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NS4053 Rising Inequality in Asia Winter Term, 2015


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Title: NS4053 Rising Inequality in Asia Winter Term, 2015

NS4053 Rising Inequality in Asia Winter Term,
  • Asian Development Bank, Rising Inequality in
    Asia and Policy Implications February 2014
  • The paper
  • Examines the resent trends of rising inequality
    in developing Asia
  • Asks why inequality matters in the Asian context
  • Examines the driving forces of rising inequality
  • Proposes policy options for tackling high and
    rising inequality
  • Main Findings Increasing inequality due to
  • Technological change
  • Globalization
  • Market-oriented reform
  • Policy Suggestions

Introduction I
  • Poverty reduction in developing Asia over last
    two decades faster than
  • Any other region in the world
  • At any other time in history
  • Problem
  • The bulk of the regions population lives in
    countries with rising inequality
  • New Situation in Contrast to
  • The growth with equity story that marked the
    transformation of the NIEs in the 1960s and 1970s
  • Recent trends in some other parts of the
    developing world, particularly Latin America
    where inequality has been narrowing since the

Introduction II
  • Drivers of Asias rapid growth
  • Technological change
  • Globalization
  • Market oriented reform
  • Have had significant distributional consequences.
  • Growth drivers have favored
  • Owners of capital over labor
  • Skilled over unskilled workers and
  • Urban and costal areas over rural and inland
  • Unequal access to opportunity caused by
  • Institutional weakness and
  • Social exclusion
  • Have compounded the impacts of these forces

Introduction III
  • These factors have led to
  • Falling share of labor income in national income
  • Increasing premiums on human capital and
  • Growing spatial disparity
  • All contributing to rising inequality
  • Dilemma the three drivers of inequality cannot
    and should not be blocked
  • They drive productivity and growth
  • A policy mix needs to be designed to reduce
    inequality while not suppressing increases in
    productivity and growth

Recent Trends in Inequality I
  • In last two decades growth and poverty reduction
    in Asia and Pacific have been remarkable
  • From 1990 to 2010
  • Average annual growth in GDP for developing Asia
    reached 7 -- more than double for Latin America
  • Growth mainly driven by PRC and India with annual
    GDP growth rates of 9.9 and 6.4
  • Per capita GDP in 2005PPP terms increased from
    1,633 to 5,133
  • The percentage of population living at or below
    the 1.25 a day poverty line fell from 53 in
    1990 to 21 in 2010
  • 700 million people lifted out of poverty
  • Seventeen countries reduced poverty by more than
    15 in the period

GDP Growth and Poverty Reduction
Recent Trends in Inequality II
  • Growth accompanied by rising inequality
  • Of the 28 economies that have comparable data
    between the 1990s and 2000s
  • 12 accounting for more than 80 of developing
    Asias population in 2020 experienced rising
  • The Gini coefficient of per capita expenditure
    worsened in 12 economies including the PRC,
    Indonesia and India
  • There appears to be a positive, statistically
    significant relationship between the increase in
    Gini coefficient and GDP growth
  • The change in the quintile ratio is more
    pronounced than the change in the Gini in all 12
    countries suggesting rising inequality has been
    driven by the rich getting richer much faster
    than the poor
  • The expenditure shares of the richest 1 and 5
    of population also show rising gaps between the
    rich and poor

Annual Growth of Gini Coefficients, 1990s-2000s
Recent Trends in Inequality III
  • Another challenge facing developing Asia is
    inequality of opportunity which is a critical
    factor in widening income inequality
  • Great disparities exist in the means to raise
    ones living standards such as
  • Physical assets (e.g., capital and land),
  • Human capital (e.g., education and health, and
  • Market access (e.g., labor and finance)
  • Inequality of opportunity derives from unequal
    access to public services, especially education
    and health
  • School age children from households in poorest
    income quintile were three to tive times as
    likely to be out of primary and secondary schools
    as their peers
  • Infant mortality rates among the poorest
    households in some countries were double or
    triple rates among richest households

Why Inequality Matters I
  • 1. Inequality of opportunity and income can lead
    to vicious circle
  • As unequal opportunities create income
  • Which in turn lead to differences in future
    opportunities for individuals and households
  • 2. Rising inequality hampers poverty reduction
  • Simulations reveal how rising inequality holds
    back poverty reduction
  • Had inequality not increased the poverty
    headcount at the 1.25-a-day the poverty line
    would have been in
  • India 29.5 instead of the actual 32.7 in 2010
  • PRC 4.9 instead of the actual 13.1 in 2008 and
  • Indonesia 6.1 instead of the actual 16.3 in
  • For the 12 economies the cost of rising
    inequality equates to 240 million more people
    being trapped under the poverty line -- or
    6.5of the regions current population.

