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Economy

Asia's Growing Pains

Juzhong Zhuang

The single biggest policy issue facing Asia is how to sustain rapid economic growth that reduces poverty and is socially inclusive and environmentally sustainable.

The challenges are all the greater given rapid population growth in much of the region, the necessity to rebalance growth in the light of the global financial crisis, and the multiple needs of responding to climate change.

Inclusive growth, with its focus on creating economic opportunity and ensuring equal access, will play a pivotal role in addressing these challenges. More and more countries in developing Asia are adopting inclusive growth as the goal of policy.

India's budget this year clearly identifies fostering high rates of growth and broadening inclusiveness as key objectives. Similarly, in March, China's budget emphasised improving the lot of the rural population as part of the effort to build a 'harmonious society' - a concept closely related to inclusive growth.

The recognition of the importance of inclusive growth has been triggered by rising concerns that the benefits of economic growth have not been equitably shared. Although growth has led to a significant reduction in poverty, the region remains home to two-thirds of the world's poor. And in a large number of countries, many human development indicators continue to lag behind.

Malnutrition among children under five years of age, for example, is worse in South Asia than in sub-Saharan Africa. Half of Asia lives without basic sanitation and 900 million people without access to electricity.

Equally disturbing, a recent Asian Development Bank study shows that a large number of developing Asian countries have seen their Gini coefficient - a measure of income inequality - increase in recent decades. The rich are getting richer much faster than the poor.

There is also unequal access to basic social services such as education and health, exacerbated by income inequality. In Indonesia, children from the poorest households are five times more likely to be out of school than those from the richest. In India, a child from a poor household is three times less likely to live past the age of five than a child from a rich household.

How should Asia's policy makers react to the increases in inequality? There is no simple answer.

On the one hand, there is good reason to be concerned about the growing inequality. Increasing inequalities could imply a slower pace of poverty reduction. For a given growth rate, a growth process in which inequalities are increasing sharply will lower poverty reduction. There are also compelling reasons why high levels of inequality dampen growth prospects. High inequality could foment social unrest and weaken institutions, which in turn can slow growth.

On the other hand, economic development is likely to entail processes that increase inequality. Development, observed Nobel economics laureate W. Arthur Lewis in the 1950s, 'does not start in every part of the economy at the same time'. Just look at China: Most of its spectacular growth occurred in its export-driven provinces along the east coast. Some have also argued that designing and implementing policies to combat inequality is extremely difficult and could even reduce economic growth.

Both arguments have merits. But they also point to the need for a nuanced analysis of inequality and clearly defined inclusive growth strategies. Critically, policy interventions aimed at tackling inequality need to distinguish between two types of inequality. One is driven by unequal access to opportunities and circumstances beyond the control of the individual. The other reflects the rewards and incentives that a market economy provides for citizens who work harder, look for opportunities and take risks in seizing them.

It is the unequal access to opportunities that must be a non-negotiable target of reform. The provision of basic health care and education to empower the poor is fundamental. It is also essential to improve access to markets and basic productive assets by putting in place good policies, establishing sound institutions and levelling the playing field. Also, the developing of social safety nets to prevent extreme poverty should be an important part of policies for inclusive growth.

At the same time, it is critical that more jobs be provided for the poor. In attacking poverty, the key is in generating productive, well-paying and decent job opportunities for the workforce.

Economic crises, climate change and population growth mean that public resources will be squeezed to meet competing needs. Done right, an inclusive growth strategy that expands equal access to economic opportunity - not excessive income redistribution - will not empty the public purse or crimp growth.

Asia has embraced the inclusive growth agenda. Now it needs to make it work.

The writer is an assistant chief economist at the Asian Development Bank.