Asia must balance its quest for equality with the pursuit of growth

Lee Jong-Wha says Asian countries won’t reduce inequality without both pro-growth policies and those that increase opportunities for the disadvantaged, particularly young people

PUBLISHED : Wednesday, 22 November, 2017, 10:26am
UPDATED : Wednesday, 22 November, 2017, 7:13pm

Asia’s rapid expansion has lifted hundreds of millions out of poverty in recent decades, yet the income distribution has worsened, with inequality potentially more severe than in developed economies of the West.

This trend is driven largely by the same forces that fuelled Asia’s economic growth: globalisation and technological progress. Increasingly open borders make it easier for businesses to find cheap locations for operations.

Meanwhile, new technologies raise demand for skilled workers, reducing demand for less-skilled counterparts – a trend fuelling expansion of the wage gap between the skilled and unskilled. As inequality becomes entrenched, it can erode the consensus in favour of pro-growth economic policies, undermine social cohesion and spur political instability.

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Asia must provide chances for all youth to ascend. The market is not enough. Governments must act, complementing pro-growth policies with those ensuring gains are shared equally and sustainably.

To be sure, some Asian governments have attempted to tackle inequality with redistribution policies. For example, South Korea’s government recently announced that it will raise the minimum wage next year by 16.4 per cent, to 7,530 won (HK$54) per hour. It will also raise taxes on the highest income earners and companies.

But such measures could end up hurting the economy by reducing investment and job creation. The first rule of thumb in combating inequality should be that simplistic egalitarian policies are not a permanent solution.

Consider the Venezuelan government’s decision in the late 1990s to implement redistributive policies without addressing overreliance on oil and lack of competitiveness. That choice pushed the country to bankruptcy, fuelling large-scale social unrest.

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The best way to enhance both equity and growth is effective development of human capital, supporting higher incomes today and intergenerational mobility tomorrow. This requires enhanced social safety nets, redistributive tax-and-transfer programmes and access to quality education for all.

Many East Asian economies are investing more in education to expand opportunities. But Asia needs to improve its higher education, reforming curriculums so young people get the skills they need to prepare them for the labour market. Meanwhile, the labour market should be more efficient and flexible to match people with the right jobs.

Promoting participation of girls and women in education and economic activity is important too. Governments should also foster start-ups.

There is a temptation to reject globalisation and embrace redistribution that could cause harm. Asia’s leaders must do better to realise “growth with equity”.

Lee Jong-Wha is professor of economics and director of the Asiatic Research Institute at Korea University. Copyright: Project Syndicate