allocation (World Bank, 2003). As more foreign companies began participating in the economy, the efficiency of resource allocation improved, and this was reflected in higher productivity.

The third period, 1992- 1998. As economic liberalization continued, technological progress accelerated. Annual gross FDI inflows soared to 6 per cent of GDP by 1994. This resulted in a considerable increase in capital equipment imports, with foreign firms importing more than two and a half times as much as domestic firms. Therefore, foreign enterprises acted as the major locus for the inflow of new technologies, scientific knowledge and modern management practices (World Bank, 2003). In addition, contined SOE reforms improved efficiency in that sector (Lin, 2000). During the same period, the rural sector enjoyed renewed growth as higher grain prices led to improved terms of trade in agriculture, accelerating rural poverty reduction. However, the more remote areas continued to lag behind (Stern, 2001).

Recent developments. The period from 1998 onwards has been characterized by greater dynamism in urban and coastal areas. This dynamism, the major source of growth, was partly rooted in China's increasing engagement in the world economy, especially after China joined WTO in 2001. China is now playing a greater role in the world market in general, and in the East Asian region in particular. The dynamism was also attributed to intensified structural changes and continued high growth, reflected in a declining share of agriculture in GDP and employment. A slower average agricultural productivity growth rate threatened poverty reduction. As most of the poor work in the agricultural sector, the manufacturing and services sectors must consequently find ways to absorb redundant agricultural labour.

Since economic reforms were introduced, China's economy has developed very rapidly. An impressive average annual GDP growth rate of 9.4 per cent from 1979 to 2002 pulled the average per capita GDP growth rate up to 8.1 per cent per annum (Hu Angang et al., 2003), unparalleled and remarkable for such a large country as China. At the provincial level, while growth in almost all provinces has been high by international standards, it has been fastest in the eastern and central

regions (the richer regions) and slowest in the south-western and north-western regions (the two poorest regions in China). The north-east is a notable exception. During the 1990s, this region experienced relatively slow growth despite higher per capita income and low poverty rates in 1991 (table 111.1).

Table III.1. Per capita growth and rate of change in the rural poverty rate in China, by region

Source: World Bank (2001).

The reforms led to profound structural changes in the Chinese economy. The share of GDP originating from the primary sector (agriculture and mining sector) fell from 31.2 per cent in 1979 to 15.9 per cent in 2000, while the shares of secondary (industry) and tertiary (service) sectors increased from 47.4 to 50.0 per cent and from 21.4 to 33.2 per cent respectively (Lau, 2001; see also table 111.2). This highlights the rapid modernization of the Chinese economy during that period.

Labour force participation exhibited a similar pattern. The agricultural labour force declined from 70 per cent of the total workforce in 1978 to around 50 per cent in 2002 (Hu Angang et al., 2003). The service sector and TVEs absorbed a large number of new entrants to the labour force as well as those shifting away from agricultural production. The proportion of the total labour force employed in the service sector increased from 23 per cent in 1993 to 29 per cent in 2002 (World Bank, 2003). On average, the service sector generated 7.6 million jobs each year from 1990 to 2002, while the industrial sector could generate only 1.6 million jobs. The number of labourers working for TVEs increased drastically, from 9.2 per cent of the total labour force in 1978 to 26.7 per cent in 2001 (Hu Angang et al., 2003).

R q b J Growth in per capita Rafs of change in rural

GDP 199i-1996 powHy rate (percentwe) {percentage)

East 15.9 -31.1 Central 14 1 -24.1 Nwth 12.1 -1 9.3 SOuth-WeSt 1 4 5 Northeast 1 -12.4 North- west 8.7 -1.2

Table 111.2. Major economic indicators, 1993-2002


The relaxation of the resource allocation system allowed the private sector to flourish and led to a decline in the role of SOEs in the economy. In 1999, the share of SOEs in the gross industrial output value was only 28.2 per cent, a decline of 49.4 percentage point in two decades (Zhao and Tang, 2002). Correspondingly, the share of private enterprises in gross industrial output value increased from a negligible figure to 56.3 per cent in 1999.2

A component of the reforms that China has pursued over the past 20 years is to open up the economy to the world market. This has brought about undeniable achievements. China has become the fifth largest trading nation in the world, with exports of US$ 265 billion and imports of US$ 245 billion in 2001. China is also becoming a most favourite destination for foreign investors, not only because of its high rate of economic growth but also because of its economic size. Cumu- lative FDI from the beginning of the reforms to the end of 2001 amounted to almost US$ 400 billion. The orientation of FDI has changed from exports to the domestic market, from light industry to heavy and high-technology industries and from small projects to large projects. In addition, foreign investors have changed their views of China, no longer

Private enterprises encompass collectively owned and individually owned enterprises.

53

)$ar 1893951M 1897 1998 1999 2ooo 2001 200.2 GDP (US$ billion) 700 816 898 946 991 1081 1 175 1237

GNl/capita (US) 520 620 710 740 780 840 890 940

Output (% of GDP) - AgricuRUW 20 20 19 19 18 16 16 15 - Industry 4 8 5 0 5 0 4 9 4 9 5 1 5 0 5 2

- Services 3 2 3 0 3 1 3 2 3 3 3 3 3 4 3 3

Manuf. (%total export) 84 85 87 89 90 90 90 91 - Import 21 19 18 17 19 23 23 27 Employment (mill.) 681 690 698 706 714 721 739 737

- Industry ("A) 28 27 28 27 27 26 28 28 - Services ("h) 23 26 26 27 27 28 28 29

Manufacturing 3 5 3 5 3 5 3 4 3 4 3 5 3 5 3 6

- Export 2 2 2 1 2 3 2 2 2 2 2 6 2 6 3 0

- Agriculture (?A) 4 9 4 7 4 6 4 6 4 6 4 6 4 4 4 3

seeing only an export base but also a very important destination for finished products.

2 Viet Nam3

Prior to the 1980s, Viet Nam's economy was essentially a centrally planned economy. Between 1980 and 1988, the economy can be regarded as a modified-planned economy in which some microreforms were undertaken without any significant changes in macroeconomic management. From 1989 onwards, it has been an economy in transition, striving for industrialization and international integration.

Before the 1980s, the economy was a typical centrally planned economy at a low development level. Major characteristics of the economy included: (a) State or collective ownership of production means; (b) government-administered supply of physical input and output; (c) lack of business autonomy, absence of factor markets, highly regulated goods and services markets; (d) and a bias towards heavy industry in investments. Viet Nam was overwhelmingly dependent on external sources for investment and was relatively autarkic, trading mostly with the former socialist countries within the former Council for Mutual Economic Assistance. As a result, the economy was heavily distorted in resource allocation, with poor incentives and restricted information flows.

During the period 1980-1988, the centrally planned economy was modified to respond to depletion of the economy. Some microeconomic reforms were introduced in 1981 to recognize and legalize spontaneous measures, such as "illicit contracting" in agriculture and "fence breaking" in the manufacturing sector. These microreforms created new incentives for producers in raising outputs during the period 1982-1985. The economy became more dynamic and, as a result, Viet Nam enjoyed a high rate of economic growth in the first half of the 1980s. However, growth was not sustainable and tended to decline as the effects of macroeconomic imbalances set in. The financial reform implemented in 1985 in an attempt to reverse the situation also failed, as it had been introduced without addressing the fundamental problems of resource misallocation and macroeconomic imbalances in the economy.

Primarily adapted from Le Dang Doanh et al. (2002) and Vo Tri Thanh (2003).

54

The Sixth Party Congress in December 1986 was a turning point in Viet Nam's economic policies. It recognized the existence and the essential role of a multi-ownership structure in Viet Nam's economy. However, significant changes in this direction occurred only sometime after the approval of the Doimoi (renovation) programme by the Congress.

In March of 1989, Viet Nam adopted a radical and comprehensive reform package aimed at stabilizing and opening up the economy and enhancing freedom of choice for economic units and introducing competition. The reforms, which fundamentally changed the country's economic management system, included:

Almost complete price liberalization

Large devaluation and unification of the exchange rate

Increases in interest rates to positive levels in real terms

Substantial reduction in subsidies to the SOE sector

Agricultural reforms

Encouragement of the private sector, including FDI

Removal of domestic trade barriers and creation of a more open economy.

Macroeconomic stabilization was successful in conjunction with the price liberalization, the interest rate and exchange rate policy changes and, at the same time, the relief from the fiscal burden. Monetary policy has also improved and the use of changing monetary instruments has become more effective in cutting down inflation.

Several measures to increase private sector participation in production and distribution have been taken, including the creation of a legal framework for private business. The recognition of the farming household as a basic economic unit and long-term land use rights conferred by a new land law in 1987, amended in 1993, created strong incentives for farming households to make long-term investments and expand agricultural production. Agricultural production has become much more diversified under market and foreign trade development. The reform of the agricultural sector was essential to poverty reduction as it is the largest sector of the economy and provides about three quarters of the population with income.

Rapid growth in services and construction during the 1990s was due mainly to the quick response of private entrepreneurs. Nearly 2 million newly established household businesses in urban areas helped to enhance the performance of the economy and improve the retail sales and service network considerably. During the 1990s, about 45,000 private enterprises were registered under the Law on Private Enterprises and the Company Law approved in 1991. The private sector became a major source of employment in the economy. In an attempt to make the operation of the SOEs viable, the Government has substantially reduced subsidies, diminished "cheap" credit to these enterprises and given them greater autonomy. Furthermore, inefficient and money- losing enterprises have been liquidated. From 1990 to 1994, the number of SOEs fell from 12,000 to 6,300, and 1.5 million SOE workers (out of the 4.05 million total SOE employees) retired or became part-time workers. These reforms led to some positive improvements in the growth performance of the SOE sector in the first half of the 1990s.

Viet Nam has substantially liberalized its trade and investment policies since the late 1980s. In an attempt to integrate its economy with the rest of the world, Viet Nam has entered into trade agreements with about 60 countries and has trade relations with some 170 countries. It has had a preferential trade agreement with the European Union since 1992. In addition, Viet Nam has been a member of the Association of Southeast Asian Nations (ASEAN) since June 1995 and the Asia Pacific Economic Cooperation forum (APEC) since 1998.

The liberalized investment climate resulted in rapid growth in foreign investment between 1993 and 1997. The country has received foreign investment from some 60 countries. The Law on FDI promul- gated in 1987 and subsequent amendments enabled Viet Nam to attract a large volume of capital to renew technology and expand the markets. FDI has indeed become an integrated part of the Vietnamese economy and an important factor in Viet Nam's economic growth during the 1990s.

To facilitate the development of trade and investment, the Gov- ernment has also introduced reforms in the banking sector. The mono- banking system was replaced by a two-tier system, which could function in 1990, when the laws on banking authorized the State Bank of Viet Nam to assume traditional central bank functions, such as conducting monetary policy and supervising the financial system. Also, sectoral restrictions on the specialized banking activities and the entry barriers were abolished. At present, in addition to the five State-owned commercial banks, a number of joint-stock banks, credit cooperatives1 funds, joint-venture banks and foreign banks are in operation.

Despite broad and fast liberalization, it was recognized that significant restrictions remained, for instance in the areas of trade and market entry. The reform of SOEs and the financial sector has been limited and has not kept pace with economic development. There has also been a deep concern with the question of sustainable economic growth and development, especially during and after the Asian crisis in 1997-1998. The challenges and difficulties facing Viet Nam led many to call for a further "renovation" process. From 1997 to 1999, however, Viet Nam was still reluctant to undertake a decisive and comprehensive reform programme. From 2000 to 2003, a demand stimulus policy was implemented to revitalize the economy, which had suffered from the negative impacts of the Asian crisis and the new commitment to continued reform. Some progress was made, especially in the development of the private sector and trade liberalization. Meanwhile, the reform of SOEs, the banking system, and public administration were slower than expected and this limited the effectiveness and efficiency of other reforms.

The demand stimulus policy contained several measures, such as public investment in infrastructure projects, financial support to help SOEs deal with their increasing inventories, increased budgets for poverty reduction programmes, higher wages and salaries, encouraging consumption and partial support for enterprises to expand exports. This package of measures has minimized deflation and economic stagnation, but there is a need for further structural and administrative reform.

The development of the private sector surged thanks to the implementation of the New Enterprise Law in 2000. From 2000 to September 2003, 72,600 private enterprises were registered under the new Law, with total capital a mounting to VND 145,000 billion, equivalent to US$ 9.5 billion. (This figure is much higher than the amount of FDI during the same period and four times higher than the capital held by private enterprises established during 1991 -1 999). The remaining problems are related to the creation of "a level playing field" for business activities in practice. There have also been some improvements in the environment for attracting FDI (the Foreign Investment Law was amended in 2000). However, cumbersome administrative procedures and corruption, an inconsistent and barely transparent system of legal documents and high costs of infrastructure services facilitating business remain major obstacles.

The pace of SOEs and banking sector reform, however, remains not as fast as expected despite a resolution on SOEs and an overall programme for the restructuring of the commercial banking system. In the period 2003-2005, 3,000 out of a total of 5,000 SOEs were scheduled to restructure, 1,640 of them in 2003 (including 967 to be equitized). However, in the first half of 2003, only 286 SOEs were restructured, of which 163 SOEs were equitized. The fragile banking sector remains a serious concern with many non-performing loans and the possible expansion of risk to large and high-cost projects.

Trade policy has become more transparent and predictable (Deci- sion 4612001lQD-TTg in April 2001). Trade reform in some areas has been undertaken faster than planned (for example, the extension of trading rights to all economic sectors; the removal of some quantitative restrictions and export focal points; etc.). The international economic integration process has been stepped up. The Viet Nam-United States Bilateral Trade Agreement (VN-US BTA) became effective in December 2001. Viet Nam is in nearly full compliance with its commitments under the ASEAN Free Trade Area (AFTA) and is now focusing its efforts on becoming a WTO member in 2005.

The pace of administrative reform is still slow and a breakthrough is nowhere in sight. The year 2002 was to be the year in which rules were corrected and discipline was introduced into the administrative system, but only limited results were achieved. Administrative reform was to be considered as a central task for 2003-2005.

The "renovation" in 1986, especially the market-oriented reform in 1989, marked a turning point in the history of Viet Nam's economic development. The country escaped from the crisis in the mid-1980s and the face of the economy and society has changed significantly. In 1989, inflation was under control and has remained in the low single- digit levels. From 1990 to 1997, the GDP growth rate was maintained high at around 8 per cent per annum on average. The GDP growth rate, however, went down between 1997 and 1999, partly because of the financial crisis in East Asia, and partly because reform effects had dissipated. Since 2000, the economy has recovered, with a growth rate of 7 per cent per annum (figure 111.1).

Since 1991, the economy has been undergoing steady structural changes, albeit not fast enough. While the agricultural sector contributed only 22.3 per cent to GDP in 2003, a decline of 18.23 percentage points from 1991, the contribution of the industrial sector and the service sector has increased to 39.9 and 37.8 per cent of GDP in 2001

Figure 111.1. GDP growth rates and inflation rates, 1977-2003

Source: Vo Tri Thanh (2003).

from 23.8 per cent and 35.7 per cent in 1991, respectively (table 111.3). The share of manufactured exports in total commodity exports also increased from about 8 per cent in 1991 to about 40 per cent in 2003. This pattern of industrialization is similar to that of Indonesia, Malaysia and Thailand from 1970 to 1990. However, it is observable that the share of the service sector has been declining since 1995 and high value added services have still not been developed.

Table 111.3. Viet Nam's structure of GDP by economic sector

(Per cent at current price)

Source: Estimates based on data provided by the General Statistics Office (GSO).

7991 1995 1998 1999 2000 2001 3382 2003

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Agriculture 40.49 25.77 25.78 25.44 24.30 23.30 22.99 22.26

Industry 23.79 32.08 32.49 34.49 36.61 37.70 38.55 39.94 - Manufactory 13.1 16.5 17.2 17.7 18.7 19.6 20.4 20.7

Services 35.72 42.15 41.73 40.07 39.09 39.00 38.46 37.80

Surprisingly, the contribution of the domestic private sector, both informal and formal, to the economy experienced a downward trend, from 68.93 per cent in 1991 to 47.8 per cent in 2002, while the State sector, recognized as inefficient, increased its total contribution to the economy to 38.3 per cent in 2002 from 31.17 per cent in 1991. The question here is how long this trend in the context of market reform can be sustained given the inefficiency of the SOE sector and public investment. During the same period, foreign-invested firms increased their contributions to GDP steadily, from nearly nil to 13.2 per cent. This implies that FDI plays an increasingly important role in the Vietnamese economy.

The significant structural change, however, did not translate into a corresponding increase in employment (table 111.4) since this change did not reveal much of the gains from exploiting Viet Nam's comparative advantage. The situation has improved since the enactment of the new Enterprise Law in 2000 and the implementation of the VN-US BTA leading to a surge in the export of labour-intensive products (textiles and garments and handicrafts) to the United States market. However, there are two problems arising. First, most jobs have been created without a significant quality improvement. The skill of Viet Nam's workers is still weak in comparison with that of workers in other countries. In 2002, only about 12 per cent of the total labour force had a diploma from high secondary vocational training schools or a higher level of education. Second, most rural labour has been absorbed by low value-added sectors in manufacturing and services.

Table 111.4. Viet Nam's employment structure by economic sector

(Per cent of total)

Source: Estimates based on data provided by the Ministry of Labour, Invalids and Social Affairs.

In parallel with strong economic development, international trade also improved dramatically. In terms of the total tradeIGDP ratio, Viet Nam is now one of the most open economies in the world (The ratio was

1991 1997 1998 1999 2 0 2001 2002 2003

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 72.66 65.84 63.49 63.60 63.05 62.61 60.67 59.04 Industry 13.62 12.38 11.93 12.45 13.19 13.10 15.13 16.41 Services 13.72 21.78 24.58 23.95 23.76 24.29 24.20 24.55

about 110 per cent in 2003) (table 111.5). Viet Nam's trade has become much more diversified in both export product structure and markets. The implementation of commitments under bilateral, regional and multilateral trade agreements would have a significant impact on the reform process and the socio-economic changes in Viet Nam.

Table 111.5. Viet Nam's merchandise exports and imports

Source: Vo Tri Thanh (2003).

To some significant extent, the reform processes in both China and Viet Nam had major similarities:

When the reform began, the Chinese economy looked very different from the Vietnamese economy in terms of size and industrial development. Both countries, however, were regarded as agrarian economies and the "bottom up" reforms first launched in rural areas were thought to be easier as they satisfied people's wishes and the political situation in rural areas was seen not to be as complicated as in urban areas.

As mentioned in the introduction, the economic reform in China and Viet Nam was in general a process of "learning by doing" and was characterized by gradualism. This approach has several advantages since it can avoid economic collapse or a crisis, while gradually building confidence as people see the reform successes.

In fact, the selection of a reform approach is driven not only by the goal of the reforms but also by the structure of existing institutions. In a broader view, it can be seen that underlying China's and Viet Nam's reforms is a series of changes that transformed institutions. These institutions work because they achieve two objectives at the same time: on the one hand, they improve economic efficiency and, on the other hand, they make the reform a win-win game with the interests

_ -

Export (X Gap) 24.00 32. 47.5 49.03 Import &E$ billion) 2.338 11.5 Import (% GDP) 26.88 41. 56.68 60.35 Total (% GDP) 50.88 73.72 70.51 79.89 94.04 95.16 104.57 109.38

of compatible those in power. These institutional reforms were not created "solely for increasing the size of the pie, but also reflecting the distributional concerns of how the enlarged pie is divided and the political concerns of how the interests of those in power are served" (Qian, 2002).

