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WorldApril 2 2013

Inequality threatens Asia’s growth story

Senior figures at the Asian Development Bank explain why their priority is to ensure that the continent's growth benefits all of its population, countering the rising levels of inequality in the region over the past 20 years.
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Inequality threatens Asia’s growth story

The bright story of Asia’s growth has a dark side. The gap between the haves and the have nots in Asia is widening, and there are fears that rising inequality could pose a threat to the region’s future growth prospects. 

Asia, once the poorest region in the world, now accounts for one-third of the world’s gross domestic product (GDP). The dramatic growth story is expected to continue and by 2050 Asia could account for more than 50% of global GDP, according to estimates from the Asian Development Bank (ADB). 

Fight against poverty

With this growth story has come a reduction in overall poverty. Rajat Nag, the ADB’s managing director-general, explains that in 1970 the poverty rate in Asia was one in every two people. In 1990 it was one in three and now it is one in five people. “In one generation there has been remarkable progress in fighting poverty. It is something Asia is proud of. Having said that, we still have 830 million people living below $1.25 a day,” he says. “More worrisome is the fact that there is a huge amount of non-income [quality of life] deprivation,” he adds.

And the gap between Asia’s rich and poor is widening. Juzhong Zhuang, deputy chief economist at the ADB’s economics and research department, explains that although rapid economic growth in developing Asia has led to an overall reduction in poverty, income inequality is rising. 

“Among developing regions, it is only Asia that is experiencing rising inequality,” says Mr Zhuang, adding that Latin America and sub-Saharan Africa are experiencing decreasing levels of inequality. The Gini coefficient, which measures inequality, has risen in Asia in the past two decades from 38 to 47. According to ADB estimates, if inequality had remained stable, the same growth in 1990 to 2010 would have taken about 240 million more people out of poverty. “Because of rising inequality those people are still trapped in poverty,” says Mr Zhuang.

Mr Zhuang outlines the reasons for this disparity. “Inequality is rising because of three major forces: technological change, globalisation and market-oriented reform. These three forces created enormous new opportunities but these opportunities have not benefited all equally. Weaknesses in governance, market distortions and social exclusion make the situation worse.” 

Inequality has now changed Asia’s ‘growth with equity’ story of the 1960s and 1970s, and economic growth is not automatically pulling people out of poverty. “The maxim of growth is that it is good for poverty reduction, that a rising tide lifts all boats. But that is based on the fundamental assumption that there are no holes in any of the boats,” says Mr Nag. 

“If people are disadvantaged because of the circumstances of their birth, then economic growth does not do much for them,” says Mr Nag. “Income inequality translates into serious social consequences,” he says, adding that the chances of a poor infant dying at birth are more than 10 times higher than an infant born to a rich family. 

Business impact

With a mission of fighting poverty in the Asia-Pacific region, it is understandable that the ADB is concerned by rising inequality. But it is not just those concerned with the plight of poor people, such as charities and non-governmental organisations, that have reason for concern. Inequality affects anyone who does business in Asia. “The other concern is that a rise in inequality can undermine the basis of growth itself,” says Mr Zhuang. 

Gil-Hong Kim, director of the ADB’s sustainable infrastructure division, says: “Without addressing inequality, I am sceptical that we will see more sustainable development in Asia. If you do not address the opportunity gap or income gap, it is just a matter of time before that society will suffer from instability. This is happening in the Middle East.” 

But inequality is not just about a disparity of income in dollar terms, it is also about an inequality of access to opportunities. “Six-hundred million people in Asia cannot access safe water. If you look at energy, 800 million cannot enjoy electricity and about 1.8 billion cannot enjoy sanitation. These are huge numbers. That is why we are serious [about making] changes in the access,” says Mr Kim. “Asia has progressed a lot, but these numbers have not reduced very much. That is why Asia’s poor need to access these opportunities.” 

Building bridges

Mr Kim highlights that without electricity, people cannot study or work in the evenings, drugs cannot be refrigerated and farmland cannot be irrigated. “Some schools do not have separate toilets, which is one reason why girls are not going to go to school. Traditionally in Asia, girls are responsible for collecting water. If they cannot access safe water they need to go a long way to collect water. That is another reason why they are not going to go to school,” he says.

A lack of infrastructure is often the reason why the poor in Asia are unable to access opportunities that can lift them out of poverty. Mr Kim says that in Asia, 50% of the roads are not paved, which means in the rainy season people are isolated and cannot get to schools or hospitals. “We need to create opportunities and then we need to help more people access these opportunities,” says Mr Kim. 

Mr Nag explains that the majority of the ADB’s work is in infrastructure, both physical and social. “Infrastructure is a very important and necessary condition for growth, but it has to be the hardware and the software. As well as the right transportation system, there has to be the right policies,” he says.

India’s infrastructure

India, where the ADB’s annual meeting will be held in early May 2013, is one such country where the need to develop the infrastructure is all too apparent. “India can deal with inequality by tackling the infrastructure deficit across the board for all states,” says Juan Miranda, director-general of the ADB’s south Asia department. “Investors need this infrastructure deficit removed because it decreases the costs of doing business. It makes their investment more viable and adds to their competitiveness.” 

