Asia faces challenge of income disparity

Asian economies are grappling with slowing growth but for most of them, from China to the Philippines and from India to Fiji, the challenge is exacerbated by the need to close growing income gaps.

And slowing growth may hamper those efforts by hitting government revenues used to fund education, healthcare, employment training, clean water and sanitation, and the myriad other programs.

Inclusive growth is key to not only eliminating abject poverty, but to making it possible for those in the worst of conditions to continue to climb the economic ladder, ideally with secure prospects for themselves and future generations.

But in Asia, efforts to fight poverty have languished. Billions of people who once lived in absolute poverty no longer do so, but they are still living in relative poverty. Their lifestyles are still a far cry from the conditions that the rapid economic growth in the region was expected to help achieve.

"The change in the last three decades has been dramatic, more dramatic than any other region," Stephen Groff, vice-president of operations at the Asian Development Bank, says. "Despite tremendous progress that has been made in poverty reduction in the region, it remains the home to most of the world's poor."

The ADB expects economic growth across the region to rise to 6.4 percent by 2015 from 6.1 percent last year. But it likely to be uneven: Absolute poverty is unarguably lower but income inequality is on the rise. People are getting richer but the rich-poor gap is getting bigger.

The Gini coefficient, a widely used measure of inequality, has increased from 0.39 to 0.46 in developing Asia as a whole. A higher number represents more inequality, with a figure of 1 representing total inequality.

In the past 25 years, the Gini has risen from 0.29 to 0.38 in Indonesia. In Bangladesh, it has risen from 0.27 to 0.32 in the same period. Hong Kong, with a Gini of 0.54, has the widest income gap in Asia.

The problem is significant because greater inequality means that all the economic growth in the region over the past few decades has benefited a small minority far more than the vast majority at the bottom of the economic pyramid.

To ensure economies grow sustainably, policymakers have to promote inclusive growth as part of any fiscal plans. Governments have the option of directing more resources to meet inclusion targets but they may not have much time. Changing demographics and environmental concerns tend to cause greater inequality and both are moving in the wrong direction.

"Widening income gaps in developing Asia strengthen the case for government response," says Park Donghyun, principal economist with the Economics and Research Department at the ADB. "Making the growth process more inclusive is likely to require some expansion of public spending. But expanding public expenditure without adequate revenue mobilization can be unsustainable."

Park explains that the region's past growth boosted living standards and lifted millions out of poverty, but now widening inequality is undermining this success.

"International experience shows that public spending can reduce income inequality. For example, government spending on education and healthcare broadens access for the poor to these vital services and thus levels the playing field."

Education may be a key area of focus. More access to education facilitates more active participation in the economy.