However, there is also a major difference in the "turning points" in institutional changes between China and Viet Nam. The gradual approach did not seem to work well in Viet Narn until the radical 1989 reform was launched, which came into being under the pressures of an economy in macroeconomic instability and crisis and the "drying up" of aid from the former socialist block. The 1989 economic reform package is considered most successful since the basic conditions were created for the transformation to a market-oriented economy. China took a "dual track" and gradual approach to prevent significant losses and instability, as the economy had relatively large industries. In this regard, China seems to have been more pragmatic than Viet Nam. It is not easy for Viet Nam, with its small economy, to take risks while considering various geo-economic and geo-political dimensions. Of course, the domestic and external situations in both countries have changed significantly. The question now is how China and Viet Narn can have more proactive and effective reforms in response to these changes.

Whatever the case, some common and interrelated lessons can be drawn from the reform experiences in China and Viet Nam. First, effective and successful reforms require not only political will but also a mental change reflecting the dynamics of real life. Second, the nature of reform is to grant rights and to expand opportunities for people in choosing and deciding the direction and form of their production and business activities. Third, partial and sectoral reform measures can be good but are not good enough. They should be undertaken within more comprehensive reforms, especially in conjunction with macroeconomic reforms and the opening of the economy. Specifically, the socioeconomic achievements in China and Viet Narn can be attributed to three key factors: (1) the acknowledgment of the right to private business and the market-oriented reforms; (2) the opening (mostly in terms of trade and FDI) and integration of the economy into the regional and world economy; and (3) maintenance of macroeconomic and sociopolitical stability.

B. POVERTY REDUCTION

1. China

(a) Trends in poverty reduction

As a result of strong economic growth brought on by economic reform since 1978, China has experienced a tremendous decline in poverty. For urban residents, average annual income per capita rose 20 times, from 343 yuan in 1978 to 6,860 yuan in 2001. During the same time, the annual income per capita of rural households increased 18 times, from 134 yuan to 2,366 yuan. High economic growth, thus, is relatively broad-based. By using the official poverty line,4 the number of poor people fell from 200 million in 1981 to 34 million in 1999. By a poverty line of one dollar per day per capita, the number of poor people declined from 490 million in 1981 to 98 million in 1999 and 80 million in 2002. And by a poverty line of one dollar consumption per day per capita, the figures are 360 million in 1990, 223 million in 1999 and 161 million in 2002 (see also figure 111.2).

Figure 111.2. Poverty reduction in China

(Percentage of total population)


Because poverty in China is mainly a rural problem, the Government has not officially adopted an urban poverty line. The official poverty line for rural areas is very low, Y635 per capita income per year, and reflects absolute poverty based on the minimum subsistence necessary to sustain life.

Poverty, however, dropped mostly significantly in two periods. The first period was in the early 1980s, when fast growth emerged as a result of rural reforms, which led to strong growth in grain yields and in rural industries, accompanied by sharp increases in agricultural procurement prices, alongside improvements in rural-urban terms of trade. The second period occurred during 1994-1 996 when the Government shifted its focus towards rural reform by increasing agricultural prices and output in rural areas, and by introducing the "8-7" plan for poverty reduc- t i ~ n . ~ This pattern of poverty reduction in China implies that there is a correlation between agricultural growth and poverty reduction, and that the agricultural sector has played a dominant role in poverty alleviation in China.

Not only did China succeed in reducing the number of people living under the poverty line, but other social indicators dramatically improved. By 2001, the adult literacy rate was 85 per cent and the net enrolment rate in primary school was 99 per cent. During 1980-2001, the share of the population with primary schooling remained at about 35 per cent, but the share increased from 15 to 34 per cent for those with junior secondary schooling and from 6 to 11 for those with senior secondary and technical schooling. Other health indicators also showed significant improvement. Life expectancy increased from 67 years to 70 years and mortality under 5 decreased from 64 to 39 per cent (World Bank, 2003).

However, there has been some concern recently about a slower pace of poverty reduction in China. The proportion of people living under the China's official poverty line declined 16.8 percentage points during 1978-1991 but only 8.3 percentage points over the period 1991 - 2002. Among other things, this slowdown was explained by a decline in the quality of pro-poor growth and by widening inequality between groups in the society. The Gini coefficient increased rather fast. While the Gini coefficient was 0.288 in 1981, it went up to 0.349 in 1989 and 0.458 in 2000. The Gini coefficient in China was growing at a rate of around 2.35 per cent per annum, one of the fastest in the world (Medhi, 2003). During this period, rural-urban inequality, intra-urban inequality and intra-rural inequality widened the most. For instance, by 1999, intra-urban inequality contributed nearly one half to the increase in total inequality and to 30 per cent of total inequality (World Bank, 2003). Not only is per capita income unequally distributed, but so are education attainment and health indicators across counties. The Human

More details about "8-7 plan" appear in the next section.

64

Development Index (HDI) varies widely from province to province, ranging from 0.57 to 0.88. In rural provinces, HDI is much lower than in the wealthier and more urbanized provinces. Relatively low educational attainment and poorer health status among children in backward localities may in time impede local economic competitiveness and the quality of local governance.

(b) Characteristics of poverty

(I) Individual and household characteristics of poor people

In China, poor households are characterized as those with low- quality land, on which it is not possible to achieve subsistence food levels of crop production. In the meantime, the poorest households are typically those further disadvantaged by high dependency ratios, ill health and other difficulties. Minority people are known to represent a highly disproportionate share of the poor. And women are greatly overrepresented among the poor, though poverty certainly does exacerbate society-wide problems of lower rates of female participation in education, higher relative female infant mortality rates, and higher rates of maternal mortality.

Ethnic minorities make up 9 per cent of total China's population but accounted for 40 per cent of the poor. Much of this poverty may be associated with geographic issues. Minorities are concentrated in the north-east and south-west regions, and those living in the most remote areas tend to be the poorest. In the mid-1990s, minority autonomous counties and regions accounted for more than four fifths of the nationally designated poor counties with per capita incomes under 300 yuan. In these remote mountainous areas, extremely difficult agroecologicaf conditions have been exacerbated by periods of rapid deforestation and population growth. Until recently, poverty programmes rarely reached these areas. Moreover, the lack of outside contacts among minorities deprived them of opportunities for off-farm jobs, markets and investment, as well as connections that would have enabled them to make use of those opportunities. Living in remote areas also results in lack of participation in labour mobility, an important source of income for poor families for most of the decade.

Disabled people and households with disabled members represent a large and rising share of the poor. The chronic shortage of labour power that often afflicts families with disabled members is a major cause of the absolute poverty remaining in China. Statistics showed that 17 million out of a total of 60 million disabled people in China were

counted as absolute poor and 12 million were among the rural absolute poor. This means that, although the disabled accounted for 5 per cent of the national population, they represented nearly 20 per cent of the poor living in the nationally designated poor counties. However, unlike the general pattern of poverty in China, the disabled poor are not found primarily in geographically isolated areas. About two thirds of the rural disabled poor live outside the 592 nationally designated poor counties. In relatively wealthy provinces, disability appears to be the single most important cause of poverty.

In China, little available evidence suggests that women do not suffer from poverty at much higher rates than do men (Stern, 2001). However, participatory poverty assessments conducted recently have shown that poor women and girls were particularly disadvantaged in access to basic education and health services. In addition, heavy demands on female labour, the rigid gender divisions of labour, poor local infrastructure and lack of support for specialized training for women in agricultural technologies and for a variety of knowledge and information hindered women's opportunities to raise their income (World Bank, 2001).

There are causal links between poverty and low levels of education. The less educated are overrepresented among the poor. The number of years of schooling ranges from 3.5 years in the poorest provinces to about 8 years in the wealthiest.

(ii) Sectoral and geographic characteristics of the poor

Poverty mainly remains a rural problem as 99 per cent of people with a daily consumption below $1 reside in rural areas. However, the map of rural poverty has changed. While many of the rural poor in 1978 resided in less remote and less hilly areas in the coastal and central regions, since the 1990s, an increasing share of the rural poor has been concentrated in China's western provinces. The number of the poor in the western provinces (including both the north-western and south- western provinces) increased from less than half of all of China's rural poor in 1988, 1989 and 1991 to more than two thirds (about 70 per cent) in 1996. Poverty in the western provinces is now more severe than in the rest of China. The squared poverty gap declined sharply in the north, north-east, east and central regions during the period 1991 -1 996. On the other hand, poverty in the south-western provinces was less severe than in most of the other regions in 1991, but had declined by a much smaller margin by 1996 (World Bank, 2001).

In addition to the concentration of poverty in the western provinces, the majority of China's poor reside in mountainous counties and townships and border areas.

2 Viet Nam

(a) Trends in poverty reducfion

Viet Nam has made substantial progress in poverty reduction over the 1990s, but the pace of poverty reduction decelerated for the period 1998-2002. There was a sharp fall in both rural and urban poverty over the 1990s, whichever poverty line is used.6 The percentage of the population living below the poverty line declined from over 70 per cent at the end of 1980s to 58 per cent in 1993, 37 per cent in 1998, and 29 per cent in 2002. The proportion of the food-poor fell from 25 per cent in 1993 to 15 per cent in 1998 and 11 per cent in 2002 (table 111.6).7 The depth of poverty has also been reduced for all different groups of the population.

Table 111.6. Incidence of poverty in Viet Nam, 1993,1998 and 2002

(Percentage)

Sources: Adapted from Poverty Working Group (1999), GSO (2003).

The poverty line mentioned in this paper is calculated as expenditures required, given Vietnamese food consumption patterns, to deliver 2,100 calories per person per day and a minimum quantum of non-food expenditure. The poverty line in 2002 is VND 1 .W6 million (US$ 124) per person per year.

' Poverty Working Group (1999), GSO (2003) and data provided by GSO based on Viet Nam Living Standard Survey (VLSS) 2002.

Food poverty General poverty 1993 1998 2002 1993 1998 2002

Total 24.9 15.0 10.9 58.1 37.4 28.9

UrbanlRural Urban Rural

Ethnicity Kinh & Chinese Others

Gender Male Female

7.9 29.1

20.8 52.0

2.5 1,9 18.6 13.6

10.6 6.5 41.8 41.5

25.1 66.4

53.9 86.4

9.2 6.6 45.5 35.6

31.1 23.1 75.2 69.3

26.0 16.2 12.0 61.0 39.9 31.2 21.0 10.6 6.6 48.3 28.2 19.9

Available studies and statistics suggest that the decline in poverty in Viet Nam reflects rising household expenditures and GDP per capita due to an increase in real income during the 1990s. According to the three rounds of VLSS, income and consequently expenditure levels have been improved significantly over the 1990s. The real annual per capita expenditure was 1,936 thousand Vietnamese dong (VND) (equivalent to US$ 130) in 1992-1 993, VND 2,764 in 1997-1 998, and VND 3,229 in 2002. The annual average household per capita expenditure rose by 7.4 per cent between 1993 and 1998, and it increased by 4.0 per cent between 1998 and 2002 in real terms. These figures indicate a considerable improvement in living standards during the 1990s, although there was a slowdown late in the decade.

Household incomelexpenditure in both urban and rural areas, in all regions and for every income quintile, improved over the period 1993- 2002. However, expenditure in richer quintiles grew faster than in poorer ones, and the expenditure gap between the richest and the poorest quintiles has been widening (table 111.7). The situation is similar for urban and rural income. Female-headed households fared better than male-headed ones, and the expenditure gap between these two groups has also been increasing gradually.

Table 111.7. Real annual per capita expenditure and annual growth, 1993-2002

Source: Fan et al. (2003).

Region

Real annual Annual growth in per capita

(thousand VND) expenditure (?A) per capita expenditure

IQ93 1998 2002 19931998 1996-2002

Whole Viet Nam

Urbanlrural Urban Rural Gap (urbanlrural)

Qulntile Poorest Near poorest Middle Near richest Richest Gap (richest/poorest)

1 936

3 013 1 669

1.8

854 1 233 1 582 2 098 3 911 4.6

2764 3229

4 829 5 a12 2166 2447 2.2 2.4

1099 1197 1 632 1 796 2 125 2 386 2 929 3 401 6 032 7 363 5.5 62

7.4 4.0

9.9 5.4 n.a.

4.7 3.1 n.a.

5.2 22 5.8 2.4 6.1 2.9

9.1 5.1 n.a n.a.

6.9 3.8

As income for different groups of the population is not equal, poverty incidence in Viet Nam is rather diverse. While more than a third of the rural population was still poor in 2002, the urban poor now are very few. Throughout the 1990s, poverty remained a rural phenomenon with above 90 per cent of the poor in Viet Nam living there. Rural poverty was also deeper and more severe. Ethnic minorities had substantially higher poverty rates and witnessed much smaller reductions over the 1990s (only 17.1 percentage points for ethnic minorities versus 30.8 for Kinh and Chinese; see table 111.6). The poverty incidence within ethnic minority people was the highest across all social groups. Poverty among ethnic minorities was also the most severe. The poorest ethnic minorities in Viet Nam reside in the Central Highlands and the North West region. Poverty incidence also has a regional dimension. The three regions with the highest poverty rates for the past 10 years were the Northern Uplands, the Central Highlands and the North Central Coasts.

(6) Characteristics of poverty

0) Individual and household characteristics of poor people

The poor in Viet Nam are not very different from other poor people around the world. A typical poor is less educated and less skilled; has more children but less access to land and credit; spends less on education and has less health insurance coverage; lacks opportunities to earn income and is more vulnerable to external shocks and risks (Vu Quoc Huy, 2002).

Poverty incidence was more prevalent and more persistent among ethnic minorities. Expenditure per capita among ethnic minority households was 13 per cent lower than for Kinh or Chinese households. Ethnic minority households are larger and have more children than the average. The educational attainment of household heads and spouses is lower. Endowments in terms of housing and other assets are also below average. The compounded effect of all these characteristics is such that minority households are substantially poorer. The share of ethnic minorities among the poor is also increasing steadily, from 20 per cent in 1993 to more than 30 per cent by 2002. The upward trend is even stronger if food poverty is considered instead. The share of ethnic minorities among the food-poor increased from less than 30 per cent in 1993 to almost 53 per cent in 2002.

It is rather surprising that male-headed households in Viet Nam have a higher poverty rate than female-headed households. The tradi-

tionally lower poverty rates reported by female-headed households might be due to different reasons. It might reflect the fact that female-headed households are commonly recipients of large remittances from migrant husbands. Moreover, female-headed households report a smaller family size, a characteristic closely correlated to poverty levels. Finally, family registration procedures do not allow ascertaining how many of the female-headed households and single female-headed (and arguably more vulnerable to falling into poverty), so available data need to be treated with caution (UNDP, 2003).

The poor generally have low levels of educational attainment. Although poverty incidence has dropped for every level of educational attainment over the 1990s, the poor by and large have relatively low levels of educational attainment. The highest incidence of poverty (40 per cent) is for those who have not completed primary school, whereas none of those with a Master's or higher degree is poor. In 2002, the poor had the lowest literacy rate (less than 90 per cent) compared with the non-poor. About one fourth of the poor have not finished primary school. The highest education attainment for another two thirds of them is primary and lower secondary school. Less than 2 per cent of them have skills.*

(ii) Sectoral and geographic characteristics of the poor

The overwhelming majority of the poor (92 per cent) live in rural areas. Poverty is also very much associated with ethnic minorities living in isolated and mountainous areas such as the Northern Uplands and the Central Highlands.

As table 111.8 shows, both poverty incidence and the share of total poverty were highest for farmers during the 1990s, and its share in the total poor has not changed much (just 1.7 percentage points). In 1998 and 2002, poverty incidence among farmers was still more than double that among manufacturing workers, and about four times that among those who worked in services. It is notable that poverty reduction for farmers progressed more rapidly for the period 1993-1 998 than for 1 998-2002.

Skilled here are defined as those persons that have finished a technical or vocational college and tertiary education.

Table 111.8. Poverty by main sectoral occupation for people aged 15 years old or higher who were employed

in the preceding 12 months

(Percentage)

Source: Pham Lan Huong et al. (2003).

Common trends and characteristics of poverty can be observed in China and Viet Nam during the reform process. First, the majority of the poor were concentrated in rural and in isolated areas. Second, the poverty situation has spread unevenly among regions and poverty is deepest in the areas with ethnic minority populations. Third, the gap between the rich and the poor has tended to widen nationwide and within many areas and provinces.

Other important observations are as follows:

First, growth in per capita GDP has been closely associated with the pace of poverty reduction. Therefore, differences in economic growth between the agricultural and manufacturing sectors, between rural and urban areas, can partly explain the different rate of poverty reduction across the country. The poor regions usually grew more slowly than the country's average, causing a regional concentration of poverty.

Second, macroeconomic fluctuations and external shocks can have devastating effects on the poor, as many of the poor live close to subsistence and typically have limited opportunities to insure themselves against income shocks. This implies that designing macroeconomic policies requires more attention to the way in which macroeconomic cycles and fluctuations are "smoothed" out.

Sector

Poverty Share of Share of incidence total poverty population

1993 1998 2002 1993 1998 2002 1993 1998 ZOO2

Agriculture, forestly 66.1 44.4 38.9 85.7 84.3 84.0 73.9 67.1 58.7 and fishety

Mining, manufacturing and construction

Services

Others

37.8 20.9 15.3 7.4 8.0 8.5 11.1 12.8 17.0

28.1 12.7 9.9 5.7 6.4 6.4 11.6 15.5 18.6

20.8 9.1 4.9 1.2 1.3 1.1 3.4 4.7 5.7

Total 57.0 34.8 27.6 100.0 100.0 100.0 100.0100.0 100.0

Third, efficient investment and spending by the Government have been crucial to growth and poverty reduction in China and Viet Nam.g Without improved technology, infrastructure and education, such rapid economic growth and large-scale reduction in poverty would not have been possible. Empiri- cal works by Fan et al. (2002-2003) show that, although such spending has a very large impact on the poor, their magni- tudes vary among sectors. Furthermore, its ranking in terms of the number of the poor escaping poverty differs in China and Viet Nam (box 111.1).

The efficiency of public investment and spending will be discussed in the following section.

72

Box 111.1. Impact of public investment on rural poverty reduction (number of poor reduced per 10,OOO yuan or billion VND)

While spending on education bas the largest impact in China (l0,OOO yuan spent on education helps to lift 6.3 persons out of poverty), it is ranked second in Viet Narn (one billion VND turns 164.6 poor into non-poor). Agricul- tural R&D seems to generate the largest impact in Viet Nam, with one billion VND spent in this sector helping 246.5 poor get out of poverty.

sector China vmt Nem

Agricultural R&D 3.4 (3) 246.5 (1) lnigation 0.4 (6) 23.3 (5) Roads 3.0 (4) 102.5 (3) Education 6.3 (1) 164.6 (2) Electrification 2.9 (5) 90.7 (4) Rural telecommunication 4.0 (2)

Sources: Fan et al. (2002) and Fan et al. (2003).

Nclns: Figures in parentheses are ranking of the impacts in terms of poverty reduction. It is rather surprising that the irrigation impact is smallest in both countries. Possible explanations are government overfunding for the sector relative to others, unfavourable allocation of spending for poorer regions or poorer population groups, low investment efficiency and lack of complementary spending on R&D and other infrastructure. The studies thus clearly show importance of government intervention for poverty reduction in both China and Viet Nam through spending on education, road, agricultural R&D and telecommunication.

Fourth, economic growth is necessary, but not sufficient, for poverty reduction. The impact of growth on poverty not only depends on the rate of growth, but also on the composition of growth and the structure of the economy. Moreover, it seems that the lower the poverty incidence, the harder the poverty reduction. This may be because the fight against "hard-core" poverty needs to be undertaken within a more comprehensive framework, implying an increasingly important role for the specific programmes targeted on poverty reduction.

C. PROGRAMMES ON POVERTY REDUCTION

1. China's poverty reduction programme^'^

Over the past 20 years, remarkable achievements in poverty recluc- tion have resulted from early reforms. Although not viewed as pro-poor growth, they unleashed the potential for broad-based growth and poverty reduction programmes with the ambitious aim of quickly reducing the incidence of poverty in China. Although the very first formal poverty reduction programme started in 1986, the best results appeared during 1993-1 996. This implied that developing and implementing these programmes was a necessary but not sufficient condition for alleviating poverty. This subsection reviews the programmes implemented in China from 1986 until the present, the limitations of those programmes and their impact on poverty reduction. Institutional arrangements, which is believed to be a pre-condition for the success of programmes, is examined separately while elements of programmes such as targeting, instruments would be seen overtime.

