Inclusive Growth in Asia: Trends and Issues

Inclusive Growth in Asia: Trends and Issues Hyun H. Son Independent Evaluation Department Asian Development Bank

What is Inclusive Growth? • No agreed, single definition of inclusive growth. • Inclusive growth is a multidimensional concept. • Inclusive growth requires: (i) sustained economic growth; (ii) poverty reduction; (iii) inequality reduction; and (iv) broadening access to opportunities. • These four are not independent of each other. • These social objectives are means to achieving social well-being defined by Sen in terms of functioning and capabilities.

Sustained Economic Growth – Growth needs to be sustained to help increase the average standard of living through greater income and consumption Table: Annual growth rates of selected indicators in Asia Source: Author’s calculations.

To What Extent PRC has contributed to Asia’s Growth Performance? • PRC’s growth performance has been the main contributor to Asia’s stellar economic growth during the 1990s and 2000s. • Without PRC, Asia’s growth could still be deemed high and sustained but it would not be as remarkable as it was over the past two decades.

Table: Annual growth rates of indicators of average standard of living in Asia,excluding PRC Source: Author’s calculations.

Poverty in Asia • The inclusiveness of growth depends on whether growth is accompanied by poverty reduction. • Asia has made remarkable progress in reducing its absolute poverty but is still home to the largest number of people living in absolute poverty. • However, Asia’s progress has been less impressive for poverty based on $2-a-day poverty line.

Table: Average poverty estimates in Asia Source: Author’s calculations

How Effective Is Economic Growth in Reducing Poverty? • Inclusive growth should be concerned with the effectiveness of growth in reducing poverty. • The degree of its effectiveness may be measured by the growth elasticity of poverty – defined as the ratio of rate of poverty reduction to growth rate of GDP.

Table: Growth Elasticity of Poverty Source: Author’s calculations

Trends in Inequality • Inclusive growth needs to be broad-based, reaching as many segments of the population as possible while protecting the vulnerable and poor. • Inequality-reducing growth ensures that benefits of economic growth are more equitably shared among the population.

Table: Annual growth rates of inequality in Asia, weighted by population * With a significant increase or decrease in inequality at the 5% level of significance. Source: Author’s calculations Table: Annual growth rates of inequality in Asia,excluding PRC * With a significant increase or decrease in inequality at the 5% level of significance. Source: Author’s calculations

Inequality of Opportunity in Asia • The concept of inequality is now being extended to cover many other dimensions of living standard such as inequality in outcomes in health, education, employment, etc. • Governments usually provide opportunities in health, education, basic infrastructure, etc., but not all citizens can avail of these opportunities. • It is useful to understand the inequality of opportunities prior to designing policies aimed at universal provision of these basic services. • In some Asian countries, inequality of opportunity remains a challenge as seen in unequal access to basic services including education, safe waterand sanitation, and electricity.

Inequality of Opportunity in Asia • Inequality of opportunity arises from disparities due to circumstance variables, or factors over which an individual has no control (i.e. gender, race, ethnicity). • In Asia, circumstance variables including household expenditure and location of residence in rural or urban areas were found to be crucial in influencing access to education and basic infrastructure.

Inequality of Opportunity in Asia • Inequality of opportunity in Asia remains a challenge in promoting inclusive growth in the region. How can inequality of opportunity in Asia be addressed? • Bolster the demand side of the provision of education and basic infrastructure – e.g., CCT • Compensate for the lack of demand and incentive to provide basic infrastructure services in rural areas – e.g., subsidies to rural communities • Decentralize to improve the delivery of basic services

Policy Responses toward Inclusive Growth • Policies for Promoting Growth with Jobs • To facilitate the process of structural transformation to transfer from large amounts of rural, agriculture surplus of labor to urban, manufacturing and service sectors, where most of the future’s productive jobs will be generated. • Public employment schemes to address unemployment and underemployment (e.g., public works programs, India’s Rural Employment Guarantee Scheme) • Promoting skills development through e.g. support for technical and vocational education

Policy Responses toward Inclusive Growth • Fiscal Policies • Greater and better spending on health and education to promote coverage and equity in access to these basic social services • Health spending (% of GDP): less than 5% (Asia) vs. 9.4% (OECD) in 2009 • Education spending (% of GDP): less than 4% (Asia) vs. 5.3% (OECD) in 2010 • Fiscal transfers to impoverished areas • To help narrow the urban-rural divide, improve transportation and communication networks. • Greater and equitable revenue mobilization: direct vs. indirect tax

Policy Responses toward Inclusive Growth • Social Protection Policies • focused on skills and capabilities rather than on compensating taxes and transfers • covering appropriate pension and safety net schemes to assist marginalized groups such as elderly or disabled • Needs to be well targeted to minimize leakage

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Inclusive Growth in Asia: Trends and Issues