Closing the Gap – Policy Options for Tackling Inequality

By Max von Bonsdorff

Recently IMF Managing Director Christine Lagarde noted: “In too many countries, the benefits of growth are being enjoyed by far too few people”. She was making the point that high levels of inequality are a global concern.

Recently IMF Managing Director Christine Lagarde noted: “In too many countries, the benefits of growth are being enjoyed by far too few people”. She was making the point that high levels of inequality are a global concern.

Her observation certainly applies to Asia and the Pacific where the UNDP’s newly published report Humanity Divided: Confronting Inequality in Developing Countries confirms the rising trend of inequality in the region.

From the early 1990’s to late 2000’s income inequality (as measured by the Gini coefficient) for Asia and the Pacific grew by 13%. At the same time the two other major developing regions, Africa and Latin America, had opposite trends. Africa’s inequality reduced by 7% and Latin America’s by 5%, although their regional average is still higher. According to the UNDP, the Arab States, however, have lower income inequality than Asia and the Pacific.

These figures are regional averages, and hide varying country trends. According to Asian Development Bank’s, Asian Development Outlook (2012), the region’s income inequality has been growing in eleven countries, representing 82% of the population.

This trend represents a serious development risk for Asia and the Pacific. Empirical research shows that high and growing inequality weakens the poverty reduction impact of economic growth, and can hurt economic growth itself. World Bank research has concluded that no country retaining very high income inequality has successfully developed beyond middle income country status.

What should Asian policy makers do then to halt the trend of growing inequalities? The answer obviously depends on individual country circumstances but UNDP’s report provides interesting ideas on policy options that policy makers in Asia might favor. UNDP interviewed 363 policy makers in 15 developing countries, among them four from Asia: India, Philippines, Bangladesh and Kazakhstan. The policy makers were asked what policy measures they perceived as being the most relevant, both for reducing income inequality, as well as inequalities of opportunities.

Most of the policy measures surveyed by UNDP were seen as relevant by over 50% of respondents, indicating that the inequality challenge requires a comprehensive set of policy measures. The prioritized measures for reducing income inequality were: reducing tax evasion (74% support by respondents), conditional cash transfers (66%) and subsidies to factors of production for small and medium-sized enterprises and the agricultural sector (62% and 63%). Interestingly, although reducing tax evasion was favored by many, likely due to its positive revenue impact, an increase in the progressivity on income tax was less popular (55%).

Some of the less favored policy options were asset redistribution (e.g. land reform) and consumer subsidies. In terms of policy measures to reduce inequalities of opportunities the most favored options were, not surprisingly: infrastructure development in rural areas (87%), reduction of unemployment (84%), greater access to education (84%) and greater access to critical public services (81%).

The same policy makers were also asked about the political feasibility of implementing the surveyed measures to reduce income inequality. The answers were rated from 1 (no political support) to 5 (very high political support). Interestingly, the overall sense of political feasibility coming out the UNDP survey is surprisingly low. The average for the 12 identified policy measures was 2.87, and only four measures – reducing tax evasion, conditional cash transfers, subsidies to agriculture and SMEs – received ratings just over 3, which UNDP calls the “political feasibility threshold”.

The report does not provide similar answers for measures to increase opportunities, but one could guess that they would have been higher. But the report clearly gives an indication that reaching political consensus about measures directly targeted to reduce income inequality is not easy.

For policy makers in the Asia and Pacific region, growing and high inequalities represent a serious long term development challenge that needs attention. Development partners, like Asian Development Bank, also need to step up their prioritization of this challenge, and help governments find the right policy measures to avoid a future of divided societies.