Confronting Rising Inequality in g g q yAsia and the Pacific

Juzhong ZhuangDeputy Chief EconomistDeputy Chief EconomistAsian Development Bank

Presentation at 1st ADB‐Asian Think Tank Development ForumBeijing, PRCj g,October 30‐31, 2013Views expressed are those of the author and do not necessarily reflect those of ADB.

1

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

OutlineOutline

• Recent trends of inequality in Asia• Why inequality matters• Drivers of rising inequality• Drivers of rising inequality• Responding to rising inequalityp g g q y• Moving towards inclusive growth

2

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

32.43035

GDP growth and poverty reduction

15202530

7.03.7 3.4 2.4

9.75.7

1.505

1015

0

Developing Asia Sub‐Saharan Africa Latin America and Caribbean

Middle East and North Africa

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

3

… but has been accompanied by rising inequality in many countries

• Inequality increased in 12 out of the 29 countries with comparable datap

• The 12 account for over 80% of Asia’s populationE dit b d Gi i ffi i t d f• Expenditure‐based Gini coefficient worsened from:– 32 to 43 in P. R. China– 33 to 37 in India– 29 to 39 in Indonesia

• Taking developing Asia as a single unit, its Gini coefficient rose from 39 to 46 in the last 2 decadescoefficient rose from 39 to 46 in the last 2 decades

4

Annual growth of Gini reached more than 1% in some countriessome countries

Annual increase of Gini coefficient from 1990s to 2000s %

Indonesia

PRC

from 1990s to 2000s, %

Korea, Rep. of

Lao PDR

Sri Lanka

M li

Bangladesh

Georgia

Korea, Rep. of

Tajikistan

India

Mongolia

0 0 0 5 1 0 1 5 2 0

Singapore

Taipei,China

5

0.0 0.5 1.0 1.5 2.0

The rich are getting richer much faster than the poor

Quintile ratios, countries with rising inequality

8.99.610

12

Q , g q y

7.1

4 8 5.1 4 8 4 54 75.7

6.65.9

6.9

4 86

8

3.94.8

4.1 4.3 4.8 4.54.7 4.8

2

4

0

2

BAN GEO IND INO LAO PRC SRI TAJ

1990s 2000s

6

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

Median Maximum MinimumMedianGini

MaximumGini

MinimumGini

lDeveloping Asia(consumption)

37.0 50.9 27.8

OECD 30 0 49 6 23 0OECD(income)

30.0 49.6 23.0

Latin America & Caribbean 52 3 59 5 44 7Latin America & Caribbean (income)

52.3 59.5 44.7

Middle East & North Africa 36.8 41.4 29.8Middle East & North Africa (consumption)

36.8 41.4 29.8

Sub‐Saharan Africa 42.8 65.8 30.0(consumption)

7

Why inequality mattersWhy inequality matters• If inequality had been stable, additional 240 million (6.5% of Asia’s population) would have been lifted out of povertyp y

• Inequality can weaken the basis of growth itself byitself by:– leading to a waste of human capital– undermining social cohesion– hollowing out the middle classhollowing out the middle class– worsening the quality of governancei i f i ffi i t li t li i– increasing pressure for inefficient populist policies

8

Why inequality has risenWhy inequality has 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 areasCities/coastal regions over rural/inland areas

• Distributional impact of the drivers of growth has been compounded by unequal access to opportunity due to social exclusion. pp y

9

Share of labor income declined, and share of capital i hi h i l i dincome—which is more unequal—increased

Labor Income Share

70

Labor Income ShareManufacturing

40

50

60

20

30

0

10

10

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

Skills premium has risen; education inequality accounts f 25 35% f l i lifor 25–35% of total inequality

44 2 46.250

%

Income inequality decomposition by educational attainment of household head

26.529.9 29.8

25.0 23 2 24 730.8

35.7

44.2

30

40

equa

lity, %

8.1

20.325.0 23.2 24.7

10

20

n‐grou

p ine

0

1995

2007

1993

9‐10

1990

2010

2002

2008

1994

2009

1995

2005

of between

1 2 1

2009 1 2 2 2 1 2 1 2

PRC India Indonesia Pakistan Philippines Thailand

Share o

11

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

Share of spatial inequality (%)54

50

60Share of spatial inequality (%)

3235

3840

21 2226

20

30

13

10

0

Sri Lanka …Philippines …Pakistan … Indonesia … India … Viet Nam … Bhutan … PRC …

12

Urbanization also affects inequality

0.30

0.35

0.30

0.35Urbanization and inequality: PRC Urbanization and inequality: India

0.20

0.25

l Ind

ex

0 15

0.20

0.25

il inde

x

0.05

0.10

0.15

Theil

0.05

0.10

0.15

The

0.00

0% 50% 100%

Share of urban population

0.00

0% 20% 40% 60% 80% 100%

Share of urban populationShare of urban population

Total inequality Within BetweenTotal inequality Within Between

• Assuming urban inequality, rural inequality and urban‐rural income ratio remain g q y, q yconstant, Kuznets  (1955) shows mere population shift from rural to urban areas leads to an inverted‐U curve: inequality first increases, reaches a turning point, and then decreases.• Analysis shows PRC has already passed the turning point and India has a long way to go

13

Analysis shows PRC has already passed the turning point, and India has a long way to go.

