March 28, 2014 | Contribution by
Trang Nguyen is a Senior Economist in Poverty Reduction and Economic Management, the World Bank.
Over the past 5 to 10 years, many East Asian countries, not just China, continued to reduce poverty despite an economic growth slowdown surrounding the 2008-2009 global financial crisis. The $1.25 a day poverty rate in developing East Asia and Pacific (EAP) declined from 17.1 percent in 2005 to 12.5 percent in 2010. Which factor played the biggest role in the further progress against poverty? A likely assumption would be increased labor income, given that social policies in EAP are far less generous than in regions like Latin America and Eastern Europe and Central Asia.
Vietnam workers processing fish.
Photo credit: Flickr @World Bank - East Asia and Pacific (https://www.flickr.com/photos/worldbank_eastasiapacific/)
In an effort to better understand EAP's poverty dynamics, we recently studied 6 countries (Cambodia, Mongolia, Philippines, Thailand, Timor-Leste, and Vietnam) using data from the mid-to late-2000s. Our findings suggest that access to work and better earnings are essential — results that echo those of another recent World Bank study, which looked at 16 countries of different regions (for EAP, only Thailand) where there had been a substantial drop in poverty over the past decade (for more details, see "Jobs Boost Poverty Reduction").
Better jobs dominate in poverty reduction
Our study began by asking which factors played the greatest roles in each country's battle against poverty. We found that:
Chart 1. Income from work explains a large share of poverty reduction
||Labor income. Consistent with emerging evidence in other parts of the world, better jobs are the biggest force at work to reduce poverty. In all but one of the countries with data for the analysis (the Philippines), income from work (the sum of contributions from wage, farm, non-farm work, and the employment effect — that is, share of adults that are working) explains more than 40 percent of the observed changes in poverty (see figure below). In Vietnam and Cambodia, in particular, higher labor income explains more than 70 percent. In Timor-Leste, the loss of labor income between 2001 and 2007, covering a period of civil conflicts, explains almost all of the increase in poverty. |
||Non-labor income. This factor (the sum of income from assets, private remittances, public social assistance or insurance, and other transfers) was a big help in some countries. In Mongolia, increases in social transfers constituted an increasing fraction of the income of the poorest, consistent with the large contribution of non-labor income to poverty reduction. Similarly, in Thailand, non-labor incomes were quite important, with the share of transfers in aggregate incomes nearly doubling during the time period. |
||Demographic change. This factor (share of adults in the households) — which reflects birthrate declines some years ago and falling dependency rates (that is, a higher proportion of employable adults among all household members) — has made it easier to increase income and consumption per person in some of the countries, especially the Philippines. |
(Percent contribution to poverty changes)
Source: World Bank 2014 (forthcoming).
East Asia Pacific At Work: Employment, Enterprise, and Well-being.
Notes: (1) Components below the zero line represent the factors whose changes contributed to a fall in the poverty rate (negative percents) whereas components above the zero line represent the factors whose changes contributed to a rise in the poverty rate. (2) Share of adults is number of adults divided by household size. (3) Share of working adults is number of employed divided by working-age people. (4) Poverty is measured as the fraction of the population with per-capita income of less than $1.25 a day for all the countries except for Thailand, where it is measured using the $2.50 poverty line. Changes in poverty were calculated for the following periods: Cambodia (2007, 2010), Thailand (2006, 2009), Philippines (2006, 2009), Vietnam (2004, 2010), Mongolia (2007, 2011), and Timor-Leste (2001, 2007).
Different types of labor income matter differently
Which of these types of labor income helped or hindered the fight against poverty? The answer varies among the countries. In the 1980s and 1990s, work in agriculture was a key driver of poverty reduction. But more recently, wage income has played a bigger role. In fact, it explains roughly 50 percent of the observed decline in poverty in Vietnam, the Philippines, and Cambodia – and even more so in Mongolia.
At the same time, the loss of real farm incomes during this period set back efforts to reduce poverty in Cambodia, Mongolia, and the Philippines, although the wage income increases managed to more than offset those falls. Poor households in Cambodia and the Philippines experienced a reduction in the share of agriculture income in total income over the period 2006-2009. From 2007 to 2011 in Mongolia, agricultural production suffered substantial losses owing to severe weather conditions.
In sum, for EAP — as for other regions of the world — boosting access to work and better earnings is key to fighting poverty. Part of that process involves a movement from low-pay to better-pay employment and an increasing role of wage income relative to agricultural income.