Transcript Rising Inequality and Polarization in Asia Trends, Causes and Potential Responses Wanda Tseng Deputy Director, Asia and Pacific Department International Monetary Fund September 2006

Rising Inequality and
Polarization in Asia
Trends, Causes and Potential Responses
Wanda Tseng
Deputy Director, Asia and Pacific Department
International Monetary Fund
September 2006
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A. What do we know?
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Over the last decade, income distributions
across Asia have worsened significantly…

Unprecedented. Recent trend is in contrast to
region’s past record of “equitable growth”
–
–
–
Between 1965 and 1990, East Asia grew faster than
any other region
Yet maintained equitable distribution of income
Indeed, inequality fell in both NIEs and ASEAN-4

Broad-based. Rise in inequality extends to
South Asia, where inequality traditionally low

Pronounced. Today, China more unequal than
US or Russia; Japan more than OECD average
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…as reflected in a broad and pronounced
rise in inequality.
Change in Gini Index, Last Ten Years
(Gini Points)
Sri Lanka (40.2)
Nepal (47.3)
China, urban (33.3)
Hong Kong SAR (51.4)
China, rural (36.3)
Philippines (46.1)
Singapore (48.1)
Korea (33.1)
Lao PDR (34.7)
Bangladesh (31.8)
Malaysia (49.2)
Taiwan POC (33.9)
New Zealand (33.7)
Japan (31.4)
Thailand (42.0)
Australia (29.4)
India, urban (35.0)
India, rural (28.1)
Indonesia (34.3)
Vietnam (34.4)
-6
-4
-2
0
2
4
6
8
10
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At the same time, particular attention is
being paid to polarization.


…or emergence of distinct socio-economic
groups
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Gap between rich and poor widens
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Gap between urban-rural or coastal-inland
Although differs conceptually, polarization
often moves together with inequality
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Asia’s economies have also become
more polarized, as suggested by a
widening gap between rich and poor…
Change in Decile Mean Ratio (D9/D2), Last Ten Years
Korea (5.9)
Sri Lanka (3.8)
Malaysia (6.1)
China, urban (3.4)
Philippines (5.2)
China, rural (3.5)
Nepal (4.1)
Lao PDR (3.2)
Japan (4.9)
New Zealand (4.4)
India, urban (3.6)
Bangladesh (2.9)
Thailand (4.3)
Australia (3.7)
India, rural (2.7)
Indonesia (3.1)
Vietnam (3.3)
-1.0
-0.5
0.0
0.5
1.0
1.5
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Income disparities matter because they
can…
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Hinder poverty reduction
•
Limit opportunities for social mobility, in particular
when polarization is high
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Lead to inferior macroeconomic outcomes
•
Result in resistance to reform and conflict
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B. What explains these trends?
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1. Skill-biased technological change.

Shifts in production technology that favor skilled
over unskilled labor (e.g., IT revolution)
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Predicts an increase in relative productivity (and
hence demand) of skilled labor

Which leads to rise in wage dispersion, and hence
inequality
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Indeed, wage dispersion has widened
in Asia’s labor markets…
Change in Wage Dispersion, Last Ten Years
(percentage points)
Thailand (51.5)
Hong Kong SAR (46.4)
Philippines (21.1)
India (75.0)
Australia (25.1)
Bangladesh (49.4)
Korea (31.4)
Japan (29.1)
China (24.3)
Singapore 41.9)
Sri Lanka (35.4)
-5
0
5
10
15
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…as skill premia have risen, reflecting
increased demand for skilled labor.
Annual Growth of Real Wages by Skill or Education, Last Ten Years
(In percent)
Thailand
Singapore
unskilled
skilled
Korea
Indonesia
China
Cambodia
Bangladesh
Australia
-15
-10
-5
0
5
10
15
20
25
30
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2. Transition from agriculture to industry.

Find support for inverted-U relationship between
inequality and income
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Many economists have long believed that income
disparities increase in early stages of development, and
decrease subsequently
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Predicted by Kuznets (1955), as people move from
agriculture to modern industrial sector
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inequality and polarization increase initially, but decline as
majority of people find employment in high-income sector.
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Results suggest turning point occurs at per capita GDP of
around $4,000-$6,000
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Encouragingly, many developing
economies may be close to a turning point.
GDP Per Capita of Sample Countries, 2005
(Purchasing Power Parity)
Hong Kong SAR
Australia
Japan
Singapore
New Zealand
Korea
Malaysia
Thailand
China
Philippines
Indonesia
Sri Lanka
India
Vietnam
Cambodia
Mongolia
Lao PDR
Bangladesh
Nepal
Turning Points of Kuznets Curve
Gini coefficient
Wage dispersion
0
5,000
10,000
15,000
20,000
Source: World Bank, World Development Indicators .
25,000
30,000
35,000
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4. Similarly, limited role for Asian crisis.
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
Economic shocks can hurt poor disproportionately
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Tend to have less flexibility to protect themselves against adverse
shocks
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Lack of education and skills makes it less easy for them to adjust
to shifting demand conditions
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Illustrated by Latin American crises of the 1980s
However, little evidence that Asian crisis led to
widespread increase in inequality
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If anything, income distribution
improved in some crisis economies.
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Pre- to Post- Asian Crisis change in Gini Index
(Gini points)
Philippines
Thailand
Malaysia
Indonesia
Korea
-4
-3
-2
-1
0
1
2
3
4
Source: Zin (2005).
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Compares Gini index in 1998 to that in 1996 for all countries, except Malaysia where
1999 is compared to 1995 and Philippines where 1998 is compared to 1997.
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C. What can be done?
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Finally, some potential policy actions.
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Focus should be on enhancing opportunities for
moving up income ladder, rather than largescale redistribution
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Specific policies need to be tailored, but
number of directions likely to help, including
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Greater and/or more effective spending on education
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Investing in transport and communications
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Removing rigidities in labor and product markets, e.g.
barriers to migration
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Improving access to financing
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Thank you
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