How to respond to rising inequalityHow to respond to rising inequality

• Three drivers of growth cannot be hindered

• Governments can reverse rising inequality through– Growth that is more employment‐friendly to increase labor’s income share

– Interventions to address lagging regions to reduce spatial inequalityp q y

– Efficient fiscal measures to reduce inequality in human capitalhuman capital

– Move towards an inclusive growth strategy

14

Make growth more employment‐friendly

• Structural transformation for

15transformation for more balanced composition of growth y = -13.38x + 7.262

R² = 0 266

5

10

ient

• Support development of SMEs

R² = 0.266

-5

0

inic

oeffi

ci

• Remove factor price distortions that discourage the use of

-15

-10

hang

e in

G

discourage the use of labor

• Strengthen labor-25

-20Ch

• Strengthen labor market institutions -30

-0.5 0.0 0.5 1.0 1.5 2.0

Employment elasticity

15

Interventions to address lagging regions• Improve regional connectivity• Develop growth centers in lagging regions• Fiscal transfers to poorer areas to enhance human capital• Remove barriers to within‐country migration

0.4

PRC India Philippines

• PRC’s Great Western

0 3

0.35

0.4• PRC s Great Western Development Strategy: Inequality of provincial 

0.25

0.3q y p

per capita income has been on the decline 

0.15

0.2

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0

since 2004 in PRC 

16

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Efficient fiscal measures• More spending on human capital and social protectionEstimated marginal impact of government spending on the Gini coefficient

Asia Rest of the world Asia Rest of the world

Social protection 0.490 −0.276

Education −0.486 −0.034

Health −0.241 −0.330

Housing 2.162 −0.614Source: Claus, Martinez-Vazquez, and Vulovic (2012).

Government spending on health and education, 2011  Social protection expenditure, 2010 or latest 

5.6101214

or latest year available (% of GDP)

Education Health 19.320

25

year available  (% of GDP)

7.6 7.4

3.8

6.6 5.0 5.8 4.94.0 5.1

3 3 2 7 2 846810

6.3 5.0 5.0 3.4 2.1 0 75

10

15

2.7 4.1 3.1 3.9 2.5 1.6 1.2 1.4 0.9

3.3 2.7 2.802 0.7

0

17

Efficient fiscal measures

Fossil‐fuel consumption subsidy (% of current GDP), 2010

• Switch from inefficient general subsidies to targeted transfers

PakistanBangladesh

ThailandViet Nam

Brunei DarussalamPakistan

IndonesiaMalaysiaThailand

PhilippinesSri Lanka

India

0 1 2 3 4 5 6

China, People's Rep.

18

Efficient fiscal measures• Greater and more equitable revenue mobilization: Level of personal income taxGreater and more equitable revenue mobilization: Level of personal income tax 

is low in Asia due to narrow tax base and weakness in tax administration Personal income tax (% of GDP) and top marginal 

( l l bl )

40

50

60income tax rate (2009 or latest available year)

10

20

30

40

0

10

Personal tax revenue (% of GDP)

Redistribution effect of personal income tax in urban PRC

Year Pre-tax Gini After-tax Gini1997 30.1 29.62005 35.2 34.2

19

2009 34.7 33.5

Source: Li et al. (2012).

Move towards inclusive growth• Inclusive growth means everyone can participate in and benefit from the growth process on an equitableand benefit from the growth process on an equitable basis.

• Inclusive growth makes a distinction between• 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.

• So inclusive growth can also be defined as “growth coupled with equality of opportunities”.

20

21 21

Key messages• Asia faces the challenge of rising inequality: 

R id h h f d i l l b kill d– Rapid growth has favored capital over labor, skilled over unskilled workers, and coastal regions/cities over inland/rural areasinland/rural areas

• Asian countries need to confront rising inequality through – Efficient fiscal measures, interventions to reduceEfficient fiscal measures, interventions to reduce regional disparity, and growth that is more employment‐friendly, and

– Move toward an inclusive growth strategy that is based on equality of opportunityq y pp y

22

Th k !Thank you!The presentation is based on Asian Development Outlook 2012. 

For the full report, please visit ADB web site atADB web site atwww.adb.org

For more details on the concept of inclusive growth, please read the bookFor more details on the concept of inclusive growth, please read the bookPoverty, Inequality, and Inclusive Growth in Asia: Measurement, Policy Issues and Country Studies, edited by J. Zhuang, published by Anthem Press in 2010

or contact jzhuang@adb.org

23