By Anoop Singh

(Versions in 中文, 日本語)

For the past two or three decades, rising inequality—inequality of incomes, of economic outcomes and of economic opportunities—has taken a back seat to the goal of boosting overall growth. But growing discontent with the fallout of the global financial crisis has put inequality back on top of the policy agenda. While the symptoms may be different, tackling inequality is no less an issue in Asia.

Indeed, research shows that inequality can be counterproductive to sustaining longer-term growth. So, in increasingly turbulent global economic times, this gives added importance to promoting shared—or inclusive—growth in Asia that is more likely to be sustained.

This has been a major focus our latest Regional Economic Outlook, which we presented in Manila today. A great challenge for the government here, and for other countries across the region, is to raise living standards for a wide section of their populations.

Asia’s record on equality

Over the past two decades, growth in most Asian economies has been impressive; higher on average than in other emerging regions. This, in turn, has translated into significant reductions in poverty, highlighting the fact that growth in per capita incomes remains the key ingredient to poverty alleviation. Notwithstanding these successes, Asia still remains home to the largest number of the world’s poor.

It may then seem counterintuitive that inequality across the region has also increased over the same two decade period. This sits in stark contrast to the previous three decade record of equitable growth across much of Asia—in Japan, the newly industrialized economies (NIEs), and the Association of Southeast Asian Nations (ASEAN). The rise in inequality has been much more pronounced than in most other emerging regions, leaving parts of Asia less equitable than the Middle East and approaching levels of inequality in Sub-Saharan Africa and Latin America.

Rising inequality has dampened the impact of Asia’s fast growth on poverty reduction and, in many countries in the region, the gap between rich and poor has been growing.

Our analysis confirms that growth has been significantly less inclusive in many Asian economies. The income of the bottom fifth of the population has grown much more slowly than average incomes in China, the NIEs, and South Asia (excluding India). By contrast, in India and the ASEAN countries, incomes of the poorest fifth have kept pace with average income growth. And in Brazil, the poorest fifth have seen their incomes rise even faster than average, highlighting the much more equitable nature of its recent growth experience.

The policy challenge

These trends are worrying, particularly given increasing evidence of the importance of greater income equality for sustained growth. Accordingly, this is something we are paying close attention to in our regional economic assessments and in our policy dialogue with member countries in Asia.

But one also does not need to be pessimistic. There are many potentially beneficial policies that can be implemented, and many governments in Asia seem to be doing just that.

The problem is complex and will likely require a set of mutually reinforcing policies, and the necessary mix will vary from country to country. Let me briefly touch on some aspects of fiscal policy that we believe can make an important contribution.

  • The relatively low share of education and health spending in GDP across Asia points to an important potential role for fiscal policy in strengthening inclusiveness. Conditional cash transfer programs (CCT) are being increasingly used in low-income emerging economies and, in Asia, the introduction of a CCT in the Philippines is a welcome development. By 2012, this program is budgeted to cover 60 percent of the poor.
  • Countries in Asia with higher per capita income and lower poverty should make it a priority to enhance other safety nets. In particular, few emerging Asian economies have unemployment insurance schemes and many have low pension coverage rates―less than 20 percent of the working age population is covered in most of emerging Asia compared with an average of 60 percent in OECD countries. Enhancing such safety nets would help in two respects: increasing inclusiveness, and reducing precautionary motives to save, hence increasing consumption and facilitating global rebalancing.
  • A key question about such policies is their fiscal cost. The Bolsa Familia program in Brazil only costs 0.4 percent of GDP, and recent IMF work on China and Korea argues that a minimum social safety net can be provided at low cost. So at least in some cases, policies to promote more inclusive growth need not be prohibitively expensive.

Such reforms to social protection schemes, and health and education investment could be key elements of a broader strategy—which might also include, for example, labor, financial, exchange rate and governance reforms—to reduce the share of vulnerable households in Asia. Ultimately, rebalancing the benefits of Asia’s fast growth in this way may hold the key to sustaining it in the years ahead.