(a) Institutional arrangements

Poverty reduction was first officially introduced in China in 1986, the year in which the seventh five-year plan began. In this poverty reduction programme, the Government of China had attracted the involvement of a wide variety of actors, not only at the central level but also at the lower and grass-roots levels. Each of the central ministries and agencies had its own special poor area projects and every province had its own specially funded programmes. At the national level, the Ministry of Civil Affairs was asked to provide disaster relief and income maintenance support and to coordinate the distribution of relief grain with

'O This section is sourced from World Bank (2003), World Bank (2001), Zhang (2002) and Hu et al. (2003).

the Ministry of Commerce's Grain Bureau. Some special programmes to improve the education and health status of the poor were also established and administered by the relevant Ministries, such as the Ministry of Education and the Ministry of Health. The Agricultural Bank of China and several other banks offered subsidized loans for poor areas through a variety of funds administered by provincial bank branches and their country-wide networks. The Ministry of Finance took charge of providing grant assistance. The Regional Office of the State Plan- ning Commission administered the Food-For-Work programme, under which roads and riverine transport were built, and drinking water systems, irrigation works and other capital construction were developed in poor areas.

In order to provide greater coherence for the large number of poverty reduction initiatives and expediting economic development in poor areas, the State Council had established the Leading Group Office for Poverty Reduction (LGPR). In addition, LGPR was assigned to coordinate the nation's funding for poverty reduction programmes. Since then, LGPR and its executing agency, the Poor Area Development Office (PADO), had emerged as the principal advocate of China's rural poor. At lower levels of authority, the models of LGPR and PADO were imitated. Currently, most poor provinces, prefectures and counties have all established organizations similar to,LGPR and PADO at the central level. Even in many townships, local authorities have assigned at least a "designated person" to handle policies.

Furthermore, the battle against poverty also drew the attention and participation of authorities in richer coastal provinces and in major municipalities as well as a number of non-governmental organizations. International donors also played an increasing role in poverty reduction programmes throughout the 1990s. The Women's Federation is a good example of an organization working on poverty reduction. Working through its offices at all levels of administration, it has special responsibility for poverty alleviation activities. These activities include (a) organizing training courses in applied planting techniques and pest prevention for grain and case crops, animal husbandry, forestry and other production skills; (b) establishing a number of case crop production bases which train and employ poor women in the production of fruit, coffee and tea, sugarcane, aquatic products and others; (c) augmenting the provision of credit and farm inputs to poor women through the Agricultural Bank of China; and (d) facilitating female labour mobility from poor villages to employment opportunities in nearby town, counties and provinces.

(6) The 8-7 Plan for poverty reduction

The first nationwide poverty reduction programme was launched in 1986 (the so-called seventh plan). One of the major features of this programme was that most of the Government's subsidized loans to poor household were earmarked for developing agricultural production. However, the programme was not very effective.

The Government's commitment to poverty reduction was further strengthened in the eighth five-year plan, in 1994. In that plan, the Gov- ernment adopted a more broad definition of poverty (i.e. greater realization of the multidimensional characteristics of poverty), reflected in the programme goals. These goals included (a) lifting 80-1 00 million remaining poor in 1994 out of poverty in 7 years (i.e. by 2000); (b) reaching the twin targets of extending nine-year compulsory education to 85 per cent of the population and eliminating illiteracy among citizens aged 15-45 in the areas where 90 per cent of the national population lived; and (c) reestablishing cooperative health insurance schemes to raise the level of coverage from 10 to 70 per cent by the year 2000 and to 80 per cent by 2010. Correspondingly, LGPR's leading role in poverty reduction was further reconfirmed and extended to coordinate responsible for poverty measurement and research, project planning, and monitoring and management of both domestic and international funding for poverty reduction. Unlike the previous programme, most of the "cheap" funds for poverty reduction would flow to enterprises instead of poor households. This was due to the belief that poor households either lacked necessary technical and management skills to make the best use of poverty reduction or were unable to achieve economies of scale in operation.

To achieve those stated goals, the Plan called for (a) assisting poor households with land improvement, increased cash crop, tree crop and livestock production, and improved access to off-farm employment opportunities; (b) providing most or all townships with road access and electricity, and improving access to drinking water for most poor villages; (c) universalizing primary education and providing basic preventive and curative health care; (d) graduating better-off counties in the coastal provinces from the newly established list of nationally designated poor counties; (e) improved management of available funding, including increased attention to the appraisal and financial viability of poverty reduction investment activities, greater recovery of loan funds and reduced leakage of poverty reduction funding to alternative activities; and (f) greater involvement and support from all government ministries and agencies, the coastal provinces and major municipalities and other domestic organizations.

Under the framework of the 8-7 plan, two national conferences on poverty reduction were held. At the first conference, in 1996, poverty reduction once again was further confirmed as the key task for China's development. This conference also marked a new milestone in the political arrangement, funding and strategies for poverty reduction. A new "poverty reduction responsibility system" was set up whereby the leaders of the poor provinces and poor regions and counties would be handed the responsibility for the effectiveness of the poverty reduction work in their jurisdictions. Another change in this plan involved directing all funds for enterprises and industrial projects in poor areas to households, thus allowing households to regain the role of providing jobs and reducing poverty. The second conference was organized in 1999. In this plan, the Government reiterated its commitment to targeting only impoverished villages and households, and confirmed that poverty funding must be more strictly focused on measures that could solve the food and clothing problems of the poor. Moreover, the second conference (a) strongly discouraged the use of poverty funds for industrial projects; (b) confirmed that microcredit would continue to be a part of the poverty reduction programme, provided standardized procedures were used; (c) noted the need for further strengthening of financial controls and auditing measures for all poverty funds; and (d) identified increased domestic investment and capital construction in the western provinces as a key aspect of poverty reduction efforts.

To achieve non-monetary targets, the Government resumed supportive public intervention in education and health care. It also gave privileges to poor areas through preferential financial and monetary policies and by increasing investment and loans to build an essential base for the expansion of social opportunities. Expanding income-earning opportunities among disadvantaged groups attracted much more attention.

(0 Funding sources and allocation

In order to meet the goals of the 8-7 programme, the Government combined political commitments with financial commitments to poverty reduction. The annual contribution for poverty alleviation increased. In nominal terms, annual central government poverty reduction funding ranged between US$ 1 billion to US$ 1.5 billion during 1986-1996; it increased sharply each year from 1 996 onwards, eventually totalling more than US$ 20 billion during 1986-1999. Central government funding is supplemented by provincial and lower level poverty funding, which is targeted to provide 30-50 per cent of the national loan funds. However, the weak fiscal condition of many of the poorer provinces has made it difficult to reach this target.

An inspection of national sectoral spending allocations from 1991 - 1995 shows that almost 60 per cent of the total poverty spending (including subsidized loans, food for work programme, fund grants from the Ministry of Finance for the development of poor areas) went to agriculture (29 per cent) and industry (31 per cent). Infrastructure spending represented 35 per cent of the total with less than 2 per cent spent on education and public health (excluding substantial funding from the Ministry of Education and Health for poor area education and health programmes as well as funding for infrastructure investment in poor areas from sector ministries). Subsidized loans were concentrated on industry and agriculture, Food for Work (FFW) on infrastructure and Ministry of Finance grants were spread more evenly among all the sectors.

However, whether funds for poverty reduction were effectively utilized or not was a different story. Lessons learned from previous poverty reduction programmes have caused the Government to apply strict controls over the funds for poverty reduction, such as restricting expenditure for local government consumption. The central Government suggests that, in poor counties, there should be no hotels, government office building, cellular phones or cars before the poverty problems are solved. In addition to increasing funds, the Government also mobilizes the financial resources from developed provinces and municipalities in the coastal areas to support the target provinces and autonomous regions in poor areas by employing a partnership method, i.e. a rich province would be selected to help a poor one.

Funds were also raised by many other civilian organizations, such as Hope Programme and the Spring Bud Programme, to build schools and health care centres. Furthermore, local communities play an increasing role in mobilizing resources for poverty reduction.

(ii) Targeting

The list of poor counties was introduced in 1986 to better concentrate available poverty reduction funding in some counties with the greatest needs. Initially, this list consisted of the 331 poorest counties in 1986; it was expanded to 592 counties in 1993. Quantitative analysis had provided evidence of the benefits of poverty reduction programmes; for example, households in the nationally designated poor counties had a higher rate of consumption. However, as Park et al. (1999) has shown, "targeting effectiveness has deteriorated over time and leakage has increased, the list of targeting communes was no longer effective". This in turn was reflected by (a) a severe dilution of available poverty

reduction funding for the half of China's remaining poor who reside in the national designated poor counties; and (b) the near complete omission of central government poverty reduction funding for the other half of the poor who reside outside the poor counties. This required a new method of targeting. Instead of county targeting, township targeting would benefit the minorities who lived outside the boundaries of both the poor counties and the minority regions, thus currently receive neither poverty assistance nor special types of relief administered in minority regions.

(iii) Subsidized loans

This programme is the largest of the poverty programme and is assigned the leading role in the poverty reduction efforts of the Govern- ment of China. Since its inception, 68 billion yuan has put into the programme. However, it has proven difficult to ensure that this amount of money brings clear benefits to poor households. Thus, the Govern- ment employed many different approaches to increase the programme's effectiveness.

The first approach was to issue loans to households. Due to the belief that poor households lacked managerial and technical skills to use those subsidized loans effectively, a new approach had been put into operation in 1989, however. That approach had been to allocate a large proportion of subsidized loans to support the growth of county and township enterprises in poor areas. In 1992 and 1993, about half of the subsidized loans were made to industrial enterprises and more than 60 per cent went to county-run enterprises. By the mid-1990s, the shortcomings of this approach had appeared. Most of the rural enterprises receiving subsidized loans were capital-intensive andlor loss-making firms with minimal impacts on poverty reduction. Moreover, funds and other resources available for household farm production and off-farm production undertaken by small-scale private enterprises had been reduced. Consequently, this pattern of investment, i.e. too much funds allocated to capital-intensive firms and limited funds to households, may distort patterns of development in poor areas. These shortcomings spurred a completely new approach to supporting the economic development of poor counties. Instead of playing the loan maker, local governments turned their attention to facilitating the development of N E s . A range of measures were employed, including (a) reforming N E ownership and management, (b) allowing those enterprises that had negative equity and had suffered from financial losses for a number of years to go bankrupt, and (c) encouraging local enterprises whose operations were consistent with local comparative advantage to establish

joint ventures with enterprises from more developed areas. Due to a lack of experience in establishing and managing enterprises, local governments should focus on simplifying the procedures for the establishment of private and collective enterprises, reducing taxes and other burdens on enterprises, improving local infrastructure, and providing more training for local accountants, auditors and technicians (World Bank, 2001).

Together with the changes in the role of local government in supporting the development of TVEs, the decision was made at the first National Poverty Reduction Conference to deliver, from 1996 onwards, 70 per cent of subsidized loans to the poor and 30 per cent to agriculture. Although there were some changes in the structure of the loans, this target was hardly achieved. Sizable lending for industry remained, and the composition of spending did not reach the 70130 targets. By 1998, the loans to households comprised only 30 per cent of total loans, and the proportion actually reaching poor households was even lower.

There are a number of factors contributing to the programme's difficulty in directing loans to the poor. Firstly, the objectives of the programme, reaching poor households and fostering development, seem to be a conflict for local officers in carrying out the programme. In order to secure repayment of the loans and to increase tax revenue, programme officers tended to select projects with higher financial benefits regardless of whether or not such projects would help poverty reduction. This tendency was, to some degree, based on the perception of managerial and technical insufficiency on the part of the poor. Secondly, even if the loans were made to households, the proportion of poor households that could borrow was limited. This is due to: (a) competition for "cheap" (i.e. low interest rate) and sizable loans, which the poor usually lost; (b) complicated procedures for loan application and approval, which discouraged the poor; and (c) loan conditions, such as loan guarantees and collateral, which usually excluded the poor from the programme. Lastly, the inadequate monitoring and supervision capability of local PAD0 officers exacerbated the problems in implementing the programme.

Defaults became a problem, partly hindering the success of the programme. In 1991-1993, the repayment levels averaged 54 per cent, much lower than the sustainable level. Overdue loans were greater than 100 per cent of all loans coming to term. Repayment of loans to enterprises was the lowest at less than 40 per cent. In addition to the lax supervision and monitoring efforts, low and negative real interest rates serve as a disincentive for repayment. Also, good repayment does not necessarily lead to additional loans (Park, 1998).

(iv) Microcredit programmes

Problems during the process of implementing the subsidized loan programmes, together with worldwide success of microcredit programmes, led the Government to turn resources for the subsidized loan programme into microcredit activities. The growth rate of this type of activity was very fast. In 1997, only 80 counties were included in the programmes, with credit totalling 100 million yuan, but by 1998 the programme had reached 200 counties with total investment amounting to 800 million yuan. Most government-funded microcredit programmes have used variations of the Grameen Bank approach, which has been employed successfully in other countries and in some donor programmes in China.

This programme was initially carried out by PADO, but a new regulation required the Agricultural Bank of China (ABC) to undertake it. Under this regulation, ABC would sign the loan contracts with households directly, while PADOs would focus on organizing households into groups and centres and facilitating loan repayments. This movement created many difficulties. Firstly, as ABC did not have agencies or staff at the township level in many countries, financial management and supervision would be difficult. Secondly, the loan commission to be paid by ABC to the PADOs for their work was most likely too small to sustain their interest in microcredit.

(c) The Food for Work Programme

This programme was implemented by the State Development Planning Commission with the responsibility of funding infrastructure investment in poor areas. Funding from the programme in the early years went almost entirely to rural roads, water and land improvement. After large expansions in the early 1990s, the programme had diversified and included investments in wider areas, such as water conservation, and even commerce, education and health. Central government funds, usually used for construction inputs, were supposed to be matched by provincial and county funds. Because in most cases matched funds are inadequate, the shortage would be offset by the use of voluntary labour contributions from villagers, which is estimated to account for 40 per cent of total construction labour. In general, the types of investment were made by national and provincial governments. County government selected the villages to participate in the programme, and village committees make decisions on the allocation of project investment and labour contribution.

However, the benefits of this programme were not spread evenly. While villages with more favourable economic conditions, those in more remote areas, and those with higher populations had been more likely to receive FFW projects, the poorest villages were less likely to receive these projects. This situation was partly rooted in the rational economic decisions which were based on estimations of economic return. Build- ing a road or providing electricity in a remote, sparsely populated village would not be the most efficient use of poverty reduction funds.

Given that the matched funds provided by the local government usually took the form of labour work, it acted as a "labour tax", which fell disproportionately on the poor, who are most likely to contribute labour than those from richer households. This resulted from the fact that labour work provided under FFW schemes was in many cases unpaid; thus, households with higher cash earnings sometimes chose not to participate but instead contribute an equivalent sum of money. Whether the money collected from richer people was put to use was not reported. Thus, it is much better for poverty reduction if those who take part in the labour work schemes of FFW projects are paid with the money collected from those who make monetary contributions.

Another problem was that the programme was administered in a top-down manner, and in some cases the actual project investment was contrary to the expressed needs of villagers. Moreover, infrastructure built under the programme was not well integrated with other investments carried out by other programmes.

Finally, a concern relating to effectiveness of the programme and its impact on the poor has emerged after the expansion of the programme in the mid-1990s. Zhu and Jiang (1996) pointed out that some of the investments included in FFW had no direct relation to poverty reduction, such as investments in rural post offices and some afforestation projects. Furthermore, the involvement of many sectors and line ministers exacerbated the shortage of matching funds, causing inefficiency and delays in many projects.

(d) Ministry of Finance grant funds

The Ministry of Finance provided funds for investment in poor areas, and it was believed that most of those funds were directed to the poor counties. Poor Area Development Funds played the main roles in providing the grant funds. Those funds amounted to 3 billion yuan in 1998. Moreover, budgetary supports in the form of grants for education, a revolving fund, tax incentives and budgetary subsidies were also

provided for poor counties. However, the grant funds under this programme were rarely investigated, so their efficiency is unknown. However, some implementation problems had been pointed out by Park (1999), such as difficulty in raising counterpart funds, diversion of funds to pay administrative costs, unclear authority over fund use, slow and late delivery of funds and dispersion of funds.

(e) Rural relief programmes

The Ministry of Civil Affairs and provincial and county Civil Affairs took charge of China's rural relief system. This programme was independent from the Government's poverty relief programmes, although many recipients were poor. Targets of the programme included those affected by natural disasters such as earthquakes, flood and drought. A smaller amount of funds was used to provide food, clothing, housing, medical care, education for those considered truly destitute, who lack any means or potential to support themselves. Provincial governments provided most of the budgetary funds for the programme, but the programme also received donations from other sources. Township-level governments used funds allocated from the county Bureaus to purchase necessities for those needing relief who were prohibited from receiving money from the programmes.

The relief system has functioned well in providing a safety for the most destitute and preventing starvation during the most severe circumstances. The funding for the programme is maintained adequately. The concerns that reform of the grain marketing system might under- mine the effectiveness of the system have not been borne out.

(9 Safety net programme

The current, formal system of social security in China covers only a small part of the population. It is segmented along the lines of rural-urban household registration. It excludes the rural labour force, farmers as well as off-farm workers and most of the migrant labour force. Financing and management is decentralized down to the level of counties, township and villages. Such decentralization sometimes fragments the policy response to poverty. It also inhibits labour mobility, which is generally an effective household response to shocks.

Urban social security traditionally targets employees of State and urban collective enterprises. This implies that the system overlooks migrants, who increasingly become the dominant source of urban poor. The extension of formal social insurance to the whole urban labour force

abolishes the division between the State sector and non-State sector employees. However, in practice, many small private firms are reluctant to join. In addition, the social insurance schemes suffer from financing weakness. There are several reasons for this. First, social insurance contributions are collected separately for each scheme and are often separate from the enterprise tax. Second, in some localities, the combined contribution may be too high, thus inducing non-compliance and impeding the extension of coverage. Third, financing is decentralized to the lower level, while social insurance is based on regulations issued by the central level. This mismatch leads to insufficient resources for social insurance in small cities.

The minimum living standard scheme provides adequate social safety net for the eligible urban population but it has restricted coverage driven in part by decentralized financing. First, it did not apply to migrants. Second, it did not cover medical costs, which usually was viewed as a source of poverty. Third, the lack of a cost-sharing procedure caused variations in the operation of the scheme across localities.

In the meantime, the social security scheme available in rural areas are sparse, highly variable across rural counties, and geared largely to relieving severe poverty. In addition, rural social security schemes did not apply to 133 million workers working for TVEs. Locally organized and financed partial old-age pensions and cooperative medical insurance cover less than 10 and 20 per cent of rural population and highly variable among localities in their coverage and benefit. Similarly, the local rural support schemes for poor households are restricted and variable in coverage.

There is no effective system for dealing with household and individual poverty in the midst of relative prosperity. The focus on assistance to poor counties rather than on poor household addresses those causes of poverty that are particular to the whole locality, such as poverty of natural resources. However, about one half of the rural poor live outside the poor counties, implying that many causes of poverty are determined at the household and individual levels.

The cultivation of plots of individual and household land, combined with income diversification opportunities in rural enterprises, did not sufficiently prevent poverty. The liberalization of trade in agricultural commodities exposes Chinese farmers to international prices, which implies volatility in returns, thus reducing the social security value of land.

