By
Taimur Khilji[1]
Abstract
Asia and the Pacific region have witnessed phenomenal economic growth over the past few decades. The growth in aggregate GDP, however, does not depict the extreme and increasing deprivation that has accompanied prosperity. The uneven distribution of wealth is a root cause of many inter and intra-state rifts and social injustices that the region faces. In this article, the author analyses the basis of this economic disparity in the region and highlights possible solutions. – Editor)
1. Introduction
There are at least two Asias today. One has, in the past half century, grown at an unprecedented rate; faster than any other region. The economic successes of the economies in this Asia have been aptly deemed ‘miracles’. This Asia has reaped the benefits of globalization, made tremendous strides in reducing poverty and firmly established itself as an economic powerhouse challenging the established world order. It has built complex trade networks within the region based on a strong intra-regional trade in electronic ‘parts and components’, where the production process has been fragmented according to dynamic comparative advantage. This is the frequently projected impression of Asia. It rests on the belief that Asia’s economic successes are largely due to its active role in the globalization process. This is Asia rising; a partially true, but nonetheless incomplete picture.
Then there is the less pristine Asia. This comprises of the largest number of poor in a single continent; close to a billion strong. This is the Asia where 500 million people go hungry daily. Most of these people live inland and work in the rural sector, far from the booming cities. It is also home to 14 Least Developed Countries (LDCs) with an average per capita income of just $500. The LDCs have not been able to adapt to the growing demands of a more connected world. A number of these countries are marred by constant conflict and political turmoil, leading to constant instability. The last couple of years have taken a further toll on the peoples of this diverse region, as food and fuel prices have disproportionately affected the people in the lowest income bracket. It now seems as if even the middle classes and wealthy are not completely immune, as they have seen their life savings tumble in a fragile and inter-dependent financial world. This paints an impression of an Asia that is poverty stricken, struggling and vulnerable. This picture is again only partially true. It needs to be seen against its alter-ego – Asia rising.
When the two contrasting depictions are woven together the obvious conclusion is that affluence is increasing in the face of extreme and persistent deprivation. The two coexist side by side. The concentration and distribution of the high and consistent growth has been uneven. Consequently, widening disparities exist between those who have benefited from economic growth and those who have not. There is a yawning gap across countries in the region in terms of levels of economic growth and development. Within countries, the disparities are equally stark. The Gini-coefficient, the indicator most commonly used for inequality, shows that 11 out of 16 countries in Asia and the Pacific have shown increases in levels of inequality over the past decade. The problem is real. As we look towards the future and try to reconcile the strong, sustained and concentrated growth with persistent and glaring poverty, the issue of growing inequality comes to the fore.
Income inequality is the focus of this paper. By looking at the patterns of growth through a sectoral analysis, this paper attempts to establish why inequality has increased in Asia and the Pacific. The sign posts are the three main sectors of the economy—agriculture, manufacturing, and services. Following the trajectory of these three sectors over time will shed light on the changing structure of economies in the region. The respective growth rates, contribution to GDP, and contribution to employment of each sector should provide an anchor towards determining the unevenness in distributional outcomes. As will be discussed, the manufacturing and services sectors are the largest contributors towards GDP. Ironically, combined they employ less persons than the agricultural sector. Many of the poor live in rural areas and work in the agriculture sector, therefore, the rural-urban income disparity forms one of the main divisions in society. This geographical and sectoral divide also points to differences in skill level between the unskilled rural poor and the relatively skilled urban non-poor. These divisions have widened over time and have manifested themselves in terms of a widening wage gap between rural and urban residents.
2. Trends in Income Inequality
Income inequality[2] has increased in a majority of countries within Asia Pacific over the past two decades. Despite experiencing solid economic growth and macroeconomic stability after the 1997 financial crisis, inequality not only persisted, but increased in a number of Asian economies. Some countries began to embrace market reforms, and others that had already embraced them began to move up the value-added chain to more capital-intensive production. There has been rapid economic growth. However, within the economies, it was also clear that some sectors and actors benefited significantly more than others. Consequently, income disparities between rich and poor, skilled and unskilled, literate and illiterate widened. Inequality grew not only in developing countries, but also in developed countries, thus defying the Kuznets hypothesis (Kuznets 1955, 1963).
There are a number of different ways of measuring income inequality (Milanovic 2005). Let us begin by observing whether economies in Asia-Pacific are converging in economic terms. A simple comparison of economic performance is to compare PPP adjusted GDP per capita during the past couple of decades.[3] This particular analysis can also give a sense of whether Asian economies are displaying what economists commonly refer to as β convergence, the claim that the dispersion in incomes across countries should decrease over time. Figure 1 below shows the time trend in PPP adjusted GDP per capita numbers for most countries in Asia for the period of 1985-2005. Each line in figure 1 corresponds to a particular country’s growth trajectory over the above mentioned period. As one notices, the dispersion between countries in 1985 is much less than the dispersion between countries in the 2000s. This clearly indicates a divergence over time in GDP per capita. Taking 1985 as the initial point, we notice that certain economies grew much faster than others creating a clear difference in growth trajectories over time.
A similar exercise was carried out for the other sub-regions in Asia and Pacific. East Asia, South East Asia, and South Asia also show a pattern of divergence in GDP per capita over time. The Pacific Island Countries (PICs) are an exception, as they do not conform to this general trend of divergence, but they do not show convergence either. What is noteworthy is that none of the PICs showed strong or sustained growth, and therefore theirs’ was not a situation where some economies took off leaving others behind. These countries seemed to have similar economic experiences and therefore they have not exhibited the divergence of other regions.
