Poverty trap continues as growth slows further in East Asia

Ros Reaya, a 20-year-old worker in the Cambodian capital, recently quit his job as a security guard after his employer began giving his salaries late, which made him unable to meet expenses or send money home. He has since gone to work as a construction worker.

In Bangkok, Witaya Rakswong, a 37-year-old cook, saw his wage drop by almost 60 percent in the last two years.

Falling livestock prices have caused falling incomes for herdsmen in Mongolia, such as Zagd Lkhagvajargal, who has been forced to take out loans that are difficult to repay.

These are some faces of the crisis profiled by the World Bank in its midyear update on East Asia’s economic outlook.

According to the bank, about 10.2 million people in developing East Asia - a little over half of whom are in China - will remain trapped in poverty in 2009 due to a marked slowdown in economic expansion.

The World Bank expects growth in the region to decelerate further to 5.3 percent from 8 percent in 2008 and 11.5 percent in 2007, and even foresees contraction in three economies, due to weaker exports and slower domestic demand.

Unemployment is seen deteriorating throughout the region as a result of factory closures, layoffs and returning migrants who have lost jobs elsewhere. These factors, in turn, would depress real wage, especially in the informal sector.

The region’s only hope for partial recovery amid the bleak economic environment is the possibility that China’s economy will bottom out by midyear, according to the bank’s semiannual report on East Asia and the Pacific.

The report covers developing East Asia: China, Indonesia, Philippines, Thailand, Vietnam, Cambodia, Laos, Mongolia, Papua New Guinea and Pacific island nations.

Without China, growth in East Asia in 2009 will only add up to 1.2 percent indicating that the “aggregate number masks a lot of things” said Vikram Nehru, World Bank’s chief economist in East Asia, during an April 7 video conference from Tokyo.

One of the gravest consequences of sluggish growth is on poverty fight. Cambodia, Malaysia and Thailand are projected to record absolute increases in poverty arising from declining per capita income. Malaysia’s economy is expected to contract by 2.7 percent while the other two will shrink by 1.0 percent.

But even in countries where per capita income will grow, people will still shift in and out of poverty as workers in export-oriented economies bear the full force of the crisis.

What does an economic contraction mean for, say, Cambodia?

“Incomes will not increase this year as fast as past years and it will also become more difficult for the 250,000 young people leaving school each year to find their first job,” said Stéphane Guimbert, an economist at the World Bank’s Phnom Penh office.

“What also will be different is that with no growth in aggregate, there will be a proportion of those with a livelihood at the end of the year worse than at the beginning,” he added.

Governments in developing East Asia have acted quickly to counteract the impact of the crisis through monetary and fiscal policies. But the report indicated that the effect of these measures, including massive fiscal stimulus packages “will only mitigate, not overcome, the contractionary forces operating on their economies.”

Nehru warned that unless advanced economies recover from the crisis - which will come at a much slower pace - a rebound in developing East Asia “is unlikely to be sustainable.”

In the meantime, Ivailo Izvorski, principal author of the report and World Bank’s lead economist in East Asia, reminded that targeted social programs to soften the impact of the crisis on the most vulnerable sectors of society should be undertaken without letup.

About the author

  • Josefa Cagoco

    Sef Cagoco served as one of Devex's international development correspondent from mid-2008 to mid-2009. Her writing focused on social entrepreneurship and multilateral agencies such as the U.N. and Asian Development Bank. She previously worked as senior reporter for the national daily BusinessWorld and a production journalist for the Financial Times.