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Inequality in Asia and the Pacific

Juzhong ZhuangDeputy Chief Economist

Economics and Research Department, ADB

The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.

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Inequality in Asia and the Pacific

Asia’s rapid economic growth has led to a significant reduction in extreme poverty, but accompanied by rising inequality. This book deals with the following questions:• What have been the trends of

inequality in Asia and the Pacific?

• Why inequality matters?• What are the key drivers of rising

inequality in the region?• How should Asian countries

respond to the rising inequality?

Download at: http://www.adb.org/sites/default/files/pub/2014/inequality-asia-and-pacific.pdf

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Asia’s high growth has led to large reductions in poverty …

Developing Asia Sub-Saharan Africa Latin America and Caribbean

Middle East and North Africa

05

101520253035

7.03.7 3.4 2.4

32.4

9.75.7

1.5

GDP growth and poverty reduction

Annual GDP growth (1990-2010), %Cumulative reduction in poverty rate (1990s-2000s), percentage point

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…but has been accompanied by rising inequality in many countries

Singapore

PRC

India

Mongolia

Taipei,China

Tajikistan

0 5 10 15 20 25 30 35 40 45 50

44.2

37.1

32.4

29.2

32.5

30.4

33.2

32.5

31.2

27.6

29.0

24.5

46.3

42.1

42.1

38.9

37.0

36.7

36.5

36.4

33.8

32.1

30.8

28.9

Gini Coefficients, Selected Economies, 1990s and 2000s

2000s 1990s

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Richest 1% of Asian households account for 6–8% of total expenditure

BHU PRC IND INO PAK PHI SRI0

5

10

15

20

25

Expenditure shares (%), 2000s

Top 5% Top 1%BHU=Bhutan; PRC=People’s Republic of China; IND=India; INO=Indonesia; PAK=Pakistan; PHI=Philippines; SRI=Sri Lanka

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Globally, Asia’s inequality is lower, but its rise over time is a concern

MedianGini

MaximumGini

MinimumGini

Developing Asia(consumption)

37.0 50.9 27.8

OECD(income)

30.0 49.6 23.0

Latin America & Caribbean (income)

52.3 59.5 44.7

Middle East & North Africa (consumption)

36.8 41.4 29.8

Sub-Saharan Africa(consumption)

42.8 65.8 30.0

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Why does inequality matter?• Rising inequality slows down the pace of poverty reduction

– If inequality had been stable, additional 240 million Asians (6.5% of Asia’s population) would have been lifted out of poverty

• Inequality can weaken the basis of growth by affecting human capital, social cohesion, middle class, and quality of governance

– Empirical studies show lower inequality is associated with longer growth duration. A 10-percentile decrease in inequality increases the expected length of a growth spell by 50% (IMF 2011)

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Why has inequality risen?• Technological progress, globalization, and market-

oriented reform have led to rapid growth in Asia, but working together they have favored:– capital over labor– skilled over unskilled workers– Cities/coastal regions over rural/inland areas

• These have been compounded by unequal access to opportunity due to social exclusion.

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Share of labor income declined, and of capital income—which is more unequal—increased

Japan

Korea, R

ep. o

fPRC

Taipei,

China

Indone

sia

Singapo

re

Malays

iaIndia

Hong K

ong,

China

Banglad

esh

0

10

20

30

40

50

60

70

Labor Income ShareManufacturing

Early 1990s Mid-1990s Early 2000s Mid-2000s

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Skill premium has risen; education inequality accounts for 25–35% of total inequality

1995 2007 1993 2009-10

1990 2010 2002 2008 1994 2009 1995 2005

PRC India Indonesia Pakistan Philippines Thailand

0

10

20

30

40

50

8.1

26.5

20.3

29.9 29.825.0 23.2 24.7

30.835.7

44.2 46.2

Income inequality decomposition by educational attainment of household head

Shar

e of

bet

wee

n-gr

oup

ineq

ualit

y, %

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Spatial inequality—urban-rural and inter-province combined—accounts for a large share of total inequality

Sri Lanka (2009)

Philippines (2009)

Pakistan (2008)

Indonesia (2009)

India (2008)

Viet Nam (2008)

Bhutan (2007)

PRC (2007)

0

10

20

30

40

50

60

13

21 2226

3235

38

54Share of spatial inequality (%)

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How to respond to rising inequality?

• Three drivers of growth cannot be hindered• Governments can address rising inequality through

– Efficient fiscal measures to reduce inequality in human capital

– Interventions to address lagging regions to reduce spatial inequality

– Growth that is more employment friendly to increase the labor income share

– Governance reform to equalize opportunities

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More broadly, move toward inclusive growth• Inclusive growth means everyone can participate in and

benefit from growth process on an equitable basis.

• Inclusive growth makes a distinction between – Inequality due to differences in individual efforts, and

– Inequality due to differences in individual circumstance, or inequality in opportunity.

• Reducing or eliminating inequality in opportunity is at the heart of an inclusive growth strategy.– Inclusive growth is “growth coupled with equality of

opportunities”.

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Thank you!