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20 February 2013
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The Quest for Equality

The widening gap between rich and poor in Asia could undo many of the successes of recent years. Policymakers need to make necessary trade-offs to share the benefits of growth more inclusively.

Over the past two decades, many countries in Asia have seen remarkable achievements in growth and poverty reduction. Many institutions believe annual growth rates of around 5% should be the norm for most countries for the next few years.

Expanding industrial activity throughout Asia has spurred demand for natural resources, energy and commodities. The rise of the middle class, meanwhile, has buoyed demand for just about everything else that comes with a better lifestyle, from smartphones to designer clothes, cars and urban homes. Life is getting better, richer and fuller for many Asian people.

However, the remarkable achievements of the past two decades have been accompanied by rising inequality in many countries. According to the Asian Development Bank (ADB), a wider gap in per capita incomes, as measured by the Gini coefficient (a standard gauge of inequality), affected more than 80% of the Asian population in 2010. The richest 1% of Asian households now own about 6-8% of the region’s wealth — still lower than Latin America and the United States, but the gap is widening.

The gap is most apparent in China, India and Indonesia, three countries with huge populations and fast-growing economies with the potential to drive the entire region’s economy forward.

On China, the Gini coefficient in 2012 was 0.474 (on a 0-1 scale, zero is perfect equality and 1 is perfect inequality), making the country among the most unequal societies. Analysts say a gap of this size is wide enough to potentially lead to social unrest, the government’s greatest fear.

In India, which 20 years ago had only 2 billionaires and today it has 46, nearly 70% of the people live on less than two dollars a day. The expenditure share of the top 1% of the population increased from 6.5% in 1993 to 9% in 2010. Indonesia, meanwhile, saw the highest increase in income inequality levels worldwide: from 0.33 in 2006 to 0.41 in 2011.

“Rising inequality in the region over the last decade is of concern for a number of reasons. It undermines long-term economic growth prospects and also social stability,” said Stephen P. Groff, a vice-president of the ADB.

“We have seen that this problem has risen to be on the priority list of many governments, but addressing inequality correctly will continue to be a huge challenge for all these countries in the coming years.”

Mr Groff sees a two-pronged problem: inequality of income and inequality of opportunity. However, the latter is more worrying because it could be passed on from one generation to the next. Sufficient investment in healthcare and education are essential to ensure sustainable, inclusive growth in the long run.

For instance, a child born to a poor family has a much higher risk of dying in infancy than one born to an affluent family. In the same manner, people from remote areas are less likely to pursue university degrees than students in urban areas. The gaps between two children with different levels of access to opportunities have already defined the likelihood of their career paths and economic security in the long run.

Regional disparities are a big concern of governments. China’s “Go West” policy and India’s “Look East” policy are good examples of how governments try to promote economic growth and stability in underdeveloped regions. Trade ties and investments from neighbouring countries are seen as one way to improve the status of neglected areas.

Somchai Jitsuchon, a research director at the Thailand Development Research Institute (TDRI), believes inequality can be exacerbated in a country where economic growth is mainly driven by foreign direct investment (FDI), which usually is very unevenly distributed.

“A system in which uneven distribution of FDI and corruption proliferate will leave the shared benefits only to those already rich entrepreneurs and politicians, leading to higher levels of inequality,” he said. “In this case, India and Vietnam seem to fit into this type of growth model and the problems in those countries are rising to a worrisome level.”

The suggested solution, he added, is for policymakers to direct FDI by demanding that investors pay more attention to technology transfer, capacity building, creation of job opportunities for local people, and awareness of environmental issues. Policymakers must ensure that FDI, whether for a specific industry or area, will not ruin the local communities, which could lead to large-scale unemployment and social conflict.

Mr Groff, meanwhile, sees signs that some government are trying to help their least fortunate citizens in creative ways.

“We have already seen quite successful and efficient fiscal policies across the region, particularly in conditional cash transfers that target income to the poorest but also incentivise the building of human capital. It is very significant to make sure that children are being sent to school and able to get access to a healthcare centre,” he said.

More investments in human capital building and social protection would outweigh spending on inefficient general price subsidies (e.g. on fuel or food) to targeted transfers.

Thailand in particular is a good example of how widening inequality could lead to instability and poor political choices. Mr Somchai said the populist policies of the current government, such as the rice mortgage scheme, the first-car and first-home programmes, tended to benefit the well-off rather than the poor. Their continued use could lead to a public debt crisis and destruction of the market mechanism.

He said the political system in the country has been polarised and therefore populist polices will become the norm as political parties find they are the only way to defeat their rivals, which becomes a very serious issue.

To address inequality sustainably, policymakers need to focus on a comprehensive rights-based social welfare system, whereby people are taken care of from birth to death in terms of minimum needs, particularly education and healthcare services. A social safety net for the poor and vulnerable can improve their well-being, which will improve access to opportunities for those with limited assets and capabilities.

Tax reform and minimum wage increases are also key policy measures to improve income distribution. The Chinese government recently approved tax reforms to make wealthy state-owned firms, property speculators and the rich pay more to narrow the gap. It also will raise the percentage of profits contributed by state-owned firms to the government by five percentage points by 2015.

Of course, tax reform to create more revenue to improve society is meaningless if tax collection is inefficient or just plain negligent. This is the case in many Asian countries where tax evasion is widespread. In the Philippines, poor tax administration has been identified as a critical constraint to increasing government revenue.

Complicated systems with many tax rates, exemptions and concessions increase administrative costs and are often unfair, because richer taxpayers can find more ways to shift income to avoid higher tax rates. For this reason, progressive income tax rates and inheritance tax are seen as appropriate tools to narrow the gap.

Asian policymakers also need to redouble their efforts to generate more productivity, equalise opportunities in education, healthcare and employment. Tax reforms and minimum wage increases signal an attempt to shift economic growth toward increased consumption rather than the current reliance on investment spending. Without such policies, Asia may be pulled into a vicious cycle of populist policies, which will benefit neither growth nor equality.

The concept of inclusive growth (growth coupled with equality of opportunity) should be at the heart of development policy, says the ADB. This would ensure that all members of society can participate in the development process productively and benefit equally from the opportunities generated by economic growth.

“If we look at the economic situation across the globe, Asia is the bright spot. A whole lot of attention by the rest of the world is being focused on what is happening here,” said Mr Groff.

“So I think leaders in countries across the region need to realise the responsibility they have in leading the economic growth of the world. They should continue to invest in appropriate policies and continue to allow the region to have these kinds of drivers of growth in the long run.

“However the challenges are great. The path is not certain but we are optimistic and still believe this could happen.”


First published in the Bangkok Post, 18 February 2013


Somchai Jitsuchon, Ph.D.
Research Director, Inclusive Development