Asia's widening divide between rich and poor is not just a moral issue. The Asian Development Bank's Rajat Nag tells Stefanie Eschenbacher that rising inequality will reduce the region's growth potential.
Four-fifths of Asia’s population live in countries with rising inequality, an issue that creates major challenges for the region.
Treating developing Asia as a single unit, the Asian Development Bank says its Gini coefficient has risen from 39 to 46 over the past two decades.
The Gini coefficient is the most commonly used measure of inequality, whereby zero reflects complete equality and one represents complete inequality.
“While Asia has seen very impressive growth, which has reduced poverty, the gap between rich and poor has widened,” says Rajat Nag, managing director general at the bank.
Developments that have allowed Asia to prosper – such as technological progress, globalisation and market reforms – have also created inequality because not everyone has the same opportunities.
“We need to look at how we can make growth more inclusive,” says Nag. “We need to create opportunities and make sure everyone has access to education, health care and things such as technology.”
Inequality is not just a moral and social issue. Rising inequality, Nag says, leads to less social cohesion and reduces growth potential.
He highlights the importance for Asian countries to pursue inclusive economic growth strategies, implement a fair tax system and review existing development programmes.
Fuel subsidies, for example, are an inefficient form to help poor people because the rich consume more fuel and will get a disproportionate advantage.
“A better system is to have government subsidies for targeted projects, such as cash incentives for poor people to send their children to school,” says Nag. “Fiscal management has to be responsible and needs to have a specific target to enhance growth and reduce poverty.”
Asia has already cut the number of extreme poor by 430 million since 2005, but it remains home to two-thirds of the world’s poor.
Much of the region has sustained economic growth even during the global financial crisis, but the slowdown elsewhere in the world has led to significant reduction in investment growth.
With businesses all over the world deleveraging, the region has seen outflows.
“The volatility of capital flows is what we are most concerned about,” he says. “
What we want is investment in infrastructure or manufacturing. China has benefitted from this, for obvious reasons, but the opportunities are greater in other countries.”
Investing in other parts of Asia, he adds, is also a means for diversification. There are some sectors on this continent that already show signs of overheating. Property is the prime example. Inflows from foreign investors are one reason; a lack of investment opportunities domestically is another.
Much of Asia’s economic growth has been based on exports to Europe, the United States and Japan.
“We believe Asia needs to be a consumer as well as a producer,” says Nag, adding that many countries in Asia need to rebalance.
Regional saving rates are high, mainly because there is no welfare network. To encourage consumption, he says, countries will have to build a social protection network, start pension reforms and insurance.
Small businesses, which often operate in the informal sector, are the backbone of many economies in Asia. Nag says access to viable credit for these small businesses is important, too.
“If done properly, it will result in a healthy competition,” he adds. “Good governance, the rule of law and the application of law, are key factors in Asia’s development.”
The Asian Development Bank’s main devices for assistance are loans, grants, policy dialogue, technical assistance and equity investments.
Rajat Nag is managing director general at the Asian Development Bank
©2012 funds global