The Case of the Old Lady
The old lady walks in with the evening crowd, clutching an old
bag that she sets down in the middle of the square. Surrounded by
fancy windows promoting sparkling jewelry and diamond brocaded
watches, and restaurants that charge more per meal than she spends
on her food in a week, she unties her sac of wares and lays them
out. Five minutes later, she is sitting on her foldable chair with
her arms stretched out in front of her, with two packets of paper
tissues at the end of each, quietly beckoning the flowing multitude
around her to equip themselves for an unexpected case of a sweaty
brow or a running nose.
It is Friday evening in Orchard, Singapore's premier shopping
district, and the setting sun is making way for the revelry of yet
another weekend. The old lady is beginning her lonely struggle to
earn what she will need to feed herself tomorrow. She does not have
a pension fund, social security, unemployment insurance or old-age
benefits. Fluctuations in her daily earnings matter more to her
than the ups and downs of the stock market, and she is probably as
disconnected a participant as one can be in the economic juggernaut
that Singapore is often spoken of as.
Yet if you could zoom out of this tiny island to gaze across the
entire expanse of Asia, you will see that she is not alone. From
homeless have-nots huddled together in the cold subways of Seoul,
watching the smartly dressed haves hustle from swanky offices to
heated homes, to a family of six sheltered in their one room wooden
shack, listening to the thundering roar of airplanes landing on the
strip beside the world's largest slum in Mumbai — jarring
illustrations of social and economic inequality abound across this
continent.
In the aftermath of the worst global financial crisis since the
Great Depression, pundits in the hallowed financial centers of
London and New York speak of Asia as the next success story. "Asian
countries have been leading a recovery in the world economy,"
claims an IMF report. (1) Separately, Mr. Dominique Strauss-Kahn,
managing director of the IMF, has remarked that "rapid economic
growth has turned the region into a global economic powerhouse ...
Asia's economic weight is on track to grow even larger." (2)
That most emerging economies from the Middle East to the Far
East will continue to develop in the coming decades seems to be an
inescapable conclusion. What is not guaranteed however is whether
the fruits of this almost incontrovertible development will be
available to all who dwell in these countries. As Asia has grown,
so has an underbelly of penniless paupers. The bulk of Asian
countries face a growing impoverished population that does not have
any stake in the spoils being flaunted by their rich.
See
TIME's Pictures of the Week.
See the
Cartoons of the Week.
<!--pagebreak-->Which brings me to the question of this
essay. If there is one challenge above all others that policymakers
in the region need to address within the next decade, it is this:
rising economic inequality. The only way for countries to ensure
that their economic growth is sustainable and remains so through
their own future and that of their children is to offer Inclusive
Development to their citizens.
Economic Inequality
A new measure of global poverty — the Multidimensional Poverty
Index — recently made headlines when it pronounced that "eight
Indian states account for more poor people than in the 26 poorest
African countries combined." (3) Quite a surprise given the
contrast between the images that underprivileged Africa usually
conjures — that of parched landscapes and malnourished children —
and the beaming headlines Indian businesses generate in the pages
of the world's business and financial dailies.
But the least confounded were those living in India itself.
There, poverty moves alongside opulence like chocolate in a marble
cake. BMWs and Mercedes run over fly-overs that shelter shanty
towns and slums. And beggars beseech the drivers and the driven
when the same cars stop at the next traffic light. The top 10% of
India's population possesses 31.1% of the country's income, but the
lowest 10% has access to only 3.6%. (4)
The numbers don't get much better if look across the northern
border to the country's larger neighbor. According to a
Credit-Suisse sponsored report released earlier this year, the
average per-capita income for the richest 10% in China is 65 times
higher (thrice as compared to even the official estimate) than the
bottom 10%. (5)
And yet, static snapshots tell only
half the story. Bad becomes far more unsettling if it gets worse
over time. And that is exactly what's happening with inequality in
Asia. The GINI coefficient of income — a commonly used measure of
income inequality — for most Asian countries has only gotten worse
through the 1990s, as shown alongside. It isn't quite as much the
case of the "rich getting richer and the poor getting poorer" as it
is of the "rich getting richer faster than the poor." (6)
Nevertheless, worsening inequality does not bode well for many
countries riding the waves of economic success in Asia. Figure
Source: See 17
A 2007 report by the Asian Development Bank identifies a litany
of problems — economic, political and social, associated with
rising inequality. (6) According to the report, in imperfect
financial markets — a category even the most open of Asian
economies belong to — inequality can trap the poor in an
inescapable spiral, shutting them out from access to credit,
education or business opportunities. To add to this, rising
inequality increases pressure to redistribute income, adding
potentially distorting mechanisms and making the markets even less
perfect. The report declares that in the long run, "a high level of
inequality may actually hinder... growth and development
prospects."
See
TIME's Pictures of the Week.
See the
Cartoons of the Week.
