Gap between poor and rich getting wider

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NORTHAMPTON: Consider the following fact; average income of the top 0.1% of US households in 2014 was $6.1 million, compared to average income of the bottom 90% of households being about $33,000 — almost 184 times less than the top 0.1%. Income disparities have become pronounced not only in America but worldwide including Asia. Being the powerhouse of growth in the global economy and being home to more than half of the world’s population, it is imperative to analyse whether the ‘growth with equity’ miracle has worked in Asia.

The recently-released Regional Economic Outlook for the Asia and Pacific has projected growth in Asia-Pacific economies to slightly decelerate to 5.25% in 2016-17. The report finds that until about 1990, Asia grew strongly and secured large gains in poverty reduction while simultaneously achieving a fairly equitable society. However, this has been broken down and in many large Asian emerging markets there has been a significant increase in income inequality.

Inequality is inimical to growth

Economic literature has found inequality to be harmful for the pace and sustainability of growth. High levels of inequality can lead to sub-optimal levels of investment in basic human rights such as education and health. Increase in inequality also leads to less inclusive and pro-poor growth. Recent studies have found inequality both in terms of income and opportunities rising in Asia, which has led governments to explicitly deal and practice a more sustainable and balanced growth model. This has been clearly stated in China’s Thirteenth Five Year plan (2016-20) and India’s Twelfth Five Year Plan (2012-17).

Measuring Inequality in Asia

The Gini coefficient is a measure of statistical dispersion which exhibits the dispersion in the income of a country’s residents and is one of the most commonly used measures of inequality. The level of the Gini coefficient is now higher in Asia than the rest of the world. The average gini coefficient rose from 36 in 1990 to about 40 in 2013 in Asia, relative to a rise of less than 2 points for the rest of the world during the same period.

Amongst the emerging market economies, inequality has been persistent and rising in India and China. Much of this increase is explained by spatial disparities especially that between urban and rural areas. According to the report, higher inequality has also lowered the effectiveness of growth to combat poverty and prevented the building of a substantial middle class.

The Pakistani picture

According to the Poverty and Inequality Statistics published by the World Bank, the Gini coefficient for Pakistan has fallen. Spatial inequalities, however, plague Pakistan too and a recent report by the UN titled ‘Multidimensional Poverty in Pakistan’ for 2014-15, states that although poverty in urban areas of Sindh stands at 10.6% an alarming 75.5% of rural areas in the province are mired by poverty.

Similarly, although Punjab has accounted for the highest reduction in poverty but districts in southern Punjab remain starkly poor.

The divide between urban and rural areas also creates inequality of opportunities with the poor in rural areas having little access to education, health and financial services. This sows the seeds for wider inequality in the future.

Policy frameworks to combat inequality

Access to spending on development projects, education and capital expenditure have been found to be some of the crucial drivers of inequality in Asia as they have disproportionately benefited those who are at the higher end of the income distribution. Policies should be designed to focus on three main areas to fight inequality.

Firstly, expanding and broadening the coverage of social spending, to achieve efficiency and equity.

Secondly, there also needs to be a concerted effort to enhance the coverage of financial services to the bottom 40% of the population. Lastly, legal protection for regular and non-regular workers should be prioritised so as to provide job security and flexibility.

These policies have proved to have beneficial impacts in other South Asian countries such as Thailand, Philippines and Malaysia.

The writer is an economist and
ex-central banker

 

 

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