Inequality Check

August 21, 2007
The Wall Street Journal (USA)

A wise man once noted that a rising tide lifts all boats. So why are booming Asian countries so worried about income inequality? Such talk is hardly cheap. If these fears spur bad economic policies, it could end up costing Asia dearly.

The worries were fanned this month by a report from the Asian Development Bank. The study, comparing more than a decade's worth of data from 22 developing countries, found significant increases in inequality across the region. "Widening disparities in standards of living can threaten the growth process in one of the most dynamic regions of the world," the bank noted in its press release unveiling the report.

National leaders agree. India's newly installed President Pratibha Patil marked the 60th anniversary of her country's independence this week by claiming that "growth, when unevenly spread, dwarfs overall prosperity. We have to ensure equitable growth for all." In Tokyo, Prime Minister Shinzo Abe's cabinet has floated the possibility of a negative income tax to stem growing income inequality. Hong Kong Chief Executive Donald Tsang has made battling inequality one of his top priorities. Singaporean Prime Minister Lee Hsien Loong noted on the city-state's national day last week that the rising income gap is a "major challenge."

There is evidence that inequality is rising in Asia. The ADB's report finds that inequality as measured by the Gini coefficient -- a statistical tool commonly used to gauge the severity of income differentials -- is growing across Asia, from Nepal and China to South Korea, India and Bangladesh. In some places the uptick is marked. (The Gini coefficient ranks income on a percentile basis. In Asia, the ADB used consumption, rather than income data, due to lack of better data.)

But, as the ADB notes, this doesn't mean the rich are taking food from the mouths of the poor. Rather, the rich are getting richer faster than the poor are. In all but one developing country, per capita incomes for the bottom fifth of the work force increased at least slightly; Pakistan was the only exception. This trend is also evident from other measures of poverty. In China, the proportion of people living on $1 a day declined by an average of 8.75% a year between 1993 and 2004, even as inequality (measured by the Gini coefficient) increased by 1.35% a year.

Other measures also point at dramatic improvements in the lives of the region's poor. India's statistical office reported earlier this year that 54% of rural households (which are more likely than the urban to be poor) had electricity in 2004-05, up from 34% in 1993-94. Prime Minister Manmohan Singh complained in June that inequality breeds social unrest because "the electronic media carries the lifestyles of the rich and famous into every village and every slum." That's because the poor can increasingly afford television sets: The percentage of rural households with TVs increased to 26% in 2004-05, up 7% from 1999-2000.

It's a story that's being repeated in the unlikeliest of places. In Cambodia, whose Gini-measured inequality clocked the third-greatest increase in the ADB study, life expectancy at birth has increased to 57 years in 2005 from 42.6 years in 1960, according to the World Bank. The proportion of births attended by trained medical staff increased to 43.8% in 2005 from 34% in 1998.

And while developed countries like South Korea saw an increase in inequality, according to the ADB, and Japan and Singapore (not included in the bank's report) worry about their own income disparities, citizens aren't exactly suffering the pangs of hunger. They're too busy talking on the phone. For every 100 people in these countries, there are, respectively, 131.4, 118.22 and 132.67 mobile- and land-based telephone lines.

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Poverty remains a serious problem throughout Asia -- the ADB estimates 600 million people still live below the $1-a-day line, to use one popular measure. But "fixing" inequality won't fix poverty.

As even the ADB recognizes, inequality can be a symptom of economic growth. Not everyone can experience equal income growth simultaneously. China's rising inequality, for example, is fueled by growing numbers of people transitioning to higher-paying manufacturing and construction jobs from low-income agricultural work. A policy of allowing successful people to keep their gains -- by not subjecting them to redistributive tax policies -- rewards risk takers and creates incentives for others to try to emulate them.

Likewise, not all inequality is, well, equal. While inequality of outcome can be a good thing, inequality of opportunity is another matter. A caste system or corrupt government can contribute to the kind of "structural inequality" that hinders development by making it harder for entrepreneurial people to get ahead.

The ADB worries that too much of the good inequality can lead to the bad variety by entrenching a new set of self-interested elites. But to the extent that's a danger, the best solution is political, not economic. Economists like New York University's William Easterly have filled books with stories of how corrupt, unaccountable governments embezzled money out of programs designed to tackle inequality of opportunity. True democracy, complete with universal suffrage, rule of law and transparent government, is the most reliable method for keeping oligarchs in line.

The danger is that all this talk of "inequality" will lead to policies that, in the name of redistributing income, reduce economic growth and thus make it harder for Asia's poor to join the middle class. The Asian "pie" is growing for everyone. The challenge is to keep it that way, instead of quarreling over the relative size of the pieces.