Actual and Simulated Poverty Rates, 1990s-2000s
Why Inequality Matters II
  • 3. Inequality can weaken basis of growth itself
  • Inequality of wealth and income can lead to large
    divergences in human capital
  • Those with little wealth or low income face
    challenges in investing in human capital or
    wealth and income enhancing activities and will
    remain poor
  • Imperfect financial markets may limit their
    ability to borrow to invest
  • Widening inequality leaving more people at the
    top and bottom of income distribution can mean a
    smaller middle class
  • Growth driven by and benefiting a middle class is
    more likely to be sustained economically
  • Rent seeking and corruption associated with
    highly concentrated gains to growth are avoided
  • Politically to the extent that conflict and
    horizontal inequalities between racial and ethnic
    groups are easier to manage

Why Inequality Matters III
  • 4. Greater inequality may lead to a political
    backlash in which pressure for governments to
    enact populist policy measures grows.
  • In response to rising demands, political process
    may favor policies that benefit lower end of the
    income distribution in short run
  • But hold back efficient and growth in the long
  • In this situation interests of political system
    diverge from the interests of the economy as a

Policy Responses
  • Asian governments are responding to rising
    inequality by trying to make their development
    plans more inclusive
  • Distinction between inequality of opportunity and
    inequality of outcome important in guiding policy
  • Inequality of opportunity access to education,
    health care, public services of jobs often arises
    from differences in individual circumstances
    outside control of individual
  • Such inequality largely reflects institutional
    weakness and social exclusion and should be
    target of policy
  • On other hand given an individuals
    circumstances, efforts in labor market or
    education will also affect outcomes income,
    consumption etc.
  • Inequality of outcomes arising from differences
    in individual efforts reflects and reinforces the
    market based incentives that are needed to foster
    innovation and growth

Factors Driving Inequality in Asia I
  • 1. Technological Change can influence income
    distribution if
  • It favors skilled labor (more educated or more
    experienced) over unskilled labor
  • by increasing its relative productivity and
    resulting skill premium
  • It is biased in favor of capitalleading to an
    increasing share of capital in national income
  • In general capital incomes are generally less
    equally distributed and accrue more to the rich
    than the poor

Factors Driving Inequality in Asia II
  • 2. Globalization can affect income distribution
  • Trade integration
  • Changes the relative demand for and hence
    relative wages of skilled and unskilled workers
  • It can affect income distribution between capital
    and labor because capital and skills often work
    together due to their complementarity
  • Financial integration can
  • Broaden access to finance by the poor,
  • But it can increase the risk of financial crisis
    and hurt the poor more than the rich
  • Studies by the IMF find that
  • Global trade integration helps reduce inequality
  • Global financial integration increases
  • But the found also found that technological
    progress a more important contributor to rising
    global inequality in last two decades

Factors Driving Inequality III
  • 3. Market oriented reform an important driver of
    growth, but can have significant distributional
  • Trade policy reform often part of the driving
    forces of globalization
  • Labor market reforms can change the bargaining
    position of labor in relation to owners of
    capital Impacting on wage rates and income
  • The three drivers of growth, technological
    progress, globalization and market oriented
    reform can be geographically uneven
  • New economic opportunities released by these
    drivers are often most easily seized by locations
    closer to existing trade routs
  • Agglomeration economies also facilitate a
    self-perpetuating process of increasing
  • Considerable empirical evidence linking the three
    key sources to rising inequality in Asia

Factors Driving Inequality IV
  • Rising skill premiums Share of inequality
    accounted for by differences in educational
    attainment increased in all countries
  • Most significant in PRC from 8.1 in 1995 to
    26.5 in 7007
  • India next from 20 in 1993 to 30 in 2010
  • In late 2000s as much as 25-35 of total
    inequality can be explained by inter-person
    differences in human capital and skill endowments
    in most Asian countries
  • Labors falling share of total income. Between
    the mid 1990s and the mid-2000s labor income as a
    share of manufacturing output in formal sector
    fell from
  • 48 to 42 in the PRC
  • 37 to 22 in India
  • Because capital income more unequal than labor
    income, inequality increases
  • Increasing spatial inequality In late 2000s
    about 25-50 of all inequality can be explained
    by spatial inequality
  • urban/rural, coast/hinterland, and by province.

Inequality from Educational Attainment of
Household Head
Share of Labor Income in Industrial/Manufacturing
Value Added
Contribution of Spatial Inequality to Overall
Responding to Inequality I
  • Idea is to reduce inequality without stifling
    factors contributing to growth
  • Distinction between factors outside of individual
    control and those that individual makes choices
  • Asian Development Bank recommends three sets of
    policy responses to rising inequality in Asia
  • Efficient fiscal policies to reduce inequality in
    human capital with view to addressing rising
    skill premiums relative to low wages of unskilled
  • Interventions to reduce spatial inequality
  • Policies to make growth more employment friendly
    with a view to increasing labor demand and hence
    labors share in national income
  • These policies cannot eliminate inequality, but
    will go long way to reducing it and at same time
    not endanger development and hurt growth

Responding to Inequality II
  • Interventions in lagging regions
  • Improving transport and communications networks
    between more developed and poorer regions
  • Creating growth poles in lagging areas
  • Strengthening fiscal transfers for greater
    investment in human capital and better access to
    public services in lagging regions, and
  • Removing barriers to within country migration
  • Policies to make growth more employment friendly
  • Support development of SMEs
  • Remove factor market distortions that favor
    capital over labor
  • Establishing or strengthening labor market
    intuitions and
  • Introducing public employment schemes an a
    temporary bridge to address pockets of
    unemployment or underemployment

Responding to Inequality III
  • Efficient fiscal policies
  • Spending more on education and health, especially
    for poorer households
  • Developing and spending more on better targeted
    social protection schemes including conditional
    cash transfers that target income to poor but
    also incentivize buildup of human capital
  • Switching fiscal spending from general price
    subsidies (such as fuel) to targeted transfers
  • Broadening the tax base and strengthening tax
    administration for greater and more equitable
    revenue mobilization
  • Summing up adopt strategy of inclusive growth

Policy Pillars of Inclusive Growth
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