Global Policy Forum

The rich are growing richer faster than the poor in developing Asia, and widening disparities in standards of living can threaten the growth process in one of the most dynamic regions of the world, says a new ADB report.

http://www.adb.org/documents/books/key_indicators/2007/, the flagship annual statistical publication of the Asian Development Bank, says the poor are still lagging behind in the region's rapid development even as poverty rates decline. Both relative and absolute inequality have increased in most parts of developing Asia, the report adds. While relative inequality is concerned with proportionate differences in incomes, absolute inequality is concerned with actual dollar differences in incomes.

Relative inequality as measured by the Gini coefficient has risen significantly in Bangladesh, Cambodia, the People's Republic of China (PRC), Lao PDR, Nepal and Sri Lanka between the 1990s and 2000s (http://www.adb.org/Media/Articles/2007/12077-asian-developments-reports/figure-1.jpg). In the case of the PRC, the Gini coefficient is estimated at around 47 in 2004, closer to figures associated with Latin American economies and less reminiscent of the "growth with equity" experience of developing Asia's original newly industrializing economies, such as the Republic of Korea and Taipei,China.

Absolute inequality has increased virtually everywhere between the 1990s and 2000s. One consequence of this is that the most well-off have experienced considerably larger increases in their standards of living than the least well-off. For example, the expenditures of the "rich" (top 20%) have increased much more than those of the "poor" (bottom 20%). This has happened even in countries such as Indonesia and Malaysia where relative inequality declined (http://www.adb.org/Media/Articles/2007/12077-asian-developments-reports/figure-2.jpg).

"In a region as dynamic and vibrant as developing Asia, low growth in incomes of the poor is reflective of weakness in the pattern of growth," says Ifzal Ali, ADB Chief Economist. "Growing inequalities can weaken social cohesion." For example, a study on Nepal—a country which saw one of the most rapid increases in inequality over the last 10 years and also experienced a political conflict, found that a lack of economic opportunities was significantly associated with a higher intensity of political violence.

The report warns that in societies where wealth is concentrated in the hands of a few, there is a danger of policy levers being captured by the rich for their own benefit and a weakening of the institutional foundations of the growth process. So, what is causing the gap between rich and poor to widen in developing Asia? The report identifies unevenness in growth in incomes across urban and rural areas, leading and lagging sub-national regions, and highly educated households and the less educated as important factors associated with increases in inequality. Some of the unevenness in growth is a natural outcome of the development process and is to be expected. The process of economic development is unlikely to start in every part of an economy at the same time and rising inequality is not unusual during periods of rapid growth and major structural change. In the PRC, for example, there is a general consensus that sharpening income disparities between coastal and interior regions have been driven by the country's increased openness.

However, weaknesses and imbalances in policy have also been at play. In several cases, slow growth in rural incomes has resulted from weaknesses in public investments in rural infrastructure and a policy environment that has kept private investment away. Meanwhile, growth in urban areas has been insufficient to absorb surplus labor from rural areas. Instead, new opportunities generated by urban growth in developing Asia have favored the highly-educated, further aggravating the earnings gap between the rich and poor. The reasons for these are varied and complex, but they often result from the interplay between market-oriented reforms and globalization.

The report stresses, however, that this does not call for a rollback of market-oriented reforms or international integration. The overall gains from market-oriented reforms and international integration can be quite large. Instead, policy action is required on three separate fronts. First, complementary policies that can counter the negative distributional impacts of market-oriented reforms are needed. Two important examples are well designed social protection mechanisms and skills and training programs.

Second, a concerted effort involving a partnership between the public and private sectors is needed to develop new economic activities and industries that generate new employment opportunities that do not bypass the poor. Finally, policy makers have to focus on radically improving the quality of basic health care and education available to Asia's disadvantaged.

Inequalities in life start early – and they begin with extreme circumstances that deny millions the opportunity to have adequate nutrition, health, and basic education. The key challenge to public policy here lies on not just increasing the quantum of public expenditures, but also ensuring that these are well targeted, effective, and funded through mechanisms that do not detract from economic growth.