Wednesday, April 9, 2014

Rising Inequality Is a Blemish on Asia’s Growth Story

Deng Xiaoping said: “Let some people get rich first.” He was referring to China but it turns out he could have been talking about Asia as a whole.

In the past two decades, rapid growth across much of Asia has widened the wealth gap. That has caused “a great convergence” with Latin America, according to one development official. While inequality has narrowed in much of South and Central America, in Asia it has been going the other way, according to Vinod Thomas, director-general of the Asian Development Bank. Asian inequality as measured by the Gini index rose about 1 per cent each year throughout the 1990s and 2000s.

In a new report, the ADB looks at the effect growth has had on poverty reduction, inequality and social welfare. It concludes that raw growth numbers should no longer serve as the be all and end all in assessing a country’s performance. Broader measures of “improvements in human welfare and living standards”, brought about by what it calls “an inclusive pattern of growth”, are equally important.

In the 1990s, gross domestic product in the Asia-Pacific region grew at an annual rate of 9 per cent, slowing to 8.2 per cent in the 2000s. But average living standards did not keep pace. In the 1990s, household consumption grew far more slowly than GDP – at just 5.7 per cent. As a result, consumption as a percentage of GDP fell across a large part of the region. Ordinary people missed out on much of the wealth their nation was theoretically creating.

True, fast growth has dramatically cut the number of “absolute poor”, defined as living on $1.25 or less a day in 2005 purchasing power parity terms. The number of people in this desperate category fell from 1.23bn in the 1990s to 790m in the 2000s. In China alone, the number of absolute poor fell from 520m, or 43 per cent of the population, in the 1990s, to 230m, or 17 per cent, in the 2000s.

However, the record on reducing rates of “moderate poverty”, defined as below $2 a day, is less impressive. Numbers in this category fell considerably more slowly. Much of the growth, in other words, went to those who were already better off, allowing them to pull further away from the pack. In the 1960s and 1970s, Asian economic expansion was fairly equitable. It has been far less so in recent decades. In a few countries, such as Vietnam and the Philippines (where it could hardly get much worse), inequality has fallen in the past decade.

But these are the exception. In the most populous countries, including China, India and Indonesia, inequality has risen sharply. In China, this is largely because of the gap between those living in cities and those stuck in the countryside. In India, by contrast, inequality has risen sharply among city-dwellers.

Nor do countries in Asia appear to have done enough with the growth they have generated. In about half Asia’s countries, including China, India, Indonesia and the Philippines, spending on education is less than 4 per cent of GDP, compared with an average of 5.2 per cent in advanced countries. The ADB also found that health outcomes had generally lagged behind economic performance.

The study is partly aimed at the ADB itself. The report concludes that the organisation has been too focused on top-line growth and not enough on broadening the impact of economic development. But there are implicit lessons for governments, too. Inequality clearly matters in Asia. A Pew poll found that 82 per cent of Indians see it as a major problem. In Thailand, supporters of Thaksin Shinawatra, the self-exiled former prime minister, have been mobilised by a sense of social injustice born of income disparity. On the other hand, attempts to level the playing field – such as Malaysia’s positive discrimination laws – have opened social wounds of their own.

In India, in particular, economists and policy makers have been debating for years whether the government should prioritise growth or focus instead on improving the social conditions under which growth can flourish. The better health, literacy and female empowerment indices in much poorer Bangladesh are often held up in India as evidence that growth alone is not sufficient to transform people’s lives.

The ideal, of course, is to have both: to generate as much growth as possible, then to ensure that this confers the greatest opportunity on the greatest number of people. That means providing the public goods – the social and physical infrastructure – that governments are often best-placed to provide. It means building a fair and stable tax base, something lacking in many Asian countries. It also means squeezing out corruption and crony capitalism such that advantage is not conferred on those with the best connections or the least scruples. It may mean some wealth redistribution, too, though this needs to be carefully targeted. The sort of blanket subsidies that have been favoured from India to Indonesia often help the middle class and the rich more than the poor.

Asia’s fast growth has, of course, done wonders for poverty reduction. It has raised all boats. But some boats are still much leakier than others. The Financial Times (UK)
By David Pilling

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