An Achilles’ Heel

AuthorRavi Balakrishnan, Chad Steinberg, and Murtaza Syed
Positiona Deputy Division Chief in the IMF's Western Hemisphere Department; is a Senior Economist in the IMF's Strategy, Policy, and Review Department; and is the IMF's Deputy Resident Representative in China.

Over the past 25 years, Asia has grown faster than any other region of the world, leading many to label the coming years the “Asian Century.” With the region’s successful integration into the global marketplace and its large middle class increasingly coming to the fore, there are good reasons to think that the world economy will increasingly shift toward Asia in the coming decades.

However, Asia’s fortunes are threatened by a surge in inequality that has accompanied that quarter century of growth. Paradoxically, the same growth that reduced absolute poverty has created a widening wedge between haves and have-nots. This polarization has not only tarnished the region’s economic achievements but, left unaddressed, could leave Asia’s promise unfulfilled. As a consequence, policymakers throughout the region are looking for ways to arrest rising inequality and make growth more inclusive.

We look at what lies behind this worsening income distribution, why it matters, and what can be done to make Asian economic growth more inclusive.

Inclusive growth matters

Society should be interested in confronting inequality of income and wealth not just for ethical reasons but because it also has more tangible implications.

For a given growth rate, rising inequality typically means less poverty reduction. A growing body of research also shows that income disparities are associated with worse economic outcomes, including lower growth and greater volatility. At a fundamental level, income inequality is now widely thought to retard growth and development, for such reasons as limiting the accumulation of human capital in a society (see “More or Less,” in the September 2011 F&D). Recent work by Berg and Ostry (2011) also argues that unequal societies are less likely to sustain growth over a long period.

The most commonly used summary measure of income distribution is the Gini index. It varies from zero, which signifies complete equality because everyone has the same income, to 100, where there is total inequality because just one person has all of it. The lower the Gini index, then, the more equitably income is distributed among the various members of society. Relatively egalitarian societies like Sweden and Canada have Gini indices between 25 and 35, whereas most developed economies are clustered around 40. Many developing economies have Gini indices that are even higher.

Changes over time in a country’s Gini index can help demonstrate whether economic growth has been “inclusive”—that is, whether its benefits are increasingly shared by people at all income levels. A falling Gini index would suggest that the distribution of income is becoming more even.

More narrowly, we could home in on the most vulnerable—say, for example, the bottom 20 percent of the population—and see how much of the fruits of growth accrue to them. For example, we could ask how a 1 percent increase in national income affects them. If their incomes rise by at least 1 percent, growth can be said to be inclusive. But if the incomes of the poor rise by less, growth is not inclusive, because it leaves them relatively worse off.

Asia’s blemished record

Over the past two and a half decades, growth in most Asian economies has been higher, on average, than in other emerging markets. This growth has...

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