Figure 1: Growth Trajectory of Countries in Asia and Pacific, 1985-2005
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Despite Asia’s diversity, manifested in the varying and different experiences of each economy, commonalities do exist. Regional and global institutions, coordinated and complementary macroeconomic policies and greater communication have created economic interdependence that reveals a common pattern of the distribution of productive resources within an economy. Certain regions with better access to international trade through historical ties to world trade, better infrastructure, reduced transport costs, better management by the state, or regions specifically targeted for foreign investment by government policy may benefit more from economic industrialization (and liberalization) than other regions. Geographical preference within an economy has led to a wider gap between regions. For example, the coastal regions in China are now many times more well off than inland regions, the capital region surrounding Manila in the Philippines is much wealthier than other regions, and states like Maharashtra and Karnataka in India are economically and technically more advanced than states like Bihar and Orissa. [4] Across sectors, the emphasis has been on developing the capabilities of manufacturing and services sectors while investments in agriculture have lagged behind.
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2.1 The Geography of Poverty
Recent World Bank data shows an increase in the number of poor in Asia due to previous estimation biases (World Bank 2008). The revised estimates put the number of persons living on under $ 1.25-a-day in Asia close to a billion. Poverty in most of the developing countries of Asia and the Pacific Region remains a rural and agrarian phenomenon, as the overwhelming majority of the poor live in rural areas and rely on the rural and agricultural sector for their livelihood. [5] The major sub-groups of rural poor are the landless, along with marginal farmers and tenants, indigenous peoples and Scheduled Castes, internally displaced persons, and victims of landmines. The pastoralists and coastal fishermen are important sub-groups of rural poor in certain island countries. For all intents and purposes, poverty is a rural problem.
At the same time, there exist strong migratory trends, especially from rural to urban areas. The urban populations across Asia are growing at alarming rates, especially in the low to middle income countries (ESCAP 2007). The urban population is increasing by an average of over 40 million each year. In 1966 one in every five persons lived in a city; this proportion has increased today to one in every third person. By 2020 it is estimated that every other person in Asia will be an urban resident. Higher urban poverty and inequality bring new challenges. The increase in urban populations across Asia squarely puts pressure on governments to manage issues of urban sustainability. A wide range of problems have to be addressed – from issues concerning public health due to increased air and water pollution to the lack of legal and regulatory frameworks that allow people to live and avail the opportunities of citizenship.
Overall, the Asian population is in transition. The problem of poverty as it currently stands is a rural one even though its future trajectory points towards a greater urban presence. Policies should focus on managing this transition with short-term and medium to longer term strategies. The short-term would necessarily require a focus on rural areas, where poverty is currently concentrated. Rural development strategies focused on generating employment, especially in the off-farm sector, would help to ease some migratory pressures. Better communication, linkages and exchange with urban centers is likely to promote a sense of cohesion between rural and urban areas. The growing incidence of urban poverty requires addressing a new set of challenges, as urban poverty is characterized by a different set of issues and concerns than rural poverty. Thus, strategies to address it require a reassessment of the general poverty strategies that were developed primarily to address rural poverty. For instance, social inclusion in the urban milieu requires broader and more comprehensive legal and regulatory protection. Provision of public services to the poor in an urban environment will require a very different organizational structure than one situated in a rural setting. Furthermore, the living and working conditions of many of the poor need to be designed to promote healthier lives and the focus ought to be on public health and safety. In general, strategies need to be designed that are sensitive to the context-specific needs and constraints of urban life for the poor. Urban sustainability needs to underscore any viable development policy of the future.
2.2 Inequality within Countries
The value of the gini has risen for a number of economies in Asia, signifying increasing inequality within those countries. Current income inequality is, to an extent, a manifestation of preceding patterns of uneven growth. Most of Asia, with the exception of a few countries, is in a state of economic transition. Although, each country finds itself at a different stage along the development continuum, the transitory aspect is clearly present. Sectorally, this is marked by the diminished role of agriculture in the economy as the economic contribution of industry, manufacturing and services has increased manifold over the past couple of decades. Some economies have adjusted better than others and adopted more comprehensive strategies rather than one primarily focused on high growth. For example, South Korea developed and liberalized, and at the same time kept inequality in check. Its gini hovered at around 0.3, while only recording a moderate increase recently, signifying relatively inclusive and even economic growth. Similarly, Indonesia has also maintained a relatively steady gini value for over the past two decades.
A number of countries in the region, however, haven’t managed their economies in such a manner which has led to visibly uneven allocation of resources. For example, in Malaysia the economic transformation is characterized by a very high gini, as growth is concentrated in the western states of the peninsula, coinciding with the geographical location of industry. Similarly placed economies such as Thailand and Philippines show a strikingly similar pattern with development concentrated in urban locations. In Philippines, the National Capital Region that encompasses Manila accounts for more than one third of the national economy and has a GDP per capita three times the national average. In contrast, the Autonomous Region of Mindanao had GDP per capita that was less than one quarter of the national average. Likewise, in Thailand, the central area which includes Bangkok, accounts for only 0.2% of the population below the poverty line whereas the northeast and southern states account for 45% of the population below the poverty line.
