Site icon Pakistan & Gulf Economist

Reducing inequality: Economic growth need to be inclusive in Asia

Reducing inequality: Economic growth need to be inclusive in Asia

As reflected from Asian Development Bank Outlook reports on Asia, ranging from the years 2012 to 2021, Asia despite becoming a dynamic force attracting the entire world economy in its folds since the start of last decade, its growth is likely to be threatened by a fast increase in inequality.

An astounding fast growth achieved by Asian emerging economies during the last two decades, which no doubt has reduced absolute poverty, but at the same time has initiated an ever-widening gap between rich and poor masses, which in turn has not only rendered Millennium Developmental Goals (MDGs) unfulfilled for the majority of Asian countries but also due to lock down of economic activities in recent past due to COVID pandemic, particularly in China and severe abrupt climatic changes based disasters experienced in South Asian countries, tightening monetary policies of advanced economies and impact of the Russian invasion of Ukraine has created doubts for achieving sustainable economic growth rate in the region as a whole by the targeted timeline under SDGs programme.

During the year preceding the global economic crash, there was little concern for the inequitable distribution of wealth. Incomes were increasing faster at the top than at the bottom representing the masses, but everyone was sharing the benefit of sustained economic growth. However, the ensuing financial crisis and austerity measures taken all over the globe brought in forefront distributional issues, which were totally ignored during the boom period. Even in economically rich nations like Great Britain, 8.9 million people are living in poverty. This is over and above 6.3 million who are workless or retired.

Biggest threat

Similarly during the World Economic Forum (WEF) in Davos, Switzerland inequality was on the agenda. Oxfam reported that at that point in time world’s 85 richest individuals are equal to the bottom half of the population of 7 billion, hence WEF reached the conclusion that the widening gap between rich and poor is the biggest threat to global economic prosperity during the next decade.

In almost all economically rich countries including the United States, the reduction of taxes on the powerful rich class plus tax evasion by this segment going unpunished, weakening of trade unions power and monopolisation of markets by corporations have substantially contributed towards aggravating inequality status.

Further globalisation and increased automation due to advancement in information technology has subside the momentum of growth of middle-class jobs, which flourished until 2012.

Asian countries have particularly been threatened by rising inequality in the face of a fast economic growth rate. It is not only an ethical reason but also it has serious implications on socio-economic structure of the countries encountered with this situation. Japan and Asian tigers during their fast economic growth era had due concern for achieving inclusive growth or in other words combining fast economic growth with a reduction in inequality.

The rise in inequality is more pronounced in emerging economies like China, India and East Asian countries. Since the mid-eighties both China and India are experiencing fast economic growth rate. During the early eighties China was ranked among the poorest nations with 84% of its population living below the poverty line but by the year 2008 only -13% of its population was found impoverished, which is much lower than the developing countries average. In case of India until 1981 60% of its population was living on less than $1.25 a day and by the year 2010. Percentage of the poor population had reduced to 33%. Despite a drastic fall in poverty both countries continue to encounter unequal income distribution. According to Gini index, which shows the varying income distribution status of countries( it varies from zero showing complete equality or in other words everyone has the same income and goes unto 100, which means the country having that Gini index is faced with total inequality). China’s Gini index as per ADB 2012 report in mid-nineties was 33 and it increased to 37 in 2010.

Apart from income distribution gender-based inequality also increased in China. Contrary to it according to the World Bank Report, since 1990 income inequalities have been reduced in Latin American countries, where the income of the bottom 20% have increased by more than those in higher levels of income.

No doubt since global phenomenon occurring in last two decades like globalisation end technological advancement have automatically created income inequalities by increasing the market demand for the skilled workforce, but in case of Asia and South African countries it is irrational fiscal policies and ineffective labour policies, which are widening gap between rich and poor. Neglect of social sector development is another factor for growing inequalities in Asian countries.

Liable factors

Low budget allocations for education and healthcare and lack of good governance particularly in South Asian countries including Pakistan are factors responsible for the slow growth of human capital, which is essential for achieving inclusive economic growth.

Taxation policies need to be rationalised by introducing an effective progressive taxation system. The tax ratio to GDP, which is quite low in number of Asian countries needs to be addressed and steps taken on an immediate basis to bring all individuals and business entities under tax net in order to enhance revenue, which will facilitate allowing relief to small taxpayers. Secondly, reliance on indirect taxes that is tax on the consumption of goods and services be reduced, which ultimately results in an adverse impact on the poor class.

According to the Asian Development Bank report of 2012 there has been a significant decline in labour’s share of total income and an increase in the share going to capital. As stated above use of new technologies and automation has contributed towards reducing labor share on total economic growth. In recent years in almost all Asian countries there is a general move towards setting up export lead and large manufacturing industries, which normally have a high capital ratio to labour. Accordingly, there is a concentration of wealth in corporations rather than households.

Apart from the above inaccessibility of small business entities to formal financial services is another factor for the concentration of Wealth in the hands of big industrialist and big farm owners in the agriculture sector. However advent of microfinance bank networks, e-banking and mobile banking in the whole of South and East Asian countries will address this issue, particularly of peculiar financial services needed for small and medium-sized businesses.

The majority of micro and home-based small businesses in all South Asian countries particularly in Pakistan and India are operating in the informal sector and hence remain unregistered and deprived of labor laws support and benefits. Most importantly they remain out of the tax net. By making financial services accessible to a major chunk of small business owners their economic and financial activities will be documented and automatically brought under tax net.

In the context of Pakistan, recent political turmoil and devastating floods encountered in the greater part of the country during last two years resulting in escalating inflation has worsened poverty/ income inequality status. It is hoped that ensuing general elections to be held in the immediate future, which promises political and economic stability by reforming the entire socio-economic set up under Revived IMF program will stabilise the economy. Further in order to reduce gender inequality there is a need to enhance girls enrollment in schools and arrest the increasing dropout rate. In order to address the issue in almost all the provinces stipends are given to girls provided their attendance is at least 80% of the term period. Such steps apart from enhancing the literacy rate would make the young generation of today an effective human capital potential contributing towards lessening income and gender inequality situation.

Great economic and financial crash harshly experienced in European countries and America is the outcome of increasing income inequalities as low and middle-income households borrowed excessively to maintain their living standards in the face of falling real wages. Besides above reduction of taxes on the rich combined with their tax evasion tactics, the weakening of trade unions power and monopolisation of the market by corporations have combined to make income inequalities a permanent reality in these economically rich countries.

Suggestions came forward in Davos meeting were a substantial increase in property and land taxes, which are harder to avoid than those on income and secondly greater investment in social sector area, which ensures long-term benefits like child care and education and improved corporate governance with emphasis on enhancing their social responsibility.

In the Asian emerging economies scenario also if countries take initiatives to broaden the benefits of their fast economic growth by enhancing allocation for primary and secondary education and health care of masses along with sufficient cash transfer under social safety nets programme, plus reforming labor laws in order to provide greater protection to low-income workers as these initiatives are essential for assuring the sustainability of rapid economic growth of Asian countries.

Exit mobile version