Asia’s rising rural wages

Employment & Income,Inclusive Economy26 Nov 2014Sharada Keats, Steve Wiggins

Rural wages are rising in Asia, and the strongest drivers are demographic changes and the growth of manufacturing.

With few fanfares, something remarkable is happening in Asia. Rural wages are rising. Not just in China, where extraordinary increases of 92% have been registered between 2003 and 2007; but also in countries such as Vietnam, where the median (across regions) rural wage has risen by more than three times between 1992 and 2008; in Bangladesh where the average (male) rural wage rose in real terms by 45% between 2005 and 2010, and in India where rural wages rose by 35% between 2005 and 2012. Furthermore increases have accelerated since the mid-2000s in several countries, including China, India and Vietnam. Where the data are readily available, differences between male and female wages, and between more and less prosperous regions have narrowed.

Given that the (very) poor of Asia are still largely located in rural areas, depending heavily on agricultural and informal labouring, this is very good news. For much of rural Asia, the end of deep poverty for those in work is in sight, bringing to an end several centuries in which agricultural labourers have lived in dire poverty.

So what explains rising rural wages? Comparative analysis across countries suggests the strongest driver is demographic, somewhat to the surprise of an economist. Across Asia the rural workforce is growing ever more slowly. Indeed, in some countries, such as South Korea, Malaysia, Indonesia, and — most notably — China, the rural labour force has started to shrink. Part of this stems from migration out of rural areas, but much comes from the major falls in fertility seen in Asia since the 1980s. The other notable driver is growth of manufacturing — and urban jobs in general — that draws labour from agriculture.

It is unlikely that the drivers of slower population growth and expansion of manufacturing will stop in the near future, so we may expect rural wages to continue to rise. If so, two implications should follow.

One, costs of food will rise. In China rice cost 70% more to produce in 2010 than it did in 2005: more than 40% of the increase came from higher wages, most of the rest resulting from higher prices of fertilizer and fuel. As domestic costs of production rise, so imported food becomes more attractive. Asia may well become an expanding market for food produced in other regions at lower cost. To date South America with its soybean exports has taken advantage of this. In the future, other parts of the developing world may benefit as well. Given investment, land-abundant parts of Africa have the potential to produce surpluses of vegetable oils and animal feed for export to Asia.

Two, higher rural wages will tend to push up manufacturing wages and costs: it will no longer be possible to attract labour from rural areas at low wages. China’s coastal factories have seen major increases in their wages during the last ten years, largely because they can no longer get cheap labour from the villages. Factory owners thus may relocate. Inland China is one possibility, as are the (ever fewer) remaining low-income countries in Asia including Bangladesh, Burma and Cambodia.

Most intriguing, however, is Africa. The World Bank reports Ethiopian factory wages for unskilled labour as one quarter those of Chinese wages. Higher logistics costs offsets this advantage, but overall costs are lower. Outside Addis Ababa, the first pioneer wave of relocated Chinese plants can be seen. Now these have broken the ice, how many more will follow? Justin Lin, former Chief Economist at the World Bank, said in May this year that 85 million factory jobs could leave China in the coming years. If half of those go to Africa, they would be welcome in a continent where there is a surge in youth entering the labour market, thereby allowing Africa to reap its demographic dividend.

Africa’s economic under-performance has always been far greater in manufacturing than in farming. Renewed growth of manufacturing in Africa promises prosperous urbanisation with vibrant markets for those farmers staying on the land. The good news may be first and foremost Asian, but potentially it’s also good news for Africa.

It is the fate of many development economists to be drawn to the poorest countries where growth is low. As soon as countries lever themselves out of deep poverty, they cease to be the focus of aid agencies that largely set the development research agenda, and fund it. In the process, some good news — and lessons — can be lost to sight. So what do we learn from this emerging evidence? It seems a story of big decisions taken decades earlier that explains current trends, rather than anything that reflects specific employment policy.

At least half this story is demographic, posing the question of the drivers of the falls in Asian fertility that would have been difficult to imagine for anyone observing Asia in the late 1960s. Does this suggest that draconian measures to limit fertility as seen in China were necessary? No: other countries, such as Thailand, have seen their fertility rates fall to Chinese levels.

The other side of this is the success of manufacturing and urbanisation. Is this the result of getting some fundamentals — institutions, investment climates, investment in human capital, etc. — right, or of inspired strategy to promote export industries — that have pulled the rest of the urban economy along?

Of course, for much of Asia these debates have moved on: countries that a generation ago had millions in deep poverty now agonise about how to escape the middle income trap. For much of Africa such questions are a luxury, but the Asian experience can instruct and inspire.