Economics

Income Inequality in Asia Growing

The ADB has just released a report titled “Key Indicators 2007: Inequality in Asia” (covered in IHT and BBC). The report concludes that the gini index, a measure of relative inequality had grown in all 15 countries studied, since the 1990s. More alarmingly, absolute inequality had grown even more. The bank identified the trend as “the rich getting richer faster than the poor”:

Indeed, underlying many of the cases of increasing Gini coefficients is a growth process in which those at the top of the distribution (top 20% here) have seen their expenditures/incomes grow considerably faster than those at the bottom (bottom 20% here).

This report is follows on my previous post on the IEB on income inequality in India. In that I made some fairly basic points that a) income inequality was increasing in India (as measured by the Gini index), b) this was undesirable because income inequality reinforced social exclusion, (as a case I showed that inequality negatively impacted access to healthcare), and c) insofar as growth had not reduced, and possibly contributed to, inequality, India should revisit the kind of growth it engendered.

This report further strengthens the case for a more equal growth. It also indicates that our current growth path does indeed exacerbate inequality and how policy interventions could help. The following points, in particular, stand out.

First, why is inequality important? This being an economic report, it does not delve into the ethical choice inherent in that question, but it suggests two more practical reasons – because it damps the “poverty reducing impact of a given amount of growth”, and because it may hinder growth prospects (there is also a very readable introduction on measuring inequality, and how appropriate the gini index is to that measurement).

Second, is the inequality a result of growth? The report suggests it is not growth per se, but the kind of growth we are witnessing that is resulting in inequality, with three proximate causes: growth differentials between rural and urban divides, between sectors (agriculture vs. services and industry), and between the educated and those not. In fact, “widening differentials in earnings of the college-educated vis-à-vis less educated individuals appears to be the single most important observable factor accounting for increasing inequality.” Somewhat simplifying, the BBC quotes the report as saying:

The bank said the main reason for widening wealth gaps in recent years was the discrepancy in investment between urban and rural areas which favoured better-educated, better-off urban populations.

This is particularly important. In my previous post I had made a similar observation regarding healthcare – that inequality affected access to health, a key to equality of opportunity . This report suggests a similar dynamic leaves the uneducated poor in a vicious cycle of social exclusion. Since economic growth prospects favor the educated and the poor lack quality education, it is unlikely they will be able to benefit from those prospects and move up – leading to further inequality.

What role for policy? The ADB suggests increasing reforms that generate income and growth for the poor, as the way forward. The emphasis, clearly, needs to be on ensuring equality of opportunity, through for instance better access to finance, removal of social exclusion, and redistribution of wealth through public funding of rural education and basic health.

The discussion to my previous post was vigorous particularly on the last point. Some suggested that private healthcare (in this case education) is better. But that argues only for private operation of these services, not their funding (two separate debates). The second major criticism, that is countered here, is whether it is public spending – or spending in general – that is important, and the public sector should in fact stay out of funding healthcare. That argument is rather counter-intuitive – since the poor are, by definition, poor and pay a premium for most services, the only way for them to spend more on education (or health) is if someone else does it for them (say the government). I will grant, however, that given the scale of the challenge, it is more appropriate to talk of public and private spending. This is particularly true in agriculture, where distortionary public policies keep private investment out of the supply chain (a point reiterated by the ADB).

I have not seen the entire report, but even the summary makes fascinating reading. It should remind us that GDP growth is not the final measure of success. Since we compare India so often to China, here’s a statistic – China’s GDP increased the most amongst the economies studied, but so did its income inequality. Perhaps we can learn something from that too.

This post originally appeared on the IEB.