Asia's rural areas booming
High food prices have lifted incomes in the country-side, often at a faster pace than in the cities.
According to Frederic Neumann, co-head of Asian Economics Research from HSBC, this has important implications. First, it adds to wage pressures as migrants require ever higher wages to entice them to industrialized areas. Second, while it helps alleviate inequality between rural and urban areas, it aggravates it in cities. For officials, this means that potential growth rates have slowed, and industrial slack is no longer the best guide for the appropriate monetary stance.
Here's more from HSBC Global Research:
Rampant food inflation has been a periodic feature in Asia over the past several years. Only think back to the spike in early 2008, with subsequent such waves, even if a little less pronounced, occurring again in each of the past three years. Even if price pressures have cooled of late, food remains, in absolute terms, as costly as ever. It is easy to miss the broader significance of this: not only has food become a recurring driver of inflation, but there is also a long-lasting change afoot in relative prices.
Agricultural products are rising in price faster than other goods and services. This is great news for rural areas. In simple terms, farmers are enjoying a positive terms of trade shock, being able to purchase more in return for their output year after year. As a result, consumption in the country-side is soaring, even if average incomes are still below those in cities.
Unfortunately, there is only scarce data to document this. Where it is available, however, the trend is unequivocal. In China, by some measures, rural incomes have outpaced urban incomes since 2009, and by an increasing margin over the years. In Indonesia, per capita consumption in rural areas has risen faster than in cities since 2006, after lagging urban areas for years. In Thailand, though patchy, data also shows faster income growth in the largely rural Northeast than in Greater Bangkok in 2007, a trend that likely persisted since. India, too, reflects this trend. Helped by rising food prices in recent years, but also public employment schemes in the countryside, rural areas are seeing burgeoning consumption, a fact that helps to propel overall demand even as the industrial sector looks a little shaky.
Asia's rural boom has a number of important implications. First, it slows the flow of migrant workers into cities, thus putting upward pressure on wages. One salient feature of urban labor markets in recent years has been sharply rising wage costs and, in some cases, lack of available labor, forcing companies even in man-power abundant China to turn increasingly to factory automation. Demographic headwinds play a role here, too, with slowing growth in working age populations across the region (though from still very high levels in places like India and the Philippines) aggravating wage pressures. But demographics are slow moving, with the relative shift in rural and urban incomes explaining much of the recent tightness in urban labor markets.
Second, higher food prices, which lead to rising rural incomes, have helped to reduce the income gap between rural and urban areas. In itself, this is a welcome development, as Asia's country-side has for many years been left behind in the region's rush towards industrialization. In addition, increased government spending in rural areas, such as China's new emphasis on developing its hinterland, India's employment scheme, and Thailand's redistribution of government resources to the Northeast, have helped to reduce the income gap further. However, within cities, higher food prices have aggravated income inequality. With workers still paying the largest share of their income on food, living costs have continued to rise, something that even higher wages were not able to entirely offset.
Third, the rural boom may have reduced, at least for now, potential growth rates. With labor markets tight, due to structural as well as cyclical reasons, inflation is nowadays more elevated for a given rate of growth than only a few years ago. This also means that traditional indicators, such as industrial production, are no longer a reliable guide for the resource slack in individual markets. Central banks and investors, therefore, have to tread carefully in interpreting their usual charts. Monetary officials will have to either allow inflation to drift up if they want to maintain growth, or reduce growth if inflation is to stay in accustomed ranges.
India is a case in point. The rural boom has pushed up overall demand even as the industrial sector shows signs of buckling. Price pressures remain extraordinarily sticky as well. The RBI, therefore, has far less room to cut today than it had a few years ago in the face of an industrial slowdown. This all may be a welcome trend towards urban-rural rebalancing in Asia. But it does pose headaches in the short-term for investors, central bankers and urban businesses. Perhaps a more relevant picture of the new Asia would be a farmer sitting, smilingly, on top of his new, shiny tractor.