Fast growing Asian economies have lifted millions out of poverty.
But they have developed high income inequalities in recent decades, which need to be addressed.
What do the numbers say?
Gini coefficient is a common measure of inequality in which 0 signifies perfect equality and 1 means high inequality.
From 1990-2012, the net Gini coefficient increased dramatically in China, from 0.37 to 0.51.
During the same period, it rose from 0.43 to 0.48 in India.
In South Korea, the share of income held by the top 10% rose from 29% in 1995 to 45% in 2013.
Even the “Asian Tigers”—Hong Kong, Singapore & Taiwan, which were previously known for equity, face rising inequality.
What has caused this trend?
Increasingly open borders have made it easier for businesses to find the cheapest locations for their operations.
In particular, China’s entry into global markets has put downward pressure on the wages of low-skill production workers elsewhere.
Also, new technologies raise demand for skilled workers, while reducing demand for their less-skilled counterparts.
This expansion of disruptive technological has hence led to expansion of the wage gap between skilled and unskilled.
Notably, return on investments also increased for capitalists due to technological progress and process enhancement.
Hence, while new opportunities have opened for some people, many have face wage stagnation and unemployment due to unbridled globalization and disruptive technologies.
What are its implications?
Income inequality often goes hand in hand with inequality of opportunity for the future.
With limited educational and economic prospects, talented youth from disadvantaged backgrounds don’t get their due share.
This deprivation can potentially erode the consensus in favour of pro-growth economic policies, undermine social cohesion, and spur political instability.
What can be done?
To avoid such a future, countries need to ensure opportunities for youth, irrespective of their background, to ascend the ladder.
As market mechanisms aren’t enough to achieve this, governments must step in to ensure that gains are shared more equally.
Income Redistribution - Notably, some governments have been attempting to tackle inequality with redistribution policies.
Considerably raise the minimum wages and ensuring stricter adherence to it is being considered by many policy makers.
Also raising the tax rates for the highest income earners & corporate entities to finance welfare is another consideration.
Human Development - Effective development of human capital is the best way to secure futuristic growth and equity.
This requires enhanced social safety nets and redistributive tax-and-transfer programmes, as well as quality education for all.
Also, improving the quality of higher education and timely curriculum reforms to match the dynamic demands of the labour market is important.
What are the challenges?
While redistribution measures have strong public support, they could end up hurting the economy due reduced investment.
As this could in turn hurt job creation and tax collection, redistributive decisions must be taken with caution.
There is a growing temptation to reject globalization in its totality and embrace protectionism which would be regressive.
