Saturday February 16, 2013

Helping people with basic opportunities will propel Asia to the next level


DAWN breaks early in Larantuka, at the eastern-most end of Flores, 1,000 miles east of Bali. The fishermen come early with their morning catch, the farmers are all at the market displaying their fresh vegetables, and the ubiquitous ojek drivers (local motorbike taxis) are already circling the market like vultures looking for passengers.

Going to the local market is a good way to assess how a country is going. Indonesia is a country of 242 million people, with more than 40% under the age of 25. You can see the vigour of the youth, and how globally interconnected they are when they are even chatting on the mobile balanced precariously on their motorbikes. In the local buses, the ladies in their native costumes talk loudly on their handphones to their grandchildren at home. Indonesia has one of the most widespread use of Internet, including the highest membership of Facebook in Asia.

The market works wondrously even in the most remote regions. Going down a dirt road around a dormant volcano, we pass a local on a motorbike. Our guide tells him that we are out looking for local textiles. Half an hour later, the local comes back with news that someone down the village is willing to sell. We stop by an old lady's home, with the unemployed son sitting bored outside. She shows us two pieces of handspun cotton clothe, beautifully dyed and hand woven. Ordinarily, two of these pieces would have been enough for a dowry for a local maid. With half the village watching and joining in the bargaining, we clinch a deal at a fair price for all. The son is greedily counting the money as we leave.

Markets thrive on information, and today, the old lady in the remote village knows the fair price of her labour. But markets also have structure and hierarchy. The best pieces go to Bali, where they are sold to collectors from Jakarta or Switzerland for their cultural value. Markets concentrate in hubs, and it is cheaper often to buy direct in Bali than try to hunt for the artifacts at the source of their origin. Similarly, it is cheaper to buy goods made in China with better quality in the United States, than to try and buy them within China.

Travelling in local markets is a better education about the functioning of markets than studying about them in Chicago. Peruvian economist Hernando de Soto keeps on reminding everyone that theories of markets evolved from developed markets, where they have forgotten how primitive markets work in practice. Out of 7 billion people in the world, 5 billion are in the poorer, developing world. Indonesia is an excellent example of the pressure of population growth on employment. Over 4 million Indonesians are born every year, putting huge pressure on urban infrastructure and the need to create jobs.

The next war is not about trade or currency but about jobs. Between 1979 to 2007, the United States shed nearly 6 million manufacturing jobs, replacing them with service industry jobs. Most of the manufacturing became outsourced to emerging markets with cheaper labour, principally China. But this grand bargain could not last. Once the crash came in 2007, the US also began to look for manufacturing jobs, on top of retaining the high value added.

The real trouble is that as we begin to move out of the Great Depression, the reality has struck home that without basic structural reforms, there may be a jobless recovery. According to the latest World Bank World Development Report 2013 on jobs, out of 3 billion employed people in the world, there are 200 million unemployed, with pressure to create 600 million jobs in the next 15 years.

In addition, an excellent McKinsey Centre for Government study on “From Education to Employment”, estimated that 75 million youths are unemployed and 40% of employers say that a lack of skills is the primary reason for job vacancies. This is a serious problem. Countries like China pay huge attention on job creation, because that is the cornerstone of social stability. The Arab Spring has reminded us all that unemployed youths are restless and can be a tinderbox for the next revolution.

Looking at the rising number of young men and women who are looking for jobs in Indonesia made me realise that we need creative ways of generating jobs. De Soto is absolutely right to say that what the economist's textbook says about unemployment is flawed. In many emerging markets, the unemployment numbers are low because there are no unemployment benefits and therefore few report their lack of jobs. They are, as de Soto correctly pointed out, illegally employed in informal sectors and certainly are working in informal markets. The rise of shadow banking proves to economists that just monitoring or regulating “formal” markets is incomplete. You need to understand how the informal market works.

The young man working in an underground betting shop, selling pirated CDs or helping to collect passengers at a bus terminal for a friend is employed, but no official statistic captures these activities. But to ignore these activities and how these fringe markets work is to ignore reality. Perhaps our universities should be teaching less on how the Fed conducts (or misconducts) monetary policy and more on how these informal and vibrant local markets work to create jobs and affect consumption. For example, we should be teaching people basic principles of entrepreneurship to enable small and medium enterprises (which create over 80% of all jobs) to compete and thrive, rather than spending huge amounts on energy subsidies.

There is no doubt that all of us need a dose of working and living with the common people to appreciate how most people live. Despite the prosperity and prospects of rising Asia, especially countries with new-found confidence like Indonesia, many people still struggle with the basic needs. Helping people with basic opportunities, such as what mobile technology has brought about, will propel Asia to the next level. l Tan Sri Andrew Sheng is president of the Fung Global Institute.

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