Wednesday, April 11, 2012

Rising inequality is eating up growth dividend in Asia

A latest ADB report argues that “Asia’s rapid growth is leaving millions behind, causing a widening gap between rich and poor that threatens to undermine the region’s stability.”

The striking point of the report is the estimate 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 report states that the richest 1% of households account for 6% to 8% of total income. Close to 20% of total income went to the wealthiest 5% in most countries. It has fascinating numbers on inequality of opportunity in access to education, health and public services.

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.

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.

Governments need to focus on policy options for reducing inequality, the report says. These include the creation of quality jobs; increased spending on education and health; and expanding social protection including conditional cash transfers for the poor. Other key policy options include switching fiscal spending from untargeted price subsidies, such as on fuel, to targeted transfers; greater and more equitable revenue mobilization; and more investment in infrastructure to reduce imbalances between developed and lagging regions.

The ADO 2012 is silent about the case where you have low growth, but both poverty and inequality are decreasing (its Nepal’s case). The latest national poverty estimate based on the National Living Standard Survey 2010/11 (NLSS III) shows that 25.2 percent of the population lived below the absolute poverty line. Similarly, the latest US$1.25 a day poverty estimate based on data from NLSS III reveals that about 24.82 percent of the population is living below the globally comparable absolute poverty line. Furthermore, the Gini index—a popular measure of inequality—has declined from 43.83 in 2003 to 32.82 in 2010, according to WB estimates. The CBS estimated Gini index at 41.4 and 32.94 in 2003/04 and 2010/2011 respectively. Meanwhile, income or consumption of those in the middle of income deciles (i.e. middle class) has also increased remarkably. Obviously, the main factor here is remittances.

The ADB estimates that Nepal’s GDP growth would be 4.5% and 4% in FY2011/12 and FY2012/13 respectively. Inflation to be 8% and 7% in the two years and current account balance (share of GDP) to be 0.5% and 1%.

I am wondering why the ADO 2012 doesn’t discuss the low growth but declining poverty and inequality in Nepal (looks like a rare case). Also, it is a bit unsettling to not see the Nepal chapter of ADO 2012 not touching upon this issue though one of the main themes of the report is growth and inequality.

Here a synopsis of what the ADO states about Nepal’s economic scenario:

Growth slowed in FY2011 on weaker remittance inflows, a downdraft in real estate, fuel and power shortages, and continued political uncertainty. Inflation stayed hovering around the double-digit threshold, and the banking system came under stress. The outlook is for a modest pickup in growth but with some progress in bringing down inflation. Timely completion of the peace process, including an agreement on a federal structure and on a new constitution, would allow political leaders to focus on spurring growth and development.

Here is a synopsis of South Asian growth scenario:

South Asia will see growth improve a shade in 2012 to 6.6%. Growth in 2011 fell sharply to 6.4%, mainly reflecting India’s marked monetary tightening in the face of persistent inflation and slumping investment. Growth in Pakistan declined because of disastrous flooding, although Bangladesh and Sri Lanka did well on brisk exports. The pace of India’s growth is projected to edge up to 7.0% in 2012 and 7.5% in 2013, providing most of the lift for subregional growth to reach 7.1% in 2013. Pakistan’s growth will advance only slightly in both years because electricity will remain a bottleneck on the supply side. South Asia’s inflation is expected to fall from 9.4% last year to 7.7% in 2012 and further to 6.9% in 2013. Some cutbacks in the heavy fuel and electricity subsidies in most countries are expected, and will set a floor to how far inflation can fall.