(pp. 52-54)
In addition to an expanded view of the relationship between economic growth and human capital, there now is a deeper understanding of the relationship between growth and equity. Human capital has more impact on growth, for example, if it is equitably distributed.
It previously was thought that a trade-off existed between growth and equity - that distributing income too equally would undermine incentives and thus lower everyone's income. The assumption was that rich needed special encouragement to save and invest more.
Recent evidence suggests that this conventional wisdom is wrong. Many economies in Asia - Hong Kong, Indonesia, Malaysia, the Republic of Korea, Singapore, Taiwan (province of China) and Thailand - have had both rapid growth and relatively low inequality. Between 1960 and 1993 the East Asian economies, excluding China, had annual per capita growth of 7.6%, while income inequality remained stable or declined. Japan and Sweden have also combined rapid growth and low inequality (boxes 2.3 and 2.4) These are important findings, since they contradict the conventional view that it is better to channel income to the rich, who tend to save and invest more.
The key to East Asia's success was a relatively equal distribution of private and public assets - countries there concentrated on redistributing not income but wealth. What generates income is productive wealth - including human capital. Some new growth theories claim that redistributing income more equitably takes income away from people with capital, lowering their profits and thus supposedly reducing growth. In fact, a progressive redistribution of assets tends to boost growth because it has a broad positive effect on people's incentives. One study concluded that if in 1960 the Republic of Korea had had Brazil's inequality, its GDP in 1985 would have been 15% lower.
Some countries in East Asia, such as the Republic of Korea, initiated growth through large scale land reform that broke up feudal class structures and through the building of rural infrastructure. But all stressed broadly based investment in education - Particularly in primary and secondary education. In 1985 the Republic of Korea, which has enjoyed fairly equitable growth , devoted only 10% of its education budget to tertiary education, while Venezuela, where growth has been more inequitable, devoted 40% to the tertiary level.
Besides increasing the pace of growth, mass education can ensure that its benefits are more equitably distributed. When a small elite of workers loses its education monopoly, it can no longer command a high premium for its skills - so wage inequality is reduced. In the Republic of Korea between 1976 and 1985 the premium that those with higher education could enjoy over those with only primary education fell from an additional 100% to 66%. This helped reduce wage inequality over this period. In Brazil, by contrast, where education expenditures tend to favor the rich, the premium for higher education scarcely changed, and wage inequality rose over the same period.
But education will not ensure equitable growth on its own. People also need the opportunity to use their skills. Otherwise, society loses valuable resources, and people will not invest in education in the first place. East Asian economies have established this connection between the supply of skilled labor and the demand for it by first promoting such labor-intensive sectors as manufactured exports and agriculture. This provided widespread employment and raised everyone's wages.
The role of agriculture in East Asia's success is often ignored. In Taiwan (province of China) in the 1950s and early 1960s it was not exports but agriculture that took the lead in generating domestic demand and employment. The income generated in agriculture creates more demand for agricultural inputs and basic consumer goods - both of which require labor-intensive production. So, employment multiplies throughout the economy. Indeed, in East Asia a I percentage point increase in agricultural growth tended to generate a 1.5 percentage point increase in the growth rate of the non-agricultural sector.
Discussions that link equity with growth have frequently neglected the demand side of the economy. A more equal distribution of income changes the composition of demand towards more labor-intensive products - and this stimulates both growth and employment. Public policy must therefore be directed not only at building up people's capabilities, but also matching these capabilities with opportunities - linking the supply of human capital with the demand for it. Jamaica, the Philippines and Sri Lanka have enhanced basic capabilities but still had low growth, in part because of insufficient demand for people's skills.
When the supply of human capital and the demand for it are in balance - when capabilities match opportunities - a dynamic process of cumulative causation is set in motion that can raise growth and lower inequality.
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