In other less developed economies in the region including the South Asian countries the regional disparities are prevalent, as the majority of the populations still depend on agriculture for their livelihoods. This is true of countries like Bangladesh, Pakistan, Nepal and Sri Lanka where an emerging semblance of industrial, commercial and private activity in the urban centers of Dhaka, Lahore, Katmandu and Colombo coexists with a critical mass of rural activity. These countries, although also in transition, are at quite different points in their development trajectory compared to their more developed East-Asian counterparts. Although changing structurally as well, Lao PDR and Cambodia show continued reliance on agriculture which accounts for 42% and 30% of the GDP—a level that is significantly above the average level for Asia and the Pacific.
However, there is one clear message that emerges from the Asian experience: inequality is on the rise. As figure 2 below indicates, Gini levels have been on an increase for most of the countries in the region. In the case of Bangladesh, Cambodia, China, Nepal and Sri Lanka the increase in level has been more than five percentage points since 1990. Others like Vietnam, India and Lao have recorded modest increases. Only a couple of economies have shown reductions since 1990. The fact is that inequality has not only increased between countries, but also within countries.
Figure 2: Changes in Gini for income distributions, 1990s-2000s (%)
Source: ABD 2007
2.3 China and India
Despite the significant reduction in poverty in China over the last couple of decades, China and India, due to their enormous populations, account for the majority of the poor in Asia. In both countries the issue of rising regional inequality has come to the fore, and has been well documented.[6] China and India are unique cases due to their large populations. The development of both countries essentially translates to the development of a third of mankind. In this sense the task is enormous, requiring not only reforms and intervention at a very wide scale, but also measurable impact based on those reforms and interventions.
China
In China, since the inception of market reforms in 1978, which had accelerated in the 1990s under the impetus of Deng Xiaoping, the country’s economy has grown at a breathtaking pace. As China has progressed from an agricultural and government owned industrial economy to a privately owned industrial and service economy, real GDP per capita has grown at a rate of 8.48% per year for the time period of 1985-2004; this is one of the highest growth rates over a two decade period (World Bank 2007). However, urban and coastal China has grown disproportionately faster compared to rural and inland China. This unequal growth has led to rapidly increasing income inequality.
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Another coastal province, Zhejiang, is also growing faster than the remaining provinces. Shandong province, a remnant of the heavily industrial state owned enterprise dominated region of the pre-reform era, has seen less growth and started at a lower level than the two coastal regions. Nonetheless it is still ahead of the inland province of Hunan and the western province of Xinjiang. As suggested by this figure, these inland and western provinces have yet to really share in the massive wealth gains of the other regions. The factors that have contributed to such large gaps between provinces have been preferential policies that have shifted productive resources towards manufacturing, creating Special Economic Zones to encourage foreign investment, restrictions on labour and capital mobility, and urban biased policies (Yang 2002).
Plotting the cross-sectional standard deviation of GDP per capita across China over the years reveals a similar picture. As seen in figure A1 (Appendix 1), the standard deviation has increased dramatically, implying greater variation in GDP per capita growth across provinces over time. Looking for β convergence (figure A2/appendix 1) we plot the growth rate of GDP per capita from 1995 to 2002 (y axis) against the log of initial GDP per capita in 1995 (x axis). For there to be convergence over time, there should be a negative relationship between these two variables. Instead, we notice a positive relationship between the initial GDP per capita and the growth rate, underscoring the divergence in growth rates between provinces over the period 1995-2002.
India
Like China, India’s urban areas have experienced a disproportionately large share of the country’s growth, leading to rising income inequality. In 1986, India had a Gini coefficient of 32.22. But by 1997, its gini coefficient had grown to 37.83, an increase of 17% over a 12 year period. More recently, by 2004 its gini coefficient has steadied at 36.8. The rural gini hovered around 29 and the urban gini has fluctuated around 36 in recent years. This lack of drastic movement of the rural and urban gini cannot account for the increase in the overall gini. It therefore seems that the increase in the overall gini is due to increasing disparity between the rural and urban areas.
India’s regional inequalities have been driven mostly by the inequalities in the agriculture and service sectors (Das and Barua 1996). For example, not all states benefited equally from the sharp productivity gains of the green revolution. Also, only a few states have significantly changed the structure of their economy and driven India’s rise to global leadership in the information technology industry. Consequently, one observes trends such as the one depicted in figure 3 below where states such as Karnataka and Maharashtra lead other states such as Bihar and UP. However, urban centers such as Delhi are even wealthier than the relatively wealthy states of Karnataka and Maharashtra.
Figure A3 (appendix 1) supports this general conclusion of increasing regional inequality where the cross-sectional standard deviation in GDP per capita has increased from 2001 to 2006. Figure A4 (appendix 1) underscores this conclusion by showing a lack of β convergence across the Indian states.
Fig 3: GDP per capita time trends for Karnataka, Uttar Pradesh, Maharashtra, Bihar, and Delhi 2001-2006
3. Patterns of Growth
How has growth taken place?
Asia’s growth has been associated with the forces of globalization. Countries that have integrated into the global economy have done so by restructuring their economies. There is absolutely no doubt that Asia’s economy is more outward oriented and open than it was two decades ago. Successful economies within Asia have liberalized, albeit prudently and gradually. [7] Globalization in and of itself has been a blessing for much of Asia, but it is not a panacea and as such is independent of value. What becomes important is the manner in which globalization is taking place, how it is being managed, and the consequences it has on a large proportion of the population.