(g) New approach

Eventually, the Government would employ alternative approaches to tackle poverty. One of the most promising approaches is the multisectoral project-based approach. This approach is widely used in donor- and NGOs-funded projects. The multisectoral rural development project usually includes an integrated programme of investments in (a) agricultural development, using various field and tree crop and livestock activities to increase agricultural productivity; (b) labour-intensive construction of rural roads, drinking water systems, small-scale irrigation, agricultural drainage works, and other rural infrastructure; (c) provision of off-farm employment opportunities through a voluntary system of enhanced rural labour mobility for the poor; (d) institution-building and poverty monitoring; and (e) rural enterprise development. Improved access to basic education and health, and separate microcredit components, should also be considered for inclusion in the programme.

However, this approach requires a great deal of design and implementation capacity. At present, funding and institutional arrangements may not be adequate to enable an effective rollout of this approach. Despite its mandate to coordinate the nation's poverty reduction programme, the LGPR system does not have (a) sufficient advance access to the detailed programme information necessary to ensure that all poverty reduction funding benefits the poor, or (b) the staffing to properly oversee the quality of poverty reduction project works and activities. At the provincial and lower levels, officials often complain that they had in sufficient control over the funding or the necessary staffing to fully complete this important mission. Access to data on the projects and activities undertaken through the FFW and Ministry of Finance grant programmes was limited, and influence over the works and activities undertaken by ABC was negligible. The current arrangement of relying on local bureaus and agencies to implement project works and activities must be maintained, but the LGPR system should play a greater role in the planning of the utilization of funds and in the supervision and monitoring of that utilization. Thus, the LGPR system requires a greater planning and supervisory role to raise the impact of the funds on the poor and reduce diversion of funds. In addition, links with government line bureaus and academic and civic organizations involved in poverty work should be forged. A stronger link would increase LGPRs effectiveness in setting policy and implementing programmes. Moreover, measures to increase LGPRs accountability by improving the monitoring of the impact of the poverty programme and the use of poverty funds would strengthen LGPR oversight and control over poverty reduction. The participation of beneficiaries in project

management, monitoring and evaluation should be fostered to ensure that the projects are run smoothly and satisfy the needs of the poor.

2 Viet Nam's poverty reduction programmes

Viet Nam has a series of programmes, which transfer resources to specific population groups. These programmes do not aim at increasing the overall supply of basic services, although the resources might be tied to the services provided. They do not aim at expanding infrastructure in general either, even if they involve public investments in selected communes. What these programmes have in common is that they explicitly favour or compensate households or communes with specific characteristics. Some of those programmes have poverty alleviation built into them. The first programme, which targets poor households, was named Hunger Eradication and Poverty Reductions (HEPR) programme or Programme 133 while the remaining programmes targets poor communes and usually is called Programme 135.

Both programmes view the lack of basic infrastructure services in rural areas as the centre of the problems. Thus, infrastructure development has been one of the key policies in the national poverty reduction strategies of the Government of Viet Nam.

(a) Programme 135

In July 1998, the Prime Minister issued Decision No. 135119881QD- TTg approving the National Programme for Socio-Economic Development in Communes Suffering Special Hardship in Mountainous and Remote Areas. The programme has since been renamed and revamped several times. Benefits under this programme take the form of a series of grants to finance small-scale infrastructure investment. The main focus of Programme 135 is on providing essential basic infrastructure to poor communes in mountainous and isolated areas." The programme

l 1 The selection of the communes benefiting from the programme has been made through a process spreading over several stages and involving various criteria. Communes specified in Programme 135 are those having the following characteristics: (i) distance from tradinglindustrial areas, (ii) production conditions, (iii) literacy rate, (iv) availability of basic infrastructure, and (v) living standards (30 per cent of population below national poverty line). The list of communes was compiled from the bottom up, through a series of stages. In the first phase, between 1998 and 2000, 1,715 communes were selected to participate in Programme 135. One thousand of them were labeled as "the most difficult and remote", but it is not clear how this selection was made. By 2002 the list was expanded from 1,715 to 1,870 communes. In the second phase, under Programme 147, the total number of beneficiary communes increased to 2,362, accounting for 26 per cent of total number of communes. These communes sheltered 46-53 per cent of the rural poor households.

provides funding for roads, small-scale irrigation works, clean water, electric power, school, health clinics and markets (that is, physical locations for trading). Other aspects of the programme include: (a) creating employment and improving livelihoods by promoting the sustainable use of natural resources and product processing in remote areas; (b) training the leadership at the commune, village and hamlet levels to manage better the economic and social development of their localities; and (c) relocating people from areas of extreme hardship to locations with more favourable conditions.

As the focuses of Programme 135 was mostly on the mountainous areas where the ethnic minority groups reside, the Committee for Ethnic Minority and Mountainous Areas (CEMMA) was assigned to administer the Programme, under the overall guidance of a deputy prime minister. It also had responsibility of coordinating with the other line ministries to implement the programme.

According to official guidelines, households at the commune level are involved in planning and managing investments under Programme 135. People are asked to choose some infrastructure projects from a list of infrastructure projects including road, small-scale irrigation, water supply, electrification, school building, health centre building, and local market building. They are also consulted on the level of community contributions. The commune People's Committee (CPC), or the management board for Programme 135, proposes a plan to the People's Council. The Fatherland front and other mass organizations disseminate information and consult the local population through village meetings. Originally it was foreseen that the commune's People's Committee would have overall procurement and management responsibility for small-scale infrastructure works, with the financial management done through the commune's treasury account.

Programme 135 is funded on an annual basis, with resources transferred directly to communes, districts or implementing institutions according to approved investment plans. To date, VND 4,632 billion (US$ 298.8 million) has gone into constructing 13,736 items of infrastructure and 2,250 irrigation works since its was launched. A total of 2,325 communes in 49 provinces nationwide are reported to have benefited from the programme as at last year (Nhan Dan - The People, 18 November 2003).

This programme had received supports from mass civil organizations as well as the donor communities. A range of projects with similar features was carried out by international NGOs, such as Oxfam's

projects to support poor communes in Tra Vinh and Laocai provinces and ActionAid's project in Ninh Thuan. Several donors also engaged in this programme in several parts of Viet Nam, such as Australia in Quang Nam and Quang Ngai provinces. Although those projects carried out by donors or NGOs still did not share the common framework for key project elements with those implemented by the Government.

Currently, it is viewed as too early to assess the success of this programme, since most beneficiary communes are still in the process of making their choices or implementing the first phase of their investment programme. However, some problems have emerged recently, including limited participation of people, ineffective targeting, and the suspicion that focusing too much on developing infrastructure as a way to alleviate poverty was not efficient.

(b) Programme 133: Hunger Eradication and Poverty Reduction

The HEPR programme (sometimes referred to as Programme 133) was established in 1996 to integrate a range of anti-poverty programmes within an overall HEPR framework. This programme was originated in the early 1990s from local initiatives and various sectoral efforts by the central Government. But it was only institutionalized in 1998 as the Prime Minister issued Decision No. 13311998lQD-TTg ratifying the national target programme on hunger elimination and poverty alleviation in the period 1998-2000.

Specific targets for poverty reduction set out in the HEPR are:

By 2005, to eliminate chronic hunger and to reduce the level of poverty to below 10 per cent according to the national poverty line;

By 2010, reduce the level of poverty to below 5 per cent according to the national poverty line.

HEPR consists of 11 specific direct targeting policy areas:12 credit for the poor; health care; education and vocational training; support of ethnic minorities having especially difficult circumstances; social security; legal assistance for the poor; support for the poor in housing and production; basic infrastructure works in poor communes; training of the poor in business skills, extension services; sedentarization and

12 These components may be provided in other poverty reduction programmes, such as microcredit programmes or programmes to secure access by the poor to health care, in particular for in-patient treatment. These separate programmes would be separately studied below.

migration to new economic zones; and support for the poor in culture and information.

While there are a number of components to the HEPR, the majority of HEPR funds have been devoted to credit and infrastructure development.

HEPR provides a nationwide framework to coordinate and integrate efforts of various sectors at different levels. Some of its benefits are targeted to poor households and others to poor communes. Among the former are the provision of "poor household certificates" and "health insurance cards". Both of these give some entitlement to free medical treatment in government hospitals and clinics. A different component of the HEPR programme provides partial or full exemptions to school fees, and yet another provides access to subsidized loans. Lists of beneficiaries are drawn up for each component of the HEPR programme. For instance, the guidelines for support with health costs go beyond those with poor household certificates, as they also include all residens of a commune covered by Programme 135, and all ethnic minorities (World Bank et al., 2003).

HEPR's management structure consists of four levels: national, provincial, district and commune levels. At the national level, a Steer- ing Board composed of representatives of leaders of different ministries and mass organizations, and headed by one of the deputy prime ministers. MOLISA is assigned as the programme managing agency. Table 111.9 presents responsibilities of central ministries and other agencies under HEPR.

At the local level, HEPR Boards have been established in all provinces, districts and poor communes. Representatives of local government and major mass organizations are members of local HEPR boards. At the beginning of 1998, almost all provinces established HEPR boards. HEPR boards also established in 529 among total 560 districts, and 9,200 among 10,034 communes in the whole country.

Targeting: There are several methods used to measure poverty and target the poor, including household expenditure; poverty mapping; income-based; local classification, self-reporting and wealth ran king. While the household expenditure, poverty mapping methods are largely employed data from deep household surveys and from population census, thus providing only accurate household expenditure at regional and provincial level and household expenditure at district level with significant errors. The income-based method was developed by MOLISA.

Table 111.9. Responsibilities of central ministries and other agencies under HEPR

Ministry of Planning Guide the localities to integrate ather programmes, projects and Investment into the poverty alleviation task; collaborate with the

Ministry of Finance to identify the annual resources for strategy implementation.

Collaborate with the MPI to Identify &ital resources, annual Government budget for implementation of the poverty alleviation strategy for the period 2001-2010; lead the budget formulation process, determine budget all* cations consistent with approved objectives, and oversee public finandal managsment.

Formulate policies, mechanisms and plans on: sedentarization, migration to new economic zones; rural infrastructure, support for product and business development, and extension of services.

Ministry of Finance

Ministry of Agricutture and Rural Development

Ministry of Aquaculture

Provide guidance in business skills, deliver aquacultural extension services, and formulate models of rearing and catching aquatic products related to poverty alleviation actiies.

Formulate policies, mechanisms and plans to support ethnic minorities facing especially difficult circumstances, and formulate other policies regarding ethnic and moun-

National Committee on Ethnic and Mountai~ws Areas

taitlOtJ8 areaS.

Wet Nam State Bank Formulate mechanisms and plans to implement the policy on credii for the poor.

Ministry of Trade Formulate policies, mechanisms and plans to assist poor areas, poor communes and poor households in product consumption.

Ministry of Justice Formulate policies, mechanisms and plans to provide free-of-charge legal advice for the poor.

Ministry of Health Formulate policies and mechanisms to assist the poor in medical treatment and heatth care.

Minisby of Education and Training

Ministry of Culture and Information

Formulate policies and mechanisms to assist the poor in access to education and training.

Formulate policies, mechanisms and plans of assisting the poor in cultural activities.

Table lll.9 (continued)

Ministty of Science, Technology and Environment

Collaborate with the National Centre of Natural Science and Technology to formulate policies, mechanisms and plans for transfer of technologies suitable to poor areas and poor households.

Ministry of Home Formulate plans to complete the network of poverty allevia- Affairs tion staff and to mobilize staff for poor communes;

complete the system of policies and conditions of employment for poverty alleviation staff at different levels.

National Committee on Population and Family Planning

Formulate policies and mechanisms for implementing the: Population, Family Planning Programme integrated into the poverty alleviation programme; credit programme for family economic development; programme of improving life quality, population quality; and other policies to assist poor households, and poor areas in population. Family planning activities.

Work with the Central Youth Union to formulate and imple ment the policy of replacing bamboo bridges with con- Crete bridges in the Mekong Delta area.

As a standing agency, collaborate with other Ministries, mass organizations and localities to formulate and organize implementation of the HEPR strategy, identify priori- tized beneficiaries and localities, demands for resources: train poverty alleviation staff; and formulate policies and mechanisms on the social security system.

Ministry of Transportation

MOLISA

Nhan Dan m People) Newspaper, Viet Nam Television, Voice or Viet Nam Radio Station

Collaborate with other Ministries, mass organizations and localities in dissemination of policies of the Communist Party and the Government on poverty alleviation; find and disseminate effective local poverty alleviation models; publish features and special columns on poverty alleviation; and organize dissemination campaigns based on the tasks of the Programme.

The People’s Council in the localities

At the provincial, district and, commune level, take responsibility for: planning the implementation of poverty alleviation, policies, programmes and projects; strengthening poverty alleviation systems, increasing the capacity and qualifications of local staff for their better implementation of tasks. Receive and make effective use of external resources for poverty alleviation.

This method relies on a survey including questions on assets and on income from a variety of sources.13 Based on results of estimation from this method, the allocation of poor-household certificates is implemented. Thus, targeting may not be as good as expected for two reasons. Firstly, at a conceptual level, the income benchmarks used to classify a household as poor in different types of communes appear to be quite arbitrary, and not necessary comparable. Secondly, at a practical level, however, the MOLISA methodology is not applied consistently across localities. Typically, only a fraction of households are surveyed: those who already have a poor-household certificate and a few others who are deemed to be close to poverty. The results of the survey are often ignored by local authorities when they have to allocate benefits such as school fee exemptions or health care cards (World Bank et al., 2003). In reality, the identification of beneficiaries for the exemption of education fees or the distribution of health care cards is actually based on more participatory methods, including local classification, self-reporting and wealth ranking. Each commune includes several units, or thon, grouping from a few dozen to more than a hundred households each. Each thon is led by a village chief who is often elected and tends to carry respect among his or her peers. Village chiefs' main task is to know the situation of the households in their thon. This, in turn, help to target poor households for the allocation of whichever benefits are available. Each thon thus compiles a list of "poor" and "hungry" households, with the latter being a subset of the former. This list is updated once or twice a year, when benefits such as exemptions of education fees and health care cards are distributed. Quite often, resources available do not allow to allocate the benefits to all those classified as poor. However, this method also entails some weakness. A potential weakness of the local classification methodology is its lack of a rigorous protocol to identify poor households. Whether the discus- sions at the village level actually succeed at identifying those who need the benefits the most is an open question. Another weakness is the systematic exclusion of some households from the classification. Those who are not considered hardworking or socially responsible seldom receive any benefit and .may not even be listed as poor. Exclusion from benefits might penalize their children, or unregistered

l 3 According to this method, households are considered poor if their income per capita is lower than VND 150,000 per month in urban areas, VND 100,000 in rural areas, and VND 80,000 in mountainous and remote areas. Households with a monthly income per capita below VND 50,000 are labeled as "hungry" in all areas. Poverty rates can be obtained by counting the fraction of the population below the poverty line in a commune, district or province.

migrants are deprived of benefits regardless of their poverty status. Combining local classification methods with wealth ranking and self- reporting may provide a more accurate results. The PPAs conducted recently suggest that the actual mechanism used by local officials to allocate benefits is genuinely oriented towards the identification of the poorest households.

lmpact of the HEPR pr~gramme?~ The impact of this programme on poverty reduction has been documented in the recently published Viet Nam Development Report 2004. This report extensively used the data coming from the Viet Nam Household Living Standard Survey conducted in 2002 to examine the poverty status of those who receive specific benefits, including exemption of education fees, health care cards, and access to credit. For the other components of the programme, the number of beneficiaries in the sample was too small to assess its impacts. Table 111.10 presents data on access to targeted benefits in 2002.

Table 111.10. Access to targeted benefits in 2002

Source: World Bank et al. (2003).

Based on the expenditure method used by GSO, less than 30 per cent of households who receive poor-household certificates, health care cards and access to subsidized credit can be classified as non-poor. This leakage rate is not high by international standards. However, the

l4 This section is largely sourced from World Bank et al. (2003).

92

Percentage of Percentage of beneficiaries

Percentage who are of HH

Non- poor Food pwr poor

the poor who are beneficiaries

Among Among all the the food paor pwr

Poor household with certificates 3.8 27.4 72.6 36.9

Health care card 4.0 28.6 71.4 42.0 Access to subsidized

credit 2.2 25.1 74.9 37.9 Exemption of

education fees 5.5 30.2 69.8 39.8

9.5 9.9

5.8

12.8 15.5

7.1

13.2 20.0

coverage of this programme is not high. Except for the education fee exemption, which reached about 13.2 per cent of all the poor and 20 per cent of food poor, all the other components could reach less than 10 per cent of all the poor, and only 5.8 per cent of all the poor could access subsidized credit.

By calculating the average differences in outcome variables, such as school enrolment between beneficiaries and their closest matches, the impacts of HEPR benefits are presented in the following table (table 111.1 1).

Table ll1.11. The impact of HEPR benefits

Source: World Bank et al. (2003).

Note: Estimates are based on propensity score matching, using closest match only. Results for exemption of education fees are for households with children of school age. Results for health care expenditures are only for households who sought health care. Statistically significant impacts are indicated with one asterisk.

93

Level HEPR benefit Household income Level among among Estimated

beneficiaries similar impact households

Health care card

Access to subsidized credit

Exemption of education fees

Treatment in hospital 28 26 2 (in percent of care sought)

Heath expenditures (‘OOO VND)

Household per capita expenditure (‘OOO VND)

Have a cow, buffalo or horse (per cent)

Household per capita expenditure (‘WO VND)

Children’s school enrolment (per cent)

Education expenditure per pupil (‘OOO VND)

expenditure (‘000 VND) Household per capita 1 842 1 816 26

246 190 56

530

35

1 744

81

460

26

1 676

70

70

8

68

11

185 242 -57

The exemption of education fees and other school contributions has a significant impact on school enrolment among the children of the beneficiaries. School attendance is roughly 11 percentage points higher than among similar households who do not receive the exemptions, and the difference is statistically significant. But note that the level of exemptions differs among communes. If only households who receive exemptions of more than 50 per cent of education fees are considered, the increase in the enrolment rate is 16.5 per cent. It also appears that beneficiary households have a lower level of education expenditures per pupil. At more than VND 200,000, the gap in expenditures is particularly large for households with children in upper secondary school.

Results are more mixed regarding other household benefits under HEPR. Reductions in health-care payments can be obtained if the person treated has a health insurance card or a poor household certificate. Access to health care cards and certificates appears to be associated with both more frequent use of hospital facilities and higher expenditures in health. Both results go in the expected direction. The increasing cost of health care is associated with increased self-treatment and lower health expenditures. A programme that succeeds in reducing the cost of treatment can be expected to lead to more frequent seeking of health care and thus a higher total expenditure on health care. However, both the higher utilization of hospital facilities and the higher spending on health are small in magnitude, and not significant in statistical terms. Moreover, difficulties in obtaining health care cards and using them to receive treatment have hindered the success of this project. Delays in the issuance of the cards were common. Cards were often issued only in the name of the household head or they missed some household members and people in many sites complained that it was not the right person who fell sick. And there were problems associated with claiming the benefits due to the households' lack of information on the rights conferred by the card. In addition, many card holders complained of confusion, complicated procedures and supplemen- tary payments although the level of the maximum exemption of health costs was sometimes set as low as VND 30,000. This is a relatively minor amount compared to the non-treatment costs the poor have to incur, such as traveling costs and medicine.

The subsidized credit for programme of HEPR provides loans without collateral to households which are classified as poor. While there is no visible impact of this programme expenditure per capita, beneficiary households are more likely to have a cow, a buffalo or a horse.

Microcredit programme: Households in Viet Narn generally have access to several sources of credit, both formal and informal. One of them is managed through the HEPR programme. This source of credit has been examined in the previous section. Other sources of credit accessible to the poor are the Viet Narn Bank for Social Policies (VBSP) and, for farmers, the Viet Narn Bank for Agriculture and Rural Develop- ment (VBARD). In addition, several communes run savings-and-loans schemes, usually with help from local NGOs. Mass organizations also provide credit programmes, and there are many informal sources of credit. Overall, it appears that a majority of households have had access to credit, in one way or another (up to three quarters of households). Ironically, the poorest farmers are likely to be more dependent on informal financial services with higher interest rates. Low-income households represented 61 per cent of microlending in 2001.

