ADB makes a case for "inclusive growth"

Income inequality needs to be tackled for Asia to realise its full potential, ADB assistant chief economist Juzhong Zhuang tells FinanceAsia.

While economic growth in developing Asia has been astonishing in recent years, it has been accompanied by growing income inequality. This is the starting point of a recent study by leading Asian Development Bank economists Juzhong Zhuang and Ifzal Ali.

Their observations and proposals are set out in a new book, "Poverty, Inequality, and Inclusive Growth: Measurement, Policy Issues, and Country Studies" (ADB and Anthem Press), which will be published on July 8.

"There has been remarkable economic growth within many Asian countries during the past three decades, notably in China and more recently India. This has led to reductions in extreme poverty, but has also created greater inequality," Zhuang told FinanceAsia.

Measured by increases in Gini coefficients (a widely recognised measure of a country's income disparity) from the mid-1990s up until 2007, "levels of inequality have been especially marked in Bangladesh, Cambodia, Laos, Nepal, Sri Lanka and, of course, China".

Levels of absolute poverty remain high in the region, especially in South Asia. In 2005, two-thirds (1.8 billion) of developing Asia's population lived on less than $2 a day, and one-third (900 million) on less than $1.25.

But, non-income inequality is also a problem, argued Zhuang. This is reflected in higher mortality rates, worse healthcare and fewer educational opportunities for poorer households than richer ones.

Zhuang identifies several causes of greater inequality: "Economic transition, market liberalisation, and globalisation in the recent decades have created many new business opportunities and greater wealth, but this often starts in certain regions within a country, for example the large cities and coastal areas in China."

There is some labour mobility, but too many households lack sufficient skills, education or connectivity. Greater reliance on markets also leads to larger wage differentials; and weak governance opens opportunities for rent-seeking.

"Social exclusion is a significant problem in many countries," he said.

But, as miserable as this certainly is for millions of people, shouldn't social and geographical dislocation be accepted as an unfortunate, but short-term, effect of rapid economic growth spurred by entrepreneurs and facilitated by market liberalisation?

The problem, argues Zhuang, is that it is also wasteful and prevents developing countries from reaching their full potential.

"It causes a slower pace of poverty reduction; undermines growth potential through damaging effects on social cohesion; and wastes human capital, which extends to future generations due to low investment on children's education. Also, civil and political pressure for income redistribution distracts focus away from development and wealth creation. The quality of institutions is diminished too," he said.

Zhuang and Ali have articulated the ADB's proposals for what it calls "inclusive growth".

"Inclusive growth is essential, which means expanding economic opportunity and making it accessible to all," said Zhuang.

The past 30 years has shown that economic growth in itself is insufficient; countries cannot wait for trickle-down benefits. But, it is important to distinguish between inequality of opportunity and inequality due to differences in efforts. The former is often caused by institutional failures, and by social exclusion.

Equalising opportunity offers the best route, he said, and equalising opportunity requires investing in education and health, addressing social exclusion, levelling playing fields, and spreading social safety nets. Essential to realising this ambition is a foundation of good governance and honest and strong institutions.

ADB itself helps by investing in infrastructure and education, by promoting financial and private sector development, and by being on call for disaster management.

Its role is set out in "ADB's Strategy 2020", which offers a roadmap to support inclusive growth. It aims to contribute to job creation and expansion of opportunity through investment in transport and energy; by helping develop financial sectors; and the promotion of the private sector, regional integration and policy reforms.

ADB hopes that access to opportunity should be helped by its investment in education, water and sanitation, irrigation and rural roads. It is also active in developing rural and micro-finance.

"Developing Asia's stellar growth rates have masked rising inequality, leading to two faces of Asia -- one shining and the other suffering," write Zhuang and Ali in their forthcoming book. Merging them will be a development challenge for many years to come.

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