THE EAST ASIA CRISIS AND THE POOR: WHAT ROLE FOR AGRICULTURE?

“Almost overnight,” says Bruce Koppel, a senior fellow at the East-West Center in Hawaii, “the crisis has rolled back many of the gains that were made in reducing absolute poverty.” In addition to price rises, large numbers of urban workers have returned to their villages and this has pushed down agricultural wages. Combined with more expensive agricultural credit and the high farm-household debt incurred during the boom years, the crisis is laying the groundwork for a potentially serious food security problem, according to Koppel.

Social Effects

Unemployment and migration. The reverberations from the crisis have reached all the way down to the rural household level, where few government safety nets exist. Initially the most visible effects of the economic crisis were massive job layoffs and reduced wages in urban areas. Between October 1997 and February 1998, real income declined in South Korea, unemployment doubled, and the Korean Ministry of Labor predicted that unemployment would reach new highs in subsequent months. In Thailand, unemployment has risen from virtually zero to a predicted 2 million in 1998. Indonesia will experience a doubling of unemployment according to the International Labour Organization, which also warned that women are likely to comprise a disproportionate number of the newly unemployed in the region because of their inferior position in the labor market.

Many of the newly unemployed have tried to deal with their sudden loss of income by returning to their villages. Eric Craswell, who heads the International Board for Soil Research and Management, headquartered in Thailand, warns that migration is “putting tremendous pressure on the land because people are using largely unsustainable methods as they expand their intensive cultivation of crops. The environmental impact is disastrous.”

Indonesia epitomizes some of the key problems arising from the deterioration of the urban economy. According to Graeme Hugo, an expert on Indonesian migration patterns at the University of Adelaide, returning unemployed have further strained rural relatives, many of whom are already suffering from the effects of a severe drought. Moreover, remittances from Jakarta during Ramadan have traditionally been an important source of income for villagers, but this year it is estimated that only half of last year’s US$32 million made it back to rural areas. Also of considerable concern is the anticipated decline in remittances from roughly 2.5 million overseas Indonesian contract workers who send home US$1 billion officially, but probably much more unofficially. These workers, most of whom are in Malaysia, come from some of the poorest areas in Indonesia. “Hence,” says Hugo, “their impact on regional and local development can be far greater than their impact on national development.”

The economic crisis has contributed to social unrest and ethnic tensions as well. Fearing for their lives and livelihoods, many Chinese traders have left Indonesia. IFPRI’s Francesco Goletti says that “the departure of Chinese traders from Indonesia will mean that prices will go up more than the shocks would suggest because there will be fewer marketing and distribution intermediaries working. You can’t replace one business class with another quickly.”

Not all countries have suffered the same travails. One of the few positive effects of the crisis has been felt in Thailand, despite the large jump in unemployment. In Thailand rural households gain the greater share of their income from farming, which has become more lucrative because of exchange rate devaluation. Ammar Siamwalla of the Thailand Development Research Institute writes in a recent paper on the crisis that “a very tentative conclusion can be drawn that the crisis may have helped the rural poor somewhat, through the increase in agricultural income [from export commodities].” Whether inflation eventually outstrips the gains made through devaluation remains to be seen. This is a particular concern in the short term because government expenditures in the social sectors have been cut by 10 to 20 percent. Such reductions have also taken place in other countries in the region.

Although Thailand and South Korea are supposed to be bouncing back, IFPRI’s Romeo Bautista says that “people have been overly optimistic. They have not taken into account the hardships associated with the IMF programs. Labor strikes in South Korea have put a damper on recovery. The austerity measures have created economic hardships and recessionary conditions.”

Food insecurity on the rise. In recent years East Asia had made massive gains in food security and nutrition, but the crisis has wiped out some of the benefits of the “miracle,” temporarily at least, and many people now confront the most serious challenge to their food security in years. For some countries, “the current crisis has only revealed negative trends which existed well before the actual financial meltdown,” according to Nicolas Pron, planning officer at UNICEF’s Office for East Asia & the Pacific. Despite reductions in poverty, income disparities have grown in the region, and high levels of food insecurity have remained. In Indonesia about a third of children under 5 were already malnourished before the crisis. In the Philippines, agricultural productivity had been slowing and incomes declining before the recent economic troubles hit the poor.

