EVEN as the Philippines and 14 other developing countries in Asia are experiencing considerable measures of economic growth, there still is little reason to celebrate. This is because recent gains in the levels of expenditure have also come with increasing income inequalities between the rich and the poor, according to a recent Asian Development Bank (ADB) report.

The ADB study on 21 of its developing country members, “Key Indicators in 2007,” zeroes in on inequalities as a serious challenge for many Asian countries, though it acknowledges that levels of inequality “for the most part…continue to be lower than the very high levels seen in many countries in Latin America and Sub-Saharan Africa.”

Download the ADB report here.

The report is therefore a wake-up call for those hoping that the current growth in Asia would lead to greater economic and social equality, as had occurred in South Korea and Taiwan in the 1980s. In spite of economic growth, relative inequality (proportionate differences in income/expenditures as measured by the Gini coefficient) has increased since the 1990s in most of Asia’s developing countries — very significantly in Nepal, the People’s Republic of China, Cambodia, Sri Lanka and Bangladesh.

Source: ADB, “Key Indicators in 2007”

Absolute inequality between the richest 20 percent and the poorest 20 percent of the population, measured by changes in monthly per capita expenditures, has increased in almost all of Asia, even where relative inequality has declined.

Source: ADB, “Key Indicators in 2007”

Commenting on the ADB study, Arsenio Balisacan, economics professor at the University of the Philippines in Diliman and director of the Southeast Asian Regional Center for Graduate Study and Research in Agriculture, calls for caution about interpreting what is a statistically very small change in the Philippines’s Gini coefficient between 1994 and 2003. Balisacan suggests that a better interpretation may be that relative inequality in the country has been fairly stable, as the Gini coefficient has wavered up and down between 1994 and 2003, without any clear upward or downward trend.

Yet even though the country has not experienced a marked increase in inequality that many other Asian countries have seen, the Philippines has the third highest Gini measure of relative inequality of the countries looked at in the ADB study. This could be explained by the fact that the challenge of inequality in the Philippines is not so much that it’s becoming worse as that it is a longstanding problem.

Source: ADB, “Key Indicators in 2007”

Nonetheless, readers of the ADB study should be careful not to make too much of the fact that the RP’s Gini is the third highest of the 21 Asian countries examined. Balisacan explains that while it is instructive to look at the Gini changing over time, comparisons between countries are less accurate because of country “differences in the type and quality of data employed to construct inequality indexes such as Gini.”

The ADB is very clear in its report that, in nearly all of the countries where inequality has increased, the poor are not becoming poorer, their incomes are just not increasing nearly as fast as the rich. In the Philippines, the extreme poor, the rich, and everyone in between experienced at least some increase in expenditures, and absolute poverty has decreased somewhat.

When inequality is growing, economic growth will not achieve its potential in reducing poverty. An added problem, warns the ADB, is that high levels of inequality damage the long-term prospects for economic growth. Inequality can undermine growth by creating conflict or instability, and it also limits growth by restricting the number of people who can participate in financial markets. Even though income/expenditure inequality in Asia is not extreme, the plight of the poor is compounded in most Asian countries by other pronounced inequalities in health and education outcomes, in assets (including landholdings) and in access to infrastructure.

Looking also at the causes of of inequality, the ADB study examines why growth is not benefiting the poor as much as would be hoped. In the Philippines, where economic growth between the early ’90s and 2005 was not fast, most of the increased consumption was enjoyed by families living in urban areas or by families with a highly educated head of the household. Interestingly, female-headed households also experienced higher than average growth in income and expenditures. Most of the increase in inequality in the Philippines is driven by increases in expenditures for the highly educated that have not been shared by the less educated.

The study reports that across developing Asia, income growth is concentrated in certain urban centers, and those whose incomes increase are usually already above average in income and education. The reality is that those best positioned to gain from new economic opportunities are the educated urban-dwellers. On the other hand, the poor rely mainly on agriculture, and the agricultural sector has not been growing as fast as other sectors in most of Asia.

In the case of the Philippines, the statistical data in the ADB study shows that agricultural spending (in current market prices) as a share of total government expenditures declined from 6.3 percent in 1990 to 3.6 percent in 2005. In general, the current context of new technologies, market-oriented reforms and globalization has not favored the agricultural sector. Other causes of the agricultural sector’s lackluster growth include: the decrease in transfers of new technology to farmers, and governments that invest little in agriculture and do little to encourage private investment in the sector.

Given that high levels of inequality are partly the result of government policy, the ADB wants governments to address inequalities by introducing policies that ensure the poor share in the overall gains produced by market-oriented reforms and trade. The public and private sectors should work together to increase productivity and incomes in the informal sector and in agriculture, and to create new industries in which the poor can find work. For the Philippines in particular, the ADB recommends increased public investment in agriculture. Skills and training programs, and social protection mechanisms can help to protect the poor from, what the ADB describes as, “the negative distributional impacts of market-oriented reforms.”

Some redistribution is necessary, the ADB study says, in order to make the opportunities provided by economic growth available to the poor. Effective redistribution could take the form of governments shifting public expenditures so as to help the poor. One example given in the study is that improved education in rural areas will open new opportunities to the rural poor. For millions of children, inequality begins with not having access to adequate nutrition, health, and basic education. So, adds the ADB, policy makers need to make big strides in improving the quality of basic education and health care provided to the poor.

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