The Viet Narn Bank for Social Policies and the Viet Narn Bank for Agriculture and Rural Development are two formal sector financial institutions that dominate the provision of microfinance in Viet Nam. These two institutions provided credit to 8.3 million rural households in 2001. VBARD accounted for 60 per cent of the total number of loans with average size loan of VND 6.45 million, much larger than the average size loan made by VBSP (around VND 2 million). However, VBSP has recently been expanding its operation rapidly. VBSP took over the functions of the Viet Narn Bank for the Poor and the Central Credit FundIPeople's Credit Fund network, and will become the channel for subsidized microcredit provision by the Government, done in the past through ministries under various poverty reduction or social policy-oriented projects and programmes. Thus, the VBSP is now considered as the primary formal lending institution explicitly targeting the poor. VBSP plans to develop a network of 500-700 branches across all 61 provinces. By end-2003, it has VND 9.75 trillion in loans outstanding and expects to have over VND 16 trillion by end-2004.

VBSP will concentrate its subsidized lending to poor households and businesses in remote areas. Lending to poor households can be undertaken through group arrangements. The group has joint liability for the loans and poor households do not have to post collateral. They can borrow up to VND 7 million for 1- to 5-year maturity at an interest rate of 0.5 per cent per month. The terms of the loans are flexible and generally include monthly or quarterly interest repayment. The loans can be used for a variety of purposes, including the purchase of business inputs, house construction and improvement, electricity connection, clean water facilities, and partial educational coverage. The repayment rate of

VBSP loans to poor households is not yet clear, but the VBSP claims it is very high for group lending arrangements. However, the VBSP is a new institution and has insufficient credit risk and management skills, as well as limited internal audit and reporting systems, which may produce difficulties in accurately monitoring the bank's outstanding loans.

There are terms for rescheduling and extending overdue loans. First-time credit applicants can borrow up to VND 1 million. Households without a poor household certificate have to provide collateral. But the requirement can be waived if the corresponding People's Committee en- dorses the application. The interest rate is 0.5 per cent per month, usually lower than the market rate. The interest has to be paid monthly. The first large payment is scheduled to be made after one year. But many debtors find it difficult to comply with this obligation. Those who repay the loan can apply for VND 2 million, and then subsequently for a maximum of VND 3 million. In practice, however, the VND 2 and 3 million loans are taken to cancel the arrears. As many as 70 per cent of households in poor communes default on their obligations, although they may sometimes have enough resources to repay the loans.

Accessing credit from VBARD is common among farmers. Loans of up to 10 million VND do not require collateral if the applicant is sponsored by a quasi-state organization, such as the Women's Union or the Farmer's Union. By this requirement, those organizations become jointly responsible for servicing the loan. For all loans above 10 million VND, collateral is needed. Loans are typically for six months, renew- able for another six. Different from loans from VBSP, interest rates of credits from VBARD are much more market-determined. Currently, the interest rates range from 0.8 to 1.2 per cent per month. VBARD offers a variety of repayment formulas, from lump sum to regular instalments. Debt rescheduling is not uncommon, but a higher interest rate applies to arrears. Compliance with debt obligations is better than in the case of VBSP. Less than one third of the loans are non-performing in poor communes. Mass organizations, including the Viet Nam Women's Union, the Viet Nam Farmer's Union, the Viet Nam Youth Union, as well as the Commune People's Committee and District Governments, are deeply involved with the microcredit process at the local level, mainly through the development and certification of credit groups. Some of these local organizations, such as the Women's Union, also operate savings and credit operations. Although interest rates of credit from VBARD are higher than that of credit from VBSP, the size of loans from this source is also much larger. In addition, households with poor household

certificate seem to be excluded from borrowing from this source since they would lose their "poor certificate" if they access a loan from VBARD. This implies that credit provided by VBSP is much more oriented to temporarily lift the poor out of poverty while that provided by VBARD targets much more to fostering household economic development.

In addition, some 57 international NGOs support microfinance activities in Viet Nam, some channeled through mass organizations. The total size of activities supported by NGOs amounts to only 5 per cent of all microcredit offered in Viet Nam, but these activities often play a significant role in poor localities. Many microcredit programmes carried out by international NGOs become typical cases. A microcredit mechanism set up with help from the Centre for Rural Progress in Ninh Thuan province is a good example. Established in 2001, it already has 2,124 member households in three communes. Each of them has to save VND 10,000 per month, and is eligible for a VND 1 million loan almost immediately without collateral. But loans are given to groups of five-member households, who are jointly responsible for repayment. These groups receive a three-day training on procedures and on how to better use the money. Credit is spent on a variety of small investments, typically for the development of a small business enterprise. Repayment is on a bi-weekly basis for both interest and principal. Households who comply with their obligations are entitled to take loans of VND 1.5 million in a second round, and VND 2 million in the third round. This scheme became financially sustainable in 2003.

(c) National Target Programme on Employment Generation

This programme was established in 1992 with a view to alleviating the negative impact of restructuring State enterprises. However, the programme had broadened its scope since the later half of the decade of 1990s. The programme currently focuses on promoting employment opportunities through provision of severance payments, subsidized credit and training. Under this Programme, a fund for employment generation was established. By the year 2000, the total capital of this fund amounted to VND 2,000 billion. From 1996-2000, this Fund provided subsidized loans of VND 3,000 billion to enterprises and business entities. A total of 1.8 million new jobs have been created in projects with loans from this fund. Moreover, 140 vocational training centres has trained nearly 2 million people through technical classes; 700,000 people through on-the-jobs training. These centres also acted as employment service centres. From 1996-2000, 860,000 job-seekers had found jobs through these centres.

This programme has partly contributed to the change in the labour force participation. Salaried work is becoming more common. In barely four years, the proportion of people who mainly work on their own farm dropped from almost two thirds to slightly less than half. Instead, many more are now engaged in wage employment. The proportion is particularly high in the South-East. Thanks to its buoyant expansion, by 2002 the formal private sector already accounted for around 2.5 million jobs, more than the entire public sector.

The fraction of households running their own, non-farm business has also increased substantially. Businesses of this sort are now the main source of income for almost a quarter of the adult population. The proportion has increased across all regions, but interestingly enough not in the South-East. One possible interpretation is that non-farm household enterprises play an important role in the period of transition, when agriculture is declining in importance but the formal sector has not developed enough to take up all of the slack (Haughton and Vijverberg, 2002).

(d) Social safety net system

An equally important concern is how to prevent those who currently are not poor from falling into poverty. From a policy perspective, a focus on adverse shocks created by economic reforms is warranted. The policies needed to increase economic efficiency, hence to reduce poverty at an aggregate level, can sometimes have a dramatically adverse impact on the livelihoods of specific groups of the population. If well designed, the gains far outweigh the losses. But protecting the well-being of the losers is an understandable concern.

For Viet Nam, at least three potential groups who may be "losers" from economic reforms can be identified. First, the gradual liberalization of foreign trade could lead to job destruction in currently protected sectors of activity, and also affect the livelihood of suppliers to those sectors, including workers in cottage industries. Second, the restructuring of SOEs trading in agricultural commodities, such as coffee, could lead to a change in the supply contracts linking farmers to those SOEs. Those contracts currently have an insurance component embedded, as they stabilize prices in "bad" times. Bringing the domestic prices of commodities closer to international prices, which would be good for efficiency, could affect the livelihoods of rural households. And third, the process of restructuring and divesting SOEs is expected to lead to considerable labour retrenchment, given their considerable overstaffing. It is worth noting the considerable overlap between the first and third

groups of potential losers, as many of the enterprises operating in currently protected sectors are actually SOEs.

Currently, the poverty and social impacts of trade liberalization on rural households have only just been assessed, thus it is too early to report any significant results. But considerable analytical work had estimated the social impacts of labour retrenchment in the SOE sector. In order to deal with these adverse impacts, the Government set up a special Social Safety Net Fund for redundant SOE workers, run by the Ministry of Finance. Workers who are either separated from their jobs or volunteer to leave are offered two months of basic salary per year of service, plus a training allowance equivalent to six months of salary, plus six months of salary to support their job-seeking process, plus a lump-sum of VND 5 million. The design of this compensation package was aimed at minimizing the expected welfare loss of separated workers, with a special focus on women, as they are one of the groups who stand to lose more from retrenchment. The Social Safety Net Fund has been in operation since mid-2002. It has assisted 14,500 separated workers from 374 SOEs, paying an average compensation package of VND 28.8 million. A tracer survey of 2,600 workers, randomly selected among those assisted by the Fund, was completed in the summer of 2003. Its findings can be used to assess whether SOE restructuring could become a source of increased poverty in Viet Nam (Nguyen Nguyet Nga and Martin Rama, 2003).

The recent studies reveal that separated workers made a sound use of the relatively large amount of money they received. It is often feared that workers who are not used to investment decisions could simply waste their package, and eventually become destitute. On average, only a minor fraction of the package was devoted to current consumption. Most of it was used for physical or financial investments, including housing, starting or expanding a household business, and repayment of debts. Moreover, the rates of return on these investments appear to be quite high: 10 per cent per year for housing and other physical assets, 8 per cent for financial placements, and 11 per cent from reduced interest payments due to the cancellation of debts. At 33 per cent per year, the rate of return on starting or expanding a household business appears to be extremely high. However, it is not strictly comparable to the other rates, as in this case the returns also result from the labour input of the household, and not just from the capital invested. Still, there is no evidence to think that compensation was wasted or grossly misallocated.

The findings of this study are also encouraging regarding the labour market insertion of separated SOE workers. The activity rate gradually climbs to 60 per cent, which is less than the average for the Vietnamese population, but is still quite high. More importantly, the share of the separated workers who remain unemployed declines over time. Among those employed, there is also a gradual change in the nature of the jobs. A fraction of the separated workers still had some contractual relationship with the public sector right after separation (probably related to their former SOE job), but that fraction almost vanishes after nine months. On the other hand, the fraction in self-employment increases steadily, as does the fraction working as salaried employees in the private sector.

The choice, the design and the implementation of the specific poverty reduction programmes have been subjects to serious debates. Study of experiences of China and Viet Nam can provide with several useful lessons for other transitional and developing countries to design and implement more effective poverty reduction programmes. At least, these are lessons about targeting (limited geographic coverage; benefit targeting to the poor); efficiency; programme implementing procedures (participation of beneficiaries; monitoring, supervision and coordination; and coordination between funding channels) as well as separation of the programmes from economic policy; and coordination with welfare programmes.

(0 Targeting

Limited geographic coverage

In China, official anti-poverty strategy has a strong regional focus based on the assumption that poverty is primarily a rural problem and, in particular, it is associated with ecologically fragile or remote, highland regions. This had led to a policy focus on raising average income in designated poor counties (592) through a variety of microeconomic interventions. But the scope of poverty alleviation activities has extended beyond these 592 poor counties, with each province selecting additional poor counties. This has placed additional pressures on the already strained finances of poor provinces. Assumptions in the official anti- poverty strategy also caused the exclusion of significant groups of poor people who live outside the designated poverty counties and the urban poor.

Similar to China, anti-poverty programme in Viet Nam also has a regional focus based on the similar assumption of China, therefore causing the exclusion of some groups of poor such as migrants. Based

on the criteria of programme 135, 1,715 communes were identified as the "most difficult and poor communes" in 1998 and 2,325 communes were selected for the programme in 2001. However, these criteria are so ambiguous that the identification of poor commune is also arbitrary. For example, the first criterion presumes that all households are surveyed. However, this is impractical due to the limited staff and limited budget. Thus, poor households are sometimes chosen arbitrarily. Or the number of the poor households may be fixed consistently with the national target so that the national target is always achieved as planned. The second criterion requires constructing a development centre within 20 km of any commune. However, the definition of 20 km varies according to the location and road condition. Therefore 20 km does not have a significant meaning. The fourth criterion tends to identify the ethnic minority groups as poor if they use their own language in daily life and are not used to Vietnamese. This criterion was based on the subjective belief that those ethnic minority people who speak their own language are poor even though their economic condition may not be poor. The sixth criterion has a ironic implication. It recommends (and sometimes forces) borrowing money even if people do not want to borrow. Some people prefer borrowing no money to be free and independent if they can achieve minimum economic condition. The condition of market access also has a strange result in some communes where a modern concrete market is built.

Moreover, for both China and Viet Nam, new forms of poverty have emerged as consequences of economic reforms. Actually, a large share of the population is now facing new risks associated with rapid economic growth and market liberalization. Furthermore, erosion of collective welfare services has made it difficult for many people to have a minimum level of security. Growing regional and household level inequalities, together with demographic change and mass population mobility are putting increasing pressure on previous mechanisms for relief and poverty alleviation. These changes are leading to the emergence of new groups who are increasingly at risk of short-term poverty, and potentially of falling into longer-term poverty traps. Those people can live outside the designated areas, so fall outside the scope of the Government's current poverty reduction efforts.

Ineffective targeting of benefits to the poor

Leakage of benefits and the lack of effective mechanisms for targeting resources to the level of household or individual have hindered the effectiveness of anti-poverty programmes in both China and Viet Nam.

A programme's designated focus on raising average incomes in poor counties as a whole is a main cause of misallocation of benefits from the interventions and funds in China while emphasis on developing infrastructure and ignorance of developing mechanisms to foster economic development in designated communes has caused leakages and misuse of resources. Although most programmes were designed to avoid creating dependency or returning to permanent subsidies, most of implementing agencies perceived that the poor lacked the technical and management skills necessary to make use of these resources. Therefore, many anti-poverty activities see most of the intended benefits going to the non-poor, who are better placed to access resources and to influence the decision-making or implementation process. The result has been a substantial and avoidable leakage of benefits to the non-poor, with better-off households, enterprises, and townships (in China) frequently the main beneficiaries of such programmes.

(ii) Efficiency

Although public expenditure on infrastructure has large impact on poverty reduction (box III.l), more attention should be paid to the efficiency of this kind of expenditure.

Firstly, whether the poor is identified and the other is whether it is efficient to identify and concentrate on the poor. As we have discussed above, since the survey is not strictly conducted, those communes identified as poor are not necessarily poor. If people know that they will receive the budget of poverty alleviation when they are identified poor, they will underreport their income. To the contrary, if people do not know it, the really poor people may overreport their income for fear that they may be looked down as poor, which is closely related to self-respect. If this true, this will make income inequality widen. This problem may be solved by conducting the survey strictly. However, here we face the trade-off between strictness and cost.

The second issue is the efficiency of focusing. Viet Nam's programme 135 requires the poor communes to choose some infrastructure projects such as road, small-scale irrigation, water supply, electrification, school building, health centre building, and local market building. However, investing in infrastructure is only the very first step in order to lift a poor commune out of poverty. The next step is to create environment or mechanisms for this infrastructure operating effectively. In the last few years, the Government of Viet Nam is much concerned with the former while ignoring or paying little attention to the latter, thus the Government's efforts have met with only limited success in upland

areas, as evidenced by the relatively slow drop in poverty rates during the past decade. In those areas, although many schools, hospitals and markets were built recently, a small number of children attended school because people in the commune were sometimes too poor to send their children to school or for lack of textbooks. Hospitals lack installed necessary medical equipment, and are not supplied with enough medicine. People do not have enough money to go to hospital. Market buildings may be constructed but no business is transacted within it because it is not comfortable to stay in it. Irrigation is for the non-poor in the poor communes, not for the poor who do not have enough land to benefit from it. Roads may provide business opportunities for the non-poor in the poor communes or in other communes but they just stimulate consumption by the poor, who may waste the money borrowed from the Bank for the Poor or somewhere else and accumulate debt. Or it may result in the exhaustion of natural resources of the commune.

Third, the efficiency of focusing on infrastructure investment may be undermined by corruption. Infrastructure projects are often susceptible of corruption, though it is not known how often corruption is involved. The cases of corruption that often appear in newspapers indicate that it is widespread. The infrastructure-oriented poverty alleviation policies may be just to increase the opportunity of corruption.

Fourth, whether it is desirable to identify and concentrate on the poor. There are two types of inefficiency. One is known as a trade- off between economic equality and efficiency. Poverty alleviation policy may retard economic growth by allocating resources for poverty alleviation rather than for economic growth. It is insisted that in the past decade Viet Nam succeeded in decreasing poverty incidence by economic growth that was induced by the market-oriented economic reforms. Therefore this trade-off was not serious in the past decade. Another inefficiency is whether the poor people can adapt to the drastic change caused by the poverty alleviation policies. For example, if a sparsely populated commune located in a remote area is identified as poor, it will be allocated to construct the basic infrastructure. However, if the poor people can be absorbed in a better-conditioned neighbouring commune by a smaller budget, it will be more efficient to allocate budget to the latter. This does not insist to neglect the former for the sake of efficiency but to emphasize the importance of the relationship between communes and regional planning.

Stage of development is an important factor not only at the national level but also at the commune level. An extremely poor commune

whose standard is much lower than the criteria cannot be raised above the criteria at once. Though this may be achieved by allocating a large amount of budget, at the same time people will be force to adapt to the drastic changes. They may be forced to discard their traditional custom or in some cases they may be taught that they are poor because their traditional custom and culture is inferior. If they cannot adapt the change, their life may become worse than before. In the sense of capability they lack some important functioning such as self-respect and their own culture.

(iii) Implementation procedures

Lack of beneficiaries' participation

Under the framework of the Programme 135 (of Viet Nam), people are asked to participate in making-decision process. However, to what extent the people would participate is determined by the communes, the extent of local-level participation in planning and implementation has varied from place to place (Pham Van Hai as cited in World Bank and PAC, 2003). Similarly, while the programme guidelines indicate the need to establish commune-level Supervision Boards, the powers given to these boards are often quite limited (World Bank and PAC, 2003). This may be attributed to two beliefs. The first one is that commune residents had the "low level of education" particularly those are minorities or live in the poorest areas. Commune-level officials and residents were not considered to possess sufficient skills sets to manage decentralized funds, even for relatively small-scale infrastructure works. The second, related reason offered is that local people, if given the chance, were likely to make plans that deviated from the overall socio-economic development blueprints of districts and provinces; even they were unable to objectively assess their own needs (Fritzen, 2002).

The weakness of mechanisms for. participation and oversight by the potential beneficiaries of the infrastructure works has resulted in numerous cases of resource misuse. At a popular level, programme 135 is often referred to as "programme 5-3-l", because of the considerable leakage of funds as resources are transferred from central to commune levels. Nonetheless, some provinces seem to have implemented the programme successfully and have taken a more progressive approach towards delegation of authority to the local level.

Local people participating in making decisions and in implementing and monitoring poverty alleviation programmes would foster greater local initiative for production and economic development and strengthen the

ability of society to cope with various threats to its security. By the end of 1990s, in order to realize principle of "people know, people discuss, people implement, people supervise, and people benefit", Viet Nam has launched the course on strengthen the "grassroots democracy" as a key means to implement the CPRGS.

Weak monitoring, supervision and coordination

In China, attempts to monitor changes in the incidence of poverty or to evaluate the Government's policy reduction programme were rare. Therefore the data required to assess the cost-effectiveness and impact of specific interventions, and to understand which interventions lead to sustainable poverty reduction are currently not collected or are inadequate. In the meantime, Viet Nam has built for itself a system to monitor changes and assess the impacts of Government's programmes on poverty reduction. However, securing data reliability is required to provide an accurate assessment of the impacts of Government's efforts in reducing poverty.

Weak coordination between funding channels

Better coordination between funding channels is necessary to enable the poverty programme to direct sectoral components in an integrated manner to the poorest of the poor. Most critical to the successful implementation of this approach are strong institutional arrangements.

