Closing the gap: New trends and challenges faced by developing Asia

By Vinod Thomas on Mon, 15 July 2013

Evidence-based strategies—the pragmatic pursuit of polices that worked—were at the front and center of developing Asia’s extraordinary success in raising living standards and reducing extreme poverty over the past two decades.

With the region at a turning point in its development, the case for continuing with the successful policies of the past is still strong. But, with rapid social change and rising economic uncertainty, evidence-based strategies now call for recognizing new trends and challenges. The foremost of these are social inclusion and environmental sustainability. 

There is no question that Asia still needs fast economic growth; this will anyway be essential for eradicating extreme poverty. Yet it’s also clear that rapid growth can no longer be achieved by any means: a new balance of priorities is needed that elevates social inclusion and environmental sustainability to the same level as the pursuit of growth.

This blog looks at some trends on inclusion and key conditions needed to operationalize the concept of inclusive growth in national plans. 

Poverty reduction is still the most important dimension of inclusion. Developing Asia has made striking progress in reducing extreme poverty, its incidence falling from 54% in 1990 to just over 20% in 2010. But, as we know, poverty reduction still remains a huge agenda, with 500 million people in South Asia and 250 million in East Asia and the Pacific trapped in $1.25-a-day poverty. 

Over the last decade, income inequality has worsened substantially in countries that account for 80% of Asia’s population—and this in a region that historically has been among the more egalitarian in the world in terms of income distribution. The Gini coefficient for developing Asia increased from 39 in the mid‒1990s to 46 in the late 2000s, a rise of 1.4% a year. 

Inequality has a corrosive effect on the poverty reduction impact of economic growth. According to one estimate, had equality remained stable in Asian countries over the past two decades, the same level of growth would have lifted 240 million more people out of poverty than it actually did to one estimate. This corresponds 6.5% of developing Asia’s population in 2010.

 

A big worry is that among the countries with the greatest income inequality are the region’s largest developing economies. The share of labour incomes in manufacturing is sharply declining across the region, and especially in India, where it fell from 37% in the mid-1990s to 22% in the mid-2000s. 

The causes of exclusion are several and often intertwined. But the most glaring ones are the unequal and worsening provision of decent education and a widening gap in the premium for skilled compared to unskilled work (and biases against unskilled workers). In education, there are vast differences between the poorest and richest quintiles in many Asian countries. 

Subsidies are an aggravating factor. Many governments in Asia and elsewhere continue to subsidize capital which is an implicit tax on labor. Subsidies for food, fuel, and other items often do not benefit the very poor. These subsidies are a wasteful drain on resources that could be better deployed in well-targeted safety nets, particularly conditional cash transfers to the poor focusing on education and health goals.

Three mutually reinforcing pillars are needed for inclusive growth. The first is an enabling environment that focuses on job-generating growth among small and medium businesses by liberalizing labour markets and raising productivity in weak sectors. The second pillar boosts opportunities through investments in human capital, improves access to land and infrastructure, and removes barriers to participation based on gender and ethnicity. The third builds comprehensive safety nets to lessen the transitory effects of poverty.

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