Though the effects of the crisis have varied across the region, sharp and frequent rises in food, fuel, and input prices have created acute food shortages in some countries, again especially in Indonesia. Pron expects that “for the majority of the poor, frequency of food intake and quality are likely to become insufficient to maintain normal levels of growth, development, and productivity. In Indonesia animal protein consumption is expected to become an almost exclusively elite privilege.” Cecilia Ochoa of The Philippine Peasant Institute in Manila draws a similar picture for her country in a recent assessment of the crisis. She adds that the introduction of budgetary austerity due to decreases in revenue is “expected to affect the provision of social services such as health, social welfare assistance, and education, which the poor rely on as a safety net.”

Even relatively healthy economies are struggling because of overall contractions and heavy import costs. According to Tan Siew Hoey, formerly of the Institute of Strategic and International Studies in Kuala Lumpur and now a consultant, Malaysia’s food import bill was about US$4 billion before the crisis. Because of devaluation and the effects of the drought in Thailand, the import price of food has doubled for Malaysia. In addition, the costs of nonfood imports have gone up by 140 percent, fueling inflation at a time of economic slowdown and impending recession. Tan adds that “Spiraling food and nonfood prices at both the wholesale and retail levels transmitted from across the region create a sense of insecurity or scarcity in food supply.”

The crisis has raised the highest food security stakes in Indonesia, because it has been hit all at once by the worst drought in decades, unmanageably steep currency devaluations, inflation, and political instability. The World Bank estimates that if current El Niño conditions continue, Indonesia will have to spend US$1.2 billion to import the required amount of rice and another US$500-600 million in subsidies to make that rice affordable to the poor. (See the February 1998 issue of News & Views for broader discussion of El Niño issues.) In addition to these large budgetary setbacks, about 8 million people are expected to join the ranks of the rural poor during the course of the next year.

Peter Bult, a project officer in UNICEF’s Jakarta office, says that “there are sufficient warning signs that things are drastically changing for people. If nothing is done urgently, the effects on children will be huge and long-lasting because nutrition is crucial for physical as well as mental development. The learning capacity of children would be reduced and they could lose 10 to 15 IQ points, which would mean a huge loss in productivity at the social level.”

What If the Crisis Continues?

It is of course possible that the worst long-term effects can be minimized as countries urgently help those most at risk and get their economies back on track quickly. Looking back to an earlier crisis, Prabhu Pingali of the International Maize and Wheat Improvement Center (CIMMYT) commented, “The current crisis is exactly what happened in Mexico in 1994. Mexico experienced the same critical situation but things have improved since then. There was a realignment of the agricultural sector and the export sector took off after the crisis, due partly to NAFTA and currency devaluation. Wheat exports into Europe and Asia increased. The 1994 crisis is now a distant memory in Mexico.”

But are there favorable trade and financial arrangements under way for Indonesia and other Asian societies that are hurting? What if the East Asian miracle does not reappear? IFPRI’s Mark Rosegrant has analyzed what would happen if the worst effects of the crisis continue through 2020. If it is assumed that domestic agricultural commodity prices due to exchange rate devaluation remain 20 to 30 percent above pre-crisis levels and income growth rates fall to half of what they were before the crisis, global cereal demand in 2020 would fall by 3 percent and meat demand by 8.4 percent, compared to the baseline scenario. These global declines would be a direct result of reduced demand in East and Southeast Asia, where the demand for meat, for instance, would drop by 30 to 40 percent. Combined U.S. and European cereal exports to the world in 2020 would decrease by 7 percent and meat exports would plunge by 87 percent as East and Southeast Asian countries became large meat exporters instead of importers due to decreased domestic demand. Compared with trends prior to the crisis, the number of malnourished children under 5 would increase by 21 percent in Southeast Asia, to 12.2 million. The nutritional effects of the crisis would spill over to other developing countries. In South Asia, for example, the number of malnourished children under 5 would increase by 17 percent to 76.7 million.