The aim of this section is to map out parts of the economy that have been the engine of economic growth. This exercise will also shed light on areas that have been unable to contribute in a significant or sustained manner to the growth process. In an ideal world, one would hope for broad-based growth that is at the very least distributed neutrally. In reality, this is very hard to achieve due to the very nature of the growth process. Comparative advantage (a relative concept), by definition, depends on inequality for its realization. It really comes down to how governments choose to manage their economies, and the paths they choose at difference stages of the development process.
A natural tendency for investors, speculators and more generally for private actors has been to divert resources from less profitable enterprises to more profitable ones. Greater returns are reaped by moving resources to areas that are more profitable. On the other hand, the public sector has always maintained a more public outlook with a strong emphasis on the provision of public goods and services. It has also usually championed equity over efficiency. An equitable distribution of goods and services (over and above a more efficient distribution) has been the voice of moral and public reasoning. The interplay between the public and the private is the locus where economic, ethical and political considerations intertwine.
Asia’s integration into the global economy has required a fundamental restructuring of its respective economies. In order to gain from trends in the global economy, it has had to focus and devote itself more resolutely to developing its manufacturing and industrial capabilities so as to carve out a niche. It has also had to develop its services sector. These two sectors together have successfully developed in a number of Asian economies: China and East and South Asia are truly part of the global manufacturing, industrial, and financial architecture. One does not have to look far or search hard to find examples of their relevance. Chinese and Asian manufacturing products flood the shelves of main streets in Europe and the United States and the on-going financial crisis reveals the extent of the inter-dependence of the financial services industry.
Where has growth taken place?
As Asia integrated into the global economy a key paradigm shift took place. Both public and private motivation was on developing the manufacturing and industrial capacity of respective economies. The key strategic partnership has been between the public and the private actors in the areas of manufacturing, industry and services. As barriers to trade and investment have been reduced, private and public capital has poured in (with the notable exception of the Asian Financial Crisis). The pay-off for both private and public entities have been clear cut: the government has been rewarded with high and sustained GDP growth and private actors have been rewarded by ever-higher returns. Both the rise in the number of billionaires and the rise in GDP for Asia have been unprecedented.[8]
Growth in GDP during the last decade and a half has mainly been driven by growth in industry, manufacturing and services for both South Asia and East Asia and the Pacific. Agricultural growth has been markedly slower to the extent that it has dragged down average GDP. The table below depicts the growth rate across sectors over two time periods, 1990-2000 and 2000-2005. The average GDP growth of East Asia and the Pacific has been 8.5% and 8.4% over 1990-2000 and 2000-2005 respectively. For South Asia GDP growth has also be formidable and sustained over the same period at 5.6% and 6.5% over the two periods respectively.
Table 1: Sectoral Growth for Countries in Asia 1990-2005
| Countries | GDP | Agriculture | Industry | Manufacturing | Services | |||||
| 1990-2000 | 2000-05 | 1990-2000 | 2000-05 | 1990-2000 | 2000-05 | 1990-2000 | 2000-05 | 1990-2000 | 2000-05 | |
| EastAsia and Pacific | 8.5 | 8.4 | 3.4 | 3.7 | 11 | 9.4 | 10.8 | 9.8 | 8.1 | 8.7 |
| Cambodia | 7.1 | 8.9 | 3.9 | 5.7 | 14.3 | 14.2 | 18.6 | 14.1 | 7.1 | 8.2 |
| China | 10.6 | 9.6 | 4.1 | 3.9 | 13.7 | 10.9 | 12.7 | 11.1 | 10.2 | 10 |
| Indonesia | 4.2 | 4.7 | 2 | 3.4 | 5.2 | 3.9 | 6.7 | 5.2 | 4 | 6.2 |
| Korea, Rep | 5.8 | 4.6 | 1.6 | -0.1 | 6 | 6.3 | 7.3 | 7 | 5.6 | 3.7 |
| Lao PDR | 6.5 | 6.2 | 4.8 | 2.8 | 11.1 | 12.1 | 11.7 | 10.4 | 6.6 | 6.7 |
| Malaysia | 7 | 4.8 | 0.3 | 3.4 | 8.6 | 4.6 | 9.5 | 5.2 | 7.3 | 5.3 |
| Mongolia | 2.7 | 5.8 | 3.7 | 0.1 | 2.3 | 7.5 | 9.7 | 5.5 | 0.2 | 7.8 |
| Philippines | 3.3 | 4.7 | 1.7 | 3.9 | 3.5 | 3.3 | 3 | 4.3 | 4 | 6 |
| Thailand | 4.2 | 5.4 | 1 | 1.9 | 5.7 | 6.9 | 6.9 | 7.2 | 3.7 | 4.5 |
| Vietnam | 7.9 | 7.5 | 4.3 | 3.8 | 11.9 | 10.2 | 11.2 | 11.5 | 7.5 | 6.9 |
| South Asia | 5.6 | 6.5 | 3.1 | 2.4 | 6.1 | 7.2 | 6.6 | 7 | 7.1 | 7.8 |
| Bangladesh | 4.8 | 5.4 | 2.9 | 2.5 | 7.3 | 7.3 | 7.2 | 6.7 | 4.5 | 5.6 |
| India | 6 | 7 | 3 | 2.5 | 6.3 | 7.5 | 7 | 6.9 | 8 | 8.5 |
| Iran | 3.1 | 5.8 | 3.2 | 5.5 | 2.6 | 7 | 5.1 | 10.2 | 3.8 | 5.1 |
| Nepal | 4.9 | 2.8 | 2.4 | 3.2 | 7.2 | 1.1 | 8.9 | -0.6 | 6.4 | 2.8 |
| Pakistan | 3.8 | 4.8 | 4.4 | 2.3 | 4.1 | 6.5 | 3.8 | 9.1 | 4.4 | 5.4 |
| Sri Lanka | 5.3 | 4.2 | 1.8 | 0.7 | 6.9 | 3.3 | 8.1 | 2.9 | 5.7 | 5.8 |
Source: World Bank, WDI 2008
Agriculture growth has been significantly less than the GDP growth for both sub-regions (table 1 above). For most, if not all, countries in table 1 agriculture has grown at a much slower pace than industry, manufacturing and the services. The average growth for agriculture over this period has been almost five percentage points lower than average GDP growth rate for East Asia and the Pacific over 1990-2005. In South Asia, predominately made up of agrarian societies, growth in agriculture has been three percentage points lower than the average GDP over 1990-2005. Between respective sectors, the widest disparity in growth rates exists between agriculture growth on the one hand, and industry, manufacturing, and the services on the other hand. The key takeaway is that for both sub-regions—East Asia and Pacific and South Asia—GDP growth has been driven primarily by sustained growth in the industry, manufacturing and services sectors. As such, industrial and manufacturing capabilities have rapidly developed, while the role and prominence of agriculture has diminished.
