Title: Rising Inequality and Polarization in Asia Trends, Causes and Potential Responses
1Rising Inequality and Polarization in
AsiaTrends, Causes and Potential Responses
- Wanda Tseng
- Deputy Director, Asia and Pacific Department
- International Monetary Fund
- September 2006
2A. What do we know?
3Over the last decade, income distributions across
Asia have worsened significantly
- Unprecedented. Recent trend is in contrast to
regions past record of equitable growth - Between 1965 and 1990, East Asia grew faster than
any other region - Yet maintained equitable distribution of income
- Indeed, inequality fell in both NIEs and ASEAN-4
- Broad-based. Rise in inequality extends to South
Asia, where inequality traditionally low - Pronounced. Today, China more unequal than US or
Russia Japan more than OECD average
4as reflected in a broad and pronounced rise in
inequality.
5At the same time, particular attention is being
paid to polarization.
- or emergence of distinct socio-economic groups
- Gap between rich and poor widens
- Gap between urban-rural or coastal-inland
- Although differs conceptually, polarization often
moves together with inequality
6Asias economies have also become more polarized,
as suggested by a widening gap between rich and
poor
7Income disparities matter because they can
- Hinder poverty reduction
- Limit opportunities for social mobility, in
particular when polarization is high - Lead to inferior macroeconomic outcomes
- Result in resistance to reform and conflict
8B. What explains these trends?
91. Skill-biased technological change.
- Shifts in production technology that favor
skilled over unskilled labor (e.g., IT
revolution) - Predicts an increase in relative productivity
(and hence demand) of skilled labor - Which leads to rise in wage dispersion, and hence
inequality
10Indeed, wage dispersion has widened in Asias
labor markets
11as skill premia have risen, reflecting increased
demand for skilled labor.
122. Transition from agriculture to industry.
- Find support for inverted-U relationship between
inequality and income - Many economists have long believed that income
disparities increase in early stages of
development, and decrease subsequently - Predicted by Kuznets (1955), as people move from
agriculture to modern industrial sector - inequality and polarization increase initially,
but decline as majority of people find employment
in high-income sector. - Results suggest turning point occurs at per
capita GDP of around 4,000-6,000
13Encouragingly, many developing economies may be
close to a turning point.
144. Similarly, limited role for Asian crisis.
- Economic shocks can hurt poor disproportionately
- Tend to have less flexibility to protect
themselves against adverse shocks - Lack of education and skills makes it less easy
for them to adjust to shifting demand conditions - Illustrated by Latin American crises of the 1980s
- However, little evidence that Asian crisis led to
widespread increase in inequality
15If anything, income distribution improved in some
crisis economies.
16C. What can be done?
17Finally, some potential policy actions.
- Focus should be on enhancing opportunities for
moving up income ladder, rather than large-scale
redistribution - Specific policies need to be tailored, but number
of directions likely to help, including - Greater and/or more effective spending on
education - Investing in transport and communications
- Removing rigidities in labor and product markets,
e.g. barriers to migration - Improving access to financing
18Thank you