<!--pagebreak-->Of a more immediate worry however, is the
report's conclusion that rising inequality can impose tremendous
social costs, "ranging from peaceful but prolonged street
demonstrations all the way to violent civil war." So even as an
economy develops, if it is unable to offer a stake in this
development to its poorest, it is only creating a recipe for more
social tension. The report quotes a study that "suggests that a 10
percentage point increase in poverty is associated with 23 – 25
additional conflict-related deaths."
A separate study released last year drew a positive correlation
between higher socioeconomic inequality and negative social
phenomena such as "shorter life expectancy, higher disease rates,
homicide, infant mortality, obesity, teenage pregnancies, emotional
depression and prison population." (7) And if recent events are
anything to go by, there is clear evidence that such phenomena
related to economic inequality are increasingly their toll across
the region.
Some commentators have linked the attacks on schoolchildren in
China to the rising discontent among its poor and marginalized,
"many of whom feel left behind as the rest of China gets
wealthier." (8) Similar explanations have been offered for the
groundswell of support behind the violence in Thailand earlier this
year. According to the country's own Ministry of Social
Development, the public protests in the nation's capital offered an
opportunity to the country's most strapped citizens "to vent their
frustrations over declining living standards and the deepening
divide between rich and poor." (9)
Biggest Challenge
In breaking down the effects of rising economic inequality, I am
perhaps missing out on a slew of others. Nevertheless, it is not
the mere number of such repercussions that makes it the most
significant challenge facing Asia today. It is the fact that very
high (and rising) levels of inequality can make other problems
worse.
To present a few examples, inequality makes it more difficult to
address problems of ethnic or religious tensions (socioeconomic
disparity has been credited for adding fuel to fire in the troubled
southern Thailand), or uncontrollable population (rising poverty
means more people without access to family planning) or even
natural calamities (the greater the number of impoverished, the
more the potential victims without the means to prepare for or
rescue themselves from floods and earthquakes).
So what then, is the solution? Some
economists maintain that rising inequality is merely a stage in the
development of any economy. This idea is captured in the Kuznet's
curve. As a country picks up from an initial low-level of
development, the acquisition of capital adds to the wealth of the
new owners of this capital and shows up as rising inequality.
Gradually however, redistribution mechanisms restore equality
bringing the formerly marginalized sections back into the
mainstream economy.
This theory is supported by data from the United States, where
the share of wealth held by the top 1% of the society grew from 15%
in 1775 to 45% in 1935, before falling back through the 1970's.
(10) It could be that Deng Xiaoping had his one eye on these
numbers when the then Communist Party leader launched market
reforms in China in the 1970's with the famous words "Let some get
rich first," (8) conceivably with the unspoken assumption that the
rest will follow later.
What worked for America cannot however be expected work in Asia
as well. This region is different; many developing countries here
are more densely populated, which means that there are more poor
who can band together in groups of sizeable clout, or be brought
together by political parties with populist agendas, to demand for
immediate action. In addition, the times have changed. With
technology now connecting previously far-flung regions of a
country, the underprivileged can now more easily gape at the
affluence of their fellow countrymen, potentially inflaming their
grievances even further.
Misguided Solutions
Waiting patiently therefore, for things to take their natural
course as predicted by debatable economic theory, is not an option.
Before discussing whether an alternative, affirmative approach can
make a difference however, it will be helpful to take a detour and
briefly look at the underlying causes of economic inequality.
Figure Source: See 18
See
TIME's Pictures of the Week.
See the
Cartoons of the Week.
<!--pagebreak-->The ADB report quoted earlier claims that
worsening inequality limits the poverty alleviating impact of
economic growth. "Poverty rates would have been lower had the
economies in question been able to achieve the growth in mean per
capita expenditure that they did but with their previous and more
equal distributions."
Which brings me to the proverbial million dollar question — Is
it even possible for these two to go hand in hand? Is economic
growth that is driven by free markets and loose regulation, as is
the one that has been embraced by many Asian countries over the
last two decades, compatible with an egalitarian society? Or is
such a growth the very agent that kindles inequality in the first
place?
A cursory analysis seems to support the latter proposition. A
capitalist economy rewards — with income being the reward —
initiative, skill, education, labor and capital. The fewer of these
you possess, the less is the eventual reward you walk away with.
Empirical data further reinforces this sometimes anecdotally
perceived causality. As shown in the charts below, income
inequality started rising after a brief drop a few years into the
launch of the Chinese economic reform in the late 1970's and hasn't
looked back since. Likewise, inequality in India also began its
consistently upward climb only after the liberalization reforms
were launched in 1991.
It is not my intention however to prosecute economic liberalism
for the ills of inequality. To do so would be to close one's eyes
to the body of evidence that indicates otherwise. A comprehensive
study published in 2007 by the Economic Freedom Network testified
that there is nothing inherent in the idea of a free economy that
worsens the state of its poor. (11) On the contrary, the authors of
the report found that the freer a country is economically, the
higher the income of its poorest, together with a better average
income, life expectancy, and environment.
