Asia's Increasing Rich-Poor Divide Undermining Growth, Stability - ADB Report

News Release | 11 April 2012

HONG KONG, CHINA - Asia's rapid growth is leaving millions behind, causing a widening gap between rich and poor that threatens to undermine the region's stability, according to a new report from the Asian Development Bank (ADB).

"Another 240 million people could have been lifted out of poverty over the past 20 years if inequality had remained stable instead of increasing as it has since the 1990s," said Changyong Rhee, ADB's Chief Economist.

The Asian Development Outlook 2012 (ADO 2012), ADB's annual flagship economic publication, says income divisions are rising markedly in the region, where the richest 1% of households account for 6% to 8% of total income. Close to 20% of total income went to the wealthiest 5% in most countries. The report shows that the share of income accruing to the richest households has increased over time.

The Gini coefficient - a key measure of inequality - grew in the region's three largest economies: People's Republic of China (PRC), India and Indonesia. From the early 1990s to around 2010, it increased from 32 to 43 in PRC, from 33 to 37 in India, and from 29 to 39 in Indonesia. Considering the region as a single unit, the Gini coefficient has leapt from 39 to 46 in the last two decades.

Unequal access to education, health and other public services contributes greatly to growing inequalities, further hindering opportunities for the poor to raise their living standards. School drop-out rates are up to five times higher for children in the poorest families, while the chance of a poor infant dying at birth can be 10 times higher than those of a child born to a rich family.

"Inequality leads to a vicious circle, with unequal opportunities creating income disparities, that in turn lead to dramatic differences in future opportunities for families," Mr. Rhee said.

Highly uneven distribution of new technology, infrastructure and investment is further fueling the divide, particularly between rural and urban areas, and coastal and inland provinces. In PRC, rural-urban and interprovincial differences account for the bulk of inequality.

Skill premiums have risen in many countries, and better educated workers are enjoying much higher income growth. Technological progress favors capital over labor, with the share of labor income in gross domestic product declining and that of capital increasing in many countries. The abundance of labor relative to capital in the region is also a contributing factor to the declining labor income share, says the report.

Governments need to focus on policy options for reducing inequality, the report says. These include the creation of quality jobs; increased spending on education and health; and expanding social protection including conditional cash transfers for the poor. Other key policy options include switching fiscal spending from untargeted price subsidies, such as on fuel, to targeted transfers; greater and more equitable revenue mobilization; and more investment in infrastructure to reduce imbalances between developed and lagging regions.