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Asia needs income equality strategies

Publication Date : 25-04-2012


Asian governments should invest more in human capital, end inefficient general subsidies and reform their tax bases as urgent steps to tackle rising income inequality, the Income equality strategiesn Development Bank said yesterday.

Higher education tends to boost productivity and income for workers, Juzhong Zhuang, the ADB's deputy chief economist, told a workshop at the Thailand Development Research Institute.

Governments should switch from inefficient general subsidies to targeted transfers, as many economies spend huge amounts on subsidies for fuel in particular, he said. In Thailand, the fuel subsidy in 2010 accounted for nearly 3 per cent of gross domestic product, against 5 per cent in Bangladesh and less than 0.5 per cent in China.

In Asia, tax rates are not low compared with developed countries but personal-income-tax bases are low because of "too many exemptions", Zhuang said. Revenue in China from Personal income tax is less than 1 per cent of GDP, against 2 per cent in Thailand and India.

"Asian governments should examine the tax system, as this will redistribute income and mobilise resources for spending in other areas like human capital," he said.

While forecasting GDP growth rates of 6.9 per cent for developing Asia this year and 7.3 per cent in 2013, the ADB sees the need for governments to focus more on income inequality, which is widening fast.

The forecast 2012 growth rate is an easing from 7.2 per cent in 2011, as Asia's main trading partners have yet to return to the growth rates they enjoyed before the global financial crisis of a few years ago. Meanwhile the prospects for the United States, the euro zone and Japan are uninspiring, with overall GDP growth set to stall at 1.1 per cent this year before gaining some lift to 1.7 per cent next year.

"Asia's high growth led to growth reductions in poverty but this was accompanied by rising inequality in many countries," Zhuang said.

His study showed that inequality increased in 11 of the 28 countries, and they cover 80 per cent of Asia's population. While the richest 1 per cent account for 6-8 per cent of total expenditures, the top 5 per cent get nearly 20 per cent of total spending. Asia's rising wealth is fuelling inequality and income disparities, with the underprivileged at risk of being sucked into a vicious cycle of poverty and neglect.

Inequality can weaken the basis of growth, as this will lead to a waste of human capital, lack of social cohesion, a proportionally smaller middle class, impact on the quality of governance, and higher pressure for inefficient populist policies.

"Technological progress, globalisation, and market-oriented reform have led to rapid growth in Asia, but working together they have favoured capital over labour, skilled labour over the unskilled, and cities/coastal regions over rural/inland areas," Zhuang said.

Economic growth should be made more employment-friendly through more balanced composition of growth, support for the development of small and medium-sized enterprises - which are the biggest employers - removal of price distortions that discourage the use of labour, and strengthening of labour-market institutions that will in turn increase workers' bargaining power over protection and minimum wages.

On the composition of growth, a study by Pranee Tinakorn, an economics lecturer at Thammasat University, found that while manufacturing generated 34 per cent of Thailand's GDP in 2009, it employed only 15 per cent of the workforce. In contrast, agriculture employed 38 per cent of the workforce, but contributed only 9 per cent of GDP.

"The economic structure causes inequality by favouring large businesses and owners of capital, not labour," she said.


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