The real agents of inequality lie not in free-market driven
growth itself, but one level below, in how this growth has
traditionally been unevenly distributed across geographical regions
(urban vs. rural) and industry sectors (non-agricultural vs.
agricultural). (6)
And herein lies the understanding that guides us to the answer
to Asia's biggest challenge today. Income redistribution or social
redress measures as solutions are incomplete, ineffective or worse
because they often follow from a case of mistaken provenance of
economic inequality. Numbers that demonstrate a worsening
inequality aren't so much a disease that needs a cure, but more a
symptom indicative of the real malaise — that unevenly distributed
economic growth offers uneven opportunities across peoples,
translating into unevenly distributed income and hence economic
inequality.
See
TIME's Pictures of the Week.
See the
Cartoons of the Week.
<!--pagebreak-->In the long run, it is opportunity and not
income that we should strive to equalize. It will not eradicate
inequality. But it will be an important step towards preventing it
from growing further without compromising on continued economic
growth.
The 'ESLH Framework
What remains then is for us to translate this idea of equality
of opportunity into a set of policy guidelines. A detailed
prescription of such recommendations is out of scope for this
essay. Instead, what I would like to do is to outline a framework
(let's call it the Economic Sustainability Lessons from History, or
ESLH, framework) that can allow us to use empirical macroeconomic
data from global economic history to pick out these guidelines
ourselves.
Keeping in mind that any recipe for more equality that
compromises on economic growth is unlikely to be palatable to
policy makers, investors or economists, the underlying idea of the
ESLH Framework is to hunt for instances in the history of
developing nations where income inequality has fallen even as the
economy has continued to grow. Once identified, these windows of
economic history can then be studied further for specific policies
that were designed to equalize opportunities and correspondingly
succeeded in equalizing incomes, while maintaining economic
growth.
To see this framework in action, we can look at the example of
Mexico. Between 1999 and 2008, Mexico's GINI coefficient fell 7
percentage points from 53 to 46, less than any recorded score for
the country in the last 60 years. (15) In the same period, the
country's real GDP continued to grow at an average rate of around
3%. (16)
What counsel can we draw from this experience? No doubt, the
economies of Latin America and Asia are different, and there are
things that worked in Mexico's favor that aren't applicable to
Asia. But surely there should be a few ingredients of Mexico's
success that can offer Asia a lesson in balancing economic growth
with equality of opportunity.
There is at least one: the country's focus on rural development.
A depreciation in rural poverty contributed significantly to
Mexico's economic growth as well as its tempering inequality over
the last decade. "Between 2000 and 2004, extreme poverty fell
almost 7 percentage points, which can be explained by development
in rural areas, where extreme poverty fell from 42.4 percent to
27.9 percent." 12
According to the World Bank, the factors that contributed to
this reduction include "macroeconomic stability ... and the
diversification of income from non-agricultural activities, such as
tourism and services," arguably also applicable in equal measure in
at least some parts of emerging Asia.
Gandhi said that India lives in her villages. Sixty-three years
after the country's independence, his words are still true.
Seventy-two percent of the country's one-billion-plus population
today lives in rural areas. The same number for Nepal is 85%, Sri
Lanka is 79%, Bangladesh is 76% and Pakistan is 66%. (13) For much
of their history, these regions have formed the bread baskets for
the rest of their countries. But with the rapidly declining share
of agriculture in the GDPs for many of these countries, (14) it is
imperative that there now be new avenues for development of rural
territories, such as tourism as in the Mexican example above.
Bringing growth to the country-side, instead of luring village
folk the other way with the glitter of swanky metropolitan
development offers many advantages. It opens up new opportunities
for the inhabitants of those areas without requiring them to desert
their families or familiar landscapes. It reduces migratory
pressures on urban centres, many of which in Asia are reeling from
the effects of an exploding population density and an overburdened
infrastructure. And it attracts more investment to the rural areas,
allowing for economic growth to continue and at the same time be
spread more evenly across communities.
Eliciting from the Mexican experience then, we have at least one
strategic guideline that Asian leaders can follow in pursuing the
goal of Inclusive Development: emphasis on rural development. There
is of course no reason to stop at one. Following the ESLH Framework
can allow for other such lessons to be learnt from economic
histories of other countries as well that may be applicable in this
region.
Conclusion
In many circles in emerging Asia, the recent financial crisis is
already being talked about as history. A history that will teach us
some lessons, but will not repeat itself, not in the immediate
future at least. The future is bright. In the relentless journey of
the Asia's economic bandwagon however, a growing number of its poor
are being thrown off the cart along the way. Rising economic
inequality now plagues countries across the continent's expanse,
and threatens to undermine the very purpose that the polity of the
region swears by: economic growth for its people.
It is essential for the long-term sustainability of this growth
that Asian countries pursue a model of Inclusive Development, that
offers a stake in the fruits of this progress to their poorest. The
ESLH framework outlined in this essay helps us discover periods in
our economic history when economic growth did not come at the
expense of rising economic inequality, and learn from them.
Nevertheless, this framework is but one step towards formulating an
effective response. The key point is this — unless we are able to
ensure that economic development creates new opportunities for each
and every one amongst us, we may just be laying the stage for more
men and women to give up hopes for a better future and resort to
the business of selling paper tissues on street sidewalks.