The diminishing role of agriculture in economic growth is further confirmed by the decrease in agriculture’s value-added contribution as a percentage of GDP since 1990. For both sub-regions the decline has been sharp. In East Asia and the Pacific agriculture’s value-added contribution has declined from 28.5% of GDP in 1980 to just 12% of GDP in 2006. Similarly, for South Asia its share in GDP declined from 34.7% in 1980 to just 18.5% in 2006. The reverse is true for the services sector, increasing its value added contribution to GDP from 26.5% to 41.3% for East Asia and the Pacific over the same period. For South Asia the increase has been slightly less, though significant over the same period. The curious observation is that the services sector really took off in East Asia and the Pacific during the 1980s, increasing by almost 10%. Industry’s value added contribution as a share of GDP has stayed, more or less, even over the period 1980 to 2006 for East Asia and the Pacific. In South Asia’s case it has shown an increase of almost 5% over the same period. In sum, the share of agriculture’s value-added portion in GDP has decreased significantly since 1980 and the industry and services sector’s value-added portions occupy larger shares in the GDP. The upshot is that Asian countries, especially in East Asia and the Pacific have restructured their economies during the last 25 years; with the focus clearly on the industry and services sectors at the expense of the agricultural and rural sectors.
Table 2: Sectoral Contribution to GDP over time, 1980, 1990, 2000, 2005 and 2006
| Agriculture, value added (% of GDP) | 1980 | 1990 | 2000 | 2005 | 2006 |
| East Asia & Pacific | 28.5 | 24.9 | 14.9 | 12.6 | 12.0 |
| South Asia | 34.7 | 29.1 | 23.9 | 19.3 | 18.5 |
| Industry & Manufacturing, value added (% of GDP) | 1980 | 1990 | 2000 | 2005 | 2006 |
| East Asia & Pacific | 45.0 | 40.0 | 44.5 | 46.2 | 46.7 |
| South Asia | 24.4 | 26.1 | 25.8 | 28.4 | 28.9 |
| Services, etc., value added (% of GDP) | 1980 | 1990 | 2000 | 2005 | 2006 |
| East Asia & Pacific | 26.5 | 35.1 | 40.6 | 41.2 | 41.3 |
| South Asia | 40.9 | 44.7 | 50.3 | 52.3 | 52.6 |
Source: World Bank, WDI 2008
4. Employment and the Phenomenon of Jobless Growth
By looking at economies through their three main sectors – agriculture, manufacturing and services – we see most economies in the region making the development transition from an agricultural based to an industrial based economy. Each sector’s contribution to GDP over time underscores the point that many of the Asian economies are no longer agriculture based. However, what is striking is that the majority of people still live in the rural areas and furthermore a significant majority of the poor (over 70%) live and work in rural Asia. The dynamics emerging are of great interest as they point to growth being concentrated among a minority of the population working in more productive sectors.
Between the three sectors, the agriculture sector employs the most number of persons, even though its contribution as value added (% of GDP) is the least and has grown at the slowest rate. Chart 1 below shows agriculture employs more persons than industry and services sectors combined. A majority of the poor reside in the rural areas which strongly suggest that they are directly employed in the agricultural sector (in the absence of a substantial off-farm economy) and/or indirectly depend on agriculture for their livelihood. Furthermore, as the poor comprise of unskilled or semi-skilled labor, their wages are consequently considerably lower compared to the average wages in industry and services. The logic is clear: agriculture is the lowest contributor to GDP, employs considerably more persons than industry and services and thus also pays, on average, relatively lower wages. On the other hand, industry and services contribute significantly more to the GDP than agriculture, generally employ fewer persons that are semi- and skilled labor compared to abundant unskilled in agriculture, and consequently on average pay relatively higher wages.
Chart 1: Employment by Economic Activity in Asia & Pacific (excluding China), 1996-2005
Source: UNDP HDR 2007/2008
The upshot of this discussion is that capital and resources have been moved to the more productive manufacturing and services sectors in line with typical development trajectory. However, the concern has been the lag in absorption of labour in these more productive sectors. This inability for the growth sectors to generate adequate employment has left a large portion of the population in a state of relative depravity. Therefore, while aggregate GDP figures show tremendous progress in growth, they mask significant variations. This phenomenon of jobless growth points to the peril of uneven development.
