Reducing Inequality in Asia: Sharing the Growth Dividend

IMF Blog, May 24, 2016

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Asia is "home to more than half of the world’s population" and "remains the engine of global growth."
It is "expected to grow at 5.5 percent in 2016" and "account for almost two thirds of global expansion this year and next."
After more than two decades of rapid economic development, incomes rose across all segments of Asia’s population, but "economic development has not benefited the region’s populations equally or at the same pace," producing rising income disparity.

"Income inequality has risen in most of Asia," a contrast with most other regions.
In some larger countries, "including China and India, spatial disparities, in particular between rural and urban areas, explain much of the increase."
"Since 1990, China’s economy has recorded the steepest growth but also a large increase in income inequality."
"In India, the gap between the income share of top and bottom earners also grew significantly."
Global factors such as "technological change that puts a premium on skills" contribute to inequality, but Asia’s pattern also reflects distinctive policy-related drivers.

Financial deepening in Asia has had an equalizing effect in many economies by expanding access to credit for low-income households and small and medium-sized enterprises.
Education and social benefits, which often act as equalizers elsewhere, "have failed to reduce income inequality in Asia and even tend to increase it" in the region.
Progressive taxation "ameliorates income inequality in Asia," consistent with other regions.
Poorly targeted policies and "social safety net spending [that] is relatively low in Asia compared with the rest of the world" undermine redistribution.
"Lower revenue collection translates into lower coverage of spending, including, for example, on social insurance."
Specific statistic: "At 22 percent, the share of retirees in Asia who receive a pension is among the lowest in the world – about the same as in Sub-Saharan Africa and approximately one-fourth the level in advanced economies or in Emerging Europe."
Unemployment benefits are similarly low, and social benefits are "distributed unequally."
Inequality of opportunity—lack of access to education, health services, and adequate financial services—deepens disparities by hampering productivity, education and health outcomes, and the ability to borrow for investment and education.

Strengthen the redistributional effect of fiscal policy to reduce inequality "without endangering the region’s poverty-reducing growth."
Tax-side measures:
- "Broaden the base for income and consumption taxes while making them more progressive."
- Improve compliance to support effective tax collection.
Spending-side measures:
- Design "well-targeted transfer programs" and avoid "costly universal price-subsidy schemes."
- Improve and broaden access to health services and higher education to "raise earnings potential and reduce income gaps."
Well-designed fiscal policies could "substantially reverse the trend of rising inequality" given current limited social safety nets.

Sonali Jain-Chandra, Kalpana Kochhar, Tidiane Kinda — May 24, 2016.