(iv) Separation of poverty programmes from economic policy

This is the major limitation of China's current poverty reduction strategy while, since 2002, this separation has been healed in Viet Nam, through preparing and implementing the CPRGS in 2001. The approach taken by the Government of China has been to concentrate on increasing the aggregate level of output and then devising specific policies to remedy particular problems as these arise during the process of adjustment and transition. Thus, the general economic policies pursued by the Government are designed to foster rapid growth, often by shifting resources away from the poor, while specific interventions under the poverty reduction programme attempt to return to the poor some of the resources originally diverted from them. For example, investment patterns, and preferential fiscal policies have generally favored the development of coastal regions at the expense of the interior. The Government investment tends to favour capital-intensive rather than labour-intensive industry, the former being concentrated largely in coastal regions and having limited direct benefits for the poor. Policies, which

encourage private domestic and international investment for these activities, would potentially free some public funds for investment in pro-poor labour intensive projects that provide immediate employment opportunities, as well as improving infrastructure that could contribute to the longer-term development of the local economy in poor regions.

(v) Weak coordination with other welfare programmes

This phenomenon is widely seen in China but rarely in Viet Nam. In China, the 8-7 programme lacks the coordination with a range of other social sector, social assistance and poverty related interventions. In China, besides the central and local anti-poverty programmes, there are numerous anti-poverty programmes implemented by a range of institutions. For instance, the Civil Affairs System coordinates the distribution of relief grain and other programmes of social assistance and support and the State Education Commission, Ministry of Health, and Ministry of Labour and Social Security have responsibility for the welfare of poor workers. Or the All China Federation of Trade Unions provides retraining programmes for unemployed urban workers; or the all China Women's Federation with its extensive local networks plays an important role in the reduction of female poverty through training, the establishment of cash crop production bases to assist female producers, and provision of credit and farm inputs, etc. However, these interventions are relatively fragmented, limited in scope and coverage and often rely for funding on scare local resources or on collective fees raised from rural households.

In addition, fiscal decentralization and dependence on local resources mean that the level and quality of service provision have become more uneven across localities. Poor regions without rural enterprises have limited capacity to raise additional funds for relief or welfare provision except through levies on already poor households or through transfers from higher levels of government or external agencies. Greater integration or coordination among activities may provide opportunities for enhancing the effectiveness of existing poverty reduction and welfare programmes.

(vi) Some other lessons

General economic growth is a necessary but not sufficient condition for overcoming poverty. So, in order to achieve growth with equity, specific anti-poverty measures must be incorporated into regional economic planning.

The condition for sustainable poverty reduction should focus on the development of income-generating activities based on local resources and local organizations.

Preferential conditions for economic development, combining with other packages such as direct relief aid and social services, assistance funds, will help to lift the poor areas out of poverty.

Without timely public intervention, the close relationship between the participatory growth and rapid poverty reduction cannot be sustained.

Political commitment to poverty reduction must be combined with financial commitment at all times.

D. CONCLUDING REMARKS: CHALLENGES AHEAD

The development objectives of China and Viet Narn over the next 10 and 20 years are ambitious. Both countries would like to sustain high economic growth with poverty reductionleradication and equity and to substantially improve the HDI. In 2015 or 2020, China expects to be an industrialized country and a key economic power in the world. The overall goal of Viet Narn is to accelerate industrialization and modernization process in order to bring the country out of underdevelopment and create a foundation so that by 2020 Viet Narn will basically become "a modern-oriented industrialized country".

However, both China and Viet Narn still face great challenges. In the past two decades, factor accumulation was the main engine of China's strong economic growth. However, in the future, due to changes in saving behaviour and demographic conditions, contributions of factor accumulation is expected to fall. Thus, China's sustained growth will increasingly depend on further increases in efficiency of domestic resource use and the effectiveness of international integration. Viet Narn is a low-income economy in transition striving for industrialization in order to catch up with more advanced economies in the region. While China and Viet Narn recorded the remarkable achievements in socio- economic development during the reform process, the imbalances in growth have emerged. Both the economies have recently exposed the weaknesses and vulnerabilities in several areas such as in SOE sector, financial system, public investment, and education and training system. The problem of poverty and income inequality also adds the risk to the socio-economic stability and economic development.

This problem, at the same time, may be exaggerated as the economies become more integrated with the world economy. The poor can benefit substantially from integration and trade liberalization. Many new jobs would be created in industries that are intensive in the use of unskilled labour, such as agriculture and related agribusiness activities and light manufacturing. That bias in the expanding demand for workers will raise income-earning prospects for the unskilled and thereby poor people (Anderson, 1998). But the evidence has shown that economic integration could also be associated with a bigger income gap, especially between the skilled and the unskilled labour. The rural poor become more vulnerable to uncertainties such as international price fluctuations. Moreover, the adjustment costs during integration process by the poor can be very high.15

At the same time, the reform process in China and Viet Nam now becomes more complicated and difficult because of the following:

First, they need to have a market-based institution dealing with the production factor (capital, labour, land) markets, the SOEs, and the financial system, many aspects of which are related to the concept of socialism orientation (with China's or Viet Nam's specifics).

Second, the reforms should be consistent with the process of international integration. It is not an exaggeration to say that the reform process in China and Viet Nam is now an international commitment-based reform process. This can be seen as a new wave of reforms in both countries.

Third, the root way of thinking, policymaking and resource allocating should be changed. The gradual approach to reform had certain advantages, but also several disadvantages because the reform could be characterized by stop-and-go

l5 An example is that in 1994, the Government of Viet Nam adopted the objective of achieving self-sufficiency in sugar by the year 2000. A special sugar production programme was launched and sugar industry has been protected from high tariff, import restrictions and other non-tariff measures. As a result, the sugar price in Viet Nam has been often much higher than the international price. Over the country, dozens sugar refineries, many of them with out-of-date technology imported from China, were built; farmers shifted from rice and other crops cultivation into sugarcane growing and they have relied almost entirely on this activity. At present, the sugar industry is estimated to employ around 40,000 workers in the refineries and nearly 1 million people in sugarcane farms. Liber- alization of sugar trade would hurt these farmers and workers in the first round. The second-round effect does not seem to be very clear since the ability of the farmers to switch to other activities is quite limited and slow (Vu Quoc Huy, 2002).

steps, inconsistency with business cycles, unpredictability of investment and business environment, and possible conflicts between central and local authorities. To a significant extent, this approach is not appropriate in the new context of globalization, international integration, and new technology revolution.

Fourth, several problems need to be addressed in order to improve the efficiency and sustainability of poverty reduction programmes. They include:

- The ability to mobilize different resources to support the programmes;

- The effective combination of the programmes' activities with a view to reaching the common target of sustainable poverty reduction;

- Operational coordination between ministries, other central and local authorities in an uniform framework for ensuring the consistency and completeness of the programme implementation;

- Promoting the contribution of people, communities and social organizations for ensuring that support reaches its intended recipients;

- The implementation capacity at local levels.

The pace and the way of further reforms in China and Viet Nam cannot be the same given the major differences in their economic sizes and structures. However, their further reform programmes seem to include the key components as follows:

Institutional reforms (the reform of legal framework and public administration, and the strengthening of people's participation and the voice of the poor);

Improvement of macroeconomic policies in conjunction with trade liberalization and the gradual opening of capital accounts;

Structural reforms, especially reform of SOE sector and ban king system;

Private sector development and attraction of efficient FDI;

Agricultural and rural development;

Radical reform of the education and training system.

Overall, the reform of economic institutions and human resource development should be priorities of policy implementation.

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Policymakers in Malaysia have been aware that the eradication of poverty is important both because of the ethical issues involved and because poverty and inequality are not conducive to social stability. In the early years of economic planning in Malaysia, the focus was on growth and development. It was reasoned that growth would result in poverty alleviation. But the racial riots of 13 May 1969 proved that poverty and inequality, when pronouncedly associated with a particular ethnic community, could be politically, socially and economically desta- bilizing. Consequently, policies based on the trickle-down effect were side lined and more emphasis was placed on strategies and programmes that addressed the problem of poverty alleviation directly.

In addressing poverty and the lack of economic participation faced by the Bumiputera (the indigenous group), the Government adopted an approach that sought to improve the access to capital that was necessary. Capital, in the Government’s view, could not be confined to physical capital. Thus, attempts were made to improve the ‘%apitals” that were needed for coming out of the poverty trap. Along with access to physical resources, policies also targeted access to financial, human and social capital. The Government took cognizance of the fact that the rural sector was rich in social capital. Although in the 1970s the discourse on social capital had not permeated policymaking circles deeply enough, the intention to harness and develop social capital was discernible.

Three elements were taken into account in the various programmes that were devised to overcome poverty. These elements included

* Prepared by Mr. Mohamed Ariff, Executive Director and Mr. Shankaran Nambiar, Research Fellow, Malaysian Institute of Economic Research, Malaysia.

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1 IV. SOCIAL CAPITAL AND POVERTY ERADICATION: SOME ISSUES FROM THE MALAYSIAN EXPERIENCE*

improving capabilities, increasing access to resources and fostering social capital. A closer examination of the various programmes, as will be undertaken later in this paper, indicates that very often more than one element was focused upon in many of the programmes. Clearly, it was recognized that the poor did not hive adequate resources, but it was equally obvious that resources alone were not sufficient. Only with the development of social capital would a community, as a group, be sufficiently empowered to be self-reliant.

The question of social capital was also important to the development of entrepreneurship. One of the challenges that the Government was keen to address was the question of organically developing a sense of entrepreneurs hip among the Bumiputera. There were several reasons for this. By developing entrepreneurship, the Bumiputera (especially the disadvantaged individuals from the rural sector) would be able to find a route out of poverty. They would be able to create employment opportunities and generate incomes that would improve their quality of life. They would also be able to participate more actively in the economy and gain parity in comparison with the economic participation that came from the other ethnic communities.

This paper will explore the question of social capital as it relates to poverty eradication and entrepreneurship development. ft will attempt to provide an understanding of the role of the State in forming (or using) social capital to alleviate poverty and create a spirit of entrepreneurship. Its thrust will be to demonstrate that the State in Malaysia has been concerned with poverty eradication and the participation of the Bumiputera in the economy. The latter issue is addressed through attempts at encouraging entrepreneurship. Thus, government policies and programmes in these areas will be discussed.

The organization of this paper is as follows. The second section of this paper will seek to define and understand social capital. This will be followed by an attempt to argue that the State in Malaysia did realize that it had a role to play in fostering social capital and that it did self-consciously intervene through the various policies and programmes that it formulated. The fourth section will deal specifically with the question of poverty, and how the State, through the instrumentality of its programmes, created or employed social capital to eradicate poverty. The fifth section deals with entrepreneurship for two reasons. First, entrepreneur development was a ground where social capital could make valuable contributions. Second, the development of entrepreneurship was a device through which the Government wanted the living standards

of the Bumiputera to increase. Third, there was much concern that the Bumiputera did not participate in the economy in a manner that was reflective of their representation in the population. The last part of the paper contains conclusions.

A. EXPLAINING SOCIAL CAPITAL

An early understanding of social capital comes from Coleman, who thought of social capital not as a well-defined and unchangeable entity but as a collection of forms. Inasmuch as we have forms of democracy, all of which share certain resemblances, so too does social capital differ in detail although its various forms do share threads of common- ality. These points of similarity are identified by Coleman as being located within the social structure, and encouraging certain actions within the social system. In attempting to offer a definition of social capital he says that social capital is defined by its function. It is not a single entity, but a variety of different entities, with two elements in common: they all consist of some aspect of social structure and they facilitate certain actions of actors - whether persons or corporate actors - within the structure (Coleman, 1988:98).

Coleman's definition lacks specificity since he claims that social capital is what it does. Rather than being able to locate social capital on the basis of pre-decided criteria, Coleman expects us to elicit the meaning of social capital from its function. The problem with such a definition is the conflation of two distinct concepts, that is, what social capital is, and what it does.

Nonetheless, Coleman provides two clues as to what defines social capital. First, social capital is located in the realm of social structure. In other words, it has to be placed within the interaction of individuals in society. Second, social structures must have the capacity to "facilitate certain actions of actors". This implies that the interrelationships in society must make it possible, or more conducive, to elicit actions that are to the benefit of individuals, and to society at large.

Putnam, a more recent thinker on social capital, and perhaps the person who did much to bring the concept to the forefront of debate, is more precise when he asserts: "By 'social capital' I mean features of social life - networks, norms, and trust - that enable participants to act together more effectively to pursue shared objectives" (Putnam, 199656).

Clearly, what distinguishes social capital as a category is the feature of interrelationships among members of a society. Further, it

must be stressed that this characteristic of interrelationships gains value in its ability to lead to the pursuit of commonly held objectives. A necessary precondition for the achievement of social capital is the formation of a dense network of social relationships between individuals, groups and organizations within society. This is important because it leads to closer relationships between individuals.

There are two important outcomes that are served through the formation of these networks. The networks, where individuals, groups (formal or informal), and organizations are connected, would benefit through the development of reciprocity. Indeed, reciprocity is a valued outcome that stems from constant interaction. One could further argue that the creation of reciprocity would lead to cooperation among individuals and organizations. In this sense, reciprocity is assumed to be the foundation of cooperation. The necessity for reciprocity as a precondition for cooperation is based on the argument that in repeated interactions (as modelled in repeated games), there is incentive for agents to act in ways that are not retaliatory. There would be a tendency in situations of repeated interaction spread over long periods of time for agents to respond in direct relation to the acts of other agents. Thus, an agent would respond with "cooperative" behaviour if the agent with whom he repeatedly interacted initiated a move that was "cooperative". However, if an agent reacted to a "cooperative" move with an "uncooperative" response, that would be held against the "uncooperative" agent. While some individuals may choose to be uncooperative in the interests of short-term gains, a larger proportion of individuals would adopt a cooperative strategy.

Against a background of reciprocative behaviour, where each member of society responds in a way that matches the behaviour of those with whom he interacts, there would arise a tendency for cooperation. The cooperative behaviour that generally prevails in society would be the result of an aggregative tendency for most individuals to be cooperative. Each individual would extend his cooperation on the belief that his neighbour would extend his cooperation in response. Most individuals would abide by this code of ethics. A small minority of individuals would, presumably, expect to gain from the whole endeavour by not reciprocating to the cooperation that they enjoy.

Central to Putnam's analysis of social capital are institutions. The notion of social capital is deeply entrenched in the understanding that institutions matter. The backbone of Putnam's understanding of social capital is based on the argument that viable institutions which help to

promote the pursuit of shared objectives constitute social capital. The categories that Putnam expressly mentions as being elements of social capital are networks, norms and trust. These phenomena are a part of the institutional framework in an economy. More precisely, social capital consists of a set of certain elements that includes norms and trust, as posited by Putnam. These elements, in turn, would be present in an economy which has efficiently functioning institutions. In effect, then, social capital is a subset of a well-functioning institutional framework.

One can derive an important implication from Putnam's attempt at defining social capital. Noting that Putnam's definition refers to the institutions in an economy, and recognizing that social capital is embedded in the healthy and efficient functioning of institutions, we are able to suggest that institutions deserve the attention of policymakers. It is possible to suggest that the problematic of achieving economic development through social capital is an attempt to adopt an applied approach to the theoretical thinking in institutional economics (for example, North, 1990; Eggertson, 1990; Basu, 2000). Social capital is a finer set of interactions and institutions than is otherwise implied by the institutional approach. We would, for instance, have little interest in habits, for instance, when dealing with social capital. Neither would we be interested in establishing an argument as to why standards of measure are institutions that have evolved and are sustained because of the need for greater certainty in society. A different set of issues pertaining to institutions would be of more relevance to us.

The creation of relationships is an issue that is central to an understanding of social capital. Relationships have been primarily studied in terms of membership or participation in informal groups. Such groups have included community choir groups, civic associations, social clubs (Putnam, 1993), Senate clubs (Coleman, 1988), and also include participation in panchayats (village governments) (Krishna, 2002). Although this list of informal groups is preliminary and perhaps does not take into account the vast array of groups that are extant in different countries, it certainly does offer some indication of the nature of the unit of analysis that is presupposed. What is at stake is the membership of individuals in informal groups and the degree of interaction among individuals through these groups. In studies on human capital, the emphasis is on the individual. Social capital, by contrast, places the focus on relationships between individuals and groups in the social context. By extension, while the outcomes in human capital theory are experienced by individuals, the points of reference in social capital analysis are groups and the community as a whole.

The nature of expected outcomes within the ambit of the human capital theory is income and productivity as directly experienced by individuals. Any investment in human capital is committed with the expectation that it will yield higher returns such as higher income, better productivity or a higher level of utility for the individual (Becker, 1993).

The social capital approach envisages outcomes that are structured in society. Anticipated outcomes that are valued in this approach are social cohesion, economic achievement and social participation in economic development. The objective of achieving higher levels of economic development is not exclusive to the social capital approach. Instead, it is the manner in which it is achieved that is distinctive to the social capital approach. This approach lays emphasis on the empow- erment of individuals as they interact and form relationships within the social context. As a consequence of this interactive process it is argued that shared objectives will develop and the networks that are formed will facilitate economic exchanges owing to the growth of variables such as trust.

Accepting the notion that norms, networks and relationships can strengthen society and lead to the pursuit of shared objectives, particularly those that can result in the improvement of economic well-being, is impelling. This pushes us to question the route that can be taken towards the development or enrichment of social capital. There is a strong appeal within the social capital approach to claim that there are intrinsic devices within society which operate on their own dynamics. This view is taken because the core elements that the social capital approach discusses, responsibility, trust, cooperation, norms and networks, are all located and strengthened at the micro level. At the policy level, this is not very satisfactory since it does not explain how interventions are possible and how they can be effectively used to improve the extent or quality of social capital. Or how, indeed, the State can work synergistically with communities to build social capital, and in doing so provide additional support through yet another form of capital for economic development.

B. STATE AND SOCIAL CAPITAL

It is, perhaps, useful to address the objection that the State has no role in building social capital. This view is premised on the argument that social capital is the outcome of interactions within the social fabric, or rather the outcome of a spontaneous response that is ordered by networks in society. Narayan claims that social capital is an

amalgam of two elements: "cross-cutting ties" and the interaction between formal and informal institutions. In presenting her view she makes the following observations:

All societies are built from social groups rather than individuals, and these groups determine attitudes, beliefs, identities and values, as well as access to resources and opportunities - and ultimately access to power. Since most societies are not homogeneous, but are divided by class, caste, religion and ethnicity, groups differ in their access to resources and power. There may be high social capital within a group ("bonding" social capital) which helps members, but they may be excluded from other groups (they lack "bridging" social capital) (Narayan, l999:l).

A reading of these comments could be taken to suggest that the State has little or no role to play in the formation of social capital. Matters such as "attitudes, beliefs, identities and values" are beyond the purview of the State. Attempts to mould social thinking on behavioural norms are generally frowned upon and are taken to assume the hue of social engineering. Further, questions of "caste, religion and ethnicity" are thorny issues, and the success of many Governments in overcoming the constraints and obstacles posed by these institutions has been questionable. Policy measures directed at resolving social issues such as caste, religion or ethnicity have the potential to evoke resent- ment from certain groups within society. These issues involve some degree of social exclusion. Members of one caste or religion would have strong networks within that community. These links would be forged at the expense of another community.

At a more general level, there is some concern about the effectiveness of Governments in bringing about change. The efficacy of external institutions to reach the rural population is often questioned. Tendler (1 997), for instance, notes that the effectiveness of "top-down" institutions is usually subject to criticism. One of the criticisms against government action is based on the doubtfulness of the Government's ability to perceive the needs of rural communities correctly and to respond in a manner that is consonant with their needs. A second area of concern relates to the inefficiency of bureaucratic intervention in policies relating to the deprived and the adequate provision of services for them. Hence, although needs may be correctly perceived, the execution is delayed or is rendered weak due to poor management by officials. The intrusion of corruption and cronyism affects the execution of well-meaning government policies. The third area of doubt has to

do with the argument that government action hinders rather than helps build synergistic relationships between social groups and government agencies. The underlying belief here is that networks, norms and reciprocity best evolve spontaneously. Government action is not believed to be a suitable agent for the creation and development of these institutions.

