Inequalities erode foundations of Asia's growth

Juzhong Zhuang says Asia must work harder to equalise opportunities

PUBLISHED : Wednesday, 05 December, 2012, 12:00am
UPDATED : Wednesday, 05 December, 2012, 2:15am

Developing Asia's impressive growth continues, but faces a new challenge - rising inequality. Over the past 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 transformation of the newly industrialised economies in the 1960s and 1970s.

In the 12 economies that account for more than four-fifths of the region's population, income disparities have expanded during the past two decades - despite the region's world-beating performance in raising average incomes.

Inequality widened in 12 of the 28 economies with comparable data, including the three most populous countries and drivers of the region's rapid growth - China, India and Indonesia. From the early 1990s to the late 2000s, the Gini index worsened from 32 to 43 in China, from 33 to 37 in India, and from 29 to 39 in Indonesia. Treating developing Asia as a single unit, its Gini index rose from 39 to 46 in that period.

Inequality of opportunity is also prevalent, and is a crucial factor in widening income inequality in developing Asia. Unequal access to public services, especially education and health, is central to inequality of opportunity.

Household surveys show that school-age children from households in the poorest fifth of the population were three to five times as likely to be out of primary and secondary school as their peers in the richest fifth in some countries. In tertiary education, high gender disparities remain in South Asia and the Pacific.

On health, infant mortality rates among the poorest households in some countries were double or triple the rates among the richest households.

The two forms of inequality - of opportunity and income - can lead to a vicious circle.

Rising inequality can dampen the poverty-reduction impact of economic growth and weaken the basis of growth. A recent Asian Development Bank report estimated that, if inequality had remained stable in the Asian economies where it increased, the same growth from 1990 to 2010 would have taken about 240 million more people out of poverty.

High and rising inequality can curb long-term growth by leading to a waste of human capital, reducing social cohesion, hollowing out the middle class, undermining the quality of governance and increasing pressure for inefficient populist policies.

Technological progress, globalisation and market-oriented reform have been the key drivers of developing Asia's rapid growth in the past two decades, but these forces have not benefited all people equally.

They affect 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.

The region 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. Without job creation policies and efficient fiscal measures to enhance growth, Asia may be pulled into inefficient populist policies, which would help neither growth nor equity.

Juzhong Zhuang is the deputy chief economist of the ADB's Economics and Research Department. This article was first published in Asia Pathways, the blog of the Asian Development Bank Institute