Inequality in Asia
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Inequality in Asia
Wednesday, 01 June 2011 05:09

These past few decades, East Asia has generated world record economic growth, and reductions in poverty.  At the same time, the gap between rich and poor has widened dramatically.

 

What’s the story?

 

Simon Kuznets was one of the first to explore the relationship between income inequality and economic development.  His famous Kuznets curve describes an increase in income inequality in the initial stages of development.  Then, after a certain average income is attained, income inequality begins to decrease.  In other words, the Kuznets curve has a bell or invested U-shape.  It is usually measured by the ratio of income going to the upper 20% of households to the income going to the lowest 20% of households. 

 

As with all economic theories, the theory of the Kuznets curve has been challenged by many empirical economists.  And it certainly does not provide an explanation for the rise in inequality in advanced countries today.

 

Kuznets explained this phenomenon through the migration of workers from agriculture to industry and from rural to urban areas.  Workers in industry and urban areas earn more than those in agriculture and rural areas.  But when more than 50 per cent of workers have transferred to the industry/urban sector, inequality will decrease.  The Kuznets curve logic has also been applied to environmental damage.  When a country begins to develop, the environment will be adversely affected.  But as development continues, cleaner technologies will be used and the services sector will grow, thereby resulting in a cleaner and greener development.

 

The most common measure of income inequality is the “Gini coefficient” developed by Italian statistician and sociologist Corrado Gini.  The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality (sometimes economists, like the Asian Development Bank, will multiply these figures by 100).  It is usually defined mathematically based on the Lorenz curve, which plots the proportion of the total income of the population (y axis) that is cumulatively earned by the bottom x% of the population.  The line at 45 degrees thus represents perfect equality of incomes.  The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve over the total area under the line of equality.

 

In an excellent study of inequality in Asia, the ADB estimated Gini coefficients for its “developing member countries.  Nepal and China topped the list with Gini coefficients close to 50, followed by the Philippines, Turkmenistan, Thailand, Malaysia and Sri Lanka each of which had Gini coefficients of 40 or above.  All the other countries had Gini coefficients between 30 and 40.  From the highest to the lowest, the countries were: Cambodia, Viet Nam, Azerbaijan, India, Laos, Indonesia, Bangladesh, Taiwan, Kazakhstan, Armenia, Mongolia, Tajikistan, Korea, Pakistan, and Kyrgyzstan.  These Gini coefficients may not be as high as many Latin American and some sub-Saharan countries.  But they are still pretty high.

 

And what’s more important is that Gini coefficients rose dramatically in many Asian countries between the 1990s and the 2000s.  Dramatic increases were recorded for Nepal, China, Cambodia, Sri Lanka and Bangladesh.  Lesser increases were registered for Laos, India, Korea, Taiwan and Viet Nam.

 

It’s important to stress that these estimates are only based on income or expenditure, and therefore only measure “income inequality”.  They do not measure inequality in access to social services like health or education, which can often be more important.  Nor do they measure the distribution of assets like land. 

 

What’s driving increases in inequality?  Uneven growth has been a key factor – with growth being uneven between regions (like coastal versus inland), between sectors (manufacturing against agriculture) and between households (the already rich have benefited more from growth than the poor).

 

Government policy has contributed to this rise in inequality, even though the process of development is rarely an even one.  China actively attracted foreign investment for manufacturing activities in its coastal provinces.  The consequence being that inland, agricultural areas did not do as well from rapid growth.  This effect has also played a role in many countries.  Improved access to technology, especially in countries like India and the Philippines, has increased the demand for high-skilled labor which is necessary to employ such technology. 

 

More generally, it seems that the well educated and wealthy may have been better placed than the poor to take advantage of the market oriented reforms.  Further, there has been a manufacturing bias in development policies, with the agricultural sector left aside, and suffering from a lack of infrastructure investment. 

 

There are other factors that the ADB does not explore in its analysis of inequality, one of the most important of which is corruption.  In poorly performing countries like Nepal and the Philippines, corruption is rampant.  It is both holding back growth and widening the gap between rich and poor.  According to Transparency International’s Corruption Perceptions Index, Nepal is ranked as one of the world’s most corruption countries (146 out 178 countries covered) and the Philippines comes in at 134th.  And in strongly growing countries like China (78th on TI’s scale), Thailand (78th) and Viet Nam (116th) political and business elites are ripping off many of the profits of economic development.

 

Why does inequality matter?  As we have discussed in earlier postings, inequality matters a great deal.  First, unequal growth reduces the poverty reduction impact of growth.  Second, any society with a sense of social justice should be concerned with inequality and inclusive growth.  Third, the evidence shows that policies to improve equality (like improving education) can actually boost economic growth.  And fourth, persistent unequal societies can generate social and political instability. 

 

All that said, it is not a question of the rich getting richer and the poor getting poorer.  Rather, most people are getting richer, but rich are getting richer faster than the poor.

 

There is a lot that government can do to improve equality.  In the short run, income can be redistributed to poor people to enable them to survive.  Beyond that, equality of opportunity can be promoted through improved education and fairer access to social services.  Special attention needs to be paid to the rural/agricultural sectors, where many poor live, especially in light of the food price rises.  In China, the government has been seeking to create a more “harmonious society” through more balanced growth.     

 

And last but not least, more serious efforts are necessary to combat corruption.

 

 

 

References:

Inequality in Asia.  Key Indicators 2007 Special Chapter.  Asian Development Bank.

http://www.adb.org/documents/books/key_indicators/2007/pdf/Inequality-in-Asia-Highlights.pdf 

Corruption Perceptions Index 2010.  Transparency International.

http://www.transparency.org/policy_research/surveys_indices/gcb   

 

 

 

 


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