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|Asia's rising inequality|
|Wednesday, 11 July 2012 15:56|
While emerging Asia continues to achieve a stunning performance in poverty reduction, the gap between rich and poor keeps widening too. Why? Does it matter? And what to do?
Emerging Asia's average per capita GDP (in PPP terms) increased from $1,633 to $5,133 over the period 1990-2010, thanks to the region's very rapid economic growth of 7.0% over the period, according to the Asian Development Bank. This was driven by high average growth in China (9.9%) and India (6.4%). Thus, the proportion of Asia's population living on or below the $1.25-a-day poverty line fell from 51.8% in 1990 to 20.8% in 2008, as 714 million were lifted out of poverty.
The changes in developing Asia's inequality are worse than Africa than Latin America. Nevertheless, the level of the Gini coefficients in developing Asia are still on average lower than Africa or Latin America -- but much higher overall than OECD countries.
(i) increasing skill premiums and returns to human capital. The emergence of vast new economic opportunities, unleashed by trade and financial integration, technological progress, and market-oriented reforms, has increased returns to human capital and the skill premium, with individuals having higher education and skill attainments able to benefit more from the new opportunities. Some 25-35% of total inequality can be explained by inter-person differences in human capital and skill endowments.
(ii) falling labor shares. Technological progress has favored capital over labor. The abundance of labor relative to capital, which depresses wages rates, is also a contributing factor to the declining labor share in developing Asia. Since capital is less equally distributed, this has contributed to rising inequality.
(iii) increasing spatial inequality. Some regions, especially urban and coastal areas, are better able to respond to the new opportunities because of their advantages in infratsructure and market access, as well as agglomeration economies from a self-perpetuating process of increasing concentration. The process of urbanization reinforces the inequality effects of agglomeration. About 30-50% of income inequality is accounted for by spatial inequality due to uneven growth.
But there is more to it than that. This effect on Asian workers has been compounded by various forms of "unequal access to opportunity" -- especially to education, health and public employment services by population groups as defined by their income, gender, ethnic origin, or birth location. The need for action is urgent because, without it, inequality of opportunity will be magnified into greater and greater inequality of opportunity, which will then continue the cycle of inequality of opportunity and outcome for the next generation.
What governments should do to address inequality? Above all, governments should not seek to reverse the main drivers of growth -- technological change, globalization and market-oriented reform -- which have also driven inequality.
The ADB proposes three other lines of action.
First, fiscal policy can be used for increasing spending on education and health, developing better targeted social protection programs. Second, interventions can be made to address lagging regions through improving regional connectivity, developing new growth poles, strengthening fiscal transfers, and removing barriers to migration from poor to more prosperous areas. Third, growth can be made more employment friendly through more balanced growth, supporting SMEs, removing policy biases that favor capital over labor, strengthening labor market institutions.
To a large extent, Asia's inequality basically occurs "by design" of the system. But it is not clear that the beneficiaries of this system are fully conscious of the risks to social and political stability. They should study the Arab Spring more closely.