In the next section, the role of public policy is taken up to see how development can be more even and as a result address income inequality both through direct and indirect interventions. It is clear that a comprehensive strategy is to be developed that includes short and long-term measures to address the widening gap within and across countries. Also both generic and non-generic policy considerations are stated, highlighting the need to see the long-standing issue of inequality from new perspectives.
4. Role for Policy
Some generic considerations emerging from the analysis
Based on the Asian experience, we are now in a position to highlight what are the key elements of a strategy for achieving more inclusive growth, especially in terms of the effect on people living in poverty. These elements are summarized in the following principles:
Growth should take place in sectors in which the poor work: It is clear now that there is need to focus on agricultural growth and rural development. Over 70% of the poor in most Asian countries are engaged in rural economic activities and need support in raising living standards through public investments in rural infrastructure and services. In particular, the focus must be on raising productivity of small farms and on promoting off-farm employment opportunities in rural areas.
Growth should occur in backward and marginalized areas where the poor live: The experience of Asia-Pacific highlights the danger of widening regional disparities during the process of growth. Poverty rates are generally much higher in backward areas, sometimes over twice the national average. Therefore, the development strategy has to focus on uplift of backward areas and removal of the basic obstacles to growth. Initially, the public sector will have to take the lead through investments in physical and social infrastructure to remove these obstacles to growth. The private sector can then be encouraged to invest in such areas through the provision of appropriate fiscal incentives and tax breaks.
Growth should use the factors of production that the poor possess and enhance their capabilities: Labor demand created during the process of growth should be concentrated on creating employment opportunities for unskilled and semi-skilled workers. Labor intensive sectors should be encouraged by preferential allocations of credit and tax treatment. In addition, the ability of the poor to avail the emerging opportunities needs to be enhanced by higher investments in human development, especially on basic education and health services.
Growth must keep prices of goods and services consumed by the poor, such as food, relatively low: high rates of growth may fail to achieve significant poverty alleviation if simultaneously the rate of inflation, especially in food prices, also rises. Not only is there a need for supporting domestic food production but also for improving marketing arrangements of such items.
Therefore, an inclusive growth strategy has to focus on sectors, areas, factors of production and items of consumption which can play a special role in alleviating poverty.
Beyond this, it is also important to recognize that particular groups are more vulnerable to being excluded or marginalized from the process of growth. Special programs or social safety nets may need to be put in place to target women, youth, the landless, casual workers in the formal sector, minorities and indigenous people and the aged and disabled.
Some non-generic and other relevant considerations
Emerging issues require regional coordination: As inequality has increased a number of other factors that had remained relatively contained and dormant have come to the fore and are challenging the current social, political and financial set-up. Social conflict, both by state and non-state actors is becoming a regional issue rather than one limited to the borders of specific countries. Social and economic exclusion of groups create the circumstances rife for conflict. The political leadership in a number of countries is facing fresh challenges to its legitimacy as information has become a widely circulated public good that helps set norms and benchmarks for good governance. Financial products have developed faster than peoples’ understanding of them. People no longer understand the products they invest in or buy. The relationships developed in the financial world rests fundamentally on trust. However, the current incentive system in finance is stacked against greater transparency and regulation and hence is marked by an absence of trust rather than by its presence. In sum, the environment and natural disasters such as the tsunami, food and fuel price hikes, financial vulnerability, and terrorism by non-state actors are all regional problems requiring a regional response. Greater coordination and complementarities at the regional level would help to consolidate efforts. Responsive global and regional institutions are necessary to address a number of cross border issues that have an impact of the social structure and relations across a number of economies.
Bridging skill differentials: Although manufacturing and services have become the drivers of growth, labour remains concentrated in agriculture. Labour in agriculture is often characterized by being low or unskilled, whereas manufacturing and services employ relatively skilled labour. Consistent with theory, the skilled worker, who is relatively scarce, is able to bargain a higher wage, whereas the unskilled worker who finds himself in relative surplus has less bargaining power. Seen over time, one obvious conclusion to be drawn is the widening income gap between higher paid skilled worker and unskilled worker as the structure of the economy demands relatively skilled labor. The often misplaced idea of urban centers offering greater opportunity is partly responsible for the strong migratory forces currently at play in a number of countries in the region. Unskilled and unemployed workers are likely to remain unemployed in urban settings as well, as the demand is low of the unskilled (and high for the skilled worker). So even though people are moving from rural to urban they are not necessarily absorbed in gainful employment. There is often a disconnect between the skills in demand, and the skills developed through the existing educational curriculum and vocation training programmes. The focus needs to be on aligning education and vocational training programmes to meet the demand. Essentially, this belongs to the realm of policymaking, as it requires intervention to adjust the mechanism of supply and demand of relevant labour over time.
Education as an equalizer: Different levels of education often manifest themselves as differences in skill level among workers, and as a consequence accounts for the disparity in wages (Juhn, Murphy & Pierce 1993). Education, as a result, has also historically been pegged to level of productivity and perhaps equally important, social relations and one’s standing in society are often determined by one’s level of education. This is likely to have a bearing on inequality in areas other than income. Along with structural changes that Asian economies experience as they develop, it is imperative that levels of education keep abreast. This has not been the case so far, especially in South Asia. Most economies in South Asia spend less than 3% of their GDP on education. In some cases it is as low as 2% of GDP. Clearly, an increase in public spending on education is desirable, especially targeted towards the poor. However, an increase in public spending is not sufficient, the design, curriculum and quality of education matter greatly and are often the salient features behind successful planning. In addition, as the MDGs clearly state, there needs to be a concerted effort in achieving gender equality vis-à-vis girls and women’s education. The use of targeted cash transfers for education have been met with some degree of success, a case in point is the Progresa/Oportunidades project in Mexico (Rodriguez 2008).
