Wednesday, April 16, 2014

Rising inequality a blemish on Asia’s growth story


David Pilling

APRIL 15 2014

Deng Xiaoping said: “Let some people get rich first.” He was referring to China, but it turns out he could have been talking about Asia as a whole.

In the past two decades, rapid growth across much of Asia has widened the wealth gap. That has caused “a great convergence” with Latin America, said a development official. While inequality has narrowed in much of South and Central America, in Asia it has been going the other way, said Mr Vinod Thomas, Director-General of the Asian Development Bank (ADB). Asian inequality as measured by the Gini index rose about 1 per cent each year throughout the 1990s and 2000s.


In a new report, the ADB looks at the effect growth has had on poverty reduction, inequality and social welfare. It concludes that raw growth numbers should no longer serve as the be all and end all in assessing a country’s performance. Broader measures of “improvements in human welfare and living standards”, brought about by what it calls “an inclusive pattern of growth”, are equally important.

In the 1990s, gross domestic product (GDP) in the Asia-Pacific region grew at an annual rate of 9 per cent, slowing to 8.2 per cent in the 2000s. But average living standards did not keep pace. In the 1990s, household consumption grew far more slowly than GDP — at only 5.7 per cent. As a result, consumption as a percentage of GDP fell across a large part of the region. Ordinary people missed out on much of the wealth their nation was theoretically creating.

True, fast growth has dramatically cut the number of “absolute poor”, defined as living on US$1.25 (S$1.60) or less a day in 2005 purchasing power parity terms. The number of people in this desperate category fell from 1.23 billion in the 1990s to 790 million in the 2000s. In China alone, the number of absolute poor fell from 520 million, or 43 per cent of the population, in the 1990s, to 230 million, or 17 per cent, in the 2000s.

However, the record on reducing rates of “moderate poverty” — defined as below US$2 a day, is less impressive. Numbers in this category fell considerably more slowly. Much of the growth, in other words, went to those who were already better off, allowing them to pull further away from the pack. In the 1960s and 1970s, Asian economic expansion was fairly equitable. It has been far less so in recent decades. In a few countries, such as Vietnam and the Philippines (where it could hardly get much worse), inequality has fallen in the past decade.

But these are the exceptions. In the most populous countries, including China, India and Indonesia, inequality has risen sharply. In China, this is largely because of the gap between those living in cities and those stuck in the countryside. In India, by contrast, inequality has risen sharply among city-dwellers.


Nor do countries in Asia appear to have done enough with the growth they have generated. In about half of Asia’s countries, including China, India, Indonesia and the Philippines, spending on education is less than 4 per cent of GDP, compared with an average of 5.2 per cent in advanced countries. The ADB also found that health outcomes had generally lagged behind economic performance.

The study is partly aimed at the ADB itself. The report concludes that the organisation has been too focused on top-line growth and not enough on broadening the impact of economic development. But there are implicit lessons for governments, too.

Inequality clearly matters in Asia. A Pew poll found that 82 per cent of Indians see it as a major problem. In Thailand, supporters of Thaksin Shinawatra, the self-exiled former Prime Minister, have been mobilised by a sense of social injustice born of income disparity. On the other hand, attempts to level the playing field — such as Malaysia’s positive discrimination laws — have opened social wounds of their own.

In India, in particular, economists and policymakers have been debating for years whether the government should prioritise growth or focus instead on improving the social conditions under which growth can flourish. The better health, literacy and female empowerment indices in much poorer Bangladesh are often held up in India as evidence that growth alone is not sufficient to transform people’s lives.

The ideal, of course, is to have both: To generate as much growth as possible, then to ensure that this confers the greatest opportunity on the greatest number of people. That means providing the public goods — the social and physical infrastructure — that governments are often best placed to provide. It means building a fair and stable tax base, something lacking in many Asian countries. It also means squeezing out corruption and crony capitalism such that advantage is not conferred on those with the best connections or the least scruples. It may mean some wealth redistribution, too, though this needs to be carefully targeted. The sort of blanket subsidies that have been favoured from India to Indonesia often help the middle class and the rich more than the poor.

Asia’s fast growth has, of course, done wonders for poverty reduction. It has raised all boats. But some boats are still much leakier than others.

The Financial Times

[The above article was published on 15 April 2014. But about 1 year ago, Kishore Mahbubani wrote this article (below) with a similar message or theme, though with a slightly different focus.]

Are Singaporeans ideological prisoners? 

May 11, 2013


Singapore needs to rid itself of the false assumptions that underpinned the Reagan-Thatcher revolution

By Kishore Mahbubani For The Straits Times

As Singapore undergoes its mighty metamorphosis and develops a new soul and character over this coming decade, one of the biggest challenges it will have to deal with is its position on the vexing and age-old question of "equality". And it would be absolutely foolish for us to believe we will arrive at a new consensus through purely internal discussions. Global trends will influence us too.

