Asia's Growing Pains

The single biggest policy issue facing Asia is how to sustain rapid economic growth that reduces poverty and is socially inclusive and environmentally sustainable.

The challenges are all the greater given rapid population growth in much of the region, the necessity to rebalance growth in light of the global financial crisis, and the multiple needs of responding to climate change.

Inclusive growth, with its focus on creating economic opportunity and ensuring equal access, will play a pivotal role in addressing these challenges. More and more countries in developing Asia are adopting inclusive growth as the goal of development policy. India's 2010 budget clearly identifies fostering high rates of growth and broadening its inclusiveness as key government objectives. Similarly, in March, the People's Republic of China (PRC) emphasized in its budget improving the lot of the rural population as part of the effort to build a "harmonious society" - a concept very closely related to inclusive growth.

The recognition of the relevance and importance of inclusive growth in developing Asia has been triggered by rising concern that the benefits of spectacular economic growth have not been equitably shared. Although growth has led to a significant reduction in poverty, the region remains home to two-thirds of the world's poor. And in a large number of countries, many human development indicators continue to lag behind. Malnutrition among children under five years of age is worse in South Asia than in sub-Saharan Africa. Half of Asia lives without basic sanitation and 900 million people without access to electricity.

Equally disturbing, a recent study from the Asian Development Bank shows that a large number of developing Asian countries have seen their Gini coefficient - a measure of income inequality - increase in recent decades. The rich, in other words, are getting richer much faster than the poor. Unequal access to basic social services such as education and health is also persistently high, exacerbated by income inequality. In Indonesia, children from the poorest households are five times more likely to be out of school than those from the richest. In India, a child from a poor household is three times less likely to live past the age of five than a child from a rich household.

How should Asia's policy makers react to the increases in inequality?

There is no simple answer.

On the one hand, there is good reason for concern about growing inequality - and thus calls for action. Increasing inequalities could imply a slower pace of poverty reduction. For a given growth rate, a growth process in which inequalities are increasing sharply will lower poverty reduction. There are also compelling reasons why high levels of inequality dampen growth prospects. High inequality could foment social unrest, and weaken the quality of institutions and policies, which, in turn, slow growth.

On the other hand, economic development is likely to entail processes that increase inequality. Development, observed Nobel Prize-winning economist W. Arthur Lewis in the 1950s, "does not start in every part of the economy at the same time." Just look at the PRC: Most of its spectacular growth has occurred in the export-driven provinces along the East Coast. Some have also argued - forcefully - that designing and implementing policies that are effective in combating inequality are extremely difficult and could even reduce economic growth.

Both arguments have merits. They also point to the need for a nuanced analysis of inequality and clearly defined inclusive growth strategies. Critically, policy interventions aimed at tackling inequality need to distinguish between two types of inequality. One is driven by unequal access to opportunities and circumstances beyond the control of the individual. The other is driven by effort and reflects the rewards and incentives that a market economy provides for citizens who work harder, look for opportunities, and take risks in seizing them.

It is the unequal access to opportunities that must form a nonnegotiable target of public policy. The provision of basic health care and education to empower the poor and disadvantaged is fundamental. It is also essential to improve access to markets and basic productive assets by putting in place good policies and sound institutions, and leveling the playing field. And developing social safety nets to prevent extreme poverty should also be an important part of policies for inclusive growth. At the same time, it is critical that policies aim to provide more jobs for the poor and to as wide a segment of the population as possible. In attacking poverty and inequality, we must be clear that success entails generating productive, well-paying, and decent job opportunities for the workforce.

Economic crises, climate change and population growth suggest that public resources will be increasingly squeezed to meet competing needs and require governments to do better with less. Done right, an inclusive growth strategy that expands and promotes equal access to economic opportunity, not excessive income redistribution, will not empty the public purse, nor crimp growth. Asia has embraced the inclusive growth agenda. Now it needs to make it work.