Urban sustainability and population management: Managing and sustaining urban populations will be one of the central challenges for a number of countries in the region in the coming years. The distribution of populations in Asia reveals an interesting pattern where populations are either concentrated in ‘mega-cities’ (with populations of over 10 million) or live in the expanse of rural areas. Unlike Europe and the Americans, there are not many options other than these two extremes in Asia. Also, what is alarming is that migratory trends are in one direction, from rural areas towards megacities. This is, in effect, putting enormous stress on these urban centers, especially with regard to infrastructure. At the same time there is an increase in general population levels across many countries in the region. The rural areas need further development in ways that help reduce the burden on megacities. Policymakers will have to take measures to address the population boom so as to better manage the transition—this is perhaps where the development of Asia differs fundamentally from historical examples of development. The task is made manifolds harder due to the population burden. Clear and decisive measures need to be put in place to address this issue with longer-term population management strategies coupled with more immediate investments in planning of smaller cities, along with the development of rural areas to accommodate migratory trends. Development of essential infrastructure (i.e. public housing, roads, schools, sewage systems etc.) for cities and rural areas alike should complement any existing efforts.
GDP as a poor indicator of economic success—correcting misconceptions: There is been an almost universal obsession with GDP growth as a measure of economic success. It is exalted its relevance, and it has thus become an important political tool. However, rather than looking and seeing the patterns and type of growth, the focus has been restricted to aggregate GDP growth. Regional and country aggregates have thus masked significant variations in incomes. At the regional level celebrating Asia’s phenomenal growth tends to overlook the plight of the Least Developed Countries in Asia. National level focus on annual GDP growth has shifted the gaze away from large pockets of depravity that still exist. The GDP has to be seen for what it is and its limits need to be carefully articulated so that its political value reflects its true value. With improvements in technology and data collecting methods, greater emphasis needs to be paid on collecting granular data that goes beyond averages to provide a more accurate account of social and economic development. This information is invaluable if policymakers are to make informed decisions.
Concluding remarks
Rather than providing the summary of the discussion thus far, it would be useful to touch upon a couple of critical issues emerging from the analysis. The sectoral analysis revealed an important fact about Asia that although agriculture contributes least to the GDP, it employs the most number of people. This highlights two interconnected issues which are an essential part of the income inequality discourse: i) low income earners live in rural areas and directly and/or indirectly depend on agriculture for their livelihood; and ii) the productive resources of economies in the region are concentrated in manufacturing, industry and services that collectively employ less persons than the agricultural sector and require more skilled personnel. The data on agriculture clearly suggests a case of low productivity and over employment. This puts into sharp focus the need for developing more organized agricultural and rural sectors alongside creating alternative off-farm employment opportunities within the rural sector.
At the same time the development transition to secondary and tertiary sectors needs to be managed carefully so as to avoid a rapid increase in income inequality. The development of these sectors has meant increased migratory pressure due to perceived opportunities available in the manufacturing, industrial and services sectors. Currently, development of these sectors has been unable to absorb this influx of (relatively unskilled) labor. As mentioned in the previous section, this is a culmination of several factors including the unmet demand for skilled labor and the lack of opportunity and over-employment in the rural sector. As the industrial base is further strengthened, focus should be on labor intensive production using local technology. If these developments are to materialize, they are to be met by sustained investments in human capital for both industrial and rural sectors. While one intervention aims to increase the pool of skilled and productive labor, the other focuses on vocational, skill and seasonal training activities geared towards both on and off-farm employment that also facilitates gainful employment in urban areas.
If the transition from ‘developing to developed’ is to be completed by the least developed countries in Asia and the Pacific while keeping inequality in check, then the transition from rural to urban needs to be managed very carefully. The political focus needs to shift from just GDP growth, to inclusive growth. This requires that the distributional nature of growth be critically questioned. If inequalities are to persist then we should ultimately be driven by the Rawlsian maxim where inequalities are permitted only if they are to the greatest benefit of the least-advantaged members of society.
DISCLAIMER: The author is solely responsible for the views expressed in this paper and they should not be attributed to the UNDP. The author would like to thank and acknowledge Fang He for his research assistance and comments on the initial draft.
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Appendix I: Tables and Graphs
Figure A1: China: time trend in the standard deviation of provincial GDP per capita
Figure A2: China: Growth rate of GDP per capita from 1995 to 2002 against log of GDP per capita level in 1995
Figure A3: India: Time trend in the standard deviation of provincial GDP per capita.
Figure A4: India: Growth rate of GDP per capita from 2001 to 2006 against log of GDP per capita level in 2001
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Appendix II: Notes on Data
The data used for the majority of the following analysis is the Gini coefficient database compiled by Branko Milanovic. It can be downloaded from http://econ.worldbank.org/projects/inequality and also used his book, Worlds Apart: Measuring International and Global Inequality, Princeton: Princeton University Press, 2005. This database is the most encompassing database of world Gini coefficients currently available. Created in 2004, it compiles and adapts three existing datasets: the Deininger-Squire dataset that covers the years 1990-1996, the UNU Wider dataset that covers the period 1950-1998, and the World Income Distribution dataset that covers the period 1985-2000. For the Milanovic database, Milanovic only included Gini coefficients of the previous datasets that were compiled from nationally representative household-based surveys.[9] And in an attempt to supplement the Milanovic database since it only contains data up until 2000, the 2008 CIA World Factbook was also used to include Gini coefficients for years beyond 2000. However, note that these later figures may not have undergone the same rigorous filtering process as the Milanovic figures.