John Maynard Keynes was dead right when he said: "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." This is equally true of Singapore's policymakers. Hence our ideas on equality have also been affected by the conventional wisdom of the times.

Left of centre

WHEN Singapore became self- governing in 1959, the prevailing ideas of the British left influenced us. Both Dr Goh Keng Swee and Mr S. Rajaratnam had spent time in London and believed that all citizens should be given an "equal opportunity". Fortunately, to defeat the communists, the government demonstrated that it could be better at providing water pipes, health clinics, schools and public housing to improve the lives of the people at the very bottom. This deep and profound concern for the people at the very bottom reflected both an internal political imperative to "win the ground" as well as an external ideological consensus that the best societies were those that helped the poor.

In the 1960s, 1970s and, perhaps, the 1980s, Singapore was clearly left-of-centre. 
Fortunately, we were moderately left-of- centre and we also believed that markets were the best agency for promoting economic growth. The role of the state was to moderate excessive capitalism and to distribute the effects of economic growth. Long before the word "inclusiveness" became fashionable, Singapore believed that all citizens should be treated equally.

The best symbolic demonstration of this ideological conviction was the decision to build HDB estates in the expensive Holland Village area. To understand how unique Singapore is, ask yourselves in which other city in the region do you find public housing in the most expensive good class bungalow area. And we even built an HDB estate on very expensive reclaimed land in Marine Parade. Our attitude then was that the poor should be given an equal opportunity to live on expensive real estate.

Reagan-Thatcher revolution 

THEN came the Reagan-Thatcher revolution of the 1980s. Even though that ideological revolution was sparked by the socialist excesses of the United Kingdom and Europe and the excessively high taxes in the United States, and even though Singapore did not have these socialist excesses, our minds were also influenced by this ideological revolution. Hence, our policies shifted towards right of centre. And we were not the only ones to be ideologically affected. Even the Chinese Communist Party government was affected by this global trend.

One of the most charming stories I have ever heard was told to me by Mr Montek Singh Ahluwalia, currently India's Deputy Chief Planner. In the early 1990s, a group of Chinese economists arrived in New Delhi and described the series of economic reforms that they planned to implement. When they finished, one Indian economist timidly asked: "But do you realise that if you implement these reforms, there will be rising inequality in Communist China?" The lead Chinese economist smiled broadly and replied: "We certainly hope so."

And why did this Chinese economist say this? He did so because the Reagan-Thatcher revolution had convinced economists all over the world that rising inequality would lift all boats. In short, when the rich got richer, the poor would get richer too. There can be absolutely no doubt that the bold economic reforms of then-Chinese premier Zhu Rongji and his team lifted hundreds of millions out of poverty in China. The same was equally true in India.

In its time, the Reagan-Thatcher revolution did a lot of good. Hence, it also permeated thinking in Singapore. We also believed that it was good for the rich to get richer. A symbolic demonstration of this new ideological conviction was the decision to allow a rich gated community to emerge in Sentosa. Since I know first-hand how much some of our founding fathers disapproved of the gated community in Makati, Metro Manila, it provided real proof that our convictions had changed.

No trickle-down effect

WE NOW live in a time where it is becoming increasingly clear that the Reagan-Thatcher revolution has gone too far. Ironically, despite their different systems, both the US and China face strong challenges of rising inequality. The Gini coefficients in both countries have worsened from 0.43 in 1990 to 0.47 in 2010 in the United States, and from 0.35 to 0.47 over the same period in China.

At first sight, the problem may seem worse in the US, where the top 1 per cent have seen their incomes rise by 275 per cent over the past 30 years while the incomes of the bottom 20 per cent have grown by only 18 per cent in the same period.

Yet the big advantage that the US has is that most Americans believe that they can succeed and, equally importantly, many of the extremely rich in America are also extremely generous. As of now, 105 billionaires have signed the "giving pledge" in which they promise to give away more than half their wealth during their lifetime or after their death. I honestly don't know how many Singapore or Asian billionaires have signed such a pledge.

This global trend towards rising inequality has also swept Singapore. Our Gini coefficient has also risen from 0.43 to 0.46 from 1990 to 2010. This is perfectly normal. As the most open economy in the world, we are naturally affected by global trends. In the 1990s, we believed that all Singaporeans would benefit from rising inequality. In the 2010s, we know that this has not happened. Contrary to what the proponents of trickle-down economics suggested, growth in the last decade has made Singapore more unequal.

Hence, the time has come for all Singaporean policymakers to ask themselves a simple question: how many of the assumptions in our minds are still influenced by the Reagan-Thatcher revolution? And if we find some, how do we scrub them out?

The good news is that this process has begun. We should cheer Deputy Prime Minister Tharman Shanmugaratnam's recent statement that the Cabinet is now left- of-centre. And we should cheer the Robin Hood Budget he presented this year. This is exactly where Singapore should be in this current phase of its metamorphosis.

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