Both the communist China and democratic India are witnessing a similar syndrome; a widening rich-poor gap, according to a new report from the Asian Development Bank (ADB) released today.
The Gini coefficient – a key measure of inequality – grew in People’s Republic of China (PRC) to 43 from 32 and in India to 37 from 33 between the early 1990s and around 2010. "Considering the region as a single unit, the Gini coefficient has leapt from 39 to 46 in the last two decades," the ADB's flagship publication revealed.
"Asia’s rapid growth is leaving millions behind, causing a widening gap between rich and poor that threatens to undermine the region’s stability," it said, adding that another 240 million people could have been lifted out of poverty over the past 20 years, if inequality had remained stable instead of increasing as it has since the 1990s.
The Asian Development Outlook 2012 — ADB’s annual flagship economic publication — reported that income divisions are rising markedly in the region, where the richest one per cent of households account for six per cent to eight per cent of total income. "Close to 20 per cent of total income went to the wealthiest five per cent in most countries," said the report revealing that the share of income accruing to the richest households has increased over time.
Unequal access to education, health and other public services contributes greatly to growing inequalities, further hindering opportunities for the poor to raise their living standards. School drop-out rates are up to five times higher for children in the poorest families, while the chance of a poor infant dying at birth can be 10 times higher than those of a child born to a rich family.
"Inequality leads to a vicious circle, with unequal opportunities creating income disparities, that in turn lead to dramatic differences in future opportunities for families," according to ADB's chief economist Changyong Rhee.
Highly uneven distribution of new technology, infrastructure and investment is further fueling the divide, particularly between rural and urban areas, and coastal and inland provinces. In China, rural-urban and interprovincial differences account for the bulk of inequality.
In spite of developing Asia’s great success in raising living standards and reducing poverty, swelling income disparities threaten to undermine the pace of progress, it said, suggesting the regional policy makers to ensure that the benefits of growth are widely shared.
"Skill premiums have risen in many countries, and better educated workers are enjoying much higher income growth," the report said, adding that technological progress favours capital over labour, with the share of labour income in gross domestic product (GDP) declining and that of capital increasing in many countries. "The abundance of labour relative to capital in the region is also a contributing factor to the declining labour income share.
"Governments need to focus on policy options for reducing inequality, the report suggested. "These include the creation of quality jobs, increased spending on education and health, and expanding social protection including conditional cash transfers for the poor," it said.
"Other key policy options include switching fiscal spending from untargeted price subsidies like on fuel, to targeted transfers, greater and more equitable revenue mobilisation and more investment in infrastructure to reduce imbalances between developed and lagging regions."
The flagship publication of the ADB also provides a comprehensive analysis of economic performance for the past year and offers forecasts for the next two years for the 45 economies in Asia and the Pacific that make up developing Asia.
Despite weak global demand, Asian Development Outlook 2012 expects that developing Asia will largely maintain its growth momentum in the next couple of years, in an environment of easing inflation for most regional economies, although policy makers must be alert to further oil-price spikes arising from threats of oil supply disruptions.
The report sees that the greatest risk to the outlook is the uncertainty surrounding the resolution of sovereign debt problems in the eurozone. Still, in the absence of any sudden shocks, developing Asia can manage the effects on its trade flows and financial markets.