Additionally, the Gini coefficients for the rural and urban economies of particular countries were extracted from the UNU-WIDER WIID2 database. Since Milanovic only extracted Gini coefficients from nationally representative surveys, he left out many useful Gini coefficients that were computed from either rural or urban representative household-based or individual-based surveys. Consequently, returning to the original WIID2 database allowed rural and urban trends to be analyzed. However, because the WIID2 database compiled data from a variety of sources, care was taken to only pick the Gini coefficients from the most credible sources. There was also a deliberate attempt to sacrifice number of data points in favor of consistency. For example, China offered numerous sources for rural and urban data. Nonetheless, only one source, Chotikapanich et al 2005, was used because it contained the relatively highest quality data and a relatively broad coverage of years. Using Gini coefficients from different sources sometimes significantly changes the patterns.
For Countries
Data limitations led to an analysis on a handful of countries in Asia: China, India, Indonesia, Bangladesh, Philippines, Thailand, and Vietnam. Even then, the data quality varies by country.
For China, the 1997, 1998, 1999, 2000, and 2003 Statistical Yearbooks published by the National Bureau of Statistics of China were used to calculate the province level GDP per capita figures. All figures are in Yuan and are in current market prices. Since province level GDP per capita figures are not reported by the Statistical Yearbooks, they are crudely calculated by dividing the province level GDP figures by the province level populations.
For India, the data are taken from the Directorate of Economics & Statistics of respective State Governments, the Central Statistical Organisation, and the 2001 Census of India. The state level GDP per capita figures are denominated in current price Rupees. Also, the data for 2006 is based off a population projection conducted by the Census. Since state level GDP per capita figures are not available, they are calculated crudely by dividing the state level GDP figures by the state level populations.
The Indonesian data are from Badan Pusat Statistik (BPS-Statistics Indonesia). The GDP per capita figures are denominated in Rupiah and are in constant 2000 prices. Again, since province level GDP per capita figures are not reported, they are calculated crudely by dividing the province level GDP figures by the province level populations.
The data for the Philippines was extracted from the National Statistical Coordination Board and are denominated in pesos at 1985 constant prices. Here, region level GDP per capita figures are reported and are therefore used in the analysis.
The data for Vietnam are collected from the General Statistics Office, Viet Nam Economy in the Years of Reform, Statistical Publishing House, Hanoi and are data from 2002. The Vietnam figures are actually the gross regional product per capita as a ratio of the national average.
The Thailand data are from the report of the 2006 Household Socio-Economic Survey, National Statistical Office, Ministry of Information and Communication Technology and are denominated in Baht. Here the data are actually average monthly total income per household. Unlike the above countries, this data is not national account data but is instead compiled from a household survey.
Finally, the Bangladesh data are from the Bangladesh Bureau of Statistics and are extracted from the March 2008 “A Strategy for Poverty Reduction in the lagging Regions of Bangladesh”, published by the General Economics Division. The data here are GDP per capita at current market prices and are denominated in Taka.
[1] Taimur Khilji is a policy specialist in the UNDP Regional Center in Colombo.
[2] Please refer to the appendix sections on notes on the use of the Gini-coefficient as the primarily measure of inequality within a country.
[3] Note that this PPP adjusted GDP per capita is a chained measure, accounting for the change in price levels and changing baskets across years
[4] Even though this divergence in the regional experiences within economies has been widely observed in Asian economies, it is actually a surprising result when considering the neoclassical growth model and previous evidence in developed countries. As introduced by Solow (1956), the neoclassical growth model actually predicts convergence among regions of a country assuming that these regions have the same economic foundations leading to the same steady state. The neoclassical growth model shows that with decreasing returns to capital and labour, poorer regions should in fact grow faster than richer regions as the richer regions are assumed to have worse capital-labour ratios. This convergence between regions should then even be accelerated further by labour and capital mobility as labour flows to the richer regions, further worsening the capital labour ratio in the richer regions. This leads to even lower returns to capital. In fact, Barro and Sala-i-Martin (1991) show that the states of America and the regions of Europe have converged. Given this theory and evidence from the US and Europe, the experience of Asia is puzzling.
[5] It is estimated that between 70 % to 80 % of the Asian poor reside in rural areas (IFAD 2006).
[6] For China (Sachs and Warner 1996, Du 2002, UNDP 2005); for India (Das and Barua 1996, Deaton and Dreze 2002)
[7] Although all successful economies invariably show an increase in Export to GDP ratio it not true that all countries with a high Export to GDP ratios have sustained high growth rates. So the argument that high exports or high outward orientation stimulates growth is an erroneous inference (Rodrik 1999)
[8] It does suffice to add that the successful East Asian economies had developed local industry to the degree of being competitive in the global arena. Also, economies better placed to absorb external shocks were those with more response and flexible institutions (Rodrik 1999).
[9] Note: For some countries, the Gini coefficient was only available for a very limited set of years. Consequently, a detailed analysis of the trend in income inequality in those countries cannot be conducted. In addition, some countries were left out of the following analysis all together due to lack of data.
