Why inequality threatens the Asian miracle

BANGKOK (ILO News) – Leaders around the world are talking about inequality. With the global economy still dragging there are growing fears that rising income disparities could hamper growth and reverse social progress. At the recent World Economic Forum in Davos, inequality was highlighted as the defining challenge for 2015. Here in the Asia-Pacific region, similar concerns are infiltrating the policy debate.

Asia’s economic achievements have been lauded globally. Since 1991 more than 465 million workers in the region have lifted themselves and their families out of extreme poverty. With better jobs and higher incomes, Asian living standards are rising. But now the region is confronting a new challenge – the widening gap between the rich and the poor.

In the ILO’s new Asia-Pacific Labour Market Update, released earlier this month, our regional economics team looked at this trend, and their findings are alarming.

Income inequality has indeed increased in the region overall, or in other cases has remained stubbornly high. In China, Indonesia and India, the Gini coefficient – an inequality metric ranging from 0 (total equality) to 100 (total inequality) – has increased by 9.6 points, 6.4 points and 3.1 points respectively, in the past 20 years. This is particularly troubling because together these three countries account for two in five of the world’s people. But, it’s not only the big emerging economies; we also see widening disparities in countries as diverse as Bangladesh, the Lao People’s Democratic Republic, Mongolia, Sri Lanka and Vanuatu.

Inequality is not just an issue for academics and policy-makers to debate. Concerns are being voiced by ordinary men and women across the region. A recent Pew Global Survey found that 70 per cent of those surveyed in India felt that the rich-poor gap was a major problem in their country. In Malaysia and the Philippines, around 50 per cent of people felt that way, and more than 40 per cent in China, Indonesia and Thailand. What’s more, there is a strong public view that government actions play a critical role in whether inequality gets better, or worse. Policy makers take note!

At the ILO we share the view that the correct policies can make a major difference. But we also know that a lack of action is not a neutral choice – left to itself the trend towards inequality will worsen. So policymakers must be swift as well as decisive.

National circumstances will obviously dictate specific national priorities, but there are some key areas that our experience tells us help all countries ensure that their growth is inclusive and their economic progress creates shared prosperity.

Firstly, skills need to be strengthened. The target should be to improve the quality of education and vocational training so that workers have the skills employers need, and even those at the bottom of the ladder can ‘skill up’ to find their way to better paid jobs.

Secondly, we need more investment in social protection. This will help cushion the effects of the rapid changes taking place in this region. It will also stabilize domestic consumer demand, support Asia’s ageing society, and encourage people to stay in education and training.

Third, hundreds of millions of workers in the region’s developing economies are in the informal sector – oftentimes in agriculture. Targeted measures are necessary to improve their working conditions and incomes, for example, through better infrastructure, access to finance, and help with improving productivity and accessing supply chains.

Finally, modern wage setting mechanisms are needed. Credible, effective and enforced minimum wage and collective bargaining systems help ensure that productivity gains translate into higher wages and better working conditions. This in turn, fosters a stronger consumer market and drives inclusive growth.

Global economic uncertainty and growing income inequality trends are like spectres at the feast celebrating Asia’s economic progress. But the right mix of labour market policies can help transform the region’s outlook and put it firmly on the path towards balanced, equitable and sustainable development. Alternatively, if our leaders fail to take action, Asia’s miraculous success story of growth could turn into one in which millions of hardworking people are left behind. –Tomoko Nishimoto, ILO Assistant Director-General and Regional Director for Asia and the Pacific