The Indian government estimates that $1000bn of investment is needed in the country’s infrastructure between 2012 and 2017, and $350bn of this is expected to come from private sector debt. In September 2012, the ADB approved a guarantee facility to boost India’s infrastructure bond market and to overcome the reliance on bank financing for infrastructure projects. With the $128m facility, the ADB will provide partial guarantees on rupee-denominated bonds issued by Indian companies to finance infrastructure projects. This will boost the credit rating of a typical project from BBB- to AA, which would allow more institutional investors to buy the bonds. 

“Inclusive growth for us is very much a marriage of three things: investments that contribute to growth, investments that create opportunities of access, and investments that provide safety nets to those who are dispossessed or in trouble,” says Mr Miranda.

Financial inclusion

Betty Wilkinson, director of public management, financial sector and trade, in the ADB’s central and west Asia department, explains that one way to address inequality is through financial inclusion. 

She gives the example of the ADB’s microfinance systems development programme in Tajikistan, which included creating the legal and regulatory framework for microfinance institutions. Financial inclusion is not just about micro-credit and loans, says Ms Wilkinson, but building the savings capacity of the poor. “We are getting better at saving for the future,” she says. “Bankers are important to this process of reducing poverty. There are huge untapped markets that banks could profit from,” she adds, citing XacBank in Mongolia as an example of a bank that has been innovative in offering microfinance to poor people. 

Another issue is addressing the impact of unexpected events and disasters, a market that insurance companies are keen to tap with micro-insurance products. But this has its challenges in getting people to pay the premiums. Ms Wilkinson says: “Insurance, more than other forms of financial services, takes a really high level of trust.” 

“Changing opportunity is a longer term process,” says Ms Wilkinson, who has also worked on projects to financially include women. She argues that any country that does not include women in its economy will have its growth rate cut in half. In Armenia, for example, the ADB has established a programme to help women make their micro and small businesses grow. One of the conditions for the ADB project loan is that female loan officers must be hired and 50% of the loans have to be targeted at female entrepreneurs. 

Such projects demonstrate the variety in the ADB’s operations across the region. Its ordinary capital resources are deployed for projects that include agriculture and natural resources, education, finance, health and social protection, industry and trade, transport and information and communication technology, and water supply. 

For the year 2011, the ADB’s operations totalled $21.72bn, of which $14.02bn was financed by the ADB and its special funds, and $7.7bn by co-financing partners. Of the ADB’s $14.02bn, $12.61bn consisted of loans, $239m in equity investments, $614m in grants, $417m in guarantees and $148m in technical assistance. The top five beneficiaries of the total operations were Vietnam, India, Pakistan, Bangladesh and China. 

The ADB’s broad agenda focuses on inclusive growth, environmentally sustainable growth and regional integration. In Strategy 2020, the ADB’s long-term vision for the Asia-Pacific region, these goals are outlined along with their three supporting pillars. The ADB’s strategy states that there should be high and sustainable growth that creates and expands economic opportunities, broad access to these opportunities, and a strong social safety net for the poor and vulnerable. 

“No project is undertaken if it is not consistent with Strategy 2020 and not consistent with the country strategy,” says Mr Nag. “Economic growth is a necessary condition for reducing poverty. It has to be inclusive growth which will benefit people and enable them to participate in the process of growth. We believe the pie has to increase but people at the bottom must be the intended beneficiaries.” 

The ADB is working alongside numerous other organisations that share similar goals. “We are a catalyst, we are not the only one doing this. We are not that huge and we have to be very specialist and offer high value. It is not so much what one dollar represents, but what one dollar brings,” says Mr Miranda. “We bring money from outside with our dollars. It is a conduit for others to do business. 

“We have good data and analysis of what works and what does not. This blended with partnership adds value. [The ADB is a] matchmaker not just of information but also opportunities.”

This opinion is echoed by Mr Kim’s views from his experience of implementing infrastructure projects. When the ADB introduces a pilot project, Mr Kim says: “If successful, we scale up. If we fail, we learn. It is easy to give money one time, but we do not believe that will be sustainable. The ADB approach is more sustainable. We want to address why people are poor. We want to create and expand opportunities, and help the poor effectively access these opportunities.” 

A question of credit

Where Asia has been successful in reducing poverty and closing the inequality gap, it is difficult to assess whether the ADB can be directly credited with these achievements. The ADB has created a Development Effectiveness Review and has a scorecard with gradings of ‘good’, ‘mixed’ and ‘poor’. In its 2011 report, it was not afraid to give itself poor grades, indicating that its progress failed to meet less than half the key performance indicators of certain objectives. 

Mr Nag highlights the problem of attribution when it comes to assessing the ADB’s role in reducing poverty. In each country, he notes, the ADB is not the only player with the same goal. “If the problem of the poverty rate in a country has decreased it may not be because of our projects, but we take the view that it does not matter whether the projects have succeeded if the overall poverty remains,” says Mr Nag. 

He distinguishes between the inequality of outcome and the inequality of opportunity. “Some inequality is inevitable. You would not want a situation where we are all levelled out,” he says, adding that individual motivation, incentives and entrepreneurship have an important role to play. Mr Nag explains that it is the inequality of opportunity that is undesirable. 

“Asia’s growth on a sustainable basis is extremely important for Asia and for the rest of the world. Anything that endangers the growth story of Asia is everybody’s concern,” he says.

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