Notwithstanding the critique that is held against government action in building up social capital, one cannot discard the role that the State can play. The Malaysian experience offers some useful lessons as to how government action can indeed help to forge the growth of social capital. A particular characteristic of the role of the State in Malaysia has been the fact that it has not been interested in the development of social capital per se. Rather, the State’s interest in social capital formation had initially been focused on larger social problems. The attention given to social capital was incidental and subsequent. This is not to say that the formation of social capital was accidental. It would be more accurate to say that the State’s interest in social capital was an offshoot of larger attempts at social engineering. Indeed, the social dimension occupied a field of much importance for successive Gov- ernments in Malaysia. And this preoccupation with correcting social injustices incorporated strategies aimed at developing social capital.

An interesting aspect of Malaysian economic history has to be understood in order to appreciate the context within which the State interacts with the social dimension. Malaysia has had the historical practice of segregating economic activity along racial lines, a practice that was introduced by the British under their colonial rule of Malaya (pre-1957). In order to simplify administrative operations, as well as the operations of the rubber plantations and tin mines, the British administration decided to bring in workers from specific countries for particular economic activities. Indian migrant workers were brought to work on the rubber plantations and Chinese migrant workers to work in the tin mines. Having had some experience with trading with the Chinese, the British allowed the Chinese to take up certain trades and to become shop- keepers and petty traders in the towns. The Malays dominated the agricultural sector. The Malays played a role in the bureaucracy, as did the Indians, who occupied positions in the civil service. Members of the royal or upper-class Malay families of the different States were allowed into the bureaucracy, but the majority of Malays were confined to the low-income agricultural sector. This resulted in a society that was very much multi-layered, and segregated economically and racially. The majority of Malays (Bumputera) were at the bottom rung of society, economically speaking.

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In order to remedy the economic inequalities that existed within the country, it was agreed among representatives of the three major ethnic groups that, upon independence, the Malays be granted certain "special rights" in the realm of religion, economics and politics. The main reason for this "positive" discrimination was to elevate the status of the economically disenfranchised Malays and thereby create a more equitable society.

These special rights received fuller articulation under the New Economic Policy that was instituted in 1970 as a response to the growing discontent about the economic inequalities between the Malays and the other races who were still gaining economic ascendancy. Thus, the two-pronged objective of the Policy was to eradicate poverty, as well as to obliterate the strict lines identifying a particular ethnic group with a particular economic activity or occupation. Under the Policy, emphasis was put on increasing effective Bumiputera ownership and participation in the corporate sector, improving their participation in high-income occupations, as well as narrowing income inequality and eradicating poverty. The aim was to attain at least 30 per cent effective Bumiputera equity ownership by 2000. But this target was extended to the year 201 0 as stipulated in the Third Outline Perspective Plan, 2001 -201 0.

The role of the State in forming social capital must be placed against the background of the Government's larger efforts in restructuring social policy in Malaysia. Bumiputera groups have been associated, by and large, with poverty and exclusion from the private sector. The Government could have taken a different approach in tackling this problem, emphasizing a class-based or needs-based approach rather than a racially biased approach. Historical factors as well as political circumstances did not favour more racially neutral approaches. It was felt, subsequent to the racial riots of 13 May 1969, that there was a need to de-link the close correlation between race and economic exclusion. Since the Bumiputera figured prominently among sections of the population that were defined as poor, the Government realized that that phenomenon had the potential for further social instability. Further, the Bumiputera were inadequately represented in a wide range of economic activities. In particular, there was little Bumiputera involvement in business, as exemplified by participation in entrepreneurial activities and equity ownership. It was also realized that policy efforts were necessary to address the fact that few Bumiputera held well- paying occupations. Their presence in these occupations was not in proportion to their contribution to the national population. It is in the context of these factors that one should view the State's attempts at raising social capital.

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The racial riots of 1969 demonstrated the importance of social cohesion. The role that social cohesion plays in providing the preconditions for economic development is overlooked. The following definition of social cohesion reminds us of its relevance: social cohesion is a state of affairs in which a group of people (delineated by a geographical region, like a country) demonstrate an aptitude for collaboration that produces a climate for change (Ritzen, Easterly and Woolcock, 2000).

The occurrence of the racial riots implied that "an aptitude for collaboration" among the ethnic communities was patently absent. Such collaboration as is necessary for economic development was obviously necessary for social stability and economic growth. While Ritzen, Easterly and Woolcock are vague about change, one must assume that by change they imply setting the preconditions for economic growth and development in a positive manner. The May 13th incident proved that economic growth without equity could have dangerous effects, particularly if the bulk of the disadvantaged sections of society were heavily clustered within one ethnic community. This lent credence to the argument that social cohesion could not be achieved with one ethnic community being excluded from economic participation.

The State has primarily been concerned with the objective of ensuring that the Bumiputera should not be the victims of economic exclusion. It has, of course, had wider goals, such as the eradication of poverty across all ethnic communities, but the thrust of economic policies has been focused on the Bumiputera. It is in this context that social capital has been encouraged from the State level. This is not to say that there have been no other contexts within which social capital has had the opportunity to flourish. Neither does this deny that social capital formation has taken place among other ethnic communities. Rather, we would argue that social capital formation, when it has taken place in domains outside those managed by the State, has occurred against the backdrop of larger social concerns. Second, we would seek to emphasize that the policies introduced by the Government have been primarily concerned with correcting the disadvantaged position suffered by the Bumiputera. Third, social stability and ethnic harmony were crucial goals, and it was reasoned that by attending to the problems of the Bumiputera, these goals would be achieved. Contrary to the notion that government action is fraught with inefficiency and is especially unsuitable when it comes to issues such as ethnicity and attitudes, the Malaysian experience (as subsequent sections will demonstrate) has proved successful.

C. SOCIAL CAPITAL AND POVERTY

1. Background

The thrust of poverty eradication measures and policies in Malaysia has its basis in the country's historical roots. In this regard, it should be mentioned that the magnitude of poverty was not widespread prior to Malaysia's independence (1957). Poverty was most prevalent in the rural sector. Until the end of the 1970s, the main subjects of poverty were small paddy farmers, and coconut, palm oil and rubber smallholders. Small fishermen and artisans were also victims of poverty.

There was an ethnic and sectoral bias to poverty. The Bumiputera who were engaged in small paddy farms were most affected by poverty in the 1970s and 1980s. Poverty among the Indians was predominantly confined to those involved in the plantation sector; the Chinese conducting small businesses in the remotest areas were also poor. Ethnically, poverty was most prevalent among the Bumiputera. Sectorally, poverty was most significant within the agricultural sector. Subsequent to the country's independence, the policy of pursuing a development strategy based on growth favoured those who had assets of some sort, whether they were physical, financial, human or natural assets. The assetless small producers and farmers remained deprived and did not benefit from the Government's economic policies.

In view of this background, it stands to reasons why the State chose to lay its emphasis on the Bumiputera poor and focus its policies for poverty eradication on the rural sector. Clearly, those two target groups were in greatest need of assistance. While the first stage of decision-making was in response to the question of who or what groups were in greatest need of assistance, the second stage of deliberation was directed at the modalities for resolving the problem of poverty. The question was therefore one of determining those factors that needed to be provided or reallocated in order to alleviate poverty. In other words, given that equality of various sort could be achieved, what particular sort would it be worthwhile to address. Recent debate points to two issues, resources and capabilities, that ask to be redressed (see, for instance, Daniels, 1990; Cohen, 1989; Sen, 1980, 1985, 1999). Review- ing the strategies that were employed it appears that resources were the primary target. Capabilities and social capital formation were tackled at different levels of intensity. In retrospect, this seems to have been a decision that has had a beneficial payoff. However, before we can evaluate the attention paid to social capital, it may be useful to survey the policies and programmes for poverty alleviation choronologically.

2 Plan periods and strategies

The First Malaysia Plan (1966-1970) was mainly interested in attaining rapid growth. Poverty eradication was not the prime object of focus, rather the policies instituted at that time were based on the philosophy that the trickle-down policy would work and would address questions of poverty. The main objectives under the Plan were meant to achieve the following:

Employment generation

Promoting economic activities in all sectors

Stimulating human resources development

Diversifying from a commodity-producing economy to an industrialized economy

Poverty alleviation was attended to indirectly insofar as rural development was an important target. Specifically, the rural sector was targeted in the following ways:

Increasing the purchasing power of the rural population

Enhancing productivity and income-earning capacity

Providing infrastructural facilities (i.e. electricity, health, low-cost housing, transport and communications).

Further, a number of programmes were undertaken with the rural population in mind. Some of the programmes that were devised to benefit the rural population were those for the replanting of rubber, coconut rehabilitation, modernization of small-scale fisheries, improvement in agricultural marketing and the provision of irrigation and drainage. Other programmes that were implemented included the following:

Land development schemes through FELDA

Land consolidation and rehabilitation by FELCRA

Revision of credit facilities

The programmes instituted through FELDA and FELCRA had an impact on social capital formation. They included the provision of land to landless Bumiputera farmers as well as the provision of drainage and irrigation for them. The most important feature of those schemes was to set aside land for the farmers in certain locations. Along with this, housing estates were created for the farmers that led to locational proximity and more association among the farmers. This, in turn, resulted in more cooperative endeavours and a culture of mutual help.

The Second Malaysia Plan (1971 -1975) was the locus for the New Economic Policy. The major objectives of the Plan were:

The eradication of poverty

The restructuring of society

The stimulation of investment and consumption

Employment creation by accelerating growth in all sectors of the economy (i.e. the primary, secondary and tertiary sectors)

The Second Malaysia Plan had very well-defined poverty eradication programmes. In the earlier Plan period, there was reliance on the trickle-down effect, but in the second the thrust was on addressing the needs of the poor directly. Thus, programmes were aimed at modernizing rural life; improving the quality of life of the urban poor; improving the redistribution of income; and helping to foster a Bumiputera Commer- cial and Industrial Community for the less disadvantaged Bumiputera.

The Third Malaysia Plan (1 976-1 980) was geared towards restoring the ethnic balance in employment; providing adequate facilities for education and training; and establishing trust funds for the Malays. In terms of poverty eradication, the following goals were set:

Defining the targets of anti-poverty programmes

Improving the quality of life for the poor

Promoting the agricultural and industrial sectors to generate income and employment

Promoting Bumiputera participation in the ownership and control of wealth in the secondary and tertiary sectors

By and large these goals were achieved through strategies that were slanted towards the provision of physical resources, such as by granting fishing assets, improving the infrastructure of estate workers and undertaking irrigation and drainage projects for paddy cultivators. Nevertheless, it must be added that some of the land rehabilitation and settlement programmes were useful in forming social capital since they were built around creating a community of farmers.

The Fourth Malaysia Plan (1981-1985) was drawn up at a time when the external resource balances were affected by the openness of the economy. The domestic fiscal balance was also affected by the Malaysian economy's openness. Thus the Fourth Plan was designed to counter economic recession and structural adjustment. More specific to poverty eradication were programmes such as the following:

New approach under the Integrated Agricultural Development Programme

Support services such as training, extension, research, credit, marketing, processing and related services

Aside from these programmes, which had an element of social capital formation, were other programmes that targeted crop diversification, modernization of small-scale fishery and the use of the block system in land development schemes.

The Fifth Malaysia Plan (1986-1990) did not include any new policies that were directed towards the alleviation of poverty. It was concerned with issues to which earlier plans had not devoted themselves. Some of the prominent concerns were:

Reducing the size of government involvement

Privatizing sick industries rapidly

Promoting foreign direct investment

Boosting export-oriented manufacturing activities

Revitalizing the agricultural sector

Several programmes were put in place to reduce poverty during the Fifth Plan period that greatly enhanced social capital formation. These included:

Group farming

Developing small townships

Establishing rural growth centres

The programme of clustering farmers together had immediate economic benefits, such as achieving economies of scale. But more important than that were the interrelationships that it developed among the farmers. This built on the culture of associational assistance that pre-exists within the rural Malay culture. The cultural practice of gotong royong (collective social activity) among rural Malays served as a valuable foundation for tighter association among the farmers who were placed in the above-mentioned programmes. Gotong royong is a practice in which the entire community rallies together to help a particular person or group of persons in time of need. This includes situations such as helping a household to reconstruct a house that may have been devastated by floods, or organizing the members of a community to clean a kampung (village). When a wedding takes place in a Malay

village, the people resort to the practice of gotong royong to facilitate wedding preparations. Against this social practice, the encouragement of group farming was a unique idea that harnessed a longstanding practice and provided a more modern setting for its functioning. The establishment of small townships, similarly, had a threefold effect. First, it was useful in urbanizing the rural population. Second, it was helpful in ensuring that there was no dislocation of rural communities, something that might have happened if the rural population were left to their own resources to find their own houses. Third, the creation of townships helped to keep people from the rural communities together and to preserve their links. The fact that they were from the rural sector served as a common bond. These measures helped to increase the income and the quality of life of participants in these programmes.

The Second Outline Perspective Plan, covering the period 1991- 2000, was designed with the New Development Policy in mind. The Policy sought to promote a progressive, harmonious, tolerant and dynamic society. The major objectives continued to be social and political stability and the efficient management of the economy. The Policy took a serious view of poverty reduction and was keen to achieve the following:

Increasing the incomes of the bottom 40 per cent of households

Making greater efforts to eradicate hardcore poverty

Creating employment opportunities for the low and unskilled households, especially those belonging to lower income groups

Improving skills and productivity, as a whole

Several programmes were designed under the Policy for the purpose of eradicating poverty. These projects were very specific in regard to their targets and they were also very focused on building social capital. At the time when these projects were launched, the notion of social capital was not the centre of much debate and discussion. Neverthe- less, these programmes had social capital formation at their core. Two programmes that are particularly worthy of mention in this context are the Amanah lkhtiar Malaysia (AIM) scheme, and the programme for the development of the very poor, otherwise known as Program Pembangunan Rakyat Termiskin (PPRT), (the Poverty Reduction Programme for the Very Poor).

The Sixth Malaysia Plan (1 991 -1 995) does not differ substantially in approach from the previous plan documents. Generally, the Sixth

Plan still maintained its focus on creating the Bumiputera Commercial and Industrial Community (BCIC). The essence of this Plan was, still, to increase the ownership, control and participation of the Bumiputera in the corporate sector and to restructure the pattern of employment vis-a-vis the Bumiputera. The Second Outline Perspective Plan coincided with the Sixth Plan and as such the PPRT was launched during this Plan period. The programme to develop the hardcore poor citizens PPRT encompassed a wide variety of programmes dedicated to addressing the needs of the poorest sections of society. These programmes (which will be discussed in some detail below) were meant to provide the poor with basic infrastructural facilities as well as offer opportunities for them to develop the necessary social capital.

The Seventh Malaysia Plan (1996-2000) was mainly concerned with achieving growth and distribution, improving human resources development and engaging the private sector in restructuring programmes. It was also an important aim of this Plan to develop a strong BCIC in the small and medium-sized enterprise (SME) sector. It was planned to enable more Bumiputera entrepreneurs to penetrate into the secondary and tertiary sectors. During this period, the PPRT programmes were maintained. There were specific programmes geared towards income generation through cash crop cultivation, livestock rearing, aquaculture, petty trading and cottage industries. The strategy adopted was to target the poorest districts through an integrated, multisectoral approach.

The most recent Plan document, the Eighth Malaysia Plan (2001- 2005) did not neglect the issue of poverty eradication. Considering the success that the Government had achieved in previous Plan periods, the Eighth Plan has the task of ensuring that the incidence of poverty is reduced to 0.5 per cent by 2005. This Plan period has set itself the job of removing the remaining pockets of poverty, particularly in remote areas. One of the primary efforts in this timespan will be to conso- lidate existing poverty alleviation projects. In the Eighth Plan it is scheduled that the PPRT programmes as well as other anti-poverty programmes will be consolidated under the Skim Pembangunan Kesejahteraan Rakyat (Citizens' Harmony Development Scheme).

3 Government and non-governmental programmes

As mentioned earlier, the government-initiated programmes were directed at two levels, providing resources and encouraging the formation of social capital. At a more microlevel, the programmes instituted

by the Government (a matter to be discussed in this subsection) took care to attend to the problem of enabling the poor to achieve equality of resources and capabilities. Here, by "capabilities" is meant the ability to employ resources in a manner that allows individuals to gain higher levels of well-being as well as the freedom to use or not use opportunities (see Sen, 1985, 1999). It is in respect of the microlevel programmes (rather than at the level of strategy) that the Government has tended to emphasize the concern of developing social capital. The Malays within the rural sector have a proclivity to form relationships and capitalize on trust as a basis for transactions. Perhaps it would be more accurate to say that this tendency was given an opportunity to flourish in these programmes. Thus, although the Plan documents do not pay attention to social capital formation, this factor receives some attention through the microlevel programmes. The NGO programmes are more straightforward in that they focus on social capital formation more carefully. In effect, the NGO programmes complement the government programmes. The NGO programmes have a stronger bias towards social capital formation, while the government efforts have a greater emphasis on resource provision. This is perhaps as it should be: with the Government providing resources, since it is in a position to do so, and the NGOs concentrating on organizing networks and creating support to help form social capital.

The government programmes that were launched had a mix of objectives. They sought to address questions that immediately affected the poor, and were likely to be missed in the course of the broader planning exercises. The following is a list of government programmes that were designed to eradicate poverty:

Food assistance programme for the hardcore poor families (Program Makanan Tambahan Keluarga Termiskin (MTKT))

Urban poverty programme (Program Kerniskinan Bandar (PKB))

Programme to develop village economies (Program Pembangunan Ekonomi Kampung (PPEK))

Programme to develop local communities (Program Pembangunan Masyarakat Setempat (PPMS))

Programme to improve houses (Program Pemulihan Rumah

(PPR))

Programme to develop the hardcore poor citizens (Program Pembangunan Rakyat Termiskin (PPRT))

PPRT Agriculture (PPRT Pertanian)

Programme to reform the attitude of the hardcore poor families (Program Pemulihan Sikap Keluarga Termiskin (SIKAP))

Children's Programme (Program Taman Asuhan Kanak-kanak (TASKA))

The above-mentioned programmes effectively addressed the question of improving the capabilities of the poor, resource provision and social capital formation. The extent to which these three issues are tackled varies with the individual programmes. A brief discussion of some of these programmes will illustrate how the three issues are targeted. The MTKT Programme, for instance, is a food assistance programme which aims at ensuring that poor children below 12 years of age receive a balanced and nutritious food intake. The basket of food assistance given to the identified hardcore poor families is determined by the Ministry of Health of Malaysia. It is valued at RM77 for Peninsular Malaysia, RM90 for Sabah and RM95 for Sabah. While this programme does involve resource provision, it also addresses the capabilities of the hardcore poor since it is aimed at increasing the health standards of poor children to enable them to continue their education effectively.

The TASKA Programme is somewhat similar to the MTKT programme in that it hopes to improve the health status of poor children by improving their diet and through health monitoring. Here, again, the primary focus is on improving the capabilities of the poor but this is combined with some element of resource provision. Under this programme, buildings and equipment are provided for childcare. Quite often these buildings are modest ones that are put together using the cooperative efforts (gotong royong) of the community. To this extent it builds on the social capital that exists within the community and, in fact, enhances it for the purposes of improving the childcare facilities available to them. The Government undertakes to provide manpower and educators under this programme. This is a programme that sees a confluence of government efforts along with the cooperative efforts of the community. The latter tightens the interaction among members of the community and provides them with a common goal towards which they can work.

Attitudes are central to social capital formation. The literature makes it clear that trust, reciprocity and mutually binding informal agreements are the constituents of social capital. The SIKAP Programme

encourages the development of positive attitudes in an indirect manner. This programme is based on courses that are offered to hardcore poor families for the purpose of improving their ability to utilize available resources. Its intention is to create a balance between physical and spiritual development. In this sense, it is geared towards developing a sense of pragmatism and resourcefulness. The setting under which courses and exercises are given helps to enhance the spirit of teamwork and cooperation. This serves the objective of assisting poor, hardworking families who have the initiative and motivation to get out of the poverty trap.