Effects Outside the Developing World

The crisis continues to reverberate around the globe through its effects on finance and trade. According to Keith Collins, chief economist at the U.S. Department of Agriculture, “early estimates showed that U.S. agricultural exports would be down by 3 to 6 percent in fiscal 1998/99 because of the crisis, but the effect may well be larger because the time frame for recovery has become increasingly uncertain.”

IFPRI’s Sherman Robinson says that “the tradable agricultural sectors in some East Asian countries will gain. As these countries improve their trade balances, they will have to market their goods somewhere, and they inevitably end up in the U.S. and Western Europe. The resulting recovery in Asia will be good for U.S. industry initially, and in the long run for U.S. agricultural exporters as well as it spurs greater demand.” But Robinson adds that in the next two years “the currency devaluations in East Asia will make the region more competitive and contribute an additional US$50 billion or so to the U.S. trade deficit, with the light manufacturing and machinery sectors hit particularly hard, and they will add about the same amount to the West European trade deficit.” South Korea will likely be a particularly big gainer in terms of a larger trade surplus with the U.S.

Some of the effects on developed-country exports are due to increased East Asian competitiveness, but Indonesia vividly illustrates that decreased demand plays a critical role as well. Because imported feed prices have risen dramatically for Indonesia, its poultry production has contracted by 80 percent. Cattle imports from Australia, previously about 50,000 heads per month, have stopped altogether.

What Role for Agriculture?

As countries seek to resume growth, the cheap labor that the crisis has made available may tempt some to move toward labor-intensive export-oriented industries. According to Bruce Koppel “that is a short-term and only partial solution. . . . Pursuing that strategy without paying strong attention to services and agriculture will just court another collapse.”

With financial sectors still on shaky ground, high unemployment rates, rising food prices and food shortages, and competitive advantages in agriculture in some countries, agriculture will play an important role as the region resumes growth. According to Goletti, “agriculture will compensate partly for the other sectors during the recovery. In Indonesia, for example, coffee, fruits, palm oil, and rubber exports will moderate the negative effects of the crisis and make a significant dent in the import cost of rice. In Viet Nam the crisis has set in motion more rice production, which will also help to alleviate trade imbalances.”

In Malaysia the production of goods looks more promising for recovery than financial or asset market growth according to Tan. She expects agriculture to play a major part in the recovery because of its low import content. In the short term, Tan sees fruit and vegetable production and aquaculture showing particular promise, but livestock production being constrained by high costs of imported feed. The agriculture ministry, according to Tan, is drawing up plans to boost food production with agricultural land that was abandoned during the past decade of rapid growth. She believes that “together with foreign exchange earnings from exports, the agriculture sector provides some real hope of reducing the current account deficit, and thereby strengthening the ringgit.”

For many East Asian economies the crisis has focused attention once again on the cornerstones of economic health. In their assessment of the foundations of growth in the region, both the World Bank and the Asian Development Bank have recognized that policies and technologies that supported agriculture played an important part in attaining high economic growth rates. But even so, Walter Falcon, professor of economics and director of the Institute of International Studies at Stanford University, says that “agriculture has not really gotten its full share of the historical credit for reducing poverty and boosting growth in the region. It can’t be treated in passing now because significantly reduced growth over the next few years will reduce the economic contribution of the cities, and this will put added demands on agriculture due to greater numbers of people in rural areas and reduced urban remittances.“ While some countries will use exports to recover, Falcon sees Indonesia relying even more heavily on agriculture. “The whole Indonesian economy has become unstuck,” he says, “and wages and employment will have to come from agriculture.”

People the world over hope that the East Asian crisis will soon be a distant memory, not least of all because the crisis has such far-reaching repercussions. The extent to which agriculture plays an “engine” role in the economic recovery will naturally vary from country to country. There is little doubt, however, that many more people will be paying closer attention to agricultural issues than they have in the recent past.

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