Rising income inequality a threat to Asia's growth

Developing Asia's rapid growth in recent years has given rise to a widening rich-poor divide that threatens to undermine the region's growth and stability, but governments can address the problem via shifts in spending priorities, the Asian Development Bank said.

The region must spend more on education and health, create quality jobs and invest in infrastructure to reduce imbalances between developed and lagging rural areas so as to prevent social problems that can lead to inefficient populist policies, the Manila-based ADB said on Wednesday.

In its Asian Development Outlook 2012 report, the bank said if inequality in the region had remained stable over the past two decades, growth over the years would have lifted 240 million people more out of poverty, the equivalent of 6.5% of developing Asia's population in 2010.

But instead, inequality widened even as Asia's economic growth took off.

In the same report, the ADB said the region's emerging economies were set to cool this year before rebounding in 2013, fuelled by strong domestic demand, with risks coming from slackening trade flows owing to continued uncertainties in the euro zone.

Developing Asia is set to grow 6.9% this year, slowing from 7.2% in 2011.

This year's growth forecast for 45 economies in Central Asia, East Asia, South Asia, Southeast Asia and the Pacific was lower than the 7.5% estimate in the ADB's September update of the 2011 Asian Development Outlook.

But growth should pick up speed to 7.3% in 2013 as the region adjusts toward a more sustainable long-run growth path, the ADB said.

Income gap

The share of income going to the richest households has increased in the past decade, with close to 20% of total income cornered by the wealthiest 5% in most countries in the region, the bank said.

"Inequality can weaken the basis for growth itself. High and rising inequality can curb medium-term growth by reducing social cohesion, undermining the quality of governance, and increasing pressure for inefficient populist policies," it said.

The Gini coefficient, a key measure of inequality, has risen sharply since the early 1990s in the three most populous countries and drivers of the region's rapid growth - China, India and Indonesia.

Primary drivers of the region's rapid growth - technological progress, globalisation, and market-oriented reform - were the same factors that create a wedge between the rich and poor, with the highly skilled, capital rich, and urban centres favoured under this growth model, leaving out those without access to resources.

Shifts in fiscal policy can help correct the inequality.

Governments can develop and spend more on better targeted social protection schemes, including conditional cash transfers which serve as incentives for the poorest of the poor to seek health care and send their children to school, a programme the Philippines has used widely, the ADB said.

While Asia's inequality levels were generally lower than those in developing regions, incomes were becoming more equitable faster elsewhere, such as in Latin America, it said.

As to the region's growth outlook, the greatest risk was uncertainty surrounding the resolution of sovereign debt problems in the euro zone, the ADB said, adding there was no clear case for policy makers in the region to pursue short-term fiscal or monetary stimulus measures.

Inflation was not an immediate threat with easing food prices and slower export demand in the region, although geopolitical conflicts in the West Asia could deliver a nasty shock, it said.

The region has scope to deliver the needed macroeconomic policy response in the case of major external risks to growth, with generally narrower budget deficits, it said.