Lifting Asia out of poverty needs to be done equally

Author: Juzhong Zhuang, Asian Development Bank

Developing-Asia’s impressive growth continues but faces a new challenge — inequality is on the rise. Over the last few decades, the region has lifted people out of poverty at an unprecedented rate. But more recent experience contrasts with the ‘growth with equity’ story that characterised the newly industrialised economies’ transformation in the 1960s and 1970s.

Treating developing Asia as a single unit, its Gini coefficient of per capita consumption expenditure — a commonly used measure of inequality — worsened from 39 in the early 1990s to 46 in the late 2000s. It worsened from 32 to 43 in China, from 33 to 37 in India, and from 29 to 39 in Indonesia. Inequality widened in 12 of the 28 economies with comparable data — and these 12 countries account for over 80 per cent of developing-Asia’s population.

High and rising inequality can curb long-term growth because it leads to a waste of human capital, reduces social cohesion, hollows out the middle class, undermines the quality of governance, and increases pressure for inefficient populist policies. Recent simulation analysis by the Asian development bank (ADB) shows that if inequality had remained stable in the Asian economies where it increased, the same growth in 1990–2010 would have taken about 240 million more people out of poverty — equivalent to 6.5 per cent of developing-Asia’s population in 2010.

This is why Asian policymakers are becoming more concerned about inequality.

This concern is increasingly being addressed through medium-term development plans across the region — such as in China, India, Indonesia, Malaysia and the Philippines — that include explicit goals to make growth more inclusive.

Technological progress, globalisation and market-oriented reforms have been the key drivers of developing Asia’s rapid growth in the last two decades, but they have also had huge distributional consequences. These forces have opened enormous new opportunities for economies to prosper but have not benefited all people equally. Together, they have affected income distribution through three channels: capital, skill and spatial bias.

The bias towards physical capital reduces labour’s share of national income, while increasing the income share of the owners of capital. Similarly, the heightened demand for better skilled workers raises the premium on their earnings. And spatial disparities are becoming more acute: locations with superior infrastructure, market access and scale economies — such as urban centres and coastal areas — are better able to benefit from changing circumstances.

Inequalities between rural and urban areas and across provinces and states have increased significantly in many Asian countries during the last two decades. According to the ADB, in the late 2000s, about 25−50 per cent of total inequality can be explained by spatial inequality (urban-rural and inter-province inequalities combined) in countries such as China, India and Indonesia.

Between the mid-1990s and the mid-2000s, labour income as a share of manufacturing output in the formal sector fell from 48 to 42 per cent in China and from 37 to 22 per cent in India. Since capital is less equally distributed, this has contributed to rising inequality.

The share of inequality accounted for by differences in education attainment increased in all Asian countries with available data between the 1990s and 2000s, with the increase most significant in China, from 8 per cent in 1995 to 27 per cent in 2007, followed by India, from 20 per cent in 1993 to 30 per cent in 2010.

Moreover, these distributional impacts have been compounded by unequal access to opportunity due to institutional weaknesses and social exclusion. Unequal access to public services, especially education and health, is central to inequality of opportunity. And inequality of opportunity is a crucial factor in widening income inequality in developing Asia.

Household surveys show that school-age children from households in the poorest income quintile were three to five times more likely to be out of primary and secondary school than their peers in the richest quintile in some countries. Infant mortality rates among the poorest households were double or triple the rates among the richest households. High gender disparities in tertiary education also persist in South Asia and the Pacific.

The two forms of inequality — of opportunity and income — can lead to a vicious circle as unequal opportunity creates income disparity, which in turn leads to differences in opportunity for individuals and households.

How should Asian governments respond to rising inequality? Because the forces behind rising inequality — technological progress, globalisation and market-oriented reform — are also the engines of productivity and income growth, policymakers should not hinder their progress per se.

A distinction needs to be made between the income differences that arise as economies and individuals take advantage of the new opportunities of technology, trade and efficiency-enhancing reforms, and those that are generated by unequal access to market opportunities and public services. This latter source of inequality requires a policy response since it is magnified by the driving forces of growth, leads to inefficiency, and undermines the sustainability of growth.

Asian policymakers can consider four sets of policy responses to rising inequality in Asia: efficient fiscal policies to reduce inequality in human capital with a view to addressing the rising skill premium; interventions to reduce spatial inequality; policies to make growth more employment friendly with a view to increasing labour demand and hence labour’s share in national income; and measures to promote equal opportunities through strengthening governance and institutions.

The Asia Pacific has enjoyed a remarkable period of growth and poverty reduction, but the new global realities of technological progress, more globally integrated markets, and greater market orientation are magnifying the effects of inequalities in physical and human capital. Asian policymakers need to redouble their efforts to equalise opportunities in employment, education and health — to make growth more inclusive.

Juzhong Zhuang is Deputy Chief Economist of the Asian Development Bank.

This article is based on a new book, ‘Inequality in Asia and the Pacific’, edited by Riva Kanbur, Changyong Rhee and Juzhong Zhuang, to be published by Routledge in 2014.