Most of the other programmes devoted to poverty alleviation are directed at improving capabilities or improving the provision of resources. The PPMS Programme seeks to provide houses and basic facilities. It is aimed at creating employment opportunities. This is done through large-scale commercial projects such as fishery and orchid garden projects. The PPR Programme concentrates on physical resources. It identifies hardcore poor families and provides them with access to water, electricity and lavatories. The prerequisite for participation in this programme is ownership of land, since it is not possible to help build new houses for those who do not have their own land. But those who are landless are not excluded because, subject to the approval of their landowners, those who stay in rented accommodation are provided with assistance in repairing or renovating their houses.

The Amanah lkhtiar Malaysia (AIM), the Endeavour Trust of Malaysia is a notable NGO which advances social capital formation. AIM is designed after the Grameen Bank. Like the Grameen Bank, it has two distinguishing features: it is based on trusting the poor who have little or no assets, and sending its officers to the poor borrowers to disburse loans and collect instalments. Both features mark a sharp distinction as against credit disbursement done by the conventional banks. AIM imposes several conditions that potential borrowers must satisfy in order to take advantage of its credit facilities:

Loans are extended to groups; and each group must be composed of five members

Groups must be formed voluntarily

Members of a group must be of the same sex

Members must be from the same socio-economic background (i.e. similar educational levels and economic conditions)

Members must have mutual trust

Members must be from the same village and familiar with each other

AIM encourages the formation of social capital among its borrowers by requiring strong networking among its members. Its disciplines also require mutual cooperation and commitment among its members. Needless to say, AIM depends upon trust (among members and from the institution) for its continued success. These elements that constitute social capital are enhanced through the operationalization of AIM. It is required that those who have borrowed from AIM participate in weekly meetings. Participation in these meetings is compulsory but is scheduled in a consensual manner through the mutual agreement of the group members. Group members mutually agree on the appointment of the Chairperson and Centre Chief as well as the role of peers in the group. The mutually agreed role of peers and the regular supervision that comes in the form of the weekly meetings creates a self-regulating mechanism. This mechanism, in conjunction with the formation of social capital, has led to the success of AIM.

AIM was founded in 1987. By 1990 it had 3,220 members, and its membership grew to 42,861 in 1996 (AIM, 1996). It has been particularly successful in Kedah, Perak, Terengganu and Kelantan. This success is in line with its goals given the pattern of poverty distribution in Malaysia, since these four States account for 66 per cent of poverty in peninsular Malaysia. Up to 1996, AIM had a loan disbursement amounting to as much as RM136 million. For 1996 alone RM48 million was advanced as loans. The bulk of the loans were advanced in the above four States. It is in these States that the magnitude is higher in comparison with the country as a whole.

Another NGO that has done much to bolster the development of social capital for poverty eradication is the lslamic Economic Develop- ment Foundation of Malaysia. The Foundation was established in 1976 with the aim of trying to raise the standard of living of the Muslim community. It attempts to do this in two ways: (a) by instilling values that Muslims will find useful in order to achieve greater economic progress and (b) by introducing various programmes. The programmes include the Ar-Rahnu Scheme (an lslamic pawnship scheme providing collateral for loans in a manner that does not conflict with lslamic principles); the Urban Entrepreneur Scheme and the Apprentice Entrepreneur Scheme. There are a wide range of other programmes instituted by this organization for the purpose of bringing Muslims together and helping them to improve their productivity and incomes while also providing an lslamic environment.

4. Reduction in poverty

Having discussed the various strategies and programmes that have been instituted for the eradication of poverty, it is useful to mention Malaysia’s record of success briefly. There are no data to connect the formation of social capital with poverty alleviation. Yet, it appears that the different policies and implementation strategies have achieved their target since there has been considerable reduction in poverty levels. Generally, the incidence of poverty came down from 49 per cent in 1970 to 17 per cent in 1990. This figure dropped further to about 7 per cent in 1997.

Before detailing the reduction in poverty, it is necessary to briefly survey the poverty line income (PLI), because it is the most frequently used measure for absolute poverty. The PLI is the minimum level of income required to enjoy a decent standard of living that covers basic needs such as shelter, food, clothing, fuel, transport, education, health and recreation (Malaysia, 1989). The PLI varies years by year and is adjusted according to the prevailing economic conditions, cost of living, and the region (i.e. Sabah, Sarawak or peninsular Malaysia) (see table lV.l). Individuals earning an income below the PLI are considered “poor” while those with an income that is half the PLI or less are held to be “hardcore” poor.

Table IV.1. Poverty line income (PLI)

Source: Siwar (forthcoming).

Using the PLI as a measure of poverty, it is noted that the incidence of poverty decreased from 49 per cent in 1970 to about 8 per cent in 1999 (see table IV.2). While there were 1.6 million poor households in 1970, there were only 666,000 poor households in 1980. In 1997, there were 274,000 poor households. The rapid decline in poverty in the years between 1990 and 1995 can be attributed to the

133

Peninsular Malaysia 370 5.1 425 4 6 510 4.6 sabah 544 5.4 804 4.9 685 4.9 Sarawak 452 5.2 516 4.8 584 4.8

rapid rate of growth that the economy had experienced. The increase in poverty levels in 1999 followed the financial and economic crisis of 1997. Thus in 1999, there were 351,000 poor households, an increase of about 22 per cent over the number of poor households in 1997.

Table IV.2. Incidence of poverty and number of poor households, 1970-1 999

Source: Siwar (fo~~coming).

There were 231,000 hardcore poor households in 1985, and in 1990 there were about 143,000 hardcore poor households. There was a drastic reduction in 1995 and in subsequent years. The degree of hardcore poverty has not been a cause of deep concern because it has not been widespread. Only about 7 per cent of households were hardcore households in 1985. In 1990, the incidence of hardcore poverty decreased to 4 per cent. There was a halving of the incidence of hardcore poverty (2.1 per cent) in 1995 and a further drop in its incidence in 1997 and 1999 to 1.4 per cent.

The incidence of poverty was higher in the rural sector in 1970 (58.6 per cent). It decreased by half after two decades and in 1990 it was 21 per cent. Further decreases were seen in subsequent years. In 1999, it stood at 12.4 per cent. Urban poverty has similarly been alleviated: the incidence of urban poverty, which stood at 24.6 per cent in 1970, dropped to 7.1 per cent in 1990. It came down further to 3.3 per cent in 1999. The overall incidence of poverty decreased

134

1970 1975 1W 1985 1990 19!?5 IN7 19%)

IncidenCe of poverty (percentage) 49.3 43.9 29.2 20.7 17.1 8.7 6.7 7.5

Number of poor househdds (thousand)

Incidence of hardcore poverty (percentage)

1 606 835.1 666.1 649.4 619.4 365.6 274.2 351.1

n.a n.a n.a 6.9 4.0 2.1 1.4 1.4

Number of hardcore poor households (thousand) n.a n.a. n.a 261.1 143.1 88.4 62.4 64.1

remarkably from 49.3 per cent in 1970 to 7.5 per cent in 1999. There is, thus, a clear picture of an amazing reduction in poverty over the years. Given the data constraints, it is not possible to determine to what extent this decrease can be attributed to social capital formation. There is no doubt that that has had a role to play in the reduction of poverty, but growth and other macropolicies have also played a crucial role.

D. SOCIAL CAPITAL AND ENTREPRENEURSHIP

The Malaysian Government has a long tradition of implementing policies that are supportive of entrepreneurship. It has taken various steps for the development of entrepreneurs in general. This has included providing a conducive economic environment, and providing various financing and funding schemes and tax incentives, as well as business advisory centres. The rationale for doing so is that nurturing entrepreneurs is seen as an agent to facilitate and upgrade the industrial structure, thereby creating industries for the next generation. In addition, and for the same reasons, the Government has been paying special attention to the development of small and medium-sized industries/enterprises.

Among the foremost measures undertaken by the Government was the setting up of the Ministry of Entrepreneur Development in 1995. Although it was intended mainly for the purpose of building up Bumiputera entrepreneurship, it has sewed to act as a coordinating body for all matters pertaining to entrepreneurship. Among the specific services currently offered by the Ministry are the following:

A one-stop entrepreneurship information centre

The spearheading of the franchise and vendor development programme

The provision of entreprenuership training

The provision of subsidized business premises (for qualified entrepreneurs) financial assistance in the form of grants or loans

The provision of an online resource and information centre for entrepreneurs

A pivotal element that makes it possible for entrepreneurship to succeed is the ability to gain access to markets and to develop those markets. Small-scale enterprises and micro-enterprises have far fewer resources at their disposal than do larger companies. The Ministry of

Entrepreneur Development, being fully aware of this constraint, directs some of its attention to the smaller enterprises. There are two levels at which the Ministry targets its efforts. The first point of focus is directed at enabling entrepreneurs to obtain the resources (financial and non-financial) they require. The second area that is targeted is the building of social capital. Very often, although a particular policy may appear to be aimed at improving the resources available to entrepreneurs, it has the effect of forming social capital. The provision of specific areas for the location of businesses or the exchange of goods has the unintended effect of creating networks and links among entrepreneurs. One can thus distinguish between the intended and unintended formation of social capital.

In what follows, some of the policies that have been implemented by the Government to encourage entrepreneurship are discussed. It is possible to distinguish three sets of policies:

Policies geared towards improving the resources that are available to entrepreneurs

Policies primarily directed at improving the formation of social capital

Policies primarily meant to improve the set of resources available to entrepreneurs, but with adequate scope for forming social capital

As the subsequent discussion will illustrate, most of the programmes and policies implemented by the Government are devised in such a way as to create physical opportunities for the development of entrepreneurship and to form social capital. This is understandable, since entrepreneurship cannot exist in an environment where social capital is not present. Or, put more positively, entrepreneurs thrive in a climate where there is abundant social capital. In effect, the flourishing of entrepreneurial activity can be built successfully on two pillars: an adequate supply of resources (financial capital, infrastructure, knowledge, credit) and an environment that is rich in social capital (dense networks, relationships, trust, reciprocity).

One of the programmes engineered by the Ministry of Entrepreneur Development is the "Gallery of Bumiputera Entrepreneurs" (GBE). GBE was set up to help owners of small-scale enterprises to promote and market their products. The intention is to assist them in gaining access to hypermarkets, supermarkets, wholesalers, retailers and even export- oriented firms. GBE operates by collecting and exhibiting the produce

of the enterprises at focal locations. The only conditions that are imposed on enterprises are that their goods must be of good quality and have the potential to be marketed. GBE conducts its exhibitions at key locations over three sessions in a year. The products are exhibited for a period of four months. Products that are considered include food products and beverages, textiles, handicrafts, furniture and construction materials. These products have been selected because of the problems faced by small enterprises in gaining access to markets. Surveys conducted by the Ministry of Entrepreneur Development indicate that two important problems confronted by enterprises producing these goods. First, small enterprises were restricted by the limited market available for these goods, and second, the cost of marketing the goods was beyond the reach of the smaller enterprises.

GBE operationalizes its programme of creating markets for the smaller enterprises by categorizing the products into three levels. The first category includes goods that are ready to be marketed. This means that the goods are attractively packaged, labelled and suitable to be marketed. The second category includes goods that are packaged and labelled, but not of sufficient standard to be classified as being suitable for marketing in their current form. The third category refers to goods that are not even packaged appropriately. Producers of goods that are classified under categories two and three receive advice on marketing strategies. GBE acts as a middleman for goods that come under the first category.

The Ministry, for its part, acts as a moderator and negotiates with the supermarkets and hypermarkets so as to reduce the listing fees that are usually required by these establishments. This enables the enterprises to be able to display and sell their goods at locations that are frequented by the urban population in the larger cities in Malaysia. This, of course, applies to goods that come under the first category since they are of a quality and packaging that is in a condition for sale to a wider market. An interesting feature of the GBE programme is that once the entrepreneurs are able to make sales on their own and without too much reliance on the Ministry, they are removed from the programme. Thus the enterprises are encouraged to be self-reliant and the Ministry merely acts to support them until such time as they can fend for themselves in the market.

The Ministry has acknowledged that there are several problems with this programme. First, the firms are not able to maintain the quality of their products. Second, they lack the documented processes or recipes

for the manufacture of their products. Third, and most important, the issue of the "middleman" arises in one form or another, although the specific intention of the programme is to do away with middlemen. Middlemen attempt to influence the firms into accepting their services on the promise that this would relieve the enterprises of the burden of seeking buyers. Further, the entrepreneurs seek middlemen so as to gain access to global markets. The Ministry, however, would prefer the enterprises to be able to tap into global markets on their own or with the assistance of government agencies. But the enterprises choose to take the short cut of using the agency of middlemen.

GBE is an instance of a policy that was primarily meant to improve the marketing channels of small-scale enterprises. The elements of the marketing chain that this programme took into consideration are the quality of products, packaging, distribution pathways and links with supermarkets and other such channels. Activities that enhance this chain do not by themselves constitute an attempt to improve social capital. Nevertheless, this scheme had the effect of improving the social capital of the target entrepreneurs because, without government assistance, they would not have been in a position to establish contact with the larger distribution outlets. To the extent that links were established for the small entrepreneurs, government assistance was offered for the creation of social capital. Where successful, this meant that entrepreneurs were able to take advantage of the initial introduction to deepen and develop their connections with the marketing outlets as well as extend and create their own networks. A fully successful programme would have negated the need for middlemen since with well-established networks there would be no need for them. Those entrepreneurs who did not take full advantage of government assistance to develop their social capital resorted to middlemen.

The Majlis Amanah Rakyat (MARA), the Council of Trust for the Indigenous People, is another agency under the Ministry of Entrepreneur Development. The primary activity of MARA is to encourage entrepreneurial development among the Bumiputera. MARA has a special interest in developing entrepreneurial activity in rural areas. Although its mandate is not restricted to small-scale enterprises and micro- enterprises, it does take an active interest in these areas because its mission is to see the growth of Bumipufera participation in business. As part of the New Economic Policy, MARA was set up to correct racial imbalances in business participation. Consequently, it cannot afford to neglect the two groups of enterprises. MARA is mainly concerned with matters relating to business and industry, credit facilities, equity invest-

ments, training and development, and all other activities that would lead to the progress of the Bumiputera community. To a large extent, this agency depends on the Ministry for activities relating to promotion and marketing, a matter that has been discussed in previous paragraphs. There is one particular activity in which MARA engages that helps small- scale enterprises to market their output. This activity relates to the development of infrastructural facilities for Bumiputera businesses. More concretely, this refers to the setting up of areas where entrepreneurs can trade. The range of areas that are allocated ranges from shopping arcades to shopping complexes, but also includes shops and stalls. The needs and capabilities of the enterprises are not ignored in this effort. The rental for these premises is subsidized by MARA. The criteria are fairly flexible in that only the following conditions are set:

Malaysian nationals of Bumiputera origin, of not less than 18 years of age

Possessing valid business licences

Possessing adequate business experience

Preferably from small-scale enterprises and micro-enterprises

For greenfield or ongoing projects that seek upgrading

In 2000, MARA had established projects relating to the setting up of factories and premises for marketing and promotion worth RM2.8 billion. This is a good indication of the seriousness with which the agency has approached the issue of providing good facilities for small enterprises to market their produce.

MARA's projects are two-pronged in their approach. The first line of attack is to provide the infrastructural facilities that otherwise work as obstructions against Bumiputera entrepreneurs. This includes the provision of locations for carrying out business, credit, training and development. This aspect of government action makes sure that entrepreneurs have inputs such as knowledge, physical and financial capital, and infrastructural facilities. In the process, the entrepreneurs develop social capital. This happens, for instance, through the interaction among the entrepreneurs that takes place during training and development. When physical facilities are provided for entrepreneurs, this has the effect of unintentionally forming social capital. The physical facilities provided may take the form of buildings, or more modestly, of space in buildings. In any case, the grouping together of entrepreneurs gives rise to the formation of social capital.

A less ambitious effort to encourage entrepreneurship is fostered through the Pasar Malam (Night Market) concept. This programme is coordinated by the Municipal Councils of the various States in the country. Small traders, who act as middlemen, sell their wares at markets that are held in specific makeshift locations in the evenings. These markets are held close to residential areas on designated days of the week. The goods sold at these markets vary in nature, ranging from fruits and vegetables to fish and other food products. They also include electrical products, footwear and garments. The traders at night markets purchase their goods from small-scale enterprises and farmers. In doing so, they provide market access for them.

The night markets do not require much capital intensity for their operations. They mainly require organization by the relevant State agency. This takes the form of requiring registration on the part of the vendors and the allocation of space within a residential area. This arrangement gives small traders and other entrepreneurs an opportunity to find market access. By being placed in a common area, the entrepreneurs interact with each other and they learn more about the market that they serve. The entrepreneurs manage to form associations and use these to seek more advantages for their common good. Since the cost of participating in these night markets is very low, it gives a chance for more people to produce goods for exchange. It lowers the risks that small-scale entrepreneurs might otherwise have to face. As mentioned previously, these arrangements allow the participants to organize for their common interest and in so doing encourage the spirit of entrepreneurship to develop organically. Since these programmes are directed at rural-based entrepreneurs and the urban poor, it lowers the threshold limit of entry for these groups into the world of business. It goes without saying that these programmes also create employment opportunities.

E. CONCLUSIONS

Social capital has been an important component of policymaking in Malaysia. The vocabulary that is used by scholars familiar with the issue of social capital may not have been available in Malaysia in the 1960s or even in the 1980s. Nevertheless, the notion was present in their thinking and makes itself felt in the policy prescriptions that were designed and implemented by the Government. The position of the Bumiputera has been an issue of special concern for the Government. This is so because the incidence of poverty was highest among this

ethnic community. Although the Bumiputera constituted the bulk of the population, they did not figure prominently as far as economic participation was concerned.

It can be argued that the State can play an important role in forming and fostering social capital, as the Malaysian experience so convincingly demonstrates. We claim that social capital can, indeed, benefit from government involvement. Using poverty eradication and entrepreneur development as two noteworthy policy issues, we could demonstrate that social capital has been an important component of the strategies and programmes that have been implemented in these areas. In fact, as far as microlevel programmes are concerned, an analysis of the workings of these programmes indicates that social capital has been an important input for development in such specific areas as poverty eradication and entrepreneur development.

REFERENCES

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Coleman, J., 1988. "Social capital in the creation of human capital", American Journal of Sociology, vol. 94, Supplement.

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Eggertson, T., 1990. Economic Behavior and Institutions (Cambridge, Cambridge University Press).

Krishna, A., 2002. Active Social Capital: Tracing the Roots of Democracy and Development (Columbia, Columbia University Press).

Malaysia, 1989. Mid-Term Review of the fifth Malaysia Plan 1986-1 990, Kuala Lumpur.

Narayan, D., 1999. Bonds and Bridges: Social Capital and Poverty, Policy Research Working Paper No. 2167 (Washington, D.C., World Bank).

North, D.C., 1 990. Institutions, Institutional Change and Economic Performance (Cambridge, Cambridge University Press).

Putnam, R., 1993. Making Democracy Work: Civic Traditions in Modern Italy (Princeton, Princeton University Press).

Putnam, R., 1996. "Who killed civic America", Prospect, March.

Ritzen, J., W. Easterly and M. Woolcock, 2000. "On 'Good' politicians and 'Bad' policies: social cohesion, institutions, and growth", Policy Research Working Paper No. 2448 (Washington, D.C., World Bank).

Sen, A.K., 1980. "Equality of what?" in S. McMurrin, ed., Tanner Lectures on Human Values, vol. 1 (Cambridge, Cambridge University Press).

Sen, A.K., 1 985. Commodities and Capabilities (Amsterdam, North-Holland).

Sen, A.K., 1999. Development as Freedom (Oxford, Oxford University Press).

Siwar, C. (forthcoming). "Enabling policy framework for poverty alleviation", in S. Nambiar, ed. (forthcoming), Reassessing Poverty in Malaysia (Leeds, Wisdom House).

Tendler, J., 1997. Good Government in the Tropics (Baltimore, John Hopkins University).

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