Rising Inequality and Polarization in Asia Trends, Causes and Potential Responses

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Rising Inequality and Polarization in
AsiaTrends, Causes and Potential Responses

• Wanda Tseng
• Deputy Director, Asia and Pacific Department
• International Monetary Fund
• September 2006

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A. What do we know?
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Over 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

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as reflected in a broad and pronounced rise in
inequality.

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At 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

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Asias economies have also become more polarized,
as suggested by a widening gap between rich and
poor

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Income 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

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B. What explains these trends?
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1. 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

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Indeed, wage dispersion has widened in Asias
labor markets

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as skill premia have risen, reflecting increased
demand for skilled labor.

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2. 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

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Encouragingly, many developing economies may be
close to a turning point.

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4. 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

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If anything, income distribution improved in some
crisis economies.

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C. What can be done?
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Finally, 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

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Thank you